EPA Does Not Always Receive Adjustment Vouchers from Contractors

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Report Contributors:

Michael Petscavage
Doug LaTessa
Denise Darasaw
Marcia Hirt-Reigeluth
Kevin Lawrence

Abbreviations

Contracting Officers

DCAA

Defense Contract Audit Agency

EPA

U.S. Environmental Protection Agency

FACO

Financial Administrative Contracting Officer

FAR

Federal Acquisition Regulation

Fiscal Year

MATS

Management Audit Tracking System

OAM

Office of Acquisition Management

OIG

Office of Inspector General

Project Officer

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At a Glance

Catalyst for Improving the Environmen

Why We Did This Audit

We conducted this audit to
determine whether the U.S.
Environmental Protection
Agency (EPA) is timely
receiving adjustment vouchers
and credits from contractors
based on sustained Defense
Contract Audit Agency
(DCAA) audit results.

Background

DCAA performs audits of
final indirect cost rate
proposals that impact EPA
contracts. After negotiations
with the contractor, EPA
establishes final indirect cost
rate agreements. Once the
final indirect cost rate
agreement is established,
contractors are required to
submit adjustment vouchers to
EPA within 60 days of the
agreement date. These
vouchers adjust contractor
billings for the differences
between billed indirect costs
and the indirect costs resulting
from the application of the
negotiated indirect costs rates
for the period specified.

For further information,
contact our Office of
Congressional, Public Affairs
and Management at
(202) 566-2391.

To view the full report,
click on the following link:
www.epa.qov/oiq/reports/2010/
20100308-10-P-0075.pdf

EPA Does Not Always Receive
Adjustment Vouchers from Contractors

What We Found

EPA does not always receive adjustment vouchers from contractors for
final negotiated indirect cost rates. The final indirect cost rate agreements
provide the contractor 60 days to submit a voucher for any billing
adjustments. For 17 of the 20 DCAA audit reports in our sample, EPA did
not timely receive an adjustment voucher on at least one or more EPA
contracts. The 20 audit reports impacted 52 EPA contracts, for which EPA
did not receive adjustment vouchers for 33. Seven adjustment vouchers
were received late. The only nine vouchers that were received timely all
involved EPA owing the contractor money.

EPA does not have an effective system to ensure required adjustment
vouchers are received. As a result, EPA allowed contractors to keep
government funds and provided them with interest-free loans in those cases
where the contractor owed EPA money. In some cases, contractors kept
money owed the government for years. For example, one contractor that did
not submit adjustment vouchers during the life of two 4-year contracts owed
the government $207,494. As a result of our review, EPA received a credit
of $4,713 from one contractor and $263,193 from another contractor, for a
total of $267,906.

What We Recommend

We recommend that the Assistant Administrator for Administration and
Resources Management require its Office of Acquisition Management to
track receipt of adjustment vouchers and monies owed EPA for final
negotiated indirect cost rates. We also made recommendations to identify
agreements where adjustments have not been made, require financial
administrative contracting officers to provide needed information to
contracting officers, and increase contracting officer and projects officer
awareness of their responsibilities related to indirect cost rate agreements
and adjustment vouchers. EPA agreed with our recommendations or took
alternate corrective actions that we considered satisfactory.

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$ Q \

I® I

UNITED STATES ENVIRONMENTAL PROTECTION AGENCY

WASHINGTON, D.C. 20460

OFFICE OF
INSPECTOR GENERAL

March 8, 2010

MEMORANDUM

SUBJECT:

EPA Does Not Always Receive Adjustment Vouchers from Contractors
Report No. 10-P-0075

FROM:

Melissa M. Heist

Assistant Inspector General for Audit

TO:

Craig E. Hooks, Assistant Administrator

Office of Administration and Resources Management

This is our report on the U.S. Environmental Protection Agency's (EPA's) practice of not always
receiving adjustment vouchers from contractors. This report contains findings that describe the
problems the EPA Office of Inspector General (OIG) identified and corrective actions the OIG
recommends. This report represents the position of the OIG and does not necessarily represent
the final EPA position. Final determinations on matters in this report will be made by EPA
managers in accordance with established audit resolution procedures.

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 $398,166.

Action Required

In responding to the draft report, the Agency provided corrective action plans for addressing all
recommendations. Therefore, a response to the final report is not required. The Agency should
track in the Management Audit Tracking System those recommendations not yet implemented.
We have no objections to the further release of this report to the public. The report will be
available at http://www.epa.gov/oig.

If you or your staff have any questions, please contact me at 202-566-0899 or
heist.melissa@epa.gov; or Janet Kasper, Product Line Director, at 312-886-3059 or
kasper.ianet@epa.gov.

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EPA Does Not Always Receive
Adjustment Vouchers from Contractors

10-P-0075

Table of C

Chapters

1 Introduction 1

Purpose 1

Background 1

Scope and Methodology 1

2 EPA Not Always Receiving Adjustment Vouchers from Contractors 3

EPA and OMB Policy Requires Submission and Tracking of

Adjustment Vouchers 3

Contractors Not Timely Submitting Adjustment Vouchers 4

Process for Distributing Indirect Cost Rate Agreements and

Receiving Adjustment Vouchers Not Effective 5

Lack of Timeliness Allows Contractors to Keep Government Funds 7

Conclusion 8

Recommendations 8

Agency Comments and OIG Evaluation 9

Status of Recommendations and Potential Monetary Benefits 10

Appendices

A Agency Response 11

B Distribution 13

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10-P-0075

Chapter 1

Introduction

Purpose

The U.S. Environmental Protection Agency's (EPA) Office of Inspector General
(OIG) conducted this audit to determine whether EPA is timely receiving
adjustment vouchers and credits from contractors based on sustained Defense
Contract Audit Agency (DCAA) audit report results.

Background

EPA uses contracts to aid in accomplishing its mission. According to the Fiscal
Year (FY) 2008 Acquisition Activity Report, EPA obligated over $1.5 billion in
contracts during that fiscal year. At the request of EPA's Office of Acquisition
Management (OAM), DCAA performs audits of final indirect cost rate proposals
that impact EPA contracts to determine whether costs incurred are allocable,
reasonable, and allowable in accordance with the Federal Acquisition Regulation
(FAR) and contract terms. For contractors other than educational institutions and
nonprofit organizations, DCAA is normally the responsible government audit
agency. In FY 2008, EPA requested 282 DCAA audits and received and
processed 163 DCAA audit reports. For this same period, DCAA questioned over
$3.2 million of claimed costs as unallocable, unreasonable, or unallowable per
FAR and/or contract terms.

In accordance with the allowable cost and payment clause at FAR 52.216-7, the
contractor must submit to the contracting officer (CO) and cognizant auditor a
final indirect cost rate proposal. Each contractor must submit an adequate
proposal within the 6-month period following the expiration of each of its fiscal
years. DCAA issues the audit reports to OAM and EPA financial administrative
contracting officers (FACOs) review the results. After negotiations with the
contractor, the FACOs establish final indirect cost rate agreements. Once the
final indirect cost rate agreement is established, contractors are required to submit
adjustment vouchers to EPA within 60 days of the agreement date. These
vouchers adjust contractor billings for the differences between billed indirect
costs and the indirect costs resulting from the application of the negotiated
indirect costs rates for the period specified.

Scope and Methodology

We performed this audit from February to December 2009 in accordance with
generally accepted government auditing standards, issued by the Comptroller
General of the United States. Those standards require that we plan and perform

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10-P-0075

the audit to obtain sufficient, appropriate evidence to provide a reasonable basis
for our findings and conclusions based on our audit objectives. We believe that
the evidence obtained provides a reasonable basis for our findings and
conclusions based on our audit objectives.

According to OIG's DCAA Monitoring Application Database, in FY 2008, there
were 39 DCAA audits closed that contained questioned costs totaling $4,978,843.
We reviewed 20 of the 39 DCAA audit reports. We stratified the universe by
high dollar and low dollar audits with high dollar audits representing questioned
costs greater than $100,000. We conducted a 100-percent review of the six high
dollar audits and selected an additional 14 audits for review.

Our work encompassed reviewing contracts located in EPA Headquarters in
Washington, DC, as well as the EPA regional offices that had contracts in our
sample (Regions 2, 3, 4, 7, and 8). We requested the Agency to provide us copies
of adjustment vouchers and checks to verify that payments had been made. If
adjustment vouchers had not been received, we requested the Agency to provide a
written explanation why. Additionally, we reviewed the Financial Data
Warehouse to determine whether vouchers were paid for the selected contracts in
our sample. We interviewed COs and project officers (PO) from Headquarters;
the five regions noted; Research Triangle Park, North Carolina; and Cincinnati,
Ohio. We also interviewed the FACO Team Leader, the EPA Audit Program
Manager for DCAA Monitoring, the Acting OAM Policy Director, and two OAM
Service Center Managers. There were no previous audits of EPA's resolution of
DCAA reports.

Internal Control Structure

In planning and performing our audit, we reviewed management controls related
to our objective. Specifically, we examined EPA's Acquisition Handbook, the
EPA Acquisition Regulation, and other guidelines that outline EPA's controls and
monitoring procedures for addressing the audit resolution process. We reviewed
quality assurance plans from each program operating division, as well as OAM's
review of the quality assurance plans. OAM Divisions as well as regional
contracting offices are empowered to develop their own quality assurance plans,
which set forth their program to ensure their acquisition products and processes
are of high quality and comply with applicable statutes as well as federal and
Agency regulations and policies.

We reviewed documents EPA completed in compliance with the Federal
Managers' Financial Integrity Act. This included a review of the Office of
Administration and Resources Management's FY 2008 Federal Managers'
Financial Integrity Act Assurance Letter. EPA did not identify internal control
weaknesses related to the audit's objectives.

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10-P-0075

Chapter 2

EPA Not Always Receiving Adjustment Vouchers

from Contractors

EPA did not always receive adjustment vouchers from contractors for final
negotiated indirect cost rates. In accordance with EPA policy, contractors are to
submit adjustment vouchers within 60 days of signing the indirect rate agreement.
For 17 of the 20 DCAA audit reports in our sample, EPA did not timely receive
corresponding adjustment vouchers on at least one or more EPA contracts
impacted by each DCAA audit. The 20 audit reports impacted 52 EPA contracts,
for which EPA did not receive adjustment vouchers for 33. This occurred
because EPA does not have an effective process for distributing indirect cost rate
agreements and receiving adjustment vouchers. As a result, EPA allowed
contractors to keep government funds and provided them with an interest-free
loan in those cases where the contractor owed EPA money, sometimes for years.
For example, one contractor that did not submit adjustment vouchers during the
life of two 4-year contracts owed the government $207,494. As a result of our
review, EPA received a credit of $4,713 from one contractor and $263,193 from another
contractor, for a total of $267,906.

EPA and OMB Policy Requires Submission and Tracking of
Adjustment Vouchers

EPA's Acquisition Handbook requires that indirect cost rate agreements identify
the timeframe within which contractors must submit adjustment vouchers to
implement the rates established. According to the policy, the indirect rate
agreements are to state that the contractor has 60 days from the date of the
agreement to submit a voucher for any billing adjustments.

EPA's Acquisition Handbook establishes procedures and identifies the roles and
responsibilities of EPA staff when processing indirect cost rate agreements.
FACOs are responsible for distributing indirect rate agreements to both
contractors and COs. COs are responsible for ensuring POs receive a copy of the
indirect cost rate agreement, and POs are responsible for notifying COs if they do
not receive the adjustment voucher within 60 days of the signed agreement. The
CO is responsible for follow-up action with the contractor once informed that the
adjustment voucher has not been received.

EPA Manual 2750 outlines the EPA audit management process and contains
policies for resolving audit recommendations, including those involving funds
owed to EPA. To support the audit management process, EPA established a
Management Audit Tracking System (MATS). Reports from MATS help the CO
and office's Audit Follow-up Coordinator monitor the status of corrective actions,

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10-P-0075

monies owed the Agency, and recommended efficiencies to which the action
official agreed.

Office of Management and Budget Circular A-50 provides procedures for
executive agencies when considering reports by Inspectors General, other
executive branch audit organizations, etc. In order to ensure effective recovery
action, A-50 requires agencies to establish accounting and collection controls for
amounts due to the government.

Contractors Not Timely Submitting Adjustment Vouchers

EPA often did not receive contractor adjustment vouchers for final negotiated
indirect cost rates within the 60-day EPA requirement. For 17 of the 20 audit
reports in our sample, EPA did not timely receive corresponding adjustment
vouchers on at least one or more EPA contracts. The 20 DCAA audits in our
sample impacted 52 EPA contracts, and for 33 of those contracts the contractor
did not submit an adjustment voucher, as shown in Figure 2-1. For seven other
contracts in our sample, the contractor submitted the adjustment vouchers after
the 60-day timeframe. For all nine contracts where adjustment vouchers were
submitted within the 60-day timeframe, EPA owed the contractor money. EPA
did not require adjustment vouchers for the remaining three contracts for various
reasons, such as the final negotiated indirect cost rate exceeding the ceiling rate
included in the contract.

Figure 2-1: Receipt of Adjustment Vouchers

Receipt of Adjustment Vouchers

% 25

-4—'

o 20

4—

2 15

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10-P-0075

indirect costs and the indirect costs resulting from application of the negotiated
final indirect cost rates within 60 days. EPA has paid the contractor a total of
$127 million over the life of the contracts. Even small changes in indirect rates
on such large contracts could result in thousands of taxpayer dollars owed to EPA.

For another contract, a contractor provided services to EPA on three separate task
orders. The final indirect cost rate agreement was signed in March 2008 and was
for the period April 1, 2003, through March 31, 2004. The contractor submitted
adjustment vouchers within 60 days. However, the vouchers were submitted for
the period through October 5, 2003, rather than through the March 31, 2004, date
as established in the final indirect cost rate agreement. After the OIG notified
EPA of this, the contractor submitted supplemental invoices covering the entire
period of the indirect cost rate agreement, resulting in credits to EPA for two task
orders for over $4,700.

Process for Distributing Indirect Cost Rate Agreements and
Receiving Adjustment Vouchers Not Effective

EPA does not have an effective process for distributing indirect cost rate
agreements and receiving adjustment vouchers. Specifically, (1) EPA does not
track the receipt of adjustment vouchers required to be submitted by contractors,
(2) COs and POs do not always receive indirect rate cost agreements, (3) some
COs and POs were unaware of their responsibilities related to indirect cost rate
agreements, and (4) some COs wait until the entire contract period of
performance expires before ensuring receipt of adjustment vouchers.

EPA Does Not Track Receipt of Adjustment Vouchers

EPA does not track the receipt of adjustment vouchers in MATS. During 2008,
EPA tracked audit report resolution in MATS, but closed the audit reports in
MATS after it executed a final indirect rate agreement. EPA did not track the
subsequent receipt of the corresponding adjustment vouchers related to the
indirect rate agreements. In 2009, EPA began using a different system to track
audit report resolution, but this system also is not used to track receipt of
adjustment vouchers. Further, EPA does not have any other internal controls to
track the receipt of adjustment vouchers, including assigning responsibility for
tracking to any one group or person. Because of the lack of any tracking system
and internal controls, EPA is relying on contractors to submit adjustment
vouchers and identify the amount of money owed to either EPA or the contractor.

COs and POs Not Always Receiving Indirect Cost Rate Agreements

FACOs do not always provide COs with the indirect cost rate agreements
necessary to administer the contracts for which they are responsible. Of the
14 COs interviewed, 3 said they never received the indirect cost rate agreement.
In one case, the EPA FACO issued a unilateral indirect cost rate agreement. Due

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10-P-0075

to an oversight, the FACO never provided the agreement to the contractor or
EPA's contracting officers. While this case was an oversight, FACOs do not
identify the impacted contracts in the indirect cost rate agreement and do not
always proactively identify the COs that should receive the indirect cost rate
agreement. Instead, the FACOs post the indirect rate agreement on an EPA
software system that can be accessed by COs or they provide the rate agreement
to the head of each contracting office (region, Research Triangle Park, etc.). The
Office of Administration and Resources Management's Financial Analysis and
Oversight Service Center staff told us it is difficult for them to identify the current
CO because of turnover and changes in the CO responsible for each contract.

Likewise, 10 of 14 POs we interviewed said the COs did not provide them the
indirect cost rate agreement as required by the EPA Acquisition Handbook. COs
did not provide the POs the rate agreement because they were not aware of this
requirement or because they did not receive the rate agreement from the FACO.
In some cases, the POs were only made aware of the existence of the indirect cost
rate agreement when the contractor submitted the adjustment voucher. POs are
not aware that adjustment vouchers are due if they do not receive a copy of the
indirect cost rate agreement.

COs and POs Not Always Aware of Their Responsibilities

COs and POs were not always aware of their responsibilities regarding indirect
cost rate agreements and adjustment vouchers. Seven of 13 COs interviewed
were not familiar with requirements of the EPA Acquisition Handbook regarding
their responsibilities for indirect cost rate agreements and adjustment vouchers.
Six COs were not aware that they were required to provide a copy of the indirect
cost rate agreement to the PO. Five COs were not aware that they should contact
the contractor after receiving notification from the PO that the adjustment voucher
had not been received. Also, 10 of 14 POs interviewed were not familiar with
their responsibilities. Seven POs did not know that the contractor should submit
an adjustment voucher within 60 days of the date of the indirect cost rate
agreement. Further, seven POs did not know that if the adjustment voucher is not
received they must inform the CO.

Adjustment Vouchers Not Submitted until Contract Close-Out

For some contracts in our sample, the contractor did not submit adjustment
vouchers until after the contract had expired. For example, one contractor had
two contracts for which indirect cost rate agreements were signed in 2005, 2006,

2007, and 2008 but adjustment vouchers for these years were not submitted until

2008, after the contract's period of performance had expired. All of the final
indirect cost rate agreements clearly stated that the adjustment vouchers were due
within 60 days.

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10-P-0075

Some EPA COs indicated that it is their practice to wait until the end of the
contract and process indirect rate agreement changes as part of contract close-out.
However, EPA's experience with another contractor highlights the consequences
of waiting until contract close-out - by the time the final indirect cost rate
agreement was signed the contractor no longer had contracts with EPA, the
president of the company had retired, and the business no longer existed.
Additionally, the contractor has been nonresponsive to inquiries from EPA and
EPA staff indicated that obtaining an adjustment voucher would be difficult under
the circumstances.

Lack of Timeliness Allows Contractors to Keep Government Funds

By not ensuring that adjustment vouchers are received in a timely manner, EPA is
allowing contractors to keep government funds and providing them with an
interest-free loan when the contractor owes EPA money. For example, in 2007,
EPA and one of its contractors signed indirect cost rate agreements for the periods
November 1996 through October 2000 and November 2000 through October
2003. After the OIG asked EPA whether the contractor had submitted the
adjustment voucher, EPA reminded the contractor that adjustment vouchers were
needed. The contractor subsequently submitted a credit voucher to EPA in
September 2009 acknowledging that it owed EPA over $263,000. Also, as noted
previously, our notifying EPA of a contractor submitting an incorrect adjustment
voucher resulted in $4,700 in credits to EPA.

In another case, one of EPA's contractors did not submit adjustment vouchers for
two contracts to EPA until 2008, after the contract's period of performance had
expired. From 2001 through 2006, EPA paid the contractor a total of $20,150,583
under the two contracts. As shown in Tables 2-1 and 2-2, one contractor that did
not submit adjustment vouchers during the life of two 4-year contracts owed the
government $207,494. These funds could have been used to conduct other work.

Table 2-1: Example of Interest-Free Loan to Contractor for Contract #1

Date Contractor
Submitted
Adjustment
Voucher

Date of Indirect
Cost Rate
Agreement

Date
Adjustment
Voucher Due

Fiscal
Year

Amount Due
to EPA

2002

4/18/05

6/17/05

9/24/08

$30,039

2003

12/28/06

2/26/07

9/24/08

$45,655

2004

9/6/07

11/05/07

9/24/08

$13,234

2005

6/26/08

8/25/08

9/24/08

$56,692

Total

$145,620

Source: OIG analysis of EPA data.

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10-P-0075

Table 2-2: Example of Interest-Free Loan to Contractor for Contract #2

Date Contractor
Submitted
Adjustment
Voucher

Date of Indirect
Cost Rate
Agreement

Date
Adjustment
Voucher Due

Fiscal
Year

Amount Due
to EPA

2002

4/18/05

6/17/05

10/15/08

$11,768

2003

12/28/06

2/26/07

10/15/08

$22,866

2004

9/6/07

11/05/07

10/15/08

$4,250

2005

6/26/08

8/25/08

10/15/08

$22,990

Total

$61,874

Source: OIG analysis of EPA data.

Conclusion

EPA needs to increase management and staff awareness of their responsibilities
for ensuring that contractors submit adjustment vouchers timely. The submission
of adjustment vouchers resulting from negotiating final indirect cost rates with
contractors helps ensure that EPA pays, and contractors receive, a fair price for
services rendered to the government. Systemic breakdowns in EPA's
management of this process have resulted in contractors unnecessarily keeping
taxpayer dollars for years.

Recommendations

We recommend that the Assistant Administrator for Administration and
Resources Management:

2-1 Track receipt of adjustment vouchers and monies owed EPA for final
negotiated indirect cost rates in accordance with Office of Management
and Budget Circular A-50.

2-2 Identify all final indirect cost rate agreements where adjustment vouchers
have not been submitted and track them to ensure receipt.

2-3 Require FACOs to identify all contracts impacted and list those contracts
in the final indirect cost rate agreements.

2-4 Require FACOs to provide the final indirect cost rate agreement directly
to the COs for contracts impacted by the agreement.

2-5 Increase COs' and POs' awareness of their responsibilities for processing
and managing indirect cost rate agreements and adjustment vouchers
through discussions and presentations at meetings and conferences on
contract management, as well as through articles in OAM's quarterly
newsletter on current policy initiatives.

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Agency Comments and OIG Evaluation

The Agency's response sufficiently addressed all our recommendations.

EPA agreed with recommendations 2-1, 2-2, 2-3, and 2-5, and provided milestone

dates for completion of the following actions:

• Establish a process to ensure that adjustment vouchers and monies owed
EPA are tracked (March 31, 2010);

• Publish an article in the next Hot Tips to raise awareness for enhanced CO
oversight (March 31, 2010);

• List prime contracts in indirect cost rate agreements, and incorporate a
statement in the final indirect cost rate agreements identifying that the
purpose of the agreement is to establish indirect rates applicable to all
prime contracts and subcontracts that the vendor holds with EPA
(February 1, 2010); and

• Increase knowledge of COs' and POs' awareness by making presentations
at upcoming contractor forums (Spring 2010) and EPA's annual
Acquisition Conference.

EPA did not provide a milestone date in its written response for recommendation
2-2, but later provided a milestone of March 31, 2010, in separate correspondence.

In response to recommendation 2-4, EPA stated that as of October 1, 2009, the
FACOs are required to distribute negotiated indirect cost rate agreements to all
affected OAM Service Center Managers and Regional Contracting Officer
Supervisors. At the exit conference, EPA stated that these staff members will
distribute the negotiated indirect cost rate agreements to COs. This practice meets
the intent of our recommendation.

As a result of our review, EPA received a credit of $4,713 from one contractor
and $263,193 from another contractor, for a total of $267,906.

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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

2-1 8 Track receipt of adjustment vouchers and monies
owed EPA for final negotiated indirect cost rates in
accordance with Office of Management and Budget
Circular A-50.

2-2 8 Identify all final indirect cost rate agreements where
adjustment vouchers have not been submitted and
track them to ensure receipt.

2-3 8 Require FACOs to identify all contracts impacted
and list those contracts in the final indirect cost rate
agreements.

2-4 8 Require FACOs to provide the final indirect cost
rate agreement directly to the COs for contracts
impacted by the agreement.

2-5 8 Increase COs' and POs' awareness of their
responsibilities for processing and managing
indirect cost rate agreements and adjustment
vouchers through discussions and presentations at
meetings and conferences on contract
management, as well as through articles in OAM's
quarterly newsletter on current policy initiatives.

Planned
Completion
Date

Claimed
Amount

Agreed To
Amount

Assistant Administrator for 3/31/2010