Audit Report

OIG-07-026

ACQUISITIONS: Treasury Franchise Fund Needs to Improve 

Compliance with Department of Defense Procurement 

Requirements 

January 16, 2007 

Office of 

Inspector General 

Department of the Treasury 

Contents 

ACQUISITIONS: Treasury Franchise Fund Needs to Improve Page 1 

 Compliance with Department of Defense Procurement Requirements 

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Audit Report................................................................................................. 3 

 Results in Brief............................................................................................ 4 

 Background ................................................................................................ 8 

 Findings and Recommendations .................................................................... 14 

 FedSource Did Not Ensure that Contract Actions Taken on Behalf 

 of DoD Were Adequately Competed or Obtained Best Value ........................ 14 

 Recommendations................................................................................... 18 

FedSource Task Orders Lacked Evidence of Adequate Quality 

Assurance Surveillance............................................................................ 20 

 Recommendation .................................................................................... 22 

FedSource Should Implement Additional Due Diligence Procedures 

to Help Ensure the Proper Use of Government Funds................................... 23 

Recommendations .................................................................................. 28 

Appendices

 Appendix 1: Objective, Scope, and Methodology........................................ 33 

 Appendix 2: Missing Documentation from FedSource Task Order Files ......... 35 

 Appendix 3: Task Orders With DoD Funding and Bona Fide Need Exceptions . 37 

 Appendix 4: Management Response ......................................................... 38 

 Appendix 5: Major Contributors to This Report........................................... 43 

 Appendix 6: Report Distribution................................................................ 44 

Abbreviations

 ARC Administrative Resource Center 

 BPA Blanket Purchase Agreement 

 COTR Contracting Officer’s Technical Representative 

 DCFO Deputy Chief Financial Officer 

 DFARS Defense Federal Acquisition Regulations Supplement 

 DoD Department of Defense 

 FAR Federal Acquisition Regulation 

 GAO Government Accountability Office 
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 MIPR Military Interdepartmental Procurement Request 

 NDAA National Defense Authorization Act 

 O&M Operations and Maintenance 

 OIG Office of Inspector General 

 OMB Office of Management and Budget 

 RTD&E Research, Development, Test, and Evaluation 

 Treasury Department of the Treasury 

 U.S.C. United States Code 

 WHS Washington Headquarters Service 

 
OIG Audit 

Report

The Department of the Treasury 

Office of Inspector General

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 January 16, 2007 

Richard Holcomb 

Acting Chief Financial Officer 

This report presents the results of an audit we conducted 

separately, but in coordination with the Department of Defense 

(DoD) Office of Inspector General (OIG), of DoD procurements 

made through the Department of the Treasury (Treasury) franchise 

fund. Our audit was required by the National Defense Authorization 

Act (NDAA) for Fiscal Year 2006.1

 During fiscal year 2005, 

FedSource, a component of the Treasury franchise fund and the 

principal focus of our audit, issued approximately 19,700 contract 

actions consisting of task orders and modifications on behalf of 

DoD valued at $405.1 million. 

We initiated our audit in August 2005, shortly after the 

Government Accountability Office (GAO) issued a report that was 

critical of FedSource contracting assistance to DoD.2

 In brief, GAO 

reported that FedSource (1) generally did not ensure competition 

for work, (2) did not conduct and document price analyses, 

(3) sometimes paid contractors higher prices for services than were 

justified, and (4) relied on administrative personnel who were not 

trained as contracting officers to ensure that potential contractors 

had opportunities to submit offers. 

Our objective was to determine whether Treasury’s procurement 

policies, procedures, and internal controls applicable to the 

 

1 The National Defense Authorization Act for Fiscal Year 2006, 119 Stat. 3136, Pub. L. No. 109-163, 

was enacted January 6, 2006. Section 811 of the act mandates the audit of Treasury by our office and 

DoD OIG. Similar audits are also mandated for the Department of the Interior and the National 

Aeronautics and Space Administration and are to be performed by the DoD OIG and the OIGs of those 

agencies. 

2 GAO, Interagency Contracting: Franchise Funds Provide Convenience, but Value to DOD Is Not 

Demonstrated, GAO-05-456 (Washington, D.C.: July 29, 2005). The GAO report also examined DoD’s 

use of GovWorks, a franchise fund run by the Department of the Interior. Together, FedSource and 

GovWorks accounted for approximately 95 percent of services provided by franchise funds to DoD in 

fiscal year 2003 (the fiscal year on which the GAO report is based).
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procurement of property products and services on behalf of DoD, 

and the manner in which they are administered, were adequate to 

ensure Treasury’s compliance with the laws and regulations that 

apply to procurements of property and services made on behalf of 

DoD. To accomplish this objective, we reviewed a sample of 64 

task orders at three FedSource centers — Los Angeles, CA; St. 

Louis, MO; and Baltimore, MD. We also reviewed contracts and 

blanket purchase agreements at the Administrative Resource 

Center (ARC), another component of the Treasury franchise fund, 

located at the Bureau of the Public Debt in Parkersburg, West 

Virginia. Our objective, scope, and methodology are described in 

more detail in appendix 1. 

Pursuant to the fiscal year 2006 NDAA, the DoD OIG and our 

office informed the Senate and House Committees on Armed 

Forces in letters dated March 15, 2006, that we had determined 

that Treasury was not compliant with DoD procurement 

requirements, but had a program or initiative in place to 

significantly improve compliance with DoD procurement 

requirements.3

 Copies of our letters, which also summarized our 

work and determination, were provided to your staff. Copies of this 

report will be provided to the Committees on Armed Forces. 

Results in Brief

We found that FedSource issued policies and procedures that are 

responsive, if implemented as described, to address GAO’s 

recommendations. For example, FedSource (1) established policy in 

July 2005 pertaining to ethical conduct and proper use of contract 

vehicles; (2) established an acquisition performance measurement 

program in August 2005 to measure, evaluate, and improve 

management practices in the delivery of contract administration 

services to FedSource customers; (3) established a standard 

checklist in July 2005 for documenting task order files; (4) revised 

its customer request form for services, with detailed instructions 

 

3

 The Fiscal Year 2006 NDAA required that the DoD and Treasury Inspectors General reach one of the 

following determinations by March 15, 2006 (1) Treasury is compliant with DoD procurement 

requirements; (2) Treasury is not compliant with DoD procurement requirements, but has a program or 

initiative to significantly improve compliance with DoD procurement requirements; or (3) neither of 

these conclusions is correct.
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for completing statements of work and quality assurance 

surveillance plans; and (5) established procedures in September 

2005 for using incremental funding of acquisitions. These policies 

and procedures are discussed in more detail later in this report. 

Our review of 64 task orders, which were awarded before the 

above actions were taken, found conditions that were consistent 

with GAO’s findings. Specifically, we found the following: 

• FedSource did not adequately compete all task orders. The 

contracting officers did not provide fair opportunity for 

competition for task orders issued against multiple-award 

contracts and issued awards based on customer preferred 

services. The task orders also lacked complete documentation 

required by federal procurement regulations and FedSource 

policies and procedures. For example, we noted that 31 files did 

not have independent government cost estimates; 18 files did 

not have proposals, offers, or quotes evidencing competition; 

and 32 files lacked price negotiation documentation. We also 

noted that 1 task order was incrementally (partially) funded, but 

lacked the required clause limiting the government’s payment 

for and the contractor’s provision of services to the amount that 

was funded. 

• Twenty-one task orders lacked a quality assurance surveillance 

plan, 2 had identical quality assurance plans although the 

scopes of the task orders differed from one another, and 4 had 

plans that were inadequate. Quality assurance surveillance plans 

are required by procurement regulations and specify all work 

requiring surveillance and the method of surveillance. 

Additionally, Contracting Officer's Technical Representative 

(COTR)4

 designation letters were not consistent with quality 

assurance surveillance plan instructions for who was 

responsible for performing quality assurance surveillance. 

Quality assurance surveillance is necessary to determine that 

supplies or services received conform to contract requirements. 

The files lacked evidence that FedSource personnel performed 

inspections of the contractors’ work or had otherwise obtained 

 

4

 COTRs are responsible for technical monitoring of contract performance. Unlike contracting officers, 

they are not authorized to contractually bind the government or issue instructions or directions that 

would change the scope or price of contracted work. 
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assurance that the contractors performed in accordance with 

the contract requirements. We were told by FedSource 

personnel that DoD was responsible for determining if property 

or services were provided in accordance with the task orders. 

Although these expectations were spelled out in those quality 

assurance plans that were documented, the task order files do 

not provide evidence of monitoring being performed. 

For DoD procurements made through 21 FedSource task orders, 

DoD OIG identified instances where incorrect DoD appropriations 

were used and where the bona fide need rule was potentially 

violated. As such, these deficiencies represent potential violations 

of the Antideficiency Act. While the DoD OIG’s findings were 

principally directed at DoD, they point to a need for FedSource to 

identify the due diligence it performs when accepting orders to help 

prevent the use of incorrect appropriations. Our discussions with 

FedSource management indicated that FedSource also recognizes 

this need. We also noted that FedSource’s three servicing centers 

had inconsistent procedures for reviewing Military 

Interdepartmental Procurement Requests (MIPR) and interagency 

agreements before acceptance. Also, as FedSource management 

has pointed out, guidance for conducting due diligence is not 

defined. Accordingly, FedSource should work with DoD in 

establishing a common set of indicators that it should use to 

determine which procurement requests require more intense 

FedSource scrutiny. Furthermore, in accordance with a recent DoD 

directive, FedSource will need to ensure that the task orders for 

severable services (services that are continuing and recurring in 

nature) have periods of performance that do not exceed 1 year 

from the date of MIPR acceptance. 

Consistent with our determination that Treasury was not compliant 

with DoD procurement requirements but had a program to 

significantly improve compliance, the fiscal year 2006 NDAA 

requires that DoD OIG and our office to conduct a second 

concurrent review of Treasury’s fiscal year 2006 procurement of 

property and services on behalf of DoD. The purpose of this second 

review is to make another determination, by June 15, 2007, as to 

whether Treasury is or is not compliant with DoD procurement 

requirements. A determination of noncompliance by this second 

review has significant implications for the Treasury franchise fund. 
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Specifically, DoD would be prohibited from procuring property or 

services through Treasury in excess of $100,000 unless 

(1) authorized by the Under Secretary of Defense for Acquisition, 

Technology, and Logistics or (2) a subsequent joint review by DoD 

OIG and our office finds that Treasury is compliant with DoD 

procurement requirements. 

The provision in the fiscal year 2006 NDAA for a second review by 

DoD OIG and our office underscores the need for FedSource 

management to ensure that the policies and procedures established 

in response to the July 2005 GAO report are effectively 

institutionalized in a timely manner. We are making five 

recommendations in this report to further ensure that FedSource is 

procuring property and services on behalf of DoD in compliance 

with DoD procurement requirements. The recommendations are 

directed toward ensuring that (1) there is appropriate competition 

for supplies and services acquired on behalf of DoD and prices paid 

are reasonable, (2) the task order contract files document 

compliance with procurement requirements, (3) quality assurance 

surveillance plans are adequate and implemented and COTR 

designation letters clearly delineate lines of responsibility for who 

performs monitoring and how monitoring is to be documented, 

(4) uniform procedures are developed that outline the steps of a 

reasonable review (due diligence) to be performed before accepting 

DoD orders, and (5) task orders for severable services are for 

periods of performance that do not exceed 1 year from the date of 

MIPR acceptance. 

Management Response and OIG Comment

In the response to our draft report, the Deputy Chief Financial 

Officer (DCFO) concurred with our recommendations for findings 1 

and 2 and partially concurred with our recommendations for finding 

3. The corrective actions stated by management, if implemented as 

described, are generally responsive to the intent of our 

recommendations. The partial concurrences relate to the certain 

procurements cited as potential violations of the Antideficiency Act 

and the extent of due diligence necessary on the part of 

FedSource. These matters, and our evaluation, are discussed in the 

Findings and Recommendations section of this report. 
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The DCFO also expressed concern that the timing of our follow-up 

review does not allow FedSource or DoD sufficient time to fully 

institutionalize the improvements and changes recommended and 

currently underway (i.e., draft report was issued September 14, 

2006, with the follow up review focusing on the time period of 

July through September 2006). 

With respect to the DCFO’s concern with the timing of our followup review, it should be noted that both scope and timing of this 

review and the follow-up are mandated by the fiscal year 2006 

NDAA. Furthermore, the corrective actions taken in response to the 

recommendations contained in the GAO July 2005 FedSource 

Report, which very much mirror the recommendations in this 

report, were established before fiscal year 2006. 

The text of the management response is included as appendix 4. 

Other Matter

Subsequent to our field work, the Department’s Office of General 

Counsel informed the Department of an instance of possible 

Antideficiency Act violation related to transactions and activities of 

the Treasury Franchise Fund. Specifically, contracting and 

budgetary control weaknesses existing with the Fund may have 

allowed a potential violation of both the Competition in Contracting 

Act and the Antideficiency Act for a contract whose ceiling was 

exceeded without proper competition. This matter was also 

reported by the Independent Public Accountant in its audit report 

on the Department’s fiscal years 2006 and 2005 financial 

statements.5

Background

Franchise Funds 

The Government Management Reform Act of 1994 authorized the 

Office of Management and Budget (OMB) to establish franchise 

 

5 Audit of the Department of the Treasury’s Fiscal Years 2006 and 2005 Financial Statements 

(OIG-07-010; issued November 15, 2006). The Independent Public Accountant’s audit of these 

statements was performed under the supervision of the Treasury Office of Inspector General. 
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fund pilot programs at six executive agencies. Franchise funds are 

government-run, self-supporting, businesslike enterprises managed 

by federal employees. The funds provide a variety of common 

administrative services, such as payroll processing, information 

technology support, employee assistance programs, and 

contracting. Franchise funds are required to recover their full cost 

of doing business and are allowed to retain up to 4 percent of their 

annual income. To cover their costs, the funds charge fees for the 

services they provide. 

Congress authorized the pilot programs because it expected that 

franchise funds would be able to provide common administrative 

services more efficiently than each federal agency on its own. In 

1996 and 1997, OMB established franchise fund pilot programs at 

the Departments of Commerce, Health and Human Services, the 

Interior, the Treasury, Veterans Affairs, and the Environmental 

Protection Agency. The programs were to expire in 1999, 5 years 

after passage of the Government Management Reform Act. The 

Consolidated Appropriations Act, 2005, amended the past 

legislation giving the Treasury franchise fund permanent status. 

Treasury Franchise Fund Entities Used by DoD 

The Treasury franchise fund comprises the following entities: 

(1) FedSource, (2) ARC, (3) Federal Consulting Group, and 

(4) Treasury Agency Services. Procurement services to DoD are 

provided through FedSource and ARC. 

The acquisition process for the Treasury franchise fund originates at 

ARC. ARC performs contract competitions and establishes master 

contract vehicles from which FedSource issues task orders to meet 

customer needs. In addition, ARC appoints FedSource’s contracting 

officers, designates COTRs, and conducts compliance reviews to 

determine whether Treasury franchise fund procurement activities 

are being carried out in accordance with applicable laws and 

regulations. FedSource serves as liaison between customers and 

contractors, develops comprehensive acquisition strategies, works 

with customers to develop statements of work, competes and 

awards task orders, develops and participates in quality assurance 

surveillance plans, and closes out completed task orders. 
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One type of master contract vehicle awarded by ARC is the “multiple 

award” contract. A multiple award contract is made with two or 

more sources under a solicitation who agree to provide the same or 

similar supplies and services at fixed prices during a fixed period. 

Such contracts obligate the government to purchase a minimum 

quantity from each contractor. The government places orders under 

these contracts for individual requirements. 

FedSource’s Process 

DoD sends FedSource either a MIPR or an Interagency Agreement 

as funding documents to procure property or services. These 

documents should describe the type of property or services 

requested and identify the appropriation account of the funds being 

provided. Upon receipt, FedSource reviews the funding documents, 

and if accepted, issues task orders against master contracts for the 

requested property or services. Funding documents may fund more 

than one task order; similarly, multiple funding documents may 

fund multiple task orders. 

Key Laws and Regulations 

Procurement activities conducted by federal franchise funds are 

subject to the same laws and regulations to which other federal 

government procurement activities are subject, as well as to any 

additional regulations specific to the funding agency. Three of the 

principal legal authorities that govern the procurement activities of 

this review the Federal Acquisition Regulation (FAR), the Defense 

Federal Acquisition Regulations Supplement (DFARS), and the 

Antideficiency Act. 

The FAR is the primary regulation for use by all federal executive 

agencies in their acquisition of supplies and services with 

appropriated funds. It became effective on April 1, 1984, and is 

issued within applicable laws under the joint authorities of the 

Administrator of General Services, the Secretary of Defense, and 

the Administrator for the National Aeronautics and Space 

Administration, under the broad policy guidelines of the 

Administrator, Office of Federal Procurement Policy, Office of 

Management and Budget. 
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According to the FAR, contracting officers, as a matter of policy 

and with certain limited exceptions, must promote and provide full 

and open competition in soliciting offers and awarding government 

contracts. Contracting officers are to do this through the use of the 

competitive procedures. As prescribed in the FAR, contracting 

officers are to purchase supplies and services from responsible 

sources at fair and reasonable prices. The determination of price 

reasonableness should be documented in the contract file. 

DoD implements and supplements the FAR in the DFARS under the 

authorization and subject to the authority, direction, and control of 

the Secretary of Defense. DFARS requires, with certain exceptions, 

that each procurement for DoD exceeding $100,000 under a 

multiple award contract be made on a competitive basis. When 

using the term “competitive basis” in regard to multiple award 

contracts, the contracting officer must provide fair notice to all 

contractors offering the required supplies or services, and ensure 

that the contractors are afforded a fair opportunity to submit an 

offer and have that offer fairly considered.6

Similarly, the FAR directs contracting officers to provide all 

contractors under multiple award contracts fair opportunity to be 

considered for orders exceeding $2,500 under multiple delivery or 

multiple task order contracts. This subpart also requires contracting 

officers to document in the contract file the rationale for placement 

and price of each order. 

The Antideficiency Act prohibits federal government officials from 

making payments or committing the United States to make future 

payments for goods or services unless Congress has appropriated 

sufficient funds to pay for those goods or services. Among other 

things, the law prohibits the federal government from using funds 

for other than their intended purpose or making or authorizing 

expenditure from, or creating or authorizing an obligation under, 

 

6

 This DFARS provision implements Section 803 of the NDAA for Fiscal Year 2002, enacted as 

Pub. L. 107-107 on December 28, 2001. As stated in DFARS, exceptions to the fair opportunity 

process apply when (1) only one contractor is capable of providing the supplies or services required at 

the level of quality required because the supplies or services are unique or highly specialized or (2) the 

order must be issued on a sole source basis in the interest of economy and efficiency because it is a 

logical follow-on to an order already under the contract, provided that all awardees were given a fair 

opportunity to be considered for the original order. 
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any appropriation or fund in excess of the amount available in the 

appropriation or fund unless authorized by law.7 

GAO Analysis of DoD Use of FedSource

In July 2005, GAO issued a report on DoD’s use of franchise 

funds.8

 Overall, GAO found that FedSource generally did not ensure 

competition for work, relied on personnel who were not trained as 

contracting officers, did not conduct and document price analyses, 

and sometimes paid contractors higher prices than were justified. 

To address these findings, GAO recommended that the Secretary 

of the Treasury (1) develop procedures and performance measures 

for franchise fund operations to demonstrate compliance with 

federal procurement regulations and policies while maintaining 

focus on customer service, (2) develop procedures for franchise 

fund contracting officers to work closely with DoD customers to 

define contract outcomes and effective oversight methods, and 

(3) assign warranted contracting officers to positions responsible 

for performing contracting officer functions. Treasury concurred 

with these recommendations. 

FedSource Actions to Address GAO Recommendations 

From July to September 2005, FedSource established policies and 

procedures that, if properly implemented, would be responsive to 

GAO’s recommendations. 

• In July 2005, FedSource established policy pertaining to 

acquisition of goods and services that provided, among other 

things, that (1) all FedSource personnel are to adhere to the 

highest standards of ethics in executing contract solicitation, 

awards, and administration responsibilities; (2) all contracts and 

blanket purchase agreements (BPAs) are to be used only for 

their intended purpose; (3) only FedSource personnel are 

authorized to serve as COTRs on FedSource contracts, BPAs, 

and other contract vehicles (unless approved by the FedSource 

 

7

 31 U.S.C. § 1341(a)(1)(A). 

8

 GAO, Interagency Contracting: Franchise Funds Provide Convenience, But Value to DOD Is Not 

Demonstrated, GAO-05-456 (Washington, D.C.: July 29, 2005). 
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Vice President of Acquisition); (4) all FedSource centers 

implement use of warranted contracting officers; and (5) all 

FedSource personnel are to promote the use of performancebased contracts. 

• In July 2005, FedSource established a standard checklist for 

documentation required to be retained in task order files. 

• In August 2005, FedSource established an acquisition 

performance measurement program as a tool to measure, 

evaluate, and improve management practices in the delivery of 

contract administration services to FedSource customers. The 

acquisition performance measurement program provides for 

objectives, measures, and goals in the areas of (1) purchase 

cards, (2) small business goals, (3) compliance, (4) competition, 

(5) quality assurance, and (6) training. It should be noted, 

however, that the program goals set for fiscal year 2005 were 

at levels less than 100 percent of full compliance with 

procurement requirements. For example, FedSource’s objective 

for compliance is to ensure task orders issued on behalf of 

customers meet all legal, regulatory, and policy requirements. 

However, its compliance goal for sampled fiscal year 2005 

tasks orders was 80 percent. Likewise, FedSource’s goals for 

quality assurance were set at less than 100 percent for fiscal 

year 2005. For fiscal year 2006, FedSource’s goals in this area 

are to have surveillance plans in place for all performance-based 

contracts by March 31, 2006, and documented surveillance on 

all performance-based task orders by the end of fiscal year 

2006. 

• In August 2005, FedSource also revised its customer request 

form for services; the revised form includes detailed instructions 

for completing statements of work and quality assurance 

surveillance plans. FedSource also developed guidelines to 

delineate the role and responsibilities of the customer agency’s 

project officer. 

• In September 2005, FedSource established procedures for the 

use and documentation of task orders that are incrementally 

funded. 
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Findings and Recommendations

Finding 1 FedSource Did Not Ensure that Contract Actions Taken 

on Behalf of DoD Were Adequately Competed or 

Obtained Best Value 

For the task orders sampled by our office and DoD OIG, FedSource 

contracting practices did not always give contractors a fair 

opportunity to be considered nor did FedSource always obtain the 

best value for supplies and services purchased. The exceptions we 

found include (1) not ensuring that all contractors under multipleaward contracts were given a fair opportunity to compete, 

(2) awarding task orders for work classified as “routine” to 

contractors with the lowest markup without considering 

promotional pricing that may have been offered by other available 

contractors, (3) awarding task orders to contractors who had 

marketed the business to FedSource, and (4) awarding contracts to 

DoD preferred sources without ensuring competition. Additionally, 

we found that the contract files for most task orders in our sample 

did not contained adequate documentation to demonstrate that the 

best value was obtained for supplies and services purchased on 

behalf of DoD. It should be noted, however, that FedSource has 

taken or planned actions that should if properly implemented, 

address these problems. 

FedSource practices that limited competition and/or did not provide 

for the best value: 

• ARC established multiple-award contracts under which 

FedSource centers could issue task orders to fulfill customer 

requirements. FedSource centers, however, did not ensure that 

all contractors providing similar services under available 

multiple-award contracts were given a fair opportunity to 

compete. FedSource management told us that in the future, all 

contractors providing similar services would be given a fair 

opportunity to compete for individual task orders. 

• The DoD OIG found that FedSource, as a practice, restricted 

competition by identifying the requested work as either 

“routine” or “complex.” Routine work was work that did not 

have special recruitment, retention, management, or other 
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technical requirements. Other work was categorized as 

complex, for which FedSource required proposals for evaluation. 

Routine work was awarded to the contractor with the lowest 

markup and overhead rates. However, promotional pricing that 

may have been offered by other available contractors was not 

considered in contractor selection. In fiscal year 2005, 

FedSource made 2,201 routine buys from 2 multiple-award 

contracts, 2 single award contracts, and 7 BPAs. FedSource 

management informed DoD OIG that they plan to compete 

routine buys in the future. 

• FedSource awarded a task order in the amount of $738,013 to 

renovate a building at an Army facility. We found that the 

building renovation was not competed because FedSource 

selected a contractor that brought additional building renovation 

work to FedSource for award. In essence, if a vendor brought 

additional business to FedSource, that vendor was awarded the 

contract, as happened with this task order. In a July 12, 2004, 

letter, FedSource informed its contractors that the practice of 

awarding task orders to contractors that directly markets the 

business was inconsistent with the FAR and that task orders 

would now be competed among all awardees under multiple 

award contracts. 

• FedSource awarded certain task orders to contractors that were 

indicated as the preferred source by the ordering DoD entity. 

For example, FedSource issued a task order in the amount of 

$39,415 for the DoD’s Washington Headquarters Service 

(WHS) for the services of a technical consultant. The task order 

was issued to a BPA contractor on September 30, 2004. The 

request for the services and an email from the WHS to 

FedSource with the subject line “DoD WHS – Suggested 

Source” identified the preferred technical consultant by name. 

Also, the statement of work named the selected contractor as 

the suggested source for the award. The task order file did not 

include a price negotiation memorandum, which should have 

documented the award process, or other evidence of 

competition. While customer requests for specific vendors or 

personnel is not in themselves a problem, FedSource needs to 

ensure it can demonstrate that if the task order is awarded to 

the customer’s requested source, the contract action complied 
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with procurement requirements for fair competition and that the 

a fair and reasonable price was obtained. 

• The FedSource task orders in our sample contained inadequate 

documentation to demonstrate that FedSource obtained the 

best value for supplies and services purchased. Specifically, 31 

files did not have independent government cost estimates. 

Eighteen files did not have proposals, offers, or quotes 

evidencing competition. None of the files documented that 

market research was performed. Instead, FedSource used the 

same contractors repeatedly. Thirty-two files lacked price 

negotiation documentation. None of these files contained 

explanations of FedSource’s cost analysis. There was also no 

documentation indicating that FedSource reviewed historical or 

industry cost data. Appendix 2 identifies the inadequate 

documentation found with the task orders we reviewed. 

We also found that 1 of the 64 task order files in our sample was 

incrementally funded9

 but lacked the required documentation. That 

task order, issued for asbestos abatement on November 13, 2003, 

was for $683,799. The initial DoD MIPR for the task order, issued 

on July 30, 2003, was for $370,596. FedSource later received 

additional funding from DoD increasing the total funding available 

for the task order to $555,596. This amount, however, was 

$128,203 less than the amount needed to fully fund the task 

order. When we questioned FedSource personnel about this 

disparity, they agreed that the task order was incrementally 

funded. We found, however, that FedSource had not adhered to its 

own policy or the FAR for documenting incrementally funded task 

orders. The policy requires that files for incrementally funded task 

orders include the following: 

• total amount needed to fund the task order 

• total period of performance 

• incrementally funded amount 

 

9

 By law (Antideficiency Act, 31 U.S.C. § 1341), no office or employee of the government may create 

or authorize an obligation in excess of the funds available, or in advance of appropriations. If a contract 

is not fully funded upon award, the FAR requires that the contracts include a clause that expressly limits 

the government’s obligation to reimburse the contractor for costs incurred to the incremental amount 

funded for the contract. The clause also provides that the contractor is not obligated to continue 

performance under the contract or otherwise incur costs in excess of the incremental amount funded. 

As additional funds are allotted for the contract, a contract modification is required. 
ACQUISITIONS: Treasury Franchise Fund Needs to Improve Page 17 

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• funded period of performance 

• anticipated schedule for availability of additional funds 

• evidence that the customer has been quoted the full-year cost 

of the work and the period of performance 

• signed statement from the customer indicating that the task 

order is being incrementally funded and that the funds 

necessary to complete the project are expected to become 

available 

• language on the award stating that the funds necessary to 

complete the project are not currently available and that the 

federal government’s liability is conditioned upon those funds 

becoming available 

The task order file did not contain this documentation. 

Among the 64 task order files we reviewed, 18 were from 

FedSource’s Beaufort center. GAO had already identified this 

center as having procurement issues, including improper execution, 

improper funding, and documentation weaknesses. Consequently, 

FedSource management withdrew the Beaufort center’s ordering 

authority and transferred the work to other FedSource centers.10

Each Beaufort file was assigned a new task order number. An 

April 21, 2005, FedSource memorandum to the file acknowledged 

the problems with the files but stated that (1) there was 

insufficient time to correct the many deficiencies and (2) gaining 

centers would therefore not be held responsible for any 

substandard files inherited. In January 2006, we found funding, 

contractor monitoring, and competition issues, as well as several 

exceptions to the FAR, in the transitioned Beaufort files. These 

problems remained unresolved as of March 2006. 

We also noted that each FedSource center used different forms 

when awarding task orders. To address this, in July 2005, 

FedSource established a standard checklist for documentation. 

Items on the checklist include, among other things, the customer 

request form; justifications and approvals/determinations and 

findings; statement of work/performance work statement; quality 

assurance surveillance plan; independent government cost 

estimate; request for proposals; proposals, offers, or quotes; price 

 

10 According to FedSource management, the Beauford center was closed on June 30, 2006. 
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negotiation memorandum; and task order modifications. If properly 

implemented, the checklist should help ensure that FedSource 

centers adhere to procurement requirements. 

Recommendations

We recommend that the Deputy Chief Financial Officer direct 

FedSource to do the following: 

1. Comply with procurement requirements for fair and open 

competition when awarding task orders. Specifically, it should 

ensure that recent policies and other changes to procurement 

practices discussed in this finding have been implemented and 

institutionalized to include affording all contractors under 

multiple award contracts a fair opportunity to compete for task 

orders. 

Management Response

In its response, management concurred with the 

recommendation. According to the response, FedSource 

changed its current process on existing contracts to discontinue 

using the “routine” ordering procedures. Future FedSource-wide 

contracts will require competition on all task orders through the 

use of requests for proposals. Modifications were processed to 

the multiple award contracts on June 29, 2006, to remove 

“routine” language. FedSource also discontinued the practice of 

awarding orders to contractors that marketed their FedSource 

contract on July 12, 2004. FedSource is in the process of 

providing updated guidance to its offices, customers, and 

contractors relating to “suggested sources.” This guidance was 

completed November 17, 2006. FedSource has implemented 

new policies and procedures to address each of these findings. 

Training has been conducted since March 2006 and will 

continue to assure compliance. 

Management also asserted in its response that based on the 

ordering procedures in the multiple award contracts, fair notice 

was provided to all awardees, if complex in nature, by issuing a 

request for proposal. “Award justification” information was 

included in the task order file. Additionally, promotional pricing 
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 (OIG-07-026)

was considered in contractor selection for routine pricing, and 

contractors did offer promotional pricing which was 

incorporated into the contract. 

OIG Comment

The corrective actions by management, if implemented as 

described, address the intent of our recommendation. As part of 

our second review of FedSource, covering fiscal year 2006 

procurements on behalf of DoD, we plan to assess the actions 

taken. It should be noted, however, that while we saw evidence 

that promotional pricing by the selected vendor was considered 

in the routine buys included in our sample, the issue is that 

FedSource did not compete these buys with other available 

vendors. 

 

2. Ensure that the contract files for all new task order awards and 

modifications to existing task orders include documentation of 

required competition, market research, and price 

reasonableness. 

Management Response 

Management concurred with the recommendation. According to 

its response, in July 2005 FedSource developed a price 

negotiation memorandum template outlining areas to address for 

a price reasonableness determination. Since that time, revisions 

have been made to the template to further improve 

documentation of the task order files. The revisions were 

completed on November 17, 2006. The price negotiation 

memorandum template outlines the competition that occurred, 

summarizes the evaluation of proposals, and documents fair and 

reasonable pricing through a market comparison, the 

independent government cost estimate, and/or historical 

procurement data. FedSource has also been working closely 

with DoD customers in developing the independent government 

cost estimate, which should be prepared as part of the initial 

request for services received from DoD. FedSource developed a 

Procedure Memorandum in June 2005, with specific 

instructions on how to assist customers in developing the 

independent government cost estimate. 
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Management also stated that market research is done at the 

overarching contract level in the acquisition planning stages. 

Although, a market comparison is performed when determining 

fair and reasonable pricing. DoD is required to conduct market 

research prior to using a non-DoD contract based on DoD policy 

issued in October 2004. FedSource issued an Acquisition Policy 

Memo dated July 5, 2005, which requires its employees to 

ensure all internal DoD reviews/approvals required prior to 

placing an order with FedSource have been completed. 

FedSource has implemented new policies and procedures to 

address this finding. Training has been conducted since March 

2006 and will continue to assure compliance. 

OIG Comment 

The corrective actions by management, if implemented as 

described, address the intent of our recommendation. As part of 

our second review of FedSource, we plan to assess the actions 

taken. While we note that DoD requires its facilities to conduct 

market research to support decisions to use non-DoD 

contracting offices, market research by FedSource is still 

required to determine the best approach to acquire the specific 

services and property requested by DoD. 

Finding 2 FedSource Task Orders Lacked Evidence of Adequate 

Quality Assurance Surveillance 

 

According to the FAR, quality assurance surveillance plans are to 

be prepared in conjunction with the preparation of the statement of 

work and should specify all work requiring surveillance and the 

method of surveillance. Quality assurance surveillance is necessary 

to determine that supplies or services conform to contract 

requirements.11 Of the 64 FedSource task order files reviewed, we 

found that 21 lacked a quality assurance surveillance plan, 2 had 

identical quality assurance plans although the scope of the task 

orders was different, and 4 had inadequate quality assurance plans. 

 

11 FAR 46.401. 
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COTRs are designated by the contracting officer and serve as the 

government’s representative during the technical, acquisition, and 

pre- and post-award cycles of their assigned contracts. They 

monitor and document surveillance based on established quality 

assurance procedures. 

 

We found task orders that lacked quality assurance surveillance 

plans in the FedSource centers we visited: Los Angeles – 11 task 

orders, Baltimore – 5 task orders, and St. Louis – 5 task orders. 

Furthermore, the files for 2 task orders issued by the Baltimore 

center contained identical quality assurance surveillance plans; but 

the period of performance in the plans were not consistent with the 

period of performance specified in the task orders. 

We also found that the files for 4 task orders (3 issued by the Los 

Angeles center and 1 issued by the Baltimore center) had 

incomplete quality assurance surveillance plans. Although the plans 

were signed by a DoD project officer, they were not signed by the 

FedSource COTRs. Additionally, the quality assurance surveillance 

plans specified that when the DoD project officer signed the 

timecards or receiving reports they were certifying deliverables 

have been received and meet the government standard. They also 

state that FedSource would periodically ask for a copy of the 

project officer’s worksheet to document the contract file. We did 

not find evidence that contractor monitoring was being performed. 

The task orders that lacked or had inadequate quality assurance 

surveillance plans are identified in appendix 2. 

We determined these files as well as the files without plans lacked 

evidence that FedSource COTRs performed inspections of the 

contractors’ work or had otherwise obtained assurance that the 

contractors performed in accordance with the contract 

requirements. 

Although FedSource had assigned a COTR to each task order we 

reviewed, none of the COTRs performed any surveillance on their 

assigned contracts. Additionally, COTR designation letters were not 

tailored to the unique requirements of the assigned task orders or 

the quality assurance surveillance plans. We also found that some 

COTRs were assigned to several task orders. When we asked 
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FedSource COTRs whether they had performed or documented 

surveillance of contractor performance, they stated that 

responsibilities for monitoring were assigned to DoD and that 

supervision and monitoring were being performed by the hiring DoD 

component. For example, one COTR stated that the DoD project 

officer signed certifying time and attendance reports. The COTRs 

also stated that they considered DoD’s clearance for payment to be 

an indication that DoD had reviewed and approved the work. No 

written statements documenting that FedSource had 

communicated with DoD program managers about performance or 

acceptance of contractor surveillance was indicated in the task 

order files. When we informed FedSource management that quality 

assurance was not being performed, FedSource officials agreed and 

told us that they were aware of the situation and were taking steps 

to address it. 

Without adequate quality assurance surveillance plans, constitently 

designated quality assurance responsibilities, timely monitoring of 

contract performance, and adequate documentation of monitoring, 

FedSource cannot ensure that it is safeguarding the interests of the 

federal government in its contractual relationships. 

Recommendation

We recommend that the Deputy Chief Financial Officer direct 

FedSource to work with DoD to establish controls to ensure that 

(a) quality assurance surveillance plans are established for all task 

orders; (b) COTR designation letters clearly delineate who is 

responsible for performing monitoring, consistent with quality 

assurance surveillance plan instructions; and how monitoring is to 

be documented for each assigned task order; and (c) monitoring 

occurs and is documented before contractors are paid. 

Management Response

In its response, management concurred with the recommendation. 

According to management, during the past year FedSource focused 

its efforts on developing and refining quality assurance surveillance 

plans with its customers for performance-based contracts. A 

quality assurance surveillance plan currently exist for every 

FedSource performance-based task order since July 2005. 
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FedSource also recognized a need to revise its COTR Delegation of 

Authority letters, as well as the need to identify its customer 

agency’s responsibilities for monitoring and ensuring the technical 

requirements of the contract are being met and the performance 

was within the scope of the contract. Additionally, although the 

surveillance of task orders is completed at the customer level, 

FedSource continues to refine the process to ensure clear and 

concise performance metrics are in place. FedSource is also 

developing a plan to assist customers with surveillance of their 

orders by contacting the customer activities on a routine basis to 

perform surveillance as defined in the quality assurance surveillance 

plan. These actions were to be completed on January 2, 2007. 

FedSource team members will document the task order files with 

findings and report any yellow or red findings to the contractor for 

corrective action. 

OIG Comment 

The corrective actions by management, if implemented as 

described, address the intent of our recommendation. As part of 

our second review of FedSource, we plan to assess the actions 

taken.

Finding 3 FedSource Should Implement Additional Due Diligence 

Procedures to Help Ensure the Proper Use of Government 

Funds 

For DoD procurements made through 21 FedSource task orders, 

DoD OIG identified instances where incorrect DoD appropriations 

were used and where the bona fide need rule12 was potentially 

violated. As such, these deficiencies represent potential violations 

of the Antideficiency Act. While the DoD OIG’s findings were 

principally directed at DoD, they point to a need for FedSource to 

identify what due diligence it performs when accepting orders to 

help prevent the use of incorrect appropriations. FedSource has 

 

12 The bona fide need rule is one of the fundamental principles of appropriations law: A fiscal year 

appropriation may be obligated only to meet a legitimate (bona fide) need arising in, or in some cases 

arising prior to but continuing to exist in, the fiscal year for which the appropriation was made. 
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also recognized this need according to our discussions with 

FedSource management. However, we noted that FedSource’s 

three servicing centers had inconsistent procedures for reviewing 

MIPRs and interagency agreements before acceptance. As 

FedSource management has pointed out, guidance for conducting 

due diligence is not defined. Accordingly, FedSource should work 

with DoD in establishing a common set of indicators requiring more 

intense FedSource scrutiny. 

As another observation, going forward FedSource will need to 

ensure that task orders for severable services13 do not have periods 

of performance that exceed 1 year from the date of MIPR 

acceptance in accordance with a recent DoD internal directive. 

Under appropriations law, the concept of funds availability has 

three elements: purpose, time, and amount. All three must be 

observed for an obligation or expenditure to be legal. When DoD 

issues and FedSource accepts a MIPR, DoD records an obligation in 

its records against its appropriated funds.14 DoD is primarily 

responsible for ensuring the proper use of its appropriations. The 

DoD official who signs the MIPR is certifying this proper use. 

The issues noted with the 21 procurements are as follows: 

• Incorrect appropriations DoD OIG concluded that the wrong 

DoD appropriation was used by the ordering DoD component for 

9 FedSource task orders. Four of these task orders were for 

construction projects at Army facilities. The funding MIPRs 

were obligated against a DoD operations and maintenance 

(O&M) appropriation, an incorrect appropriation for this work 

based on the dollar amount of the projects.15 The other 5 task 

orders involved improper use by DoD of a Research, 

Development, Test, and Evaluation (RDT&E) appropriation 

 

13 When services are continuing and recurring in nature, the services are severable. Examples of such 

services in our sample include counseling, analytical, and program management support services. 

14 When FedSource issues a task order for the goods or services requested in the MIPR, it obligates a 

Treasury revolving fund appropriation. A key feature of a revolving fund is that it is available without 

further congressional action and without fiscal year limitation. 

15 10 U.S.C. § 2805 established limits on the use of DoD O&M appropriations for minor military 

construction projects. Generally, such projects cannot exceed $750,000 unless approved in advance by 

the secretary of the armed forces branch concerned and with prior congressional notification.
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versus an O&M appropriation. The 9 task orders for which 

incorrect appropriations were used are identified in appendix 3. 

• Bona fide need exceptions The goods and services acquired 

through 16 FedSource task orders were inconsistent with the 

bona fide need rule. These 16 task orders included 4 task orders 

for which DoD OIG also concluded that an incorrect DoD 

appropriation was used. The common element in these cases is 

that the task orders were awarded in the fiscal year following 

the fiscal year appropriation that was obligated by DoD. For 

example, on September 30, 2004, a DoD component issued 

and FedSource accepted a MIPR funded with a DoD fiscal year 

2004 appropriation to provide repair services on a runway and 

taxiway with a period of performance from December 1, 2004, 

to November 30, 2005. FedSource awarded the contract on 

April 4, 2005, 6 months after accepting the MIPR. The amount 

of the task order was $1,188,042. In another example, DoD 

issued a MIPR on September 13, 2004, for a Public Awareness 

Campaign and Family Child Care Conference that was obligated 

using fiscal year 2004 funds. FedSource awarded the related 

task order in the amount of $1,027,640 with a period of 

performance from September 22, 2004, through September 13, 

2005. However, the conference that was part of the services 

was not scheduled until July 2005. 

Certain task orders involved severable services. Under DoD 

procurement requirements, DoD may use funds available for a 

fiscal year to enter into a contract for severable services that 

begin during the fiscal year and end in the next fiscal year as 

long as the contract period does not exceed 1 year.16 For two 

task orders, the period of performance, including modifications, 

exceeded 1 year from the date of initial MIPR acceptance and 

obligation of the DoD funds. The details of these task orders are 

presented in the following table: 

 

16 10 U.S.C. § 2410a. A similar provision for civilian agencies was enacted as part of the Federal Act 

Streamlining Act of 1994 and is codified at 41 U.S.C. §253l. 
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Task Order 

Number Amount Period of Performance 

Date MIPR 

Accepted 

Period in Excess 

of 1 year From 

MIPR 

Acceptance 

LOS014553a $14,483,489 3/14/2005 to 12/31/2005 7/30/2004 5 months

LOS013101 $121,661 9/30/2004 to 11/30/2005 9/22/2004 2 months a The task order was initially issued on March 29, 2005, by the FedSource Beaufort center as 

no. BEA002638. 

A March 2006 DoD internal directive clarified requirements for 

severable services contracts made through servicing agencies. 

Specifically, the directive states that under no circumstances 

should any existing order for severable services using O&M 

funds extend beyond 1 year from the date the funds were 

accepted by the servicing agency.17

Appendix 3 identifies the 16 task orders for which DoD OIG 

identified bona fide need exceptions based on its review. 

It is generally recognized that legitimate rationales exist for an 

obligation incurred in one fiscal year resulting in the delivery of 

service in the next one. In the case of service contracts, the need 

for a particular service may arise in one fiscal year but full 

performance cannot be completed within that same year. In the 

case of delivery of goods contracts, there are many valid reasons 

why delivery cannot be completed in the same year. For example, 

the contractor may need to fabricate certain components, or the 

necessary materials may not be available until the next year. The 

general rule is, “If an obligation is proper when made, unforeseen 

delays that cause delivery or performance to extend into the 

following year will not invalidate the obligation.” A September 25, 

2003, internal DoD directive further recognizes that there are 

situations when it is appropriate for servicing agencies such as 

FedSource to retain and obligate the funds in the following year but 

cautions that the bona fide need must exist for the fiscal year in 

which the order is made. The directive also cautions that the 

 

17 Memorandum by the Under Secretary of Defense (Comptroller), dated March 27, 2006, “Proper Use 

of Interagency Agreements with Non-Department of Defense Entities Under Authorities Other Than the 

Economy Act.” 
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obligation by the servicing agency should be made promptly in the 

following year.18

Although DoD is responsible for the proper use of its 

appropriations, we believe and FedSource management agrees that 

FedSource has a due diligence responsibility as well. By virtue of 

its role as a servicing agency, charged with taking and executing 

orders, and obligating the United States on behalf of the requesting 

agency, FedSource has a concurrent duty to ensure the legitimacy 

and legality of orders that it places. Taking into consideration the 

limited nature of review possible on the servicing agency’s side of 

a transaction, FedSource’s contracting centers, with their expertise 

in government contracting and appropriations laws and regulations, 

have a duty to review orders and a duty to ask questions when 

cautionary flags are raised. Although they may be unfamiliar with 

the particular characteristics of a specific agency’s appropriation, 

they should be familiar with common rules, laws, and principles 

that should typically be applied in reviewing an order. 

While FedSource management acknowledged the need for due 

diligence, there is no consensus on which indicators that 

FedSource contracting officers should consider when they review 

DoD procurement requests. Each FedSource center established its 

own procedures for reviewing funding documents such as MIPRs. 

All had a check for ensuring that the funding document was signed 

by the ordering agencies and procedures to note the period of 

availability of the funding (no-year, 1-year). One center instructed 

staff to review the document for “correct use of funding” and 

noted that “O&M funding is for one year” and “[RDT&E] is for two 

or more years.” We believe that, working with DoD, FedSource 

should develop a standard set of procedures and due diligence 

checks to be followed by its ordering centers. Checks could include 

 

18 Memorandum by the Under Secretary of Defense (Comptroller), dated September 25, 2003, “Fiscal 

Principals and Interagency Agreements.” The memorandum states, in part: “Every order under an 

interagency agreement must be based upon a legitimate, specific, and adequately documented 

requirement representing a bona fide need of the year in which the order is made. As always, adequate 

funds of the appropriate type (procurement, O&M, etc.) must be available. If these basic conditions are 

met, these servicing agencies may retain and promptly obligate the funds in the following fiscal year. 

On the other hand, an interagency agreement may not be used in the last days of the fiscal year solely 

to prevent funds from expiring to keep them available for a requirement arising in the following fiscal 

year.” 
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such things as legal limits on the use of O&M appropriations for 

military construction and the proper use of RDT&E funds. It should 

also work with DoD to establish more clear parameters for the 

“prompt” awarding of contracts after the fiscal year of the funding. 

Recommendations 

We recommend that the Deputy Chief Financial Officer direct 

FedSource to do the following: 

1. Develop uniform procedures that outline the steps of a 

reasonable review (due diligence) to be performed before 

FedSource accepts a MIPR. By applying the reasonable 

standard, FedSource should ensure that the MIPR has the 

appropriate signatures and that all information appears 

adequate. If something unusual or out of the ordinary is 

identified (e.g., a request for military construction that exceeds 

a legal threshold), FedSource should seek resolution prior to 

accepting the MIPR or reject the MIPR. FedSource should work 

with DoD as necessary to establish the elements of such a 

review. 

Management Response

In its response, management partially concurred with the 

recommendation. According to management, FedSource 

established uniform procedures that require a due diligence 

review prior to signing interagency agreements or MIPRs. 

FedSource issued procedures on July 26, 2006. The review 

includes checking that signatures from both program and 

financial officials have been obtained. FedSource is relying on 

the program official to represent the customer and sign the 

agreement signifying they approve of the transaction. 

FedSource is also relying on the financial official to represent 

the customer and sign the agreement signifying that funds are 

available and appropriate for the uses outlined. FedSource will 

not assume responsibility for the lack of due diligence on the 

part of customer officials that sign the agreements. FedSource 

should be aware of government-wide and industry specific 

issues or restrictions for any area of service it is offering; 

however, the customer is ultimately accountable for any 
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 (OIG-07-026)

specific restrictions as to the availability and use of their funds. 

As such, FedSource disagrees with the example given regarding 

military construction and thresholds specific to military 

customers. This is a customer-specific restriction and should be 

considered by the program and financial representatives of the 

customers before they sign the interagency agreement or MIPR. 

Management also stated that FedSource is willing to work with 

DoD and other customers to establish a list of checks to be 

included in FedSource’s reasonableness review. This was to be 

completed on December 15, 2006. However, DoD and other 

customers will need to establish a methodology for keeping 

FedSource up to date on the customer’s internal policy 

impacting the checks included in the list. It is important to 

understand that even with these reasonableness checks in place 

the customer retains the ultimate responsibility when signing 

the interagency agreement or MIPR. 

OIG Comment 

Management’s stated action that it established uniform 

procedures for a due diligence review and is willing to work 

with DoD and other customers to establish the checks to be 

included in the review, if done, appears to conform with the 

intent of our recommendation. As part of our second review of 

FedSource, we plan to assess these actions. 

That said, certain aspects of management’s response are of 

concern. Specifically, management is taking a more limited view 

of due diligence than we believe is necessary to prevent the 

types of contracting deficiencies discussed in the finding. This 

limited view is indicated by its disagreement with the military 

construction exception (where the military construction limit 

was exceeded for the type of DoD funds used). We believe the 

military construction limit, which is prescribed in law, is not 

some obscure restriction. As such, it is the very type of 

restriction we would expect to see considered as part of a due 

diligence review. Going forward, our concern may be addressed 

as FedSource and its customers come to a common 

understanding of the due diligence to be performed by 
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 (OIG-07-026)

FedSource when accepting orders. Management needs to give 

this issue continued attention. 

2. Ensure that the period of performance of task orders for 

severable services do not exceed 1 year from the date of the 

MIPR acceptance. 

Management Response 

Management partially concurs with the recommendation. 

According to its response, FedSource and other federal agencies 

(including DoD’s operational and policy departments) interpret 

the Federal Streamlining Act differently from the conservative 

approach presented in the finding and recommendation. 

FedSource is preparing a letter to GAO requesting clarification 

on this issue. Until GAO provides clear guidance on this issue it 

will be subject to interpretation. FedSource planned to issue no 

later than November 30, 2006, that supports the DoD guidance. 

Additionally, FedSource takes the position that the customer 

should be able to receive 12 months of service from the date of 

its task order as long as the customer obligation (MIPR 

acceptance) and the FedSource obligation (task order) are made 

in the same fiscal year. In this case, the customer does not 

receive any services or benefits that they could not receive 

without FedSource. In cases where the customer obligation 

(MIPR acceptance) occurs in one fiscal year and the FedSource 

obligation (task order) occurs in a subsequent fiscal year, we 

agree the period of performance should not exceed 12 months 

from the customer obligation (MIPR acceptance). If the 

customer were allowed 12 months of service from the date of 

the FedSource task order in this instance they would be 

expanding the use of their funds beyond what they could do 

without FedSource because their funds would have expired at 

the end of the fiscal year. 

The audit report implies possible problems with FedSource 

awarding task orders in subsequent years. The report states, 

“The common element in these cases is the task orders were 

awarded in the fiscal year following the fiscal year appropriation 

that was obligated by DoD,” but then it goes on to say that this 
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 (OIG-07-026)

activity is not inappropriate. The report references that the 

servicing agency’s obligation need to be made “promptly” but 

there is no clear guidance as to what this specifically means. 

FedSource also does not agree with the two examples provided 

referring to DoD’s bona fide need issues. Dates alone do not 

make a bona fide need violation. Just because FedSource 

awards a task order in subsequent year does not mean that the 

customer did not have a bona fide need at the time of their 

obligation. In the runway example, the customer’s bona fide 

need has to do with the condition of the runway the time of the 

obligation. If the runway needed maintenance then a bona fide 

need existed. The date FedSource issued the task order for 

maintenance work could be used to shed doubt whether a bona 

fide need existed, but the report is silent as to why there was a 

6-month timeframe between the MIPR acceptance and the task 

order. In the Public Awareness Campaign example, it is unclear 

whether the Family Conference was part of the overall 

campaign or a separate need. If it were part of the overall 

campaign, the fact that this specific deliverable was not 

scheduled until the next fiscal year would not result in a bona 

fide need violation. 

OIG Comment 

 

While seeking GAO clarification is a management prerogative, 

its action to issue guidance supporting DoD guidance for 

severable services, if responsive to the DoD guidance and 

properly implemented by FedSource, satisfies the intent of this 

recommendation. We believe that the awarding of task orders in 

the subsequent year of the funding is an area of concern. The 

further out the task order is awarded relative to the MIPR date 

should raise a cautionary flag as whether the bona fide need 

rule was met. In working with DoD to establish the elements of 

a due diligence review, management should seek DoD 

expectations for promptness in the issuance of task orders, 

especially when the task order cannot be awarded in the same 

fiscal year as the funding source. 
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 Compliance with Department of Defense Procurement Requirements 

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While we agree that dates alone do not make a bona fide need 

violation, the two examples cited in our finding are problematic, 

and represent potential exceptions to the bone fide need 

requirement. The runway and taxiway repair services task order 

involved the widening of a taxiway as opposed to ongoing 

repair services. Additionally, the period of performance for this 

work, as stated on the task order, started 2 months after the 

funding year and before the task order was awarded. These 

factors should have raised a flag. It should also be noted that 

the task order file did not contain documentation that might 

explain why it took 6 months to award the order, and the 

management response did not include any explanation for this 

time period. Likewise, the task order file for the Public 

Awareness Campaign did not show how the Family Conference 

was an integral part of, and could not be separated from, the 

other services being acquired which were of an ongoing nature. 

This component (the Conference) of the procurement request 

should also have raised a flag as to the bona fide need rule 

because the conference was scheduled in a subsequent fiscal 

year of the funding source. In this regard, the management 

response provides no additional information to support that the 

requirement was met. 

* * * * * * 

We appreciate the courtesies and cooperation extended to our staff 

during this audit. The major contributors to this report are identified 

in appendix 5. If you have any questions, please contact me at 

(202) 927-5904. 

Thomas E. Byrnes 

Director, Manufacturing and Procurement Audits 
 Appendix 1 

 Objective, Scope, and Methodology 

ACQUISITIONS: Treasury Franchise Fund Needs to Improve Page 33 

 Compliance with Department of Defense Procurement Requirements 

 (OIG-07-026)

The Department of the Treasury (Treasury) franchise fund, through 

its FedSource and the Administrative Resources Center 

components, provides contracting assistance to the Department of 

Defense (DoD) for a fee. As required by the National Defense 

Authorization Act (NDAA) for Fiscal Year 2006, Section 811, the 

DoD Office of Inspector General and our office separately, but 

concurrently reviewed the procurement policies, procedures, and 

internal controls of the Treasury franchise fund. Our objective, 

stated in the law, was to determine whether Treasury: (1) is 

compliant with defense procurement requirements; (2) is not 

compliant with defense procurement requirements, but has a 

program or initiative to significantly improve compliance with 

defense procurement requirements; or (3) neither of these 

conclusions is correct. As mandated by NDAA, we entered into a 

Memorandum of Understanding with DoD OIG, as required by 

NDAA, to carry out this review and make the determinations 

required. We executed the Memorandum of Understanding on 

March 6, 2006, and coordinated with DoD OIG throughout our 

audit. 

We reviewed applicable DoD appropriations laws and applicable 

Federal Acquisition Regulation and DoD regulations and 

procurement requirements. We also reviewed a July 2005 

Government Accountability Office (GAO) report on FedSource. 

Additionally, we reviewed FedSource’s procurement policies, 

procedures, and internal controls applicable to the procurement of 

property and services on behalf of DoD, including policies and 

procedures established in response to the GAO report. We also 

interviewed Treasury franchise fund officials and staff. 

To test compliance with defense procurement requirements, DoD 

OIG pulled a sample of FedSource task orders representing high 

dollar amounts and DoD ordering offices with high volume 

transactions. We concurred with DoD OIG’s approach and 

reviewed FedSource’s files for 64 task orders, and related 

FedSource Contracting Officer’s Technical Representative files. The 

amount funded by DoD for the sample task orders totaled $43.2 

million an were awarded in FedSource’s centers in Baltimore, MD; 

St. Louis, MO; and Los Angeles, CA. We examined the files for 

documentation supporting compliance with applicable Federal 

Acquisition Regulation and DoD procurement requirements, 
ACQUISITIONS: Treasury Franchise Fund Needs to Improve Page 34 

 Compliance with Department of Defense Procurement Requirements 

 (OIG-07-026)

specifically requirements related to market research, competition, 

price reasonableness, funding, and the receipt of the property and 

services ordered. The files were located at the three FedSource 

ordering centers. 

We also reviewed contract files at Administrative Resources 

Center, located at the Bureau of the Public Debt in Parkersburg, 

West Virginia, for 15 blanket purchase agreements and single and 

multiple-award contracts. The blanket purchase agreements, single 

and multiple-award contracts were master contract vehicles under 

which FedSource awarded the 64 task orders in our sample. 

We performed out audit field work between August 2005 and July 

2006. Our audit was conducted in accordance with generally 

accepted government auditing standards. 
Appendix 2 

Missing Documentation From FedSource Task Order Files 

ACQUISITIONS: Treasury Franchise Fund Needs to Improve Page 35 

 Compliance with Department of Defense Procurement Requirements 

 (OIG-07-026)

Task Order 

Award No. Amount 

Independent 

Government 

Cost Estimate 

Proposal, 

Offer, or 

Quote 

Price 

Negotiation 

Memorandum 

Quality Assurance 

Surveillance Plan 

STL001972-01 $52,014 N/A N/A 

STL001972-02 136,139 N/A N/A 

STL001916-01 64,821 N/A N/A 

STL001916-02 185,177 N/A N/A 

STL001457-01 51,249 X 

STL001457-02 94,904 X X 

STL001457-03 228,384 X X 

STL001373-02 31,928 N/A N/A 

STL001373-03 70,180 N/A N/A 

STL001373-01 25,300 N/A N/A 

STL001374-03 171,691 X N/A 

STL001374-01 73,238 X N/A 

STL001374-02 79,592 X N/A 

STL001114-26 84,801 N/A N/A N/A 

STL001272-17 74,405 N/A N/A N/A 

STL001115-23 67,513 N/A N/A N/A 

STL001617-13 44,347 N/A N/A N/A 

STL001118-07 20,344 N/A N/A N/A 

STL001623-15 34,883 N/A N/A N/A 

STL001305-21 43,235 N/A N/A N/A 

STL001619-02 7,051 N/A 

STL001622-02 7,051 X X N/A 

STL001633-04 5,748 N/A N/A N/A 

STL002275-01 428,400 X X X O 

STL002276-01 35,905 N/A X X O 

STL002277-01 484,500 X X X O 

STL002432-01 306,000 X X N/A O 

STL002433-07 246,168 O 

STL002274-01 1,027,640 X X 

STL002368-01 50,532 

LOS007993-01 692,449 X X 

LOS008119-01 738,013 X X I 

LOS008200-01 950,509 X X O 

LOS008378-01 254,267 X O 

Legend: 

X - Documentation missing in task order 

file 

O - Task order file had no documentation for quality 

assurance surveillance plan

I – Quality assurance surveillance plan 

documentation was incomplete 

D - Task order file contained duplicate quality 

assurance surveillance plan
Appendix 2 

Missing Documentation From FedSource Task Order Files 

ACQUISITIONS: Treasury Franchise Fund Needs to Improve Page 36 

 Compliance with Department of Defense Procurement Requirements 

 (OIG-07-026)

Task Order No. Amount 

Independent 

Government 

Cost Estimate 

Proposal, 

Offer, or 

Quote 

Price 

Negotiation 

Memorandum 

Quality Assurance 

Surveillance Plan 

LOS011716-01 $1,683,419 X X O 

LOS012907 652,467 X O 

LOS013032-01 762,883 X X O 

LOS013101-01 121,662 X X 

LOS013139-04 556,048 X 

LOS013342-01 1,105,250 X X X 

LOS013406-02 163,317 X X O 

LOS013626-01 233,699 X 

LOS013969-01 2,714,425 X X X O 

LOS014013-011 7,246,377 X X X O 

LOS014086-01 432,427 X X I 

LOS014097-01 303,425 X X O 

LOS0141280-02 89,890 

LOS014181-01 1,208,054 X X O 

LOS014227-01 318,330 X 

LOS014468 677,830 X I 

LOS014553-01 14,483,489 X X X O 

BAL015420-06 58,787 

BAL119068 10,980 

BAL118876-03 50,001 X X X O 

BAL015435-01 44,602 X 

BAL015557-03 42,950 X D 

BAL118884-01 39,415 X X X O 

BAL015316-01 46,483 X 

BAL119603 450,000 I 

BAL016947-01 75,571 D 

BAL118432-01 2,174,401 X X X O 

BAL118906 172,993 X X X 

BAL118431 251,010 X X X O 

BAL118430 143,985 X X X O 

 $43,182,548 31 18 32 27 

Legend: 

X - Documentation missing in task order 

file 

O - Task order file had no documentation for quality 

assurance surveillance plan

I – Quality assurance surveillance plan 

documentation was incomplete 

D - Task order file contained duplicate quality 

assurance surveillance plan
Appendix 3 

Task Orders With DoD Funding and Bona Fide Need Exceptions 

ACQUISITIONS: Treasury Franchise Fund Needs to Improve Page 37 

 Compliance with Department of Defense Procurement Requirements 

 (OIG-07-026)

Deficiency Noted by DoD OIG 

Task Order No. Description 

Funded with 

Wrong DoD 

Appropriation 

Bona Fide Need 

Exception 

LOS014181 Taxiway Repair X X 

STL001373 Management Assistant X 

STL001916 Analyst III for Urban Operations Project 

Support X X 

STL001972 Analyst III X X 

STL001374 Analyst X X 

LOS008200 Construction of Main Gate Canopy and 

Inspection Bldg X 

LOS013032 Renovation of Bldg 454 X 

LOS008119 Renovation of Bldg 453 X 

LOS007993 Construction of 

Maintenance Buildings X 

LOS014553 Counseling Services X 

STL002274 

Family Child Care Public Awareness 

Campaign and Family Child Care 

Conference 

X 

STL001457 Analyst IV for Project Support X 

STL002277 Boys and Girls Club of America X 

STL002276 Youth Fitness Activities and Kits X 

STL002433 Entertainment X 

LOS013626 Transportation Relocation X 

LOS014128 Valve Replacement X 

LOS013101 Design and Acquisition Support X 

LOS013406 Repair Underground Vaults 

in Parking Apron X 

LOS013139 Utilities, Engineering, and Planning 

Support X 

BAL118884 Applications Consultant X 

Totals 9 16 
Appendix 4 

Management Response 

ACQUISITIONS: Treasury Franchise Fund Needs to Improve Page 38 

 Compliance with Department of Defense Procurement Requirements 

 (OIG-07-026)
Appendix 4 

Management Response 

ACQUISITIONS: Treasury Franchise Fund Needs to Improve Page 39 

 Compliance with Department of Defense Procurement Requirements 

 (OIG-07-026)
Appendix 4 

Management Response 

ACQUISITIONS: Treasury Franchise Fund Needs to Improve Page 40 

 Compliance with Department of Defense Procurement Requirements 

 (OIG-07-026)
Appendix 4 

Management Response 

ACQUISITIONS: Treasury Franchise Fund Needs to Improve Page 41 

 Compliance with Department of Defense Procurement Requirements 

 (OIG-07-026)
Appendix 4 

Management Response 

ACQUISITIONS: Treasury Franchise Fund Needs to Improve Page 42 

 Compliance with Department of Defense Procurement Requirements 

 (OIG-07-026)
Appendix 5 

Major Contributors to This Report 

ACQUISITIONS: Treasury Franchise Fund Needs to Improve Page 43 

 Compliance with Department of Defense Procurement Requirements 

 (OIG-07-026)

Thomas E. Byrnes, Director, Manufacturing and Procurement 

 Audits 

Cynthia S. Milanez, Audit Manager 

John Lemen, Audit Manager 

Ricardo Cabarrouy, Auditor-In-Charge 

Andras Schneider, Auditor 

 Chereeka Straker, Auditor 

 Rufus Etienne, Auditor 

 Regina Morrison, Auditor 

 Esther M. Tepper, Communications Analyst 

Delores V. Dabney, Referencer 
Appendix 6 

Report Distribution 

ACQUISITIONS: Treasury Franchise Fund Needs to Improve Page 44 

 Compliance with Department of Defense Procurement Requirements 

 (OIG-07-026)

The Department of the Treasury

 Office of Strategic Planning and Evaluations 

 Office of Accounting and Internal Control 

Treasury Franchise Fund

 Managing Director 

 Chief Executive Officer, FedSource 

Department of Defense

 Inspector General 

Office of Management and Budget

 OIG Budget Examiner 

The Congress

 U.S. Senate, Committee on Armed Forces 

 U.S. House of Representatives, Committee on Armed Forces