Grants Management: EPA Needs to Better Document Its Decisions for Choosing between Grants and Contracts
Published: 2004-03-31T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Grants and contracts constitute over two-thirds of the Environmental Protection Agency's (EPA) budget. In fiscal year 2003, EPA awarded $3.6 billion in grants directed by Congress, $656 million in grants awarded at its own discretion, and $934 million in contracts. Under the Federal Grant and Cooperative Agreement Act of 1977, whether EPA should award a grant or a contract depends upon the principal purpose of the award. In this context, GAO was asked to determine (1) the trends over the last 11 years on EPA's expenditures on discretionary grants and contracts and the types of goods and services obtained by each and (2) the extent to which EPA has and follows procedures for deciding when to use grants or contracts.
section_title: What GAO Found
paragraphs: EPA's funding for discretionary grants and contracts had similar trends from fiscal years 1993 through 2003, suggesting limited migration between these funds in EPA's budget over this period. Although EPA grants data provide little information on goods and services obtained with discretionary grants, GAO estimates, based on its survey of grantees with grants closed in fiscal years 2001 and 2002 and that had project start dates after October 1, 1997, that the majority of goods and services fell into three categories: (1) research and development; (2) training, workshops, and education; and (3) journals, publications, and reports. EPA has specific procedures to guide decisions on choosing grants or contracts but often has not followed a very important one--documenting in its award decision memorandums the reasons for choosing a grant instead of a contract. EPA procedures define staff roles and responsibilities, provide examples of when to use a grant or a contract, and require documentation in the award decision memorandum to justify the use of a grant or a contract. However, in 64 percent (43 of 67) of the memorandums GAO reviewed, EPA did not fully justify its reasons for choosing a grant instead of a contract. It is unclear whether this shortcoming obscured inappropriate decisions to use grants instead of contracts. On the one hand, GAO's survey results showed that an estimated 8 percent of EPA's discretionary grantees would identify EPA as the primary and direct beneficiary. This estimate could suggest that the principal purpose of the grant award was acquiring property or services for EPA's direct benefit, and that EPA should have awarded some grants as contracts. However, for those grantees who identified EPA as the grant's primary and direct beneficiary, GAO's review of grant files and follow-up interviews indicated that some of these grants benefited both the federal government and the public and therefore could arguably have been awarded as either a grant or a contract.

section_title: Letter
paragraphs: Grants and contracts constitute over two-thirds of the budget of the  Environmental Protection Agency (EPA) and are the primary tools through  which EPA carries out its mission of protecting the environment and  human health.  In fiscal year 2003, EPA awarded $3.6 billion in  nondiscretionary grants, $656 million in discretionary grants, and $934  million in contracts.  For nondiscretionary grants, Congress directs awards  to recipients who meet specific eligibility requirements, often on the basis  of formulas prescribed by law or regulation.  For discretionary grants, EPA  has the legislative authority to determine the funding levels and recipients.   EPA also awards contracts to acquire property or services.  The Federal  Grant and Cooperative Agreement Act of 1977, as amended, sets out  governmentwide criteria for selecting the most appropriate award  instrument—a grant or a contract.  The legislative history indicates that  Congress passed this act, in part, because the failure to distinguish between  grants and contracts had led to both the inappropriate use of grants to  avoid the requirements of the procurement system as well as to  unnecessary red tape and administrative requirements for grants.
Under the act, an agency must decide whether to use a grant or a contract  based on the principal purpose of the award.  If an agency is using federal  funds to acquire property or services for the direct benefit of the federal  government, it must award the funds as a contract.  On the other hand, the  agency is to award a grant when the principal purpose of the award is to  transfer a thing of value, usually funds, to a state or local government or  other recipients to “carry out a public purpose of support or stimulation”  authorized by law.  However, the principal purpose of an award is not  always clear because federal agencies, as well as others, may obtain  incidental use or benefit from an award.  In 1994, 1999, and 2002, EPA  Inspector General reports questioned EPA’s decision to award a  discretionary grant instead of a contract.  These reports raised concerns  about possible other instances in which EPA may have made improper  award decisions and used discretionary grant money for services that  should have been procured through contracts.
In this context, you asked us to determine (1) the trends over the last 11  years for EPA’s expenditures on discretionary grants and contracts and the  types of goods and services obtained by each and (2) the extent to which  EPA has and follows procedures for deciding when to use grants or  contracts.
To identify the funding trends in discretionary grants and contracts and the  types of goods and services obtained by each, we analyzed EPA’s data on  grants and contracts for fiscal years 1993 through 2003.  We interviewed  and obtained documents from officials in EPA’s Office of Grants and  Debarment and its Office of Acquisition Management.  We also conducted a  Web-based survey of 237 randomly selected discretionary grant recipients  whose grants were closed in fiscal years 2001 and 2002 and had project  start dates after October 1, 1997.  This sample was selected so that we  could project the results to all grant recipients in the period we reviewed.   We used survey results to identify the types of goods and services obtained  by the grants.  To determine the extent to which EPA has and follows  procedures for deciding when to use either a grant or a contract, we   (1) identified and discussed with EPA staff the policies, procedures, and  guidelines that they have in place to make discretionary grant awards;   (2) reviewed internal EPA management reviews and EPA Inspector General  reports to find instances where discretionary grant awards or adherence to  correct management procedures were questioned; (3) compared EPA’s  discretionary grant award policy with those of the nine largest granting  agencies and spoke with their Inspectors Generals about award selection  issues; (4) asked our survey respondents whether EPA was the direct  beneficiary of the grant they received, and conducted telephone interviews  with selected respondents to determine if there was evidence that EPA  should have awarded a contract instead of a grant; and (5) performed in- depth file reviews of 67 grants, selected on the basis of survey responses, to  determine if EPA was following its policies, procedures, and guidelines  when choosing between a grant or a contract.
We conducted our review from January 2003 to February 2004 in  accordance with generally accepted government auditing standards.  Our  scope and methodology are presented in appendix I.
subsections: section_title: Background
paragraphs: EPA used over two-thirds of its fiscal year 2003 budget on grants and  contracts to carry out its environmental programs and obtain services.  Out  of an $7.6 billion fiscal year 2003 budget, EPA awarded $4.2 billion in grants  and $934 million in contracts, as shown in figure 1.
In fiscal year 2002, EPA made over 8,000 grant awards and amendments,  covering 72 separate grant programs to 4,100 grant recipients.  EPA offers  two types of grant programs—nondiscretionary and discretionary:    For nondiscretionary grants, Congress directs awards to prospective  recipients who meet specific eligibility criteria, often awarded on the  basis of formulas prescribed by law or agency regulation.  For example,  nondiscretionary grants support water infrastructure projects, such as  the drinking water and clean water state revolving fund program, and  continuing environmental programs, such as the Clean Air Program for  monitoring and enforcing Clean Air Act regulations.  In fiscal year 2003,  EPA awarded about $3.6 billion in nondiscretionary grants.  EPA has  awarded these grants primarily to states and other governmental  entities.
For discretionary grants, EPA has the legislative authority to  independently determine the recipients and funding levels.  These grants  fund a variety of activities, such as environmental research and training.   In fiscal year 2003, EPA awarded $656 million in discretionary grants.   EPA awards these grants primarily to state and local government  entities, nonprofit organizations, universities, and Native American  tribes.  In fiscal year 2003, EPA awarded about 40 percent of the  discretionary grant dollars through program offices at EPA  headquarters, while its 10 regional offices awarded the remaining 60  percent.
Additionally, at its own discretion, EPA took 6,745 total contract actions  totaling $934 million in fiscal year 2003.  EPA contracting activities range  from long-term clean-up and remediation support contracts under the  agency’s Superfund program, contracts to support research at EPA  laboratories, contracts for management consultant services, and contracts  for janitorial services and building maintenance.
With discretionary funding, EPA needs to choose the appropriate award  instrument—a procurement contract, a grant, or a cooperative agreement.   The Federal Grant and Cooperative Agreement Act of 1977 established  governmentwide criteria that agencies must use in selecting the most  appropriate award instrument.  Specifically:  Procurement contracts are to be used when “the principal purpose of  the instrument is to acquire (by purchase, lease, or barter) property or  services for the direct benefit or use of the United States Government,”  or when “the agency decides in a specific instance that the use of a  procurement contract is appropriate.”
Grant agreements are to be used when “the principal purpose of the  relationship is to transfer a thing of value to the  to carry  out a public purpose of support or stimulation authorized by [federal  law],” and when “substantial involvement is not expected between the  executive agency and the  when carrying out the activity  contemplated in the agreement.”
Cooperative agreements are to be used when “the principal purpose of  the relationship is to transfer a thing of value to the  to  carry out a public purpose of support or stimulation authorized by  ,” and when “substantial involvement is expected between  the executive agency and the  when carrying out the  activity contemplated in the agreement.”
Under the act, grants and cooperative agreements are closely related to one  another.  The essential distinction between a grant and a cooperative  agreement is the degree of federal involvement.
EPA Order 5700.1 is the agency’s policy to implement the 1977 Act and  guides EPA in its selection of the appropriate award instrument.  The  order’s purpose is “to clarify the criteria for and to achieve consistency in  the selection and use of contracts, cooperative agreements and grants by  all EPA offices and laboratories.”  According to the order, the decision to  use a contract or an assistance agreement (a grant or a cooperative  agreement) must be based solely on the principal purpose of the  relationship, and EPA offices and laboratories must determine whether the  government is the direct beneficiary or user of the activity.  The order  identifies activities that must be funded through a contract, such as  activities that produce specific information that EPA will directly  incorporate into technical, policy, or regulatory decisions, and activities  that may be funded through an assistance agreement, such as state and  local government cleanup of hazardous waste sites.  The order also gives  examples to clarify areas of ambiguity, such as which instrument to select  to fund a conference when EPA may be attending, and what qualifies as  substantial involvement in the selection of a cooperative agreement.
The order also specifies the roles and responsibilities of both EPA program  and grants management offices, including the responsibilities of those  personnel who handle funding and “technical, legal, and administrative  evaluations.”  Additional project officer training guidance specifies that  project officers at EPA headquarters and in regional program offices  receive grant proposals resulting from agency advertisements and  solicitations, or through a grantee’s unsolicited proposal.  Project officers  are responsible for ensuring that grants meet technical and programmatic  requirements.  EPA’s Office of Grants and Debarment develops agency  grant policies and guidance, and, through its grants management offices at  headquarters and in regions, is responsible for the administration and  management of individual grants.  Grants management offices work with  project officers to evaluate whether individual grant proposals should be  approved as a grant, a cooperative agreement, or referred to EPA’s Office of  Acquisition Management, which oversees agency contracting.  Figure 2  describes the process that the EPA offices follow in choosing a grant or a  contract.
To document compliance with the 1977 Act, EPA Order 5700.1 requires that  a designated approval official sign a decision memorandum prepared by  the responsible project officer verifying the selection of the appropriate  award instrument.  Additional Office of Grants and Debarment guidance  listed in its project officer training manual requires that the decision  memorandum must include, among other items, the objectives of the  project or program, the total amount of the award, and a brief justification  why the award should be awarded as a grant or a cooperative agreement.   Internal management reviews conducted by the Office of Grants and  Debarment note that the justification should address the criteria identified  in the order:  principal purpose of the relationship, direct benefit or use,  support or stimulation, and legislative authority to enter into a grant  relationship.  In addition, if the award is to be a cooperative agreement,  the memorandum must include a description of the substantial federal  involvement.  For proposals to fund conferences or Web sites, the Office of  Grants and Debarment has developed separate, specific guidance for  project officers to use in order to determine whether EPA is the direct  beneficiary of the conference or Web-site proposal.
section_title: Discretionary Grant and Contract Funding Have Had Similar Trends, but Existing Data Make It Difficult to Analyze Trends in Goods and Services
paragraphs: EPA’s funding for discretionary grants and contracts have had similar  trends from fiscal years 1993 through 2003, and this trend suggests there  has been limited migration between discretionary grant and contract funds  in EPA’s budget over this period.  However, the data EPA provided to us had  little information on goods and services obtained and cannot be compared  with each other to determine whether activities once funded under  contracts are now being funded under discretionary grants.  We estimate,  on the basis of our survey responses from recipients of discretionary grants  closed in fiscal years 2001 and 2002 and that had project start dates after  October 1, 1997, that the majority of discretionary grants’ goods and  services fell into three categories:  research and development; training,  workshops, and education; and journals, publications, and reports.  A large  number of grants were also used to fund conferences and smaller  presentations and meetings.  Although fewer in number, discretionary  grants used for cleanup and monitoring activities, such as support for state  leaking underground storage tank programs, made up one of the largest  dollar categories of discretionary grant funding for any spending category  we identified.
subsections: section_title: EPA Discretionary Grants and Contracts Have Had Similar Trends
paragraphs: For fiscal years 1993 through 2003, both discretionary grant and contract  spending show similar trends, as figure 3 shows.  Both the overall and  annual trends suggest there has been limited migration between  discretionary grant and contract funds in EPA’s budget over this period.
In total, EPA funded $6.4 billion in discretionary grants and $11.3 billion in  contracts over the 11-year period.  For discretionary grants, annual funding  decreased by $18 million over the period, from $674 million to $656 million;  annual funding for contracts decreased by $130 million, from $1.06 billion  to $934 million—decreases of 3 and 12 percent, respectively.   See table 7 in  appendix II for annual funding levels for EPA discretionary grants and  contracts for fiscal years 1993 through 2003.  Table 8 in appendix II shows  annual funding levels for EPA discretionary grants at EPA headquarters and  regional offices for fiscal years 1993 through 2003.
section_title: EPA Databases Make It Difficult to Identify Trends in the Use of Grants and Contracts to Obtain Goods and Services
paragraphs: EPA’s databases do not provide sufficient information to identify and track  specific goods and services obtained with grants and contracts.  EPA  currently uses two databases for grant management purposes—the Grants  Information and Control System (GICS) and the Integrated Grants  Management System (IGMS).  Both databases are useful for retrieving  information about specific grants, but neither is useful in analyzing the  kinds of goods and services funded by discretionary grants.  For our grant  analysis, EPA was able to query these databases by Catalog of Federal  Domestic Assistance (the catalog) program codes.  As shown in table 1,  the catalog codes provide little information on goods and services obtained  through discretionary grants because single codes can encompass broad  miscellaneous groupings of goods and services, and several codes have  been merged with other codes between fiscal years 1993 and 2003.
In 6 of the 11 fiscal years, EPA program offices awarded the most EPA  discretionary grant funds under a miscellaneous catalog code, 66.606,  called Surveys, Studies, Investigations, and Special Purpose Grants.  This  code also received the most funds overall during the 11-year period, or $1.4  billion.  Because this code is not program-specific, it provided limited use  in drawing conclusions about goods and services obtained under this code.   In 2002, the EPA Inspector General found that EPA could have awarded  many of its assistance agreements under a program-specific catalog code,  rather than the miscellaneous 66.606 code, that would better link activities  to measurable assistance agreement outcomes.  EPA substantially  reduced its use of this code in 2003.  In addition, several grant programs  were merged under new catalog codes.  As shown in table 1, discretionary  grant funding under the Consolidated Research Grants program code rose,  but this increase occurred because the code subsumed the Air Pollution  Control Research and Water Protection Consolidated Research program  codes.  The Consolidated Research Grants program code is also a generic,  miscellaneous catalog code and provides little information on the specific  goods and services obtained under it.  In fiscal year 2003, EPA awarded  $128 million, or 20 percent of its discretionary grant dollars, under these  two miscellaneous catalog codes.  See table 9 in appendix II for EPA  discretionary grant funding by catalog code from fiscal years 1993 through  2003.
Regarding contracts, we could not analyze trends for fiscal years 1993  through 2003 of goods and services EPA obtained through contracts.  EPA’s  contract data come from the Federal Procurement Data System, which  changed its industrial coding categories in 1997, and EPA adopted these  changes in 2001.  The original coding categories came from the Small  Business Administration—the Standard Industrial Classification (SIC)  codes.  The Federal Procurement Data System then switched to the North  American Industrial Classification System (NAICS) codes.  However, SIC  codes categorize goods and services differently than NAICS codes, and  therefore we could not compare goods and services purchased for the   11-year period.  Moreover, because EPA’s database could only provide data  for major SIC and NAICS codes, we could not determine, except in a  general way, the goods and services EPA obtained through contracts under  these codes.
For the SIC codes, we found that four codes comprised 93 percent of all  contract spending for the period of fiscal years 1993 through 2000.  Table 2  shows selected year data for these codes.  As the table shows, Engineering,  Accounting, Research, Management, and Related Services was consistently  the highest category of contract spending.  This category accounted for 58  percent of the total contract spending for the period.
Similarly, our analysis of NAICS codes shows that four codes accounted for  90 percent of the contract spending for fiscal years 2001 and 2003.  Table 3  shows the five highest dollar contract spending codes for these fiscal years.
See tables 10 and 11 in appendix II for EPA contract funding by SIC code  (fiscal years 1993 through 2000) and NAICS code (fiscal years 2001 through  2003).
section_title: Most Grant Funds Were Used for Education, Research, and Publications
paragraphs: On the basis of our survey responses, we estimate that of all the goods and  services indicated by grant recipients, 59 percent were in three categories:   (1) research and development; (2) training, workshops, and education; and  (3) journals, publications, and reports.  These three categories accounted  for the majority of grant funds, but we identified a total of eight categories  from the survey responses, as shown in table 4.  Although these results  provide more information than catalog codes on goods and services, they  only apply to discretionary grants closed out in fiscal years 2001 and 2002  that had project start dates after October 1, 1997.  Discretionary grants  used for cleanup and monitoring activities, such as support for state  leaking underground storage tank programs, make up one of the largest  dollar categories of discretionary grant funding of the spending categories  we identified.  We estimate that 15 percent of grants fall into this category,  accounting for $56 million of the estimated $209 million spent on grants  closed in fiscal years 2001 and 2002 that had project start dates after  October 1, 1997.
Table 12 in appendix II provides a more detailed description of the goods  and services under the categories listed in table 4.
Although we were able to identify and categorize goods and services from  survey responses, we could not link these to environmental results.   According to EPA’s Grants Management Plan, released April 2003, the  agency plans to link grant performance to achievements of the agency’s five  performance goals:  clean air, clean and safe water, preserve and restore  the land, healthy communities and ecosystems, and compliance and  environmental stewardship.  To implement this initiative, the agency  planned to issue policy guidance to ensure that all grant work plans,  decision memorandums, and/or terms of condition include environmental  outcomes and how to measure them in 2003.  On January 14, 2004, EPA’s  Office of Grants and Debarment issued an interim policy order requiring  program offices to include a discussion of how a proposed project or  program supports the goals of EPA’s Strategic Plan in funding packages  submitted to the grants management offices, on or after February 9, 2004.   Office of Grants and Debarment officials told us that they expected the  final policy order to be issued in October 2004.
section_title: EPA Generally Has More Specific Procedures Than Other Federal Agencies but Often Does Not Adequately Document Its Reasons for Choosing a Grant or a Contract
paragraphs: EPA has procedures to guide decisions on choosing a grant or a contract,  but often has not followed one of its most important procedures— documenting in its award decision memorandums the reasons for choosing  a grant instead of a contract.  We found that EPA’s procedures are generally  more specific than those of other federal agencies that award substantial  grant funds.  Although EPA’s procedures are more specific, in our detailed  review of 67 EPA grant and cooperative agreement awards, we found that  EPA often did not follow its requirements for documenting its decision on  why it chose to award a grant instead of a contract.  It is unclear whether  this documentation shortcoming obscured inappropriate decisions to use  grants instead of contracts.  On the one hand, on the basis of our survey  results, we estimate that 8 percent of EPA’s grantees would identify EPA as  the grant’s primary and direct beneficiary.  This estimate could suggest that  the principal purpose of the award was to acquire property or services for  EPA’s direct benefit, and that EPA should therefore have awarded some  grants as contracts.  However, for those grant recipients we surveyed who  identified EPA as the grant’s primary and direct beneficiary, we could not  determine from our file reviews and grantee interviews that the principal  purpose of the award was to benefit EPA directly and that a contract  should have been used instead.  We found that both EPA and the public  benefited, as in the case of a grantee who used EPA funds to develop waste  management standards that the private sector, state and local governments,  and EPA and other federal agencies could use.  Because the principal  purpose of an award is not always clear, it is important for EPA to carefully  document its reasons for choosing a grant or a contract.
subsections: section_title: EPA’s Award Policy and Procedures Are Generally More Specific Than Other Agencies
paragraphs: EPA’s policy and procedures to select the appropriate award instrument are  generally more specific than those of other federal agencies that award  substantial grant funds.  See table 14 in appendix IV for more detailed  information.  As shown in table 5, our analysis of the award policies and  guidance of the top 10 federal grant-making agencies shows that EPA’s  policy on the selection of a funding instrument met all nine of the features  we used to compare agencies’ policies for determining whether to award a  grant, a cooperative agreement, or a contract.
EPA Order 5700.1 includes the following features:  the use of an internal control mechanism (decision memorandum) to  document the appropriate selection of a grant or a contract award  instrument;    the roles and responsibilities of grants management and program  personnel in selecting and approving the appropriate award instrument;  the statement that the type of recipient does not determine the award  instrument;   specific guidance and examples on handling awards for conferences and  subgrantees and “in-kind” assistance;    the use of examples for awarding a grant, a cooperative agreement, or a   the use of case-study material to supplement the examples and provide  additional guidance.
Although not included in the order, additional EPA Office of Grants and  Debarment guidance requires that the decision memorandum must include  a description of the substantial involvement when a cooperative agreement  is selected.  Each of the agencies’ policy features is discussed in greater  detail in table 14 of appendix IV.
section_title: EPA Does Not Always Fully Document Its Justifications for Decisions to Award Grants or Cooperative Agreements
paragraphs: EPA’s award policy requires a decision memorandum to document the  selection of an award instrument, but our review of 67 decision  memorandums showed that EPA often did not follow the award  documentation requirements, as identified in order 5700.1 and the project  officer training manual, and further expanded upon in internal  management reviews conducted by the Office of Grants and Debarment.   Table 6 summarizes the problems we found with EPA award  documentation from grant and cooperative agreement awards made at EPA  headquarters and six EPA regional offices.
Sixty-four percent, or 43 of the 67 decision memorandums reviewed, lacked  adequate justification for selecting a grant instead of a contract at EPA  headquarters and EPA regional offices.  The decision memorandums did  not fully address the criteria identified by EPA.  These criteria include the  principal purpose of the relationship, direct benefit or use, support or  stimulation, and the legislative authority to enter into a grant relationship.   Frequently, the justification used boilerplate language from EPA’s award  policy citing that EPA was not the direct beneficiary of the award and that  the grant was meant for a public purpose.  Additionally, 84 percent, or 26 of  the 33 decision memorandums reviewed for cooperative agreements, did  not include justification for the award of a cooperative agreement instead  of a grant, as required by EPA’s guidance, or the justification was not  specific.  These justifications were usually missing from the decision  memorandums completely or simply stated that EPA would be  substantially involved in carrying out the award without detailing the type  or degree of involvement.  Of the four grants we reviewed from one EPA  region, none of the decision memorandums associated with the grant  awards identified the statutory authority for making the award.  For two  awards, the appropriate signature was missing on the decision  memorandums.
Internal reviews conducted by the Office of Grants and Debarment’s Grants  Administration Division identified similar problems with documentation in  award decision memorandums.  According to a July 2003 internal  management review of EPA Region 9, many of the memorandums did not  fully explain the link between the statutory authority being selected and the  specific grantee activities.  Furthermore, almost all of the decision  memorandums used a formula statement for the justification, rather than  the criteria referenced in section 6 of order 5700.1.  The management  review stated that the justification should address the criteria referenced in  section 6 of the order, which it identified as the principal purpose of the  relationship, direct benefit or use, support or stimulation, and the  legislative authority to enter into a grant relationship.  Internal  management reviews of Regions 5 and 4, in July and August 2003,  respectively, found similar problems with the regions’ award decision  memorandums and stated that the decision memorandums should address  the criteria referenced in section 6 of the order.  The Grants Administration  Division recommended that the Assistant Regional Administrator for  Management in these regions strengthen the justifications for “contracts  versus grants” and “statutory authority” with respect to discretionary  grants.  Internal review staff in the Office of Grants and Debarment with  whom we spoke noted that although their reviews found documentation  problems, they found no evidence that any grants should have been  awarded as contracts.
Although EPA’s Office of Grants and Debarment has raised concerns about  the lack of documentation in decision memorandums and made  recommendations to strengthen them, officials in the Office of Grants and  Debarment told us that the decision memorandum does not always reflect  the full level of consideration given to the grant or contract issue because  the decision memorandum is written by the project officer prior to the  review by the grants management office.  For example, after reviewing the  decision memorandum, grants specialists in the Office of Grants and  Debarment may request that the project officer provide clarifying  information.  Office of Grants and Debarment staff told us that evidence of  the grant or contract discussions is often found elsewhere in the project  file, such as in revisions in the recipient's work plan or in clarifying e-mails  sent back-and-forth between the project officer and the grants specialist  during the review process.  They told us that they consider these clarifying  e-mails and other documentation as an addendum to the decision  memorandum, and that the decision memorandum is not always rewritten  to reflect this process or any additional information that is developed.   Finally, according to Office of Grants and Debarment officials, beginning in  April 2004, EPA regions will be required to attach or enter documentation  electronically justifying their decision to award a grant or a cooperative  agreement instead of a contract, and headquarters offices are scheduled to  begin this practice by the end of 2006.
section_title: Follow-up Analysis of Survey Results Shows That Both EPA and the Public Benefited from Some Grants
paragraphs: We estimate that 88 percent of EPA’s grant recipients would identify the  general public or entities other than EPA as the grant’s primary beneficiary,  and that 8 percent would identify EPA.  Specifically, we estimate that grant  recipients would identify the primary beneficiary of their grants as the  following:  13 percent—schools and universities;  6 percent—research and academic communities;  6 percent—business or private sector;  1 percent—nonprofit organizations; or  4 percent—don’t know, or no response.
To determine whether EPA was the direct and primary beneficiary as the  respondents had indicated, we reviewed EPA’s grant and project officer  files for 20 grants and conducted interviews with those grant recipients.   These recipients noted that while EPA benefited from the grant, other  entities benefited as well.  Our file reviews confirmed this statement.  As  EPA’s policy notes, there may be some cases in which EPA expects to  derive some incidental use or benefit from funded activities.  Such  incidental use or benefit does not preclude a grant award when the  principal purpose is public support or stimulation.  Although some of these  grants could arguably be described as having a principal purpose of  acquiring property or services for the direct benefit or use of EPA, in which  case a contract would have been the award instrument, we could not make  this determination from our review of the files or grant recipient  interviews.
For instance, in 1998, EPA awarded a noncompetitive cooperative  agreement to an international nonprofit organization that develops  voluntary waste management standards that are used worldwide by  industry, regulatory bodies, and individuals.  According to award  documents and the award recipient, the main purpose of the award was to  assist EPA in developing waste management standards that could be  incorporated into EPA’s Resource Conservation and Recovery Act  Program, and which could also be used by federal, state, and local  regulatory bodies; industry; and individuals.
During EPA’s internal review of the justification contained in the decision  memorandum for the award, questions arose as to whether funding the  proposed project as a cooperative agreement rather than a contract would  violate provisions of the 1977 Act.  Subsequent review by EPA legal counsel  found that since the proposal focused on developing standards that could  be used by both the public and private sector, a case could be made that  federal use would be incidental to the principal public purpose of support  and stimulation, and awarding the project as a cooperative agreement  could be justified.  However, EPA legal counsel also pointed out that to  fund the project as a cooperative agreement, reference to EPA direct use  and benefit would have to be removed from the decision memorandum  because “Technical materials that EPA uses to set guidelines or to prepare  EPA guidance documents or manual must be obtained under a contract.   EPA Order 5700.1, p. 10.”  As such, EPA would have to delete portions of  the memorandum that stated “These standards will form a nucleus from  which OSWER will develop updated sampling guidance for inclusion in  Chapter Nine of ‘Test Methods for Evaluating Solid Waste,  Physical/Chemical Methods’, (SW-846), the RCRA test methods manual.”   EPA staff modified the decision memorandum accordingly and awarded  the project as a cooperative agreement.  The EPA project officer  acknowledged that EPA could have funded the project as a contract, but  the agency instead took the steps necessary to award the project as a  cooperative agreement because it was “a faster process.”
In another instance, in 1999, EPA awarded a cooperative agreement to a  state Department of Environmental Quality (DEQ) to develop a wet- weather monitoring program for a watershed within that state.  According  to the award recipient, the state and the public benefited from this project,  as well as EPA.  However, EPA was under court order to develop Total  Maximum Daily Loads (water quality indicators) for the watershed  involved and instead opted to award a cooperative agreement to the state  to perform this work for them.  The state DEQ did not actually perform the  work involved but subcontracted the project to a state university  laboratory.  Our review of project files confirmed that EPA was not the only  beneficiary of this project, but EPA might otherwise have chosen to  contract directly with the university laboratory involved for the  performance of this work.
According to officials we interviewed at the Office of Management and  Budget (OMB), OMB does not review agencies’ policies implementing the  1977 Act.  These officials stated that agencies have latitude to interpret the  act.
section_title: Conclusions
paragraphs: Although EPA has specific guidance to implement the Federal Grants and  Cooperative Agreement Act, our review showed that EPA often did not  follow its own requirements for adequately documenting in its decision  memorandums the reasons for choosing a grant or a cooperative  agreement instead of a contract.  Because an award may have multiple  beneficiaries and the direct beneficiary of an award is not always easily  discernible, it is important for EPA to fully document in its decision  memorandums its reasons for choosing a grant or a contract.
section_title: Recommendation for Executive Action
paragraphs: We recommend that the Administrator of EPA consider ways to improve  project officers’ compliance with EPA’s requirement to properly document  in award decision memorandums the justification for using a grant or a  cooperative agreement instead of a contract.
section_title: Agency Comments
paragraphs: We provided a draft of this report to EPA for comment.  In response, we  received oral comments from EPA officials, including the Director of the  Office of Grants and Debarment.  EPA officials agreed with the  recommendation in our draft report and stated that they have already  begun to take steps to implement it.  Furthermore, EPA officials  commented that they were pleased that we did not find any instances  where a contract should have been awarded instead of a grant.  EPA  officials also commented that our review of decision memorandum  documentation did not reflect the full level of consideration given by EPA  when deciding whether to use a grant instead of a contract.  While we  included language in this report to reflect EPA’s comment regarding the full  level of consideration given to the decision, both EPA and we have found  and agree that the decision memorandum documentation justifying the use  of a grant instead of a contract needs strengthening.  Finally, EPA provided  some clarifying comments that we incorporated into this report, as  appropriate.
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Should you or your staff need further information, please call me at (202)  512-3841.  Key contributors to this report are listed in appendix V.
section_title: Objectives, Scope, and Methodology
paragraphs: Our objectives were to determine (1) the trends over the last 11 years on  the Environmental Protection Agency’s (EPA) expenditures on grants and  contracts and the types of goods and services obtained by each and (2) the  extent to which EPA has and follows procedures for deciding when to use  grants or contracts.
Initially, we conducted a literature search to identify reports, studies,  legislation, and other documents relevant to EPA’s grant versus contract  management.  Our work was closely coordinated with EPA’s Office of  Inspector General (OIG) to prevent duplication with ongoing OIG efforts.   To achieve our first objective, we interviewed and obtained documents  from officials in EPA’s Office of Grants and Debarment and Office of  Acquisition Management (OAM).  These offices provided grant and  contract award data to us for fiscal years 1993 through 2003.  The grant  trend data were pulled from EPA’s Grants Information Control System  (GICS) and their Integrated Grants Management System (IGMS).  The  contract trend data were pulled from the Federal Procurement Data  System.  We assessed the reliability of these databases by reviewing  existing information and documentation about the data and the systems  that produced them, and by interviewing Office of Grants and Debarment  and OAM officials who were knowledgeable about the data and the checks  and procedures used internally to verify data reliability, particularly with  regard to financial information.  Based on this information, we determined  that these data were sufficiently reliable for the purposes of our report.
EPA’s data were used to develop overall financial trends for grant and  contract awards for fiscal years 1993 through 2003.  Grant financial trends  by Catalog of Federal Domestic Assistance (CFDA) codes were also  developed for the 11-year period.  However, contract financial trends could  only be developed for fiscal years 1993 through 2000.   For these years, EPA  classified contract awards by Standard Industrial Classification (SIC)  codes.  These four-digit codes included 1,004 industries and classified  businesses by the products or services they made available.  Beginning in  fiscal year 2001, EPA adopted the new North American Industrial  Classification System (NAICS) codes.  These six-digit codes included 1,170  industries and classified businesses based on the production or processes  used.  Consequently, contract data for fiscal years 2001 through 2003 were  not comparable with previous years.  It was also not possible to develop  trends regarding the specific goods and services obtained under EPA grants  for the 11-year period because EPA’s automated databases do not track  awards in this manner.
To determine the extent to which EPA has and follows procedures for  deciding when to use either a grant or a contract, we reviewed the  congressional hearing report covering the introduction and passage of the  Federal Grant and Cooperative Agreement Act of 1977, provisions in the  act itself, associated EPA implementation guidance such as EPA Order  5700.1, and the EPA Project Officer Training Manual.  We also contacted  EPA’s OIG and obtained and discussed past OIG reports regarding EPA  grant versus contract management issues.
To obtain a comparison of EPA’s grant versus contract award policies and  procedures with those of other federal agencies, we compared the award  policies and guidance of the 10 federal agencies across the federal  government that obligated the highest dollar value of assistance awards in  fiscal year 2002 with requirements spelled out in the 1977 Act.  EPA ranked  seventh in fiscal year 2002, with $4.2 billion in grant obligations.  We then  compared provisions of each agency’s policies with one another.  The  results of this comparison are summarized in table 5.  We also sent a  standard set of questions to grant managers and Inspector Generals at each  of these 10 agencies that asked them to identify all implementation issues  identified in their agencies’ award policies.
To help determine EPA compliance with provisions in the 1977 Act, as well  as its own implementation guidance in selecting discretionary grants  versus contracts, we drew a stratified random probability sample of 237  discretionary grants from a population of 2,163 discretionary grants for  which the grant amount, according to EPA, was a positive dollar amount,  and which was thought to represent all discretionary grants that had  project start dates after October 1, 1997, and closed in fiscal years 2001 and  2002.  Grants were stratified by whether they were issued by EPA  headquarters or by an EPA regional office, and then by dollar amount.   After the sample was selected, we found that some of the grants in the  sample were earmark grants and were out of scope for this study.  Also, we  were unable to obtain information for a small portion of the remaining  discretionary grants.  We were ultimately able to analyze data from 174  discretionary grants.  With this statistically valid probability sample, each  discretionary grant in the study population had a nonzero probability of  being included, and that probability could be computed for every grant.   Each sampled discretionary grant was subsequently weighted in the  analysis to account statistically for all discretionary grants in the study  population, including those that were not selected.  The study population  data were drawn from EPA’s IGMS.  We assessed the reliability of the IGMS  data by (1) reviewing existing information and documentation about these  data and the system that produced them, (2) interviewing EPA officials  who were knowledgeable about these data, (3) performing electronic  testing of the required elements, and (4) comparing grant recipient  responses about the type of grant they received with the information in the  database.  Based on this information, we determined that these data were  sufficiently reliable for the purposes of our report.
Because we followed a probability procedure that was based on random  selections, our sample is only one of a large number of samples that we  might have drawn.  Since each sample could have provided different  estimates, we express our confidence in the precision of our particular  sample’s results as 95 percent confidence intervals (e.g., +/-  x percentage  points).  These are intervals that would contain the actual population value  for 95 percent of the samples we could have drawn.  As a result, we are 95  percent confident that each of the confidence intervals in this report will  contain the true values in the study population.  All percentage estimates  from the file review have sampling errors (widths of 95 percent confidence  intervals) of +/- 10 percentage points, unless otherwise noted.
To obtain grantee information regarding the grant sample selections, we  developed a Web-based survey.  We met with EPA headquarters officials  and spoke with an EPA OIG official in developing the survey and pretested  the survey with six grantees.  These grantees were judgmentally selected to  ensure coverage of large and small awards, headquarters- and field- awarded grants, and type of grant recipient.  We asked these recipients to  complete the survey over the Internet while we monitored their responses  and checked for their understanding of each question.  After completion of  the pretest, we interviewed the respondents to ensure that (1) the  questions were clear and unambiguous, (2) the terms that we used were  precise, (3) the survey did not place an undue burden on the recipients  completing it, and (4) the survey was independent and unbiased.  Technical  corrections and adjustments were made to the survey based on the  feedback we received.  Grantees selected by our random sample were then  contacted by telephone and e-mail.  Information about accessing the survey  was provided in a second e-mail, the survey was activated, and recipients  were informed of its availability on July 18, 2003.  The survey remained  available until December 31, 2003.  To ensure security and data integrity,  each recipient was provided with a unique user name and password.  No  one else could access that survey or edit its data.  We also provided  recipients with a pledge of confidentiality to ensure their candor in  completing the survey.  Of the 237 grantees surveyed, 213 were eligible  sample cases.  We used the results of 174, or 82 percent, of those responses  to make population estimates.  The results of our survey are summarized in  appendix III.
EPA project officer and grant specialist files were obtained and reviewed  for 67 cases in which grantee responses indicated the possible existence of  a contract versus a grant award relationship.  To verify/clarify these  responses, follow-up telephone interviews were conducted with 20  respondents who had identified EPA as the primary beneficiary of the  award and/or indicated that EPA had directed purchases under the award,  directed work outside the scope of the original grant work plan, and/or had  passed on more than 75 percent of the awarded funds to subcontractors.
section_title: Survey Results
paragraphs: To help determine EPA compliance with provisions of the Federal Grant  and Cooperative Agreement Act as well as its own implementation  guidance in selecting discretionary grants versus contracts, we drew a  stratified random probability sample of 237 discretionary grants from a  study population of 2,163 discretionary grants that had project start dates  after October 1, 1997, and closed in fiscal years 2001 and 2002, and for  which the grant amount (according to EPA) was a positive dollar amount.   Of the 237 grantees surveyed, 213 were eligible sample cases.  We used the  results of 174, or 82 percent, of those responses to make population  estimates.  The population estimates for key questions from our survey are  summarized below.
Q2. Was this financial assistance award made in the form of a grant or a cooperative  agreement?
Q12. Were the project outputs/deliverables designed to directly benefit EPA?
Q15. Please indicate the primary beneficiary of the project outputs/deliverables.
Comparison of Q12 and Q15.
Q12. Were the project  directly benefit EPA? (16.58 percent of  respondents)
Q15. Primary beneficiary of the project  outputs/deliverables.
Q18. During the postaward phase, did EPA direct you to conduct activities outside  the original scope of work?
Q21. Did EPA direct that you contract with a specific entity (organization or  individual) under this grant/cooperative agreement?
Q22. Did EPA direct that you issue a subgrant to a specific entity under this  grant/cooperative agreement?
Q23. Did EPA direct that contracts be awarded by you on a sole-source or  noncompetitive basis under this grant/cooperative agreement?
Q25.  Survey completion status by grant award dollars.
section_title: GAO Contacts and Staff Acknowledgments
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section_title: Staff Acknowledgments
paragraphs: In addition to those individuals named above, Scott Heacock, Andria Key,  Mike Rahl, Sid Schwartz, Rebecca Shea, Carol Herrnstadt Shulman, and  Amy Webbink made key contributions to this report.
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