Department of Homeland Security
 

Review of Costs Invoiced by the 

City of San Jose Relating to the 

Terminal B Checked Baggage Screening Project 

at the Norman Y. Mineta San Jose International 

Airport Under Other Transaction Agreement 

Number HSTS04-09-H-REC161 

American Recovery and Reinvestment Act of 2009 

OIG-12-40 February 2012
 
 

Office of Inspector General 

U.S. Department of Homeland Security 

Washington, DC 20528

 FEB 16 2012 

Preface 

The Department of Homeland Security (DHS) Office of Inspector General (OIG) was established 

by the Homeland Security Act of 2002 (Public Law 107-296) by amendment to the Inspector 

General Act of 1978. This is one of a series of audits, inspections, and special reports prepared 

as part of our oversight responsibilities for programs, grants, and projects administered by the 

Department under the American Recovery and Reinvestment Act of 2009 (Recovery Act). 

This report presents the results of our audit of the costs invoiced for reimbursement by the City 

of San Jose under an agreement funded by the Recovery Act from the Transportation Security 

Administration. The purpose of the agreement was to finance a portion of the costs of 

modifications to the Norman Y. Mineta San Jose International Airport to accommodate a 

checked baggage inspection system. 

The recommendations herein have been developed to the best knowledge available to our office, 

and have been discussed in draft with those responsible for implementation. We trust this report 

will result in more effective, efficient, and economical operations. We express our appreciation 

to all of those who contributed to the preparation of this report. 

Anne L. Richards 

Assistant Inspector General for Audits 
Executive Summary .........................................................................................................................1
 

Background......................................................................................................................................2
 

Results of Review ............................................................................................................................3


 Unsupported Owner-Controlled Insurance Program Costs ........................................................3 


 Use of American Iron, Steel, and Manufactured Goods .............................................................4 


Recommendations............................................................................................................................5
 

Management Comments and OIG Analysis ....................................................................................5 


Appendices

 Appendix A: Purpose, Scope, and Methodology.........................................................................6 


Appendix B: Management Comments to the Draft Report .........................................................8 


Appendix C: Major Contributors to this Report ........................................................................11 


Appendix D: Report Distribution...............................................................................................12
 

Table of Contents/Abbreviations 

Abbreviations 

CBIS Checked Baggage Inspection System 


DHS Department of Homeland Security 


OIG Office of Inspector General 


OTA Other Transaction Agreement
 

OMB Office of Management and Budget 


TSA Transportation Security Administration 

OIG
 

Department of Homeland Security 

Office of Inspector General 

Executive Summary 

The Transportation Security Administration entered into an Other 

Transaction Agreement with the City of San Jose to fund a portion of the 

costs to modify Terminal B at the Norman Y. Mineta San Jose 

International Airport to incorporate a checked baggage inspection system. 

Under the agreement, the Transportation Security Administration agreed 

to reimburse the City of San Jose up to $20,916,360 for designing, 

managing, and building the project. At the time of our audit, the 

Administration had paid the City of San Jose $14,387,182 on the basis of 

invoices submitted through March 31, 2011. 

We conducted our audit to determine whether invoiced costs were 

allowable, allocable, and reasonable according to the funding agreement 

and applicable federal requirements. 

We concluded that costs of $254,092 invoiced for owner-controlled 

insurance were questionable for reimbursement because they were not 

adequately supported by the accounting records. Also, we determined that 

the City of San Jose complied with the requirements for submitting 

quarterly reports to the federal government and for paying prevailing 

wages, but could not provide adequate support that it complied with the 

requirement for buying goods manufactured in America. The report 

contains two recommendations to address unsupported invoiced costs and 

to ensure City of San Jose compliance with the requirement to buy 

American goods. The Administrator concurred with the two 

recommendations. 

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Background 

On February 17, 2009, Congress enacted the American Recovery and 

Reinvestment Act of 2009 (Recovery Act) to preserve and create jobs, 

promote economic recovery, and invest in transportation, environmental 

protection, and other infrastructure that will provide long-term economic 

benefits. The Recovery Act appropriated $1 billion to the Transportation 

Security Administration (TSA) for “procurement and installation of 

checked baggage explosive detection systems and checkpoint explosives 

detection equipment....” TSA awarded $574,023,483 of that amount to 25 

airport organizations for 29 projects modifying airports to accommodate 

new baggage-screening equipment. 

On March 5, 2009, TSA informed the City of San Jose (City) that the 

City’s explosive detection system project in Terminal B of the Norman Y. 

Mineta San Jose International Airport was under consideration for 

Recovery Act funding. The City had already awarded a design-build 

contract for the Terminal B area and issued four task orders totaling 

$25,023,637 for the baggage-handling system. Subsequently, the City 

estimated that TSA’s Checked Baggage Inspection System (CBIS) project 

represented about $21,257,400 of the total cost. In addition, the City 

requested $1,983,000 as schedule impact costs for potential delays in the 

TSA delivery of the screening equipment (CTX-9800 machines). 

Negotiations between the City and TSA resulted in the award of Recovery 

Act funds of $20,916,360, which represented 90% of the estimated 

eligible project costs of $23,240,400 ($21,257,400 plus $1,983,000). 

TSA authorized the funding under Other Transaction Agreement (OTA) 

number HSTS04-09-H-REC161, dated September 28, 2009. The OTA, as 

amended, runs from April 1, 2009, through June 30, 2011, and requires the 

City to submit invoices for reimbursement of project costs. Reimbursement 

for eligible project costs is based on the scope of the agreement; Office of 

Management and Budget (OMB) Circular A-87, Cost Principles for State, 

Local and Indian Tribal Governments; and the TSA publication 

Reimbursable and Non-Reimbursable Costs for the Electronic Baggage 

Screening Program, version 1.0 June 2008. As of March 31, 2011, the 

City had invoiced costs of $14,387,182, which it incurred from April 2009 

through March 2011. The costs invoiced by the City represented 90% of 

the costs incurred. 

The agreement also requires the City to comply with OMB Circular A133, Audits of States, Local Governments, and Nonprofit Organizations, 

and Recovery Act provisions to submit quarterly recipient reports to the 

federal government; pay prevailing wages as determined by the Secretary 

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of Labor; and use American1

 iron, steel, and manufactured goods. The 

objective of this audit was to determine whether costs invoiced by the City 

were allowable, allocable, and reasonable according to the funding 

agreement and applicable federal requirements. 

Results of Review 

We determined that invoiced costs of $14,133,090 were allowable, allocable, and 

reasonable. We identified $254,092 of costs that were questionable for reimbursement 

because they were not adequately supported by the accounting records. We also 

concluded that the City complied with the requirements for submitting quarterly reports 

and for paying prevailing wages. The City could not, however, provide adequate support 

that it complied with the requirement for buying goods manufactured in America. We 

are recommending that TSA examine the relevant project documents to ensure that 95% 

of the project was built with American products. 

Unsupported Owner-Controlled Insurance Program Costs 

The City invoiced TSA $332,894 for insurance program costs. We determined 

that the amount consisted of $78,802 for the costs of general liability premiums, 

workers’ compensation, builder risk, and broker fees, and $254,092 for estimated 

future liability. The City based the estimate on allocations of incurred insurance 

costs plus projected insurance expenses. The basic guidelines in OMB Circular 

A-87 say that to be allowable, a cost must be properly documented and be 

allocable to the federal award, among other things. The circular says that “a cost 

is allocable to a particular cost objective if the goods or services involved are 

chargeable or assignable to such cost objective in accordance with relative 

benefits received.” In addition, Article IV of the OTA states that “TSA will 

reimburse the City on an actual expense basis supported by one or more 

invoices....” Although we believe that insurance program costs may be allocated 

to the CBIS project, we classified the $254,092 as unsupported because the 

amount was an estimate based on future costs. 

After the audit exit conference, the City provided insurance invoices and its 

analysis of insurance program expenses for our examination. The City’s analysis 

used labor costs and construction costs to allocate the total invoiced insurance 

program costs to benefiting activities. Using the City’s allocation methodology 

would result in questionable costs of $127,210. Although the City’s cost 

allocation methodology seemed reasonable, we were not able to validate that the 

costs supporting the bases used to allocate the insurance costs were applicable to 

1

 On October 13, 2009, the Department of Homeland Security (DHS) issued a limited waiver of the “buy American” 

requirements for each TSA Electronic Baggage Screening Program project. The waiver specifies that at least 95% 

of the costs of each project will comply with the buy American requirements of Section 1605 of the Recovery Act, 

and allows up to 5% of total project costs to be used for non-American products. 

Review of Costs Invoiced by the City of San Jose Relating to the Terminal B Checked Baggage Screening Project at the 

Norman Y. Mineta San Jose International Airport Under Other Transaction Agreement Number HSTS04-09-H-REC161 

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the period covered by the OTA. Consequently, we retained our classification of 

the entire $254,092 as unsupported. 

Use of American Iron, Steel, and Manufactured Goods 

Section 1605 of the Recovery Act requires the use of American iron, steel, and 

manufactured goods in the construction of Recovery Act projects. Under DHS’ 

limited waiver of the requirement for TSA’s Electronic Baggage Screening 

Program projects, up to 5% of the total project costs may be used to purchase nonAmerican goods. The OTA includes a list of some 42 individual baggagehandling system components that TSA and the City agreed would be exempt from 

the buy American requirements. However, the City’s support to demonstrate 

compliance with the buy American requirement was incomplete. 

Neither the City nor the contractor obtained any letters from the baggage-handling 

system subcontractor or the individual vendors regarding the source of the 

components used for the CBIS project. The contractor did prepare a spreadsheet, 

dated May 17, 2010, that included a schedule of values for the CBIS project, the 

names of the subcontractor and vendors who provided the components for the 

various work activities, and the identification of American and foreign products 

used. The spreadsheet showed that 5.5% of the estimated materials costs were 

from non-American sources. However, we could not validate the accuracy of the 

spreadsheet without letters or other documents from the subcontractor and 

vendors certifying the source of the materials used on the project. 

TSA officials have not examined the City’s compliance with the requirement to 

use American goods. TSA did publish an administrative checklist to aid 

contracting officials in determining buy American compliance on February 3, 

2011. TSA’s Director, Security Technology Acquisition Division, told us that 

TSA is developing procedures to implement the checklist. 

TSA should use the checklist to help determine whether the City complied with 

the buy American requirement for the CBIS project. City officials agreed that the 

documentation showing compliance with the buy American requirements was 

incomplete. The officials also advised that the TSA guidelines were not available 

when the project was constructed. 

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Recommendations 

We recommend that TSA’s Contracting Officer: 

Recommendation #1: Resolve the $254,092 of unsupported owner-controlled 

insurance program costs. 

Recommendation #2: Review the iron, steel, and manufactured goods used in 

the CBIS project to determine whether the City complied with applicable “buy 

American” requirements. 

Management Comments and OIG Analysis 

TSA Comments to Recommendation#1: 

TSA Concurs: TSA said that it will “work with the City to recoup $254,092 

in unsupported future insurance liability. This adjustment will be attained by 

TSA receiving a future invoice from the City reflective of a $254,092 

reduction in total reimbursable CBIS costs.” 

OIG Analysis: 

The TSA decision sufficiently responds to the recommendation. However, the 

recommendation will remain open until TSA provides us with a copy of the 

invoice with the $254,092 reduction. 

TSA Comments to Recommendation#2: 

TSA Concurs: TSA said that the contracting officials will work with the City 

to obtain certification from the subcontractor and vendors. 

OIG Analysis: 

The TSA decision sufficiently responds to the recommendation. However, the 

recommendation will remain unresolved until TSA provides us with a 

timeframe for completion of its planned actions and will remain open until 

TSA provides us with evidence that it has obtained the certification. 

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Appendix A 

Purpose, Scope, and Methodology 

The objective of this audit was to determine whether costs invoiced by the 

City of San Jose are allowable, allocable, and reasonable according to the 

funding agreement and applicable federal requirements. Our audit covered 

invoiced costs of $14,387,182 for the period April 1, 2009, to March 31, 

2011. This represents the total amount invoiced as of May 13, 2011. 

Our tests and procedures included the following: 

•	 Reviewing TSA project files, the award agreement and 

modifications, the Recovery Act, and TSA and OMB guidelines 

•	 Interviewing TSA officials to obtain an understanding of the 

project and project management 

•	 Examining City accounting records supporting amounts invoiced 

•	 Interviewing City officials to obtain an understanding of project 

management, accounting, procurement, and invoicing 

•	 Inspecting the CBIS project 

•	 Reviewing the audit working papers of the certified public 

accounting firm that performed the Single Audit of the City for the 

fiscal year ending June 30, 2010. 

The Single Audit of the City was performed by Macias, Gini, & 

O’Connell LLP and included Recovery Act-funded CBIS project costs 

totaling $13,479,872 (about 94% of invoiced costs). The Single Audit 

report classified the CBIS as a major program and assessed the City as a 

low risk.2 The Single Audit report did not identify any questionable costs 

related to the CBIS or any deficiencies in internal controls that were 

identified as material weaknesses. 

We also tested City records supporting costs invoiced to determine 

compliance with OMB Circular A-87 and with other terms and conditions 

of the agreement. We considered the City’s internal controls over the 

administration of TSA funds in determining our audit procedures. 

We conducted this performance audit between April 11 and June 28, 2011, 

pursuant to the Inspector General Act of 1978, as amended, and according 

to 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 upon our audit objectives. We believe that the evidence obtained 

2

 A low risk assessment results from the preceding annual Single Audit presenting an unqualified opinion on the 

entity’s financial statements and the schedule of expenditures of federal awards, and reporting no deficiencies in 

internal controls that were identified as material weaknesses under the requirements of generally accepted 

government auditing standards. This assessment allows for reduced audit coverage. 

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Appendix A 

Purpose, Scope, and Methodology 

provides a reasonable basis for our findings and conclusions based upon 

our audit objectives. 

We appreciate the cooperation of City of San Jose and TSA officials in 

providing the information and access necessary to accomplish this review. 

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Appendix B 

Management Comments to the Draft Report 

u.s. Department ofHomehuwl Security 

I'lul Suuth 12th Street 

ArlinglOll., VA ZlJ5'J8 

Transportation IECOl2D11 Security 

Administration 

INFORMA nON 

MEMORANDUM FOR: Charles Edwards 

Acting Inspector General 

U.S. Department of Homeland SeclJril)' 

" . / l 

FROM: John S, PistoleC;J.,tC, c'+" (>"-;i-:~;';-«.-<_ AdministratorC7 

SUBJECT: Transportation Security Administration's (TSA) Response to the 

{l.S. Department of Homeland Security (DHS) Ollice of Inspector 

General's OIG Draft Report titled Review o(Costs Invoiced by the 

City o/San Jose Relating to the Terminal B Checked Baggage 

Screening Project al the Norman Y. A1inela San Jose inlernmional 

Airport tinder Other Transaction Agreement Number R'IT.'104-09-

H-REC161- FO[lO 

This memorandum constitutes TSA's formal Agency response to the U.S. Department of 

Homeland Security (DHS), Office of Inspector General (OIG) draft letter report, Review o.fCosts 

invoiced by the City o/San Jose Relating to the Terminal B Checked Baggage Screening Project 

at the Norman r:Minetu San Jose International Airport Under Other TransaCljon Agreement 

Number HSTS04-09-H-RECI61-FOUO dated October 2011. TSA appreciates the opportunity 

to review and provide comments to your draft report. 

Background 

As part of the American Recovery and Reinvestment Act of 2009 (Recovery Act), TSA was 

appropriated $1 billion tor "procurement and installation of checked baggage explosive detection 

systems and checkpoint explosives detection equipment ... " TSA has awarded more than $500 

million in Recovery Act funding to airport organizations for modifying facilities to accommodate 

nt:w baggage-screening equipment through the Electronic Baggage Screening Program (EBSP). 

One of these Recovery Act awards was to the City of San Jose (the City) for a Checked Baggage 

Inspection System (CHIS) project in Tenninal B of the Norman Y. Mineta San Jose International 

Airport (SJC) through an Other Transaction Agreement (OTA) dated September 28, 2009. The 

City had previously awarded a design-build contract for Terminal B at SJC in which TSA was 

not involved, that included four task orders totaling $25,023,637 for the baggage-handling 

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Appendix B 

Management Comments to the Draft Report 

2 

system. Through the OTA, TSA provided Recovery Act funding in the amount of$20,916,360, 

which represenkd 90 percent of the estimated eligible project costs ($23,240,400). As of March 

31,2011, the City had invoiced costs of $14,387, 182. 

The resu1t .. of the audit detennint:d that approximately 1 percent of the costs invoiced by the City 

were questionable because they were not adequately supported by accQwning records. 

Specifically, the city invoiced $332,894 for insurance program costs, of which $78,802 was for 

general liability premiums. and $254,092 was for estimated future liability. While the 010 

believes that insurance program costs may be allocated to the CBIS project, the $254,092 is 

deemed unsupported because it is an estimate based on fumre costs. As the oro noted, Article 

IV of the OTA states that "TSA will reimburse the City on an actual expense basis ... " Insurance 

costs incurred by the City may be allowable under the terms of the OTA but are reimbursable 

only ao; they become actual incurred expenses. Since the questioned costs involve fhture 

insurance liability, TSA will recoup the $254,092 in the form of a credit in a future invoice and 

will instruct the City regarding futme reimbursement for only costs as incuned. 

The audit also detennined that TSA officials did not examine the City's compliance with the Buy 

American Act. As the OIG noted, the contractor did prepare a schedule of values, which 

included the names of subcontractors and vendors who provided the components for the work 

and identification of the American and foreign products used. While this schedule reflected that 

5.5 percent] of the estimated material costs \vere from nOIl~American sources, OIG was unable to 

validate the infomlation without documentation from the subcontractor and vendors certifying 

the source of the materials used. In order to verify that the goods used are in fact Buy American 

Act compliant, TSA will work with the City to obtain certitication of the sources of materials 

used in the cms project. 

TSA conclUS with both ofthe recommendations made in the subject draft report and will take the 

actions necessary to resolve these issues. 

Recommendation 1: TSA's Contracting Officer resolve the $254,092 of unsupported 

Owner-Controlled lnsurancc Program costs. 

TSA Concurs: As indicated above, TSA will work with the City to recoup $254,092 in 

unsupported future insurance liabiHty. This adjustment will be attained by TSA receiving a 

future invoke from the City reflective of a $254,092 reduction in total reimbursable CBIS costs. 

TSA \-vill also instruct the City regarding future reimbursement for only costs as incuned. 

Recommendation 2: TSA's Contracting Officer review the iron, sted and manufat1ured 

goods used in the CHIS project to determine whether the city complied with applicable 

"Buy American" requirements. 

] DHS has a limited waiver for TSA's Electronic Baggagi,; Screening Program, which provides that up to 5 percent 

of the total project cos\.s may be for the purchase of non~American goods. 

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Appendix B 

Management Comments to the Draft Report 

3 

TSA Concurs: In order to veri!)1 that the materials used arc compliant with Buy American Act 

requirements, the Contracting Officer will work with the TSA Contracting Officer's 

Representative (COR) and the City to obtain certification from the subcontractor and vendors. 

Additionally, the TSA Office of Acquisition has begun using a checklist to assist acquisition 

\vorkforce staff in assessing ,md monitoring Recovery Act recipient compliance with Buy 

American Act compliance. This checklist was provided to the OIG in TSA's 90-day update to 

OJG-ll-07. Final Report, [/<.;e of American Recovery and Reinvestment Act Funds by the TS'A/or 

the Electronic Baggage Screening Program (November 12.2010). This checklist ha<; been 

provided to the OIG as resolution for similar recommendations on other Recovery Act-related 

audits. 

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Appendix C 

Major Contributors to this Report 

Roger LaRouche, Director 

Robert Leonard, Audit Manager 

Karl Gallagher, Audit Manager 

Enrique Leal, Report Referencer 

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Appendix D 

Report Distribution 

Department of Homeland Security 

Secretary 

Deputy Secretary 

Chief of Staff 

Deputy Chief of Staff 

General Counsel 

Executive Secretariat 

Director, GAO/OIG Liaison Office 

Assistant Secretary for Office of Policy 

Assistant Secretary for Office of Public Affairs 

Assistant Secretary for Office of Legislative Affairs 

Departmental Recovery Act Coordinator 

Acting General Manager, Checked Baggage Division/Program 

Manager, Electronic Baggage Screening Program, TSA 

Audit Liaison Official, TSA 

Office of Management and Budget 

Chief, Homeland Security Branch 

DHS OIG Budget Examiner 

Congress 

Congressional Oversight and Appropriations Committees, as 

appropriate 

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our OIG Office of Public Affairs at DHS-OIG.OfficePublicAffairs@dhs.gov. For 

additional information, visit our OIG website at www.oig.dhs.gov or follow us on Twitter 

@dhsoig. 

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Attention: Office of Investigation - Hotline, 

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