Department of Energy, Office of Worker Advocacy
Deficient Controls Led to Millions of Dollars in Improper and Questionable Payments to Contractors Gao ID: GAO-06-547 May 31, 2006The Energy Employees Occupational Illness Compensation Program Act of 2000 (EEOICPA) authorized the Department of Energy (Energy) to help its former contractor employees file state workers' compensation claims for illnesses that could be linked to exposure to toxic substances during their employment. Concerned with the relatively small number of finalized cases and the overall effectiveness of the program, Congress asked GAO to review costs incurred by Energy to administer the program. Specifically, Congress asked GAO to determine whether (1) internal controls over program payments were adequately designed to provide reasonable assurance that improper payments to contractors would not be made or would be detected in the normal course of business and (2) program payments were properly supported as a valid use of government funds.
Energy did not establish an effective control environment over payments to contractors or overall contract costs. Specifically, because Energy lacked an effective review and approval process for contractor invoices, it had no assurance that goods and services billed had actually been received. Although responsibility for review and approval of invoices on the largest contract rested with the Space and Naval Warfare Systems Center, New Orleans (SSC NOLA) through an interagency agreement, Energy did not ensure that SSC NOLA carried out proper oversight. Energy also failed to maintain accountability for equipment purchased by contractors. Further, subcontractor agreements, which represented nearly $15 million in program charges, were not adequately assessed, nor were overall contract costs sufficiently monitored or properly reported. These fundamental control weaknesses made Energy highly vulnerable to improper payments. GAO identified $26.4 million in improper and questionable payments for contractor costs, including billings of employees in labor categories for which they were not qualified or that did not reflect the duties they actually performed, the inappropriate use of fully burdened labor rates for subcontracted labor, add-on charges to other direct costs and base fees that were not in accordance with contract terms, and various other direct costs that were improperly paid. Further, certain payments toward the end of the program for furniture and computer equipment may not have been an efficient use of government funds. These improper and questionable payments represent nearly 30 percent of the $92 million in total program funds spent through September 30, 2005, but could be even higher given the poor control environment and the fact that GAO only reviewed selected program payments.
RecommendationsOur recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director: Team: Phone:GAO-06-547, Department of Energy, Office of Worker Advocacy: Deficient Controls Led to Millions of Dollars in Improper and Questionable Payments to Contractors
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Report to Congressional Requesters:
May 2006:
Department of Energy, Office of Worker Advocacy:
Deficient Controls Led to Millions of Dollars in Improper and
Questionable Payments to Contractors:
GAO-06-547:
GAO Highlights:
Highlights of GAO-06-547, a report to congressional requesters
Why GAO Did This Study:
The Energy Employees Occupational Illness Compensation Program Act of
2000 (EEOICPA) authorized the Department of Energy (Energy) to help its
former contractor employees file state workers‘ compensation claims for
illnesses that could be linked to exposure to toxic substances during
their employment. Concerned with the relatively small number of
finalized cases and the overall effectiveness of the program, Congress
asked GAO to review costs incurred by Energy to administer the program.
Specifically, Congress asked GAO to determine whether (1) internal
controls over program payments were adequately designed to provide
reasonable assurance that improper payments to contractors would not be
made or would be detected in the normal course of business and (2)
program payments were properly supported as a valid use of government
funds.
What GAO Found:
Energy did not establish an effective control environment over payments
to contractors or overall contract costs. Specifically, because Energy
lacked an effective review and approval process for contractor
invoices, it had no assurance that goods and services billed had
actually been received. Although responsibility for review and approval
of invoices on the largest contract rested with the Space and Naval
Warfare Systems Center, New Orleans (SSC NOLA) through an interagency
agreement, Energy did not ensure that SSC NOLA carried out proper
oversight. Energy also failed to maintain accountability for equipment
purchased by contractors. Further, subcontractor agreements, which
represented nearly $15 million in program charges, were not adequately
assessed, nor were overall contract costs sufficiently monitored or
properly reported. These fundamental control weaknesses made Energy
highly vulnerable to improper payments.
GAO identified $26.4 million in improper and questionable payments for
contractor costs, including billings of employees in labor categories
for which they were not qualified or that did not reflect the duties
they actually performed, the inappropriate use of fully burdened labor
rates for subcontracted labor, add-on charges to other direct costs and
base fees that were not in accordance with contract terms, and various
other direct costs that were improperly paid. Further, certain payments
toward the end of the program for furniture and computer equipment may
not have been an efficient use of government funds.
Table: Summary of Improper and Questionable Payments;
Type of Cost: Labor: Labor categories[A]; Improper: $2,498,920;
Questionable: $17,686,892;
Total: $20,185,812.
Type of Cost: Labor: Fully burdened labor rates; Improper: 3,661,429;
Questionable: 569,798;
Total: 4,231,227.
Type of Cost: Labor: Overtime charges; Improper: 3,019;
Questionable: [Empty];
Total: 3,019.
Type of Cost: Labor: Subtotal;
Improper: [Empty];
Questionable: [Empty];
Total: $24,420,058.
Type of Cost: Other direct costs: Add-on charges and base fees;
Improper: $655,734;
Questionable: [Empty];
Total: $655,734.
Type of Cost: Other direct costs: Per diem and commuting costs[A];
Improper: 12,418;
Questionable: $4,704;
Total: $17,122.
Type of Cost: Other direct costs: First-class travel[A]; Improper:
5,207;
Questionable: 9,119;
Total: $14,326.
Type of Cost: Other direct costs: Other miscellaneous payments;
Improper: 91,431;
Questionable: [Empty];
Total: $91,431.
Type of Cost: Other direct costs: Subtotal; Improper: [Empty];
Questionable: [Empty];
Total: $778,613.
Type of Cost: Inefficient use of government funds: Furniture; Improper:
[Empty];
Questionable: $821,129;
Total: $821,129.
Type of Cost: Inefficient use of government funds: Equipment; Improper:
[Empty];
Questionable: $341,790;
Total: $341,790.
Type of Cost: Inefficient use of government funds: Subtotal; Improper:
[Empty];
Questionable: [Empty];
Total: $1,162,919.
Type of Cost: Total;
Improper: $6,928,158;
Questionable: $19,433,432;
Total: $26,361,590.
Source: GAO.
[A]The amounts reported for these categories represent the gross amount
paid to Energy to its contractors and therefore do not reflect any
reductions or offsets that may be due the contractors for the goods and
services that were provided. Any potentially recoverable amounts would
need to be determined after consideration of these reductions or
offsets.
[End of Table]
These improper and questionable payments represent nearly 30 percent of
the $92 million in total program funds spent through September 30,
2005, but could be even higher given the poor control environment and
the fact that GAO only reviewed selected program payments.
What GAO Recommends:
GAO makes 16 recommendations to help Energy and SSC NOLA strengthen
controls over payments to contractors and to mitigate the risks of
paying improper contract costs in the future. While Energy accepted the
recommendations, it took issue with several of GAO‘s findings,
including GAO‘s view of its responsibility for activities carried out
through an interagency agreement. SSC NOLA concurred with the
recommendations GAO made to it. GAO reaffirms its findings and
recommendations.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-06-547].
To view the full product, including the scope and methodology, click on
the link above. For more information, contact Linda Calbom at (202) 512-
9508 or calboml@gao.gov.
[End of Section]
Contents:
Letter:
Results in Brief:
Background:
Energy Did Not Establish Effective Controls over Payments to
Contractors or Overall Contract Costs:
Energy Made Millions of Dollars in Improper and Questionable Payments
to Contractors:
Conclusion:
Recommendations for Executive Action:
Agency Comments and Our Evaluation:
Appendixes:
Appendix I: Scope and Methodology:
Appendix II: Comments from the Department of Energy:
Appendix III: Comments from the Space and Naval Warfare Systems Center,
New Orleans:
Appendix IV: GAO Contact and Staff Acknowledgments:
Tables:
Table 1: Total Program Costs for October 2000 through September 30,
2005:
Table 2: Descriptions of Contract Vehicles Used by Energy for the OWA
Program:
Table 3: Summary of Improper and Questionable Payments:
Figures:
Figure 1: Significant Program Events:
Figure 2: Westwood Group, Inc., Invoice for Services Provided to OWA in
October 2004:
Figure 3: Unused Modular Furniture in Storage Facility:
Abbreviations:
BPA: blanket purchase agreement:
CO: contracting officer:
COR: contracting officer's representative:
DCAA: Defense Contract Audit Agency:
DOJ: Department of Justice:
DOL: Department of Labor:
EEOICPA: Energy Employees Occupational Illness Compensation Program Act
of 2000:
ES&H: Office of Environment, Safety, and Health:
FAR: Federal Acquisition Regulation:
FSS: Federal Supply Schedule:
FTR: Federal Travel Regulation:
FTS: Federal Technology Service:
GSA: General Services Administration:
IRS: Internal Revenue Service:
OWA: Office of Worker Advocacy:
SEA: Science and Engineering Associates, Inc.
SSC NOLA: Space and Naval Warfare Systems Center, New Orleans:
TDI: Technical Design, Inc.
May 31, 2006:
The Honorable Charles E. Grassley:
Chairman:
Committee on Finance:
United States Senate:
The Honorable Jeff Bingaman:
Ranking Minority Member:
Committee on Energy and Natural Resources:
United States Senate:
The Honorable Jim Bunning:
United States Senate:
The Energy Employees Occupational Illness Compensation Program Act of
2000 (EEOICPA) was passed by Congress, in part, to provide for timely
compensation of former nuclear weapons workers who sustained illnesses
that could be linked to exposure to toxic substances while employed at
a Department of Energy (Energy) facility.[Footnote 1] Subtitle D of
EEOICPA instructed Energy to assist its contractors' employees by
developing and submitting state workers' compensation claim
applications to an independent physician panel for review of each
claimant's potential eligibility for workers' compensation benefits.
Subtitle D of EEOICPA did not instruct Energy to pay the benefits due
an eligible worker, but instead authorized Energy to assist the
claimant in filing a claim to receive compensation from a state
workers' compensation program.
Concerned with the relatively small number of finalized cases and the
overall effectiveness of the program, the Senate Energy and Natural
Resources Committee held three hearings from November 2003 through
March 2004 that highlighted programmatic challenges to achieving the
program's objectives and Energy's limited progress in overcoming
them.[Footnote 2] Further, in May 2004, we issued a report identifying
issues with the claims review process. For example, we reported that a
shortage of qualified physicians serving on the review panels continued
to constrain Energy's capacity to decide cases more quickly.[Footnote
3] In October 2004, EEOICPA was amended to repeal Subtitle D and add a
new Subtitle E to be administered by the Secretary of Labor.[Footnote
4]
Prior to the amendment of EEOICPA, in a letter dated August 30, 2004,
you asked us to review costs incurred by Energy in its administration
of Subtitle D by considering the design of internal controls over
expenditures and the propriety of program payments. Specifically, we
determined whether (1) internal controls over program payments were
adequately designed to provide reasonable assurance that improper
payments to contractors would not be made or would be detected in the
normal course of business and (2) program payments were properly
supported as a valid use of government funds.
To address these objectives, we considered payments made by the Office
of Worker Advocacy (OWA), the Energy office tasked with administering
Subtitle D, from the inception of the program in October 2000 through
September 30, 2005.[Footnote 5] We primarily focused on payments to key
contractors that received approximately 60 percent of the $92 million
in program expenditures through September 2005. We reviewed the design
of controls over program payments, including payments made to
contractors. We also reviewed controls designed to monitor overall
contractor costs. We used a variety of forensic auditing techniques,
including data mining, to identify payments for detailed review. We
requested comments on a draft of this report from the Secretary of
Energy and on selections of this report from the Commanding Officer of
the Space and Naval Warfare Systems Center, New Orleans (SSC NOLA). We
received written comments from Energy's Deputy Assistant Secretary of
Planning and Administration, Office of Environment, Safety and Health
and the Commanding Officer of SSC NOLA. We have incorporated the
comments as appropriate. The comments are reprinted in appendixes II
and III. We performed our work in accordance with generally accepted
government auditing standards in Washington, D.C., and three contractor
locations from February 2005 through March 2006. Further details on our
scope and methodology can be found in appendix I.
Results in Brief:
Energy's control environment over payments to contractors and overall
contract costs was not effective in reducing the risk of improper
payments. Energy did not establish fundamental control activities, such
as an effective review and approval process for contractor invoices
that enabled it to verify that goods and services billed for had
actually been received and charged at the agreed-upon amounts.
Specifically, contractor services were not adequately monitored, labor
rates were not verified, and other direct costs lacked adequate
supporting documentation. Through an interagency agreement, SSC NOLA
was responsible for the review and approval of Science and Engineering
Associates, Inc. (SEA), invoices, among other administrative duties,
but did not adequately perform this function. For example, the SSC NOLA
official responsible for observing services made no site visits to
SEA's main performance location after February 2004, when SEA more than
tripled its workforce assigned to the program, and made only periodic
visits before that time. Energy, however, took no steps to assure
itself that SSC NOLA was properly carrying out its responsibilities.
Energy also did not have sufficient controls over equipment purchased
by contractors for the program and, as a result, could not fully
account for equipment during the program or at the expiration of the
contracts. Additionally, Energy and its contracting partners, the
General Services Administration (GSA) and SSC NOLA, did not adequately
assess subcontracted activity, which represented nearly $15 million in
payments by the program. Further, Energy made errors in reporting total
contract costs in its internal and external financial reports, and did
not effectively monitor cumulative contract costs--an important step in
managing overall contract costs, particularly for time and materials
contracts.
These fundamental internal control weaknesses and Energy's poor overall
control environment made Energy highly vulnerable to improper payments
and contributed to $26.4 million in improper and questionable payments
to contractors that we identified through a variety of forensic
auditing techniques. Of these improper and questionable payments, $24.4
million related to labor charges. These included $2.5 million in
improper payments to certain contractors under inappropriate labor
categories, including employees in labor categories for which they were
not qualified or that did not reflect the duties they actually
performed. Payments for labor charges further included $17.7 million in
questionable payments where, for example, the labor category
descriptions provided insufficient criteria by which to assess whether
the person was qualified under that labor category. In addition, Energy
paid two contractors for subcontracted labor costs using fully burdened
labor rates--rates that included base wages plus fringe benefits,
overhead costs, and profit--for which there was no basis under the
contracts. This resulted in more than $4.2 million in improper and
questionable payments by Energy. We also identified $778,613 in
improper and questionable payments for other direct costs, including
amounts for add-on charges and other fees not provided for in the
contracts, first-class travel, and unallowable per diem and commuting
costs. We found, for instance, that Energy paid contractor charges for
per diem for out-of-town personnel for weeks at a time when time
records we reviewed showed that they were not working. Finally, we
questioned whether more than $1 million in payments for furniture and
office equipment purchased toward the end of the program, much of which
was not used by OWA, was an efficient use of government funds. These
improper and questionable payments for contract costs represent nearly
30 percent of the $92 million in total program funds spent through
September 30, 2005, but could be even higher given the poor control
environment and the fact that we only reviewed selected program
payments.
We are making 16 recommendations to address the issues identified in
this report. We are making 14 recommendations to Energy to (1) improve
controls over the review and approval process for contractor invoices;
(2) strengthen accountability for government-owned equipment purchased
by contractors; (3) improve reporting and control of overall contract
costs, including subcontractor costs; and (4) pursue opportunities for
recovery of improper and questionable payments identified in this
report. We are also making 2 recommendations to SSC NOLA to reassess
its procedures for carrying out its responsibilities for delegated
contract administration in connection with interagency agreements.
In written comments on a draft of this report, Energy stated that it
agreed with the spirit and intent of our recommendations and that it
will give careful consideration to each of them. However, Energy took
issue with our core finding that it was responsible for its program
activities carried out through the cooperation of other agencies and
contractors through use of an interagency agreement. It also disagreed
with some of our other findings, including those related to improper
payment of certain contractor fees. In addition, Energy described some
of the corrective actions it is implementing to improve its controls,
including those over interagency contracting.
We continue to believe that Energy cannot assign or delegate away its
responsibility for ensuring the success of contracted efforts as well
as the propriety of payments under interagency agreements. Also, we
stand by our assessment of the improper and questionable nature of
certain fees Energy paid to its contractors. Our more detailed
responses to these comments are provided in the Agency Comments and Our
Evaluation section of this report and in appendix II.
SSC NOLA concurred with our recommendations and indicated that it has
plans to complete actions on the recommendations by August 1, 2006.
Background:
EEOICPA has two major components. The Department of Labor (DOL)
administers Subtitle B, which provides eligible workers who were
exposed to radiation or other toxic substances and who subsequently
developed illnesses, such as cancer and lung disease, a onetime payment
of up to $150,000 and covers future medical expenses related to the
illness. The benefits are payable from a compensation fund established
by EEOICPA. Subtitle B is not covered in this report. Prior to October
2004, Energy administered Subtitle D to help its contractors' employees
file state workers' compensation claims for illnesses determined by a
panel of physicians to have been caused by exposure to toxic substances
in the course of employment at an Energy facility. This report covers
payments made to administer Subtitle D.
To facilitate outreach to potential claimants and to help claimants
obtain work and medical records to initiate claims under EEOICPA,
Energy established 11 regional resource centers.[Footnote 6] These resource
centers were a gateway for claimants applying for assistance under
EEOICPA under both Subtitle D, administered by Energy, and Subtitle B,
administered by DOL. Energy and DOL shared the resource centers' costs
of operation, staffing, and training. To achieve this, DOL reimbursed
Energy for about half of the costs of its contract with Eagle Research
Group, Inc., the company that staffed and operated most of the resource
centers. Additionally, DOL reimbursed Energy for a portion of other
costs Energy paid directly, such as those for the leased space for the
centers.
After EEOICPA claims were received through the resource centers and
headquarters, Energy requested its field offices to locate records that
would support the claims, such as employment, medical treatment, and
toxic substance exposure records. Energy forwarded the information
collected to claim developers and various assistants who assembled the
information into case files. A panel of physicians reviewed the case
files to determine whether exposure to a toxic substance during
employment at an Energy facility was at least as likely as not to have
caused, contributed to, or aggravated the claimed medical condition. In
addition to the panel physicians, other doctors performed quality
assurance checks of the case files before the claims were submitted to
the physician panels and again after the physician panels had made
recommendations. All panel determinations were finalized by a medical
director employed by Energy. Energy communicated with applicants
through an EEOICPA hotline and through letters.
Energy began accepting applications for Subtitle D in July 2001 when
the majority of the resource centers opened, and began developing cases
in the fall of 2002 when its final administrative rule took
effect.[Footnote 7] While Energy got off to a slow start in processing
cases, completing only 6 percent of approximately 23,000 cases by
December 31, 2003, Energy later increased claim development activities,
which resulted in a backlog of claims awaiting review by the physician
panels. In June 2004, Energy transferred $21.2 million in funds to OWA
in an effort to clear the backlog of claims. During the same time, it
increased the number of case developers and physicians serving on the
review panels. Legislation was also moving through Congress as early as
June 2004 to transfer the administration of Subtitle D from Energy to
DOL.[Footnote 8] Ultimately, in October 2004, Congress repealed
Subtitle D and created Subtitle E, to be administered by DOL. In light
of the potential transfer, Energy ceased hiring new case developers in
August 2004, then gave official instruction to cease claims processing
in November 2004. Energy received $112.6 million in appropriated funds
(including transfers) through fiscal year 2005 for its EEOICPA
activities and spent over $92 million. Energy's field offices continue
to research claims that are now processed by DOL under Subtitle E. See
figure 1 for a time line of significant OWA program events.
Figure 1: Significant Program Events:
2000: Congress passes EEOICPA Oct. 2000:
2001: Resource Centers open July 2001:
2002: Final rule takes effect, claims processing begins Sept. 2002:
2003: $9.7 million transfer becomes available Nov. 2003:
2004: $21.2 million transfer becomes available; ramp up of program
activities Jun. 2004:
2004: Legislation to transfer program to DOL passes Congress Oct. 2004:
2004: Ramp down of program activities begins Nov. 2004:
2005: Program officially transferred to DOL; claims research still
performed by Energy field offices Feb. 2005:
Source: GAO
[End of figure]
Under Subtitle D of EEOICPA, Energy's role was to assist applicants in
pursuing state workers' compensation benefits but not to pay any
benefits to the applicants. Therefore, the costs associated with
Energy's EEOICPA activities are administrative costs only. We analyzed
Energy's program costs by major program activity, as shown in table 1.
Table 1: Total Program Costs for October 2000 through September 30,
2005:
Activity: Managed and operated 11 resource centers;
Amount: $11,817,528; [Empty];
Major contractors performing these activities: Eagle Resource Inc.
($10.4 million).
Activity: Researched cases and exposure records at Energy offices;
Amount: 29,081,346; [Empty];
Major contractors performing these activities: Primarily performed by
major; facility operating contractors[A].
Activity: Prepared/assembled cases, including the associated furniture
and office space for personnel; developed and maintained the Case
Management System;
Amount: 34,321,660; [Empty];
Major contractors performing these activities: Science and Engineering;
Associates, Inc.[B]; ($31.5 million).
Activity: Established physician panels to review cases, staffed the
EEOICPA hotline, supported the Advisory Committee, and provided program
and administrative personnel;
Amount: 13,611,440; [Empty];
Major contractors performing these activities: Westwood Group, Inc;
($10.3 million); Technical Design, Inc; ($3.3 million).
Activity: Other (such as travel for federal employees and information
technology management beginning in June 2004);
Amount: 3,485,097; [Empty];
Major contractors performing these activities: [Empty].
Activity: Total program costs reported by Energy through September 30,
2005;
Amount: $92,317,071; [Empty];
Major contractors performing these activities: [Empty].
Activity: Major contracts GAO reviewed;
Amount: [Empty]; [Empty];
Major contractors performing these activities: $55,500,000.
Source: GAO.
[A] Energy's major facility operating contractors, in general, operated
national laboratories and performed the EEOICPA case research
activities. They are subject to audit by Energy's Inspector General and
were not considered in our review.
[B] Includes $28.8 million under Energy's interagency agreement with
SSC NOLA and $2.7 million under Energy's contract with SEA.
[End of table]
Through multiple contracts in some cases, four major contractors
performed the majority of OWA's program activities.
* Eagle Research Group, Inc. (Eagle), staffed and operated the resource
centers from September 2001 through February 2005 under time and
materials task orders issued under a GSA Federal Supply Schedule
(FSS)[Footnote 9] contract.
* Westwood Group, Inc. (Westwood), administered the physician panels,
provided a quality-assurance check on claims, managed the EEOICPA
hotline, and coordinated the field office research requests.
Additionally, Westwood provided certain other administrative services.
Energy obtained Westwood's services through two time and materials task
orders issued under a GSA FSS contract. One task order was in effect
from August 2001 through February 2005. The other began in September
2004 and can be extended through September 2009 if Energy exercises the
four option periods. Under the option periods and current statement of
work, Westwood would continue its analytical services relating to the
EEOICPA claims research and other administrative activities for
Energy's Office of Environment, Safety, and Health (ES&H).
* Technical Design, Inc. (TDI), provided administrative personnel as
well as analysts trained in environment and health issues. TDI provided
services to OWA under three consecutive contracts issued by Energy. All
three were cost reimbursement contracts that contained performance
incentives. The first contract was described by Energy as a cost plus
incentive fee. The second and third contracts were cost plus award fee.
Westwood also provided additional services to OWA through TDI under
these contracts.
In addition to services provided to OWA, both Westwood and TDI also
provided other services to Energy's ES&H. On their monthly invoices,
Westwood and TDI identified OWA services separately from other ES&H
services.
* SEA, under its first task order, provided information technology
services to create, develop, and maintain the Case Management System to
track the progress of individual cases. Under subsequent task orders,
services broadened over time so that SEA provided case developers and
assistants who performed case processing activities.[Footnote 10] SEA
ultimately provided services equal to approximately one-third of OWA's
program costs. In January 2004, Sidarus, Inc. (Sidarus), purchased SEA.
In June 2004, Sidarus was renamed Apogen Technologies, Inc.[Footnote
11] SEA continues to do business as SEA.
SEA's services were initially obtained by Energy through a memorandum
of agreement (referred to in this report as an interagency agreement)
between Energy and SSC NOLA.[Footnote 12] To implement the interagency
agreement, SSC NOLA used GSA's Federal Technology Service (FTS) to
utilize an existing blanket purchase agreement (BPA) between SEA and
GSA's FTS, dated August 2000, that was entered into under a GSA FSS
contract. Under the BPA, GSA's FTS issued three consecutive time and
materials task orders to SEA to provide services to Energy. The
interagency agreement between Energy and SSC NOLA took effect in
December 2001 and was scheduled to run for 3 years. Under this
arrangement, GSA paid SEA for its services and was reimbursed by SSC
NOLA. SSC NOLA received reimbursement from Energy. Energy is the
customer and final payer for SEA's services. SSC NOLA elected to end
work under the interagency agreement on September 30, 2004. In this
report, we refer to payments to SEA as payments by Energy.
In February 2004, Energy began pursuit of a new contract to replace the
interagency agreement between Energy and SSC NOLA. However, the new
procurement action was not completed by the end of the interagency
agreement on September 30, 2004, and Energy issued a time and materials
bridge contract directly with SEA beginning October 1, 2004, for a base
period of 3 months to continue case development activities and,
eventually, assist in terminating and transferring the program.
Energy's direct contract with SEA expired in December 2004.
Table 2 provides a description of two contract types used to administer
OWA: cost reimbursement and time and materials. OWA utilized two
different variations of cost reimbursement contracts: cost plus
incentive fee and cost plus award fee. A description, common
applications, benefits and risks associated with the contract type, and
constraints or requirements for the government are listed for each
type.
Table 2: Descriptions of Contract Vehicles Used by Energy for the OWA
Program:
Contract vehicle: Cost reimbursement: cost plus incentive fee and cost
plus award fee;
Description: A contract that provides for the payment of the
contractor's allowable incurred costs to the extent prescribed in the
contract, not to exceed a ceiling;
Applications: Appropriate when uncertainties involved in contract
performance do not permit costs to be estimated with sufficient
accuracy to use a fixed-price contract;
Benefits and risks: Benefits;
Constraints/government requirements: May be used only when the
contractor's accounting system is adequate for determining allowable
costs under the contract and appropriate government surveillance or
oversight will be provided.
Contract vehicle: Cost reimbursement: Cost plus incentive fee;
Description: Cost plus incentive fee;
Applications: Cost plus incentive fee;
Benefits and risks: Allows the government to meet complex or unique
requirements;
Constraints/government requirements: Cost plus incentive fee.
Contract vehicle: $0.9 million Contractor: TDI;
Description: Provides for an initially negotiated fee that is later
adjusted by a formula;
Applications: May be used when a target cost and a fee-adjustment
formula that are likely to motivate the contractor to manage
effectively can be negotiated;
Benefits and risks: May encourage economic, efficient, and effective
performance when a cost reimbursement contract is necessary;
Constraints/government requirements: Fee adjustment formula should
provide an incentive that will be effective over the full range of
reasonably foreseeable variations from the contract's target cost.
Contract vehicle: Cost plus award fee $2.4 million;
Description: Cost plus award fee;
Applications: Cost plus award fee;
Benefits and Risks: Risk;
Constraints/government requirements: Cost plus award fee.
Contract vehicle: Contractor: TDI;
Description: Provides for a fee consisting of a base amount and an
award amount based upon a judgmental evaluation by the government;
Applications: Appropriate when the work does not lend itself to
developing incentive targets;
Benefits and risks: Shifts cost risk from the contractor to the
government;
Constraint/government requirements: Any additional administrative
effort and cost required to monitor and evaluate the contractor's
performance are justified by the expected benefits.
Contract vehicle: Time and materials $52.2 million: Contractors: SEA
(under both the interagency agreement and direct contract) Westwood
Eagle;
Description: Contract that provides for direct labor hours billed at
fixed hourly rates that include wages, overhead, general and
administrative expenses, and profit and contractors' materials at cost;
Applications: May be used only when it is not possible at the time of
placing the contract to estimate accurately the extent or duration of
the work or to anticipate costs with any reasonable degree of
confidence;
Benefits and risks: Benefit: Can fulfill a special need;
Risk: Does not provide a positive profit incentive for contractor to
control costs;
Constraints/government requirements: May be used only after the
contracting officer determines that no other contract type is suitable,
and the contract must include a ceiling price that the contractor
exceeds at its own risk;
The government must provide appropriate surveillance to ensure the
contractor is using efficient methods and effective cost controls.
Source: GAO analysis of Federal Acquisition Regulation.
Note: Based on Federal Acquisition Regulation (FAR) subparts 16.4 and
16.6, as well as Energy's Acquisition Guide. The FAR is promulgated at
48 C.F.R. ch. 1.
[End of table]
Roles and Responsibilities under Interagency Agreement with SSC NOLA:
The services provided by SEA were obtained by Energy through a series
of agreements. Energy's interagency agreement with SSC NOLA required
SSC NOLA to provide certain services to Energy. SSC NOLA carried out
the agreement using an existing BPA between GSA's FTS and the
contractor, SEA. The BPA was entered into under a GSA FSS contract, and
an official at GSA's FTS was the contracting officer (CO) who had
authority to contract for goods and services on behalf of the
government. Additionally, the CO had overall responsibility for
negotiating task orders under the BPA and certifying the contractor's
invoices for payment based on evidence of approval (i.e., receipt and
acceptance of goods and services) by the ordering agency. The CO
designated representatives of the ordering agency--in this case, SSC
NOLA--to be the contracting officer's representatives (COR). The COR
was authorized by the CO to perform specific technical and
administrative functions. The COR was responsible for the review and
approval of SEA invoices for payment by GSA. Additionally, SSC NOLA was
responsible for approval of contractor travel and contract
deliverables. Although authority for contract oversight and
administration was delegated among multiple agencies, ultimate
responsibility for the contract rested with the customer agency
(receiving agency), Energy.
Although the use of interagency contracting vehicles can be beneficial
because the ordering agency does not have to go through an extensive
procurement process, interagency agreements must be effectively managed
to ensure compliance with the FAR and to protect the government's
interests. When a customer agency's contracting needs are being handled
by another agency, effective internal controls are particularly
critical because of the more complex environment. We, along with agency
inspectors general, have reported risks associated with interagency
contracting. Management of interagency contracting was added to GAO's
high-risk list in January 2005.[Footnote 13] We found that roles and
responsibilities for managing interagency contracts need clarification
and agencies need to adopt and implement policies and processes that
balance customer service with the need to comply with requirements.
Federal requirements for acquiring goods and services through contracts
are found in laws and implementing regulations. The FAR prescribes
uniform policies and procedures for acquisition by executive agencies.
Additionally, agencies may have their own supplemental regulations,
policies, and procedures for acquisition. For example, Energy has a
supplemental regulation called the Department of Energy Acquisition
Regulation, an acquisition guide, an accounting handbook, and other
guides that describe its policies regarding contracts, subcontracts,
and interagency agreements.
Government Settlement Agreement and Release with SEA:
On November 29, 2005, the Department of Justice (DOJ) and SEA executed
a settlement agreement and release (settlement) after an investigation
of allegations of improper billings by SEA of labor charges on work for
SSC NOLA and its customers under a GSA FSS contract and two related
BPAs covering the period from April 1999 through September
2005.[Footnote 14] SEA billed SSC NOLA approximately $346 million for
labor charges over this period, including approximately $26.6 million
under task orders that provided services to Energy.[Footnote 15] The
"covered conduct" investigated by the government related to allegations
of improper billing by SEA for labor in two areas: billing indirect
labor costs as direct labor costs and billing for employees in labor
categories for which they were not qualified. Under the terms of the
settlement, SEA paid the government $9.5 million.[Footnote 16] In turn,
the government release provided that the government will have no
further civil or administrative monetary claims or cause of action
against SEA under the False Claims Act[Footnote 17] or any other
statute creating causes of action for damages or penalties for the
submission of false or fraudulent claims, or at common law for fraud or
under any other statutes or under theories of payment by mistake,
unjust enrichment, or breach of contract, for the covered conduct.
In this report, we did not determine whether or to what extent the
terms of the settlement may affect any potential additional monetary
recoveries by the government for the questionable and improper payments
made to SEA that we identified.
Internal Control:
Internal control is the first line of defense in safeguarding assets
and preventing and detecting fraud and errors. Internal control is not
one event or activity but a series of actions and activities that occur
throughout an entity's operations on an ongoing basis. It comprises the
plans, methods, and procedures used to effectively and efficiently meet
missions, goals, and objectives. Internal control is a major part of
managing any organization. As required by 31 U.S.C. § 3512(c),(d),
commonly referred to as the Federal Managers' Financial Integrity Act
of 1982, the Comptroller General issues standards for internal control
in the federal government.[Footnote 18] These standards provide the
overall framework for establishing and maintaining internal control and
for identifying and addressing major performance and management
challenges and areas at greatest risk of fraud, waste, abuse, and
mismanagement. These standards include establishment of a positive
control environment that provides discipline and structure as well as
the climate that influences the quality of internal control. As we
reported in our Executive Guide, Strategies to Manage Improper
Payments, a lack of or breakdown in internal control may result in
improper payments.[Footnote 19] Improper payments are a widespread and
significant problem in government and include inadvertent errors, such
as duplicate payments and miscalculations; payments for unsupported or
inadequately supported claims or invoices; payments for services not
rendered; and payments resulting from outright fraud and abuse.
Energy Did Not Establish Effective Controls over Payments to
Contractors or Overall Contract Costs:
Energy's control environment and specific internal control activities
over payments to contractors and overall contract costs were not
effective in reducing the risk of improper payments. Energy did not
establish an effective review and approval process for contractor
invoices that enabled it to verify that goods and services billed had
actually been received and charged at the agreed-upon amounts. In the
case of SEA, much of the responsibility rested with SSC NOLA; however,
Energy did not assure itself that these responsibilities were
adequately carried out. Further, accountability for equipment purchased
and reimbursed by Energy for the program by contractors was not
maintained. In addition, Energy and its contracting partners, GSA and
SSC NOLA, did not give adequate consideration to subcontractor
arrangements, including the extent to which subcontracts were used and
what amount contractors were to be paid for subcontractor work.
Payments for subcontractor costs represented nearly $15 million.
Finally, Energy did not effectively monitor overall contract costs and
made errors in reporting total contract costs in its internal and
external financial reports. Cumulatively, these weaknesses and the poor
control environment made Energy vulnerable to improper payments to
contractors and precluded it from effectively managing the overall cost
of the contracts.
Effective Review and Approval Process for Contractor Payments Was Not
Established:
Energy did not establish adequate control activities to ensure an
effective process for the review and approval of contractor invoices.
Specifically, contractor services were not adequately monitored, labor
categories were not verified, and other direct costs were not
adequately reviewed. In the case of the largest contract with SEA, SSC
NOLA was responsible for review and approval of SEA invoices, but did
not adequately perform this function, nor did Energy take steps to
assure itself that SSC NOLA was properly carrying out its
responsibilities. Further, the review and approval process used by
Energy for its contracts did not include the steps necessary to
validate the invoices before payment. The FAR, Energy's accounting
handbook, and federal standards for internal control require review and
approval of invoices in order to determine if goods and services were
actually provided in accordance with contract terms and if invoiced
amounts were allowable under regulation or the terms of the contract.
Contractor Services Billed Were Not Sufficiently Monitored:
Proper invoice review procedures for contractor services call for an
effective process to observe and monitor the services provided by
contractors and ensure that timely verification of services is provided
to the officials approving the invoices for payment. However, neither
Energy on its contracts nor SSC NOLA on the SEA contract conducted
adequate observations and monitoring of services provided by
contractors or linked the observations that were performed to invoices
submitted to the government. SEA, Westwood, and Eagle provided services
under time and materials task orders. The FAR states that because time
and materials contracts provide no positive profit incentive to the
contractor for cost control or labor efficiency, appropriate government
surveillance (or monitoring) of "contractor performance is required to
give reasonable assurance that efficient methods and effective cost
controls are being used."[Footnote 20]
SSC NOLA, as the COR on the SEA contract, was responsible for
performing observations of services provided by SEA but did so only
sporadically. The SSC NOLA Project Manager, who was located in New
Orleans, stated that he made periodic trips to observe SEA services in
the Washington, D.C., area.[Footnote 21] However, we determined based
on our review of travel documentation that as much as 6 months passed
between his trips, and that no trips were made after February 2004 when
SEA more than tripled its workforce in support of OWA. Further, even
when the SSC NOLA Project Manager did observe services, he did not
systematically link these monitoring activities to the invoice review
and approval process.
We identified a similar lack of systematic linkage of monitoring
activities to the invoice review process for services provided by
Eagle. Eagle operated the resource centers supporting EEOICPA
activities of both Energy and DOL. Energy provided some evidence of
programmatic monitoring and the receipt of quarterly financial
information for Eagle's services, but did not demonstrate how those
activities were systematically linked with Energy's review of Eagle's
monthly invoices. Without such linkage, Energy did not have adequate
assurance that amounts billed reflected services actually provided and
that they were billed at the correct rates.
Energy's monitoring of services provided under the Westwood contract
was also insufficient, as follows.
* Physicians serving on physician panels were retained by Westwood as
independent contractors. These physicians reviewed cases at their homes
or at Energy headquarters and submitted invoices or time sheets to
Westwood for the hours worked. Neither Energy nor Westwood had an
effective mechanism in place to assess the reasonableness of the hours
billed by these physicians, which totaled over $3 million. Our review
of selected physician panel invoices found that one physician reported
working as many as 19 hours in a day, and these hours were not
questioned by Westwood or Energy. In another example, a physician
regularly billed significantly more than 173 hours a month--the average
number of working hours a month based upon working 5 days a week and 8
hours a day. This physician billed 265 hours in March 2004, 210 in
April 2004, 335 in May 2004, and 252 in June 2004. Westwood provided
some evidence--a variety of metrics--that it considered the
productivity of the physicians, such as reports that summarized hours
needed to review each case, and quality metrics, such as decisions
overturned and cases returned because of clerical errors. However, this
approach was not effective in assessing the reasonableness of the hours
billed. In fact, the productivity measures were developed based on the
hours actually billed on the invoices submitted by the physicians, and
therefore Energy had no independent baseline with which to measure
productivity or to assess the reasonableness of hours billed on the
invoices submitted by the physicians.
* Four doctors who performed quality checks before the claims were
submitted to the physician panels and again after the physician panels
had made recommendations were also not sufficiently monitored. Three of
the four doctors we interviewed told us that they worked independently
or with only limited monitoring or supervision by Westwood. The doctors
told us that they did interact with Energy technical personnel;
however, these technical personnel were not involved in Energy's
invoice review and approval process. The doctors submitted their
invoices or other records of time worked to Westwood for payment, and
Westwood then billed the government for these charges. These physicians
regularly billed for 9 to 12 hours per day and as high as 18 hours per
day, yet there was no evidence that these charges were validated by
Westwood or questioned by Energy. Energy told us that it was aware that
these doctors worked long hours. However, Energy did not systematically
observe the hours worked and then compare any observations to the
amounts paid for those hours, nor did it determine that Westwood was
adequately monitoring these services as a basis for its billings.
Labor Categories and Certain Other Activities Were Not Verified against
the Contract:
For SEA task orders, SSC NOLA did not take appropriate steps to verify
that labor hours were being billed at the appropriate rates or to
determine that employees were qualified under the labor category
education and experience requirements negotiated in its contracts.
Further, Energy did not take steps to ensure that SSC NOLA implemented
appropriate verification procedures or effective compensating control
strategies. Appropriate procedures to verify labor hours may include
sampling on a test or periodic basis résumés of contractor employees,
including independent verification of education and work experience to
requirements under the contract or detailed evaluations of labor
categories at higher risk because of volume or price per hour.
In certain cases, we found that the labor categories negotiated in the
contract did not reflect the actual tasks being performed, making it
difficult to determine whether the labor charges were based on
appropriate rates. We found that the labor categories in the contract
were originally designed for information technology activities and did
not reflect labor categories appropriate for the significant case
development activities SEA performed in the last 2 of 3 years of SEA's
task orders.[Footnote 22] While Energy provided us with a crosswalk of
the information technology labor categories that SEA used for billing
purposes to case processing job titles under the third task order, this
crosswalk was not used by SSC NOLA in order to review SEA's billings.
Further, the underlying BPA was not amended to reflect labor categories
that matched the case development activities that SEA provided.
We found similar problems with another contractor, Westwood. The
statement of work underlying the Westwood task orders from August 2001
through February 2005 provided for nine activities "supporting the
Advisory Committee." However, Westwood performed the following
additional activities that were significant to OWA in terms of nature
and amount but were never incorporated into Westwood's statement of
work:
* Implementing physician panels, which included retaining doctors and
coordinating the flow of cases between panel members.
* Providing medical doctors who performed quality checks before the
claims were submitted to the physician panels and again after the
physician panels had made recommendations.
* Obtaining consulting services at the request of Energy, including
advisors on environmental health issues and process improvements.
Since the contract did not fully reflect actual duties that were
subsequently performed, Energy did not have an adequate basis on which
to determine if amounts billed for labor were appropriate and
consistent with the contract terms.
Other Direct Costs Were Not Adequately Reviewed:
Neither Energy for the Westwood contract nor SSC NOLA for the SEA
contract performed a sufficient review of other direct costs billed
under the contracts. Energy did not require Westwood to report a
detailed breakdown of its other direct costs, such as travel and
materials, as stipulated by its contract and did not request Westwood
to submit supporting documentation for these costs except on a sporadic
basis because, according to Energy, the amount of supporting
documentation was "too voluminous." Westwood billed Energy for
approximately $11.6 million of goods and services provided from August
2001 through February 2005 in support of OWA, of which approximately
$5.2 million was for other direct costs. As shown in figure 2, the
amount of Westwood's other direct costs was significant to its monthly
billings but was not adequately described on the invoice.
Figure 2: Westwood Group, Inc., Invoice for Services Provided to OWA in
October 2004:
[See PDF for image]
Source: Westwood Group, Inc.
Note: "DPLH" stands for Direct Productive Labor Hours and represents
the number of hours charged in each labor category.
[End of figure]
Our review of the invoice documentation Energy did request and receive
for one monthly invoice identified costs that should have been
questioned and investigated by Energy prior to payment, but were not.
In addition, we examined the supporting documentation that was
available for other Westwood invoices (a majority of which Energy did
not request or review prior to payment) and identified numerous charges
improperly paid by Energy. These findings are discussed later in the
report.
SSC NOLA, in its role as COR and project manager on the SEA task
orders, did not sufficiently review travel costs incurred by SEA. SSC
NOLA preapproved travel when it determined the travel met a need of the
program and then subsequently reviewed and approved the travel voucher,
including all receipts submitted, after the travel had occurred. The
COR also verified that travel had been preapproved, travel corresponded
with the preapproved dates and location, and the amounts did not exceed
the preapproved estimates. However, SSC NOLA did not question whether
the costs actually incurred for airfare were reasonable and
appropriate. In particular, we found instances of first-class travel
and other excessive airfare costs that were not identified or
questioned by SSC NOLA. For example, our analysis of the historical
data supporting SEA's travel for OWA activities on its most frequently
flown route (New Orleans to Ronald Reagan Washington National Airport)
showed airfares as high as $1,482 for first-class travel and as low as
$362 for coach class. SSC NOLA officials indicated that in the future
they would review contractor travel costs more closely, including
adding new procedures to verify that contractor travel complied with
the applicable travel regulations regarding first-class travel.
Accountability for Equipment Purchased by Contractors Was Not
Maintained:
Energy did not have sufficient controls over the equipment, such as
computers, laptops, and copying machines, purchased by its contractors
for the program. The equipment, totaling nearly $1 million, ranged from
a $160 printer to a $17,742 copying machine. Any equipment purchased by
a contractor and for which the government holds the title is considered
government-owned property.[Footnote 23] Maintaining accountability over
assets calls for procedures to approve equipment purchases prior to
purchase, steps to ensure the contractors received and safeguarded the
assets during the operation of the program, and conducting timely
inventories of equipment it received from each contractor at the
conclusion of the program. However, Energy did not have adequate
procedures in place to properly account for equipment purchased by its
contractors nor did it work with SSC NOLA to ensure adequate monitoring
of SEA-purchased equipment. Specifically, Energy did not have a formal
process to approve Westwood equipment purchases prior to purchase.
Additionally, Energy did not take steps to ensure the contractor
maintained accountability over equipment while it was in its
possession. Further, physical inventories of Westwood and SEA purchased
equipment were not completed until at least 8 months following the
expiration of the respective contracts.
Our analysis of documentation supporting Westwood's invoices from
January 2002 through February 2005 found that Westwood purchased over
70 pieces of computer and computer-related items costing approximately
$62,000 and was subsequently reimbursed by Energy. Energy, however, did
not conduct an inventory of that equipment until December 2005, nearly
9 months after Westwood's contract expired. Further, since Energy had
not previously obtained supporting documentation for Westwood's
equipment purchases, Energy relied on Westwood to provide it with a
listing of all items purchased. During its inventory, Energy identified
13 missing items. Our comparison of the inventory to Westwood's
billings for the equipment, however, identified an additional 31 items
that Westwood had not included on its listing that also needed to be
accounted for. Finally, we identified over $31,000 in computer
purchases that did not contain sufficient supporting detail, such as a
description of the items, serial numbers, or model numbers, to be used
to determine if the items were accountable assets and, if so, if they
were included on the inventory list. In response to our inquiries,
Energy made an effort to locate these additional items and has
indicated that several items have been found. Energy's and its
contractor's lack of accountability for the equipment over an extended
period put this equipment at risk of loss or misappropriation without
detection.
Inadequate Consideration of Subcontract Arrangements:
Energy did not consistently obtain and review subcontract arrangements
or adequately consider the billing implications of the extensive use of
subcontracts by its prime contractors. Nearly $15 million of $92
million in OWA program costs were incurred by subcontractors. However,
neither Energy nor SSC NOLA for SEA exercised sufficient management
oversight to be fully informed of the nature, extent, scope of
services, and terms of billings to the government for these services as
well as the oversight the prime contractor was to exercise over its
subcontractors.[Footnote 24] Our review of the subcontracting
arrangements used by SEA and TDI identified numerous subcontracting
issues that were not addressed by Energy or, in the case of SEA, by SSC
NOLA or GSA.
Of the $29 million in labor billings by SEA, $10.1 million was provided
by subcontractors, including temporary staffing agencies. While Energy,
SSC NOLA, and GSA were aware that SEA utilized subcontracted labor,
GSA's initial consideration of the use of subcontractors was given in
2000 as part of SEA's proposal under the BPA more than a year before
the Energy task orders and was not updated to reflect changes in SEA's
business partners or the scope of work provided to Energy over time. To
illustrate, SEA utilized 16 subcontractors to provide services to
Energy, but only 5 of those subcontractors, representing approximately
6 percent of total billings for subcontractor services, were included
in SEA's proposal. Further, there was no evidence that either SSC NOLA
or GSA had been informed of the extent to which SEA used subcontractors
to provide OWA services or the amount SEA paid for those services. SSC
NOLA told us that it was concerned that SEA did not separately identify
the amount of charges associated with subcontracted labor from other
labor charges, but said that GSA officials told it such a breakout was
not necessary. SSC NOLA did not pursue the issue again with either GSA
or SEA.
Additionally, TDI billed Energy for services provided by Westwood from
February 2002 through September 2004 under an arrangement that TDI and
Westwood viewed as a prime contractor and subcontractor relationship.
However, we found that an agreement between TDI and Westwood containing
basic information, such as hourly billing rates by labor category,
allowable costs, and other basic terms and conditions for the period
Westwood provided services did not exist. Further, while Energy's CO
told us he obtained and reviewed a price proposal submitted by Westwood
for this period, Energy did not take the appropriate steps to ensure
the prices were formalized into TDI's prime contract with Energy or any
other binding agreement. Without an effective contractual agreement,
including negotiated rates, it was not possible for Energy to
adequately review the amounts TDI billed for costs attributed to
Westwood.
Overall Contract Costs Were Not Effectively Monitored or Accurately
Reported:
Energy did not establish internal control monitoring practices to
effectively manage overall contract costs, including using contract
ceilings to manage and encourage cost-effectiveness. Further, Energy
did not accurately report contract costs in internal and external
financial reports. We identified instances of improper cost assignments
between Energy programs and a payment error that understated the
program's costs by $2.5 million. This amount includes a processing
error of $1.7 million we identified during our review that had not been
previously identified by Energy.
Contract Ceilings Were Not Effectively Monitored:
Energy failed to monitor cumulative contract costs adequately.
Ceilings, or caps, on total contract values and on certain contract
components, such as other direct costs, impose limits that help the
government manage contract costs. Contract ceilings are particularly
valuable tools for monitoring time and materials contracts, which have
few other mechanisms for managing cost-effectiveness. Our review of
contract and interagency agreement ceilings for the four major OWA
contractors showed that the ceiling amounts of certain contracts were
increased numerous times. For example, the amount for Westwood's total
contract ceiling was modified six times, including four times during
the last 9 months of the contract. However, Westwood still exceeded the
cost ceiling for other direct costs by nearly $2 million by the end of
the contract. Energy paid these amounts, thereby reducing the value of
the contract ceiling and further demonstrating Energy's lack of a
proper control structure to manage contract costs.
Contract Cost Reporting Was Flawed:
Energy also did not properly track and report contract costs in
internal and external financial reports. Energy improperly assigned
some costs of OWA activities to other program reporting units and, in
some cases, assigned the costs of other program reporting units to OWA.
For example, Energy improperly assigned the costs of OWA services
provided by Westwood to other program reporting units, in effect using
other programs' funds to pay for OWA activities. This occurred because
Energy did not assign the costs of the invoice according to services
provided to each program, but instead either divided the total cost of
the invoice equally across all programs receiving services or assigned
costs based upon the amount of funds available in the different program
reporting units. At the end of Westwood's first contract, $1.6 million
of costs associated with OWA activities were assigned to other program
reporting units, understating the OWA program costs. Conversely,
Energy, using similar methods, improperly used $2.1 million of OWA
funds to pay TDI costs through its second contract that were unrelated
to OWA activities, overstating the OWA program costs. Assigning costs
on a basis other than the actual cost of services not only misstates
program costs but also hinders the agency's ability to adhere to
federal cost accounting standards.
In addition, Energy used $1.3 million of funds from two other Energy
program reporting units to pay for SEA services in fiscal years 2003
and 2004. Although the amount transferred was authorized by senior
Energy management, it was not reported externally in Energy's September
30, 2004, report to Congress on EEOICPA expenditures. As a result, the
cost report was understated by $1.3 million.
We identified a total of $5.0 million (gross) in cost assignment errors
and reporting omissions. These errors, which were partially offsetting
and resulted in a net understatement of OWA program costs of $800,000,
prevented the agency and other interested stakeholders from knowing the
true cost of program activities at any given time.
We further identified a $1.7 million payment error related to SEA
billings that occurred in December 2004. GSA paid SEA for its services
and was reimbursed by SSC NOLA. SSC NOLA then received a reimbursement
from Energy through the intragovernmental payment process, but was not
reimbursed for the full amount owed it because of a processing error.
Neither SSC NOLA nor Energy identified the mistake. The error went
undetected by Energy because it did not reconcile reimbursements made
to SSC NOLA to appropriate supporting documentation in accordance with
Energy accounting policy. The error understated the OWA's program costs
until it was corrected in September 2005 after we brought it to the
attention of the Defense Finance and Accounting Service, the Department
of Defense unit that handled SSC NOLA's intragovernmental payment
transactions.
Energy Made Millions of Dollars in Improper and Questionable Payments
to Contractors:
The fundamental internal control weaknesses associated with Energy's
contract payment process contributed to $26.4 million in improper and
questionable payments to contractors that we identified as part of our
review. We employed a variety of forensic auditing techniques to assess
the validity of Energy payments for OWA activities and identified $24.4
million in improper and questionable payments to contractors for direct
labor billed under improper labor categories and the inappropriate use
of fully burdened labor rates. We also identified $778,613 in improper
and questionable payments for other direct costs, including amounts for
add-ons and base fees, and certain travel and related costs. Further,
we questioned whether certain other payments toward the end of the
program for furniture and computer equipment, totaling nearly $1.2
million, were an efficient use of government funds. Given Energy's poor
control environment and the fact that we only reviewed selected Energy
payments, other improper and questionable payments may have been made
that have not been identified.
Table 3 includes the net amount of improper and questionable payments
when we could determine a net amount. We use the gross amounts paid by
Energy when it was not practical for us to determine offsets or
reductions that might be due to the contractors in lieu of the amounts
that Energy paid. Any potentially recoverable amounts would need to be
determined after consideration of any reductions or offsets.
Table 3: Summary of Improper and Questionable Payments:
Type of Cost: Labor; Improper: [Empty]; Questionable: [Empty]; Total:
[Empty].
Type of Cost: Labor: Type of Cost: Labor categories[A];
Improper: $2,498,920;
Questionable: $17,686,892;
Total: $20,185,812.
Type of Cost: Labor: Fully burdened labor rates;
Improper: 3,661,429;
Questionable: 569,798;
Total: $4,231,227.
Type of Cost: Labor: Overtime charges;
Improper: 3,019;
Questionable: [Empty];
Total: $3,019.
Type of Cost: Labor: Subtotal;
Improper: [Empty];
Questionable: [Empty];
Total: $24,420,058.
Type of Cost: Labor: Type of Cost: Other direct costs: Add-on charges
and base fees;
Improper: $655,734;
Questionable: [Empty];
Total: $655,734.
Type of Cost: Other direct costs: Per diem and commuting costs[A];
Improper: 12,418;
Questionable: $4,704;
Total: $17,122.
Type of Cost: Other direct costs: First-class travel[A];
Improper: 5,207;
Questionable: 9,119;
Total: $14,326.
Type of Cost: Other direct costs: Other miscellaneous payments;
Improper: 91,431;
Questionable: [Empty];
Total: $91,431.
Type of Cost: Other direct costs: Subtotal;
Improper: [Empty];
Questionable: [Empty];
Total: $778,613.
Type of Cost: Inefficient use of government funds: Furniture;
Improper: [Empty];
Questionable: $821,129;
Total: $821,129.
Type of Cost: Inefficient use of government funds: Equipment;
Improper: [Empty];
Questionable: 341,790;
Total: $341,790.
Type of Cost: Inefficient use of government funds: Subtotal;
Improper: [Empty];
Questionable: [Empty];
Total: $1,162,919.
Type of Cost: Total;
Improper: $6,928,158;
Questionable: $19,433,432;
Total: $26,361,590.
Source: GAO.
[A] The amounts reported for these categories represent the gross
amount paid by Energy to its contractors and therefore do not reflect
any reductions or offsets that may be due the contractors for the goods
and services that were provided. Any potentially recoverable amounts
would need to be determined after consideration of these reductions or
offsets.
[End of table]
The following sections provide additional information on the improper
and questionable payments we identified.
Energy Made Improper and Questionable Payments for Labor Charges:
A significant portion of OWA program expenditures was for labor
provided by contractors and their subcontractors. For the four major
contractors discussed in this report, Energy paid $45.3 million for
contracted and subcontracted labor, representing approximately 49
percent of total OWA program costs reported by Energy. In light of
Energy's weak controls over labor category requirements and
insufficient observation and monitoring of contracted services, we
performed a variety of tests on the amounts billed for labor. Our tests
disclosed that certain contractors used inappropriate labor categories
for billing purposes, and as a result the government made improper
payments for those charges. We also found that some labor billings
could not be validated because of insufficient criteria for labor
category qualifications but were paid nonetheless. Additionally, Energy
and SSC NOLA paid prime contractors for subcontractor labor at fully
burdened labor rates instead of paying only the costs incurred by the
prime contractor and also paid time and a half for certain hours worked
beyond a standard 40-hour week, which was not in accordance with the
contract.
Labor Categories:
Westwood billed over half a million dollars of labor charges under
labor categories for which the employees were not qualified to be
billed. We reviewed résumés for 25 Westwood employees whose time was
billed to OWA. Our comparison of employee résumés to the qualifications
that were required under Westwood's contract revealed that Westwood
billed for 7 employees under labor categories and at billing rates for
which the employees were not qualified, resulting in $602,000 of
improper payments by Energy. For example, the analyst labor category
required a college degree and at least 5 years of experience in a
specific field, such as health or physical sciences or environmental
studies. However, the employees we reviewed who were billed as analysts
did not have college degrees or did not have the necessary years of
experience. Westwood's Project Manager told us that he was unfamiliar
with the minimum qualifications negotiated under the contract. Further,
Westwood management officials had not previously compared the
employees' qualifications to the requirements listed in the contract,
but they told us they have since taken steps to screen applicant
qualifications.
We also identified $1.9 million of improper payments to SEA that
resulted from the use of inappropriate labor categories by SEA. Using
data mining and other forensic auditing techniques, we selected 94
individuals directly billed by SEA and requested their personnel files
in order to compare education and experience qualifications to what the
contract required. Because personnel are often billed under more than
one labor category under the contract, the personnel files we requested
represented 187 comparisons. However, as discussed later, we were only
able to make 87 comparisons. For these 87, we identified the following
instances of labor costs billed under inappropriate labor categories,
which resulted in improper payments by Energy.
* SEA billed approximately $970,930 under labor categories that did not
reflect actual duties performed. SEA had three consecutive program
managers who functioned as the project lead and were the main liaisons
between Energy and SEA officials. Yet these three managers were not
billed to the government under the program manager (average billing
rate of $106/hour) or project manager (average billing rate of $117/
hour) labor rates but rather as subject matter experts, which were
billed at an average rate of $205/hour. Project and program managers,
according to the labor descriptions under the contract, generally
required the ability to manage contract support operations, including
organizing and planning activities. On the other hand, a subject matter
expert provides assistance in "enhancing the alignment of Information
Technology strategy with business strategy" and "evaluates expectations
for and capabilities for the information management organization."
In November 2005, we asked SEA officials why these project leads were
not billed under the less costly project or program manager labor
categories, but they offered no viable explanation. On March 23, 2006,
counsel to SEA told us that they disagreed with our view that these
were improper payments because the three individuals' "ability to
manage was informed and enhanced by their expertise in engineering and
information technology." Further, counsel to SEA said that "given their
extensive expertise in their fields, it seems appropriate for SEA to
have billed these senior personnel as subject matter experts." We
disagree and find no basis for the government to have paid more for
program manager labor than the agreed rate for that labor category.
* SEA also billed and Energy paid $649,182 for services provided by
four employees who were not qualified for the labor category under
which they were billed. Two employees were billed as systems engineers
(average billing rate of $85/hour) who did not meet the minimum 5 years
programming experience. They had 3 years or less of general computer
experience. A third employee did not have the years of experience
necessary to be billed as a case management technician, which required
a minimum number of years of medical records experience. The fourth
employee was billed as a senior computer scientist at an average
billing rate of $117/hour, but the documentation maintained in the
employee's file did not provide adequate evidence that the employee met
the minimum 5 years of programming experience.
* Charges for two other SEA employees, totaling $276,808, were billed
as graphics illustrators, although the job descriptions for these
employees indicate that they performed administrative support services,
for example, project scheduling, support activities, and making travel
arrangements and preparing travel-related paperwork. We found no basis
for these employees to be billed as graphics illustrators at an average
billing rate of $52/hour. Further, because general and administrative
costs, such as those associated with the administrative duties
performed by these two employees, are recoverable through a component
of the fully burdened labor rates used under the time and materials
task orders, the costs associated with these two administrative
employees may be duplicative.
Of the 187 total comparisons we initially planned to make, 72
comparisons were not possible because certain labor category
descriptions negotiated for use under the BPA lacked sufficient
criteria for assessing whether a person was qualified to be billed at
that labor category. In total, we identified about one-third of the
labor categories used by SEA, representing $15.6 million in
questionable payments by Energy, that did not include sufficiently
explicit descriptions of the requirements and duties of the position
for us to assess the appropriateness of the labor amounts billed for
these labor categories. For example, the description for senior
management analyst listed desirable skills and knowledge in the areas
of business and mathematics, for instance, but did not list education
or years of experience requirements. SEA billed $7.2 million, at an
average hourly billing rate of $90/hour, under that labor category. We
found that billings in this labor category included amounts for case
processors (who generally were registered nurses or had medical
backgrounds) and records management personnel (who generally had
degrees in business or records management).
Based upon discussions with both SEA and SSC NOLA officials and our
review of the BPA and underlying GSA schedule contract, we found that
labor categories reflecting the necessary duties, education, and skills
Energy required for the work performed did not exist under the GSA
contract, which was originally let solely for information technology
activities. Instead, SEA used labor categories that "best fit" the work
performed and that had what SEA considered to be an appropriate billing
rate for the services provided. GSA as the contracting officer did not
amend the contract to align labor category descriptions with the needs
of the government. While Energy developed a crosswalk of labor
categories to case processing job titles, this crosswalk did not
specify skills or education qualifications that would supplement those
originally provided for under SEA's contract.
Further, an additional 28 labor category comparisons could not be made
because SEA either did not obtain or had not retained résumés and other
documents that evidenced independent validation by SEA (or confirmation
of validations performed by others) of employee skills, work
experience, and education requirements for personnel it obtained
through temporary hiring agencies or other subcontractors. The 28
comparisons we made in our review represented a portion of the $10.1
million in subcontracted labor charged the government. After removing
other improper and questionable amounts noted elsewhere in this report
to prevent double-counting, we consider $2.1 million of subcontracted
labor billings to be unsupported and therefore questionable payments by
Energy. Without this information, it would not be possible for us or
others to determine if these temporary personnel were billed under
appropriate labor categories and at appropriate billing rates.
Fully Burdened Labor Rates:
SEA and Westwood used fully burdened labor rates that included base
wages plus fringe benefits, overhead costs, and profit to bill for
subcontracted labor but had no basis to do so under their contracts.
This practice resulted in over $4 million in "markups" on subcontracted
labor charges that were paid by Energy. Based on our analysis, Energy
should have paid only incurred costs for the subcontracted labor, which
represented amounts paid by the prime contractors for labor obtained
from temporary staffing agencies, other subcontractors, or independent
contractors. The following is a discussion of SEA and Westwood billing
practices and the resulting improper and questionable payments by SSC
NOLA and ultimately Energy.
SEA:
Over 40 percent of SEA's direct labor hours were provided by labor
obtained under arrangements with temporary staffing agencies. In total,
from December 2001 through December 2004, SEA paid subcontractors,
including temporary staffing agencies, $6.86 million for the services.
Instead of billing the government for this amount, SEA billed the
government $10.08 million for these services under fully burdened labor
rates, resulting in a markup of $3.22 million and improper and
questionable payments by SSC NOLA and ultimately Energy.
Energy inappropriately paid $7.12 million for work costing SEA $4.47
million that was not contemplated at the time the labor rate
negotiations occurred. As previously noted in the background section,
the GSA Inspector General reviewed the three Energy task orders for SEA
services and reported that the case development activities performed by
temporary staffing agencies under the second and third task orders were
outside the scope of the underlying GSA FSS contract and a misuse of
the contract vehicle that was designed for information technology
services. These two task orders represented approximately 83 percent of
total SEA services provided to Energy. Because the services were
outside the scope of the underlying FSS contract, there was no basis
for SEA to bill for the subcontracted services at other than cost.
The contracting officer may add items not on the FSS only if all
applicable FAR requirements are followed. These requirements include
publicizing the government's proposed contract action (FAR part 5),
complying with the full and open competition requirements (FAR part 6),
and meeting the source selection requirements (FAR part 15). In
addition, the contracting officer should determine that the price of
the items or services not on the underlying GSA schedule contract--
here, case processing activities performed by labor obtained through
temporary staffing agencies--is fair and reasonable. None of these
requirements were satisfied for the $7.12 million of payments to SEA.
Given that the FAR requirements were not met for this out-of-scope
work, the schedule rates were inapplicable. Accordingly, the $2.65
million markup of subcontractor rates over cost was not properly
supported and was improper.
SEA also billed for subcontracted services that were within the scope
of work of the underlying contracts and task orders but may have been
inappropriately paid by Energy using fully burdened labor rates. The
time and material payment clause included in the SEA contracts, FAR
52.232-7,[Footnote 25] states that "the Government will limit
reimbursable costs in connection with subcontracts to the amounts paid
for supplies and services purchased directly for the contract." SEA
paid $2.39 million for the subcontracted labor under these agreements
but billed the government $2.96 million for a markup over cost of
$569,798. There are currently differing views in the contracting
community (including government agencies) regarding how the payment
clause is to be applied by contracting agencies when paying contractors
for services provided by their subcontractors when the contract is
otherwise silent on this matter. The clause provides that based on
invoices or vouchers approved by the CO, the contractor will be paid an
hourly rate amount "computed by multiplying the appropriate hourly
rates prescribed in the Schedule by the number of direct labor hours
performed. The rates shall include wages, indirect costs, general and
administrative expenses, and profit." The clause also provides that
reimbursements to contractors for subcontractor services shall be
limited "to the amounts paid."
The view of some in the federal contracting community is that prime
contractors are to be paid for subcontractor labor based on the
approved fully burdened labor hour rates as if the prime contractor
provided the services directly through its employees, since these are
the rates the government agreed to pay for each labor category. Another
view is that contractors are to be reimbursed only for what they pay
their subcontractor for services. An amendment to the FAR has been
proposed that attempts to clarify the application of the
clause.[Footnote 26] For the purpose of this report, we have identified
payments in the amount of $569,798 as questionable based on the literal
application of this clause with regard to reimbursement to contractors
for subcontractor services.
Westwood:
Westwood paid four independent contractors $2.23 million for services
provided, yet billed Energy $3.24 million using fully burdened labor
rates for a markup of $1.01 million. On October 21, 2002, Energy
modified its contract with Westwood to provide for a new labor
category, senior scientist, to be billed at a fully burdened labor rate
of $250/hour. The senior scientists were doctors who performed quality
assurance review checks over the case files before and after the files
entered physician panel review. Energy officials advised us that they
negotiated this labor category and the high hourly rate in order to
ensure that they had full access to the medical specialists necessary
to meet the increased case-processing demands of the program. Despite
this fact, and that Westwood, in its cost justification to add the
senior scientist labor category, indicated that the senior scientists
would be added as employees, Westwood engaged them to work as
independent contractors.
When we inquired about the employment status of the senior scientists,
Westwood's President told us they were full-time employees. However,
the documents we reviewed, including written agreements between the
senior scientists and Westwood, showed that Westwood engaged the senior
scientists as independent contractors at hourly rates ranging from
$110/hour to $200/hour and they were ineligible to participate in
benefit packages. In response to our request for Internal Revenue
Service (IRS) Form W-2, Wage and Tax Statements, for the senior
scientists, Westwood provided us instead with IRS Form 1099--MISC. Form
1099 is used to report amounts paid to independent contractors, not
employees. Because Westwood engaged these personnel contrary to the
negotiations with Energy and the terms of the contract, Westwood
inappropriately billed the government, and Energy improperly paid a
$1.01 million markup for these services.
Overtime Charges:
Westwood billed and Energy improperly paid for hours beyond a standard
workweek at one and a half times the billing rate for the labor
category under the contract. Under its time and materials task orders,
hours worked were to be billed under the labor rates negotiated in the
contract, and no provision was made for overtime rates. Over the 4
years Westwood provided services to OWA, it billed Energy for 168 hours
at time and a half for an incremental difference over the regular labor
rate of $3,019. Westwood's President told us that the overtime payments
were verbally approved and allowed by Energy, which was evidenced by
Energy's approval of Westwood invoices that clearly showed the number
of hours billed at time and a half. However, Westwood's contractual
agreement was not modified to reflect this approval.
Energy Improperly Paid Contractor Fees and Other Direct Costs:
Other direct costs, such as travel, purchases of equipment, and add-on
rates and base fees, for the four major contractors in this report
totaled approximately $10 million, or 11 percent, of total OWA program
costs reported by Energy. These costs are subject to a variety of terms
and conditions contained in the contracts and in the FAR. For example,
allowable fees are negotiated specifically for each contract. Also, the
contracts may have incorporated either the Federal Travel Regulation
(FTR) or the Joint Travel Regulations used by the Department of
Defense, which define allowable travel costs. For time and materials
contracts, FAR 16.601(a)(2) and (b)(2) limit other direct costs to
those separately identifiable from costs included in its fully burdened
labor rate. Because of the weaknesses in Energy's invoice review
process identified in this report, specifically the weaknesses related
to Westwood's invoices, and the significant amounts of other direct
costs billed to the government by both SEA and Westwood, we obtained
and reviewed the supporting documentation for selected other direct
costs these two contractors billed the government. We also analyzed the
fees TDI billed the government on its invoices. We identified the
following questionable and improper payments.
Add-on Rates and Base Fees:
Energy made $557,429 in improper payments to Westwood for amounts the
contractor added to billings for other direct costs in the form of a 12
percent add-on rate. However, there is no provision in the contract to
justify such a charge. The contract provides that other direct costs
were not to exceed $120,000 in the base year, and did not provide for
additional amounts, such as fees, profits, or add-on rates.
Additionally, when determining the "best value" among the proposals
provided in response to Energy's solicitation for the work, Energy
deemed Westwood's proposal of a flat amount for other direct costs
(with no add-on rates) to be in conformance with the solicitation while
a competitor's addition of an add-on rate for general and
administrative expenses was deemed contrary to the solicitation.
Energy also improperly paid $98,305 in base fees to TDI. The base fee
is negotiated up front by Energy and TDI. It was calculated based on
the level of effort provided under the contract and was limited to 3
percent of the estimated cost ($2,761,581) for a total of $82,847. The
contract did not distinguish between the level of effort provided by
TDI and any other contractor that TDI viewed as its subcontractor,
including Westwood. Westwood, in addition to its previously discussed
prime contract with Energy, provided services through TDI in what TDI
and Westwood viewed as a prime-subcontractor relationship.[Footnote 27]
From March 2002 through September 2004, TDI billed Energy for $181,152
in base fees that according to TDI, represented base fees for both TDI
and Westwood. Because the base fee under the prime contract was limited
to $82,847, TDI overbilled and Energy improperly paid $98,305.[Footnote
28]
Per Diem, Commuting, and Travel Costs:
Energy paid $12,418 for per diem and commuting costs billed by Westwood
related to the physician panels that were not allowed under Westwood's
task orders, which incorporated the FTR.[Footnote 29] For example,
Energy improperly paid Westwood for per diem and commuting expenses of
physicians who lived in the local area and per diem to out-of-town
physicians for days that their own time records showed they did not
work (sometimes weeks at a time). We considered an additional $4,704 in
payments to be questionable because they were not properly supported in
order to determine whether the amounts billed were in accordance with
the FTR.[Footnote 30]
Energy also made $14,326 in improper and questionable payments for
first-class airfare purchased by SEA. First-class airfare is prohibited
by SEA's task orders that incorporate the Joint Travel Regulations
except under certain circumstances, and those circumstances must be
clearly documented in the travel voucher. Energy improperly paid $5,207
in airfare when at least one leg of the trip was first class and was
not justified in the travel documentation supporting the trip. We also
questioned payments of an additional $9,119 in first-class airfare. The
travel documentation supporting these airfare costs contained some
explanation for the use of first class generally related to
availability. For example, one traveler noted "only first class
available." However, the travel regulations state that travelers should
determine travel requirements in sufficient time to reserve and use
coach accommodations.[Footnote 31] Therefore, we question whether the
travelers' justifications were sufficient under the terms of the
contract.
Other Miscellaneous Payments:
We identified $91,431 in other miscellaneous payments that Energy
improperly made to Westwood and TDI. Of this amount, $45,631 was made
for duplicate and erroneous billings from Westwood. In one case, we
found that Westwood billed the government multiple times for the same
cost for a physician serving on review panels. The duplicate amounts
for this one physician equaled $28,783. Westwood also billed Energy for
a plane ticket that was never used and subsequently credited back to
Westwood ($643) by the airline and therefore should not have billed to
Energy. These duplicate and erroneous billings were likely not
identified prior to payment because Energy did not regularly obtain
documentation supporting Westwood's invoices or sufficiently review the
documentation it had received.
Additionally, TDI billed the government twice for work provided by its
subcontractor, Westwood, during the month of April 2004 instead of
billing the subcontractor's April and May 2004 invoices. The
subcontractor's April invoice included more costs than its May invoice;
therefore, Energy improperly paid an incremental amount of $19,277.
Energy also improperly paid at least $26,523 in other costs billed by
Westwood that were not permitted under the terms of the contract and
the FAR. The payments included $21,172 for monthly phone bills, $4,603
for staff parking permits, and $748 for water cooler rentals.
Purchases of Certain Furniture and Equipment May Not Have Been an
Efficient Use of Government Funds:
We identified $1,162,919 in purchases of furniture and equipment and
related storage costs that may not have been an efficient use of
government funds given that Congress was giving consideration to
transferring responsibility for the program to another agency.[Footnote
32] As part of our review of overall program costs, we noted a
significant increase in program costs during the last 6 months of the
program beginning in July 2004. For example, the amount of SEA's
invoices increased approximately 87 percent from a monthly average of
$1.2 million for the 6 months prior to July 2004 to $2.3 million for
the following 3 months. The increase in program spending followed a
June 2004 transfer of $21.2 million to OWA. According to Energy
officials in a March 2004 testimony before the Senate Committee on
Energy and Natural Resources, Energy transferred the funds in part to
reduce the backlog of unprocessed applications by increasing the number
of case developers and assistants as well as the number of physicians
serving on the review panels.
In July 2004, Energy ordered $748,409 of modular furniture that was to
be installed in new work space to be occupied by claims processing
personnel provided by SEA. However, by August 2004, OWA had initiated a
hiring freeze. According to the program manager at the time, Energy was
unable to cancel the furniture order and the furniture was received in
September 2004. Energy paid $6,060 a month through fiscal year 2005 to
store the furniture at a storage facility, incurring costs of $72,720
for 12 months. (See fig. 3.) We noted that Energy prepaid the
manufacturer $50,000 of installation charges in 2004 even though the
furniture was in storage for 12 months and not installed until February
2006, over a year and a half later, for use by another Energy program.
Total costs associated with the furniture were $821,129, which we have
classified as a questionable use of government funds.[Footnote 33]
Figure 3: Unused Modular Furniture in Storage Facility:
[See PDF for image]
Source: GAO.
[End of figure]
During this period of increased program spending, SEA more than tripled
its workforce supporting OWA at the direction of Energy. To equip these
personnel, SEA purchased and subsequently billed the government for 200
desktop computers, 5 laptop computers, 6 industrial copiers, and 4 fax
machines at a cost of $341,790. This equipment was ordered from June
21, 2004, through July 27, 2004, and SEA received all items by August
2004. Because the program ceased new case processing and SEA began
downsizing its staff in November 2004, SEA only used these items in
support of the program for at most 5 months. According to Energy
officials, Energy took possession of the equipment from the contractor
when SEA's contract ended on December 31, 2004. At the time of our
inquiry nearly 8 months later, however, 134 items, with a cost of
$241,725, were still unused and located in storage rooms at Energy or
could not be located.
Conclusion:
The questionable and improper payments we identified during our review
represent nearly 30 percent of total program funds spent through
September 30, 2005. Given the lack of fundamental internal control over
the payment, monitoring, and reporting of contractor costs, and the
fact that we did not review all program payments, the amount of
improper and questionable payments could be even greater. Further, the
control weaknesses at Energy and SSC NOLA could be indicative of more
systemic problems at both organizations that could put other program
funds at risk. Correcting these problems will require a major
reassessment of existing practices, policies, and procedures and the
overall control environment. The success of this effort will depend on
the level of commitment by senior management in setting the "tone at
the top" and working proactively to see that the needed changes are
effectively implemented.
Recommendations for Executive Action:
We are making 16 recommendations to address the issues identified in
this report. We are making 14 recommendations to Energy to (1) improve
controls over the review and approval process for contractor invoices;
(2) strengthen accountability for government-owned equipment purchased
by contractors; (3) improve reporting and control of overall contract
costs, including subcontractor costs; and (4) pursue opportunities for
recovery of improper and questionable costs identified in this report.
We are also making 2 recommendations to SSC NOLA to reassess its
procedures for carrying out its responsibilities for delegated contract
administration in connection with interagency agreements.
To improve Energy's controls over its review and approval process for
contractor invoices, we recommend that the Secretary of Energy instruct
the Deputy Secretary to:
* Develop an assessment process to use as a basis for determining
reliance on and monitoring the performance of other federal agencies
that perform key contract management functions on Energy's behalf, such
as monitoring contractor services, review and approval of invoices, and
approval of subcontractor agreements.
* Establish policies and procedures for an effective review and
approval process for contractor invoices, including (1) conducting and
documenting observations (surveillance) of services provided by
contractors, (2) linking those observations to the invoice review and
approval process, (3) verifying labor hours are billed at appropriate
rates and that employees are qualified to perform the work consistent
with the terms of the underlying agreement, and (4) ensuring other
direct costs are properly supported and reviewed prior to payment.
* Develop guidance for CORs or other payment/review officials that
detail appropriate steps for review and approval of invoices and
appropriate documentation of that review process.
* Require timely and periodic reviews of contractual agreements,
especially time and materials contracts or task orders, including the
statements of work, to ensure that agreements continue to reflect both
the work that is being performed and the needs of the agency.
To strengthen Energy's accountability for contractor-acquired
government property, we recommend that the Secretary of Energy instruct
the Deputy Secretary to establish or reinforce existing policies and
procedures to:
* Approve contractor equipment purchases prior to purchase.
* Verify that contractors receive and safeguard the assets during the
operation of the program, including physical inventories or some other
process to validate that all assets paid for are accounted for.
* Timely conduct physical inventories of contractor-acquired government
property upon taking possession of the equipment at the close of
contract, including resolving with the contractor any missing or
defective items.
To improve Energy's reporting and control of time and materials and
cost reimbursement contract costs, including subcontractor costs, we
recommend that the Secretary of Energy instruct the Deputy Secretary to
establish or reinforce existing policies and procedures to:
* Review subcontracts, including those for labor obtained through
temporary staffing agencies.
* Require contractors to obtain formal approval in advance for
significant new subcontract agreements or changes to existing
subcontract agreements, such as significant changes in the nature,
scope, or amount of subcontracted activities, including labor obtained
through temporary staffing agencies.
* Systematically monitor overall contract costs and require documented
justifications from contractors for increased ceiling amounts, as well
as specific documentation to support Energy's approval of the increases
before incurrence of any costs beyond the ceiling.
* Properly assign costs incurred to the correct program at the time of
payment and accurately report such costs in internal and external
financial reports.
* Reinforce requirements for reconciliation of intragovernmental
payments for amounts due under interagency agreements to appropriate
supporting documentation.
To pursue opportunities for recovery of improper or questionable costs
identified in this report, we recommend that the Secretary of Energy in
coordination with the Administrator of General Services and, in
relation to SEA costs, the Commanding Officer, Space and Naval Warfare
Systems Center, New Orleans, to:
* Determine, in consultation with DOJ, the amount, if any, of
potentially recoverable costs associated with the improper and
questionable payments for labor associated with SEA that we identified
in this report in light of the settlement agreement dated November
2005.
* Determine whether the other improper and questionable payments of
contractor costs, including payments to SEA that are identified in this
report, should be reimbursed to Energy by any contractor.
In light of the findings in this report, we recommend that the
Commanding Officer, Space and Naval Warfare Systems Center, New
Orleans, reassess the organization's procedures for carrying out its
delegated responsibilities in connection with interagency agreements
for delegated contract administration responsibilities, including the
following:
* Assess the adequacy of the review and approval process for contractor
invoices, including (1) oversight and monitoring of contractor services
and linkage of these activities to the invoice review and approval
process, (2) verification that labor hours are billed in the
appropriate categories at the appropriate rates, and (3) determining
that contractor travel and other direct costs are in accordance with
the contract and applicable federal regulations.
* Establish policies to document guidance sought from GSA and the
direction received on all matters of substance, including the use and
billing implications of subcontracted labor, and to communicate the
direction provided by GSA to the customer agency (e.g., Energy) for
consideration by the customer.
Agency Comments and Our Evaluation:
In the letter transmitting its detailed written comments on a draft of
this report, Energy stated that it agreed with the spirit and intent of
our recommendations and that it will give careful consideration to each
of them. Energy also said it would revise its current policies or
procedures as appropriate and described corrective actions it had
already undertaken to improve its controls, including those over
interagency contracting. In its detailed comments, Energy agreed with
some of our findings and disagreed with others without specifically
commenting on any of the 16 recommendations, including the 14 directed
to Energy. In particular, Energy (1) disagreed with our view that it
was ultimately responsible for the issues that we identified relating
to payments and controls for SEA, a contractor obtained through an
interagency agreement; (2) stated that it was engaging the Defense
Contract Audit Agency (DCAA) to audit the costs of two contractors that
we reported as having a number of issues related to improper payments,
and that it considers this to be a control that addresses some of our
findings; (3) disagreed with our findings that Energy improperly paid
$557,429 to Westwood for add-on rates and $98,305 to TDI for base fees;
and (4) stated that its June 2004 transfer of $21.2 million was proper
and that the large purchases of furniture and equipment near the end of
the program were also proper. Energy also observed that the November
29, 2005, settlement and release between the government and SEA would
appear to preclude the recovery of any additional money from the
contractor for the improper and questionable payments that we
identified in this report.
In written comments reprinted in appendix III, SSC NOLA stated that it
concurred with the two recommendations calling for it to reassess its
procedures for carrying out its responsibilities in connection with
interagency agreements and that it expects to complete actions on both
recommendations by August 1, 2006. SSC NOLA separately provided
technical comments, which we have incorporated as appropriate.
Energy took issue with a number of our findings related to SEA contract
payments because Energy did not agree that it had ultimate
responsibility for the contract with SEA. Energy stated that it was the
responsibility of the contractor to comply with the terms of its
contract. Energy stated that it is a customer of SSC NOLA and, as such,
had no direct contractual relationship with the contractor, SEA.
Energy's position is that SSC NOLA was responsible for conducting
appropriate oversight and administration of contractor costs and that
it had relied on SSC NOLA and GSA to ensure that SEA complied with the
terms of its contract. Energy further stated that it deferred to SSC
NOLA and GSA on issues with the SEA contract such as labor categories,
billing rates, qualifications of personnel, and subcontractor
arrangements and that those issues were the responsibility of SSC NOLA
and GSA, not Energy.
We disagree with Energy's position that it had no responsibility as it
relates to the propriety of the payments made to SEA. As discussed in
the Background section of our report, in cases where authority for
contract oversight and administration is delegated among multiple
agencies, ultimate responsibility for the contract rests with the
customer agency (receiving agency), in this case Energy. Energy cannot
assign or delegate away its responsibilities[Footnote 34] through
interagency agreements; the ultimate responsibility for ensuring the
success of the contracted efforts as well as the propriety of payments
remains with the receiving agency. In particular, the Economy Act
requires that agencies ordering and paying for services under Economy
Act agreements are responsible for ensuring that they receive the
required services and pay for actual costs that were incurred by the
performing agency, in this case SSC NOLA.[Footnote 35] While Energy may
not have had sole responsibility for ensuring that payments made to SEA
were proper, Energy was responsible for making sure that others were
adequately conducting work on its behalf to ensure that program funds
were not used to make questionable and improper payments.
Notwithstanding its stated view that it was the responsibility of
others and not Energy to conduct appropriate oversight and
administration of the SEA contract, Energy stated that it did conduct
observations and monitoring of SEA services. Energy further stated that
it linked those observations to amounts billed each month through
multiple levels of metrics and the contractor's monthly cost report.
However, we found that Energy did not receive any of the SEA billings
under the interagency agreement. Also, we found that Energy had no
processes in place to link the cost reports, any metrics it may have
produced, or any observations it may have made to amounts that the
contractor billed each month. Further, because information in the
contractor's monthly cost report was not compared to amounts billed
each month, the procedures Energy described in its comments would be of
limited value as a control process against improper payments and would
not provide Energy with the necessary assurance that amounts
subsequently paid to the contractor were appropriate.
In response to a number of our findings related to improper payments
made to Westwood and TDI, Energy stated that it is currently having
DCAA audit these contracts. Energy further stated that these audits
were initiated as part of its "normal course of business" and
anticipated that many of the issues we cited would normally be
identified as part of a DCAA audit. While we agree that a DCAA audit of
contract costs can provide a detective control to help determine
whether contractor costs were proper, reliance on an after-the-fact
audit is not an acceptable replacement for the type of real-time
monitoring and oversight of contractor costs-preventive controls-that
we found to be lacking at Energy. Further, a DCAA audit of civilian
contractor costs is not automatic and requires an additional cost to
the government to procure. In addition, as stated in our report, the
numerous issues that we identified with Westwood and TDI occurred over
a 4-year period. It is important that Energy establish a control
environment that includes control activities that prevent questionable
or improper payments to begin with or that detects them soon after they
occur so that they can be resolved in a timely manner, thus ensuring
program funds are fully available to achieve the purposes of the
program. Reliance on an audit by DCAA in 2006 or later of contractor
activity that began in 2001 is not an efficient or effective approach
to implementing proper internal controls over payments to contractors.
Energy disagreed with our findings that it improperly paid $557,429 to
Westwood in the form of a 12 percent add-on rate and also improperly
paid $98,305 to TDI for base fees. Energy stated that Westwood had an
approved rate of 13 percent for general and administrative expense that
was verified by the CO in a DCAA pre-award audit. However, we found
that the 13 percent general and administrative expense that Energy
refers to was evaluated in the context of a price proposal for a cost
plus contract. Further, under time and materials contracts like this
one, general and administrative expenses are typically included in the
hourly rate associated with each labor hour. While FAR 52.232-7 allows
for "reasonable and allocable" material handling costs, including
general and administrative expenses, for materials and subcontractors
to the extent that they are "clearly excluded from the hourly rate,"
neither Westwood nor Energy provided evidence during our review that
any such costs were clearly excluded from Westwood's labor rates.
Therefore we stand by our conclusion that the 12 percent add-on rate to
Westwood's time and materials contract was improper.
With respect to the improper payment to TDI of $98,305 in base fees,
Energy stated that our approach of adding TDI's fee to the fees
associated with its subcontractor (Westwood) was not appropriate
because there is no "base fee" in Westwood's contract. Energy's stated
basis for its position was that the TDI contract was a cost-plus-award-
fee type while TDI's subcontract with Westwood was a cost-plus-fixed-
fee type contract, with no base fee. However, as stated in our report,
TDI did not have a subcontract or other binding agreement with Westwood
for services Westwood provided to Energy that TDI subsequently included
on its invoices to Energy. Further, Energy's contract with TDI limited
the amount of base fees to $82,847 applied to the level of effort
(i.e., labor hours billed) provided by TDI and made no distinction
between hours incurred by the prime contractor or any contractor viewed
as a subcontractor. Thus, the contract terms necessitate considering,
as we did, the base fees of TDI and Westwood together. As stated in our
report, Energy paid a total of $181,152 in base fees when the maximum
should have been $82,847, thus resulting in improper payments of
$98,305.
Energy stated that the information in our report showing that $21.2
million in funds was transferred to OWA in June 2004 during the same
time that legislation was moving through Congress to transfer the
administration of the program to DOL implies that Energy's ramp-up
activities were unsupportable. Energy also stated that using these
funds to purchase furniture and equipment in the summer of 2004 was
consistent with congressional approval of its reprogramming actions.
Our report does not imply that Energy's ramp-up activities were
unsupportable. Our report provides extensive background information on
the program, including the June 2004 transfer of $21.2 million in funds
to OWA in an effort to clear the backlog of claims. This background
information was provided for context. As discussed in our report,
however, we did identify $1,162,919 in purchases of furniture and
equipment and related storage costs that may not have been an efficient
use of government funds given that Congress was giving consideration to
transferring responsibility for the program to another agency. As
discussed in the report, Energy ordered $748,409 of modular furniture
in July 2004 that was to be installed in new work space to be occupied
by claims processing personnel provided by SEA. However, by August
2004, OWA had initiated a hiring freeze and therefore placed the
furniture in a storage facility, incurring costs of $72,720 for 12
months. Further, Energy paid the vendor $50,000 up front in 2004 for
installation charges even though the furniture was not installed until
February 2006, over a year and a half later, for use by another Energy
program.
Regarding our recommendation that Energy pursue opportunities for
recovery of labor and other SEA costs that we identified as improper or
questionable, Energy stated that the November 29, 2005, settlement
agreement and release between the government and SEA would appear to
preclude the recovery of any additional moneys for expenditures in
support of Energy's programs. Our report stated that we did not
determine whether, or to what extent, the terms of the November 29,
2005, settlement and release with SEA may affect any potential
additional monetary recoveries by the government for the questionable
and improper payments made to SEA that we identified. We also stated in
our report that the release clause of the settlement is limited to
"covered conduct" investigated by the government related to two areas:
billing indirect labor costs as direct labor costs and billing for
employees in labor categories for which they were not qualified. It is
important that Energy consult with DOJ in order to determine the
recoverability of funds from SEA before concluding that the funds are
not recoverable. Therefore, we reaffirm our recommendation.
Discussions on other matters are provided following Energy's comments,
which are reprinted in appendix II. SSC NOLA's comments are reprinted
in appendix III.
As agreed with your offices, unless you publicly announce its contents
earlier, we plan no further distribution of this report until 30 days
from its date. At that time, we will send copies to the Secretary of
Energy and the Commanding Officer of SSC NOLA and interested
congressional committees. Copies will also be made available to others
upon request. In addition, the report will be available at no charge on
the GAO Web site at [Hyperlink, http://www.gao.gov].
If you or your staffs have any questions about this report, please
contact me at (202) 512-9508 or calboml@gao.gov. Contact points for our
Offices of Congressional Relations and Public Affairs may be found on
the last page of this report. Major contributors to this report are
acknowledged in appendix IV.
Signed by:
Linda M. Calbom:
Director, Financial Management and Assurance:
[End of section]
Appendixes:
Appendix I:
Scope and Methodology:
For this review, we considered costs recorded by the Office of Worker
Advocacy (OWA), the Department of Energy (Energy) office tasked with
administering Subtitle D of the Energy Employees Occupational Illness
Compensation Program Act of 2000 (EEOICPA) from October 2000 through
September 30, 2005. Our review focused primarily on costs incurred
under contracts for services by four contractors: Eagle Research Group,
Inc. (Eagle); Science and Engineering Associates, Inc. (SEA); Westwood
Group, Inc. (Westwood); and Technical Design, Inc. (TDI). In total,
payments made to these contractors represented approximately $55.5
million, or 60 percent, of total program costs reported by the EEOICPA
program through September 2005. Our work did not extend to the program
costs for claims research activities at Energy facilities. These
activities were performed by Energy's major facility operating
contractors that are subject to audit by Energy's Inspector General and
to other reviews by Energy's financial management officials.
To assess the reliability of OWA cost data for purposes of our review,
we reviewed reconciliations of OWA costs to amounts in the audited
Statements of Net Cost for fiscal years 2001 through 2004.[Footnote 36]
In addition, for all OWA cost data for the period October 2000 through
September 2005, we (1) obtained electronic files of OWA costs and
performed electronic testing for obvious errors in accuracy and
completeness, (2) reviewed supporting documentation for selected
payments to contractors and other vendors and compared them to OWA cost
data, and (3) reviewed documentation obtained from selected contractors
of cumulative billings for OWA costs and compared these amounts to OWA
cost data. Except for the cost tracking and reporting issues identified
in the internal control section of this report and the questionable and
improper payments that we identify, and the effect of any future
actions taken by the agency to recover any improper payments, the OWA
cost information we reviewed is considered reliable for purposes of
this report. We performed the majority of our work in Washington, D.C.,
at Energy and Westwood. We also performed work at SEA and TDI offices
in Albuquerque, New Mexico. Additionally, we observed Energy's
furniture inventory located in Laurel, Maryland.
To determine whether Energy's internal controls provided reasonable
assurance that improper payments to contractors would not be made or
would be detected in the normal course of business, we used Standards
for Internal Control in the Federal Government as a basis to assess the
internal control structure--control environment, risk assessment
procedures, control activities, information and communications, and
monitoring efforts of Energy over its OWA program. Further, we reviewed
contractual agreements, including prime contracts with four
contractors; Energy's interagency agreement with the Space and Naval
Warfare Systems Center, New Orleans, (SSC NOLA); and certain
subcontract agreements provided by prime contractors. We also
considered (1) prior GAO reports on the EEOICPA program, Subtitle D;
(2) the results of the reviews by the inspectors general of the General
Services Administration (GSA) (concerning SSC NOLA's use of SEA's
schedule contract) and Energy (concerning Energy's use of interagency
agreements); and (3) a prior audit report of the Naval Audit Service
concerning SEA services provided to SSC NOLA. We obtained and reviewed
current Energy policies regarding contracting and financial management
matters, including Energy's Acquisition Guide and accounting handbook.
We also conducted interviews with program, procurement, and financial
management personnel regarding policies and procedures that were in
place over contract payments, and walk-throughs of key processes, such
as the invoice review and approval process, to gain an understanding of
Energy's controls over contract payments. We conducted similar
interviews with SSC NOLA and GSA officials to assess Energy's
contractual relationship with its federal contracting partners. We
compared Energy's controls to those recommended in our Standards for
Internal Control in the Federal Government.
To determine whether Energy's payments to contractors were properly
supported and a valid use a government funds, we used a variety of data
mining, document analysis, and other forensic auditing techniques to
nonstatistically select transactions or groups of transactions for
detailed review. For the transactions we selected, we reviewed
supporting documentation to assess the appropriateness of payments
based upon contract documents and applicable federal regulations, such
as the Federal Acquisition Regulation (FAR), Federal Travel Regulation,
and Joint Travel Regulations. While we identified some payments as
questionable or improper, our work was not designed to identify all
improper or questionable payments or to estimate their extent.
For each of the major contracts, we obtained copies of invoices from
the contractor and compared the amounts to a listing of payments made
by Energy. In addition to this high-level analysis, we performed
detailed tests on labor and other direct costs, as described below.
Labor:
We obtained an electronic file of all SEA labor charges, for both
employees and subcontracted labor, for analysis. Based upon our review
of the file for trends or anomalies, we nonstatistically selected 94
employees for testing. SEA provided personnel files containing
supporting documentation, such as employee résumés, and company
information, such as hire and termination dates. Because each person
may have been billed under more than one labor category, we attempted
to make 187 comparisons of personnel information to labor category
requirements. SEA was unable to provide us with proper documentation of
personnel obtained through temporary hiring agencies, thus preventing
us from making 28 comparisons. We could not make an additional 72
comparisons because the contract's labor categories did not contain
adequate education or experience requirements. We made 87 comparisons
of employee qualifications to labor category requirements.
To review Westwood labor charges, we obtained compensation information,
such as W-2s and 1099s, and compared certain amounts reported to
underlying payment records and amounts Westwood billed the government
for these costs. For 25 Westwood employees supporting OWA activities,
we compared their education and experience requirements as documented
on their résumés to the labor category requirements negotiated in its
contract.
We also compared the documentation of the two TDI employees'
qualifications to the contract labor category descriptions.
Other Direct Costs:
Neither SEA nor Westwood provided a detailed list or breakdown of other
direct costs as part of its invoice to Energy; therefore, we performed
a preliminary review all the supporting documentation for these two
contractors' other direct costs. From this documentation we identified
a high volume of the following types of transactions at each
contractor, for which we performed a more detailed review.
* Payments for equipment and travel costs incurred by SEA. The
supporting documentation we reviewed for these costs included expense
vouchers, vendor invoices, travel authorization forms, and plane ticket
receipts and itineraries.
* Payments for services provided by independent contractors incurred by
Westwood. These services were mainly provided by the physician panel
members. We obtained and reviewed the supporting invoices or other
documentation of time and costs for 6 of 167 physician panel members
billed. We chose these 6 physicians for detailed review because of the
high volume of charges or unusual charges that we noted during our
preliminary reviews of supporting documentation. We only considered
their billings for fiscal year 2004, the year of the highest physician
panel activity.
In addition to this review of payments made to the major contractors,
we analyzed other payments made by Energy in support of OWA. For
example, we requested supporting documentation for a nonstatistical
selection of payments based upon our analysis of payment information by
payee and amount. We also performed an analytical review of Department
of Labor (DOL) reimbursements under memorandums of understanding dated
July 2001 and December 2004 for the operation of the EEOICPA resource
centers. These reimbursements totaled approximately $11 million and
were offset against costs for the Eagle contract and other OWA program
activities.
We reviewed the November 29, 2005, settlement agreement and release
between the Department of Justice and SEA resulting from investigations
by the government of alleged improper billing by SEA. We also reviewed
the related January 2006 administrative settlement agreement between
the Department of the Navy and SEA that provided for SEA to implement a
compliance program to ensure that it adheres to lawful and ethical
procedures and practices in all areas relating to its role as a
government contractor.
We provided Energy a draft of this report and SSC NOLA a draft of
applicable sections of this report for review and comment. Energy's
Deputy Assistant Secretary of Planning and Administration, Office of
Environment, Safety and Health, and SSC NOLA's Commanding Officer
provided written comments, which are reprinted in appendixes II and
III, respectively. Energy and SSC NOLA also provided technical
comments, which we have incorporated as appropriate. We also provided
key officials of SEA, Westwood, Eagle, and TDI with draft summaries of
the findings noted in this report relating to them. We incorporated as
appropriate oral and written comments we received on these draft
summaries from management officials from Westwood, Eagle, and TDI and
from outside legal counsel for SEA. We performed our work in accordance
with generally accepted government auditing standards in Washington,
D.C., and at three contractor locations from February 2005 through
March 2006.
[End of section]
Appendix II:
Comments from the Department of Energy:
Department of Energy:
Washington, DC 20585:
April 20, 2006:
Linda M. Calbom:
Director, Financial Management and Assurance U.S. Government
Accountability Office:
441 G Street, NW:
Room 5087:
Washington, DC 20548:
Dear Ms. Calbom:
Thank you for providing the Department of Energy (DOE) the opportunity
to comment on the Government Accountability Office (GAO) review of
internal controls for payments made to contractors and overall contract
costs associated with DOE's implementation of the Energy Employees
Occupational Illness Compensation Program Act of 2000 (EEOICPA). We
have the following general comments:
* GAO provided 14 specific recommendations for DOE that have to do with
improving controls over the review and approval of contractor invoices,
strengthening accountability for Government owned equipment purchased
by contractors, improving the reporting and control of overall
contractor costs, and pursuing opportunities for recovery of any
improper costs. DOE agrees with the spirit and intent of the
recommendations. It should be noted that several recommendations have
already been implemented and are addressed in the attached comments to
the draft report. We will give careful consideration to each of the
recommendations and will revise our current policies or procedures as
appropriate.
* DOE has already undertaken a number of corrective actions, which are
identified and discussed in the attached comments. However, many of the
problems/issues identified by GAO were under the cognizance of the
Department of the Navy (Navy) because they pertain to the Science and
Engineering Associates (SEA) contract with the Navy. DOE obtained its
primary contractual support from the Navy via an Economy Act
Interagency Agreement under which the Navy utilized SEA as its support
contractor through a Navy-SEA Blanket Purchase Agreement (BPA). The
Navy assigned its own Project Manager to administer its BPA with SEA.
DOE was a customer of the Navy, and had no direct contractual
relationship with SEA. DOE issued Acquisition Letter 2005-05 Rev on 4/
26/05 addressing Interagency Contracting. The Acquisition Letter sets
out new guidance and procedures that are stricter than the current
requirements of the Economy Act and FAR 17.5. Moreover, specific
guidance and training on the proper use of other agency contract
vehicles was provided in December 2004, for all DOE contracting
professionals and program officials. A DVD of this training was made
and is posted on the Office of Procurement and Assistance Management's
website for future reference by all DOE personnel and for training of
new employees. Additionally, DOE has already initiated as standard
operating procedure, audits through the Defense Contract Audit Agency
(DCAA) of the contracts under DOE's cognizance that were used in
support of EEOICPA, We believe it is essential that this and other
corrective actions taken by DOE be referenced in GAO's report.
As mentioned above, we have included as an attachment to this letter
specific comments that would enhance the factual accuracy of your
report. Due to the scope and extent of the comments, DOE respectfully
requests that the entire text of this letter and its attachments be
included in the published version of the GAO report.
Sincerely,
Signed by:
Kevin Kelly:
Deputy Assistant Secretary:
Planning and Administration:
Office of Environment, Safety, and Health.
Attachments: Detailed Comments on GAO-06-547:
DOE Acquisition Letter 2005-05 Rev - Interagency Contracting:
Detailed Comments on GAO-06-547:
GAO Comment: GAO implies that DOE did not ensure that the Government
received good value from its Interagency Agreement with Navy and its
contractor, SEA. (draft page 19 and elsewhere):
DOE Response: Energy did conduct observations and monitoring of SEA
services, and linked those observations to the amounts SEA billed the
Navy each month. Energy had multiple levels of metrics produced weekly
that tracked cost, production, and quality. Energy received the
contractor's cost report monthly and compared that to the number of
contractor personnel and cases processed - Energy was constantly
pushing for increased production and monitored these parameters
closely. Based on the above, Energy was confident that it was receiving
a good value for the Government's money.
GAO Comment: GAO reports that in June 2004, DOE transferred $21.2
million to the program, while at the same time, legislation was moving
through Congress to transfer the program, implying that DOE's ramp up
activities were unsupportable. (draft page 10 and elsewhere):
DOE Response: DOE's reprogramming actions were proper.
* DOE properly reprogrammed $21.2 million in June 2004 because Congress
explicitly authorized it. DOE had presented its "ramp-up" plan to the
Congressional committees, who approved the reprogramming action. The
Congressional committees understood that DOE intended to use these
funds to accelerate case production, and the committees approved the
reprogramming and approved it.
* Agencies are required to act on the law as it stands, not on proposed
legislation. Various legislative proposals to reform EEOICPA, including
a proposal to transfer the program to another agency had been
introduced previously and not been passed. The legislation proposed in
June 2004 was substantially different from the bill ultimately passed
in October 2004. DOE is not in a position to second-guess what proposed
legislation may or may not become law and makes its reprogramming
decisions based upon existing laws and existing programmatic need.
DOE's reprogramming was proper, facilitated acceleration of case
production and was approved by appropriate Congressional committees.
GAO Comment: GAO describes DOE actions in the procurement process (new
contract to replace problematic Science and Engineering Associates,
Inc. (SEA) and Westwood vehicles), stating that DOE had "substantially
completed the procurement process by August 2004" but did not complete
the action "in light of the potential transfer of the program to the
Department of Labor." (draft page 14):
DOE Response: The Contract Evaluation Team for the new contract did not
provide its recommendations to the DOE Procurement Office until October
6, 2004 - more than a week after termination of the Navy's SEA contract
support. The proposed legislation to transfer the program to the
Department of Labor (DOL) did not affect DOE's decision making in
August 2004. The DOE Bridge Contract was issued to allow for continuity
of the program while the procurement action was finalized, and then
served as the vehicle to close out the case processing activities.
GAO Comment: Although authority for contract oversight and
administration was delegated among multiple agencies, ultimate
responsibility for the contract rested with the customer agency
(receiving agency), Energy. (draft page 16):
DOE Response: We disagree with GAO's assertion that the ultimate
responsibility for the contract administration and oversight of the SEA
contract rested with DOE as the receiving agency. The primary
contractual support provided for the EEOICPA program was provided via
an Economy Act Interagency Agreement with the Department of the Navy.
The Navy elected to utilize SEA as its support contractor. The Navy had
a competitively awarded Blanket Purchase Agreement (BPA) with SEA that
was placed against a General Services Administration (GSA) Federal
Supply Schedule contract. A GSA Contracting Officer, acting on behalf
of the Navy placed the Agreement. Although DOE agrees that it has
responsibility for its program, in this instance, we were a customer of
the Department of the Navy. DOE had no direct contractual relationship
with SEA, and the Navy had assigned its own Project Manager to
administer the BPA. Issues regarding labor categories, rates and
qualifications under the BPA were the direct responsibility of the Navy
and the GSA Contracting Officer. GAO correctly notes that the Navy was
responsible for the review and approval of SEA invoices and approval of
contractor travel and contract deliverables.
On November 29, 2005, the Department of Justice and SEA executed a
Settlement Agreement and Release (Settlement) after an investigation of
improper billings concerning labor charges by SEA under their GSA FSS
contract and two related BPA's. According to GAO, this included
approximately $26.6 million worth of support to the Department of
Energy. Although both the Navy and GSA were clearly aware that there
were serious issues with the SEA contract neither agency thought it
necessary to advise DOE of these issues. In fact, it would appear that
this investigation was going on at the same time DOE had requested the
Navy to provide significantly increased staff support to the program.
Under the terms of the Settlement, SEA paid the government $9.5
million. In return the Government provided a release that it would seek
no further civil or administrative monetary claims or cause of action
against SEA. This would appear to preclude the recovery of any
additional monies by the Navy/GSA for expenditures in support of DOE
programs.
Based on experience and lessons learned, DOE has already extensively
revised its procedures for Interagency Contracting. Some of the new
requirements contained in the Acquisition Letter include: designation
of a DOE Contracting Officer's Representative for Interagency
Agreements and review by a DOE Contracting Officer when an existing
servicing agency contract is utilized to ensure that proposed work is
within the scope of the existing contract. These policies and
procedures exceed the requirements in the Economy Act and its
implementing regulations in FAR Subpart 17.5:
GAO Comment: Labor categories and certain other activities were not
verified against the contract. (draft pages 23 and 24):
DOE Response: GAO notes that the Navy did not take proper steps to
verify that labor hours were being billed at the appropriate rates and
that employees were qualified under the labor category education and
experience requirements negotiated in its BPA. They are asserting that
DOE should have taken steps to ensure that the Navy implemented
appropriate verification procedures or effective compensating control
strategies. DOE disagrees with this assertion. The Navy and GSA (as its
contracting representative) had complete cognizance of their BPA.
However, as DOE had no privity of contract with SEA and was not
involved in the placement or administration of the BPA, or any
resulting task orders under the BPA, DOE was in no position to conduct
any kind of independent verification of SEA's rates or personnel
qualifications. We were relying on the service provider, in this
instance GSA/Navy, to ensure that SEA complied with terms of its
contract. We would note, however, that in light of the settlement that
was reached by the Department of Justice with SEA, the Navy/GSA clearly
recognized that there were issues with SEA labor rates and
qualifications.
GAO Comment: Westwood performed some activities in support of the DOE
Office of Worker Advocacy that were never incorporated into Westwood's
Statement of Work. (draft page 24):
DOE Response: DOE disagrees; the Statement of Work in the Westwood
contract contains the following: "identifying and obtaining appropriate
scientific, legal and medical expertise." This would include obtaining
doctors (physician panels) and advisors on environmental health issues.
GAO Comment: Inadequate Consideration of Subcontractor Arrangements
(draft pages 29 and 30):
DOE Response: Again, DOE had no direct involvement in the negotiation
or approval of subcontracting arrangements under the SEA contract.
Those responsibilities lie directly with the service provider - the
Navy/GSA. DOE would defer to the Navy/GSA to answer questions/concerns
regarding SEA's subcontracting arrangements.
GAO Comment: With regard to the Technical Design, Inc. (TDI) contract,
GAO is asserting that it was impossible for DOE to adequately review
the amounts TDI billed for costs attributable to its subcontractor --
Westwood. (draft page 30):
DOE Response: DOE disagrees with this assertion. The TDI contract is an
8(a) contract that was issued on a cost-reimbursable basis. The
contract was negotiated by DOE and a complete cost proposal for both
TDI and its subcontractor Westwood was reviewed and approved by the DOE
Contracting Officer at the time of award.
GAO Comment: GAO is indicating that an agreement (subcontract?) between
TDI and Westwood does not exist. (draft page 30):
DOE Response: While DOE agrees that TDI and Westwood should have
entered into a subcontract, if for no other reason than their own
protection, that issue has no bearing on whether or not the costs being
billed were legitimate.
The proper terms and conditions to ensure appropriate oversight and
administrative controls were included in the TDI and Westwood contracts
as they would be in any federal government contract. Accordingly, the
Contracting Officer exercised his authority, pursuant to the terms and
conditions of the contracts and initiated audits of the TDI and
Westwood prime contracts and Westwood's subcontracts to ensure all
billings are proper. This was done as part of the normal course of
business and not as a result of GAO's audit. DOE would anticipate that
many of the issues raised by GAO would have been identified in the
normal course of auditing the contracts.
GAO Comment: GAO states that "physical inventories of Westwood and SEA
purchased equipment were not completed until at least eight months
following the expiration of the respective contracts." (draft page 28):
DOE Response: This is incorrect. All SEA equipment was inventoried in
the fall of 2004, during the closeout period, and DOE pursued charges
for missing equipment. Westwood equipment was inventoried as well. All
equipment was inventoried as it was placed on trucks for transportation
from Forrestal to Germantown. In Germantown, it was placed in temporary
storage in 9 separate rooms. Compensation has been received from
Westwood for some of the equipment and charges for other equipment are
outstanding. We intend to recover any charges that are outstanding.
GAO Comment: Accountability for Equipment Purchased by Contractors was
not maintained. DOE has identified 13 missing Westwood items. GAO has
identified an additional 31 missing items, for a total of 44. (draft
page 27-29):
DOE Response: Of the list of 44 pieces of equipment that were
identified as missing, after careful inventory review only 7 items
remain missing. DOE has asked Westwood for reimbursement of the seven
remaining items.
There were issues with a lack of supporting documentation for Westwood
purchases. DOE Office of Environment, Safety and Health (EH) has
implemented the following Corrective Action: EH has instituted a pre-
approval process for Other Direct Cost (ODC) items on contracts for any
ODC in excess of $50 (including travel).
GAO Comment: Contract Ceilings Were Not Effectively Monitored (draft
pages 30 and 31):
DOE Response: GAO is asserting that there were numerous increases in
contract ceilings for contracts supporting the OWA program. This is an
accurate statement; however, the increases were necessitated by
continually expanding program requirements. Each of the increases was
reviewed and approved by both OWA and the DOE Contracting Officer and
was properly effected in accordance with the FAR and internal DOE
requirements. At no time did DOE exceed a contractually negotiated and
established contract ceiling. The fact that modifications to the
contract(s) were issued in a timely manner demonstrates that DOE was
well aware of its ceilings and was managing them.
GAO Comment: Energy made millions of dollars in improper and
questionable payments for contractor costs (draft page 32):
DOE Response: GAO is asserting that approximately $26.4 million of
improper or questionable payments were made to contractors supporting
OWA activities. The bulk of this number - $20,185,182 pertains to
potentially "improper" and "questionable payments" regarding labor
categories. It is the responsibility of the contractor to comply with
the terms and conditions of its contract, including ensuring that the
contractor's staff possesses the requisite minimum qualifications
prescribed in the contract. As previously noted, the SEA contract (BPA)
belonged to the Navy and it was their responsibility to ensure that the
contractor complied with the terms of its contract. It was also the
Navy's responsibility to conduct appropriate oversight and
administration of contractor costs in accordance with the terns of the
BPA, including any necessary audits. The Navy apparently recognized
that there was an issue with some of SEA's personnel and initiated an
investigation which resulted in a $9.5 million settlement with SEA.
Unfortunately, since neither the Navy nor GSA alerted DOE to the issues
with its personnel, DOE was unable to proactively avoid the incurrence
of questionable costs. In light of the settlement already reached with
SEA it may no longer be possible to recover any additional
overpayments.
In regard to the Westwood contracts, DOE is currently having the
Defense Contract Audit Agency (DCAA) audit those contracts. These
audits were initiated as part of DOE's normal course of business. Many
of the issues that GAO is citing would normally be identified as part
of a DCAA audit. After the audits are received, DOE will determine what
action is warranted.
GAO Comment: GAO criticizes DOE for spending money on furniture and
equipment in the summer of 2004. (draft page 33, and again more
substantially on pages 46-47):
DOE Response:
* DOE acted with Congressional approval of $21.2 million in
reprogrammed funds to accelerate its production activities, including
providing furniture and equipment for its increasing staff. Had
Congress not transferred the program; DOE would have been widely
criticized for its failure to take timely steps to implement the plan
submitted to Congress to accelerate production.
* The furniture purchase is not an issue with contractual controls,
which is the stated focus of this GAO report. There is nothing
questionable (in terms of protocols, controls, or procedures) about the
furniture purchase itself.
GAO Comment: GAO is asserting that both SEA and Westwood applied "mark-
ups" in their fully burdened hourly rates for subcontracted labor,
resulting in "improper" and "questionable" payments. GAO contends that
the subcontracted labor should only have been billed at actual costs
and that the hourly rates should not have contained "mark-ups." (draft
pages 39-42):
DOE Response: Regarding GAO's comments on the SEA contract we would
defer to the Navy/GSA. With respect to the Westwood contract, DOE was
billed at the fully-burdened rate of $250/hr established in Westwood's
GSA FSS contract for the designated labor category for Senior
Scientists. The rates contained in Westwood's FSS contract were
negotiated and approved by GSA and in accordance with the GSA Multiple-
Award-Schedules (MAS) program which, in accordance with FAR subpart
8.4, are predetermined to be fair and reasonable. This rate was in fact
the discounted rate from Westwood's GSA schedule contract for that
labor category. It is pertinent to note that, in its proposal to DOE,
Westwood represented that the Senior Scientist positions were employees
of Westwood and not independent contractors or subcontractors. DOE has
initiated audits via DCAA of the Westwood contracts and these audits
are currently being conducted. Any improper or questionable costs that
are identified through those audits will be appropriately addressed by
the Contracting Officer.
With respect to GAO's opinion and interpretation of the terms of FAR
clause 52.232-7-Payments under Time-and-Materials and Labor-Hours
contracts, it is relevant to note that the FAR Council published a
proposed rule on September 26, 2005 (FAR Case 2004-015) to amend the
clause, primarily to clarify the treatment of direct labor performed
under Time-and-Material (T&M) contracts provided by subcontractors.
Public comments were received in December 2005, and we understand the
pending final rule will be issued shortly and that it will clarify that
subcontract labor for other than incidental services be billed and paid
at the contract fixed labor rate in accordance with the contract
requirements applicable to the labor hour portion of the contract. This
is consistent with our method established for T&M contracts requiring
both primes and subcontractors to be reimbursed for direct labor based
on their own established fully burdened labor rates.
GAO Comment: GAO is criticizing DOE for paying add-on rates to Westwood
that were "improper" and for overpaying the base fee to TDI and their
subcontractor Westwood. (draft pages 43 and 44):
DOE Response: GAO is asserting that Westwood was improperly paid a 12%
add-on rate for its Other Direct Costs (ODCs), which totaled $557,429.
DOE disagrees with this assertion. Westwood does have a currently
approved rate of 13% for General and Administrative Expense (G&A) that
is applied to its total cost base. This rate and its application. base
were verified by the Contracting Officer in a DCAA pre-award audit. We
provided a copy of that pre-award DCAA audit to GAO previously along
with the governing FAR policy. GAO's objection appears to be that it
was not specifically written into the task order. However, FAR 52.232-
7-Payments under Time-and-Materials and Labor-Hours contracts, is
applicable to Westwood's task orders and this clause permits the
application of an approved General and Administrative (G&A) rate to
direct materials in accordance with the contractor's usual accounting
practices and FAR 31.2. However, the G&A rate and its application will
be reviewed by DCAA in the course of conducting its audit(s) of
Westwood's task orders.
GAO is also asserting that Energy improperly paid $98,305 in base fees
to Technical Design, Inc. (TDI). DOE disagrees with this assertion. GAO
is asserting that TDI exceeded both its base fee and the 10% limitation
on fee at FAR 15.404. However, adding TDI's fee to its subcontractor's
(Westwood's) fee is not appropriate. While the TDI contract was a Cost-
Plus-Award-Fee (CPAF) type, the subcontract with Westwood was a Cost-
Plus-Fixed-Fee (CPFF) type. There is no "base fee" in Westwood's CPFF
subcontract. GAO is improperly adding the separate fees together to
create one base fee pool. We would agree that neither TDI, nor its
subcontractor (Westwood) was entitled to a fee in excess of 10%
individually and DOE did not pay fee to TDI in excess of the 10%
statutory limit.
GAO Comment: GAO is asserting that "improper" and "questionable"
payments were made for Per Diem, Commuting and Travel Costs and that
there were some duplicate and erroneous billings under the TDI and
Westwood contracts. (draft pages 45 and 46):
DOE Response: GAO is asserting that both SEA and Westwood over billed
on per diem, commuting and travel costs. GAO also asserts that Westwood
and TDI were overpaid due to duplicate and erroneous billings. Again,
the SEA BPA would fall under the cognizance of the Navy/GSA. With
regard to the Westwood contract, DOE is currently having DCAA audit all
the prime and subcontracts. That would include any of the costs that
GAO is questioning. After DOE receives those audits a determination of
what, if any, action is required will be made. As previously mentioned,
DOE's Office of Environment, Safety and Health (EH) has implemented the
following Corrective Action: EH has instituted a pre-approval process
for Other Direct Cost (ODC) items on contracts for any ODC in excess of
$50 (including travel). This policy should eliminate over billings and
erroneous billings on per diem, commuting and travel costs.
GAO Comment: GAO states that "by August 2004, OWA had initiated a
hiring freeze in light of the potential transfer of the program to
DOL." (draft page 47):
DOE Response: This statement is inaccurate. The legislation was not
imminent in August 2004. The hiring freeze was to conserve funds in
light of an expected (and extended) continuing resolution, which would
have severely constrained the program's finances.
GAO Comment: GAO states that DOE did not seek a refund on the $50,000
furniture assembly fee. (draft page 47):
DOE Response: The systems furniture was used at 950 L'Enfant Plaza for
swing space for the Forrestal Life Safety Sprinkler and Fire Alarm
Installation Project. The $50,000 of pre-paid installation charges from
the manufacturer were used to install the systems furniture for that
project. The installation took place from January 8, 2006 through
February 13, 2006. DOE received full value for the installation
dollars.
GAO Comment: Energy's monitoring of services provided under the
Westwood contract was insufficient. (draft page 20):
DOE Response: Although review and approval was done in the past, it was
on a negative confirmation basis. DOE EH has implemented the following
Corrective Action: DOE EH has since put in place positive confirmation
approval on all EH invoices for support service contracts. Task
Monitors (TM's) are required to sign off on the hours and other direct
costs for each task under the contract. TM's are also required now to
sign a memorandum explaining their responsibilities and duties as
related to contract monitoring and other TM responsibilities.
GAO Comment: Energy did not request Westwood to submit supporting
documentation for some ODCs because it was too voluminous. (draft page
24):
DOE Response: It is not clear where the quote "too voluminous" came
from. Regardless, DOE agrees that volume is not a reason to preclude
submitting ODC documentation. DOE EH has implemented the following
Corrective Action: DOE EH has established a new Other Direct Cost
Policy, where all purchases in excess of $50 must receive prior
approval in writing by the Task Monitor (TM) and the Contracting
Officer's Representative (COR) in order to receive reimbursement under
the contract. The signed approval is to be submitted with the invoice
as well.
GAO Comment: Energy improperly assigned some Westwood OWA costs to
other program reporting units and, in some cases, assigned costs of
other reporting units to OWA. (draft page 31):
DOE Response: This only occurred for a short period. However, DOE EH
has taken the following Corrective Action: Task Costs are billed to
each office's B&R reporting code directly on each invoice. For cases
where multiple offices use one task, specific delineation of employees
and their specific costs are now received and used for billing to the
correct B&R code.
GAO Comment: Energy "borrowed" $1.3M from other program reporting units
to pay OWA costs. (draft page 32):
DOE Response: The $13M from two other program reporting units was not
"borrowed." It was transferred to OWA by senior DOE Management at the
time. There was no plan to ever reimburse the offices providing the
funding.
The following are GAO's comments on the Department of Energy's letter
dated April 20, 2006.
GAO Comments:
1. See the Agency Comments and Our Evaluation section.
2. We have not included the acquisition letter attached to this letter
in this report. The letter can be found on Energy's Web site,
[Hyperlink, http://www.doe.gov].
3. We did not assess or conclude on whether the government received
"good value" from the contract with SEA. The scope of our work was to
determine whether internal controls over program payments were
adequately designed, and if program payments were properly supported as
a valid use of government funds. We addressed financial management
practices and procedures and whether payments were proper, not the
value or quality of services received.
4. We modified the report for this additional information.
5. We disagree. Our report stated that the contract with Westwood did
not fully reflect actual duties that were subsequently performed and
provided three examples of such. The quotation provided by Energy in
its comments is from the statement of work section of the Westwood
contract entitled "Advisory Committee Activities" that only addresses
the work that Westwood should perform in support of the Advisory
Committee, and therefore this language does not address the other
activities Westwood performed.
6. Energy states that a complete cost proposal was obtained from
Westwood. However, Energy does not address that our report stated that
Westwood's cost proposal was not incorporated into the prime contact
with TDI nor was any other binding agreement created between Energy and
Westwood relative to its cost proposal. Thus, as our report also
stated, without an effective contractual agreement, including
negotiated rates, it was not possible for Energy to adequately review
the amounts TDI billed for costs attributed to what Energy
characterizes as the subcontractor, Westwood. We reaffirm this
position.
7. A formal agreement between a prime and a subcontractor not only
protects the interests of the parties involved, but also those of the
government. Additionally, as discussed in the Agency Comments and our
Evaluation section of our report, after-the-fact detective controls,
such as the Defense Contract Audit Agency audits are not a replacement
for real-time monitoring and oversight of contract costs.
8. At the time of our first inquiry, Energy told us it was still
updating and finalizing the locations and conditions of the government-
owned equipment that SEA purchased. On September 29, 2005, the Director
of the Office of Information Management within the Office of
Environment Safety and Health stated that "the identification and
recording process is still underway." This was 8 months after
expiration of the SEA contract in December 2004. Our report also stated
that an inventory of contractor-purchased, government owned equipment
that Westwood purchased was not conducted until December 2005, nearly 9
months after Westwood's contract expired, which Energy does not
dispute.
9. We did not review Energy's work in 2006 to address the missing
items.
10. We do not agree with Energy's statement that "at no time did Energy
exceed a contractually negotiated and established contact ceiling." Our
report stated that Energy did not establish internal control monitoring
practices to effectively manage overall contract costs, including using
contract ceilings to manage and encourage cost-effectiveness. We found,
for example, that Westwood was paid amounts that exceeded the "not to
exceed" ceiling on other direct costs each year under its first
contract, which covered the 3 ½ year period August 2001 through
February 2005 as well as under the second contract that began in
September 2004. As a specific example, the other direct cost ceiling
was $600,000 in year 3, but Westwood was paid $2,421,176, or $1,821,176
more than the "not to exceed" limit per the contract.
11. Our report stated that the scope of our work was to determine
whether internal controls over program payments were adequately
designed and if program payments were properly supported as a valid use
of government funds. The furniture purchases were considered by us in
the context of both objectives.
12. Our report recognized that there are different interpretations of
the time and material payment clause (FAR 52.232-7). For purposes of
our report, we have based our findings on the literal application of
this clause. Further, as also stated in our report, we found that
neither Energy nor SSC NOLA for SEA exercised sufficient management
oversight to be fully informed of the nature, extent, scope of
services, and terms of billing to the government for subcontracted
services. In addition, we found inconsistencies in the application of
what Energy refers to in its comments as its "method established for
T&M contracts of requiring both primes and subcontractors to be
reimbursed for direct labor based on their own established fully
burdened labor rates."
13. Energy originally told us that the hiring freeze instituted in
August 2004 was because of the combination of a probable continuing
resolution and the possible transfer of the program to DOL. We modified
the report based on Energy's written comments.
14. We modified the report to reflect that the $50,000 of up-front
installation charges were paid in 2004 even though the equipment "was
not installed until February 2006." Notwithstanding this, the furniture
installation fee, like the furniture, did not benefit OWA but rather
another Energy program.
15. We did not review the procedures described as a corrective action
to address our finding that Energy's monitoring of services provided
under the Westwood contract was insufficient. However, it will be
important that changes are made to comprehensively address the
conditions we found at the contractor and at Energy. Our report stated
that the productivity measures used by the contractor to monitor work
performed by physician panel members were developed based on the hours
actually billed on the invoices submitted by the physicians, and
therefore Energy had no independent baseline to measure productivity or
to assess the reasonableness of hours billed on the invoices submitted
by the physicians. Further, our report stated that doctors who
performed a quality check function on claims were also not sufficiently
monitored. Energy did not systematically observe the hours worked and
compare any observations to the amounts paid for those hours, nor did
it determine that Westwood was adequately monitoring these services as
a basis for its billings.
16. The contracting officer's representative told us that supporting
documentation for Westwood's invoices was not requested because of the
"voluminous amounts" of paper that Westwood would need to copy and
transmit to Energy each month. Our report stated that one of the
elements of the control weakness for other direct costs was that the
contractor was not required to report a detailed breakdown of its other
direct costs as stipulated by its contracts. Without this level of
information, it was not possible for Energy officials to effectively
review and approve these invoices for payment. Further, a substantial
portion of the amount billed by Westwood for other direct costs was for
temporary labor, and Energy's controls would not, therefore, be
enhanced by the corrective action put in place covering purchases of
$50 or more. According to the implementation memo, this action is
intended to address purchases such as government-owned equipment and
travel, but does not specifically state whether temporary labor would
be covered. It will be important for Energy to take further corrective
actions that address enforcing its requirements for a detailed
breakdown of other direct costs as well as controls specifically
designed for temporary labor that are not covered by its new policy on
purchases.
17. We disagree. Our report stated that Energy improperly assigned the
costs of OWA services provided by Westwood to other program reporting
units, in effect using other programs' funds to pay for OWA activities.
We found that these practices occurred throughout the 4 years of the
program for both the Westwood and TDI contracts, not just for "a short
period" as Energy stated in its written comments.
[End of section]
Appendix III: Comments from the Space and Naval Warfare Systems Center,
New Orleans:
DEPARTMENT OF THE NAVY:
Commanding Officer:
Space And Naval Warfare Systems Center:
New Orleans:
2251 Lakeshore Drive:
New Orleans, La 70145-0001:
April 21, 2006:
Linda M. Calbom:
Director, Financial Management and Assurance:
United States Government Accountability Office:
441 G. Street, N.W.
Washington, D.C. 20548-0001:
Dear Ms. Calbom:
Re: Space and Naval Warfare Systems Center, New Orleans, Response to
GAO Draft Report To Congressional Requesters, "Department of Energy,
Office of Worker Advocacy", April, 2006:
Space and Naval Warfare Systems Center, New Orleans (SPAWARSYSCEN NEW
ORLEANS LA), appreciates the opportunity to provide comments to the
referenced Draft Report. Our responses are set forth below.
GAO Draft Report Recommendations for Space and Naval Warfare Systems
Center, New Orleans:
In light of the findings in this report, we recommend that the
Commanding Officer, Department of Navy's Space and Naval Warfare
Systems Center, New Orleans, reassess its procedures for carrying out
its delegated contract administration responsibilities, including the
following:
-Assess the adequacy of the review and approval process for contractor
invoices, including (1) Oversight and monitoring of contractor services
and linkage of these activities to the invoice review and approval
process, (2) Verification that labor hours are billed in the
appropriate categories at the appropriate rates, and (3) Determining
that contractor travel and other direct costs are in accordance with
the contract and applicable federal regulations.
SPAWARSYSCEN NEW ORLEANS LA Response: Concur. The Commanding Officer
will ensure processes are in place to effectively accomplish the 3
recommendations to improve the review and approval of contractor
invoices. We will request a review of our processes as a special
interest item during the August 2006 triennial command inspection
conducted by Space and Naval Warfare Systems Command. Completion date:
August 1, 2006:
-Establish policies to document guidance sought from GSA and the
direction received on all matters of substance, including the use and
billing implications of subcontracted labor, and to communicate the
direction provided by GSA to the customer agency (e.g., Energy) for
consideration by the customer.
SPAWARSYSCEN NEW ORLEANS LA Response: Concur. Procedures for
documenting all significant communications and guidance from GSA or any
contract procurement or administrative source will be established.
Training for CORS and project/program managers will emphasize
communication documentation and effective sharing of information with
customers and stakeholders. This documentation will be required to be
maintained as a part of the contract file. Completion date: August 1,
2006.
If you have questions or require additional information you may contact
Mr. John Gampel, Acting Inspector General, Space and Naval Warfare
Systems Command, who can be reached at (619) 524-7065 or
John.Gampel@navy.mil.
Signed by:
FRED J. Mingo JR.
Captain, U.S. Navy:
Commanding Officer:
Copy to:
SPAWAR Inspector General (Mr. John Gampel):
[End of section]
Appendix IV: GAO Contact and Staff Acknowledgments:
GAO Contact:
Linda Calbom, (202) 512-9508 or c [Hyperlink, calboml@gao.gov]
alboml@gao.gov:
Acknowledgments:
In addition to the contact named above, staff members who made key
contributions to this report include Robert Owens, Assistant Director;
Marie Ahearn; Sharon O. Byrd; Richard Cambosos; Donald Campbell; Lisa
Crye; Tyshawn Davis; Timothy DiNapoli; Abe Dymond; Ryan Geach; Jason
Kelly; Dina Landoll; Patrick McCray; and Ruth S. Walk.
FOOTNOTES
[1] Pub. L. No. 106-398, §. 1, div. C, title xxxvi, 114 Stat. 1654A-494
(Oct. 30, 2000).
[2] The hearings on Energy's administration of EEOICPA, Subtitle D,
were held by the Senate Committee on Energy and Natural Resources on
November 21, 2003, December 6, 2003, and March 30, 2004. GAO's
testimony statements are GAO, Energy Employees Compensation: Case-
Processing Bottlenecks Delay Payment of Claims, GAO-04-249T
(Washington, D.C.: Nov. 21, 2003); Energy Employees Compensation: Case-
Processing Bottlenecks Delay Payment of Claims, GAO-04-298T
(Washington, D.C.: Dec. 6, 2003); and Energy Employees Compensation:
Obstacles Remain in Processing Cases Efficiently and Ensuring a Source
of Benefit Payments, GAO-04-571T (Washington, D.C.: Mar. 30, 2004).
[3] GAO, Energy Employees Compensation: Even with Needed Improvements
in Case Processing, Program Structure May Result in Inconsistent
Benefit Outcomes, GAO-04-515 (Washington, D.C.: May 28, 2004).
[4] Pub. L. No. 108-375, div C, title xxxi, § 3161(i), 118 Stat. 1811,
2178 (Oct. 28, 2004).
[5] After Subtitle D was repealed and the program effectively
transferred to the Department of Labor (DOL), Energy continued to
provide claims research activities at the field offices in support of
DOL and other agency activities.
[6] The resource centers were located in Espanola, New Mexico;
Richland, Washington (Hanford); Idaho Falls, Idaho; Las Vegas, Nevada;
North Augusta, South Carolina (Savannah River); Oak Ridge, Tennessee;
Paducah, Kentucky; Portsmouth, Ohio; Westminster, Colorado (Rocky
Flats); Livermore, California; and Anchorage, Alaska.
[7] Energy published its final rule at 67 Fed. Reg. 52841 (Aug. 14,
2002), codified at 10 C.F.R. Part 852, "Guidelines for Physician Panel
Determinations on Worker Requests for Assistance in Filing for State
Workers' Compensation Benefits," which became effective on September
13, 2002.
[8] S. 2400, 108th Cong. (passed by the Senate on June 23, 2004).
[9] GSA established the FSS program in 1949 to facilitate federal
agencies' purchases of common products and services from commercial
vendors through schedule contracts.
[10] GSA's Inspector General reported that of the three SEA task orders
for services provided in fiscal years 2002, 2003, and 2004, the task
orders for 2003 and 2004 included case processing activities in
addition to information technology activities and were therefore
outside the scope of the underlying GSA FSS contract and a misuse of
the contract vehicle. Further, the GSA Inspector General concluded that
the statement of work for the second task order was vague and open-
ended, which discouraged competition. See General Services
Administration, Audit of Federal Technology Service's Client Support
Center Greater Southwest Region, Report Number A040097/T/7/Z05011
(Washington, D.C.: Dec. 10, 2004), and Letter to Senator Charles
Grassley, from GSA's Inspector General, July 2004.
[11] On March 23, 2006, counsel to SEA told us that since acquiring
SEA, Apogen has put a new management team in place.
[12] Energy executed an interagency agreement with SSC NOLA under the
Economy Act, 31 U.S.C. § 1535.
[13] GAO, High-Risk Series: An Update, GAO-05-207 (Washington, D.C.:
January 2005).
[14] The settlement is applicable to all task orders under the two
BPAs. The investigations serving as the basis of the settlement
consisted of one conducted by DOJ on amounts billed from April 1999
through September 2000 and another conducted by the Naval Audit Service
on amounts billed from August 2000 through September 2004. Neither of
these investigations, however, included the task orders under which SEA
provided services to Energy.
[15] Further, under a separate agreement from September 2004 through
December 2004, SEA billed Energy directly for an additional $2.6
million of labor charges for a total of $29.2 million.
[16] SEA disputes the allegations at issue in the government's
investigation concerning the covered conduct, and contends that SEA's
conduct was proper and in accordance with applicable law and
regulation.
[17] 31 U.S.C. §§ 3729-3733.
[18] GAO, Internal Control: Standards for Internal Control in the
Federal Government, GAO/AIMD-00-21.3.1 (Washington, D.C.: November
1999). See also, GAO, Policy and Procedures Manual for Guidance of
Federal Agencies, Title 7, "Fiscal Guidance", chs. 2, 6, and 7
(Washington, D.C.: May 1993).
[19] GAO, Strategies to Manage Improper Payments: Learning From Public
and Private Sector Organizations, GAO-02-69G (Washington, D.C.: October
2001).
[20] FAR 16.60(b)(1).
[21] Initially, SEA provided information technology services in New
Orleans. Later, SEA began providing case processing activities for OWA
and relocated the case processing services to Washington, D.C. The case
processing services ultimately accounted for 86 percent of total SEA
services provided under SSC NOLA's BPA.
[22] As discussed in the Background section, the GSA Inspector General
found that two of the three task orders included case processing
activities in addition to information technology activities and were
therefore outside the scope of the underlying GSA FSS contract and a
misuse of the contract vehicle.
[23] FAR subpart 45.5.
[24] For example, FAR 44.201-1 and 44.201-2 provide mechanisms for
agencies to consent to or be notified of subcontracting agreements
prior to award of the subcontracts.
[25] 48 C.F.R. § 52.232-7.
[26] See, FAR cases 2004-015 and 2003-027 at 70 Fed. Reg. 56314 and
56318, respectively, September 26, 2005.
[27] Westwood's services were significant to TDI's billings from March
2002 through September 2004, accounting for 30 percent of its billings
for OWA activities and over 40 percent of total TDI billings.
[28] The excessive base fee also resulted in another violation of TDI's
contract terms, which limited the total amount of base fee and award
fees to 10 percent of the estimated cost of the contract. The base fee
and award fees TDI billed Energy equaled 12.49 percent of the estimated
cost of the contract. Further, TDI received $89,296 out of the total
amount of $181,152 as its own base fee, exceeding the contract amount
by $6,449.
[29] We reviewed the supporting documentation for the costs of 6 of 167
panel physicians. We chose these 6 physicians for detailed review
because of either the high volume of their charges or unusual charges
that we noted in our preliminary reviews of supporting documentation.
We only considered their billings for fiscal year 2004, the year of the
highest physician panel activity.
[30] 41 C.F.R. § 301-11.1(c).
[31] Joint Travel Regulations, CC2204(B)(1)(b).
[32] In June 2004, the Senate passed an amendment to the fiscal year
2005 Defense Appropriations bill that would have transferred the
administration of EEOICPA Subtitle D to DOL. Ultimately, the bill that
was signed into law on October 28, 2004, repealed Subtitle D and
replaced it with Subtitle E, which is administered by DOL. (Pub. L. No.
108-375.)
[33] Storage costs from October 2005 through December 2005 were paid by
Energy's Office of Operations, Office of Space Management and
Facilities Development Group.
[34] GAO, Principles of Federal Appropriations Law, vol. 4, 2nd ed.,
pp. 15-69 through 15-70, GAO-01-179SP (Washington, D.C.: March 2001).
[35] 31 U.S.C. §§ 1535, 1536 and chapter 2 of title VII of GAO's Policy
and Procedures Manual for Guidance of Federal Agencies provide guidance
on agencies' responsibilities.
[36] For these years, Energy received an unqualified opinion on its
financial statements. In April 2005, Energy implemented a new financial
management system. A significant number of conversion, posting,
reconciliation, and reporting issues associated with the conversion
hindered Energy's ability to ensure the accuracy and completeness of
the financial statement balances. As a result, Energy's auditors issued
a disclaimer of opinion for fiscal year 2005. Four percent of OWA's
program costs were initially recorded in Energy's new financial
management system, and therefore the conversion does not have a
material effect on the usability of the data for purposes of our
report.
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