U.S. ENVIRONMENTAL PROTECTION AGENCY 

OFFICE OF INSPECTOR GENERAL 

Catalyst for Improving the Environment 

 Attestation Report 

Examination of Costs Claimed Under 

EPA Cooperative Agreement X83275501 

Awarded to The Montana Physical 

Sciences Foundation 

 Report No. 11-4-0013 

 November 8, 2010 

REDACTED VERSION FOR PUBLIC RELEASE 

The full version of this report contained sensitive information. This is a 

redacted version of that report, which means the sensitive information 

has been removed. The redactions are clearly identified in the report. 
 

Report Contributors: Jessica Knight 

 Lela Wong 

 Michael Owen 

Abbreviations 

CFR Code of Federal Regulations 

EPA U.S. Environmental Protection Agency 

FY Fiscal Year 

Grant Cooperative Agreement Number X83275501 

Grantee The Montana Physical Sciences Foundation 

OIG Office of Inspector General 
 

 

 

U.S. Environmental Protection Agency 11-4-0013 

November 8, 2010 Office of Inspector General 

At a Glance 

Catalyst for Improving the Environment 

Why We Did This Review 

The U.S. Environmental 

Protection Agency (EPA) 

Office of Inspector General is 

examining assistance 

agreements to non-profit 

organizations. We selected 

The Montana Physical 

Sciences Foundation (grantee) 

for one of these examinations. 

Background 

EPA awarded Cooperative 

Agreement number 

X83275501 (grant) on 

September 23, 2005. The 

purpose of the grant was to 

provide federal assistance of 

$770,500 for research into 

producing biodegradable 

lubricants and solvents from 

waste. There was no match 

requirement for this grant. 

EPA’s contribution to the 

project was 100 percent of 

approved costs not to exceed 

$770,500. 

For further information, 

contact our Office of 

Congressional, Public Affairs 

and Management at 

(202) 566-2391. 

To view the full report, 

click on the following link: 

www.epa.gov/oig/reports/2011/ 

20101108-11-4-0013.pdf 

Examination of Costs Claimed Under EPA Cooperative 

Agreement X83275501 Awarded to The Montana 

Physical Sciences Foundation

 What We Found 

The grantee did not meet Title 40 Code of Federal Regulations (CFR) Part 30 

requirements for procurement. In particular, the grantee: 

 Has an apparent, if not real, conflict of interest with its subcontractor. 

 Awarded a sole source subcontract without a documented justification 

and a cost or price analysis. 

 Did not amend the sole source subcontract to cover a major change in 

project scope and extension of the project period. 

 Did not include terms in the sole source subcontract that provide EPA 

rights to use work funded by the grant. 

As a result, EPA will need to recover $707,320 in questioned contract costs. EPA 

should consider suspension and debarment proceedings against the grantee and its 

subcontractor. 

What We Recommend 

We recommend that the Assistant Administrator for Administration and 

Resources Management disallow and recover $707,320 in costs claimed for the 

grantee’s subcontract. We also recommend that the Assistant Administrator 

consider suspension and debarment proceedings against the grantee and its 

subcontractor. 

We recommend that the Assistant Administrator: (1) require the grantee to 

improve its procurement process to ensure compliance with Title 40 CFR Part 30; 

and (2) establish special conditions for future EPA awards to the grantee that 

require payment on a reimbursement basis, review and approval by the EPA 

project officer of reimbursement requests prior to payment, and review and 

approval by the EPA project officer of contracts prior to award. 

The Agency generally agreed with the findings, but did not comment on the 

recommendations. The grantee generally disagreed with the findings and 

recommendations. 
 

 

UNITED STATES ENVIRONMENTAL PROTECTION AGENCY 

WASHINGTON, D.C. 20460 

THE INSPECTOR GENERAL 

 November 8, 2010 

MEMORANDUM 

SUBJECT:	 Examination of Costs Claimed Under EPA Cooperative Agreement X83275501 

Awarded to The Montana Physical Sciences Foundation 

Report No. 11-4-0013 

FROM:	 Arthur A. Elkins, Jr. Mark Bialek for

 Inspector General 

TO:	 Craig E. Hooks 

Assistant Administrator 

Office of Administration and Resources Management 

David Gates 

Chairman of the Board of Directors 

The Montana Physical Sciences Foundation 

This report contains a time-critical issue the Office of Inspector General (OIG) identified. This 

report represents the opinion of the OIG and does not necessarily represent the final position of 

the U.S. Environmental Protection Agency (EPA). EPA managers will make final determinations 

on matters in this report. 

The estimated cost of this report – calculated by multiplying the project’s staff days by the 

applicable daily full cost billing rates in effect at the time – is $135,583. 

Action Required 

In accordance with EPA Manual 2750, Chapter 3, Section 6(f), you are required to provide us 

your proposed management decision for resolution of the findings contained in this report before 

you formally complete resolution with the recipient. Your proposed decision is due in 120 days, 

or on March 8, 2011. To expedite the resolution process, please e-mail an electronic version of 

your proposed management decision to adachi.robert@epa.gov. Your response will be posted on 

the OIG’s public website, along with our memorandum commenting on your response. Your 

response should be provided as an Adobe PDF file that complies with the accessibility 

requirements of section 508 of the Rehabilitation Act of 1973, as amended. The final response 
should not contain data that you do not want to be released to the public; if your response 

contains such data, you should identify the data for redaction or removal. 

We have no objections to the further release of this report to the public. This report will be 

available at http://www.epa.gov/oig. If you or your staff has any questions regarding this report, 

please contact Robert Adachi, Director of Forensic Audits at (415) 947-4537 or at the above 

e-mail address; or Michael Owen, Project Manager, at (206) 553-2542 or 

owen.michael@epa.gov. 

Note: We have redacted information on pages 15-19 of this report. Exemption (b)(6) of the 

Freedom of Information Act permits the government to withhold names of individuals when 

disclosure of such information “would constitute a clearly unwarranted invasion of personal 

privacy.” [5 U.S.C. § 552 (b)(6)] 
 

 

Examination of Costs Claimed Under EPA Cooperative Agreement 11-4-0013 

X83275501 Awarded to The Montana Physical Sciences Foundation 

Table of Contents 

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

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

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

Independent Attestation Report ................................................................................ 2 

Results of Examination .............................................................................................. 4 

Apparent Conflict of Interest Between Grantee and Subcontractor ..................... 4 

Subcontract Not Supported by Justification and Analysis .................................... 6 

Subcontract Not Amended to Reflect Revised Project Scope.............................. 6 

Subcontract Terms Do Not Include EPA’s Rights to Use Work ........................... 7 

Conclusion ........................................................................................................... 7 

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

Agency and Grantee Comments.......................................................................... 8 

OIG Response ..................................................................................................... 9 

Status of Recommendations and Potential Monetary Benefits.............................. 10 

Appendices 

A Agency’s Comments on the Draft Report ....................................................... 11 

B Grantee’s Comments on the Draft Report and the OIG’s Evaluation............ 13
 

C Distribution ......................................................................................................... 22
 
 

Introduction 

Purpose 

The purpose of the examination was to determine whether The Montana Physical Sciences 

Foundation (grantee) complied with assistance agreement requirements and applicable Federal 

laws and regulations. During our examination, we determined that the grantee did not comply 

with federal procurement requirements, including codes of conduct requirements. We believe 

these issues require immediate attention to ensure expeditious recovery of federal funds and 

implementation of additional controls to protect the government’s interest. 

Background 

The U.S. Environmental Protection Agency (EPA) awarded Cooperative Agreement number 

X83275501 (grant) on September 23, 2005. The purpose of the grant was to provide federal 

assistance of $770,500 for research into producing biodegradable lubricants and solvents from 

waste. There was no match requirement for this grant. EPA’s contribution to the project was 100 

percent of approved costs not to exceed $770,500. The grant’s budget and project period was 

from October 1, 2005, to November 30, 2009. 

11-4-0013 1 
 

Independent Attestation Report 

As part of our continued oversight of the assistance agreements awarded to nonprofit 

organizations by EPA, we have examined the costs claimed by the grantee covering the period 

October 1, 2005, to November 30, 2009. By receiving the award, the grantee has accepted 

responsibility for preparing its cost claim to comply with the requirements of Title 2 Code of 

Federal Regulations (CFR) Part 230, Title 40 CFR Part 30, and the terms and conditions of the 

grant. Our responsibility is to express an opinion on the grantee’s compliance and costs claimed 

based on our examination. 

Our examination was conducted in accordance with the Government Auditing Standards issued 

by the Comptroller General of the United States and the attestation standards established by the 

American Institute of Certified Public Accountants. We examined evidence supporting the 

amount claimed under the grant and performed other procedures we considered necessary under 

the circumstances. We believe that our examination provides a reasonable basis for our opinion. 

We conducted our fieldwork from February 2009 to July 2010. We performed the following 

steps during fieldwork: 

 Reviewed EPA project and grant files 

 Interviewed the EPA project officer and grant specialist to obtain an understanding of the 

project 

 Reconciled and verified the deposits of EPA payments (drawdowns) to the grantee’s bank 

statements for the period of February 2007 to December 2008. 

 Reviewed the grantee’s supporting documents for drawdowns under the grant including the 

grantee’s electronic accounting records and the supporting invoices 

 Conducted interviews of grantee and subcontractor personnel to obtain an understanding of 

the project as well as the grantee’s process for procurement, drawdown, and invoice payment 

 Reviewed the subcontractor procurement and the terms and conditions of the subcontract 

 Performed fraud detection procedures including interviewing EPA and grantee personnel, 

reviewing transaction patterns, performing duplicate payment analysis, and reviewing Board 

of Director meeting minutes 

As part of obtaining reasonable assurance that the grantee’s costs claimed under the grant are 

free of material misstatement, we performed tests of its compliance with the requirements of 

Title 2 CFR Part 230, Title 40 CFR Part 30, and the terms and conditions of the grant. We also 

considered the grantee’s internal controls over cost reporting to determine our audit procedures 

and to express our opinion on the costs claimed. Our consideration of internal control would not 

necessarily disclose all internal control matters that might be material weaknesses. A material 

weakness is a significant deficiency or combination of significant deficiencies, in internal control 

that provide a reasonable possibility that a material misstatement of the entity’s financial 

statements will not be prevented, or detected and corrected on a timely basis. A significant 

deficiency is a deficiency, or combination of deficiencies, in internal control that is less severe 

11-4-0013 2 
 

 

than a material weakness, but important enough to warrant attention by those charged with 

governance. 

Our examination disclosed the following material weaknesses concerning procurement 

requirements specified by Title 40 CFR Part 30: 

 The grantee has an apparent, if not real, conflict of interest with its subcontractor. 

 The grantee awarded a sole source subcontract without a documented justification and a cost 

or price analysis. 

 The grantee did not amend the sole source subcontract to cover a major change in project 

scope and extension of the project period. 

 The grantee did not include terms in the sole source subcontract that provide EPA rights to 

use work funded by the grant. 

As a result, we questioned $707,320 of the $748,432 claimed under the grant. 

In our opinion, because of the effect of the issues described above, the costs claimed do not meet, 

in all material respects, the requirements of Title 40 CFR Part 30 and the terms and conditions of 

the grant for the period ended November 30, 2009. 

Robert K. Adachi 

Director for Forensic Audits 

July 22, 2010 

11-4-0013 3 
 

 

 

Results of Examination 

The grantee did not meet Title 40 CFR Part 30 requirements for procurement. In particular, the 

grantee: 

 Has an apparent, if not real, conflict of interest with its subcontractor. 

 Awarded a sole source subcontract without a documented justification and a cost or price 

analysis. 

 Did not amend the sole source subcontract to cover a major change in project scope and 

extension of the project period. 

 Did not include terms in the sole source subcontract that provide EPA rights to use work 

funded by the grant. 

As a result, EPA will need to recover $707,320 in questioned contract costs. EPA should also 

consider suspension and debarment proceedings against the grantee and its subcontractor. The 

costs claimed and questioned are summarized in Table 1. 

Table 1: Summary of costs claimed and questioned 

Cost Category Amount 

Claimed 

Amount 

Questioned 

Contract Costs1 $707,320 $707,320 

Other Direct Costs $41,112 $0

 Totals $748,432 $707,320 

Sources: Amounts claimed were from supporting invoices provided by the
 

grantee. Costs questioned were based on the OIG’s analysis of the data. 

1 See discussion under Apparent Conflict of Interest between Grantee and 

Subcontractor. 

Apparent Conflict of Interest Between Grantee and Subcontractor 

The grantee has an apparent, if not real, conflict of interest with its subcontractor, Resodyn, in 

violation of Title 40 CFR Part 30.42 which states in part: 

“No employee, officer, or agent shall participate in the selection, award, or administration 

of a contract supported by Federal funds if a real or apparent conflict of interest would be 

involved. Such a conflict would arise when the employee, officer, or agent, any member 

of his or her immediate family, his or her partner, or an organization which employs or is 

about to employ any of the parties indicated herein, has a financial or other interest in the 

firm selected for an award.” 

We found that the president of the grantee’s subcontractor not only established the nonprofit 

grantee, but the evidence indicates that he assisted with the preparation of an important 

11-4-0013 4 
 

document associated with the procurement of the sole source subcontract and attended the 

grantee’s Board of Directors meetings where operation and management decisions were made. 

The grantee’s Articles of Incorporation identify that the president of Resodyn, the grantee’s 

subcontractor, founded the nonprofit grantee in September 2004. In our interview of the 

president of Resodyn, the president stated that he established the nonprofit organization in order 

to obtain the grant funding for Resodyn. Congressional appropriation records showed that the 

conference report for the Fiscal Year (FY) 2004 Appropriation Act directed that EPA award 

$800,000 to Montec Research in Butte Montana for research of pilot scale enzyme catalyzed 

processes. In 2003, Montec Research officially changed its name to Resodyn. According to an 

EPA project officer and grant specialist who were responsible for the grant, the company was 

ineligible for the award because it was a “for profit” corporation rather than a nonprofit 

organization. Because EPA was not able to award the funding to the company, the funding was 

redirected to the nonprofit grantee through the conference report for the FY 2005 Appropriation 

Act. 

Our review of EPA documentation associated with the grant award disclosed that in September 

2005, EPA Office of General Counsel expressed concern about the award when an EPA preaward compliance review found that the president of Resodyn was also a member of the 

grantee's Board of Directors. The Office of General Counsel was concerned about a potential 

conflict of interest because the grantee planned to subcontract most of the work under the grant 

to Resodyn through a sole source contract. To address EPA’s concerns, the grantee provided 

EPA with a letter from the president of Resodyn, dated September 12, 2005, announcing his 

immediate resignation from the Board of Directors. The Office of General Counsel determined 

on September 20, 2005, that the conflict of interest was eliminated based on the resignation 

letter, and EPA proceeded to award the grant to the nonprofit. 

Although the grantee informed EPA that Resodyn’s president had resigned from the Board of 

Directors, our review of procurement documents the grantee submitted to EPA disclosed that 

Resodyn’s president assisted with the preparation of an important document. Specifically, the 

electronic properties of a report summarizing the Board of Directors’ review comments and 

approval of Resodyn's project proposal disclosed that Resodyn’s president was the author of the 

document. According to the grantee, Resodyn’s president did not author the content of the 

document. The grantee said that its Executive Director inquired and obtained from the 

subcontractor’s president a template for evaluating project proposals. The grantee explained that 

the template was subsequently used by the Board of Directors to evaluate Resodyn’s contract 

proposal. 

In addition, a review of the minutes for the grantee’s Board of Directors meetings held from 

October 2005 to May 2008 disclosed that the president of Resodyn attended the meetings even 

after his resignation from the Board. According to the minutes, the president of Resodyn was 

present at meetings where the Board made major decisions about the operation and management 

of the nonprofit as well as work under the EPA grant. Specifically, during these meetings, the 

Board elected the grantee’s officers, made the employment selection for the grantee’s Executive 

Director, established the roles and responsibilities for the Executive Director, and established the 

request for proposal process for Resodyn’s sole source subcontract. 

11-4-0013 5 
 

In total, the facts suggest a failure of an arm’s length relationship between the grantee and 

Resodyn, and an apparent, if not actual, conflict of interest under Title 40 CFR Part 30.42, with 

regard to the award and administration of the sole source subcontract with Resodyn. 

Subcontract Not Supported by Justification and Analysis 

The grantee’s sole source subcontract to Resodyn was awarded without a documented 

justification and a cost or price analysis as required by Title 40 CFR Part 30.45, Part 30.46, and 

the grant. Title 40 CFR Part 30.45 requires the grantee to complete a cost or price analysis and 

document the analysis in the procurement files for every procurement action. Title 40 CFR Part 

30.46 specifies that procurement records and files for purchases that exceed the $100,000 small 

purchase threshold shall include a justification for lack of competition when competitive bids or 

offers are not obtained. The grant also required the nonprofit recipient, as a condition of the 

award, to submit for EPA’s review the justification for the sole source award and the cost or 

price analysis for the subcontract. However, neither the grantee nor the EPA grant specialist or 

project manager responsible for managing the grant were able to provide copies of these 

documents. The grantee and EPA staff were also unable to confirm whether the justification and 

cost or price analysis were ever completed or submitted to EPA. Without a proper justification 

and cost or price analysis, the grantee was unable to show that the sole source subcontract was 

necessary and the costs claimed under the grant are fair and reasonable. 

Subcontract Not Amended to Reflect Revised Project Scope 

The grantee did not amend the sole source subcontract with Resodyn to cover a major change in 

project scope and extension of the project period as required by Title 40 CFR Part 30.48. Title 40 

CFR Part 30.48 requires that recipients of federal awards include provisions that define a sound 

and complete contract. Title 40 CFR Part 30.48 also specifies that contracts exceeding the 

$100,000 small purchase threshold include provisions or conditions that allow and provide for 

administrative, contractual, or legal remedies in instances where a contractor violates or breaches 

the contract terms. Because the subcontract was not amended, the grantee was not in compliance 

with these federal contract requirements. 

During 2007 and 2008, EPA amended the grant to revise the scope of work and extend the 

budget and project periods at the grantee’s request. The grantee requested the scope change 

because there was an increase in market demand for the original project’s source material. EPA 

amended the scope of work to change the source material, which was designated a major scope 

change in the grant amendment and extended the budget and project periods through November 

2009. Despite the major change in the project scope and extension of the project period, the sole 

source subcontract was not revised. 

Our review of progress reports on the research project and interviews of the Executive Director 

for the grantee and managers and staff from Resodyn disclosed that the company did not conduct 

the research specified by the subcontract. Rather, Resodyn conducted research on the new scope 

of work approved by the grant amendment. The progress reports and interviews also revealed 

that the research was ongoing as of February 2009 and had exceeded the March 20, 2007, 

11-4-0013 6 
 

completion date specified by the subcontract. Although Resodyn’s research work appeared to be 

consistent with the amended grant, the work was not within the scope of the subcontract and had 

not been completed within the period specified by the subcontract. Therefore, the grantee was 

not able to ensure through the contract provisions that Resodyn satisfactorily completed the 

research work specified and funded by the grant as required under Title 40 CFR Part 30.48. 

Subcontract Terms Do Not Include EPA’s Rights to Use Work 

The grantee’s subcontract with Resodyn did not include terms that provide EPA rights to use the 

work funded by the grant as required by Title 40 CFR Part 30. Title 40 CFR Part 30.36 states 

that EPA reserves a royalty-free, nonexclusive, and irrevocable right to reproduce, publish, or 

otherwise use for federal purposes work that was developed under an award. The appendix to 

Title 40 CFR Part 30 further specifies that contracts for the research work under an award shall 

include a provision that provides EPA with these rights. However, the grantee’s subcontract with 

Resodyn did not include this provision and provided complete ownership of all work conducted 

under the subcontract to the company. 

Conclusion 

We question the $707,320 in contract costs claimed under the grant as unallowable, because the 

grantee did not meet Title 40 CFR Part 30 requirements for procurement. The apparent, if not 

real, conflict of interest between the grantee and its subcontractor is a material issue, and EPA 

should consider suspension and debarment of both entities from future federal awards under Title 

2 CFR Part 180. Title 2 CFR Part 180 specifies that an Agency may pursue a suspension and 

debarment action for the willful violation of a statutory or regulatory provision or requirement 

applicable to a public agreement or transaction. 

Based on the findings above, the grantee also does not meet the federal management standards 

for grants and may not have the capability to manage future EPA awards. Office of Management 

and Budget Circular A-110 establishes the federal standards for the administration of grant 

awards for nonprofit organizations. These standards include procurement codes of conduct, 

contract justification and analysis, and contract provision requirements that are equivalent to 

those specified by Title 40 CFR Part 30. EPA should impose special conditions on all future 

awards of EPA funds as outlined in Title 40 CFR Part 30. Title 40 CFR Part 30.14, 

Special Award Conditions, states: 

“If an applicant or recipient has a history of poor performance, is not financially 

stable; has a management system that does not meet the standards prescribed in 

Circular A–110; has not conformed to the terms and conditions of a previous 

award; or is not otherwise responsible, EPA may impose additional requirements 

as needed, provided that such applicant or recipient is notified in writing as to: the 

nature of the additional requirements, the reason why the additional requirements 

are being imposed, the nature of the corrective action needed, the time allowed for 

completing the corrective actions, and the method for requesting reconsideration 

of the additional requirements imposed.” 

11-4-0013 7 
 

The special conditions should include (1) payment on a reimbursement basis, (2) EPA review 

and approval of reimbursement requests prior to payment, and (3) EPA review and approval of 

contracts prior to award. 

Recommendations 

We recommend that Assistant Administrator for Administration and Resources Management: 

1.	 Disallow and recover $707,320 in the costs claimed for the Resodyn subcontract. 

2.	 Consider suspension and debarment of the grantee and Resodyn from future federal 

awards under Title 2 CFR Part 180. 

3.	 Require the grantee to improve its procurement process to ensure compliance with Title 

40 CFR Part 30, including codes of conduct and contract cost or price analysis 

requirements. 

4.	 Require that the following special conditions be included for future EPA awards to the 

grantee until EPA determines that the grantee has met all applicable federal financial and 

procurement requirements: 

a.	 Payment on a reimbursement basis. 

b.	 Review and approval by the EPA project officer of reimbursement requests. 

including all supporting documentation for the claims prior to payment. 

c.	 Review and approval by the EPA project officer of contracts prior to award. 

Agency and Grantee Comments 

The OIG received comments on the draft report from the Office of Administration and Resources 

Management and the grantee on August 23, 2010. The grantee also provided supplemental 

documentation as support for its comments. 

The Office of Administration and Resources Management generally agreed with the findings and 

offered clarifying information on the FY 2004 and 2005 appropriation acts with regard to the 

award to the grantee. The Office of Administration and Resources Management did not comment 

on the Recommendations. The Agency’s complete written response is in Appendix A. 

The grantee generally disagreed with the findings and recommendations and said that they were 

based on incomplete or misinterpreted factual information. The grantee’s complete written 

response is in Appendix B. The supplemental documentation provided by the grantee is not 

included in the report. The supplemental documentation is available on request, except for 

documentation the grantee has determined to be confidential and requested that it be withheld 

from distribution outside of EPA. 

11-4-0013 8 
 

OIG Response 

We agreed with the clarifying information on the FY 2004 and 2005 appropriation acts provided 

by the Office of Administration and Resources Management and revised the report as 

appropriate. The Agency will need to provide a proposed management decision for resolution of 

the findings in response to this report. 

The grantee's comments did not resolve the procurement issues; including the apparent, if not 

real, conflict of interest with its subcontractor. Therefore, our position on the findings and 

recommendations in the attestation report remains generally unchanged. However, we accepted 

the grantee's explanation about its use of letterhead templates and the quality assurance plan 

obtained from the sole source subcontractor. We also accepted the grantee's explanation about 

the attendance of the subcontractor’s president at Board of Directors meetings where project 

updates and progress reports were presented. We revised the report as appropriate based on these 

explanations. The full text of our response is embedded as text boxes in the grantee’s complete 

written response. 

11-4-0013 9 
 

 

 

 

 

 

 

 

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 8 Disallow and recover $707,320 in the costs claimed 

for the Resodyn subcontract. 

U Assistant Administrator for 

Administration and 

Resources Management 

$707.3 

2 8 Consider suspension and debarment of the grantee 

and Resodyn from future federal awards under 

Title 2 CFR Part 180 

U Assistant Administrator for 

Administration and 

Resources Management 

3 

4 

8 

8 

Require the grantee to improve its procurement 

process to ensure compliance with Title 40 CFR 

Part 30, including codes of conduct and contract 

cost or price analysis requirements. 

Require that the following special conditions be 

included for future EPA awards to the grantee until 

EPA determines that the grantee has met all 

applicable federal financial and procurement 

requirements: 

(a) Payment on a reimbursement basis. 

(b) Review and approval by the EPA project 

officer of reimbursement requests 

including all supporting documentation for 

the claims prior to payment. 

(c) Review and approval by the EPA project 

officer of contracts prior to award. 

U 

U 

Assistant Administrator for, 

Administration and 

Resources Management 

Assistant Administrator for 

Administration and 

Resources Management 

O = recommendation is open with agreed-to corrective actions pending 

C = recommendation is closed with all agreed-to actions completed 

U = recommendation is undecided with resolution efforts in progress 

11-4-0013 10 

1 
 

 

 

 

 

 

Appendix A 

Agency’s Comments on the Draft Report 

United States Environmental Protection Agency 

Washington, DC 20460 

 Office of

 Administration

 and Resources

 Management 

August 23, 2010 

MEMORANDUM 

SUBJECT: Draft Attestation Report 

Examination of Costs Claimed Under EPA Cooperative Agreement X83275501 

Awarded to The Montana Physical Sciences Foundation Project No. 2009-0840 

FROM: Denise Sirmons, Director /s/ 

Grants and Interagency Agreement Management Division 

TO: Robert K. Adachi 

Director of Forensic Audits 

Thank you for the opportunity to review and comment on the factual accuracy of the subject 

Office of Inspector General (OIG) Draft Attestation Report (Report), dated July 22, 2010. Based 

on our review of the Report and information available at this time, we generally agree with the 

Report findings, but offer the following two clarifications: 

1.	 The “earmarks” that prompted EPA to award funding to The Montana Physical Sciences 

Foundation (Foundation) were not contained in EPA’s Fiscal Year 2004 or Fiscal Year 2005 

appropriation acts. Rather, the Agency honored the direction provided by EPA’s 

appropriations committees in the conference reports to fund the Foundation. Although such 

directions in conference committee reports are not legally binding unless the text of the 

report is incorporated by reference into the appropriations act, Agency policy at the time was 

11-4-0013 11 
 

to follow the direction. Executive Branch policy now prohibits EPA from honoring earmarks 

that are not included in statutory text. 

2.	 The conference committee report for EPA’s Fiscal Year 2004 Appropriation Act, Report 

108-401 (November 25, 2003) directed that EPA award $800,000 to “Montec Research in 

Butte Montana.” In 2003, Montec Research officially changed its name to Resodyn 

Corporation. The earmark is item 57 in the portion of the report on EPA's Science and 

Technology appropriation. 

Our thanks again for the opportunity to comment on the Report. If you have any questions 

concerning this matter, please contact me at 202-564-6771. You may also contact Joe Lucia, the 

Office of Grants and Debarment Audit Follow-up Coordinator, at 202-564-5378. 

cc: Michael Owen 

Jessica Knight 

Cynthia Johnson 

Kysha Holliday 

Joe Lucia 

11-4-0013 12 
 

       

   

   

         

           

                           

                       

                             

   

                             

                        

                           

                           

           

                             

                             

                       

                             

                           

Appendix B 

Grantee’s Comments on the Draft Report 

and the OIG’s Evaluation 

The response from The Montana Physical Sciences Foundation is provided verbatim. OIG 

responses to those comments have been inserted in text boxes. 

Montana Physical Science Foundation
 

Audit Comments
 

Agreement X83275501
 

between
 

The Montana Physical Sciences Foundation
 

and
 

the United States Environmental Protection Agency
 

The following is the Montana Physical Science Foundation (the “Foundation”)'s response to the draft

attestation report titled: Examination of Costs Claimed Under EPA Cooperative Agreement X83275501

Awarded to The Montana Physical Sciences Foundation, Project No. 2009‐840, issued July 22, 2010 (the

“Report”).

Introduction

In several key respects, the Report’s conclusion that the Foundation failed to comply with applicable

procurement regulations is based on incomplete or misinterpreted factual information. In particular:

	 Congress intended Resodyn to be the sole source subcontractor for Project No. 2009‐840 (the

“Project”)

	 The president of Resodyn promptly resigned from the Foundation’s Board when his service was

identified as a problem by EPA

	 The president of Resodyn did not author any of the “important documents” identified in the

Report

	 The president of Resodyn did not participate in decisions made by the Board after his
 

resignation, and was not present when the Board met in executive session
 

	 Resodyn abided by the project’s amended scope of work, even though the subcontract was not

amended

	 Resodyn is willing to transfer intellectual property rights to EPA as appropriate under law

11-4-0013 13 
 

                              

                              

                                 

         

                                    

                           

                           

                          

                          

                              

                              

                                   

       

                                   

                            

 

                               

                   

                                     

                                  

Furthermore, the Foundation acted in good faith and in consultation with EPA throughout the Project.

The Project work was completed by the subcontractor on time and within budget. Under these

circumstances, there is no justification for seeking to recover any of the grant money, or imposing any

other penalties on the Foundation.

Background

The background section of the Report omits several key facts related to the Project. As an initial matter,

the Report fails to acknowledge that the Congressionally appropriated grant here at issue was originally

made in response to a 2004 request by Montec Research Corporation—the predecessor to Resodyn

Corporation—for an EPA appropriation. This request was for additional funding to continue work

started under EPA Phase 1 SBIR Solicitations No. PR‐NC‐04‐10308.1 In 2005, Congress specifically

designated $800,000 to Montec for this work.2 This line item clearly evidences Congress' intent that

Montec/Resodyn be the sole source subcontractor for the work performed in the Project. In addition,

the sole source contract is justified by the follow‐on nature of the Project’s work, which is outlined in

the SBIR Solicitation cited above.

OIG RESPONSE 1 The project funded under the cooperative agreement is not 

related to nor a continuation of work conducted under EPA SBIR Phase 1 

solicitation #PR-NC-04-10308. The cooperative agreement, which provided the 

funding for this project, was not awarded under the SBIR program. Rather, the 

cooperative agreement specifies that the award was made under the statutory 

authorities of the Clean Air, Clean Water, Solid Waste Disposal, and Toxic 

Substances Control Acts. In addition, the scope of work included in the grantee's 

application for the cooperative agreement made no reference to the SBIR program. 

The Congressional conference report for EPA's Fiscal Year (FY) 2004 

appropriation designated the $800,000 in funding for Montec's pilot scale enzyme 

catalyzed processes research project. However, the conference report for the FY 2005 

Congressional appropriation, which redirected the funding to The Montana Physical 

Sciences Foundation, did not require the grantee to award an uncompetitive, sole 

source subcontract to Resodyn. As a recipient of the EPA cooperative agreement 

award, The Montana Physical Sciences Foundation was required to comply with 

Title 40 Code of Federal Regulation (CFR) Part 30. Title 40 CFR Part 30.46 

specifies that procurement records and files for purchases that exceed the small 

purchase threshold shall include a justification for lack of competition when 

competitive bids or offers are not obtained. The grantee was not able to provide the 

required justification during our examination, and its comments above do not 

justify the sole source contract award to Resodyn. 

Once the appropriation was made Resodyn was informed that the EPA would not award the funds to a

for‐profit company. To resolve this problem and fulfill the intent of Congress, Resodyn, working jointly

1 See Resodyn Corp., Proposal to the Foundation for Biodegradable Lubricant and Solvent Production from Waste
 

Greases (Dec. 15, 2005) at 5 (attached as Ex. A)
 2 H.R. Rep. 108‐401, at 1118, Line item 57 (2003) ($800,000 for Montec Research); H.R. Rep. 108‐792, at 1555
 

(2004) (transferring funding from Montec to Resodyn). The relevant excerpts of both reports are attached as Ex. B.
 

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and cooperatively with the EPA, set up The Montana Physical Sciences Foundation. The Foundation

applied for and received its tax exempt 501(c)3 status and a Board of Directors was established. The

Foundation then subcontracted with Resodyn to perform the Project work.

OIG RESPONSE 2 We acknowledge that Resodyn established The Montana 

Physical Sciences Foundation because EPA determined that the for-profit 

company was not eligible for the funding provided by the Fiscal Year 2004 

appropriation. Our review of EPA's grant and correspondence files and interviews 

with EPA grant and project officer personnel involved with awarding and 

managing the cooperative agreement did not disclose or suggest that EPA 

participated in creating The Montana Physical Sciences Foundation. The Articles of 

Incorporation for The Montana Physical Sciences Foundation show that the 

president of Resodyn created the non-profit organization in 2004 as discussed in 

the attestation report. 

When EPA raised concerns about the Foundation’s capability to fulfill its role as contract administrator,

the Foundation completed an Administrative Capability Questionnaire.3 After reviewing this

documentation, EPA informed the Foundation that XXXXXXX, as a principal of Resodyn, could not be on

the Board of the Foundation. As the Report acknowledges, XXXXXXX immediately resigned from the

Foundation’s Board. The EPA ultimately issued a Cooperative Agreement for the project. Again, the

Foundation took these steps in consultation with EPA, and made every effort to ensure that it was in

compliance with all rules and regulation regarding the award and administration of the Project funding.

Ultimately, the Project work for which EPA contracted was completed on time and within budget. The

final Project report was accepted by the Agency.4

OIG RESPONSE 3 We acknowledge that the final project report was accepted 

by EPA. However, EPA's acceptance of the final project report does not resolve 

the procurement issues and questioned costs discussed in the attestation report. 

Apparent Conflict of Interest between Grantee and Subcontractor

As discussed above, the basis for the award of the Project work as a sole source contract to Resodyn was

a Congressional appropriation. The Foundation was created to satisfy EPA’s rules and regulations, which

dictated that the Congressional funding must be managed by a non‐profit entity. The Foundation

accordingly was set up with the full knowledge and consent of the EPA.5

3 See Administrative Capability Questionnaire (attached as Ex. C).
 4 See Federal Financial Report (attached as Ex. D); Email from XXXXXXX, EPA to XXXXXXX (Sept. 24, 2009) (attached
 

as Ex. E).
 5 See Email from XXXXXX (EPA) to XXXXXX (Sept. 19, 2005) (attached as Ex. F).
 

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OIG RESPONSE 4 As discussed in OIG RESPONSE 1, the conference report 

for the Fiscal Year 2005 Congressional appropriation, which designated the 

funding to the grantee, did not require the sole source subcontract to Resodyn. 

Our review of EPA's grant and correspondence files and interviews with EPA 

grant and project officer personnel involved with awarding and managing the 

cooperative agreement did not disclose or suggest that EPA participated in 

creating The Montana Physical Sciences Foundation as discussed in OIG 

RESPONSE 2. We also note that the email cited in the comment above discusses 

EPA's concerns with a conflict of interest between the grantee and the president of 

Resodyn rather than providing the Agency's consent on the creation of the nonprofit organization. 

The Draft Report accurately states the facts regarding the president of Resodyn's participation in the

creation of the Foundation and his initial position on the Foundation’s Board of Directors. It also

accurately reflects that the president resigned immediately after the EPA General Counsel determined

there could be an actual or apparent conflict of interest. EPA and the Foundation concluded that the

actual or apparent conflict was eliminated when the president’s resignation from the Foundation

occurred. The Report does not seem to challenge that conclusion. Instead, the Report identifies two

circumstances that allegedly “suggest a failure of an arm’s length relationship between the grantee and

Resodyn, and an apparent, if not actual conflict of interest . . . .” The Report’s conclusion, however, is

based on a misinterpretation of the facts.

Important Documents

Relying on “electronic properties,” the Report identifies Resodyn’s president, XXXXXXX, as the creator of

“four important documents.” The Report reasons that XXXXXXX must have either “created or

participated in the preparation of” those document. In fact, there is another explanation for the

“electronic properties” of these documents.

Because XXXXXXX was originally a part of the Foundation’s Board, he created several electronic

letterhead templates that the Foundation’s Executive Director and Chairman used when they authored

certain correspondence.6 But XXXXXXX did not author or otherwise have any hand in creating the three

letters mentioned in the Report.7 The fact that the Foundation continued to use a letterhead template

for correspondence originally created by XXXXXXX does not suggest the failure of an arm’s length

relationship, much less a conflict of interest, between the Foundation and Resodyn.

The Quality Assurance Plan mentioned in the Report has a similarly innocent explanation.8 When the

need arose, the Foundation’s Executive Director inquired of XXXXXX whether Resodyn had a template

that The Foundation could use in evaluating proposals it would be receiving.9 XXXXXX sent such a

6 Affidavit of XXXXXX (“XXXXXX Aff.”) ¶ 5 (attached as Ex. G).
 7 XXXXXX Aff. ¶ 6.
 8 The Quality Assurance Plan was part of the contract work to be performed by Resodyn and was appropriately
 

done by them.
 9 XXXXXX Aff. ¶ 7.
 

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template, and the Foundation’s Executive Director deemed it sufficient for The Foundation’s purposes.10

There is no evidence to supports the claim in the Report that Resodyn had any influence in the content

of the report summarizing the Board’s comments on Resodyn’s proposal. In fact, as explained in the

Executive Director’s declaration, the evaluation of Resodyn’s proposal was completed by the Board

members alone, without any input whatsoever from Resodyn.11 Again, the fact that the Board decided

to use a template from Resodyn’s president does not suggest any apparent or actual conflict of interest.

OIG RESPONSE 5 We accept the grantees explanation about the letterhead 

templates and quality assurance plan and have revised the report as appropriate. 

However, the grantee's explanation about the template for evaluating proposals 

provides additional support for our position on the conflict of interest. The 

Executive Director's inquiry to Resodyn for a template to evaluate contract 

proposals and the Board's subsequent use of the contractor's template to evaluate 

the sole source contract proposal suggest a failure of an arm's length relationship 

between the two entities. 

Board Meetings

The Report also points to Resodyn's attendance at Foundation Board meetings as evidence of a less than

an arm’s length relationship between the parties. While it is true that Resodyn employees regularly

attended Foundation Board meetings, their attendance was at the request of the Board, for the purpose

of providing the Board with contractually‐required project updates and progress reports.12 When

Resodyn’s employees were present at Board meetings, they did not participate in votes by the Board, or

in the discussions leading up to those votes.13 When the President of the Foundation’s Board called for

an executive session of the Board, all Resodyn employees were excluded from the session.14

The Report infers based on the mere presence of Resodyn employees that Resodyn participated in the

Board's decision making processes. That is simply not the case. The Foundation’s Board was merely

fulfilling its responsibilities under the agreement with EPA by ensuring that Resodyn was properly

carrying out work on the Project. No conflict of interest, actual or apparent, existed.

10 XXXXXX Aff. ¶ 7.
 11 XXXXXX Aff. ¶ 8.
 12 Affidavit XXXXXXXXXX Aff.”) ¶ 7 (attached as Ex. H); Affidavit of XXXXXXXXX Aff.”) ¶ 4 (attached as Ex. I).
 13 XXXXXX Aff. ¶ 8; XXXXXX Aff. ¶¶ 4, 5.
 14 XXXXXX Aff. ¶ 8; XXXXXX Aff. ¶ 5.
 

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OIG RESPONSE 6 We accept the grantees explanation for the presence of 

Resodyn's president and employees at Board of Directors meetings where project 

updates and progress reports were presented and revised the report as appropriate. 

However, our review of the Board meeting minutes disclosed that the president of 

Resodyn attended Board meetings when Resodyn was not providing project 

updates and progress reports. According to the minutes, the president of Resodyn 

attended Board meetings where Resodyn did not present their work and major 

decisions were made about the operation and management of the nonprofit. For 

example, the meeting minutes for the November 3, 2005 meeting disclosed that the 

President of Resodyn was present at the meeting when the Board discussed 

revising the non-profit organization's by-laws, roles and responsibilities of the 

executive director, and the request for proposal process for the sole source 

contract. The presence of the president of Resodyn at this and the other Board 

meetings where the contractor did not present work results and major decisions 

were made about the operation and management of the nonprofit suggests an 

apparent, if not actual, conflict of interest under Title 40 CFR Part 30.42 as 

discussed in the attestation report. 

Subcontract Not Supported by Justification and Analysis

As discussed above, the Project was originally conceived as a Congressional appropriation to

Montec/Resodyn, and was follow‐on work to a prior SBIR Solicitation. These facts alone warranted the

sole sourcing of the subcontract to Resodyn. Moreover, appropriate cost justification and analysis was

completed for this project. The rates that Resodyn charged the Foundation for the project were audited

by the Defense Contract Audit Agency (DCAA) which established Resodyn's rates for all government

projects. The Board reviewed Resodyn's Proposal15 for the work and found it acceptable. The Board

found that Resodyn was uniquely qualified to carry out the work proposed and determined that the

scope of work and schedule were consistent with the level of effort (budget) proposed by Resodyn. This

information was provided to the EPA and no further analysis or justification was requested by the

Agency. Further indication of the acceptability of the analysis to the EPA is evidenced by the Agency’s

issuance of the contract to the Foundation for the work.16 At all times, the Foundation acted in good

faith and consistent with Congressional intent.

15 See Letter from XXXXX XXXXXXX to XXXXX XXXXXXX (Dec. 20, 2005) (attached as Ex. J). 16 See U.S. Environmental Protection Agency Cooperative Agreement (Sept. 25, 2005) (attached as Ex. K).

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OIG RESPONSE 7 As discussed in OIG RESPONSE 1, the conference report 

for the Fiscal Year 2005 Congressional appropriation, which designated the 

funding to the grantee, did not require an uncompetitive, sole source subcontract to 

Resodyn. As also discussed in OIG RESPONSE 1, the project funded under this 

cooperative agreement is not related to nor a continuation of work conducted 

under EPA SBIR Phase 1 solicitation #PR-NC-04-10308. Regardless of the grant's 

history, the grantee was required by Title 40 CFR Part 30.45, Part 30.46, and the 

grant award to complete a cost or price analysis and document a sole source 

justification. With regard to Resodyn's rates charged to the project, the grantee has 

not provided documentation showing the rates were audited by and established by 

DCAA. However, a review of Resodyn's rates by DCAA does not satisfactorily 

meet the analysis and justification requirements of Title 40 CFR Part 30. Title 40 

CFR Part 30 and the grant award required that the grantee conduct a cost or price 

analysis and justification to determine and support cost reasonableness, 

allocability, and allowability before awarding the sole source subcontract. 

Subcontract Not Amended to Reflect Revised Project Scope

As the Report acknowledges, the Foundation sought and received EPA approval for the change in scope

and extension of time to complete the Project work. The Foundation discussed this change in scope

with Resodyn and obtained their verbal acceptance. But the Foundation acknowledges that it did not

formally amend the subcontract with Resodyn. The Foundation, as indicated by Board minutes, project

reviews, and ultimately final acceptance by the EPA of the work, still administered the contract with

Resodyn in accordance with the approved project scope change.17 Under these circumstances, the

failure to amend the subcontract should be considered a minor failure.

OIG RESPONSE 8 Our position remains unchanged. Title 40 CFR Part 30.48 

requires that recipients of federal awards include provisions that define a sound 

and complete contract. Title 40 CFR Part 30.48 also specifies that contracts 

exceeding the $100,000 small purchase threshold include provisions or conditions 

that allow and provide for administrative, contractual, or legal remedies in 

instances where a contractor violates or breaches the contract terms. Because the 

subcontract was not amended, the grantee was not in compliance with these 

federal contract requirements. 

17 See Email from XXXX XXXXXXX to XXXXX XXXXXXX (EPA) (May 28, 2007) (attached as Ex. L); Email from XXXXX

XXXXXXX (EPA) to XXXXX XXXXXXX (July 20, 2007) (attached as Ex. M).

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Subcontract Terms Do Not Include EPA's Rights to Use Work

It was the Foundation's belief that the work conducted under this agreement was follow‐on Phase II or

Phase III work originating from the EPA Phase 1 SBIR Solicitations No. PR‐NC‐04‐10308.18 Under the

Bayh‐Dole Act, intellectual property (IP) created through this process belongs to the contractor not the

EPA. Thus the contract was written with the IP belonging to the contractor. That being said, the

Foundation also recognizes that, outside of the SBIR process, IP generally belongs to the EPA, but as per

the provisions of the Bayh Dole act, subcontractors to the government can elect title to their inventions.

The Foundation is willing to negotiate with Resodyn to make this change if it is determined that the IP

has been generated under this contract. Practically speaking, there was no IP of value created under

this project.

OIG RESPONSE 9 As discussed in OIG RESPONSE 1, the project funded under 

this cooperative agreement is not related to nor is a continuation of work 

conducted under EPA SBIR Phase 1 solicitation #PR-NC-04-10308. However, we 

acknowledge that the grantee is also subject to Title 37 CFR Part 401, which 

implements the Bayh-Dole Act. Title 37 CFR Part 401.14, as well as Title 40 CFR 

Part 30.36, specify that the Federal government reserves a royalty-free, 

nonexclusive and irrevocable right to use for federal purposes work that was 

developed under an award. Therefore, the grantee is obligated under both Title 40 

CFR Part 30 and Title 37 CFR Part 401 to provide EPA with the right to use the 

research work funded by the cooperative agreement through an appropriate 

contract revision or other corrective action. 

Conclusion

A full understanding of the facts demonstrates that there was no actual or apparent conflict of interest

between the Foundation and Resodyn. Accordingly, any effort to recover the $707,320 paid to Resodyn

for work it successfully completed is inappropriate.

The sole sourcing of the contract to Resodyn was consistent with Congressional intent and the prior SBIR

processes. The Foundation also performed thorough and unchallenged cost justification for the Project.

The other issues raised in the Report are either minor issues, such as the failure to formally amend the

subcontract, or can be resolved through negotiation, such as the ownership of any IP created during the

Project.

The Foundation is pleased to answer any questions that OIG has about this response, and looks forward

to the opportunity to discuss these matters in more detail as appropriate.

18 Ex. A at 5.

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OIG RESPONSE 10 The grantee's comments have not resolved the procurement 

issues; including the apparent, if not real, conflict of interest with its subcontractor. 

Therefore, our position on the findings and recommendations in the attestation 

report remains generally unchanged. However, we have accepted the grantee's 

explanation about the letterhead templates and quality assurance plan and revised 

the report as appropriate. 

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Appendix C 

Distribution 

Assistant Administrator for Administration and Resources Management 

Assistant Administrator for Research and Development 

Director, Office of Grants and Debarment, Office of Administration and Resources Management 

Director, Grants and Interagency Agreements Management Division, Office of Administration 

and Resources Management 

Agency Followup Official (the CFO) 

Agency Followup Coordinator 

Audit Followup Coordinator, Office of Administration and Resources Management 

Audit Followup Coordinator, Office of Research and Development 

Associate Administrator for Congressional and Intergovernmental Relations 

Associate Administrator for External Affairs and Environmental Education 

Inspector General 

Chairman of the Board of Directors, The Montana Physical Sciences Foundation 

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