> ![](media/image1.pct)**UNITED STATES DEPARTMENT OF EDUCATION**

OFFICE OF INSPECTOR GENERAL

August 24, 2007

**Control Number**

**ED-OIG/A19G0006**

Lawrence Warder

Acting Chief Operating Officer

Federal Student Aid

## **Union Center Plaza III** 

830 First Street, N.E.\
Washington, DC 20002

Dear Mr. Warder:

This **Final Audit Report**, entitled *Controls Over Contract Monitoring
for Federal Student Aid Contracts,* presents the results of our audit.
The purpose was to determine whether Federal Student Aid's (FSA)
contract monitoring process ensures (1) contractors adhere to the
requirements of the contract, and (2) FSA receives the products and
services intended. Our review included evaluation of the 10 FSA
contracts for which the highest amount of payments were made during
Fiscal Year (FY) 2005.

BACKGROUND

In April 2005, the Secretary of Education delegated procurement
authority to the Chief Operating Officer (COO) in FSA, to procure
property and services in the performance of functions managed by FSA as
a performance based organization. Even though FSA has its own
procurement authority, it is obligated to follow the Department of
Education's (Department) policies and procedures, in addition to its own
FSA-specific policies and procedures.

Contract management staff includes the Contracting Officer (CO),
Contract Specialist (CS), and the Contracting Officer's Representative
(COR). The CO has overall responsibility for contract management.
However, the contract monitoring process is a team effort between the
CO, CS, and COR. Contract monitoring is based on the terms and
conditions in each contract, the requirements set forth in the *Federal
Acquisition Regulation* (FAR), and the Department's and FSA's policies
and procedures.

For FY 2005, payments under Department contracts totaled
\$1,474,385,045. Payments to FSA contracts totaled \$843,696,458.09 (57
percent). During the year, FSA was responsible for 95 of 519 total
active contracts (18 percent). FSA was the Principal Office (PO) with
the highest amount of contract payments for FY 2005, and was responsible
for the second highest amount of active contracts during the year.

AUDIT RESULTS

We found FSA's contract monitoring process did not always ensure
contractors adhered to contract requirements and FSA received the
products and services intended. FSA staff did not always follow
established regulations, policies or procedures in 9 out of 10 contracts
reviewed. Specifically, we found FSA staff did not always ensure
appropriate review and approval of invoices, appropriately communicate
acceptance/rejection of deliverables, issue modifications for contract
changes, and appropriately issue or sign COR appointment letters. This
occurred because FSA staff were not always familiar with applicable
policies and procedures, and due to resource limitations.

In its response to the draft audit report, FSA concurred with the
recommendations. The complete text of the response is included as
Attachment 3 to this report.

**FINDING - Improvements Were Needed in Monitoring of FSA Contracts**

We noted at least one area where improvements were needed in contract
monitoring for 9 of the 10 contracts reviewed. Specifically, we noted
that FSA staff did not always:

1.  Ensure appropriate review and approval of invoices (9 contracts),

2.  Appropriately communicate acceptance/rejection of deliverables (5
    contracts),

3.  Issue and/or sign modifications for contract changes (3 contracts),
    and

4.  Appropriately issue and/or sign COR appointment letters. (2
    contracts)

FAR Section 1.602-2 states,

> Contracting officers are responsible for ensuring performance of all
> necessary actions for effective contracting, ensuring compliance with
> the terms of the contract, and safeguarding the interests of the
> United States in its contractual relationships.

Department Directive (Directive) OCFO \[Office of the Chief Financial
Officer\]:2-108, Contract Monitoring for Program Officials, dated
September 16, 2004, Section II, states,

> The policy of the Department is: (a) to monitor every contract to the
> extent appropriate to provide assurance that the contractor performs
> the work called for in the contract; and (b) to develop a clear record
> of accountability for performance.

Details on the issues noted in each area follow. Attachment 2 includes
details of issues noted for each contract.

Issue 1 -- FSA Staff Did Not Ensure Invoices Were Properly Reviewed and
Approved

In 9 out of the 10 contracts reviewed, we noted the COs and/or COR staff
did not follow applicable policies and procedures for processing
invoices. Specifically, we found FSA staff did not ensure invoices were
reviewed and approved by the COs, and incentive payments were verified
by appropriate staff.

Invoices Were Not Properly Reviewed and Approved by Contracting Officers

In 9 out of 10 contracts reviewed, we found the COs were not properly
involved in the invoice approval process. (ED99DO0002, ED01GS0002,
ED03CO0102/0002, ED04CO0004, ED04GS0002, ED04PO0377, ED04PO1805,
ED05CO0008, PM95009001)[^1]

All of the COs for these contracts stated that the CORs, along with the
FSA budget office, are responsible for processing invoices.
Specifically, we found when invoices are received they are sent directly
to the FSA budget office. The invoices are then routed to the
responsible COR for proper verification. The COR verifies the invoice
and creates a receipt in the Contracts Purchasing and Support System
(CPSS).[^2] The COR then sends the invoice and supporting documentation
to the budget office, indicating that it is acceptable to proceed with
approval and payment of the invoice. The budget office posts the receipt
in CPSS and approves the invoice for payment in the Department's
Financial Management System Software (FMSS).[^3]

Directive Section VII.N.4 states,

> The CO is responsible for approving a contractor's invoices for
> payment, but usually after review and advice from the COR in
> conjunction with the CO's own analysis concerning the contents of the
> invoice/voucher and the contractor's performance relative to what is
> being billed.

FSA stated the invoice approval process was transferred to FSA's budget
office in 2002 as a result of resource and workload issues in the
Acquisitions office. FSA agreed that COs should be involved in the
invoice process and noted they were in the process of implementing a
policy in which the COs would assume responsibility for both receipt and
invoice approval. Warrants that were issued for the budget office to
approve payments will be withdrawn.

## Incentive Payments Were Not Verified by Appropriate Staff

In 1 of the 10 contracts reviewed, we found FSA did not ensure that
incentive payments were verified by appropriate staff.
***(ED04CO0004)*** The COR directed Office of Inspector General (OIG)
staff to a Program Analyst in the Contract Performance & Analysis Group
to discuss how to verify the incentive payment from one of the invoices
reviewed. The Program Analyst could not assist us and had to seek the
assistance of the Independent Verification & Validation (IV&V)
contractor to explain how the incentive payment was calculated. In
addition, the IV&V contractor stated that she verified all of the
incentive payments during our scope period, and that they were in the
process of transitioning so that FSA will understand how to verify the
payments when the IV&V contract ends.

Directive Section VII.G.2.d states,

> There are many varieties of payment provisions that might be
> incorporated into contracts depending on the nature of the work and
> other factors. It is the responsibility of the COR to become familiar
> with the payment provisions applicable to each contract he or she must
> monitor. . . . The COR must review invoices individually and
> collectively as part of the responsibility to monitor the contractor's
> progress in performing under the contract.

FAR Section 7.503 (a) states,

> Contracts shall not be used for the performance of inherently
> governmental functions.

Section 7.503 Part C.12.VII states inherently governmental functions
include,

> Determining whether contract costs are reasonable, allocable, and
> allowable....

#### FSA did not agree and stated that while the IV&V contractor did verify the formula and resulting calculations, the decision to make payment remained a COR recommendation and required budget office approval. OIG did not agree with FSA's response based on the fact that the COR stated he relies on his staff for proper review of invoices, which is the basis for his payment decision.  

FSA did not fulfill its responsibility to ensure payments to contractors
were appropriate. As a result, FSA lacks assurance that payments are
proper and its interests are protected.

Issue 2 -- FSA Staff Did Not Appropriately Communicate
Acceptance/Rejection of Deliverables

In 5 out of the 10 contracts reviewed, we noted CORs did not adequately
recommend acceptance/rejection of deliverables. (ED01GS0002,
ED03CO0102/0002, ED04CO0004, ED04GS0002, ED04PO0377)

Directive Section VII.N.2 states,

> Only a CO can formally accept or reject deliverables. However, with
> respect to deliverables which the contractor must send directly to the
> COR, the COR will recommend acceptance or rejection to be furnished in
> writing to the CO.

Directive Section V.I states,

> The CO is the Government's exclusive agent as party to a contract---
>
> the contractor is the other party -- and therefore the only person
> with the authority to enter into, administer, and terminate contracts
> and make related determinations and findings. The CO responsible for a
> particular contract is named in the contract.

FSA's COR Contract Monitoring Handbook, dated April 7, 2005, Section
28.0, Deliverable Acceptance/Payment, states,

> The contractor may be required to send deliverables either to the COR
> or to the CO. For deliverables sent to the COR, the COR generally is
> responsible for conducting the inspection and recommending acceptance
> to the CO. Only a CO can formally accept or reject deliverables.
> However, with respect to deliverables which the contractor must send
> directly to the COR, the COR will recommend acceptance or rejection in
> writing to the CO.

FSA's COR Contract Monitoring Handbook, Section 28.0, also provides an
example of a contract deliverable inspection worksheet, which the COR
should use to communicate details of acceptance/rejection of
deliverables to the CO.

In three contracts reviewed, the CORs stated they accept deliverables
for the contracts, not the COs. (ED03CO0102/0002, ED04GS0002,
ED04PO0377) In one of these contracts, the COR stated she returns
deliverables to the contractor if necessary and has the contractor
resubmit them with the changes made. (ED04GS0002) In another contract,
the Program Manager indicated he was "informally" rejecting about one
report per month, providing written comments to the contractor and
asking them to resubmit with appropriate changes made. (ED04PO0377) By
sending deliverables back to the contractor for correction, the COR and
Program Manager were, in effect, rejecting the deliverables. The CO was
not involved in the rejection of these deliverables in either contract.

In one contract reviewed, the COR stated he recommended acceptance of
deliverables to an employee within FSA's budget office who is
responsible for approving invoices. Specifically, recommendation of
acceptance of deliverables is communicated to the "designated CO" in the
budget office instead of the CO who actually administers the contract.
(ED04CO0004)

In one of the contracts reviewed, the COR stated that acceptance of
deliverables was indicated in CPSS. Prior to the payment of invoices, a
receipt for the invoice is created in CPSS and a recommendation of
acceptance is noted on the receipt. However, we found this process did
not specifically document the COR's recommendation for acceptance or
rejection of specific deliverables. (ED01GS0002)

Without appropriate communication of deliverable acceptance/rejection,
FSA may have difficulty pursuing action against a contractor for
nonperformance. Acceptance or rejection of deliverables by unauthorized
personnel may compromise efforts to enforce contract requirements.

FSA stated existing staffing levels limit the level of involvement from
the COs. Specifically, the COs were involved in cases where the
deliverables did not meet the standards in the contracts as identified
by the COR. In cases where the COR recommended acceptance, no further
action was required by the CO to demonstrate acceptance except by
receipt approval in the system. However, this specific approval was made
by FSA's budget office instead of the CO. FSA concurred it was not an
effective procedure and stated they were in the process of implementing
a policy where the Administrative Contracting Officer approves all
receipts and therefore systemically accepts deliverables.

## Issue 3- FSA Staff Did Not Appropriately Issue and/or Sign Modifications For Contract Changes

In 3 of the 10 contracts reviewed, modifications were not appropriately
issued and/or signed for significant contract changes. Directive Section
VII.I, "Initiating Changes to a Contract," states,

> Few contracts go to completion without some type of change or
> modification. The COR should anticipate the likely need for
> modifications and be prepared to deal with a variety of situations
> which seem to call for a formal change to the contract. Only a CO can
> issue modifications to the contract. A modification can be
> accomplished in accordance with a contract provision or by mutual
> agreement between the Government and the contractor.

In 1 contract, 5 out of 72 bilateral modifications were not signed by
the contractor. (ED01GS0002) In addition, the CO did not give proper
notification regarding termination of Virtual Data Center (VDC) printing
services that were no longer deemed necessary. FSA staff stated they
verbally communicated to the contractor on February 18, 2005, that
certain VDC printing services were no longer needed, effective February
28, 2005, however, this change was never incorporated into a written
modification.

In another contract, the deliverables schedule was modified by the COR,
without the CO issuing a modification. (ED04GS0002) As a result, nine
deliverables were submitted past their official due dates. FSA agreed
with this issue, and stated the CO did not delegate authority to the COR
as it relates to changing the deliverable schedule(s). FSA also stated
in this case, while fully within the COs authority for a unilateral
modification, it appears that changes were made outside of the
appropriate process.

In one contract, the modification assigning a new COR was not issued
timely. ***(ED04CO0004)*** The COR was officially appointed on January
1, 2004. The modification was issued on November 28, 2005, which is
almost two years later than the COR appointment date.

Modifications are issued to ensure that all commitments of the
contractor and the Government are met according to contract
requirements. Without issuing modifications for relevant contract
changes, the Government cannot ensure that its needs and interests are
protected.

## Issue 4- FSA Staff Did Not Appropriately Issue and/or Sign COR Appointment Letters Timely

In 2 of the 10 contracts reviewed, COR appointment letters were not
issued and/or signed in a timely manner by the COR. Directive Section
VI.C.2-3 states the CO,

2.  Ensures that the COR is designated for each contract. 3. Issues to
    the COR for

> each contract a memorandum outlining the COR's basic contract
> monitoring responsibilities and limitations, and explains this
> information to the extent judged appropriate. COR appointment letters
> are issued not later than seven (7) days from the date of the contract
> award.

Directive Section VI.E.1 states the COR

Ensures receipt of appointment memorandum from the CO by no later than
seven (7) days from the date of the award. Reads, signs and returns one
copy of the original memorandum to the CO for inclusion in the official
contract file within ten (10) days of receipt of the memorandum.

Specifically, we noted the following:

-   In two contracts, a COR delegation letter was not found in the
    contract files for the original COR. ***(ED03CO0102/0002, ED04CO0004
    )***

-   In one contract, the current COR of the contract was officially
    appointed on January 1, 2004; however, the appointment letter was
    not signed until July 9, 2004. ***(ED04CO0004)***

The COR appointment memorandum reminds the COR of his/her
responsibilities and limitations in the monitoring process. The
memorandum includes such things as training and certification
requirements, monitoring and communication responsibilities, and actions
the COR does not have the authority to perform. Without issuing and
signing these documents timely, the CO does not have assurance that the
COR understands the extent and limitations of his/her responsibilities
and authority.

### Summary

Improvements were needed in monitoring by FSA staff for 9 of the 10
contracts reviewed. FSA staff did not always follow established
regulations, policies, and procedures. FSA staff did not appropriately
review and approve invoices or appropriately communicate
acceptance/rejection of deliverables. In addition, FSA staff did not
always issue and/or sign modifications for contract changes. Finally,
COs did not ensure COR appointment letters were issued and/or signed
timely.

As a result, FSA lacks assurance that payments are proper and its
interests are protected. Contract actions by unauthorized personnel may
compromise efforts to enforce contract requirements. By not issuing
modifications for relevant contract changes, the Government cannot
ensure that its needs and interests are protected. Untimely issuance
and/or signoff of COR appointment memoranda could result in confusion
over the responsibilities and limitations of the COR's duties.

Recommendations

We recommend that the Acting Chief Operating Officer, take actions to:

1.  Develop and implement a process to ensure COs conduct proper
    analysis and approval of invoices.

1.2 Ensure contract staff have the technical expertise needed to
adequately verify payments.

1.3 Develop and implement a process to ensure acceptance/rejection of
deliverables is appropriately communicated by the COR to the CO. Ensure
the CORs provide written recommendations of deliverable
acceptance/rejection to the COs. This could include the use of the
deliverable inspection worksheet that is suggested in the FSA COR
Contract Monitoring Handbook.

1.4 Ensure the CO is the only individual communicating
acceptance/rejection to the contractor.

5.  Ensure formal modifications are issued for relevant contract
    changes. Issue modifications for the contracts noted above with
    regard to deliverable termination and changes in deliverable due
    dates. (ED01GS0002, ED04GS0002)

1.6 Ensure COR appointment letters are issued timely by the CO, and
signed and returned timely by the COR. Review all FSA contracts to
ensure that all current CORs have received an appointment letter and
that a signed copy is included in the contract file.

FSA Comments

In its response to the draft audit report, FSA concurred with the
recommendations. FSA stated it has implemented an Acquisition Policy
Letter that lays out the manner in which deliverable receipt and vendor
invoices are to be processed. FSA stated that, in accordance with the
new policy, COs have assumed responsibility for approval of receipts and
invoices, and are the only individuals that communicate acceptance and
rejection of deliverables.

FSA stated that while it concurred with the recommendation to ensure
formal modifications are issued for relevant contract changes, it did
not believe that modifications for the noted contracts were appropriate.
FSA stated the COR overstepped the authority delegated to them and the
CO determined the changes were not reasonable. As a result, FSA stated
the contractors would be held to the contract requirements as they
exist.

FSA stated it reviewed contract files to ensure the appropriate COR was
appointed in CPSS and that all had received delegations of their
authority placed in the contract files.

The complete text of the response is included as Attachment 3 to this
report.

OBJECTIVES, SCOPE, AND METHODOLOGY

The objectives of our audit were to determine whether FSA's contract
monitoring process ensures (1) contractors adhere to the requirements of
the contract, and (2) FSA receives the products and services intended.
To accomplish our objectives we performed a review of internal control
applicable to the process for monitoring contracts within FSA. We
interviewed FSA staff to obtain an understanding of the process. We
evaluated prior audits and reviews relating to the contract monitoring
process to determine possible vulnerabilities and any areas that
required audit follow-up. We reviewed requirements in the FAR and
Department and FSA policy and procedures related to the contract
monitoring process. We reviewed contract files maintained by FSA staff,
and other related materials that supported the contract monitoring
process for a sample of contracts as further described below.

We focused our review on contracts that were active during the period
October 1, 2004, through September 30, 2005. We obtained a listing of
contract payments for FY 2005 for all principal offices from OCFO staff.
The listing was extracted from FMSS, a component of EDCAPS. In order to
focus our review on contracts with significant activity that were most
likely to require active contract monitoring, we refined this list to
eliminate payments that represented interagency, purchase orders, and
other types of payments, and those that totaled less than \$100,000 for
a particular contract during the year. In total, we identified 9,080
payments to 519 different contracts that totaled \$1,474,385,044 for the
year.

We determined that FSA had the second highest number of payments of any
PO (1,689 or 18.6 percent), the second highest number of active
contracts (95 or 18 percent), and the highest amount of payments during
the year (\$843,696,458.09 or 57 percent). We selected FSA for review
because it represented a significant number of the active contracts and
amount of payments during the scope period.

We selected for further review the 10 FSA contracts with the highest
amount of contract payments for the year. These contracts totaled
\$557,196,291.91 or 66 percent of the \$843,696,458.09 total payments to
FSA contracts. These contracts were judgmentally selected for review to
provide coverage of the highest amount of contract payments. See
Attachment 1 for a list of the contracts selected for review, and the
number and dollar value of FY 2005 payments to those contracts.

During our review, we relied on computer-processed data obtained from
EDCAPS/FMSS representing contract payments for FY 2005. To assure
ourselves of the completeness of this data, we compared the contracts
listed with payments to lists of active contract awards from Contracts
and Acquisition Management's (CAM) website as of November 2004 and
November 2005 \-- a total of 996 unduplicated items. We found that 629
of the active awards as of those two dates were included in the list of
contracts with payments during FY 2005. For the 367 contracts in the two
lists from CAM's website that were not included in the listing of
contract payments, we found that 251 were multiple award task orders or
blanket purchasing agreements under which separate orders would be
placed. These awards would not have payments. Of the remaining 116
awards, 3 were small purchases and not considered contracts for the
purposes of our review. Payments under these purchases in FY 2005 were
not material. All other contracts were either awarded after or ended
before FY 2005, or no payments were made under these contracts during FY
2005. Based on this analysis, we determined the listing of contract
payments was complete for the purposes of our audit.

To evaluate the accuracy of the information contained in the contract
payments listing received from OCFO for the 10 contracts reviewed, we
confirmed the payment amounts with the hard copy invoices in the
contract files, and with payment information included in CPSS, another
component of EDCAPS. We did not note any exceptions. Based on these
analyses, we determined the computer-processed data used was
sufficiently accurate and reliable for the purposes of our review.

We conducted fieldwork at Department offices in Washington, DC, during
the period June 7, 2006, through February 6, 2007. We held an exit
conference with FSA staff on June 1, 2007. Our audit was performed in
accordance with generally accepted government auditing standards
appropriate to the scope of the review described above.

ADMINISTRATIVE MATTERS

Corrective actions proposed (resolution phase) and implemented (closure
phase) by your office will be monitored and tracked through the
Department's Audit Accountability and Resolution Tracking System
(AARTS). Department policy requires that you develop a final corrective
action plan (CAP) for our review in the automated system within 30 days
of the issuance of this report. The CAP should set forth the specific
action items, and targeted completion dates, necessary to implement
final corrective actions on the findings and recommendation contained in
this final audit report.

In accordance with the Inspector General Act of 1978, as amended, the
Office of Inspector General is required to report to Congress twice a
year on the audits that remain unresolved after six months from the date
of issuance.

Statements that managerial practices need improvements, as well as other
conclusions and recommendations in this report, represent the opinions
of the Office of Inspector General. Determinations of corrective action
to be taken will be made by the appropriate Department of Education
officials.

In accordance with the Freedom of Information Act (5 U.S.C. § 522),
reports issued by the Office of Inspector General are available to
members of the press and general public to the extent information
contained therein is not subject to exemptions in the Act.

We appreciate the cooperation provided to us during this review. Should
you have any

questions concerning this report, please call Michele Weaver-Dugan at
(202) 245-6941.

Please refer to the control number in all correspondence related to the
report.

> Sincerely,

George A. Rippey /s/

> Acting Assistant Inspector General for Audit

cc: Patrick Bradfield, FSA Acquisition Group

Tony Magro, Audit Liaison Officer

Attachments

Attachment 1: Contracts Included in the Audit

+----------------+----------------+-----------------+-----------------+
| Contract       | Vendor Name    | Number of FY    | Total Amount of |
| Number         |                | 2005 Payments   | Payments        |
+----------------+----------------+-----------------+-----------------+
| ED99DO0002     | ACCENTURE      | 102             | \$90,825,120.17 |
+----------------+----------------+-----------------+-----------------+
| ED00CO0038     | NCS PEARSON    | 64              | \$19,202,765.08 |
+----------------+----------------+-----------------+-----------------+
| ED01GS0002     | COMPUTER       | 40              | \$54,184,007.93 |
|                | SCIENCES       |                 |                 |
|                | CORPORATION    |                 |                 |
+----------------+----------------+-----------------+-----------------+
| E              | ELECTRONIC     | 25              | \$3,054,909.51  |
| D03CO0102/0002 | DATA SYSTEMS   |                 |                 |
|                | CORPORATION    |                 |                 |
+----------------+----------------+-----------------+-----------------+
| #              | ACS EDUCATION  | 54              | \               |
| ### ED04CO0004 | SOLUTIONS      |                 | $234,015,577.64 |
+----------------+----------------+-----------------+-----------------+
| ED04GS0002     | APPLIED        | 87              | \$7,964,179.22  |
|                | ENGINEERING    |                 |                 |
|                | MANAGEMENT     |                 |                 |
|                | CORP           |                 |                 |
+----------------+----------------+-----------------+-----------------+
| ED04PO0377     | PHOENIX        | 27              | \$4,214,148.04  |
|                | PROGRAMMING    |                 |                 |
|                | SERVICES       |                 |                 |
+----------------+----------------+-----------------+-----------------+
| ED04PO1805     | NCS PEARSON    | 28              | \$2,656,417.40  |
+----------------+----------------+-----------------+-----------------+
| ED05CO0008     | NCS PEARSON    | 28              | \               |
|                |                |                 | $128,949,557.92 |
+----------------+----------------+-----------------+-----------------+
| PM95009001     | NCS PEARSON    | 31              | \$12,129,609.00 |
+----------------+----------------+-----------------+-----------------+
| Total          |                | 486             | \               |
| number/amount  |                |                 | $557,196,291.91 |
| of FY 2005     |                |                 |                 |
| payments       |                |                 |                 |
+----------------+----------------+-----------------+-----------------+

##### 

##### Attachment 2: Issues Noted by Contract  

#### 

###### ED99DO0002 -- Accenture, \$90,825,120.17[^4] 

1.  ***The CO was not involved in the invoice approval process.***

The COR stated the invoice is received in the budget office, and then
sent to the COR for

authorization and approval. The COR creates a receipt in CPSS, and sends
an email to the

budget office authorizing the payment to be made.

#### 

###### ED01GS0002 -- Computer Sciences Corporation, \$54,184,007.93 

1.  ***The CO was not involved in the invoice approval process.***

> The CO stated that he was not really involved in the invoice process
> and that the contracts staff has very little involvement with
> invoicing. The CO said that he only hears from the COR regarding the
> invoice if there is a problem. The COR stated she and the budget
> office handled the invoices.

2.  ***The COR did not appropriately communicate acceptance/rejection of
    deliverables.***

> The CO stated he did not receive a recommendation to accept
> deliverables from the COR. The COR stated acceptance of deliverables
> was indicated in CPSS. Prior to the payment of invoices, a receipt for
> the invoice is created in CPSS, and a recommendation of acceptance of
> deliverables is noted on the receipts in CPSS. However, we found this
> process did not specifically document the COR's recommendation for
> acceptance or rejection of specific deliverables.

3.  ***FSA*** ***staff did not issue and/or sign modifications for
    contract changes.***

> Five out of 72 bilateral modifications were not signed by the
> contractor. The modifications
>
> resulted in material and non-administrative changes to the contract,
> which included
>
> increasing funding and extending the contract end date. In addition,
> one modification was
>
> never issued for a contract change. A brief description of each
> modification is noted below:

-   Modification #65, dated 6/30/2005, de-obligated funds from the
    contract and reduced the dollar value of line item no. 91 of the
    contract by \$230,000. The CS faxed the modification signed by FSA
    to the contractor on 6/30/2005 and asked that the contractor sign
    and fax it back.

```{=html}
<!-- -->
```
-   Modification #58, dated 5/31/2005, incorporated proposal RGCA 2692.
    The CS faxed the modification signed by FSA to the contractor on
    5/31/2005 and asked that the contractor sign and fax it back.

-   Modification #70, dated 9/30/2005, revised the contract by reducing
    funding from line no. 91 by \$2,872,117.

-   Modification #71, dated 9/30/2005, funded VDC operations in the
    amount of \$31,616,816.

-   Modification #72, dated 10/25/2005, changed the contract expiration
    date.

-   A modification was not issued regarding the termination of
    Pell/Central Processing System printing services. FSA stated the
    contractor was verbally informed during a meeting on February 18,
    2005, however the termination notice was never issued in writing.

#### 

**[ED03CO0102/0002 -- Electronic Data Systems Corporation,
\$3,054,909.51]{.underline}**

1.  ***The CO was not involved in the invoice approval process.***

The COR stated he recommended acceptance to and the invoice is paid by
the budget office.

The CO only finds out that the invoice has been paid after the invoice
has been processed for

payment. The CO also mentioned that the individual in the budget office
was designated as a

CO to approve all FSA invoices for payment.

2.  ***The COR did not appropriately communicate acceptance/rejection of
    deliverables.***

> The COR stated that he was the final stop for deliverables. The CO
> confirmed that this was the process followed.

3.  ***FSA staff did not issue and/or sign COR appointment letters
    timely.***

> The COR appointment letter for the original COR could not be located
> in the contract files.
>
> During the review, the new COR and the CO both stated they could not
> locate the original
>
> COR appointment letter.

#### 

#### **[ED04CO0004 -- ACS Education Solutions, \$234,015,577.64]{.underline}** 

1.  ***The CO was not involved in the invoice approval process.***

The CO stated that the COR and budget office handle the invoices, and
that she had no

knowledge of the process.

2.  ***FSA did not ensure that incentive payments were verified by
    appropriate staff.***

> The COR stated he relies on staff to properly validate invoices prior
> to his approval of payment. The COR directed OIG staff to a Program
> Analyst in the Contract Performance & Analysis Group to discuss how to
> verify the cohort incentive payment from one invoice during FY 2005.
> The Program Analyst had to seek the assistance of one of FSA's IV&V
> contractors to explain how the incentive payment was calculated. The
> contractor stated that she verified the incentive payment during our
> scope period, and that they were in the process of transitioning so
> that FSA will understand how to verify the payment when the IV&V
> contract ends.

3.  ***The COR did not appropriately communicate acceptance/rejection of
    deliverables.***

The COR stated he recommended acceptance of deliverables to a
"designated CO" within the

> budget office who is responsible for approving invoices instead of the
> CO who administered the contract. The COR noted he thought this
> accelerated the process.

4.  ***FSA*** ***staff did not issue and/or sign modifications for
    contract changes.***

> The modification assigning a new COR was not issued timely. It was
> effective on November 28, 2005, almost two years later than the COR
> appointment date.

5.  ***FSA staff did not issue and/or sign COR appointment letters
    timely.***

The COR Appointment Letter for the current COR was signed on July 9,
2004. The current

> COR officially replaced the previous COR on January 1, 2004. The COR
> appointment letter was signed approximately six months later.
>
> In addition, a COR delegation letter could not be located for the
> original COR of this contract. FSA stated that a COR delegation letter
> was issued, but was apparently misplaced.

**[ED04GS0002 -- Applied Engineering Management Corporation,
\$7,964,179.22]{.underline}**

1.  ***The CO was not involved in the invoice approval process.***

The CO stated that he was not involved with the invoice process. The
invoices are submitted

to the COR who reviews the invoices and approves them for payment by
entering a receipt in

> CPSS. Once the COR clears the invoice for payment in CPSS, the invoice
> is processed through the budget office.

2.  ***The COR did not appropriately communicate acceptance/rejection of
    deliverables.***

> The COR stated she accepted deliverables for this contract instead of
> the CO. The COR also stated that she returns deliverables with
> comments if necessary and has the contractor resubmit them with the
> changes made. By doing this, she is in essence inappropriately
> rejecting the deliverables. The CO stated that since this is a smaller
> contract compared to the others he is the CO for, he delegated the
> majority of the monitoring to the COR.

3.  ***FSA staff did not issue modifications/task orders for contract
    changes.***

> The deliverable schedules for the contract were modified by the COR
> without the CO issuing a formal modification. Also, as a result of the
> COR informally changing the deliverable schedule, nine deliverables
> were submitted past their original due dates. Details are included in
> the table below:

  ----------------- ----------------- ----------------- -----------------
  **Deliverable     **Original Due    **Received Date** **Days Late**
  Name**            Date**                              

  NSLDS Maintenance Quarterly update  Annually          N/A-see
  Plan                                received;         footnote[^5]
                                      submitted on      below.
                                      7/5/05 and        
                                      8/2/05(final)     

  Application       Quarterly update  Annually          N/A-see footnote
  Software                            received; last    below.
  Maintenance Plan                    submitted on      
                                      7/5/05            

  System            Quarterly update  Received          N/A-see footnote
  Performance                         semi-annually;    5 on page 15.
  Monitoring Plan                     last submitted on 
                                      3/5/06            

  TO2- Application  12/31/2004        3/26/2005         85
  Software                                              

  TO2- Final Detail 10/26/2004        3/25/2005         150
  Design Document                                       

  T02- Final System 10/26/2004        3/25/2005         150
  Intergration Test                                     
  Plan                                                  

  TO6- Application  12/31/2004        5/21/2005         141
  Software                                              

  TO6- Final Detail 10/8/2004         11/12/2004        35
  Design Document                                       

  TO6-Final         10/8/2004         11/12/2004        35
  Integration Test                                      
  Plan                                                  
  ----------------- ----------------- ----------------- -----------------

**[ED04PO0377 -- Phoenix Programming Services,
\$4,214,148.04]{.underline}**

1.  ***The CO was not involved in the invoice approval process.***

The CO stated that although he was not involved in the process, he was
aware that this was

> supposed to be his responsibility. Invoices are submitted to the COR,
> who reviews and approves them through CPSS, and the invoices are then
> processed through the budget office.

2.  ***The COR did not appropriately communicate acceptance/rejection of
    deliverables.***

> The COR stated she accepted deliverables for this contract and not the
> CO. Furthermore, the
>
> Program Manager indicated he was "informally" rejecting about one
> report per month, providing written comments to the contractor and
> asking them to resubmit with appropriate changes made. Neither
> acceptance nor rejection was ever communicated to the CO.

**[ED04PO1805 -- NCS Pearson, \$2,656,417.40]{.underline}**

1.  ***The CO was not involved in the invoice approval process.***

> The CO stated that he and the CS did not receive invoices. Invoices
> are sent to the COR, who enters them into CPSS and approves them for
> payment. The COR confirmed this information and stated that she and
> the budget office process the invoices.

###### ED05CO0008 -- NCS Pearson, \$128,949,557.92 

1.  ***The CO was not involved in the invoice approval process.***

> The CO stated that the budget office receives the invoices and sends
> them to the COR for review and approval. The CO also stated that
> contract staff have not been involved in the approval process, and
> that it is the COR's and budget office's function.

**[PM95009001 -- NCS Pearson, \$12,129,609.00]{.underline}**

1.  ***The CO was not involved in the invoice approval process.***

> The CO stated that contract staff are not involved with the invoice
> process. He stated that this is a function of the COR and the budget
> office. The COR creates a receipt in CPSS, and the budget office
> approves the invoice for payment.

Attachment 3: FSA Response to Draft Report

TO: Michelle Weaver-Dugan

Director, Operations Internal Audit Team

Office of Inspector General

FROM: Lawrence A. Warder

Acting Chief Operating Officer

SUBJECT: Response to Draft Audit Report -- *Controls Over Contract
Monitoring for Federal Student Aid Contracts* Control Number
ED-OIG/A19-G0006

Thank you for the opportunity to respond to Draft Audit Report, Control
Number ED-OIG/A19-G0006, entitled *Controls Over Contract Monitoring for
Federal Student Aid Contracts*. We concur with your recommendations for
improvements in the contract monitoring process and provide the
following responses to the individual recommendations.

# OIG Recommendations

*1.1 Develop and implement a process to ensure COs conduct proper
analysis and approval of invoices.*

**Federal Student Aid Response** -- Federal Student Aid concurs with
this recommendation. Although the Administrative Contracting Officer
(ACO) is responsible for all facets of contract performance, ACOs were
not approving payment in the financial system, which ultimately
demonstrates acceptance of deliverables and authorization to release
payment. In most cases, the individual with the knowledge about the
contract requirements and acceptability of the invoice, the ACO, was not
involved in the invoice process. Federal Student Aid Acquisitions has
implemented Acquisition Policy Letter 07-001, effective February 16,
2007, which lays out the manner in which deliverable receipt and vendor
invoices are to be processed. ACOs assumed responsibility for approval
of receipts and invoices on March 26, 2007.

*1.2 Ensure contract staff has the technical expertise needed to
adequately verify payments.*

**Federal Student Aid Response** -- Federal Student Aid concurs with
this recommendation. The Contracting Officer's Representative (COR)
delegations for all identified contracts clearly identify the limits of
the authority assigned to them. The CORs shall continue to enter
receipts into the Oracle system and have received training prior to
their appointments. CORs recommend acceptance and the Contracting
Officer (CO) accepts/rejects the deliverables. COs will communicate to
vendors in cases where final deliverables do not meet the standards in
the

contracts as identified by the COR. In cases where the COR recommends
acceptance, no further action is required by the CO to demonstrate
acceptance except by receipt approval in the system. All COs have
received training in the Oracle receipts and invoice modules to ensure
that they can both accept receipts for deliverables that meet contract
requirements and process the appropriate payments through the
Department's finance system. This training was conducted on March 6,
2007. ACOs assumed responsibility for approval of receipts and invoices
for their contracts on March 26, 2007.

*1.3 Develop and implement a process to ensure acceptance/rejection of
deliverables is appropriately communicated by the COR to the CO. Ensure
the CORs provide written recommendations of deliverable
acceptance/rejection to the COs. This could include the use of the
deliverable inspection worksheet that is suggested in the FSA COR
Contract Monitoring Handbook.*

**Federal Student Aid Response** -- Federal Student Aid concurs with
this recommendation. Federal Student Aid Acquisitions has implemented
Acquisition Policy Letter 07-001 effective February 16,2007 that lays
out the manner in which deliverable receipt and vendor invoices are to
be processed. This process includes the requirement for the COR to email
the CO upon completing a receipt for goods or services in the Oracle
system. ACOs assumed responsibility for approval of receipts and
invoices on March 26, 2007. A Federal Student Aid working group has
reworked the *COR Contract Monitoring Handbook* into the *Acquisition
Process Handbook*. The next release will incorporate the revised
deliverable receipt process. COR training currently being established
within the Department will include all aspects of COR responsibilities.

*1.4 Ensure the CO is the only individual communicating
acceptance/rejection to the contractor.*

**Federal Student Aid Response** -- Federal Student Aid concurs with
this recommendation. The Department does not require formal acceptance
of deliverables except through the approval of invoices. Effective April
1, 2007, only the ACO communicates acceptance through invoice approval.
Rejections of deliverables/invoices are handled exclusively by the ACO
per Acquisition Policy Letter 07-001.

*1.5 Ensure formal modifications are issued for relevant contract
changes. Issue modifications for the contracts noted above with regard
to deliverable termination and changes in deliverable due dates.
**(ED01GS0002, ED04GS0002)***

**Federal Student Aid Response** -- Federal Student Aid concurs with
this recommendation. However, Federal Student Aid does not believe that
contract modifications for the noted contracts are appropriate. In these
contracts, the COR overstepped the authority delegated to them. In such
a situation, if the CO determines the action reasonable, a modification
will be issued to reflect the change. In cases where the CO determines
the change was not reasonable, as in these two contracts, the contractor
will be held to the contract requirement, as they exist. COs are
responsible for maintaining their assigned contracts, which include the
issuance of contract modifications for all contract actions regardless
of size or dollar value. This has always been the case.

*1.6 Ensure COR appointment letters are issued timely by the CO, and
signed and returned timely by the COR. Review all FSA contracts to
ensure that all current CORs have received an appointment letter and
that a signed copy is included in the contract file.*

**Federal Student Aid Response** -- Federal Student Aid concurs with
this recommendation. Federal Student Aid undertook the task of reviewing
contract files to ensure that the appropriate COR was appointed in the
Contract and Purchasing Support System (CPSS) and that all had received
delegations of their authority placed in the contract files. The
Director of Contracts, with all COs, began this review on March 13,
2007. We are currently analyzing the system data and comparing it to the
actual appointments. The system should correctly reflect COR
appointments by July 31, 2007.

Attachment

Policy Letter 07-001

[^1]: Contract numbers are provided parenthetically for each issue area.
    See Attachment 1 for a list of the contracts reviewed, and
    Attachment 2 for details of the issues noted by contract.

[^2]: CPSS is a component system of the Department of Education Central
    Automated Processing System (EDCAPS).

[^3]: Invoices are approved in both CPSS and FMSS.

[^4]: Amounts listed represent the FY 2005 payments made under each
    contract.

[^5]: Based on the fact that the contract did not have an exact due date
    for quarterly submissions, we were unable to determine how many days
    the deliverable was late.