DATE:     January 27, 1997
 
REPLY TO
ATTN OF:  IG-1
 
SUBJECT:  INFORMATION:   Summary Audit Report on Contractor
                         Employee Relocation andTemporary Living
                         Costs
 
TO:       The Acting Secretary
 
This summary report highlights systemic problems with
contractor charges for contractor employee relocation and
temporary living costs.  Over the past 5 years, the Office
of Inspector General issued nine audit reports that
identified unreasonable and unallowable charges for employee
relocation and temporary living costs by contractors and
their subcontractors.  We found that contractors were
reimbursed for these costs because the Department of Energy
(Department) did not use clearly defined contract provisions
that were consistent with standard Federal Acquisition
Regulation (FAR) or Department of Energy Acquisition
Regulation (DEAR) clauses, as appropriate, to limit
reimbursements to allowable and reasonable amounts.  Because
of the sizable number of contractor changes in process and
anticipated and the related relocation of contractor
employees, the Department is committing significant
resources to relocate contractor personnel.  Based on this,
we concluded that the issues raised in the audit reports
require the attention of the Department's senior managers.
 
Our audit reports showed that the Department reimbursed
contractors $13.6 million for costs associated with
employee relocation and temporary living costs that we
found to be either unallowable or unreasonable.
Specifically, the reports disclosed that a total of
$2.2 million was charged for relocation costs that, in
our opinion, were unreasonable or unallowable.  One
report identified charges of about $3.4 million for
relocation related income taxes that were specifically
unallowable per the DEAR.  Also, our audits of
temporary living costs performed on subcontractors
identified charges of about $8 million that did not
meet the DEAR requirement for reimbursement.
 
The FAR and the DEAR state that in order for costs to
be allowable, they must be both reasonable and
allocable.  The FAR and the DEAR also permit the
Department and its contractors, with certain
limitations, to negotiate "advance agreements"
regarding the reasonableness and allocability of
relocation and temporary living costs.  Advance
agreements can also be used to assist in developing
performance criteria and metrics for contracts that
contain business management performance incentives.
 
We recommended that the Department use clearly
articulated FAR and DEAR standards and criteria for
reasonableness and allowability for employee relocation
and temporary living costs in its contracts and, where
appropriate, in advance agreements.  Increasing the
specificity in the Department's contract provisions,
consistent with the FAR and the DEAR, could greatly
reduce or eliminate the systemic problems identified in
our previously issued audit reports and provide a means
for more effective contract administration.
 
In November 1994, the Deputy Assistant Secretary for
Procurement and Assistance Management issued a memorandum to
all operations offices and contracting personnel that
identified measures designed to reduce the amount of
unreasonable and unallowable costs claimed by and reimbursed
to contractors.  The Department and its contractors also
initiated corrective actions for site specific findings
reported in our past reports.  However, additional actions
are necessary to (1) resolve the root cause of the problems
and (2) provide the tools needed for effective contract
administration.
 
A draft of this report was sent to officials in the Office
of the Deputy Assistant Secretary for Procurement and
Assistance Management for review and comment.  Management's
response to the draft included a plan of action with the
goal of ensuring that contractor reimbursements for employee
relocation and temporary living costs were consistent with
Departmental policy.  Management's comments are summarized
in Part III.  The verbatim comments can be found in the
Appendix II.
 
 
 
 
                                      (Signed)
 
                                   John C. Layton
                                   Inspector General
 
cc:  Deputy Secretary
     Under Secretary
     Audit Liaison
 
 
 
                  U.S. DEPARTMENT OF ENERGY
                 OFFICE OF INSPECTOR GENERAL
                              
                              
                              
                              
                              
                              
                              
                   SUMMARY AUDIT REPORT ON
             CONTRACTOR EMPLOYEE RELOCATION AND
                   TEMPORARY LIVING COSTS
                              
                              
The Office of Inspector General wants to make the
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effective as possible.  Appendix II to this report is a
source document that cannot be transmitted electronically
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Your comments would be appreciated and can be provided on
the Customer Response Form attached to the report.
 
            This report can be obtained from the
                  U.S. Department of Energy
       Office of Scientific and Technical Information
                         P.O. Box 62
                 Oak Ridge, Tennessee  37831
 
 
 
 
Report Number:  DOE/IG-0400                  Office of Audit
Services
Date of Issue:  January 27, 1997
Washington, D.C.  20585
 
                              
                  U.S. DEPARTMENT OF ENERGY
                 OFFICE OF INSPECTOR GENERAL
 
 
 
                   SUMMARY AUDIT REPORT ON
             CONTRACTOR EMPLOYEE RELOCATION AND
                   TEMPORARY LIVING COSTS
                              
                              
                      TABLE OF CONTENTS
 
 
 
                                                       Page
 
PART I   - OVERVIEW.................................... 1
 
 
           Introduction................................ 1
 
 
           Background.................................. 1
 
           Summary of report findings.................. 2
 
PART II - CONCLUSION AND RECOMMENDATION................ 6
 
PART III- MANAGEMENT AND AUDITOR COMMENTS.............. 7
 
          Appendix I - Reports Issued...................8
 
          Appendix II - Management Comments............10
                                                            
 
 
                           PART I
                          OVERVIEW
 
 
INTRODUCTION
 
     The purpose of this report is to highlight an area of
contracting that requires Departmental attention to ensure
that only reasonable and allowable costs are reimbursed for
contractor employee relocation and temporary living costs.
The Office of Inspector General issued nine audit reports
over the past 5 years that identified almost $13.6 million
of unreasonable or unallowable charges by contractors for
employee relocation and temporary living costs.  The absence
of adequate controls to limit reimbursements to reasonable
and allowable amounts was primarily caused by either vague
contractual provisions or contractual provisions that were
not consistent with the FAR or DEAR.  The result has been
that contractors were reimbursed for employee relocation and
temporary living costs for which they were not entitled.
Because of the sizable number of contractor changes in
process and anticipated and the related relocation of
contractor employees, we believe the issues raised in the
audit reports require the attention of the Department's
senior managers.
 
BACKGROUND
 
     The Department relies on prime contractors to manage
and operate many of its facilities, including conducting
research, performing environmental cleanup and operating
major components of the weapons program.  The Department
should reimburse its contractors for costs incurred in the
performance of these tasks in accordance with the terms of
the contract and the provisions of the FAR and or the DEAR
that apply to the contract.  Incurred costs should be
necessary and directly, or indirectly, attributable to the
work under the contract.
 
     The FAR sets the policy for the acquisition of goods
and services by all executive agencies and is implemented
and supplemented for the Department by the DEAR.  Both the
FAR and the DEAR contain principles that limit the
reimbursement of incurred costs to those that are allowable,
based on reasonableness and allocability, under their
respective cost principles and the terms of the contract.
Additionally, the FAR and the DEAR permit DOE and its
contractors to negotiate the treatment of certain costs in
advance of their incurrence and encourages such negotiations
where reasonableness of amounts are difficult to determine.
Advance agreements should be consistent with applicable
acquisition regulations, be made a part of the contract, and
include specific language and guidance that contractors can
use to determine allowable charges to their contracts.
 
SUMMARY OF REPORTS FINDINGS
 
     The Office of Inspector General audit reports disclosed
systemic problems of contractors charging the Department for
unreasonable and unallowable employee relocation and
temporary living and associated travel costs.  These
unreasonable and unallowable costs were charged because the
Department did not use clearly defined contractual
provisions that were consistent with the FAR or DEAR, as
applicable, to establish reasonable and allowable charges
for contractors.  As a result, contractors claimed and were
reimbursed about $13.6 million for costs to which they were
not entitled.
 
Employee Relocation Costs
 
     The contractual provisions that authorize the
contractor to claim cost reimbursement should be
clearly articulated.  However, our audit reports showed
that the Department reimbursed contractors for employee
relocation costs of about $2.2 million that, in our
opinion, were unreasonable or unallowable.  An
additional $3.4 million was charged and reimbursed for
specifically unallowable income taxes related to
relocation costs.  The following summaries of our
travel and relocation audits highlight contractor
charges that, in our opinion, were unreasonable and
unallowable.
 
     o  The report on the Audit of Management and Operating
        Contractor Relocation Costs (CR-B-95-04), identified 
        about $299,000 in unreasonable relocation costs.  These 
        costs were determined to be unreasonable because they 
        were in excess of benchmarks developed based on prevailing 
        practices.  We used the contract provisions of the 11 
        contractors, their corporate policies, and Federal Travel 
        Regulations to develop these benchmarks.  Based on our 
        benchmarks, we classified the following relocation costs 
        as unreasonable: (1) continuing costs of ownership to 
        maintain a vacant residence at the old location, $70,662; 
        (2) mortgage discount points, $29,834; (3) loan origination 
        fees, $48,828; (4) buyers incentives, $55,916; (5) shipment 
        of household goods in excess of allowances; $48,676; and 
        (6) other temporary living costs, $45,548.
 
     o  During the Interim Audit of Costs Incurred at the
        Fernald Environmental Restoration Management Corporation 
        (ER-C-95-03), we identified about $97,000 of relocation 
        costs that were unallowable per the FAR limits or were 
        duplicate payments.  Examples of unallowable relocation 
        costs included: (1) family members' per diem that exceeded 
        the FAR limit, $2,765; (2) shipment of employees' boat, 
        travel trailer, and recreational vehicle which was not 
        allowable by the FAR, $2,108; (3) title insurance costs 
        reimbursed to employees as home selling expenses, $11,646; 
        (4) rent differential payments to employees who rented homes 
        but did not retain ownership at the old location, $6,450; 
        and (5) shipment of household goods and airfare for which 
        no receipts were maintained for services claimed, $7,566.  
        We also found that the contractor had inadvertently billed 
        the Department twice for the same service, $27,584.
 
     o  The Report on Allowable Costs at Department of Energy
        Management and Operating Contractors (IG-0321), identified
        unallowable relocation costs and, accordingly, requested
        that the respective contracting officer seek reimbursement
        for the following: (1) relocation costs that were not
        approved by the contracting officer, $53,102; (2) relocation
        allowances inconsistent with the DEAR or contract, $95,316;
        and (3) relocation bonuses, $328,919.  The report disclosed
        that a contractor was reimbursed a total of $95,316 for
        relocation allowances that were paid to employees in lieu 
        of actual miscellaneous relocation expenses.  However, the
        reimbursements were considered unallowable because
        individual relocation allowances exceeded the DEAR limit 
        of $1,000 per occurrence.  In addition, this same contractor
        received $328,919 for "special" relocation bonuses which
        were not consistent with relocation expenses allowed in the
        DEAR.
 
   o    The Audit of Management and Operating Contractor
        Relocation Costs (CR-B-95-04), identified about $42,000 
        of relocation costs that were reimbursed even though 
        contract clauses were missing, vague, or nonspecific 
        regarding their allowability.  For example, contractors 
        were reimbursed $23,179 because 6 of 11 contracts did 
        not contain the clause that would have made mortgage 
        discount points unallowable.  Unallowable relocation 
        costs were also noted in the following categories:  
        (1) continuing costs of ownership to maintain a vacant 
        residence at the old location; $4,857; (2) salary 
        allowance to offset relocation costs, $4,263; and 
        (3) swing loans to cover the down payment on a new 
        residence because the employee's equity was held up 
        in the unsold former residence, $9,618.
 
   o    Unallowable relocation costs of $32,000 were identified
        in the Audit of Internal Controls that Assure Fiscal 
        Year 1993 Costs Claimed by and Reimbursed to MK-Ferguson 
        (WR-VC-94-08).  Consistent with the DEAR, the contract 
        stated that for a voluntary termination "an employee who 
        is paid for moving or relocation expenses shall be required 
        to reimburse the Company for the full amount if the employee 
        voluntarily terminates within 12 months of employment."  
        The contractor had four employees who received relocation 
        assistance under the DOE contract and then voluntarily 
        terminated their employment within 12 months.  According 
        to DEAR 970.3102-16(d), the contractor should refund or 
        credit the relocation costs of $32,476 to the Government.
 
                Specifically Unallowable Employee Relocation Costs
 
   o    The Report on Allowable Costs at Department of Energy
        Management and Operating Contractors (IG-0321), disclosed
        that a contractor and a subcontractor were reimbursed a
        total of about $3.4 million for income taxes they paid 
        to employees to cover income tax liabilities caused by 
        the relocations.  The reimbursements for employee income 
        taxes were specifically unallowable according to the DEAR.  
        The required DEAR clause, to specifically classify such 
        costs as unallowable, was omitted from the contract.  The 
        omission of the contract clause allowed the contractor to 
        claim reimbursement for costs which were specifically 
        unallowable.
 
Temporary Living Expenses and Associated Travel Costs
 
     Temporary living expenses and associated travel
costs are authorized for employees who work away from
their official or permanent duty locations and incur
additional living expenses.  However, our audits of
temporary living expenses and associated travel costs
performed on several subcontractors identified charges
of about $8 million that did not meet that requirement.
The following audit reports identified problems with
charges for temporary living and associated travel
costs.
 
   o    The Report on the Application of Agreed-Upon Procedures
        with Respect to Temporary Living Allowance Costs Claimed 
        (ER-CC-93-05), reviewed temporary living allowances paid 
        to 136 subcontractor employees at one location from fiscal 
        years 1988 through 1990.  We found that employees were 
        paid about $3.2 million in temporary living allowances for 
        working at their official duty station.  Some of these 
        employees lived in the local area and others had been 
        transferred to the official duty station.  We identified 
        about 100 employees who inappropriately, in our opinion, 
        received payments for temporary living allowances.
 
   o    The Report on the Independent Audit of Travel and
        Temporary Living Allowance Costs Claimed (ER-CC-91-08),
        identified about $2.4 million of unallowable temporary
        living allowances and associated indirect costs claimed 
        by the subcontractor for payments to employees during 
        fiscal years 1988 and 1989.  Subcontractor employees 
        were paid temporary living allowances for work performed 
        at their official duty stations.
 
   o    The Report on the Independent Audit of Travel and
        Temporary Living Allowance Costs Claimed for EBASCO
        Services, Inc. Contract (ER-CC-91-06), identified that 
        the subcontractor paid its employees, and claimed 
        reimbursement from the prime contractor, for temporary 
        living allowances of about $424,000 when the employees 
        were performing duties at their permanent duty station.  
        Similar problems were noted in the Report on the 
        Independent Audit of Direct Subcontract Costs Claimed 
        Under ABB Impell Corporation Contract (ER-CC-91-02).  
        This audit report identified temporary living expenses 
        totaling $266,000 that were paid to employees for 
        performing duties at their official duty stations from 
        fiscal years 1988 through 1989.  Finally, the
        Report on the Independent Audit of Direct Subcontract 
        Costs Claimed for ABB Combustion Engineering Nuclear 
        Power (ER-CC-91-05), reported that reimbursements for 
        temporary living allowances totaling about $58,000 were 
        not allowable.  The subcontractor billed the prime 
        contractor for relocation expenses paid to employees 
        who were also receiving temporary living allowances 
        while working at their official duty station.  Employees 
        were hired to work at the specific location and this made 
        the location their "official duty station."  The DEAR 
        does not allow reimbursement of temporary living allowances 
        paid to contractor employees who work at their "official 
        duty station."
 
INITIATIVES BY MANAGEMENT
 
     DOE Headquarters took action to focus attention on
the problem of contractors being reimbursed for
unreasonable or unallowable employee relocation costs
and temporary living expenses and associated travel
costs.  In November 1994, the Deputy Assistant
Secretary for Procurement and Assistance Management
issued a memorandum to all operations offices and
contracting personnel that identified measures designed
to reduce the amount of unreasonable and unallowable
costs claimed by and reimbursed to contractors.
Management directed the respective personnel to take
the necessary actions to review contractors' claimed
costs and, where warranted, require reimbursement for
costs deemed unallowable.
 
     Corrective action was also taken by field elements
and their respective contractors for site specific
problems.  For example, during the Interim Audit of
Costs Incurred at Fernald Environmental  Restoration
Management Corporation (ER-C-95-03), contractor
management at the Fernald Environmental Restoration
Management Corporation agreed with our findings and
subsequently refunded to the Department $432,737 of the
costs identified.  They also agreed to review the
remainder of the costs and refund any additional
improper payments.
                           PART II
                CONCLUSION AND RECOMMENDATION
 
 
     Although the Department and its contractors may
have initiated corrective actions for specific findings
in the reports listed in the attachment, additional
actions are necessary to provide the tools needed for
effective contract administration.  Consequently, we
recommend that the Department use clearly articulated
FAR and DEAR standards and criteria for reasonableness
and allowability for employee relocation and temporary
living costs in its contracts and, where appropriate,
in advance agreements.  Implementation of the
recommendation would provide a significant measure of
uniformity and consistency to the treatment of
contractor employee relocation and temporary living
costs for the entire DOE complex.
 
     The Deputy Assistant Secretary for Procurement and
Assistance Management concurred with the recommendation
and provided a plan to improve contractual coverage of
these costs as detailed in Part III.
 
 
 
 
 
 
                              ____(Signed)   __________
                            Office of Inspector General
                          
                          
                          PART III
               MANAGEMENT AND AUDITOR COMMENTS
 
 
     The Deputy Assistant Secretary for Procurement and
Assistance Management agreed to take action to
implement improved employee relocation and temporary
living cost provisions in Departmental contracts as
detailed below.
 
RECOMMENDATION
 
     We recommend that the Department use clearly
articulated FAR and DEAR standards and criteria for
reasonableness and allowability for employee relocation
and temporary living costs in its contracts and, where
appropriate, in advance agreements.
 
     Management Comments.  Management's plan to improve
the cost provisions was based on a short- and long-term
strategy.  In the short term, a memorandum will be
issued to field offices requiring them to incorporate
DEAR 970.3102 in all future management and operating
contracts.  In the long term, a project was included in
the Fiscal Year 1997 business plan to review both the
language of all DEAR 970.3102 cost principles and how
they are applied to the Department's management and
operating contractors.
 
     Auditor Comments.  Management's comments are
responsive to the recommendation.
 
                                             Appendix I
                                                       
                                                       
                       REPORTS ISSUED
                              
The following is a list of the audit reports, including
report numbers and titles, referenced in this report.
 
 
Report No.                Report Title
 
IG-0321        Report on Allowable Costs at Department of 
               Energy Management and Operating Contractors 
               (February 23, 1995)
 
CR-B-95-04     Audit of Management and Operating
               Contractor Relocation Costs (March 2, 1995)
 
ER-C-95-03     Report on the Interim Audit of Costs
               Incurred Under Contract No. DE-AC05-92OR21972
               from September 1, 1992 to September 30, 1993,
               Fernald Environmental Restoration Management
               Corporation, Fernald, Ohio (May 11, 1995)
 
ER-CC-93-05    Report on the Application of Agreed-Upon
               Procedures with Respect to Temporary Living
               Allowance Costs Claimed Under Contract No. DE-
               AC09-89SR18035, October 1, 1987, to September
               30, 1990, Bechtel National, Inc., San
               Francisco, California, and Bechtel Savannah
               River, Inc. North Augusta, South Carolina
               (May 3, 1993)
 
ER-CC-91-02    Report on the Independent Audit of
               Direct Subcontract Costs Claimed Under
               Contract No. DE-AC09-88SR18035,
               October 1, 1987, to September 30, 1989, ABB
               Impell Corporation, Norcross, Georgia (
               October 24, 1990)
 
ER-CC-91-05    Report on the Independent Audit of
               Direct Subcontract Costs Claimed Under
               Contract No. DE-AC09-88SR18035,
               October 1, 1987, to September 30, 1989, ABB
               Combustion Engineering Nuclear Power,
               Windsor, Connecticut (December 6, 1990)
 
ER-CC-91-06    Report on the Independent Audit of
               Travel and Temporary Living Allowance Costs
               Claimed Under Contract No. DE-AC09-88SR18035,
               October 1, 1987 to September 30, 1989, ABCs
               Services Incorporated, New York, New York
               (December 24, 1990)
 
ER-CC-91-08    Report on the Independent Audit of
               Travel and Temporary Living Allowance Costs
               Claimed Under Contract No. DE-AC09-88SR18035,
               October 1, 1987, to September 30, 1989,
               United Engineers and Constructors, Inc.
               Philadelphia, Pennsylvania (December 4, 1991)
 
WR-VC-94-08    Audit of Internal Controls that Assure Fiscal
               Year 1993 Costs Claimed by and Reimbursed to
               MK-Ferguson of Idaho Company Are Allowable
               Under Department of Energy Contract No.
               DE-AC07-89ID12721 (May 9, 1994)
                                 
                                 
                                 IG Report No._________
                                                       
 
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