U.S. DEPARTMENT OF ENERGY
                    OFFICE OF INSPECTOR GENERAL
 
 
 
 
 
 
              AUDIT OF SELECTED HAZARDOUS WASTE
                              
               REMEDIAL ACTIONS PROGRAM COSTS
 
 
 
 
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Report Number:  ER-B-97-04         Eastern Regional Audit Office
Date of Issue:  August 11, 1997    Oak Ridge, Tennessee  37830
 
 
              AUDIT OF SELECTED HAZARDOUS WASTE
               REMEDIAL ACTIONS PROGRAM COSTS
 
 
 
                      TABLE OF CONTENTS
 
     
                                                 Page
 
        SUMMARY ...............................   1
 
PART I   -  APPROACH AND OVERVIEW .............   3
 
        Introduction ..........................   3
        
        Scope and Methodology .................   3
 
        Background ............................   4
 
         Prior Reports ........................   4
 
         Observations and Conclusions .........   5
 
PART II -   FINDING AND RECOMMENDATIONS ........  6
 
         Accounting Practices ..................  6
 
PART III -  MANAGEMENT AND AUDITOR COMMENTS..... 10
 
                              
                        
                  U.S. DEPARTMENT OF ENERGY
                 OFFICE OF INSPECTOR GENERAL
                  OFFICE OF AUDIT SERVICES
                EASTERN REGIONAL AUDIT OFFICE
 
 
              AUDIT OF SELECTED HAZARDOUS WASTE
               REMEDIAL ACTIONS PROGRAM COSTS
 
 
Audit Report Number:  ER-B-97-04    August 11, 1997
 
                           SUMMARY
 
     In 1986, the Department of Energy (Department) entered
into a work-for-others agreement with the Department of the
Air Force (Air Force) to provide technical assistance in
support of environmental compliance issues.   Lockheed
Martin Energy Systems' (Energy Systems) Hazardous Waste
Remedial Actions Program (HAZWRAP) supported the Department
in fulfilling its responsibilities to the Air Force.  The
objective of this audit was to determine if costs charged to
selected HAZWRAP customers were in accordance with
Departmental regulations and the terms of the Air Force's
interagency agreement.
 
     Energy Systems did not properly manage and account for
costs claimed under its interagency agreements for HAZWRAP.
Specifically, Energy Systems transferred costs among
accounts to avoid overruns and to use the maximum funds
authorized by HAZWRAP customers.  By avoiding cost overruns,
Energy Systems hoped to receive higher award fees from the
Department.  As a result of its actions, Energy Systems
mischarged one HAZWRAP customer by $504,750.
 
     We recommended that the Manager, Oak Ridge Operations
Office: (1) direct Energy Systems to ensure that existing
management controls are adhered to and that adequate
management controls are maintained; (2) determine the
allowability of $504,750 in questioned costs, recover the
appropriate amount from Energy Systems, and refund
mischarged amounts to the appropriate customers; and (3)
perform a "for cause" review of the Work-for-Others Program
to identify, recover, and refund amounts received by Energy
Systems as the result of improper cost transfers.
 
     Management concurred with the finding and
recommendations and agreed to take appropriate action.
However,  management stated that a majority of the
questioned costs were costs transferred between one
customer's projects, and thus, the customer was not
overcharged.
         
     We disagree with management's statement that the
customer was not overcharged.  We concluded that the
practice of transferring costs from projects with
insufficient funds to projects where funds are still
available, without the customer's authorization, violates
the terms of the interagency agreement and results in
overcharging.
                                      /s/
                            Office of Inspector General
                                                            
                              
                           PART I
                              
                    APPROACH AND OVERVIEW
                              
                              
INTRODUCTION
 
     The Department of Energy (Department) entered into an
interagency agreement with the Department of the Air Force
(Air Force) in 1986 to perform environmental work at various
Air Force bases.  Lockheed Martin Energy Systems (Energy
Systems) Hazardous Waste Remedial Actions Program (HAZWRAP)
supported the Department in fulfilling its responsibilities
to the Air Force.  The audit objective was to determine
whether costs charged to Robins and Wright Patterson Air
Force Bases were in accordance with Departmental regulations
and the terms of the interagency agreement.
 
 
SCOPE AND METHODOLOGY
 
     The audit was conducted in Oak Ridge, Tennessee between
July 1996 and January 1997.  The audit was requested by, and 
performed in conjunction with, the Office of Inspector General 
(OIG), Office of Investigations.  The audit included a review of
costs charged to Warner Robins Air Logistics Center at
Robins Air Force Base and to Wright Patterson Air Force Base
between October 1992 and May 1996.
 
     To accomplish the audit objective, we:
 
     o Reviewed Federal and Departmental regulations to
       identify requirements;
     
     o Reviewed the Air Forces interagency agreement and
       military interdepartmental purchase requests;
 
     o Randomly selected labor, subcontract, and overhead
       charges and traced transactions to supporting 
       documentation;
 
     o Analyzed cost transfers for trends and propriety; and
 
     o Discussed areas of concern with appropriate HAZWRAP
       personnel.
 
     The audit was performed according to generally accepted
Government auditing standards for performance audits and
included tests of internal controls and compliance with laws
and regulations to the extent necessary to satisfy the audit
objective.  Because our review was limited, it would not
necessarily have disclosed all internal control deficiencies
that may have existed at the time of our audit.  We did not
rely on computer-generated data to satisfy the audit
objective.
 
     We discussed the audit results with the Oak Ridge
Operations Office's (Operations Office) management during an
exit conference on July 11, 1997.  We have not discussed the
audit results with Energy Systems.
 
 
BACKGROUND
 
     An objective of the Department's Work-for-Others
Program is to provide assistance to other Federal agencies
in accomplishing goals that may otherwise be unattainable
and avoid the possible duplication of effort at Federal
facilities.  In 1986, the Department entered into a work-for-
others agreement with the Headquarters Air Force Logistics
Command Engineering Directorate (Directorate) to provide
technical assistance in support of environmental compliance
issues.  Under this agreement, the Directorate issued funds
to the Air Force base requesting the Department's services.
The base then issued funding documents (military
interdepartmental purchase requests) to the Department
authorizing expenditures associated with tasks detailed in
the funding documents.
 
     HAZWRAP, a program of Energy Systems' Technology
Partnerships Division, supported the Department in
fulfilling its responsibilities to the Air Force.  HAZWRAP's
mission is to develop, promote, and apply innovative, cost-
effective technologies and approaches to solve national
environmental challenges.  HAZWRAP services are made
available to other Federal agencies via interagency
agreements under the Department's work-for-others guidelines.
 
 
PRIOR REPORTS
 
     Energy Systems' Work-for-Others Program has been the
subject of two previous OIG reviews.  In Report No. ER-B-91-
15, Selected Aspects of Martin Marietta Energy Systems,
Inc., Work-for-Others Management, we disclosed that Energy
Systems had commenced work before Departmental approval,
performed work outside the scope of funding documents, and
exceeded authorized funding.  The report cited examples in
which labor costs were not charged to the associated task
and a cost overrun was charged to an overhead account.  In
Report DOE/IG-0307, Procurement of Services from 8(a)
Contracts for the Work-for-Others Program, we reported that
the 8(a) contracts were not properly administered, which
resulted in out-of-scope work being performed.
 
     In addition, the OIG has issued several inspection
reports dealing with the Work-for-Others Program at other 
Departmental sites.  In three reports, the OIG inspectors 
reported a lack of management controls over work-for-others 
projects.  This lack of controls resulted in Departmental 
appropriations and other customers' funds being used to finance 
cost overruns (DOE/IG-0335, Inspection of Selected Intelligence 
and Special Access Program Work-for-Others Projects and DOE/IG-
0369, Inspection of Los Alamos National Laboratory's System
for Controlling Cost Overruns on Work-for-Others Projects).
Further, contractors incurred costs prior to acceptance of
funds, and after exhaustion of funds (DOE/IG-0367,
Inspection of an Intelligence Work-for-Others Project at the
Idaho Operations Office).
 
 
OBSERVATIONS AND CONCLUSIONS
 
     The audit disclosed that Energy Systems did not
properly account for costs claimed under its interagency
agreements for the HAZWRAP program.  Specifically, in an
effort to avoid cost overruns and maximize award fees,
Energy Systems transferred costs from accounts with
insufficient funds to accounts where funds were still
available. We questioned $504,750 in cost transfers related
to one HAZWRAP customer and recommended that amount be
returned to the appropriate customers.
 
     In our opinion, the finding in this report disclosed
material internal control weaknesses that management should
consider when preparing its yearend assurance memorandum on
internal controls.  Internal control weaknesses identified
in this report are discussed in Part II.
                           
                           
                           
                           PART II
 
                 FINDING AND RECOMMENDATIONS
 
                    Accounting Practices
 
 
FINDING
 
     Departmental regulations require that interagency
agreements be managed and accounted for in accordance with
the funding limitations and other provisions of the
agreements.  Also, the Department's contract requires Energy
Systems to maintain adequate accounting and financial
management systems to ensure compliance with Departmental
regulations and the limitations specified in interagency
agreements.  However, Energy Systems did not properly
account for costs claimed under its interagency agreements
for HAZWRAP.  Energy Systems improperly transferred costs
among accounts to avoid overruns and to use the maximum
funds authorized by HAZWRAP customers.  By avoiding cost
overruns, Energy Systems hoped to receive higher award fees
from the Department.  As a result of its actions, Energy
Systems mischarged one HAZWRAP customer by $504,750.
 
 
RECOMMENDATIONS
 
     We recommend that the Manager, Oak Ridge Operations
Office:
     
       Direct Energy Systems to ensure that existing
       management controls are adhered to and that adequate
       management controls are maintained;
  
       Determine the allowability of the $504,750 in
       mischarges identified in this report,  recover the
       appropriate amount from Energy Systems, and refund the
       appropriate amounts to Robins Air Force Base and other
       affected HAZWRAP customers;
 
       Perform a "for cause" review of the Work-for-Others
       Program to ensure that employees are properly accounting 
       for costs and not transferring costs to maximize revenues; 
       and
  
       Recover and refund amounts received as the result of
       improper cost transfers identified in the "for cause" 
       review to the appropriate customers.
 
 
MANAGEMENT REACTION
 
     Management concurred with the finding and
recommendations and agreed to take appropriate action.
However,  management stated that a majority of the
questioned costs were costs transferred between one
customer's projects, and thus, the customer was not
overcharged.  Comments received from management are
summarized and addressed in Part III of this report.
                              
                              
                              
                     DETAILS OF FINDING
 
 
DEPARTMENTAL REQUIREMENTS
 
     Departmental regulations require that funds provided
under interagency agreements be used solely for the intended
purposes and in accordance with the limitations on the use
of funds as specified in the agreements.  The Department
also requires that obligations and expenditures against
individual interagency agreements be recorded promptly and
accurately and do not exceed the associated budgetary
resource.
 
     Further, the Department's contract requires Energy
Systems to maintain adequate accounting and financial
management systems to ensure compliance with Federal and
Departmental regulations and the terms of interagency
agreements.  Section H - Special Contract Requirements
requires Energy Systems to maintain and administer a
financial management system that (1) is suitable to provide
proper accounting in accordance with Departmental
requirements; (2) permits the preparation of accurate and
reliable financial reports; and (3) assures that proper
accountability can be maintained.
 
 
ENERGY SYSTEMS ACCOUNTING PRACTICES
 
     Despite Departmental requirements, Energy Systems did
not properly manage and account for costs claimed under its
interagency agreements for HAZWRAP.  Specifically,  Energy
Systems transferred costs among HAZWRAP accounts to avoid
cost overruns and to spend the maximum funds authorized by
its customers.
 
     For example, Energy Systems made 114 transfers
involving HAZWRAP accounts for Robins Air Force Base between
October 1992 and May 1996.  The transfers redirected
$504,750 in direct and indirect costs, thereby avoiding cost
overruns.  As the following examples show, labor charges
were the most frequently transferred cost.
 
     o Energy Systems transferred 615.9 hours for 3 employees
       out of an account which was overrun by $54,623.  The 
       amount transferred out of the account totaled $54,623, 
       the exact amount of the overrun.  The transfer request 
       stated that the three employees had charged the wrong 
       account.  However, the employees charged the same account 
       for 28 pay periods, from December 1993 through July 1994.
     
     o A project, which appeared to be complete, had
       unexpended funding of about $43,000 at the end of Fiscal
       Year (FY) 1993.  Of that amount, only $4,100 was expended
       during FY 1994.  All remaining funds were expended during
       FY 1995, primarily by cost transfers.  In September 1995
       alone, $21,745 was charged to the account by way of
       transfers from other accounts.  Included in the transfers
       were charges for 283 labor hours for two employees.
       According to the transfer requests, the employees had
       charged time from October 1994 through June 1995 in error.
       By October 1995, the project was 100-percent costed.
 
     o Time and travel charges for two employees were
       transferred among three different projects.  Two of the
       projects received funding in 1990 which expired in September
       1995.  Neither project had any costs charged to it until FY
       1995.  During FY 1995, questionable transfers were made to
       each project.  For instance, two employees transferred 129.5
       hours from the first project into the second project, which
       precluded the first project from being overrun.  However,
       the transfer resulted in the second project being overrun by
       $6,335. Consequently, $6,334 was transferred out of the
       second project and into a third project.  As a result of
       these transfers, an employee's labor hours were charged to
       one project and the travel costs were charged to a different
       project.
     
     o In FY 1995, HAZWRAP management directed that
       secretaries labor hours originally charged to overhead be
       transferred to direct accounts.  Five of the transfers
       included 4,300 hours worked from October 1994 through May
       1995 and totaled over $150,000.  Of the 4,300 hours, 522
       were charged to Robins Air Force Base; the balance of the
       hours were charged to other customers.  The secretaries were
       not involved in making the transfer, and did not know to
       which projects their time was charged.  In addition,
       secretaries were occasionally instructed to charge their
       time to accounts with unexpended funding.
     
     
AWARD FEES
 
     By avoiding cost overruns, Energy Systems hoped to
receive favorable performance evaluations from the
Department, and thus maximize award fees.  In past
performance evaluations, the Operations Office noted Energy
Systems' failure to adequately control work-for-others
projects.  In January 1993, Energy Systems' HAZWRAP Director
issued a memorandum to the program managers, directing them
to take all precautions to avoid cost overruns, stating that
the overruns would adversely effect Energy Systems' award
fee computation.  While the director did not state what
precautions the program managers should take, HAZWRAP
personnel stated that it was their standard practice to use
cost transfers to avoid or eliminate overruns rather than
terminate activities or request additional funding from
sponsors.  In November 1993, the Operations Office observed
that the number of reported overruns had decreased.
 
     We could not quantify the amount of additional award
fee Energy Systems received as a result of transferring
costs to avoid overruns.  However, avoidance of new cost
overruns was a criterion used in several performance
evaluations in which HAZWRAP received a good rating.
 
 
IMPACT OF ENERGY SYSTEMS' ACCOUNTING PRACTICES
 
     Energy Systems mischarged its customers by transferring
costs from accounts with insufficient funds to accounts
where funds were still available.  These transfers resulted
in an unauthorized use of funds provided under interagency
agreements.  We identified $504,750 in questionable
transfers involving the HAZWRAP program at Robins Air Force
Base.  Because Wright Patterson Air Force Base projects were
being phased out during the period under review, there were
few transfers made.  Therefore, we did not perform a review
of Wright Patterson Air Force Base cost transfers.
                          
                          
                          PART III
                              
               MANAGEMENT AND AUDITOR COMMENTS
 
     Oak Ridge Operations Office concurred with the finding
and recommendations and agreed to take corrective actions.
Management's specific comments are summarized and addressed
below.
                                
Recommendation 1.  Direct Energy Systems to ensure that
existing management controls are adhered to and that
adequate management controls are maintained.
 
     Management Comments.  Management concurred.  The target
date for notifying Energy Systems was set at August 15,
1997.
 
     Auditor Comments.  Management's comments are responsive
to the recommendation.
 
 
Recommendation 2.  Determine the allowability of the
$504,750 in mischarges identified in this report, recover
the appropriate amount from Energy Systems, and refund the
appropriate amounts to Robins Air Force Base and other
affected HAZWRAP customers.
 
     Management Comments.  Management concurred, stating
that the allowability of the questioned costs will be
determined upon completion of the "for cause" review,
targeted for completion by November 30, 1997.  Management
stated that the majority of the transfers identified in the
audit were between Robins Air Force Base (Robins) projects,
and were, therefore, not overcharges to Robins.  Management
also stated that it was improper for the OIG to question all
114 transfers made under the project because the OIG did not
review the appropriateness of the justification for all 114
transactions.  Further, management stated that the Economy
Act requires that all costs incurred under interagency
agreements must be paid to the performing agency by the
sponsoring agency.
 
     Auditor Comments.  While management concurred with the
recommendation, the response suggests that management
considers most of the questioned costs to be allowable
because most of the transfers were between projects for a
single customer.  Management seems to consider all transfers
between projects for a single customer to be appropriate
regardless of the justification.  However, the practice of
transferring costs from projects with insufficient funds to
projects where funds are still available, without the
customers authorization, violates the terms of the
interagency agreement and results in overcharging.  If
Energy Systems had requested authorization from Robins to
transfer funds from projects with sufficient funds to
projects with insufficient funds, Robins may have authorized
some of the transfers that were made.  However, Energy
Systems did not give Robins the opportunity to approve or
disapprove the transfers, and made the transfers without
authorization.  Thus, Energy Systems violated the terms of
the interagency agreement and overcharged Robins for the
projects involved.
     
     We reviewed the justifications for the 114 transfers
discussed in our report.  This review, in which we noted
vague and questionable justifications, led us to analyze the
financial effect the cost transfers had on Robins' projects.
Analysis of a sample of  28 transfers showed that 21 moved
costs from overrun projects, 2 moved costs from projects
that were 99-percent expended at the time of the transfer,
and 3 moved costs into projects with expiring funds.  Hand-
written notes on some transfer documents stated "transfer
excess,"  "transfers to close,"  or "moved enough to [zero]
out."  We considered the results of the sample to be
convincing evidence that a pattern existed wherein Energy
Systems transferred costs from projects with insufficient
funds to projects where funds were still available.
     
     Finally, we disagree with management's statement that
the Economy Act requires that all costs under interagency
agreements must be paid to the performing agency by the
sponsoring agency.  The Economy Act does not require
sponsoring agencies to pay for costs inappropriately charged
to their projects or for costs charged in excess of
established funding limits.
     
     
Recommendation 3.  Perform a "for cause" review of the Work-
for-Others Program to ensure that employees are properly
accounting for costs and not transferring costs to maximize
revenues.
     
     Management Comments.  Management concurred.  The "for
cause" review is under way and targeted to be completed by
November 30, 1997.  A report will be issued and provided to
the OIG.
     
     Auditor Comments.  Management's comments are responsive
to the recommendation.  However, if management undertakes
the "for cause" review with the opinion that cost transfers
between projects of the same customer are not improper, and
that the all costs associated with Economy Act interagency
agreements must be paid by the sponsoring agency, the review
may not result in appropriate corrective actions.
               
Recommendation 4.  Recover and refund amounts received as
the result of improper cost transfers identified in the "for
cause" review to the appropriate customers.
     
     Management Comments.  Management concurred and stated
that any improper costs identified in the "for cause" review
will be recovered, refunded, or reallocated as appropriate.
This action will be taken after the final determination by
the Contracting Officer, which is targeted for January 15,
1998.
     
     Auditor Comments.  Management's comments are responsive
as stated; however, we have the same concerns as asserted in
Recommendation 3.
 
 
IG Report No. ER-B-97-04
 
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