Office of Inspector General

Audit Report

DOT DOES NOT FULLY COMPLY WITH 

REVISED FEDERAL ACQUISITION 

REGULATIONS ON THE 

USE AND MANAGEMENT OF 

COST-REIMBURSEMENT AWARDS

Department of Transportation

Report Number: ZA-2013-118

Date Issued: August 5, 2013 
U.S. Department of

Memorandum

Transportation

Office of the Secretary

of Transportation

Office of Inspector General

Subject: ACTION: DOT Does Not Fully Comply With 

Revised Federal Acquisition on the Use and 

Management of Cost-Reimbursement Awards 

Department of Transportation

Report Number ZA-2013-118

Date: August 5, 2013

From: Mary Kay Langan-Feirson

Assistant Inspector General for Acquisition and

 Procurement Audits

Reply to 

Attn. of: JA-60

To: DOT Senior Procurement Executive

In an effort to reduce spending, the President, Congress, and the Office of 

Management and Budget have directed the Federal Government to improve the 

effectiveness and efficiency of its procurement practices by reducing the use of 

high-risk contracts, such as cost-reimbursement contracts. Cost-reimbursement 

contracts pose a high risk for waste or misuse of taxpayer funds because they do 

not provide a direct incentive for the contractor to control costs. In addition, 

agency inspectors general, the Government Accountability Office (GAO), and 

other independent review bodies have identified that agencies sometimes use costreimbursement contracts without appropriate justification and do not provide 

sufficient management and oversight of these contracts.

Despite the emphasis on decreased use of this contract type, the U.S. Department 

of Transportation (DOT), excluding the Federal Aviation Administration, 

increased its obligations for cost-reimbursement contracts between fiscal year 

2009 and fiscal year 2012—from $322 million to $506 million (from 18 percent to 

22 percent of all DOT contract obligations).1 Since DOT obligates hundreds of 

millions of dollars in high-risk cost-reimbursement contracts each year, even 

minimal steps toward improving the use and management of these contracts could 

yield substantial savings for DOT, the Government, and ultimately the taxpayers.

 1 We did not include the Federal Aviation Administration’s (FAA) obligations in these figures or in our audit review 

because the Agency is not required to comply with the Federal Acquisition Regulation.
2

The Duncan Hunter National Defense Authorization Act for Fiscal Year 2009 

(Duncan Hunter Act) required that the Federal Acquisition Regulation (FAR) be 

revised to provide additional guidance on the use and management of 

cost-reimbursement contracts. The Act also required that each Office of Inspector 

General review its agency’s compliance with these revisions within 1 year of the 

published FAR revisions and include the results in its next semiannual report. The 

FAR was revised in an interim rule effective March 16, 2011, and issued as a final 

rule on March 2, 2012.2 Accordingly, our audit objective was to assess whether 

DOT and its Operating Administrations comply with the revised FAR 

requirements on the use and management of cost-reimbursement contracts.

We conducted this review between July 2012 and May 2013 in accordance with 

generally accepted Government auditing standards. To conduct our work, we 

interviewed DOT and Operating Administration procurement officials and 

reviewed the Duncan Hunter Act and the revised FAR requirements, including the 

interim and final rules. To test compliance with the FAR revisions, we reviewed a 

statistical sample of 31 cost-reimbursement awards selected from a universe of 

655 DOT cost-reimbursement awards entered into between July 1, 2011, and May 

31, 2012. Six DOT Operating Administrations were represented in this universe: 

the Federal Highway Administration (FHWA), Federal Railroad Administration 

(FRA), Federal Transit Administration (FTA), Maritime Administration 

(MARAD), National Highway Traffic Safety Administration (NHTSA), and 

Research and Innovative Technology Administration (RITA) John A. Volpe 

National Transportation Systems Center (Volpe).

3 See exhibit A for more 

information on our scope and methodology.

RESULTS IN BRIEF

The six DOT Operating Administrations we reviewed do not fully comply with 

revised FAR requirements on the use and management of cost-reimbursement 

awards. The Operating Administrations’ noncompliance is primarily attributable 

to the Department’s lack of internal guidance for implementing these new 

requirements and lack of oversight needed to verify departmentwide compliance. 

We reviewed a random sample of 31 out of 655 cost-reimbursement awards, 

including 11 contracts and 20 task orders.4 Our review determined that the 

 2 FAR Case 2008-030, “Proper Use and Management of Cost-Reimbursement Contracts”; Interim Rule, 76 Fed. Reg. 

14547 (Mar. 16, 2011); Final Rule, 77 Fed. Reg. 12925-01 (Mar. 2, 2012). 3 We excluded the Federal Aviation Administration from the scope of our review because the Agency is not subject to 

the FAR or any changes to the FAR resulting from the Duncan Hunter Act.

4 While not all of the revised FAR requirements explicitly address task orders, decisions about contract type can be 

made at both the contract and task order level. Since cost-reimbursement task orders and contracts both involve 

obligations of Government funds, the common application of the revised FAR requirements is to both costreimbursement task orders and contracts. For consistency, we refer to both contracts and task orders as “awards” 

throughout this report.
3

Operating Administrations’ practices for 15 of the 31 awards do not comply with a 

significant portion, at least 25 percent, of the revised FAR requirements.

5

Specifically, we found that the Operating Administrations do not (1) fully comply 

with the revised FAR requirements related to acquisition planning and 

documenting justifications, or (2) consistently assess oversight risks, properly 

designate oversight personnel, or verify that contractors’ accounting systems are

adequate to provide valid and reliable cost data.

• The Operating Administrations do not fully comply with the revised FAR 

requirements related to acquisition planning and documenting justifications for 

the use of cost-reimbursement awards. For example, in 16 of the 31 awards we 

reviewed, the awarding Operating Administrations did not document 

justifications for selecting cost-reimbursement awards. Notably, 14 of these 16 

noncompliant awards were task order awards. One reason for the high rate of 

noncompliance among task orders is that the Operating Administrations only 

applied the revised FAR requirements for planning and justification to 

contracts, not task orders.6 However, use of cost-reimbursement contracts or 

task orders without proper justification could unnecessarily expose the Federal 

Government to higher risks.

• The Operating Administrations also do not consistently assess oversight risks, 

properly designate oversight personnel, or verify contractors’ accounting 

systems. The purpose of the revised FAR requirements is to ensure that 

agencies have adequate and qualified oversight staff in place to shoulder the 

increased oversight burden associated with cost-reimbursement awards. For 22 

of the 31 awards in our sample, the Operating Administrations designated

official oversight personnel in writing; however, only 12 of these were 

designated prior to award, as required. Moreover, the designated oversight 

personnel for five of the awards in our sample lack support that they were

properly certified to perform oversight.

We are making a series of recommendations to improve DOT’s compliance with

the revised FAR requirements on the use and management of cost-reimbursement 

awards.

 5 We identified 39 revised FAR requirements that we used as a basis for computing compliance rates. However, not all 

of the revised FAR requirements applied to every award in our sample, so the applicable requirements ranged in 

number from 30-38. 6 While the FAR revisions do not consistently include the word “order,” they require agencies to perform detailed 

planning and to document justifications for all cost-reimbursement obligations of Government funds.
4

BACKGROUND

Section 864 of the Duncan Hunter Act required amendments to the FAR to 

provide further guidance on the use and management of cost-reimbursement 

contracts in three areas: (1) circumstances when cost-reimbursement contracts are 

appropriate, (2) acquisition plan findings to support the selection of a costreimbursement contract, and (3) acquisition resources necessary to award and 

manage a cost-reimbursement contract.

Under a firm-fixed-price contract, the contractor accepts all cost risk and is fully 

responsible for delivery of the goods or services at the agreed-upon price. As a 

result, firm-fixed-price contracts provide maximum incentive for the contractor to 

perform efficiently and impose the least administrative burden and risk on the 

Government. In contrast, cost-reimbursement awards shift cost risk to the 

Government and require the Government to pay all allowable costs incurred by the 

contractor, thus providing the contractor with considerably fewer incentives for 

controlling costs and placing greater administrative burden on the Government to 

oversee the contractor’s progress and costs. In order to mitigate these additional 

risks, the FAR imposes increased oversight requirements on agencies that choose 

to use contract types other than firm-fixed-price.

DOT OPERATING ADMINISTRATIONS DO NOT FULLY COMPLY 

WITH REVISED FAR REQUIREMENTS ON COSTREIMBURSEMENT AWARDS

The six DOT Operating Administrations we reviewed do not fully comply with the 

revised FAR requirements on use and management of cost-reimbursement awards. 

The Operating Administrations’ noncompliance is primarily attributable to the 

Department’s lack of internal guidance on the implementation of these new 

requirements and lack of oversight needed to verify departmentwide compliance. 

Of the 31 cost-reimbursement awards we reviewed, 15 do not comply with a 

significant portion—from 28 percent to as much as 87 percent—of the revised 

FAR requirements related to: (1) acquisition planning and justification for 

selecting cost-reimbursement awards; and (2) assessment of oversight risks, proper 

designation of oversight personnel, and verification of the adequacy of the 

contractor’s accounting system to provide valid and reliable cost data. The 

Operating Administrations that do not comply with these revised FAR 

requirements face increased cost and performance risks associated with this 

contract type.
5

Insufficient Departmentwide Guidance and Oversight Resulted in 

Varying Compliance Throughout the Department

DOT’s Office of the Senior Procurement Executive (OSPE) did not issue guidance 

or oversee the Operating Administrations’ implementation of the revised FAR 

requirements, which resulted in varying compliance across the Department. In the 

absence of departmentwide guidance, the Operating Administrations applied their 

own interpretations of the new requirements, including the view that the revised 

FAR requirements on planning and justifications did not apply to costreimbursement task orders. In addition, our review found that the Operating 

Administrations that took the initiative to communicate the revised FAR

requirements and establish procedures for implementation had higher rates of 

compliance than Operating Administrations that did not take such proactive steps. 

OSPE Has Not Provided Sufficient Guidance and Oversight To Facilitate

Consistent Implementation of the Revised FAR Requirements

As part of its acquisition policy and oversight role, the Department’s OSPE is 

responsible for ensuring DOT’s compliance with Federal and departmental 

acquisition regulations.7 However, OSPE has not issued guidance, established 

internal policy, or updated the Transportation Acquisition Manual (TAM) to 

reflect the revised FAR requirements on the use and management of 

cost-reimbursement awards. While the Department did issue a high-level 

communication in a “DOT DASH” to alert the Operating Administrations’ Chiefs 

of the Contracting Office (COCOs) of the FAR revisions,8 the communication did 

not provide additional explanations or guidance on how the FAR revisions should 

be implemented. 

In addition, OSPE does not have procedures to assess whether the Operating 

Administrations are consistently interpreting and applying the revised FAR

requirements, such as requiring contract file reviews to assess compliance. Instead, 

OSPE relies on the Operating Administrations’ COCOs and contracting officers to 

ensure compliance with these requirements. Our findings are consistent with a 

January 2013 GAO report, which also noted that DOT lacked departmentwide 

acquisition management oversight. According to GAO’s report, OSPE stated that 

acquisition management was best left to the individual Operating Administrations,

given the decentralized nature of the Department. During our review, OSPE 

officials informed us that the organization is currently re-evaluating its oversight 

 7 The Services Acquisition Reform Act of 2003, Public Law 108-135, Section 1421, identifies the duties of Chief 

Acquisition Officer (CAO), which includes monitoring the performance of acquisition activities and acquisition 

programs of the executive agency. The Senior Procurement Executive reports to the CAO and is specifically 

responsible for management direction of the agency’s procurement system, including implementing procurement 

policies, regulations, and standards of the agency. 

8 DOT issued a “DOT DASH” in April 2011 regarding the interim rule and another in March 2012 regarding the final 

rule.
6

role—with a goal to be more proactive than reactive—but has not formalized its 

plans.

Operating Administrations Did Not Apply the Revised FAR Requirements 

to Cost-Reimbursement Task Orders

Lacking guidance from the Department, the Operating Administrations developed 

their own interpretations of the revised FAR requirements. A particular concern is 

that the Operating Administrations applied the revised FAR requirements on 

acquisition planning and documented justifications only to cost-reimbursement 

contracts and not to cost-reimbursement task orders. While the FAR revisions do 

not include the word “order” in all of the amended sections, the purpose of the 

revisions is to require agencies to perform detailed planning and to document 

justifications for all cost-reimbursement obligations of Government funds—which 

would include both contracts and task orders issued after the March 16, 2011, 

effective date. Therefore, we applied the revised FAR requirements to all costreimbursement contracts and task orders in our sample. Similarly, other Federal 

Offices of Inspector General—such as those from the Department of Defense and 

General Services Administration—have also applied the revised FAR 

requirements to both cost-reimbursement contracts and task orders in their 

agencies.

The Department’s OSPE officials agreed with our view that cost-reimbursement 

task orders issued after the effective date must comply with the revised FAR 

requirements, regardless of when the base contracts were awarded. However, 

OSPE officials noted that the FAR and DOT guidance do not require Operating 

Administrations to develop separate written acquisition plans for individual costreimbursement task orders. Instead, Operating Administrations could comply with 

the revised FAR requirements for detailed and specific acquisition planning and 

justifications by preparing documentation at either the base contract level or the 

task order level. For example, Operating Administrations could update the base 

contracts’ existing acquisition planning documents or develop supplemental 

planning documentation specific to the task order.9

While we agree with OSPE’s interpretation of the rule, we did not find evidence 

that the Operating Administrations fully applied the revised FAR planning and 

justification requirements at either the base contract level or the task order level 

for the 20 task orders in our sample of 31 awards. Notably, all task orders in our 

sample were issued under Indefinite Delivery Indefinite Quantity (IDIQ) base 

contracts that allowed individual task orders to be issued on either a fixed-price or 

cost-reimbursement basis. Although the acquisition planning documents for the 

 9 It is possible for some base contracts to have sufficient acquisition planning and justification for all task orders, but 

there were no such cases in our sample. In many cases, it may be difficult to adequately plan for future task orders 

during the initial acquisition planning stage, especially to the level of detail required by the revised FAR requirements.
7

base IDIQ contracts were approved before the interim rule, all task orders we 

reviewed were issued after the interim rule became effective. However, the 

Operating Administrations did not update the base contracts’ acquisition planning 

documents or prepare supplemental planning documents for these task orders to 

comply with the revised FAR requirements on planning and justification. 

By not applying the revised FAR requirements to these cost-reimbursement task 

orders, the Operating Administrations are missing opportunities to better manage 

or reduce high-risk contracting. For example, our sample included a $4.8-million 

cost-reimbursement task order that Volpe issued in February 2012—during the 

second year of a 5-year $234-million IDIQ contract. Although the revised FAR 

requirements were in effect when the task order was issued, Volpe did not update 

the base contract’s acquisition plan to address these new requirements, but did 

prepare documentation that addressed some of the planning factors described by 

the FAR change. If the Department does not ensure that Operating 

Administrations comply with the revised FAR requirements when issuing costreimbursement task orders, DOT will continue to be exposed to increased cost and 

performance risks during the remaining years of the base contracts’ performance 

periods.

10

Operating Administrations That Took Proactive Steps To Implement the 

Revised FAR Requirements Had Higher Rates of Compliance

In the absence of departmentwide guidance, some Operating Administrations took 

the initiative to notify procurement staff of the revised FAR requirements and to 

implement oversight procedures to facilitate compliance. For example, FHWA 

provided formal training on the revised FAR requirements. FHWA’s COCO also 

issued internal guidance that created a formal process for implementing the 

revised FAR requirements. Consequently, FHWA achieved a higher rate of 

compliance than the other five Operating Administrations we reviewed. 

Other Operating Administrations also established procedures that help ensure 

compliance with the revised FAR requirements. For example, before the revisions 

became effective, Volpe’s COCO established a procedure to standardize the 

review and approval process for procurement actions, which includes a check for 

FAR compliance. In addition, FTA’s COCO issued a standard Contracting Officer 

Representative (COR) designation letter that includes all of the FAR revision 

requirements for documenting COR designations and requires that a COR be 

designated for every cost-reimbursement award, including individual task orders. 

 10 The Duncan Hunter Act, which required the revisions to the FAR, aligns with the President’s goal of reducing highrisk contracting as noted in the Presidential Memorandum on Government Contracting, dated March 4, 2009. The 

Memorandum states that the use of cost-reimbursement type contracts creates the risk that taxpayer funds will be spent 

on contracts that are wasteful, inefficient, subject to misuse, or otherwise not well designed to serve the needs of the 

Government or interests of the taxpayers. 
8

In contrast, MARAD did not implement such actions to facilitate compliance with 

the revised FAR requirements and, consequently, achieved the lowest rate of 

compliance.

Operating Administrations Do Not Fully Comply With Revised FAR 

Requirements Regarding Acquisition Planning and Justifications 

While some Operating Administrations have higher compliance rates than others, 

none of the six DOT Operating Administrations fully complies with all revised 

FAR requirements related to acquisition planning and justifications for use of costreimbursement awards. Based on our review of a statistical sample of 31 costreimbursement awards, we identified cases of noncompliance with the revised 

FAR requirements for (1) written acquisition plans, (2) consideration of required 

planning factors,

11 (3) consideration of transition to firm-fixed-price, and 

(4) justifications for the use of a cost-reimbursement award. 

Written Acquisition Plans Are Not Prepared When Required

According to the revised FAR requirements, agencies should develop written 

acquisition plans that address specific planning factors to support the use of 

contract types other than firm-fixed-price (including cost-reimbursement). In 

accordance with the FAR,12 DOT’s TAM establishes a dollar threshold for written 

acquisition plans consistent with FAR for acquisitions greater than $20 million.13

Of the 11 contracts in our sample of 31 cost-reimbursement awards, only 2

exceeded the $20-million threshold requirement. However, neither of these two 

contracts—which have a combined value of approximately $71 million—have 

written acquisition plans. In response, a NHTSA official, which awarded both 

these contracts, stated that NHTSA’s procurement staff conduct comprehensive 

acquisition planning meetings with their program offices six times a year but do 

not record meeting notes or document these planning efforts. 

Most Operating Administrations Consider the Majority of Required 

Planning Factors

The revised FAR requirements state that a cost-reimbursement award may only be 

used when planning factors specified in FAR section 16.104—such as 

competition, price analysis, and urgency—have been considered and 

 11 FAR 16.104 Factors in selecting contract types. According to the FAR, “planning factors” include: price 

competition, price analysis, cost analysis, type and complexity of the requirement, combining contract types, urgency 

of requirement, period of performance or length of production run, contractor’s technical capability and financial 

responsibility, concurrent contracts, extent and nature of proposed subcontracting, and acquisition history. 12 FAR 7.103(e) Acquisition Plans: Agency-head responsibilities. 13 With certain exceptions. See TAM 1207.103 Agency-head responsibilities.
9

documented.14 Although only 1 of the 31 awards we reviewed addressed all the 

planning factors, 22 awards in our sample included documented consideration of 

at least half of the required planning factors (see table 1).

Table 1. Compliance With FAR Requirement To Consider 

Planning Factors

FAR requirement

Sample awards that comply with FAR requirement

Total MARAD FHWA FTA FRA Volpe NHTSA

Majoritya of planning 

factors considered 23 / 31 0 / 5 5 / 5 4 / 5 5 / 5 6 / 8 3 / 3

a In our review, we defined “majority” as 50 percent or more of the planning factors.

Source: OIG analysis of statistical sample of 31 cost-reimbursement awards from 6 DOT 

Operating Administrations

Operating Administrations Seldom Consider Transition to Firm-Fixed-Price 

According to the revised FAR requirements, as part of acquisition planning, 

agencies should document their consideration of strategies to transition from a 

cost-reimbursement to firm-fixed-price award type—whether for the current 

award, future option years, or follow-on contracts. However, only 6 of the 31 

awards we reviewed included documentation showing that the agencies considered 

strategies to transition to a firm-fixed-price award (see table 2).

 14 For our review, we consolidated the 12 planning factors from FAR 16.104 into 10 categories: (1) price 

competition/price and cost analysis, (2) type and complexity of the requirement, (3) urgency of the requirement,

(4) period of performance or length of production run, (5) contractor’s technical capability and financial responsibility,

(6) concurrent contracts, (7) extent and nature of proposed subcontracting, (8) acquisition history, (9) combining 

contract types, and (10) adequacy of the contractor’s accounting system.
10

Table 2. Compliance With FAR Requirement To Consider

Transition to Firm-Fixed-Price Type

FAR requirement

Sample awards that comply with FAR requirement

Total MARAD FHWA FTA FRA Volpe NHTSA

Consider transition to 

firm-fixed-price type 6 / 31 0 / 5 2 / 5 0 / 5 3 / 5 0 / 8 1 / 3

Source: OIG analysis of statistical sample of 31 cost-reimbursement awards from 6 DOT 

Operating Administrations

The revised FAR requirements also require agencies to consider structuring the 

contract to permit some or all of the work requirements to be awarded on a firmfixed-price basis. However, only 5 of 11 contracts in our sample of 31 awards 

included documentation that met this requirement.

15 For example, FHWA did not 

comply with this requirement when it planned a 5-year $2.7-million contract to 

provide technical, publication, communication, marketing, and outreach support 

for its Local and Tribal Technical Assistance Programs. However, this award may 

have been a good candidate for transitioning to fixed-price type given the 5-year 

period of performance and because FHWA had contracted for similar services in 

the past. By not complying with FAR requirements to consider transition to a 

fixed-price award, FHWA may have missed an opportunity to reduce the 

Government’s risk and to alleviate oversight burdens. 

Operating Administrations Do Not Consistently Document Justifications for 

the Use of Cost-Reimbursement Type

According to the revised FAR requirements, an agency must document why the 

use of a contract type other than firm-fixed-price is appropriate. The FAR states 

that a cost-reimbursement award may only be used when (1) circumstances do not 

allow the agency to define its requirements sufficiently to allow for a fixed-price 

award or (2) uncertainties involved in contract performance do not permit costs to 

be estimated with sufficient accuracy to use any type of fixed-price award. Only 

15 of the 31 awards in our sample included documented rationale to justify the 

selection of cost-reimbursement awards (see table 3).

 15 We applied this requirement only to the 11 contracts in our sample. We did not apply this requirement to the 20 task 

orders in our sample since their IDIQ base contracts allowed for either fixed-price or cost-reimbursement orders.
11

Table 3. Compliance With FAR Requirement for Justifying the 

Use of Cost-Reimbursement Awards

FAR requirement

Sample awards that comply with FAR requirement

Total MARAD FHWA FTA FRA Volpe NHTSA

Justification for use of 

cost-reimbursement type 

documented

15 / 31 0 / 5 5 / 5 0 / 5 5 / 5 2 / 8 3 / 3

Source: OIG analysis of statistical sample of 31 cost-reimbursement awards from 6 DOT 

Operating Administrations

Operating Administrations Do Not Consistently Assess Oversight 

Risks, Designate Contracting Officers’ Representatives, or Verify the 

Adequacy of the Contractors’ Accounting Systems

In our sample of 31 cost-reimbursement awards, we identified noncompliance 

with the following requirements: (1) assessments of the additional risks, burdens, 

and resources needed to award and manage cost-reimbursement awards; (2) 

written designations of CORs prior to the award date; and (3) verification of the 

adequacy of contractors’ accounting systems. Operating Administrations that 

neglect to follow these FAR’s requirements face heavier oversight burdens and,

consequently, increased cost and performance risks.

Operating Administrations Do Not Consistently Assess Risks, Burdens, 

and Resources

According to the revised FAR requirements, an agency that selects other than a 

fixed-price award should include a documented discussion of the additional risks 

and administrative burdens of managing the contract type selected. The discussion 

should describe the nature of the additional risks and establish a plan to mitigate 

risks. The FAR also requires a documented assessment of the adequacy of 

Government resources necessary to properly plan for, award, and administer the 

contract type selected. These requirements are critical because cost-reimbursement 

awards often cause the Government to shoulder additional cost risks and increased 

oversight burdens. However, our review determined that only 8 of the 31 awards 

in our sample included a discussion of the additional risks and burdens of 

managing a cost-reimbursement award. Additionally, only 14 of the 31 sample 

awards contained assessments of the adequacy of Government resources to ensure 

effective management of the risks (see table 4).
12

Table 4. Compliance With FAR Requirements on Assessing 

Risks, Burdens, and Resources 

FAR requirement

Sample awards that comply with FAR requirement

Total MARAD FHWA FTA FRA Volpe NHTSA

Consider additional 

risks and burdens 8 / 31 0 / 5 4 / 5 0 / 5 2 / 5 2 / 8 0 / 3

Assess adequacy of 

acquisition resources 14 / 31 0 / 5 5 / 5 1 / 5 5 / 5 3 / 8 0 / 3

Source: OIG analysis of statistical sample of 31 cost-reimbursement awards from 6 DOT 

Operating Administrations

Operating Administrations Do Not Properly Designate Contracting Officer’s 

Representatives

According to the revised FAR requirements, a cost-reimbursement award may be 

used only when, prior to the award of the contract or task order, adequate 

Government resources are available to provide sufficient surveillance of contractor 

performance. In addition, a properly trained COR must be designated in writing

for all cost-reimbursement contracts and orders before they are awarded. Our 

review determined that the Operating Administrations designated CORs in writing 

for 22 of the 31 awards in our sample. However, only 12 of the 22 designations 

were issued prior to the date of award (see table 5). The remaining 10 COR 

designations occurred anywhere from the same day as the award up to over 

2 months after the date of award.

Table 5. Compliance With FAR Requirements for Designating 

CORs Prior To Award

FAR requirement

Sample awards that comply with FAR requirement

Total MARAD FHWA FTA FRA Volpe NHTSA

Designated COR in 

writing 22 / 31 0 / 5 3 / 5 5 / 5 3 / 5 8 / 8 3 / 3

COR designation prior to 

award datea 12 / 22 N/A 1 / 3 2 / 5 0 / 3 7 / 8 2 / 3

a We only applied this requirement to the 22 awards that had written designations.

Source: OIG analysis of statistical sample of 31 cost-reimbursement awards from 6 DOT 

Operating Administrations. 

Further, only 16 of the 22 written COR designations included all specifications in 

the revised FAR requirements, such as the COR’s responsibilities, authorities, 

limitations, and period of delegation. The Department’s formal 2008 COR 

Program Guidance includes a sample COR designation letter that addresses all of
13

the revised FAR requirements. However, the Operating Administrations are not 

required to use the sample letter, and there are no controls to ensure that Operating 

Administrations’ internal COR designations letters are sufficient to address the 

new requirements.

Notably, MARAD lacks written COR designations for the five costreimbursement task orders we reviewed; however, MARAD did designate CORs

in writing for the IDIQ base contracts associated with each of these task orders. 

MARAD officials stated that it would be labor intensive to issue designation 

letters for every task order under these contracts because they are ship manager 

contracts that can include over 100 task orders.

16 We agree that a separate COR 

designation may not be required for each task order if the agency clearly specifies 

in the original base contract that the same COR will manage every task order 

under that contract. However, we are concerned with this approach as the COR 

may not be aware when work on a new task order has begun, especially given the 

high volume of task orders under ship manager contracts and the fact that some 

CORs oversee more than one ship manager contract at a time. 

The revised FAR requirements also call for CORs to meet training requirements to 

obtain COR certification, which must be maintained in accordance with Federal 

policy.

17 Our review determined that four of the six Operating Administrations we 

reviewed maintained documentation for each designated COR, verifying that the 

COR was certified (see table 6).

18

Table 6. Compliance With FAR Requirements on Documentation 

of COR Certifications

FAR requirement

Sample awards that comply with FAR requirement

Total MARAD FHWA FTA FRA Volpe NHTSA

Documentation of COR 

certifications

26 / 31 1 / 5 5 / 5 5 / 5 5 / 5 8 / 8 2 / 3

Source: OIG analysis of statistical sample of 31 cost-reimbursement awards from 6 DOT 

Operating Administrations

The five awards in our sample that were missing documentation on COR 

certification were from MARAD and NHTSA. For example, although MARAD 

 16 Ship manager contracts maintain Ready Reserve Fleet ships in support of national emergencies and defense 

objectives. Services may include maintenance, repair, logistics support, activation, operation, deactivation, crewing and 

management for vessels. 

17 OMB, “The Federal Acquisition Certification for Contracting Officer Technical Representatives,” Nov. 26, 2007, 

revised Sept. 6, 2011. 

18 GAO-13-117, DOT Lacks Data, Oversight, and Strategic Focus Needed to Address Significant Workforce 

Challenges (Jan. 2013). In this report, GAO found that 53 percent of the Department’s CORs were not certified in 

2011.
14

did not designate a COR for any of the five cost-reimbursement task order awards 

in our sample, it did designate a COR for each of the associated base IDIQ 

contracts. However, MARAD did not maintain documentation in either the base 

contract or the task order files to verify that four of the five CORs were certified. 

In addition, when we requested the certification support for these four CORs, 

MARAD provided outdated certification support for two of the CORs and did not 

furnish any certification support for the other two. 

Operating Administrations Usually Ensure Adequate Contractor 

Accounting Systems

According to the revised FAR requirements, the contracting officer must 

determine the adequacy of the contractor’s accounting system. Our review 

determined that 24 of the 31 awards in our sample had documentation showing the 

contracting officer ensured that the contractor’s accounting system was adequate

(see table 7).

Table 7. Compliance With FAR Requirements on Ensuring 

Adequate Contractor Accounting Systems

FAR requirement

Sample awards that comply with FAR requirement

Total MARAD FHWA FTA FRA Volpe NHTSA

Adequate contractor 

accounting system 24 / 31 5 / 5 3 / 5 5 / 5 1 / 5 7 / 8 3 / 3

Source: OIG analysis of statistical sample of 31 cost-reimbursement awards from 6 DOT 

Operating Administrations

However, 7 of the 31 awards did not have evidence that the contracting officer 

verified the contractor’s accounting system. For example, FRA awarded a contract 

to a contractor whose accounting system had never been tested by a Federal 

agency, and it did not ensure that this system was adequate. Since a contractor’s 

accounting system is used to track the costs incurred on cost-reimbursement

awards, it is critical to ensure that the system is reliable. 

CONCLUSION

DOT awarded approximately $506 million in cost-reimbursement awards in fiscal 

year 2012—placing a large administrative burden on its acquisition workforce and 

accepting greater cost and performance risk for its acquisitions. Given this 

substantial investment, even minimal steps toward improving the management of 

these high-risk awards could yield substantial savings for DOT, the Government, 

and ultimately the taxpayers. Operating Administrations can do a better job of 

managing their use of cost-reimbursement awards, starting with improved 
15

compliance with the revised FAR requirements, which are designed to assist in 

this effort.

RECOMMENDATIONS

We recommend that the Office of the Senior Procurement Executive take the 

following actions:

1. Update the Department’s Transportation Acquisition Manual (TAM) to reflect 

the revised Federal Acquisition Regulation (FAR) requirements for the use of 

cost-reimbursement awards, including consideration of task orders.

2. Until the TAM is revised, provide guidance such as acquisition policy letters to 

help acquisition personnel understand and properly implement the revised FAR 

requirements for the use of cost-reimbursement awards.

3. Require that the Maritime Administration’s Chief of the Contracting Office 

(COCO)

a. develop guidance to ensure that ship manager contract files identify the 

assigned COR and specify which task orders the COR is responsible for 

overseeing (including whether the COR is responsible for all task orders, if 

applicable),

b. implement a procedure to notify CORs of each planned task order before it 

is issued, and

c. maintain adequate training documentation for members of its acquisition 

workforce.

4. Update the Department’s Contracting Officer’s Representative Program 

Guidance to reflect the revised FAR requirements for the use of costreimbursement awards.

5. Require the Operating Administrations to conduct periodic reviews to verify 

compliance with the revised FAR requirements for the use of costreimbursement awards and to report the results to OSPE.
16

AGENCY COMMENTS AND OFFICE OF INSPECTOR GENERAL 

RESPONSE

We provided OST with our draft report on May 20, 2013, and received its 

response on July 9, 2013. OST’s complete response is included as an appendix to 

this report. Although OST either concurred or partially concurred with all five of 

our recommendations, OST raised a number of concerns with our findings. First, 

OST disagreed that it was necessary to issue guidance to the Operating 

Administrations regarding the revised FAR requirements. According to OST, our 

report provided no evidence that guidance would have improved the acquisition 

workforce’s behavior or compliance. However, as we reported, some Operating 

Administrations, such as FHWA, implemented training or notified staff of the 

revised FAR requirements resulting in higher rates of compliance than Operating 

Administrations that did not take similar actions. Therefore, we did observe a 

direct link between guidance and compliance, and OST subsequently concurred 

with this recommendation. 

Second, according to OST, we incorrectly interpreted best practice guidance as 

requirements. In its example, OST stated that the OIG “over-interpreted” the 

requirements in FAR 16.104, “Factors in selecting contract types,” which states

that “There are many factors that the contracting officer should consider in 

selecting and negotiating the contracting type.” According to OST, the word 

“should” is permissive and therefore optional. However, FAR 16.3, “Cost 

Reimbursement Contracts”—as amended by the interim rule, effective March 16, 

2011—clearly states that “a cost-reimbursement contract may be used only when” 

(italics added for emphasis) the “factors listed in 16.104 have been considered.” In 

addition, the Supplementary Information section of the interim rule states that 

“FAR 16.301-3, Limitations, is amended to . . . ensure that all planning factors 

have been considered per FAR 16.104.” Therefore, the revised FAR requirements 

require the consideration of all planning factors before selecting a costreimbursement contract type. Moreover, we were conservative in applying this 

requirement to the contracts in our sample. We considered contracts compliant if 

Operating Administrations considered at least 50 percent of the factors before 

selecting a cost-reimbursable contract type. 

Finally, OST’s response states that FAA awarded about 75 percent of DOT’s 

$1.9-billion cost-reimbursable contract obligations in fiscal year 2012—a dollar 

figure we originally cited in the introduction of our report. According to OST, 

product and service codes indicate that these FAA contracts were all related to 

complex information technology (IT) development projects, which can be 

appropriate uses of cost-reimbursable contracts. While we acknowledge that many 

of FAA’s contracts are associated with complex IT projects, we disagree that all of 

them fall into this category. In fact, some of FAA’s IT projects involve hybrid 
17

contracts comprised of several contract types, including fixed price. However, it is 

important to note that we excluded FAA contracts from our review because FAA 

maintains its own Acquisition Management System and is not subject to FAR

requirements for cost-reimbursement awards. To address OST’s concern and to 

reflect our audit scope, we modified the figures in the introduction of our report to 

exclude FAA obligations. After excluding FAA obligations, DOT’s costreimbursable obligations still show an increase between fiscal years 2009 and

2012—from $322 million to $506 million. 

Despite these concerns, OST either concurred or partially concurred with all five 

of our recommendations. For recommendations 1, 2, 4, and 5, OST concurred with 

our recommendations and provided appropriate planned actions and timeframes 

that are responsive. Accordingly, we consider these recommendations resolved but

open pending completion of the planned corrective actions. 

For recommendation 3, OST partially concurred. In its response, OST agreed with 

the need for the recommendation regarding MARAD’s contracting practices, but 

indicated that the recommendation would be most appropriately made to the 

Maritime Administrator. However, we addressed recommendation 3 to OSPE 

because the office has been delegated responsibility for performing both SPE and 

CAO duties, per Title 49 CFR Section 1.38a. The specific responsibilities of the 

SPE and CAO, as detailed in Title 41 United States Code Section 1702, include 

monitoring acquisition activities and programs, developing unique acquisition 

policies, and ensuring an adequate acquisition workforce—all of which align with 

our intention for recommendation 3. Accordingly, we request that OSPE 

reconsider its request that we redirect recommendation 3 to the Maritime 

Administrator, and provide planned actions and timeframes to address this

recommendation. Until we receive this information, we consider recommendation 

3 open and unresolved.
18

ACTIONS REQUIRED

OST’s planned actions and timeframes for recommendation 1, 2, 4, and 5 are 

responsive, and we consider these recommendations resolved but open pending 

completion of the planned actions. We request that OST reconsider its request that 

we redirect recommendation 3 to the Maritime Administrator, and provide planned 

actions and timeframes to address the recommendation. In accordance with 

Department of Transportation Order 8000.1C, we request that OST provide this 

information within 30 days of this report. Until we receive this information, we 

consider recommendation 3 open and unresolved.

We appreciate the courtesies and cooperation of DOT representatives during this 

audit. If you have any questions concerning this report, please call me at 

(202) 366-5225 or Terry Letko, Program Director, at (202) 366-1478.

#

cc: Maritime Administrator

MARAD Audit Liaison, MAR-392

FHWA Audit Liaison, HAIM-13 

FRA Audit Liaison, RAD-41

FTA Audit Liaison, TBP-30

NHTSA Audit Liaison, NPO-310

RITA Audit Liaison, RTC-1

DOT Audit Liaison, M-1
19

Exhibit A. Scope and Methodology

EXHIBIT A. SCOPE AND METHODOLOGY

As required by the Duncan Hunter National Defense Authorization Act for Fiscal 

Year 2009, this report provides the results of our work to determine whether DOT 

complied with the revisions to the FAR on the use and management of costreimbursement contracts, as prescribed in the FAR Case 2008-030. We conducted 

our work from July 2012 through May 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. We believe that the 

evidence obtained provides a reasonable basis for our findings and conclusions 

based on our audit objectives.

To conduct our work, we interviewed officials from the Department’s OSPE and 

the Operating Administrations’ COCOs to determine what internal controls were 

in place to encourage compliance with the revised FAR requirements on the use of 

cost-reimbursement awards. We reviewed applicable Federal laws and 

memorandums, the FAR case interim and final rules, and the revised FAR 

sections. We also created a standardized checklist of these requirements to test the

compliance of a statistical sample of 31 cost-reimbursement awards.

To select our sample, we used the Federal Procurement Data System-Next 

Generation (FPDS-NG) to extract a universe of all potential cost-reimbursement 

awards19 that DOT entered into between July 1, 2011, and May 31, 2012. The 655 

awards in our universe had a total value of about $3.1 million. The timeframe of 

our universe allowed DOT over 3 months to start implementing the new 

requirements. We stratified the universe by the six Operating Administrations that 

entered into cost-reimbursement awards during this time: (1) the Federal Transit 

Administration, (2) the Research and Innovative Technology Administration/ 

Volpe, (3) the National Highway Traffic Safety Administration, (4) the Maritime 

Administration, (5) the Federal Railroad Administration, and (6) the Federal 

Highway Administration.

20 We then selected a stratified sample of 31 costreimbursement awards with probability proportional to the value of the base award 

plus all options. These 31 cost-reimbursement awards included 20 task orders and 

11 contracts, with a total value of over $1.3 million. According to FPDS-NG, the 

total value of the base awards plus options was over $643 million.

Although the Department continues to report annually on deficiencies in the 

reliability of FPDS-NG data, we deemed the data sufficiently reliable for the 

 19 We extracted this universe based on the contract type identified in FPDS-NG by selecting awards indicated as costtype or order dependent. Order dependent types could possibly represent a cost-reimbursement award, depending on 

the individual task order.

20 The Federal Aviation Administration was not included in this review because it is exempt from the FAR.
20

Exhibit A. Scope and Methodology

purpose of this audit because we were able to validate the data elements we used 

for the contracts in our statistical sample.
21

Exhibit B. Major Contributors to This Report

EXHIBIT B. MAJOR CONTRIBUTORS TO THIS REPORT

Name Title

Terrence Letko Program Director

Ann Wright Project Manager

Jill Cottonaro Senior Analyst

Stacie Seaborne Senior Analyst

Meredith Howell Analyst

Christina Lee Writer-Editor

Amy Berks Senior Legal Counsel

Petra Swartzlander Senior Statistician

Megha Joshipura Statistician

William Savage Information Technology 

Specialist
22

Appendix. Agency Response

APPENDIX. AGENCY RESPONSE

U.S. Department of 1200 New Jersey Ave., SE

Transportation Washington, DC 20590

Office of the Secretary 

of Transportation

 July 9, 2013

MEMORANDUM TO: Mary Kay Langan-Feirson

Assistant Inspector General for 

 Acquisition and Procurement Audits

FROM:

 

SUBJECT: Management Response to OIG Draft Report on the Use of 

Cost Reimbursement Contracts 

The Office of the Senior Procurement Executive (OSPE) continues its efforts to 

strengthen procurement practices across the Department and provide up-to-date 

comprehensive and consistent procurement guidance for all aspects of the acquisition 

process including the use of cost reimbursement contracts. The OIG report highlights 

areas that would benefit from further refinement in practice, including accommodating 

evolving thought on the application of task orders on existing contracts to the revised 

FAR, and operating administrations’(OA) producing more comprehensive documentation 

of the decision process. However, the OIG report is lacking in key areas. For example, it 

asserts a causal linkage between guidance and behavior, but provides no evidence of the 

linkage. Further, it is an exaggeration to assert that the OAs created a “safe haven for 

high risk contracting,” by using a valid contracting tool.

OSPE Provided Timely Interim Guidance to Operating Administrations

Within 30 days of the release of the interim rule and within 2 weeks of the release of the 

subsequent final rule, OSPE, using its standard means of communicating with the DOT 

procurement community highlighted the release of these changes and emphasized the 

requirements and their importance. However, reiterating the FAR is neither appropriate 

nor necessary to implement Federal provisions. In accordance with FAR 1.301, the 

Department maintains the Transportation Acquisition Requirements and Manual in order 

to enumerate agency policies and interrelationships among OST and the OAs with regard 

to procurement activities. However, the Department also must abide by the provisions in 

FAR 1.304, stating that agencies shall limit the issuance of agency directives that restrain 

the flexibilities found in the FAR, and “shall not unnecessarily repeat, paraphrase, or 

otherwise restate material contained in the FAR.” As a result, the expeditious reference 

to the interim and final revisions to the FAR, were both appropriate and sufficient, and in 

accordance with the express direction of the FAR. 
23

Appendix. Agency Response

OSPE is Further Strengthening Procurement Structure and Practice

OSPE is updating procurement systems, practices and processes to apply a risk based 

approach to acquisition oversight. Specifically, OSPE is updating the Department’s 

Acquisition Oversight and Risk Management Policy to provide a more robust 

departmental role in supporting acquisition oversight and stewardship. The updated 

policy will recognize the importance and complexities of business decisions associated 

with various contracting types and apply the resources of a new Acquisition Strategies 

Review Board towards reviewing certain acquisition strategy documents and will better 

ensure the rigor in application of FAR requirements across the Department. Further, the 

OIG is aware of ongoing efforts to update the Transportation Acquisition Requirements 

and Manual (TAR/TAM), by the end of the calendar year, and the OSPE is intent to keep 

it up to date on an ongoing basis. Finally, it is important for the OIG to recognize that the 

statutory structure of the Department places primary responsibility on the OAs for 

managing the procurement planning and administration of acquisition requirements 

within the context of Federal Acquisition Regulation and the Department’s requirements 

established in the TAR/TAM. Within this context the Department relies on the OAs to 

provide primary oversight to ensure compliance with acquisition requirements and 

guidance, exercising sound business judgment as to the appropriate contract type, and 

support key decisions as required in the FAR.

Cost Reimbursable Contracting is Used Judiciously

While the Department recognizes the Governmentwide efforts to reduce the use of cost 

reimbursable contracts, FAR 16.3 recognizes that cost reimbursement contracts are 

suitable for use when uncertainties involved in contract performance do not permit costs 

to be estimated with sufficient accuracy to use any type of fixed price contract. It 

specifically recognizes that a cost contract may be appropriate for research and 

development work.

As a practical matter, cost reimbursable contracts are appropriate where 

1) The object, scope, and nature of the work required cannot be definitely described,

2) Performance specification represents technical achievement of a performance goal 

not yet demonstrated, or

3) Products or tasks are technically complex.

Such circumstances are typical during research and development projects and complex 

services, which might include complex information technology development projects. 

Under such circumstances, the risk of underutilizing cost type contracts is that the vendor 

community is forced to price the uncertainty into the contract price, which increases the 

potential for the Department to pay too much.

Based on our cursory review of the OIG results, about 75 percent of the $1.9 billion total 

cost reimbursable contracts for the Department in fiscal year 2012 were let from FAA. A 

summary examination of the product and service codes (PSC) associated with these 

contracts indicates that they were all related to the development and deployment of 

complex information technology development projects. For example the $173 million 

coded under S211 were development contracts for the Automatic Dependent Surveillance 

– Broadcast (ADS-B) element of FAA’s NextGen system that is intended to replace 

traditional radar surveillance systems. 
24

Appendix. Agency Response

Also $259 million coded under 5820 was for the development of En Route Automation 

Modernization (ERAM), one of the cornerstones of NextGen which processes flight radar 

data, provides communications and generates display data to air traffic controllers. Such 

types of development activities, as explained above, can make appropriate use of cost 

reimbursable contracts

OIG Report Over-Interprets Federal Acquisition Regulation

While the OIG report identifies a number of areas where the state of the practice relating 

to the application of the FAR can be enhanced, the report is diminished by its 

interpretation of best practice guidance as requirements. For example the OIG report 

states that “the revised FAR requirements state that a cost reimbursement award may 

only be used when planning factors specified in FAR section 16.104...have been 

considered.” This over interprets the language in FAR 16.104 that actually states, “there 

are many factors that the contracting officer should consider in selecting and negotiating 

the contracting type, including....” This is not an exclusionary statement that precludes 

the use of cost reimbursable contracts as portrayed in the OIG report, but rather an 

advisory of some of the areas that should be considered. We agree that these factors 

should be considered and are working hard to fully implement this guidance in a 

consistent way across the Department, but it is also well understood that there is a 

significant different between “should,” which is permissive, and “shall,” which is an 

absolute, unyielding requirement (such as that mentioned earlier for FAR 1.304). The 

OIG report needs to accommodate recognition of this key distinction, and ensure that 

throughout its presentation, it accurately represents the FAR.

RECOMMENDATIONS AND RESPONSES

The OIG draft report makes the following recommendations to OSPE:

Recommendation 1: Update the Department’s Transportation Manual (TAM) to reflect 

the revised Federal Acquisition Regulation (FAR) requirements for the use of cost- reimbursement awards, including consideration of task orders. 

Response: Concur. As described in response to a previous OIG recommendation, OSPE 

is engaged in updating the TAR/TAM. This update will include the sections regarding 

the use of cost-reimbursement contracts. The target date for completing the update is 

December 31, 2013.

Recommendation 2: Until the TAM is revised, provide guidance such as acquisition 

policy letters to help acquisition personnel understand and properly implement the 

revised FAR requirements for the use of cost-reimbursement awards.

Response: Concur. OSPE will provide the DOT acquisition community with 

supplemental guidance to convey evolving interpretations of the revised FAR. This will 

include its applicability to Task Orders, FAR requirements for adequate documentation, 

ensuring the adequacy of a contractor’s cost accounting system, and other aspects 

touched upon in the OIG report, as appropriate. The target date for completing this 

acquisition policy letter is August 30, 2013.
25

Appendix. Agency Response

Recommendation 3: Require that the Maritime Administration’s Chief of the 

Contracting Office (COCO):

a. Develop guidance to ensure that ship manager contractor files identify the assigned 

Contracting Officer’s Representative (COR) and specify which task orders the COR 

is responsible for overseeing (including whether the COR is responsible for all task 

orders, if applicable),

b. Implement a procedure to notify CORs of each planned task order before it is issued, 

and

c. Maintain adequate training documentation for members of its acquisition workforce.

Response: Concur in part. Recommendations relating to the development of procedures 

specific to contracting in the Maritime Administration would be most appropriately made 

to the Maritime Administrator. While OSPE agrees with the need for each of the 

elements of the recommendation, and it is our understanding that MARAD has actions 

underway or completed in each of the areas described, we suggest the OIG consider 

issuing the final report with this recommendation directed to the Maritime Administrator.

Recommendation 4: Update the Department’s COR Program Guidance to reflect the 

revised FAR requirements for the use of cost-reimbursement awards.

Response: Concur. OSPE will issue updated COR program guidance that includes 

updated information on the revised FAR requirements for the use of cost reimbursement 

contracts. The target date for complete the update is December 31, 2013.

Recommendation 5: Require the OAs to conduct periodic reviews to verify compliance 

with the revised FAR requirements for the use of cost-reimbursement awards and to 

report the results to OSPE.

Response: Concur. The TAR/TAM will specify that OAs are expected to conduct 

periodic reviews to verify FAR compliance for the use of cost-reimbursement awards and 

report the results to OSPE. This provision will be included in the updated intended for 

completion by December 31, 2013.