U.S. ENVIRONMENTAL PROTECTION AGENCY

OFFICE OF INSPECTOR GENERAL

Internal Controls Needed 

to Control Costs of 

Emergency and Rapid 

Response Services Contracts,

as Exemplified in Region 6 

Report No. 14-P-0109 February 4, 2014 

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code to learn more 

about the EPA OIG. 
 

 

 

Report Contributors: Janet Kasper 

 Michael Petscavage 

 Andrés Calderón 

 David Penman 

 Melinda Burks 

Abbreviations 

CO Contracting Officer 

EPA U.S. Environmental Protection Agency 

ERRS Emergency and Rapid Response Services 

FAR Federal Acquisition Regulation 

G&A General and Administrative 

OAM Office of Acquisition Management 

ODC Other Direct Cost 

OIG Office of Inspector General 

PO Project Officer 

QAP Quality Assurance Program 

Hotline Suggestions for Audits or Evaluations 

To report fraud, waste or abuse, contact To make suggestions for audits or evaluations, 

us through one of the following methods: contact us through one of the following methods:
 

email: OIG_Hotline@epa.gov email: OIG_WEBCOMMENTS@epa.gov 

phone: 1-888-546-8740 phone: 1-202-566-2391 

fax: 1-202-566-2599 fax: 1-202-566-2599 

online: http://www.epa.gov/oig/hotline.htm online: http://www.epa.gov/oig/contact.html#Full_Info 

write:	 EPA Inspector General Hotline write: EPA Inspector General 

1200 Pennsylvania Avenue, NW 1200 Pennsylvania Avenue, NW 

Mailcode 2431T Mailcode 2410T 

Washington, DC 20460
 Washington, DC 20460 
 

 

 

U.S. Environmental Protection Agency 14-P-0109 

February 4, 2014 Office of Inspector General 

At a Glance
 

Why We Did This Review 

The purpose of this review was 

to determine whether the 

U.S. Environmental Protection 

Agency’s (EPA’s) Region 6 is 

managing task orders under 

the Emergency and Rapid 

Response Services (ERRS) 

contracts effectively and 

whether contractors are billing 

Region 6 in accordance with 

contract terms. 

Region 6 awarded its two 

current ERRS contracts 

(EP-S6-07-01 and EP-S6-07-

02) in May 2007. At the time of 

our preliminary review, 

EP-S6-07-01 had 124 issued 

task orders and EP-S6-07-02 

had 50 issued task orders. 

The combined total expended 

amount on both contracts was 

$77,579,001 as of October 

2012. 

This report addresses the 

following EPA theme: 

 Embracing EPA as a high 

performing organization. 

For further information, 

contact our public affairs office 

at (202) 566-2391. 

The full report is at: 

www.epa.gov/oig/reports/2014/ 

20140204-14-P-0109.pdf 

Internal Controls Needed to Control Costs of 

Emergency and Rapid Response Services Contracts, 

as Exemplified in Region 6 

What We Found 

Region 6 manages field activities under the ERRS contracts within the terms of 

the contract. However, our review of task order files and invoices submitted under 

those task orders showed us that infrequent internal control reviews and 

inadequate staffing levels hamper Region 6’s ability to prevent and detect many 

contract management shortcomings, such as: 

Improper application of  Performing required annual invoice reviews. general and administrative  Monitoring contractor adjustment vouchers. rates resulted in higher 

 Receiving prime contractor negotiated team costs to the government. 

subcontract agreements on time. 

 Correctly coding task orders in the EPA Acquisition System. 

 Performing adequate internal control reviews. 

Without adequate staffing levels, Region 6 is unable to conduct internal control 

reviews. Such reviews are a tool for ensuring that products comply with 

regulations and are consistently of high quality. Without internal control reviews, 

crucial aspects in the acquisition cycle cannot be assessed and management 

cannot determine and properly address weaknesses and vulnerabilities. 

We identified two conditions that resulted in higher costs to the government. One 

prime contractor was applying a general and administrative indirect rate to its 

team subcontractors’ other direct costs, which went against the prime contractor’s 

proposal and indirect cost rate letter. Also, both prime contractors were receiving 

additional profit because the fixed labor rates negotiated between the EPA and 

the ERRS prime contractors were based solely on the prime’s labor rates.

 Recommendations and Planned Corrective Actions 

We recommend that the Region 6 Regional Administrator require procurement 

personnel to conduct internal control reviews twice a year or declare contract 

management as a weakness in Region 6’s next Federal Managers’ Financial 

Integrity Act submission until Region 6 starts conducting internal control reviews. 

We also recommend that the Regional Administrator address issues related to 

subcontract other direct costs in the existing ERRS contracts, and require that 

proposals for future ERRS contracts include subcontractor rates as required. 

Region 6 concurred with three out of five recommendations. Region 6 did not 

concur with recommendations 3 and 4, to require the contractor to adjust all 

billings to reflect application of the correct rate to team subcontract other direct 

costs, and to modify future billings. Region 6 believes the amounts involved are 

immaterial and do not justify the investment in time that would be needed to 

adjust all past invoices. These recommendations remain unresolved. 
 

UNITED STATES ENVIRONMENTAL PROTECTION AGENCY 

WASHINGTON, D.C. 20460 

THE INSPECTOR GENERAL 

February 4, 2014 

MEMORANDUM 

SUBJECT:	 Internal Controls Needed to Control Costs of Emergency and 

Rapid Response Services Contracts, as Exemplified in Region 6 

Report No. 14-P-0109 

FROM:	 Arthur A. Elkins Jr. 

TO:	 Ronald Curry, Regional Administrator 

 Region 6 

This is our report on the subject audit conducted by the Office of Inspector General (OIG) of the 

U.S. Environmental Protection Agency (EPA). This report contains findings that describe the problems 

the OIG has identified and corrective actions the OIG recommends. This report represents the opinion of 

the OIG and does not necessarily represent the final EPA position. EPA agreed with three 

recommendations and provided corrective actions with completion dates, and these recommendations 

are considered resolved. For the other two recommendations, the agency disagreed and these 

recommendations will be resolved through the audit resolution process. EPA managers, in accordance 

with established audit resolution procedures, will make final determinations on matters in this report. 

The audit report identifies improvements that can be made to the Emergency and Rapid Response 

Services (ERRS) contracts in Region 6. Other regions also have similar contracts. The OIG encourages 

other regions to review the issues in this report and determine whether they may exist for their ERRS 

contracts. Addressing such issues will assist in controlling costs, which is imperative in the current 

budget environment. If you have any questions about the issues in the report, please contact the 

OIG staff listed below. 

Action Required 

In accordance with EPA Manual 2750, the resolution process begins immediately with the issuance of 

this report. We are requesting a meeting within 30 days between the Region 6 Regional Administrator 

and the OIG’s Assistant Inspector General for Audit. If resolution is still not reached, the Region 6 

Regional Administrator is required to complete and submit the dispute resolution request to the 

Chief Financial Officer to continue resolution. 

We will post this report to our website at http://www.epa.gov/oig. 

If you or your staff have any questions regarding this report, please contact Richard Eyermann, 

acting Assistant Inspector General for Audit, at (202) 566-0565 or eyermann.richard@epa.gov; 

or Janet Kasper, Product Line Director, at (312) 886-3059 or kasper.janet@epa.gov. 
 

 

 

 

 

 

 

 

 

 

 

Internal Controls Needed to Control Costs of Emergency and 14-P-0109 

Rapid Response Services Contracts, as Exemplified in Region 6 

Table of Contents 

Chapters 

1 Introduction ........................................................................................................ 1 

Purpose ....................................................................................................... 1 

Background ................................................................................................. 1 

 Scope and Methodology .............................................................................. 1 

 Prior Audit Coverage ................................................................................... 2 

2 Region 6 Needs More Frequent Internal Control Reviews ............................. 3
 

Contract Management Aspects Contained in EPA Guidance ..................... 3 

Effective Contract Management Lacking in Crucial Areas .......................... 4 

Infrequent Internal Control Reviews Hinder Effective 

Contract Management ...................................................................... 5 

 Recommendations ...................................................................................... 6 

Agency Response and OIG Evaluation ....................................................... 6 

3 Contractor Applying G&A Rate Inconsistent With Rate Letter ...................... 7 

 Recommendations ...................................................................................... 8 

Agency Response and OIG Evaluation ....................................................... 8 

4 By Not Separating Subcontracted Labor Rates, 

Prime Contractors Receiving Additional Profit ............................................... 10 

 Recommendation ........................................................................................ 11 

Agency Response and OIG Evaluation ....................................................... 11 

Status of Recommendations and Potential Monetary Benefits.............................. 12 

Appendices 

A Agency Response to Draft Report and OIG Evaluation.................................. 13 

B Distribution ......................................................................................................... 20 
 

 

Chapter 1

Introduction 

Purpose 

The U.S. Environmental Protection Agency (EPA) spends millions of dollars 

annually under Emergency and Rapid Response Services (ERRS) contracts to 

provide emergency, time-critical removal and quick remedial response cleanup 

services. With the large spending comes a higher risk of fraud, waste and abuse. 

As a result, the Office of Inspector General (OIG) conducted this audit to review 

the ERRS contracts awarded in Region 6 because of the high dollar value of 

contracts and volume of emergency response work performed. Our review sought 

to answer the following questions: 

 Is Region 6 effectively managing task orders under ERRS contracts? 

 Are contractors billing costs in accordance with contract terms? 

Background 

ERRS contracts are regionally-based contracts and provide cleanup personnel, 

equipment and materials to: contain, recover or dispose of hazardous substances; 

analyze samples; and conduct site restoration. The broad range of cleanup 

services needed and the rapid time frame within which the contractors must 

respond make it likely that the contractors will do substantial subcontracting– 

particularly in the area of transportation and disposal of hazardous wastes, which 

is a mandated subcontracting activity under the ERRS contracts. 

As of October 2012, there were 23 ERRS contracts operating in the 10 regions with 

expenditures of $721.7 million. The maximum potential value of all 23 contracts is 

$2.4 billion. These contracts are predominantly indefinite-delivery contracts that 

issue task orders using various pricing arrangements. The predominant pricing 

arrangement on ERRS contracts are time-and-materials. A time-and-materials 

contract acquires services on the basis of direct labor hours at specified fixed hourly 

rates that include wages, overhead, general and administrative (G&A) expenses, and 

profit. These contracts also include materials at cost. 

Scope and Methodology 

We conducted this audit from November 2012 to August 2013 in accordance with 

generally accepted government auditing standards. Those standards require that 

we plan and perform the audit to obtain sufficient, appropriate evidence to 

provide a reasonable basis for our findings and conclusions based on our audit 

objectives, which we believe we have done. 

14-P-0109 1 
 

 

 

 

We identified internal controls regarding the management of task orders and the 

billing of invoices by reviewing EPA policies and procedures. We assessed the 

compliance with those internal controls in the sample of task orders and invoices 

analyzed. We also reviewed Region 6’s Federal Financial Management Integrity 

Act review to determine whether it reported any internal control weaknesses 

related to contract management. 

Region 6 has two ERRS contracts: EP-S6-07-01 and EP-S6-07-02. As of October 

2012, Region 6 had issued 124 task orders under EP-S6-07-01 and 50 task orders 

under EP-S6-07-02. The combined total expended amount on both contracts, as of 

October 2012, was $77,579,001. 

To determine whether Region 6 effectively managed task orders under the ERRS 

contracts, we used a non-probability sample and selected a total of 10 task orders, 

five from each contract. We selected the sample based on higher obligation 

amounts and the type of work that was performed. For example, given the scope 

of our audit, we selected task orders that involved non-time critical removals and 

also task orders that involved emergency responses. 

To determine whether contractors are billing costs in accordance with contract terms, 

we used a judgmental selection process. We selected recent invoices and invoices 

with a large dollar value. We reviewed eight invoices, four from each contract. 

We interviewed the Region 6 staff managing contracts, including the contracting 

officer (CO), the contracting specialist, the procurement director, the project 

officer (PO), five on-scene coordinators, and two people in the management 

division who work on manpower strategy. We reviewed supporting 

documentation for each task order and invoice in our sample as well as 

compliance with applicable laws, regulations and guidance documents. During 

our audit, we found that Region 6 staff was not evaluating the qualifications of 

contractor personnel who were not considered key. Because this finding is being 

addressed in another OIG report, we did not pursue the matter in this report. 

Prior Audit Coverage 

In April 2013, the OIG found that Region 9 did not require its contracting 

personnel to verify that personnel for the contractor had the qualifications 

necessary to execute a time-and-materials contract. 1 To address this issue, the OIG 

recommended that the Assistant Administrator for Administration and Resources 

Management require task order contracting officer representatives to evaluate the 

qualifications of contractor key staff proposed by the contractor in the work plan. 

The task order contracting officer representatives should also review qualifications 

for samples of the non-key staff billed on invoices. 

1

 EPA OIG Report No. 13-P-0209, Opportunities for EPA-Wide Improvements Identified During Review of a 

Regional Time and Materials Contract, April 4, 2013. 

14-P-0109 2 
 

Chapter 2

Region 6 Needs More Frequent 

Internal Control Reviews 

Region 6 manages field activities under the ERRS contracts within the terms of 

the contracts. However, our review of task order files and invoices submitted 

under those task orders showed that infrequent internal control reviews and 

inadequate staffing levels hampered Region 6’s ability to prevent and detect many 

contract management shortcomings. The EPA’s Acquisition Handbook and 

Contract Management Manual include policies and procedures that serve as 

internal controls in the contract management process. The contract management 

issues found during the course of this audit were attributable to insufficient 

internal control reviews and, according to procurement personnel, insufficient 

staff to handle the workload. When not conducting internal control reviews, 

critical aspects in the acquisition cycle cannot be assessed and, subsequently, 

strengths, weaknesses and vulnerabilities cannot be addressed properly by 

management. 

Contract Management Aspects Contained in EPA Guidance 

Contract management at the EPA is guided primarily by two policies: the 

Contracts Management Manual and Acquisition Handbook. Both documents 

contain policy and procedures that serve as internal controls in the contract 

management process. The internal controls pertinent to this report are: 

	 Quality Assurance Program (QAP) – The Acquisition Handbook requires 

the primary contracting organization, such as a regional office, to 

establish, fully implement and sustain a QAP program. Under the QAP, 

each contracting office is to develop, implement and maintain its own 

unique plan to ensure its contracting processes and products are compliant 

with governing rules and are consistently of high quality. The QAP also 

serves as a tool to identify potential vulnerabilities and preempt the 

creation of serious or systemic problems. 

	 Invoice reviews – According to the Contract Management Manual, the 

CO has ultimate responsibility for invoice processing under individual 

contracts. POs review invoices monthly, and the CO conducts periodic 

monitoring. CO review is to ensure that the contractor and PO are 

fulfilling their roles properly. Periodic monitoring must be at the level of 

frequency necessary to ensure all invoice elements are charged properly. 

Periodic monitoring may include at least one detailed review of an invoice 

on each contract each year. 

14-P-0109 3 
 

Effective Contract Management Lacking in Crucial Areas 

Region 6 manages field activities under the ERRS contracts within the terms of 

the contract. However, our review of task order files and invoices submitted under 

those task orders showed that infrequent internal control reviews and inadequate 

staffing levels hampered Region 6’s ability to prevent and detect many of the 

contract management shortcomings described in table 1. 

 Table 1: Contract management shortcomings 

Issue area Condition observed 

Annual invoice reviews Seven out of 10 required annual invoice reviews were 

not performed. 

Adjustment vouchers One adjustment voucher was not submitted within the 

required 60 days and another voucher was not submitted 

at all. 

Subcontract agreements Eight of 10 team subcontract agreements were not 

received in the required timeframe. 

Definitized task orders One of 10 task orders was not definitized within 5 days. 

EPA’s Acquisition System Five out of 10 task orders were coded incorrectly in the 

EPA’s Acquisition System. 

Source: OIG analysis. 

The awarding CO under Region 6’s ERRS contracts did not perform seven out of 

10 required annual invoice reviews. One contract only had two annual invoices 

reviewed and the other contract only had one annual invoice reviewed. Both 

contracts were entering the sixth year of performance and each contract should 

have had five CO annual invoices reviewed at the time we conducted the audit. 

The CO and PO do not monitor the submission of adjustment vouchers for the 

prime contractors under both contracts. These adjustment vouchers reflect the 

negotiated indirect cost rate between the prime contractor and cognizant federal 

agency. Once the indirect cost rate is negotiated, prime contractors submit 

vouchers that reflect the difference between the billed indirect costs and the 

indirect costs resulting from the negotiated agreement. Out of the eight invoices 

we reviewed, we noted one instance where the adjustment voucher was not 

submitted within the required 60 days and one instance in which the adjustment 

voucher had not been submitted as of March 2013, making it more than 6 months 

late. 

Team subcontractors are contractors that the prime contractor identifies in its 

proposal that will conduct work under the contract. The CO and PO for both 

contracts did not receive eight out of the 10 team subcontract agreements in the 

required timeframe. The contract requires that within 5 (calendar) days of the 

issuance of a notice to award, the contractor must provide the team subcontract 

agreement to the CO and PO. The team subcontractor agreements are contracts 

between the prime contractor and team subcontractor and serve to formalize that 

legal relationship. 

14-P-0109 4 
 

 

One out of 10 task orders reviewed was not definitized within 5 days as required 

by the contract. Instead, contractors performed services based on a verbal 

authorization for 31 days before the task order was put into writing. A verbal 

authorization usually occurs when it is impossible to negotiate the terms due to 

time constraints and the criticality of the requirements. In this case, changing staff 

delayed the definitization of the task order. The period of time in which a task 

order is not definitized can pose significant risks to the government. For example, 

the government may pay increased costs during the undefinitized period because 

the contractor has little incentive to control costs. 

We reviewed EPA’s Acquisition System and found five out of 10 task orders 

were coded incorrectly. Those five task orders were coded as fixed-price when 

they were actually time-and-materials task orders. 

Procurement personnel for Region 6 stated that the section’s staffing levels were 

inadequate based on the workload-to-staff ratio. The director provided us with a 

matrix developed in November 2012 that detailed crucial acquisition activities 

that were not being performed at all or that were being performed sporadically at 

different staffing levels. The procurement activities that are not being performed 

at the current staffing level include the following: 

	 Contract placement (oversight, quality assurance reviews and cost 

analysis): Region must outsource major contract placements to other EPA 

locations. 

	 Training and outreach: No training or customer outreach can be done at 

this staffing level. 

Meanwhile, the procurement activities being performed sporadically at the current 

staffing level include the following: 

	 Contract management (oversight, quality assurance reviews, cost analysis, 

filing and data entry). 

 Simplified acquisitions (oversight and quality assurance reviews). 

 Contract close-out. 

 Commenting on and responding to new acquisition guidance and policy. 

 Reading, digesting and implementing new acquisition guidance and 

policy. 

 Responding to the Office of Acquisition Management’s data calls. 

Infrequent Internal Control Reviews Hinder Effective 

Contract Management 

Infrequent internal control reviews allowed the contract management issues to 

occur. These internal control reviews are not being conducted as often as required 

per Region 6’s QAP. The QAP requires that internal control reviews, which the 

document refers to as peer reviews, occur semiannually. The purpose of the 

14-P-0109 5 
 

 

review is to ensure that COs are properly exercising their authority and to ensure 

that individuals and the organization comply with applicable rules and 

regulations. Procurement personnel indicated to us that they do not have the 

adequate amount of staff to perform the reviews. These reviews are a key element 

in Region 6’s quality control program. Without them, crucial aspects in the 

acquisition cycle cannot be assessed and, subsequently, strengths, weaknesses and 

vulnerabilities cannot be exposed properly by management. 

Recommendations 

We recommend that the Regional Administrator, Region 6: 

1.	 Require procurement personnel to conduct internal control reviews twice a 

year; or 

2.	 Identify contract management as a weakness in Region 6’s next 

Federal Managers’ Financial Integrity Act annual assurance letter unless 

Region 6 starts conducting internal control reviews twice a year. 

Agency Response and OIG Evaluation 

Recommendations 1 and 2 represented an either/or option as they were linked 

together. EPA Region 6 agreed with our findings and opted for recommendation 1, 

namely, that it pledged to conduct internal control reviews twice a year. The OIG 

believes that doing so will help Region 6 effectively monitor its contract 

vulnerabilities and be proactive about reducing contract risk. Therefore, we 

consider recommendations 1 and 2 adequately addressed because Region 6’s 

proposed corrective action, when implemented, will address the problems 

identified. 

14-P-0109 6 
 

 

 

Chapter 3

Contractor Applying G&A Rate 

Inconsistent With Rate Letter 

One of Region 6’s prime ERRS contractors is incorrectly applying a general and 

administrative rate to its team subcontractors’ other direct costs (ODCs). Based on 

the contractor’s negotiated indirect cost rate letter, team subcontractors should 

have received the lower subcontract administration rate and not the higher G&A 

rate. The prime contractor’s proposal and indirect cost rate letter do not clearly 

distinguish between team and non-team subcontractor costs. This has resulted in 

the prime contractor overbilling subcontractor indirect costs. 

The indirect cost rate agreement describes how contractors apply indirect costs. 

The rate agreement identifies the type of expense pool, the basis of application, 

the applicable rate, the contracts affected and the period to which the rate will 

apply. The expense pool represents a grouping of indirect costs such as fringe 

benefits, overhead and G&A expenses. The basis for application identifies 

whether the indirect cost rate is applied to direct labor costs, subcontract costs or 

some other combination of costs. The basis for application will vary by contractor 

and is based on the contractor’s accounting system. The indirect cost rate 

agreement is considered part of each contract. 

One of Region 6’s prime ERRS contractors did not follow its own proposal and 

indirect cost rate letter when it applied G&A to its team subcontractors’ ODCs. 

When we reviewed one prime contractor’s proposal, we determined that the 

contractor has several pools for allocating indirect costs. Of importance to this 

audit were the contractor’s G&A and subcontract administration pools. The basis 

for application, per the contractor’s negotiated rate agreement, is as follows: 

 G&A: Total costs incurred excluding G&A and subcontract costs. 

 Subcontract Administration: Direct subcontract costs. 

During our review of task order files and invoices under this contract, we 

determined that the prime contractor was applying the higher G&A rate to its 

team subcontractors’ ODCs.2

 Based on this contractor’s proposal and indirect rate 

letter, team subcontractors should have received the subcontract administration 

rate and not the higher G&A rate. The contractor’s negotiated indirect cost rate 

letter states that the G&A pool’s basis for application does not include subcontract 

costs. The subcontract administration rate is substantially lower than the G&A 

rate. 

2

 The rates are not being disclosed in this report because they are confidential business information. 

14-P-0109 7 
 

 

The proposal does not clearly differentiate between team and non-team 

subcontractors. The proposal also contradicts itself in describing how the indirect 

costs associated with team subcontractors should be applied. Under the 

contractor’s “General Information” section of its proposal, it states that, 

“Non-team subcontractor costs will be billed at cost plus a mark-up for 

Subcontract Administration costs.” This would indicate that team subcontractors 

are to receive the G&A rate as opposed to the subcontract administration rate. 

However, the prime contractor’s proposal states that its accounting practice is to 

apply subcontract administration rates on all subcontractor costs. 

The prime contractor has been overbilling team subcontractors’ ODCs by 

applying the G&A rate instead of the subcontract administration rate. In three of 

the five invoices analyzed, the contractor overbilled by a total of $3,435. This 

practice results in the government paying a higher rate for subcontract indirect 

costs. 

Recommendations 

We recommend that the Regional Administrator, Region 6: 

3.	 Direct COs to require that the contractor adjust all its billings to reflect the 

application of the correct rate to team subcontract ODCs. 

4.	 Direct COs to work with the contractors to modify future billings. 

Agency Response and OIG Evaluation 

EPA Region 6 did not agree with recommendations 3 and 4. Region 6 reviewed a 

Defense Contract Audit Agency audit, Financial Administrative Contracting 

Officer review, contractor’s statement, and Removal Cost Management System 

data and concluded that the contractor is applying the correct G&A rate to the 

team subcontract ODCs. We reviewed the EPA and Defense Contract Audit 

Agency reports, and neither specifically addressed the application of the G&A 

rate to team subcontract ODCs. In addition, the reports are more than 5 years old 

and may not reflect current practices. 

After receiving the response, the OIG discussed the disagreement at the exit 

conference, exchanged additional information, and had several followup 

discussions in order to try and reach agreement on the finding. Region 6 obtained 

assistance from Office of Acquisition Management (OAM) to further analyze the 

issue. OAM determined that the contractor should have been applying a 

composite rate to team subcontractor ODCs. The composite rate consisted of a 

handling charge plus the contractor’s subcontractor administration rate.3

 The 

3

 The subcontractor agreements state that the subcontractor can charge a handling charge if consistent with the 

subcontractor’s accounting system. There is no evidence that the EPA or the contractor has verified that the handling 

charge was consistent with the subcontractor’s system. 

14-P-0109 8 
 

 

 

composite rate was not mentioned in the contractor’s proposal or contract. 

However, the agency believes it is a valid cost since the handling fee was 

included in the contractor’s agreements with the team subcontractors. According 

to OAM, the contractor should have been using a composite rate. Instead, the 

contractor was using its G&A rate in the billings. According to Region 6, the 

G&A rate was applied because the Removal Cost Management System that is 

used to create the invoices only allows one indirect cost rate. 

OAM did recommend that if the supporting explanation and documentation 

proved acceptable to the OIG, the contracting officer could take corrective action 

to address the issue in the future. However, OAM believes that based on the 

review of a couple of invoices, the difference is immaterial. Further, OAM 

believes the immaterial nature of the finding does not justify the investment of 

time that would be needed to review all past invoices. 

OAM’s analysis identified that the contractor should have been applying a 

composite rate rather than the G&A rate. We agree that the contracting officer 

needs to work with the contractor to correct invoices in the future. We disagree 

regarding whether the past invoices need to be reviewed and adjusted. We 

calculated the composite rate using approved billing rates for 2008 to 2012 and 

compared it to the G&A rate that was billed. The rate billed was higher than what 

the contractor was entitled to for each of the years. 

Table 2: Difference between 

composite and G&A rate 

Year Difference 

2008 2.77% 

2009 3.26% 

2010 3.41% 

2011 1.03% 

2012 1.05% 

Source: OIG analysis of contractor 

information. 

For the one invoice reviewed as part of reaching agreement on this finding, the 

difference was $85. However, the difference on each invoice will vary depending 

on the amount of team subcontractor ODCs included on the invoice and the year 

the costs were incurred. There are over 125 task orders under the contract, each 

with multiple invoices. Therefore, the OIG continues to recommend that Region 6 

work with the contractor to adjust past invoices to correct the application of 

indirect costs. 

We revised the draft report recommendations to reflect the additional analysis that 

was conducted after the draft report was issued. The audit resolution process will 

be used to resolve the recommendations. 

14-P-0109 9 
 

Chapter 4

By Not Separating Subcontracted Labor Rates, 

Prime Contractors Receiving Additional Profit 

Prime contractors are billing subcontracted labor at the prime contract’s labor 

rates even though they negotiated lower rates with their subcontractors. Under 

Federal Acquisition Circular 2005-15, the Federal Acquisition Regulation (FAR) 

was amended to require offerors to establish, for each category of labor, fixed 

hourly rates using one of three options: separate rates for prime and subcontracted 

labor, blended rates, or a combination of separate and blended rates. Because this 

rule became effective shortly before the ERRS contracts were awarded, the prime 

contractors were not required to comply with the new rule when they submitted 

their proposals for these noncommercial services. As a result, the prime 

contractors on Region 6’s ERRS contracts were receiving extra profit. 

At the time the EPA analyzed the cost proposals for the ERRS contracts, 

Federal Acquisition Circular 2005-15 was not in effect. The fixed rates negotiated 

between the EPA and the ERRS prime contractors were based solely on the 

prime’s rates. These negotiated rates were then applied to the prime contractors 

and their team subcontractors. Because the rule was not in effect during the 

solicitation phase of the contract, it allowed the prime contractors to negotiate 

lower rates with its team subcontractors. The lower rates allowed the prime 

contractors to receive additional profit that was not disclosed to the EPA during 

contract negotiations. 

Our analysis determined that one of the two ERRS prime contractors negotiated 

agreements with its team subcontractors that were approximately 9.1 percent 

lower for all labor categories (excluding laborer). This spread in costs equated to 

the prime contractor receiving roughly 9.1 percent extra profit on those labor 

categories based on the difference between the rates. Our review found that for 

two task orders the prime contractor received approximately $3,600 and $12,800 

in extra profit. 

For the other ERRS contract, the prime contractor generally negotiated rates with 

its subcontractors that were lower than the established rates in the prime contract. 

For one subcontractor, the labor rates were approximately 8 percent less than the 

prime’s rates with Region 6. For another subcontractor, the labor rates in the 

agreement were 14 to 16 percent less than the prime’s rates with Region 6. The 

third subcontractor had only a few labor rates in the agreement and some labor 

rates were higher and some were lower than the prime’s rates. Overall, a majority 

of the labor rates in the subcontract agreements were significantly lower than the 

rates in the prime’s contract with Region 6. 

14-P-0109 10 
 

 

When the EPA negotiated labor rates for the ERRS contract, it only had 

information on the rates of the prime contractors employees and not the 

subcontracted labor. The prime contractor charged its own labor and team 

subcontract labor to the EPA at the negotiated rate. As a result, the prime 

contractors were receiving additional profit based on the difference between the 

rates in the prime contract and the rates in the subcontract agreements. 

Recommendation 

We recommend that the Regional Administrator, Region 6: 

5.	 Require that proposals for future ERRS contracts include subcontractor 

rates as required by the amended FAR. 

Agency Response and OIG Evaluation 

EPA Region 6 concurred with recommendation 5, noting that the award of any 

future ERRS contracts would be subject to FAR and EPA Acquisition Regulation 

requirements. The OIG believes that separate or blended rates for prime 

contractors and team subcontractors make good business sense for the 

government. Each category of labor should have fixed hourly rates using separate 

rates, blended rates, or a combination of separate and blended rates to reduce the 

risk of prime contractors receiving additional profit. Consequently, we consider 

this recommendation closed. 

14-P-0109 11 
 

 

 

 

 

 

 

 

 

 

 

Status of Recommendations and 

Potential Monetary Benefits 

POTENTIAL MONETARY 

RECOMMENDATIONS BENEFITS (in $000s) 

Rec. 

No. 

Page 

No. Subject Status1 Action Official 

Planned 

Completion 

Date 

Claimed 

Amount 

Agreed-To 

Amount 

1 

2 

3 

6 

6 

8 

Require procurement personnel to conduct internal 

control reviews twice a year; or 

Identify contract management as a weakness in 

Region 6’s next Federal Managers’ Financial 

Integrity Act annual assurance letter unless 

Region 6 starts conducting internal control reviews 

twice a year. 

Direct COs to require that the contractor adjust all 

its billings to reflect the application of the correct 

rate to team subcontract ODCs. 

O 

C 

U 

Regional Administrator, 

Region 6 

Regional Administrator, 

Region 6 

Regional Administrator, 

Region 6 

6/30/14 

9/23/13 

4 

5 

8 

11 

Direct COs to work with the contractors to modify 

future billings. 

Require that proposals for future ERRS contracts 

include subcontractor rates as required by the 

amended FAR. 

U 

C 

Regional Administrator, 

Region 6 

Regional Administrator, 

Region 6 

9/23/13 

O = Recommendation is open with agreed-to corrective actions pending.
 

C = Recommendation is closed with all agreed-to actions completed.
 

U = Recommendation is unresolved with resolution efforts in progress.
 

14-P-0109 12 

1 
 

 

 

 

Appendix A 

Agency Response to Draft Report and OIG Evaluation 

UNITED STATES ENVIRONMENTAL PROTECTION AGENCY 

REGION 6
 

1445 ROSS AVENUE, SUITE 1200 

DALLAS, TEXAS 75202 – 2733 

Office of the Regional Administrator 

September 23, 2013 

MEMORANDUM 

SUBJECT:	 Response to Office of Inspector General Draft Report No. OA-FY13-0046 

“Internal Control Reviews Would Improve Region 6’s Management of 

Emergency 

and Rapid Response Services Contracts,” dated August 20, 2013 

FROM: Ron Curry 

 Regional Administrator 

TO: Richard Eyermann 

Acting Assistant Inspector General 

Thank you for the opportunity to respond to the findings and recommendations presented in the 

Office of Inspector General (OIG) Draft Report, “Internal Control Reviews Would Improve 

Region 6’s Management of Emergency and Rapid Response Services Contracts”. We appreciate 

the OIG’s audit of our ERRS contracts and your recommendations on internal control and 

contract management. 

Region 6 has reviewed the findings and has determined that the recommendations in Chapter 2 

and Chapter 4 have merit for improving Region 6’s management of current and future 

Emergency and Rapid Response Services (ERRS) contracts. With respect to the findings and 

recommendations in Chapter 3, we do not concur with the OIG’s assertion that one contractor is 

incorrectly applying a general and administrative (G&A) rate to its team subcontractors’ other 

direct costs. For your consideration, we have included our position and corrective actions or 

proposed alternatives to the recommendations and a Technical Comments Attachment. 

Agency’s Response to Report Recommendations 

Recommendation Nos. 1 and 2: The OIG identified findings related to the accuracy, timeliness or 

completion of annual invoice reviews, adjustment vouchers, subcontract agreements, definitized 

14-P-0109 13 
 

 

 

task orders and the EPA Acquisition System. We understand that those findings are attributed to 

Region 6’s non-compliance with the semi-annual Internal Control Reviews as required by the 

Quality Assurance Plan (QAP). Therefore, Region 6 concurs with the conclusion and agrees to 

implement a corrective action to ensure that we are complying with applicable rules and 

regulations. The OIG’s recommendation was to require procurement personnel to conduct 

internal control reviews twice a year or identify contract management as a weakness in Region 

6’s next Federal Managers’ Financial Integrity Act annual assurance letter, unless Region 6 starts 

conducting internal control reviews twice a year. Due to the OIG’s either-or option in 

Recommendation Nos. 1 and 2, we have decided to combine the recommendations with the 

understanding that our final decision will negate the need for the other corrective action. 

Subsequently, we decided to implement Recommendation No. 1, and our corrective action is to 

conduct internal control reviews in the 1st Quarter of FY 2014 and 3rd Quarter of FY 2014 and in 

accordance with the Peer Review Process in the QAP. 

Recommendation Nos. 3 and 4: The OIG reviewed the ERRS prime contractors’ proposal and 

indirect cost rate letters and concluded that the documents do not clearly distinguish between 

team and non-team subcontractor other direct costs (ODCs) with regards to the application of 

G&A or subcontract administration G&A. Due to this ambiguity, the OIG asserts that one 

contractor is incorrectly applying a G&A to its team subcontractors’ other direct costs and this 

practice may result in the government paying a higher rate for subcontract indirect costs. As 

corrective actions, the OIG recommended that we direct the COs to require that the contractor 

adjust all its billings to reflect the application of the subcontract administration rate to team 

subcontract ODCs and direct the COs to modify the contract to explicitly explain that team 

subcontract ODCs receive subcontract administration rate. 

We understand the OIG’s concerns and we have made many efforts to determine the contractor’s 

intent at pre-award and its accounting practice after contract award. We reviewed a Defense 

Contract Audit Agency (DCAA) audit, Financial Administrative Contracting Officer (FACO) 

review, contractor’s statement, and Removal Cost Management System (RCMS) data and 

concluded that the contractor is applying the correct G&A rate to team subcontract ODCs. 

Therefore, Region 6 does not concur with Recommendation Nos. 3 and 4. Our corrective action 

is to remove the ambiguity in the contract via a modification to explicitly explain that team 

subcontract Other Direct Costs (ODCs) will receive the general and administrative (G&A) rate. 

We have combined Recommendation Nos. 3 and 4 in our response because they are integrally 

related to each other. Additionally, OAM reviewed the Region’s response to Recommendation 

No. 3 and concurs with this position. For your consideration, we are providing the following 

results of our review. 

Defense Contract Audit Agency: The DCAA examined the contractor’s Indirect Cost Pools and 

Allocation Bases to determine if the accounting system provided for, in part, the following 

procedures: 

 Direct and indirect costs are appropriately identified, accumulated, and reported; and 

 Indirect costs are allocated equitably and consistently to contracts and other cost objectives. 

Based on DCAA Audit Report No. 1621-2006B17740009 dated October 24, 2006, the contractor’s 

accounting system is adequate for accumulating and billing costs under government contracts. 

14-P-0109 14 
 

 

 

 

Although the aforementioned audit was conducted seven (7) months prior to the award, the 

current contract is a follow-on requirement to the previous ERRS contract, in which the general 

and administrative (G&A) rate was applied in the same manner (i.e. G&A rate applied to team 

subcontract ODCs). 

Financial Administrative Contracting Officer: The FACO reviewed the contractor’s accounting 

and financial records under the contract. The FACO released Financial Monitoring Report No. 

8DFM010 dated July 29, 2008 in which a finding was identified that related to the contractor’s 

Value Added Total Cost Input G&A base. The report stated that the contractor incorrectly 

excluded subcontract administration labor, fringe benefits applicable to subcontract 

administration labor and warehouse labor from its value added G&A base calculation; however, 

the report did not identify any findings related to an incorrect application of the G&A rate to 

team subcontract Other Direct Costs. 

Contractor’s Statement: “This practice has been a standard and consistent practice on our ERRS 

contracts, it is fully compliant with our contracts, and it is in compliance with our accounting 

system and practices. There is no documentation related to this practice from previous audits 

because no auditors have questioned or disputed this practice.” 

Removal Cost Management System: Region 6 reviewed and verified data through RCMS 

related to the application of the G&A rate to team subcontract ODCs under the ERRS 

contracts in Region 5, 9 and 10. Our internal review indicated that the contractor applied a 

standard and consistent business practice for team subcontract ODCs under the contractor’s 

ERRS contracts. 

Recommendation No. 5: The OIG reviewed the ERRS labor rates in the proposals and contract 

files and concluded that Region 6 did not require separate or blended rates for the prime contractor 

and team subcontractors. Under the Federal Acquisition Circular 2005-15 and the subsequent FAR 

amendment, contractors are required to establish, for each category of labor, fixed hourly rates 

using separate rates, blended rates, or a combination of separate and blended rates. When the FAC 

2005-15 came into effect, Region 6 was in the process of awarding the contracts. The OIG 

recognized the timing issue with the current ERRS contracts and recommended that we require 

proposals for future ERRS contracts to include subcontractor rates as required by FAR 52.216-29. 

Region 6 concurs with the recommendation for future ERRS contracts and we agree to comply 

with FAR and EPAAR requirements in effect. Our intent is to recommend negotiated blended 

labor rates to the ERRS Placement Contracting Officers. 

Furthermore, the Office of Acquisition Management (OAM) stance on FAR 52.216-29 is to 

follow the FAR as written. Additionally, Chapter 1 in the Acquisition Handbook does not 

contain a class deviation for ERRS solicitations. Should the ERRS Program request a class 

deviation, a Determination & Findings (D&F) must be processed and submitted through the 

Policy, Training and Oversight Division (PTOD) to the Senior Procurement Executive (SPE) for 

review and approval. 

14-P-0109 15 
 

 

 

Response to Recommendations Table 

Findings Region 6 is in agreement 

No. Recommendation High-Level Intended Corrective 

Action(s) 

Estimated Completion 

by Quarter and FY 

1 Require procurement 

personnel to conduct 

internal control reviews 

twice a year. 

Region 6 concurs with Recommendation 

No. 1 and agrees to conduct internal control 

reviews in accordance with the Peer 

Review Process in the Quality Assessment 

Plan (QAP). 

1st Quarter FY 2014 

and 3rd Quarter FY 

2014 

2 Identify contract 

management as a 

weakness in Region 6’s 

next Federal Managers’ 

Financial Integrity Act 

annual assurance letter 

unless Region 6 starts 

conducting internal 

control reviews twice a 

year. 

Region 6 agreed to the corrective action in 

Recommendation No. 1; therefore, a 

corrective action for Recommendation No. 

2 is not required. 

Not Applicable

 5 Require that proposals for 

future ERRS contracts 

include subcontractor 

rates as required by the 

amended FAR. 

Region 6 concurs with Recommendation 

No. 5 and agrees to require proposals for 

future ERRS contracts to include 

subcontractor rates as required by the 

amended Federal Acquisition Regulations 

(FAR) and to recommend negotiated 

blended rates to the Placement Contracting 

Officers. 

FY 2015 

14-P-0109 16 
 

 

 

 

Findings Region 6 is in disagreement 

No. Recommendation Agency Explanation/Response Proposed Alternative

 3 Direct COs to require that 

the contractor adjust all 

its billings to reflect the 

application of the 

subcontract 

administration rate to 

team subcontract ODCs. 

Region 6 does not concur with 

Recommendation No. 3. 

Based on the DCAA audit, FMR, 

contractor’s statement, and an internal 

data review, Region 6 determined that the 

contractor’s billings shall remain 

unchanged. 

The contractor’s 

billings shall remain 

unchanged. 

4 Direct COs to modify the Region 6 does not concur with The COs shall modify 

contract to explicitly 

explain that team 

Recommendation No. 4. the contract to 

explicitly explain that 

subcontract ODCs receive Refer to Region 6’s explanation on Pages team subcontract 

subcontract 

administration rate. 

2 and 3 of this response. ODCs receive the 

G&A rate. 

Contact Information 

If you have any questions about this letter, please call me at (214) 665-2100, or your staff may 

contact Susan Jenkins, Audit Follow-up Coordinator, at (214) 665-6578, or by email at 

jenkins.susan@epa.gov. 

Attachment 

cc: Kevin Christensen, OIG 

Janet Kasper, OIG 

Michael Petscavage, OIG 

David Penman, OIG 

Andres Calderon, OIG 

Samuel Coleman, R6 

James McDonald, R6/MD 

Ronnie Crossland, R6/MD 

Regina Milbeck, R6/MD 

Carl Edlund, R6/SF 

Pam Phillips, R6/SF 

Connie Suttice, R6/SF 

Anthony Talton, R6/SF 

Susan Jenkins, R6/MD 

14-P-0109 17 
 

Response to Office of Inspector General Draft Report No. OA-FY13-0046 

“Internal Control Reviews Would Improve Region 6’s Management of Emergency 

and Rapid Response Services Contracts,” dated August 20, 2013 

Technical Comments on the Draft Report 

While we agree with most of the findings and recommendations, we have included Technical 

Comments on the contract management shortcomings identified in Chapter 2 to further explain 

the procurement and program office activities related to the findings and to clarify or improve the 

accuracy of specific details in the report. 

Page 4, Chapter 2 – Table 1: Contract Management Shortcomings: 

Annual Invoice Reviews – Although the Administrative Contracting Officers could not locate 

seven (7) out of ten (10) annual invoice reviews for the prior periods, the three (3) reviews that 

were in the files were for the most recent required review periods (i.e. one for 2011 and two for 

2012). 

It should be noted that the Administrative Contracting Officers identified the contract 

management shortcomings of the Awarding Contracting Officers and implemented a corrective 

action by conducting the required annual invoice reviews that were due at the time. 

Adjustment Vouchers – The adjustment vouchers are required for negotiated interim and final 

Indirect Cost Rates (ICR), and the vouchers must be submitted within sixty (60) days. Although 

the voucher submissions were not timely, all monies due to the Government or to the contractors 

for prior year indirect cost rates must be settled after contract completion and final DCAA ICR 

audits and before contract closeout. 

It should be noted that a corrective action has been implemented that requires the Project Officer 

to monitor the submission of ICR adjustment vouchers and requires the Contracting Officer to 

verify the receipt of periodic ICR adjustment vouchers during the annual invoice review process. 

Subcontract Agreements – The Team Subcontract Agreements were not submitted to the 

Awarding Contracting Officers and Project Officer within five (5) calendar days of the issuance 

of a notice of award; however, the delayed submission of formal team subcontract agreements 

did not have a financial or technical impact on the contracts. 

As a corrective action, it should be noted that the Administrative Contracting Officers will 

recommend to the Placement Contracting Officers for the future ERRS contracts to review the 

requirement and make a determination regarding the reasonableness of the contractor’s 

timeframe to fully execute and submit formal team subcontract agreements to the Government. 

Definitized Task Orders – One out of ten task orders was not definitized by the Awarding 

Contracting Officer within five (5) days due to an administrative oversight related to internal 

staffing changes (i.e. the transfer of the Contract Specialist to another EPA Section and Division, 

and the changing of Administrative Contracting Officers). 

14-P-0109 18 
 

 

It should be noted that the administrative oversight only occurred once under the contracts. If 

the subject task order was excluded from the sample because of the unusual circumstances or 

replaced with another similar type of task order, it is our opinion that Region 6 success rating 

would be 100%, which is effective and efficient contract management. 

Furthermore, from an administrative and technical standpoint, the delayed definization did not 

pose any significant financial or technical risks to the Government because a Contracting Officer 

Technical Representative (COTR)/On-Scene Coordinator (OSC) was assigned to the project 

when the verbal authorization for services was given to the contractor. The COTR/OSC 

safeguarded the Government and controlled costs by being on-site during performance, 

providing daily technical direction to the contractor, reviewing and signing daily 1900-55s of all 

costs incurred, and developing a cost estimate and Statement of Work within five (5) days. As a 

result, there were no changes in field performance/activities or an increase in government costs. 

EPA’s Acquisition System (EAS) – The system default for the Award Type/pricing 

arrangement on all EPA orders is “Firm-Fixed Price” regardless of the contract pricing 

arrangement, which poses a national EAS data quality issue. 

The Administrative Contracting Officers (COs) identified the system default issue prior to this 

audit and was working with the national EAS Focus Workgroup on a resolution to change the 

award type/pricing arrangement from “Firm-Fixed Price” to “Time-and-Materials”. Also, the 

COs presented the issue to OAM’s Information Technology Service Center (ITSC) and 

recommended two options, one was the removal of the default feature (i.e. automatic population 

of the field), which would allow for user selection, and the other was to retain the default feature 

but with the automatic population of the contract pricing arrangement as the award type. The 

COs recommendation was not implemented by ITSC, and the EAS default remains unchanged. 

Nonetheless, the paper file is the official contract file, and all task orders under the ERRS 

contracts fall under the “Time-and-Materials” pricing arrangement, unless otherwise negotiated 

as “Firm-Fixed Price” and stated on the task order in the official contract file. 

It should be noted that the Administrative Contracting Officers understand that data quality is 

important and necessary so they have implemented a corrective action to verify and validate that 

the information in the EAS award type field is consistent with the official contract file. 

Additionally, the COs have taken corrective action by changing the award type on incorrectly 

coded task orders in EAS when a modification is required. 

14-P-0109 19 
 

Appendix B 

Distribution 

Office of the Administrator 

Regional Administrator, Region 6 

Agency Follow-Up Official (the CFO) 

Agency Follow-Up Coordinator 

General Counsel 

Associate Administrator for Congressional and Intergovernmental Relations 

Associate Administrator for External Affairs and Environmental Education 

Director, Office of Acquisition Management, Office of Administration and Resources Management 

Deputy Regional Administrator, Region 6 

Chief, Procurement Section, Region 6 

Contract Specialist, Emergency and Rapid Responses Services Contracts, Region 6 

Audit Follow-Up Coordinator, Region 6 

14-P-0109 20