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OFFICE OF INSPECTOR GENERAL
Catalyst for Improving the Environment
Audit Report
EPA Should Further Limit Use of
Cost-Plus-Award-Fee Contracts
Report No. 08-P-0093
February 26, 2008

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Report Contributors:
Michael Petscavage
Jean Bloom
Kevin Lawrence
Abbreviations
CPAF	Cost-Plus-Award-Fee
EPA	U.S. Environmental Protection Agency
EPAAR Environmental Protection Agency Acquisition Regulation
OIG	Office of Inspector General
PEB	Performance Evaluation Board
Cover photo: A site in Benton Harbor, Michigan, that had been cleaned up using a
Region 5 Cost-Plus-Award-Fee contract (photo courtesy EPA).

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U.S. Environmental Protection Agency
Office of Inspector General
At a Glance
08-P-0093
February 26, 2008
Catalyst for Improving the Environment
Why We Did This Review
We sought to determine
whether the U.S.
Environmental Protection
Agency (EPA):
•	Used award fee plans for
C ost-Plus-A ward-F ee
(CPAF) contracts that
clearly identified the
specific award fee criteria
and properly established
performance indicators;
•	Achieved a higher level of
performance by using this
contract type; and
•	Sufficiently reviewed,
approved, and awarded fees.
Background
CPAF contracts are used to
motivate contractors to
provide a high level of
performance. CPAF contracts
provide base fees and award
amounts based on a
judgmental evaluation by
EPA. In recent years, EPA
has begun to move away from
using CPAF contracts. As of
October 2006, EPA had
14 active CPAF contracts
valued at $4.2 billion.
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/2008/
20080226-08-P-0093.pdf
EPA Should Further Limit Use of
Cost-Pi us-Award-Fee Contracts
What We Found
While EPA has paid contractors nearly $16 million in award fees over the past
10 years on the nine contracts reviewed, it has no assurance that the use of CPAF
contracts facilitates a higher level of performance than other types of contracts.
EPA CPAF contracts generally contain performance indicators tied to the Agency's
mission. EPA consistently provided contractors with high ratings and award fees.
However, we could not determine if EPA properly awarded fees because it did not
sufficiently document the basis for the ratings. Because EPA consistently provided
high ratings, we believe award fees are more of an expectation for contractors rather
than a factor that motivates excellence.
In some instances, EPA paid a higher base fee than allowed by the EPA Acquisition
Regulation. We found five contracts that contained a base fee percentage higher
than the 3 percent allowed. Two of those contracts have significant time remaining.
For those two, we estimated that EPA overpaid about $100,000 of base fee through
July 2007, and will overpay another $760,000 over the remaining life of the
contracts. The high base fees were provided because of a lack of knowledge by
EPA employees regarding the regulation and an oversight by Headquarters.
Developing and administering CPAF contracts is a labor intensive process, and
many EPA employees involved with contract management believe that competition
is a more effective way to motivate contractors. Also, the CPAF process could be
made less burdensome. The calculation used to compute base fees on these
contracts is overly complex, and eliminating the requirement for contractors to
submit self evaluations could save up to $50,000 over the course of a contract.
What We Recommend
We recommend that EPA further limit the use of CPAF contracts by revising the
Contracts Management Manual to require that a cost-benefit analysis be conducted
prior to awarding a CPAF contract. In instances when CPAF contracts are used,
we recommend that EPA better document the basis for decisions to substantiate
the performance ratings given. EPA should also modify its contracts to bring
them into compliance with the EPA Acquisition Regulation to avoid the future
overpayment of base fees. Further, EPA should simplify its CPAF process. EPA
agreed with a majority of our recommendations or provided a valid alternative.
EPA did not agree with some of our recommendations related to simplifying the
CPAF process, and those recommendations have been revised for the final report.

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OFFICE OF
INSPECTOR GENERAL
February 26, 2008
MEMORANDUM
SUBJECT:	EPA Should Further Limit Use of Cost-Plus-Award-Fee Contracts
Report No. 08-P-0093
FROM:	Melissa M. Heist
Assistant Inspector General for Audit
TO:	Luis A. Luna
Assistant Administrator for Administration and Resources Management
Donald S. Welsh
Regional Administrator, Region 3
Mary A. Gade
Regional Administrator, Region 5
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 positions.
Final determinations on matters in this report will be made by EPA managers in accordance with
established audit resolution procedures.
The estimated cost of this report - calculated by multiplying the project's staff days by the
applicable daily full cost billing rates in effect at the time - is $336,936.
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. We have no objections 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, please contact Michael Petscavage, Acting Director,
Contract Audits, at 202-566-0897 or Petscavage.Michael@epa.gov.

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EPA Should Further Limit Use of
Cost-Plus-Award-Fee Contracts
Table of C
Chapters
1	Introduction		1
Purpose		1
Background		1
Noteworthy Achievements		2
Scope and Methodology		3
Internal Control Structure		3
2	EPA Not Assured CPAF Contracts Provide High Performance		4
EPA Consistently Provided Contractors High Performance Ratings		4
EPA Needs to Improve Documentation for Performance Ratings		6
CPAF Contracts May Not Be Worth the Associated Costs		7
Conclusion		8
Recommendations		9
Agency Response and OIG Comments		9
3	EPA Paid Higher Base Fees than EPAAR Allows		10
Potential Overpayments Noted		10
Recommendations		11
Agency Response and OIG Comments		11
4	Other Matters		12
Computation of Base Fees Is Overly Complex		12
Contractor Self Evaluations of Minimal Value		12
Minor Errors Noted		13
Recommendations		13
Agency Response and OIG Comments		13
Status of Recommendations and Potential Monetary Benefits		15
Appendices
A Agency Response	 16
B Distribution	 20

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Chapter 1
Introduction
Purpose
The U.S. Environmental Protection Agency (EPA) is currently using several large
dollar value Cost-Plus-Award-Fee (CPAF) contracts. The Office of Inspector
General (OIG) initiated this audit of CPAF contracts to determine whether EPA:
•	Used award fee plans that (1) clearly identified the specific award fee
evaluation criteria, and (2) properly established performance indicators
that are tied to the Agency's mission and goals;
•	Achieved a higher level of performance in support of the Agency's
mission through the use of award fees; and
•	Sufficiently reviewed, approved, and awarded fees according to the
established award fee plan.
Background
EPA can choose among several contract types to acquire products and services,
one of which is a CPAF contract. A CPAF contract is a cost-reimbursement
contract that provides for a fee consisting of a base amount (which may be zero)
and an award amount based on a judgmental evaluation by EPA. Federal
Acquisition Regulation 16.305 states that the award fee amount should be
sufficient to provide motivation for excellence in contract performance.
Excellent performance is generally sought in areas of quality, timeliness, technical
ingenuity, and cost-effective management.
EPA has historically used CPAF contracts as a way to motivate contractors to
provide higher-than-satisfactory performance. All of the Agency's regional
Remedial Action Contracts were CPAF contracts at one time. However, EPA has
begun to move away from using CPAF contracts and is using other contracting
methods to motivate contractors. Although some of the Remedial Action
Contracts are no longer CPAF, those that still exist represent large dollar amounts.
As of October 2006, EPA had 14 active CPAF contracts, valued at $4.1 billion.
EPA's Office of Administration and Resources Management sets policy for using
contracts, including CPAF contracts, and oversees the general use of such
contracts. Headquarters offices and the regions award and administer the actual
contracts. This includes evaluating the contractor's performance and providing
award fees. For the most part, EPA specifies award fee evaluation criteria and
performance indicators that are tied to the Agency's mission and goals.
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Table 1-1 provides a general overview of the process for evaluating and
determining CPAF award fees, which occurs every 6 months.
Table 1-1: General Overview of Award Fee Process
1.	The project officer distributes a call letter to work assignment managers.
2.	The work assignment managers evaluate active and completed work assignments
and provide written evaluations to the project officers.
3.	The project and contracting officers evaluate the contractor's program support
(i.e., administrative and technical support, mobilization, and reporting) and the
project officer evaluates the contractor's overall performance.
4.	The contracting officer calculates the available award fee for completed work
assignments.
5.	The project officer compiles evaluation material, including material for the
Performance Evaluation Board (PEB) to review. The project officer uses several
interim ratings to compute a weighted average score for completed work
assignments.
6.	The PEB members review evaluation material prior to the PEB meeting.
7.	The PEB meets to discuss contractor performance. Attendees include all PEB
members, project officers, contracting officers, and sometimes work assignment
managers.
8.	The project officer (sometimes assisted by the contracting officer) prepares a
report that summarizes the PEB's decision and presents it to the PEB for
signature.
9.	The project officer coordinates and chairs a debriefing with the contractor.
10.	The contracting officer verifies fee calculations and prepares a letter for signature
by the EPA fee determination official.
11.	Once a fee determination letter is signed, the contracting officer issues a contract
modification allowing the contractor to bill for the award fee.
Source: OIG analysis of EPA data
Noteworthy Achievements
In lieu of CPAF contracts, EPA in some instances has begun using performance-
based contracts and competition to motivate contractor performance. Many PEB
members believe competition and the anticipation of future work are better
motivators than award fees. EPA is also considering other types of contracts to
motivate contractor performance, such as award-term contracts, where contractors
can earn extra contract years based on their performance.
EPA Headquarters took prompt action to correct inadequate documentation
requirements for one Headquarters contract. The award fee plan for this contract
actually required performance evaluation documentation to only be retained for
1 year. When we informed the contracting officer of this condition, the
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contracting officer immediately modified the contract to require documentation to
be maintained well beyond the completion of the contract.
Scope and Methodology
We performed this audit from March to September 2007 in accordance with
generally accepted government auditing standards, issued by the Comptroller
General of the United States. We visited EPA Headquarters in Washington, DC,
as well as EPA regional offices in Philadelphia, Pennsylvania (Region 3), and
Chicago, Illinois (Region 5).
To accomplish our objectives, we reviewed the Federal Acquisition Regulation,
the EPA Acquisition Regulation (EPAAR), and EPA's Contracts Management
Manual. We performed in-depth reviews of the award fee process for 9 of 14
CPAF contracts, with a total contract value of over $2 billion. The nine contracts
selected were awarded by Headquarters and Regions 3 and 5. Headquarters
awarded the largest dollar value CPAF contracts. Region 3 was discontinuing the
use of CPAF contracts, while Region 5 had recently awarded two large CPAF
contracts. We reviewed contract files, award fee plans, Work Assignment
Completion Reports, and PEB documentation at both Headquarters and regional
locations. Additionally, we reviewed the base fee percentages for all 14 CPAF
contracts. We interviewed Headquarters personnel, as well as project officers,
contracting officers, and PEB members in Regions 3 and 5. Although we
reviewed prior OIG reports related to CPAF contracts, we did not follow up on
any of the recommendations in those reports because they did not relate to our
objectives.
Internal Control Structure
In planning and performing our audit, we reviewed management controls related
to our objectives. As part of this review, we examined the Agency's Contracts
Management Manual and other guidelines that outline EPA's controls and
monitoring procedures used under CPAF contracts. We confirmed our
understanding of these controls and procedures through interviews and
documentation reviews. We also reviewed documents EPA completed in
compliance with the Federal Managers' Financial Integrity Act. This included a
review of EPA's Fiscal Year 2005 and 2006 Performance and Accountability
Reports, in addition to integrity assurance letters prepared by the Office of
Administration and Resources Management and Office of Solid Waste and
Emergency Response. EPA did not report any material or Agency weaknesses
related to its use and management of CPAF contracts.
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Chapter 2
EPA Not Assured CPAF Contracts Provide
High Performance
While EPA has paid contractors nearly $16 million in award fees over the past
10 years on the nine contracts reviewed, it has no assurance that the use of CPAF
contracts facilitated a higher level of performance than other types of contracts.
EPA CPAF contracts generally contain performance indicators tied to the
Agency's mission. EPAAR specifies that award fees are only to be awarded for
performance that exceeds satisfactory. EPA consistently provided contractors
with high ratings and award fees without sufficiently documenting the basis for
those ratings. Moreover, the CPAF process is subjective in nature, and numerous
personal judgments occurred without being documented. Because EPA
consistently provided high ratings, we believe award fees are more of an
expectation for contractors than a factor that motivates excellence.
EPA Consistently Provided Contractors High Performance Ratings
Contractor performance ratings were generally high throughout the life of a work
assignment, resulting in contractors receiving a large portion of available award
fees. EPA paid nearly $16 million in award fees over the past 10 years from the
almost $20 million available for award fees under the nine contracts we reviewed.
Table 2-1 shows the percentage of award fees paid for the seven CPAF contracts
in our review that had received award fees (two did not yet receive any award fees
because no work assignments had been completed at the time of site visits).
Table 2-1: Award Fees Issued Through CPAF Contracts
Contract Purpose
Available
Award Fee
Award Fee
Paid
Percent
1. Remedial Action Contract
$334,242
$237,714
71.1%
2. Remedial Action Contract
587,447
465,498
79.2%
3. Remedial Action Contract
1,552,521
1,284,117
82.7%
4. Response Engineering and Analytical
Contract to support Environmental
Response Team Centers
1,561,337
1,314,057
84.2%
5. Input, manage, provide, and maintain
information technology services
6,647,067
5,296,701
79.7%
6. Provide information technology support
for integration and development of large
systems
6,580,244
5,764,390
87.6%
7. Remedial Action Contract
2,663,017
1,577,118
59.2%
Total
$19,925,875
$15,939,595

Source: OIG analysis of EPA data
Note: Remedial Action Contracts provide professional architect/engineer, technical, and management
services to support remedial response, enforcement oversight, and non-time critical removal activities.
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CPAF contracting is intended to facilitate a high level of contractor performance.
Contractors are to be compensated for satisfactory work through the base fee,
while award fees should be for greater-than-satisfactory work. EPAAR 1516.404-
273(a) states, "No award fee may be earned if the Fee Determination Official
determines that contractor performance has been satisfactory or less than
satisfactory." The award fee plans for CPAF contracts support this criterion.
Regions 3 and 5 Award Fee Plans for Remedial Action Contracts state, "The
performance fee should motivate the contractor to provide excellence in
performance."
High performance ratings were typical for the contracts we reviewed. Most work
was consistently given a rating of exceeds expectations or outstanding. We
reviewed 956 final ratings and found that 809, or 85 percent, had a score higher
than satisfactory and resulted in the contractor receiving award fees. These high
final performance ratings translated into significant award fees for contractors.
For example, for a Region 3 contract that had 32 completed work assignments at
the time of our review, the average interim rating prepared by the work
assignment managers for 19 (almost 60 percent) was higher than satisfactory.
Further, the final ratings determined by the PEB substantially increased the
number of assignments rated higher than satisfactory to 29 of the 32 work
assignments (91 percent). Table 2-2 summarizes the interim and final ratings for
work assignments for this contract.
Table 2-2: Summary of Ratings for Region 3 Contract

Interim
Final
Rating Category
Ratings
PEB Rating
Outstanding
2
7
Exceeds Fully Successful
17
22
Satisfactory
13
3
Unsatisfactory
0
0
Source: OIG analysis of EPA data
PEB members provided several reasons for increased final performance ratings.
The most common reason given was that several PEB members give substantial
consideration to end results and environmental outcomes achieved by the work.
The PEB members said such factors as timeliness, budget, results achieved, and
obstacles overcome cannot be realized until a project is complete. They also
acknowledge there is a tendency to award the contractors some type of award fee.
A satisfactory rating seems to have a negative connotation, and contractors tend to
get ratings greater than satisfactory. As a result, award fees can be more of an
expectation for contractors than a factor that motivates excellence in performance.
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EPA Needs to Improve Documentation for Performance Ratings
The documentation associated with performance evaluations often did not support
the ratings given. The Government Accountability Office's Internal Control
Management and Evaluation Tool establishes that documentation for transactions
and other significant events should be complete and accurate. Documenting the
rationale for ratings is not required by the Contracts Management Manual. The
manual gives broad authority to the PEB to determine final ratings and
recommend award fees, and does not require that all aspects of the decision be
documented.
We reviewed interim performance evaluations prepared by Regions 3 and 5, as
well as Headquarters. Generally, Region 5's interim evaluations were adequately
supported, while the ratings prepared by Region 3 and Headquarters did not
always contain sufficient documentation to justify the rating given. For example,
a work assignment under a Headquarters contract was given an interim rating of
exceeds expectations for Program Management. The support for that rating was
as follows: "The project management was excellent with no problems
encountered and costs were within scope of work." There was no further
description of how the work exceeded expectations or project management was
excellent. We believe that indicating that the project did not encounter problems
or go over budget is only descriptive of satisfactory work.
Documentation for final ratings and corresponding award percentages also often
did not support the ratings or awards given. The project or contracting officers
provided the PEB with documentation associated with interim ratings. The PEB
used this information as the primary source for determining its final overall rating.
Since documentation to support the interim ratings sometimes did not justify the
rating, PEB members said they often relied on the testimony of project officers
and work assignment managers. Discussions that took place during PEB
meetings and the specific reasons for final decisions were not documented for any
of the contracts we reviewed. Also, when final ratings were higher than the
interim ratings, no documentation was available to support the change. For
example, the following excerpt from a Region 5 PEB report applies to a work
assignment with an interim rating of satisfactory that the PEB increased to
exceeds expectations:
The contractor's overall historical performance was rated as
"satisfactory. " The contractor's self-evaluation has requested a
Performance Award of 80%. The PEB recommends a Performance
fee of 65% consistent with an overall rating of exceeds
expectations....
Region 5's narrative, which is the same basic language used in all Region 5 PEB
ratings, lacks the reasoning for increasing the contractor's rating. This same
language was consistently used within Region 5 PEB reports to document final
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decisions. It gives the appearance that the PEB increased the final rating based on
the contractor's self evaluation. Region 5 PEB members said the contractor self
evaluations were only included as general information and had no influence on
final ratings; several Region 5 PEB members indicated they barely considered self
evaluations. However, they agreed that the language in their reports was
misleading and should be improved.
PEB members in Regions 3 and 5 told us that PEB reports were the only source of
documentation for final PEB decisions. Several EPA employees from
Headquarters, Region 3, and Region 5 agreed that documentation needs to be
improved to support both interim and final ratings. When the PEBs do not
receive sufficient documentation from project officers and work assignment
managers, the PEBs are limited in the information they have to make final
decisions. In particular, work assignment managers generally have the most
contact with contractors performing work, and thus can provide the most
meaningful input on contractor evaluations. Also, without documentation on why
the PEB modified final ratings, work assignment managers cannot effectively
apply the PEB's logic to future evaluations. To adequately justify and
substantiate performance ratings, EPA needs to better document interim ratings,
and the PEB needs to document the basis for its final decisions.
Without sufficiently documenting contractor evaluations, the process allows for
and relies on unsupported personal opinions and individual judgments. Work
assignment managers provide the first evaluation of the contractor's performance.
However, as one Region 3 contracting officer noted, it can be difficult for work
assignment managers to maintain an arms length relationship with contractors.
They work closely together on a regular basis so personal opinions are developed
that can lead to bias, both positive and negative. PEB members also use personal
judgment when determining final ratings. The PEB members we spoke with said
they take into account that some work assignment managers are tough raters and
others are not.
PEB members also place different emphasis on the criteria set forth in the award
fee plan, based on whether their interest is technical or programmatic. PEB
members with a programmatic interest tend to emphasize end results and
environmental outcomes achieved. Those with a contract administration
background tend to be more concerned with contract provisions.
CPAF Contracts May Not Be Worth the Associated Costs
EPA cannot demonstrate whether the CPAF process resulted in EPA receiving
higher performance from contractors and, if so, the benefits received justified the
increased administrative costs of these contracts. CPAF contracts require
substantial resources to administer. Numerous EPA employees spend substantial
time evaluating performance throughout the life of the contract. Also, contractors
incur extra administrative costs, which they pass on to EPA. For these reasons,
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we believe a cost-benefit analysis should be performed and approved by Office of
Acquisition Management personnel prior to using CPAF contracts in the future,
even though this type of analysis is not presently required by the CMM.
In spite of the resource-intensive process, EPA could not substantiate that CPAF
contracts resulted in a higher level of performance than other types of contracts,
even though a high percentage of the available award fees was being paid.
Some PEB members from Regions 3 and 5 believe that overall fees paid to a
contractor and the performance received are the same whether using CPAF or
Cost-Plus-Fixed-Fee contracts. This demonstrates that some employees familiar
with CPAF contracts see little difference in performance despite the extra
resources required to administer CPAF contracts.
Several EPA contracting officers, project officers, and program employees told us
that CPAF contracts do have advantages because the process forces EPA
personnel and the contractor to examine performance on a regular basis.
Conversely, other EPA employees said the process did not provide any relevant
motivation to contractors since contractors generally expect to receive high
ratings and fees. Instead, many PEB members and other EPA employees told us
that the potential for future work and competition were the primary motivations
for contractors to perform well - contractors would try to perform well regardless
of the contract type because they want to get the next contract. Further, several
employees said the award fee amounts may not be substantial enough to motivate
higher performance.
Conclusion
Developing and administering CPAF contracts is a labor intensive process that
causes EPA to spend significant amounts of time evaluating and documenting
contractor performance. For this reason, many EPA employees involved with
contract management as well as with the program offices believe that competition
is a more effective way to motivate contractors to perform. Portions of EPA have
already begun to move away from CPAF contracts and are using, or planning to
use, other types of contracts to motivate contractor performance, such as
performance-based contracts or award-term contracts. We agree that EPA should
continue to explore other types of contracts. This will allow EPA to avoid the
subjective CPAF process and the costly administrative effort associated with
them. While EPA's Contracts Management Manual does not require a cost-
benefit analysis, we believe that if a CPAF contract is needed, a cost-benefit
analysis should be performed to ensure that the expected benefits are worth the
additional administrative costs. Additionally, future CPAF contracts should be
approved at a management level sufficient to provide adequate oversight (e.g., the
contracting officer's Service Center Manager).
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Recommendations
We recommend that the Assistant Administrator for Administration and
Resources Management:
2-1 Revise the Contracts Management Manual to require that:
•	a cost-benefit analysis be conducted prior to awarding a CPAF
contract, and
•	all CPAF contracts be approved by the contracting officer's Service
Center Manager.
2-2 Revise the Contracts Management Manual to require work assignment
managers, project officers, contracting officers, and PEB members to
explicitly document the basis for award-fee decisions made.
Agency Response and OIG Comments
EPA concurred with our recommendation to perform a cost-benefit analysis prior
to awarding future CPAF contracts. It also agreed with our recommendation to
revise the Contracts Management Manual to have work assignment managers,
project officers, contracting officers, and PEB members explicitly document the
basis for award-fee decisions made. The OIG concurs with EPA's proposed
resolutions to address the recommendations by revising the Contracts
Management Manual and Acquisition Handbook.
EPA did not agree with our original recommendation to have CPAF contracts
approved by the Office of Administration and Resources Management. EPA
stated that, consistent with the Federal Acquisition Regulation, the appropriate
approval level for these contracts is at the contracting officer level, and that it
does not see a compelling reason to elevate approval to the Office of
Administration and Resources Management level. EPA did propose an
alternative plan that includes revising the Contracts Management Manual to
require the Service Center Manager to approve the contracting officer's decision
to award a CPAF contract. Since OIG believes that EPA's proposed alternative
will adequately address the problem by providing additional oversight above the
previous required level, the OIG agrees with the proposed alternative plan. We
revised our recommendation accordingly.
EPA's complete response is in Appendix A.
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Chapter 3
EPA Paid Higher Base Fees than EPAAR Allows
EPA overpaid contractors on 5 of its 14 CPAF contracts by awarding base fees
that exceeded the EPAAR limitation. This condition occurred because EPA
employees were unaware of the limitation and Headquarters did not note the
issue. Although three of the contracts were nearly completed, for the two
awarded in 2006, we estimated that EPA already overpaid the contractors about
$100,000 and will overpay an additional $762,000 during the remaining life of the
contracts if they are not modified.
Potential Overpayments Noted
EPAAR 1526.404-273(b) provides that base fees paid to contractors shall not
exceed 3 percent of the estimated cost of the contract, exclusive of the fee.
However, of 14 contracts reviewed, we found that payments for 5 exceeded the
3-percent amount, as shown in Table 3-1. The September 1998 contract was
awarded by Region 9 while the other four were awarded by Headquarters or
Region 5 for work administered by Region 5.
Table 3-1: CPAF Contracts with Base Fee
I Contract
Base Fee %
Date Awarded I
1
4.0%
September 1996
2
4.0%
May 1997
3
4.0%
September 1998
4
5.0%
March 2006
5
4.2%
June 2006
Source: OIG analysis of EPA data
Two of the Region 5 contracts and the Region 9 contract are nearly complete.
Therefore, we only calculated the potential overpayments for the remaining two
contracts, which were issued in 2006 and potentially may not be complete for
9 more years. We recomputed the base fees for both contracts using the same
methods employed by EPA except that we used a base fee of 3 percent, and then
applied our computations to the professional hours billed on the contracts through
July 2007. This indicated that EPA overpaid $100,020 so far on these two
contracts. We used the same calculations prorated over the remaining life of the
contracts and estimated that EPA will overpay an additional $762,468 unless the
contracts are modified to bring them into compliance with EPAAR. The
$762,468 represents a potential monetary benefit to EPA.
Region 5 contracting officers, project officers, and program employees told us
they were unaware of the EPAAR limitation on base fees under CPAF contracts.
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Office of Administration and Resources Management personnel also
acknowledged that the fee percentages for the contracts were higher than that
allowed by EPAAR, and allowing the use of those percentages was an oversight
by Headquarters.
Recommendations
We recommend that the Regional Administrator, Region 5:
3-1 Negotiate with contractors to modify contracts currently providing base
fees in excess of the 3-percent limit cited by EPAAR 1526.404-273(b)
so that the fees no longer exceed the 3-percent limit.
We recommend that the Assistant Administrator for Administration and
Resources Management:
3-2 Communicate the 3-percent base fee limit included in EPAAR to all
contracting and project officers using CPAF contracts and verify
compliance during Headquarters reviews.
Agency Response and OIG Comments
EPA concurred with both OIG recommendations. Specifically, EPA Region 5
said it will develop a strategy for bringing its contracts into compliance with the
EPAAR by March 30, 2008. Further, EPA said it will communicate the 3-percent
base fee via a Flash Notice. The OIG concurs with EPA's proposed actions to
address the recommendations.
EPA Region 5 said it did not agree that it overpaid $100,020 in base fees on the
two contracts awarded in 2006. Region 5 based its position on the fact that it has
not yet reached 3 percent of the funds obligated, exclusive of fees. While this
may be true, the base fee percentage in the contract was greater than the
maximum 3 percent allowed by EPAAR. The billable base fee amounts are
calculated by using a formula that includes this higher base fee percentage. The
OIG recalculated the billable base fee by using the same formula, and inserting
the maximum allowable 3 percent into the formula to derive its estimate of
overpaid base fees. Therefore, the OIG continues to believe that EPA overpaid
base fees by using a rate higher than allowed by EPAAR.
EPA's complete response is in Appendix A.
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Chapter 4
Other Matters
We noted some administrative procedures required by EPA's CPAF contract
award fee process that appear to be overly burdensome and provide minimal
benefits. Some of these procedures could be simplified or eliminated, reducing
the administrative workload for both EPA and the contractor.
Computation of Base Fees Is Overly Complex
The computation of base fees in EPA's CPAF contracts is overly complex. The
base fee is not a multiplication of direct labor costs by the base fee percentage
included in the contract. Instead, the base fee is computed by using a dollar
amount that is applied to each direct labor hour charged to EPA. This dollar
amount is calculated using the estimated base fee and estimated direct labor hours
for each contract period. This is shown below for a contract that provided a base
fee of 4.2 percent.
Estimated Base Fee	 $42.825
Estimated Direct Labor Hours	10,000 hrs. = $4.28
The contractor multiplied each professional hour billed to EPA by $4.28 to
compute the base fee that EPA will pay. The amount of base fee paid becomes
complex because each contract will eventually have a different dollar factor for
the base period and each subsequent option year. Moreover, a different base fee
percentage is applied to subcontractor costs. EPA uses this methodology to
ensure that contractors do not charge base fees too quickly during the life of a
contract. However, the benefits received from using this factor appear to be
minimal, while it unnecessarily complicates the base fee calculation and makes
EPA's ability to verify amounts billed by contractors difficult.
Contractor Self Evaluations of Minimal Value
EPA CPAF contracts generally required each contractor to submit a self
evaluation every 6 months. These self evaluations generally are three or four
pages, depending on the work done and the number of contractor work
assignments; self evaluations can be as much as 50 pages if not more. Several
PEB members told us they did not use contractor self evaluations when rating
performance because the evaluations were biased. Some PEB members did not
read the contractor self evaluations, while others read them to ensure EPA had not
missed anything but did not place much weight on them.
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EPA does not require the contractors to separately track the time spent or costs
billed to EPA for producing self evaluations. In the absence of such cost data, we
estimated that each self evaluation would take approximately 4 labor hours to
produce. We also noted that some of the contracts reviewed had over 150 work
assignments. Based on these figures, we estimated that for each of EPA's
14 CPAF contracts, EPA could pay almost $50,000 for self evaluations over the
course of a contract that provide minimal if any input and value to the CPAF
process.
Minor Errors Noted
Given the overall complexity of the CPAF process and the large volume of
information processed, it was inevitable that some minor errors occurred. In two
instances, records indicated that EPA Region 5 incorrectly paid for fees contrary
to provisions in the award fee plan. On two work assignments for which the
contractor was rated "Exceeds," the award fee plan indicated the maximum
percentage that could be awarded for that rating was 80 percent. The contractor
was awarded 90 percent of the available award fee, resulting in an overpayment to
the contractor of over $3,000. EPA reviewed these instances and responded that
for one work assignment, this was a documentation mistake and that the rating
actually was "Outstanding" rather than "Exceeds Expectations", and thus the
award was correct. However, during its review of the documentation, EPA found
an overpaid amounts totaling $4,801 for the other work assignment.
Recommendations
We recommend that the Assistant Administrator for Administration and
Resources Management:
4-1 Analyze alternatives and determine a way to simplify the base fee
calculation for CPAF contracts.
4-2 Require the contracting officers for all current CPAF contracts to review
the self-evaluation requirement and either eliminate the requirement or
provide written justification for not eliminating the requirement.
We recommend that the Regional Administrator, Region 5:
4-3 Recover the $4,801 in overpaid award fees paid to a contractor, or offset
this amount against future payments.
Agency Response and OIG Comments
EPA disagreed with our original Recommendation 4-1 to simplify the base fee
calculation and stated that the OIG recommendation creates a cost-plus-
percentage-of-cost contract. We do not believe that this is the case; our
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recommendation was for EPA to find a simpler way to distribute a fixed amount
of base fee to a contract because the current method is overly complex and creates
difficulties in verifying the amounts billed. Because of the importance of
effectively verifying amounts billed by contractors, we continue to recommend
that EPA simplify its method of calculating base fee charges. We did not
recommend a specific method for distributing base fee in the future, simply that
EPA should develop a method that is less complex than the current method. We
have modified our original recommendation to clarify our intent.
EPA partially agreed with our original Recommendation 4-2 to eliminate the
contract requirement for contractor self evaluations. While the Agency believes
the requirement could be eliminated in some cases, EPA did not agree that the
requirement for self evaluations should be eliminated across the board because
some EPA officials find the self evaluations to be useful. We continue to
question the utility of contractor self evaluations and believe EPA should not pay
contractors to develop justifications for providing themselves with performance
ratings and proposed award amounts. If there is a case where the self evaluations
are useful, the contracting officer should justify the need for this requirement in
writing. Therefore, we have revised our original recommendation to provide for
the contracting officers to review all active CPAF contracts and either eliminate
the requirement for self evaluations or justify the need for the self evaluations in
writing.
With regard to our Recommendation 4-3, EPA did not agree with the amount of
improper fees the OIG calculated regarding two work assignments under a
Region 5 contract. However, in reviewing these work assignments, EPA
calculated $4,801 in overpaid fees for one of the work assignments. For the other
work assignment, EPA determined the fee awarded was correct, but the rating was
incorrectly documented as "Exceeds Expectations" and should have been
"Outstanding." We agree with EPA's proposed resolutions to (1) recoup the
overpayment by obtaining a refund from the contractor, or offsetting the
overpayment against a future invoice; and (2) document appropriate contract files
to reflect the correct rating. We have modified our recommendation accordingly.
EPA's complete response is in Appendix A.
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Status of Recommendations and
Potential Monetary Benefits
RECOMMENDATIONS
POTENTIAL MONETARY
BENEFITS (In $000s)
Rec.
No.
Page
No.
Subject
Status1
Action Official
Planned
Completion
Date
Claimed
Amount
Agreed To
Amount
2-1 9 Revise the Contracts Management Manual to
require that:
•	a cost-benefit analysis be conducted prior to
awarding a CPAF contract, and
•	all CPAF contracts be approved by the
contracting officer's Service Center Manager.
2-2	9 Revise the Contracts Management Manual to
require work assignment managers, project
officers, contracting officers, and PEB members to
explicitly document the basis for decisions made.
3-1	11 Negotiate with contractors to modify contracts
currently providing base fees in excess of the
3-percent limit cited by EPAAR 1526.404-273(b) so
that the fees no longer exceed the 3-percent limit.
3-2	11 Communicate the 3-percent base fee limit included
in EPAAR to all contracting and project officers
using CPAF contracts and verify compliance during
Headquarters reviews.
4-1	13 Investigate alternatives and determine a way to
simplify the base fee calculation for CPAF
contracts.
4-2 13 Have the contracting officers for all current CPAF
contracts review the self-evaluation requirement
and either eliminate the requirement or provide
written justification for not eliminating the
requirement.
4-3 13 Recover the $4,801 in overpaid award fees paid to
a contractor, or offset this amount against future
payments.
Assistant Administrator for
Administration and
Resources Management
Assistant Administrator for
Administration and
Resources Management
Regional Administrator,
Region 5
Assistant Administrator for
Administration and
Resources Management
Assistant Administrator for
Administration and
Resources Management
Assistant Administrator for
Administration and
Resources Management
Regional Administrator,
Region 5
$762.4
1 0 = recommendation is open with agreed-to corrective actions pending;
C = recommendation is closed with all agreed-to actions completed;
U = recommendation is undecided with resolution efforts in progress
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Appendix A
Agency Response
OFFICE OF
ADMINISTRATION
AND RESOURCES
MANAGEMENT
MEMORAMDUM
SUBJECT: Response to Draft Audit Report: EPA Should Further Limit Use
Of Cost-Plus-Award-Fee Contracts
FROM:	Luis A. Luna
Assistant Administrator
TO:	Michael Petscavage
Acting Director, Contract Audits
Thank you for the opportunity to comment on the draft report entitled
"EPA Should Further Limit Use of Cost-Plus-Award-Fee Contracts," dated
December 14, 2007. We generally agree with your findings regarding the need for the Agency to
better document its need for using cost-plus-award-fee (CPAF) contracts and the basis for ratings
given to contractors. We offer the following comments on your recommendations:
Recommendation 2-1 - That the Assistant Administrator for Administration and
Resources Management revise the Contracts Management Manual to require that:
-	a cost-benefit analysis be conducted prior to awarding a CPAF contract, and
-	all CPAF contracts be approved by the Office of Administration and Resources
Management (OARM).
Response: We concur with the first part of this recommendation. We intend to revise the
Contracts Management Manual (CMM) and Acquisition Handbook (AH) to adequately address
contract types and the need to use considerations such as risk and cost-benefit analyses when
selecting the type of contract. The Office of Federal Procurement Policy (OFPP) has recently
issued guidance on the appropriate use of incentive contracts, which we will incorporate into the
CMM and AH revisions. We expect to complete all revisions by September 30, 2008.
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2
We do not agree with the second part of the recommendation. The current approval level for
such contracts, per the Federal Acquisition Regulation (FAR), resides with the contracting
officer. We see no compelling reason to elevate this level up to the OARM Assistant
Administrator. However, since the contracting officer's Service Center Manager (SCM) serves
as the Fee Determination Official (FDO) on such contracts, we will require that the SCM review
and concur with the CO's decision to award a CPAF contract. This will be accomplished
through a revision to the required levels of approval in the CMM, which will be completed by
September 30, 2008.
Recommendation 2-2 - That the OARM AA revise the CMM to require work assignment
managers, project officers, contracting officers, and PEB members to explicitly document
the basis for award-fee decisions.
Response : We concur with this recommendation, and we intend to revise the CMM chapters
related to the use of CPAF contracts to strengthen the coordination in decision-making and
documenting the basis for decisions made. We expect to complete all revisions by September
30, 2008.
Recommendation 3-1 - That the Regional Administrator, Region 5, negotiate with
contractors to modify contracts currently providing base fees in excess of the 3-percent
limit cited by EPAAR 1526.404-273(b) so that fees no longer exceed the 3-percent limit.
Response : Region 5 concurs that the contracts were awarded with base fees in excess of the 3-
percent limit, and they intend to bring these contracts into compliance with the EPAAR. First,
they need to analyze each contract to determine if they should: (1) renegotiate the base fee; (2)
request a waiver; or (3) pursue other options. Region 5 will submit its overall strategy for
bringing the contracts into compliance, to OAM by March 31, 2008. Once OAM reviews and
approves the strategy/plan, Region 5 will begin implementation within 30 days of the approval.
Final resolution of this issue will depend on the option chosen, and whether negotiations with
contractors are required. This is not a unilateral type of action, and any contract modification
will require the contractor's concurrence
Recommendation 3-2 - That the OARM AA communicate the 3-percent base fee limit
included in the EPAAR to all contracting and project officers using CPAF contracts and
verify compliance during Headquarters reviews.
Response : We concur with this recommendation. OAM will communicate this information to
EPA's acquisition community via a Flash Notice by March 31, 2008. This Flash Notice will also
request that all Agency contracting offices verify through their Quality Assessment Plan (QAP)
process, that they are complying with the 3-percent base fee limit for their CPAF contracts.
OAM also intends to follow up by sending out reminder verification/compliance request notices
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3
on an annual basis (by March 31 of each year), starting 2009, to OAM Division Directors and
Regional Contracting Officer Supervisors.
Recommendation 4-1 - That the OARM AA simplify the base fee calculation for CPAF
contracts by not calculating a separate factor for billing purposes.
Response : We do not agree with this recommendation. The EPAAR 1516.301-70, Payment of
Fee, states: "The policy of EPA for cost-reimbursement, term form contracts is to make
provisional payment of fee (i.e., the fixed fee on cost-plus-fixed-fee type contracts or the base fee
on cost-plus-award-fee type contracts) on a percentage of work completed basis, when such a
method will not prove detrimental to proper contract performance. Percentage of work
completed is the ratio of the direct labor hours performed in relation to the direct labor hours set
forth in the contract..."
This fee calculation was designed to avoid a situation where the Agency is paying fee based on
costs the contractor expended - a cost-plus-percentage-of-costs contract, which is forbidden by
the FAR. The method the OIG recommends of calculating the base fee by multiplying the base
fee percentage times the direct labor costs may be easier, but creates a cost-plus-percentage-of-
cost contract.
Recommendation 4-2 - That the OARM AA eliminate the contract requirement for the
submission of contractor self evaluations.
Response : We partially concur with this recommendation. We agree with the OIG that our
contracting officers should not require contractors to prepare and submit self evaluations if they
are of limited or no use to EPA. We intend to communicate this to EPA's acquisition
community by March 31, 2008, encouraging contracting officers and program officials to either
make better use of contractors' self evaluations, or work with their contractors to remove the
requirement from the award fee plans of their contracts. We do not agree that the contract
requirement should be eliminated across the board, as some EPA officials do find the self
evaluations to be useful.
Recommendation 4-3 - That the Regional Administrator, Region 5, recover the $3,503 in
improper award fees paid to a contractor, or offset this amount against future payments.
Response : Region 5 does not agree that they overpaid $3,503 in improper award fees for the
two Work Assignments (WA) cited in the draft report. They concur that there was an error in the
computation of the award fee for WA No. 105. Their analysis indicates that the Performance
Evaluation Board (PEB) had agreed on a consensus score of 75% for this site. Region 5
recomputed the award fee for this WA and determined that it should have been $24,006.15,
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4
instead of the $28,807.38 that was awarded. The Region will recoup this overpayment of
$4,801.23 by obtaining a refund from the contractor, or offsetting the overpayment against a
future invoice, by March 31, 2008.
Region 5 disagrees with the OIG's recommendation that they obtain a refund or offset for
overpayment of award fee under WA No. 212. After discussing the rating with the project
officer and PEB members, it was determined that there was an error made in the adjectival rating
(should have been Outstanding), and not the numeric consensus rating (which was 90%, correct
for an Outstanding rating). Therefore, the award fee was correctly computed for this site.
Region 5 will document the WA and contract modification files to reflect the correct adjectival
rating by March 31, 2008.
Region 5 does not agree that they overpaid $100,020 in base fees on the two contracts. The OIG
calculated the 3-percent base fee by applying it to the total level-of-effort (LOE) hours incurred
to date. In accordance with the EPAAR Subpart 1516.404-273(b), the base fee paid to
contractors shall not exceed 3 percent of the estimated cost of the contract. Region 5's
calculations indicate that the total amount of base fee paid to the contractor to date is less than 3
percent of the total funds currently obligated under the contract, exclusive of fees.
We look forward to receiving your final report. Should you have any questions, please
contact Kerrie O'Hagan, Director, Policy, Training & Oversight Division in the Office of
Acquisition Management, at (202) 564-4315.
cc: Denise Benjamin Sirmons
John Gherardini
Joan Wooley
Kerrie O'Hagan
John Oliver
Juan Common
Mary A. Gade
Pat Bamford
Lisa Smith
Darlene Hainer
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Appendix B
Distribution
Office of the Administrator
Assistant Administrator for Administration and Resources Management
Regional Administrator, Region 3
Regional Administrator, Region 5
Agency Followup Official (the CFO)
Agency Followup Coordinator
Audit Followup Coordinator, Office of Administration and Resources Management
Audit Followup Coordinator, Region 3
Audit Followup Coordinator, Region 5
Office of General Counsel
Associate Administrator for Congressional and Intergovernmental Relations
Associate Administrator for Public Affairs
Deputy Inspector General
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