Department of Energy, Office of Worker Advocacy: Deficient Controls Led to Millions of Dollars in Improper and Questionable Payments to Contractors
Published: 2006-05-31T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The Energy Employees Occupational Illness Compensation Program Act of 2000 (EEOICPA) authorized the Department of Energy (Energy) to help its former contractor employees file state workers' compensation claims for illnesses that could be linked to exposure to toxic substances during their employment. Concerned with the relatively small number of finalized cases and the overall effectiveness of the program, Congress asked GAO to review costs incurred by Energy to administer the program. Specifically, Congress asked GAO to determine whether (1) internal controls over program payments were adequately designed to provide reasonable assurance that improper payments to contractors would not be made or would be detected in the normal course of business and (2) program payments were properly supported as a valid use of government funds.
section_title: What GAO Found
paragraphs: Energy did not establish an effective control environment over payments to contractors or overall contract costs. Specifically, because Energy lacked an effective review and approval process for contractor invoices, it had no assurance that goods and services billed had actually been received. Although responsibility for review and approval of invoices on the largest contract rested with the Space and Naval Warfare Systems Center, New Orleans (SSC NOLA) through an interagency agreement, Energy did not ensure that SSC NOLA carried out proper oversight. Energy also failed to maintain accountability for equipment purchased by contractors. Further, subcontractor agreements, which represented nearly $15 million in program charges, were not adequately assessed, nor were overall contract costs sufficiently monitored or properly reported. These fundamental control weaknesses made Energy highly vulnerable to improper payments. GAO identified $26.4 million in improper and questionable payments for contractor costs, including billings of employees in labor categories for which they were not qualified or that did not reflect the duties they actually performed, the inappropriate use of fully burdened labor rates for subcontracted labor, add-on charges to other direct costs and base fees that were not in accordance with contract terms, and various other direct costs that were improperly paid. Further, certain payments toward the end of the program for furniture and computer equipment may not have been an efficient use of government funds. These improper and questionable payments represent nearly 30 percent of the $92 million in total program funds spent through September 30, 2005, but could be even higher given the poor control environment and the fact that GAO only reviewed selected program payments.

section_title: Letter
paragraphs: The Energy Employees Occupational Illness Compensation Program Act of  2000 (EEOICPA) was passed by Congress, in part, to provide for timely  compensation of former nuclear weapons workers who sustained illnesses  that could be linked to exposure to toxic substances while employed at a  Department of Energy (Energy) facility. Subtitle D of EEOICPA instructed  Energy to assist its contractors’ employees by developing and submitting  state workers’ compensation claim applications to an independent  physician panel for review of each claimant’s potential eligibility for  workers’ compensation benefits. Subtitle D of EEOICPA did not instruct  Energy to pay the benefits due an eligible worker, but instead authorized  Energy to assist the claimant in filing a claim to receive compensation from  a state workers’ compensation program.
Concerned with the relatively small number of finalized cases and the  overall effectiveness of the program, the Senate Energy and Natural  Resources Committee held three hearings from November 2003 through  March 2004 that highlighted programmatic challenges to achieving the program’s objectives and Energy’s limited progress in overcoming them.  Further, in May 2004, we issued a report identifying issues with the claims  review process. For example, we reported that a shortage of qualified  physicians serving on the review panels continued to constrain Energy’s  capacity to decide cases more quickly. In October 2004, EEOICPA was  amended to repeal Subtitle D and add a new Subtitle E to be administered  by the Secretary of Labor.
Prior to the amendment of EEOICPA, in a letter dated August 30, 2004, you  asked us to review costs incurred by Energy in its administration of  Subtitle D by considering the design of internal controls over expenditures  and the propriety of program payments. Specifically, we determined  whether (1) internal controls over program payments were adequately  designed to provide reasonable assurance that improper payments to  contractors would not be made or would be detected in the normal course  of business and (2) program payments were properly supported as a valid  use of government funds.
To address these objectives, we considered payments made by the Office of  Worker Advocacy (OWA), the Energy office tasked with administering  Subtitle D, from the inception of the program in October 2000 through  September 30, 2005. We primarily focused on payments to key contractors  that received approximately 60 percent of the $92 million in program  expenditures through September 2005. We reviewed the design of controls  over program payments, including payments made to contractors. We also  reviewed controls designed to monitor overall contractor costs. We used a  variety of forensic auditing techniques, including data mining, to identify  payments for detailed review. We requested comments on a draft of this  report from the Secretary of Energy and on selections of this report from  the Commanding Officer of the Space and Naval Warfare Systems Center,  New Orleans (SSC NOLA). We received written comments from Energy’s  Deputy Assistant Secretary of Planning and Administration, Office of  Environment, Safety and Health and the Commanding Officer of SSC  NOLA. We have incorporated the comments as appropriate. The comments  are reprinted in appendixes II and III. We performed our work in  accordance with generally accepted government auditing standards in  Washington, D.C., and three contractor locations from February 2005  through March 2006. Further details on our scope and methodology can be  found in appendix I.
subsections: section_title: Background
paragraphs: EEOICPA has two major components. The Department of Labor (DOL)  administers Subtitle B, which provides eligible workers who were exposed  to radiation or other toxic substances and who subsequently developed  illnesses, such as cancer and lung disease, a onetime payment of up to  $150,000 and covers future medical expenses related to the illness. The  benefits are payable from a compensation fund established by EEOICPA.  Subtitle B is not covered in this report. Prior to October 2004, Energy  administered Subtitle D to help its contractors’ employees file state  workers’ compensation claims for illnesses determined by a panel of  physicians to have been caused by exposure to toxic substances in the  course of employment at an Energy facility. This report covers payments  made to administer Subtitle D.
To facilitate outreach to potential claimants and to help claimants obtain  work and medical records to initiate claims under EEOICPA, Energy established 11 regional resource centers. These resource centers were a  gateway for claimants applying for assistance under EEOICPA under both  Subtitle D, administered by Energy, and Subtitle B, administered by DOL.  Energy and DOL shared the resource centers’ costs of operation, staffing,  and training. To achieve this, DOL reimbursed Energy for about half of the  costs of its contract with Eagle Research Group, Inc., the company that  staffed and operated most of the resource centers. Additionally, DOL  reimbursed Energy for a portion of other costs Energy paid directly, such  as those for the leased space for the centers.
After EEOICPA claims were received through the resource centers and  headquarters, Energy requested its field offices to locate records that  would support the claims, such as employment, medical treatment, and  toxic substance exposure records. Energy forwarded the information  collected to claim developers and various assistants who assembled the  information into case files. A panel of physicians reviewed the case files to  determine whether exposure to a toxic substance during employment at an  Energy facility was at least as likely as not to have caused, contributed to,  or aggravated the claimed medical condition. In addition to the panel  physicians, other doctors performed quality assurance checks of the case  files before the claims were submitted to the physician panels and again  after the physician panels had made recommendations. All panel  determinations were finalized by a medical director employed by Energy.  Energy communicated with applicants through an EEOICPA hotline and  through letters.
Energy began accepting applications for Subtitle D in July 2001 when the  majority of the resource centers opened, and began developing cases in the  fall of 2002 when its final administrative rule took effect. While Energy got  off to a slow start in processing cases, completing only 6 percent of  approximately 23,000 cases by December 31, 2003, Energy later increased  claim development activities, which resulted in a backlog of claims  awaiting review by the physician panels. In June 2004, Energy transferred  $21.2 million in funds to OWA in an effort to clear the backlog of claims.  During the same time, it increased the number of case developers and  physicians serving on the review panels. Legislation was also moving  through Congress as early as June 2004 to transfer the administration of  Subtitle D from Energy to DOL. Ultimately, in October 2004, Congress  repealed Subtitle D and created Subtitle E, to be administered by DOL. In  light of the potential transfer, Energy ceased hiring new case developers in  August 2004, then gave official instruction to cease claims processing in  November 2004. Energy received $112.6 million in appropriated funds  (including transfers) through fiscal year 2005 for its EEOICPA activities  and spent over $92 million. Energy’s field offices continue to research  claims that are now processed by DOL under Subtitle E. See figure 1 for a  time line of significant OWA program events.
Under Subtitle D of EEOICPA, Energy’s role was to assist applicants in  pursuing state workers’ compensation benefits but not to pay any benefits  to the applicants. Therefore, the costs associated with Energy’s EEOICPA  activities are administrative costs only. We analyzed Energy’s program  costs by major program activity, as shown in table 1.
Through multiple contracts in some cases, four major contractors  performed the majority of OWA’s program activities.
Eagle Research Group, Inc. (Eagle), staffed and operated the resource  centers from September 2001 through February 2005 under time and  materials task orders issued under a GSA Federal Supply Schedule  (FSS) contract.
Westwood Group, Inc. (Westwood), administered the physician panels,  provided a quality-assurance check on claims, managed the EEOICPA  hotline, and coordinated the field office research requests. Additionally,  Westwood provided certain other administrative services. Energy  obtained Westwood’s services through two time and materials task  orders issued under a GSA FSS contract. One task order was in effect  from August 2001 through February 2005. The other began in September  2004 and can be extended through September 2009 if Energy exercises  the four option periods. Under the option periods and current statement  of work, Westwood would continue its analytical services relating to the  EEOICPA claims research and other administrative activities for  Energy’s Office of Environment, Safety, and Health (ES&H).
Technical Design, Inc. (TDI), provided administrative personnel as well  as analysts trained in environment and health issues. TDI provided  services to OWA under three consecutive contracts issued by Energy. All  three were cost reimbursement contracts that contained performance  incentives. The first contract was described by Energy as a cost plus  incentive fee. The second and third contracts were cost plus award fee.  Westwood also provided additional services to OWA through TDI under  these contracts.
In addition to services provided to OWA, both Westwood and TDI also  provided other services to Energy’s ES&H. On their monthly invoices,  Westwood and TDI identified OWA services separately from other  ES&H services.
SEA, under its first task order, provided information technology services  to create, develop, and maintain the Case Management System to track  the progress of individual cases. Under subsequent task orders, services  broadened over time so that SEA provided case developers and  assistants who performed case processing activities. SEA ultimately  provided services equal to approximately one-third of OWA’s program  costs. In January 2004, Sidarus, Inc. (Sidarus), purchased SEA. In June  2004, Sidarus was renamed Apogen Technologies, Inc. SEA continues  to do business as SEA.
SEA’s services were initially obtained by Energy through a memorandum of  agreement (referred to in this report as an interagency agreement) between  Energy and SSC NOLA. To implement the interagency agreement, SSC  NOLA used GSA’s Federal Technology Service (FTS) to utilize an existing  blanket purchase agreement (BPA) between SEA and GSA’s FTS, dated  August 2000, that was entered into under a GSA FSS contract. Under the  BPA, GSA’s FTS issued three consecutive time and materials task orders to  SEA to provide services to Energy. The interagency agreement between  Energy and SSC NOLA took effect in December 2001 and was scheduled to  run for 3 years. Under this arrangement, GSA paid SEA for its services and  was reimbursed by SSC NOLA. SSC NOLA received reimbursement from  Energy. Energy is the customer and final payer for SEA’s services. SSC  NOLA elected to end work under the interagency agreement on September  30, 2004. In this report, we refer to payments to SEA as payments by  Energy.
In February 2004, Energy began pursuit of a new contract to replace the  interagency agreement between Energy and SSC NOLA. However, the new  procurement action was not completed by the end of the interagency  agreement on September 30, 2004, and Energy issued a time and materials  bridge contract directly with SEA beginning October 1, 2004, for a base  period of 3 months to continue case development activities and, eventually,  assist in terminating and transferring the program. Energy’s direct contract  with SEA expired in December 2004.
Table 2 provides a description of two contract types used to administer  OWA: cost reimbursement and time and materials. OWA utilized two  different variations of cost reimbursement contracts: cost plus incentive  fee and cost plus award fee. A description, common applications, benefits  and risks associated with the contract type, and constraints or  requirements for the government are listed for each type.
subsections: section_title: Roles and Responsibilities under Interagency Agreement with SSC NOLA
paragraphs: The services provided by SEA were obtained by Energy through a series of  agreements. Energy’s interagency agreement with SSC NOLA required SSC  NOLA to provide certain services to Energy. SSC NOLA carried out the  agreement using an existing BPA between GSA’s FTS and the contractor,  SEA. The BPA was entered into under a GSA FSS contract, and an official  at GSA’s FTS was the contracting officer (CO) who had authority to  contract for goods and services on behalf of the government. Additionally,  the CO had overall responsibility for negotiating task orders under the BPA  and certifying the contractor’s invoices for payment based on evidence of  approval (i.e., receipt and acceptance of goods and services) by the  ordering agency. The CO designated representatives of the ordering  agency—in this case, SSC NOLA—to be the contracting officer’s  representatives (COR). The COR was authorized by the CO to perform  specific technical and administrative functions. The COR was responsible  for the review and approval of SEA invoices for payment by GSA.  Additionally, SSC NOLA was responsible for approval of contractor travel  and contract deliverables. Although authority for contract oversight and  administration was delegated among multiple agencies, ultimate  responsibility for the contract rested with the customer agency (receiving  agency), Energy.
Although the use of interagency contracting vehicles can be beneficial  because the ordering agency does not have to go through an extensive  procurement process, interagency agreements must be effectively  managed to ensure compliance with the FAR and to protect the  government’s interests. When a customer agency’s contracting needs are  being handled by another agency, effective internal controls are  particularly critical because of the more complex environment. We, along  with agency inspectors general, have reported risks associated with  interagency contracting. Management of interagency contracting was  added to GAO’s high-risk list in January 2005. We found that roles and  responsibilities for managing interagency contracts need clarification and  agencies need to adopt and implement policies and processes that balance  customer service with the need to comply with requirements.
Federal requirements for acquiring goods and services through contracts  are found in laws and implementing regulations. The FAR prescribes  uniform policies and procedures for acquisition by executive agencies.  Additionally, agencies may have their own supplemental regulations,  policies, and procedures for acquisition. For example, Energy has a  supplemental regulation called the Department of Energy Acquisition  Regulation, an acquisition guide, an accounting handbook, and other  guides that describe its policies regarding contracts, subcontracts, and  interagency agreements.
section_title: Government Settlement Agreement and Release with SEA
paragraphs: On November 29, 2005, the Department of Justice (DOJ) and SEA executed  a settlement agreement and release (settlement) after an investigation of  allegations of improper billings by SEA of labor charges on work for SSC  NOLA and its customers under a GSA FSS contract and two related BPAs  covering the period from April 1999 through September 2005. SEA billed  SSC NOLA approximately $346 million for labor charges over this period,  including approximately $26.6 million under task orders that provided  services to Energy. The “covered conduct” investigated by the  government related to allegations of improper billing by SEA for labor in  two areas: billing indirect labor costs as direct labor costs and billing for  employees in labor categories for which they were not qualified. Under the  terms of the settlement, SEA paid the government $9.5 million. In turn, the  government release provided that the government will have no further civil  or administrative monetary claims or cause of action against SEA under the  False Claims Act or any other statute creating causes of action for  damages or penalties for the submission of false or fraudulent claims, or at  common law for fraud or under any other statutes or under theories of  payment by mistake, unjust enrichment, or breach of contract, for the  covered conduct.
In this report, we did not determine whether or to what extent the terms of  the settlement may affect any potential additional monetary recoveries by  the government for the questionable and improper payments made to SEA  that we identified.
section_title: Internal Control
paragraphs: Internal control is the first line of defense in safeguarding assets and  preventing and detecting fraud and errors. Internal control is not one event  or activity but a series of actions and activities that occur throughout an  entity’s operations on an ongoing basis. It comprises the plans, methods,  and procedures used to effectively and efficiently meet missions, goals, and  objectives. Internal control is a major part of managing any organization.  As required by 31 U.S.C. § 3512(c),(d), commonly referred to as the Federal  Managers’ Financial Integrity Act of 1982, the Comptroller General issues  standards for internal control in the federal government. These standards  provide the overall framework for establishing and maintaining internal  control and for identifying and addressing major performance and  management challenges and areas at greatest risk of fraud, waste, abuse,  and mismanagement. These standards include establishment of a positive  control environment that provides discipline and structure as well as the  climate that influences the quality of internal control. As we reported in our  Executive Guide, Strategies to Manage Improper Payments, a lack of or  breakdown in internal control may result in improper payments.  Improper payments are a widespread and significant problem in  government and include inadvertent errors, such as duplicate payments  and miscalculations; payments for unsupported or inadequately supported  claims or invoices; payments for services not rendered; and payments  resulting from outright fraud and abuse.
section_title: Energy Did Not Establish Effective Controls over Payments to Contractors or Overall Contract Costs
paragraphs: Energy’s control environment and specific internal control activities over  payments to contractors and overall contract costs were not effective in  reducing the risk of improper payments. Energy did not establish an  effective review and approval process for contractor invoices that enabled  it to verify that goods and services billed had actually been received and  charged at the agreed-upon amounts. In the case of SEA, much of the  responsibility rested with SSC NOLA; however, Energy did not assure itself  that these responsibilities were adequately carried out. Further,  accountability for equipment purchased and reimbursed by Energy for the  program by contractors was not maintained. In addition, Energy and its  contracting partners, GSA and SSC NOLA, did not give adequate  consideration to subcontractor arrangements, including the extent to  which subcontracts were used and what amount contractors were to be  paid for subcontractor work. Payments for subcontractor costs  represented nearly $15 million. Finally, Energy did not effectively monitor  overall contract costs and made errors in reporting total contract costs in  its internal and external financial reports. Cumulatively, these weaknesses  and the poor control environment made Energy vulnerable to improper  payments to contractors and precluded it from effectively managing the  overall cost of the contracts.
subsections: section_title: Effective Review and Approval Process for Contractor Payments Was Not Established
paragraphs: Energy did not establish adequate control activities to ensure an effective  process for the review and approval of contractor invoices. Specifically,  contractor services were not adequately monitored, labor categories were  not verified, and other direct costs were not adequately reviewed. In the  case of the largest contract with SEA, SSC NOLA was responsible for  review and approval of SEA invoices, but did not adequately perform this  function, nor did Energy take steps to assure itself that SSC NOLA was  properly carrying out its responsibilities. Further, the review and approval  process used by Energy for its contracts did not include the steps  necessary to validate the invoices before payment. The FAR, Energy’s  accounting handbook, and federal standards for internal control require  review and approval of invoices in order to determine if goods and services  were actually provided in accordance with contract terms and if invoiced  amounts were allowable under regulation or the terms of the contract.
subsections: section_title: Contractor Services Billed Were Not Sufficiently Monitored
paragraphs: Proper invoice review procedures for contractor services call for an  effective process to observe and monitor the services provided by  contractors and ensure that timely verification of services is provided to  the officials approving the invoices for payment. However, neither Energy  on its contracts nor SSC NOLA on the SEA contract conducted adequate  observations and monitoring of services provided by contractors or linked  the observations that were performed to invoices submitted to the  government. SEA, Westwood, and Eagle provided services under time and  materials task orders. The FAR states that because time and materials  contracts provide no positive profit incentive to the contractor for cost  control or labor efficiency, appropriate government surveillance (or  monitoring) of “contractor performance is required to give reasonable  assurance that efficient methods and effective cost controls are being  used.”
SSC NOLA, as the COR on the SEA contract, was responsible for  performing observations of services provided by SEA but did so only  sporadically. The SSC NOLA Project Manager, who was located in New  Orleans, stated that he made periodic trips to observe SEA services in the  Washington, D.C., area.  However, we determined based on our review of  travel documentation that as much as 6 months passed between his trips,  and that no trips were made after February 2004 when SEA more than  tripled its workforce in support of OWA. Further, even when the SSC NOLA  Project Manager did observe services, he did not systematically link these  monitoring activities to the invoice review and approval process.
We identified a similar lack of systematic linkage of monitoring activities to  the invoice review process for services provided by Eagle. Eagle operated  the resource centers supporting EEOICPA activities of both Energy and  DOL. Energy provided some evidence of programmatic monitoring and the  receipt of quarterly financial information for Eagle’s services, but did not  demonstrate how those activities were systematically linked with Energy’s  review of Eagle’s monthly invoices. Without such linkage, Energy did not  have adequate assurance that amounts billed reflected services actually  provided and that they were billed at the correct rates.
Energy’s monitoring of services provided under the Westwood contract  was also insufficient, as follows.
Physicians serving on physician panels were retained by Westwood as  independent contractors. These physicians reviewed cases at their  homes or at Energy headquarters and submitted invoices or time sheets  to Westwood for the hours worked. Neither Energy nor Westwood had  an effective mechanism in place to assess the reasonableness of the  hours billed by these physicians, which totaled over $3 million. Our  review of selected physician panel invoices found that one physician  reported working as many as 19 hours in a day, and these hours were not  questioned by Westwood or Energy. In another example, a physician  regularly billed significantly more than 173 hours a month—the average  number of working hours a month based upon working 5 days a week  and 8 hours a day. This physician billed 265 hours in March 2004, 210 in  April 2004, 335 in May 2004, and 252 in June 2004. Westwood provided  some evidence—a variety of metrics—that it considered the  productivity of the physicians, such as reports that summarized hours  needed to review each case, and quality metrics, such as decisions  overturned and cases returned because of clerical errors. However, this  approach was not effective in assessing the reasonableness of the hours  billed. In fact, the productivity measures were developed based on the  hours actually billed on the invoices submitted by the physicians, and  therefore Energy had no independent baseline with which to measure  productivity or to assess the reasonableness of hours billed on the  invoices submitted by the physicians.
Four doctors who performed quality checks before the claims were  submitted to the physician panels and again after the physician panels  had made recommendations were also not sufficiently monitored. Three  of the four doctors we interviewed told us that they worked  independently or with only limited monitoring or supervision by  Westwood. The doctors told us that they did interact with Energy  technical personnel; however, these technical personnel were not  involved in Energy’s invoice review and approval process. The doctors  submitted their invoices or other records of time worked to Westwood  for payment, and Westwood then billed the government for these  charges. These physicians regularly billed for 9 to 12 hours per day and  as high as 18 hours per day, yet there was no evidence that these charges  were validated by Westwood or questioned by Energy. Energy told us  that it was aware that these doctors worked long hours. However,  Energy did not systematically observe the hours worked and then  compare any observations to the amounts paid for those hours, nor did  it determine that Westwood was adequately monitoring these services  as a basis for its billings.
section_title: Labor Categories and Certain Other Activities Were Not Verified against the Contract
paragraphs: For SEA task orders, SSC NOLA did not take appropriate steps to verify  that labor hours were being billed at the appropriate rates or to determine  that employees were qualified under the labor category education and  experience requirements negotiated in its contracts. Further, Energy did  not take steps to ensure that SSC NOLA implemented appropriate  verification procedures or effective compensating control strategies.  Appropriate procedures to verify labor hours may include sampling on a  test or periodic basis résumés of contractor employees, including  independent verification of education and work experience to  requirements under the contract or detailed evaluations of labor categories  at higher risk because of volume or price per hour.
In certain cases, we found that the labor categories negotiated in the  contract did not reflect the actual tasks being performed, making it difficult  to determine whether the labor charges were based on appropriate rates.  We found that the labor categories in the contract were originally designed  for information technology activities and did not reflect labor categories  appropriate for the significant case development activities SEA performed  in the last 2 of 3 years of SEA’s task orders. While Energy provided us with  a crosswalk of the information technology labor categories that SEA used  for billing purposes to case processing job titles under the third task order,  this crosswalk was not used by SSC NOLA in order to review SEA’s billings.  Further, the underlying BPA was not amended to reflect labor categories  that matched the case development activities that SEA provided.
We found similar problems with another contractor, Westwood. The  statement of work underlying the Westwood task orders from August 2001  through February 2005 provided for nine activities “supporting the  Advisory Committee.” However, Westwood performed the following  additional activities that were significant to OWA in terms of nature and  amount but were never incorporated into Westwood’s statement of work:    Implementing physician panels, which included retaining doctors and  coordinating the flow of cases between panel members.
Providing medical doctors who performed quality checks before the  claims were submitted to the physician panels and again after the  physician panels had made recommendations.
Obtaining consulting services at the request of Energy, including  advisors on environmental health issues and process improvements.
Since the contract did not fully reflect actual duties that were subsequently  performed, Energy did not have an adequate basis on which to determine if  amounts billed for labor were appropriate and consistent with the contract  terms.
section_title: Other Direct Costs Were Not Adequately Reviewed
paragraphs: Neither Energy for the Westwood contract nor SSC NOLA for the SEA  contract performed a sufficient review of other direct costs billed under the  contracts. Energy did not require Westwood to report a detailed  breakdown of its other direct costs, such as travel and materials, as  stipulated by its contract and did not request Westwood to submit  supporting documentation for these costs except on a sporadic basis  because, according to Energy, the amount of supporting documentation  was “too voluminous.” Westwood billed Energy for approximately  $11.6 million of goods and services provided from August 2001 through  February 2005 in support of OWA, of which approximately $5.2 million was  for other direct costs. As shown in figure 2, the amount of Westwood’s  other direct costs was significant to its monthly billings but was not  adequately described on the invoice.
Our review of the invoice documentation Energy did request and receive  for one monthly invoice identified costs that should have been questioned  and investigated by Energy prior to payment, but were not. In addition, we  examined the supporting documentation that was available for other  Westwood invoices (a majority of which Energy did not request or review  prior to payment) and identified numerous charges improperly paid by  Energy. These findings are discussed later in the report.
SSC NOLA, in its role as COR and project manager on the SEA task orders,  did not sufficiently review travel costs incurred by SEA. SSC NOLA  preapproved travel when it determined the travel met a need of the  program and then subsequently reviewed and approved the travel voucher,  including all receipts submitted, after the travel had occurred. The COR  also verified that travel had been preapproved, travel corresponded with  the preapproved dates and location, and the amounts did not exceed the  preapproved estimates. However, SSC NOLA did not question whether the  costs actually incurred for airfare were reasonable and appropriate. In  particular, we found instances of first-class travel and other excessive  airfare costs that were not identified or questioned by SSC NOLA. For  example, our analysis of the historical data supporting SEA’s travel for  OWA activities on its most frequently flown route (New Orleans to Ronald  Reagan Washington National Airport) showed airfares as high as $1,482 for  first-class travel and as low as $362 for coach class. SSC NOLA officials  indicated that in the future they would review contractor travel costs more  closely, including adding new procedures to verify that contractor travel  complied with the applicable travel regulations regarding first-class travel.
section_title: Accountability for Equipment Purchased by Contractors Was Not Maintained
paragraphs: Energy did not have sufficient controls over the equipment, such as  computers, laptops, and copying machines, purchased by its contractors  for the program. The equipment, totaling nearly $1 million, ranged from a  $160 printer to a $17,742 copying machine. Any equipment purchased by a  contractor and for which the government holds the title is considered  government-owned property. Maintaining accountability over assets calls  for procedures to approve equipment purchases prior to purchase, steps to  ensure the contractors received and safeguarded the assets during the  operation of the program, and conducting timely inventories of equipment  it received from each contractor at the conclusion of the program.  However, Energy did not have adequate procedures in place to properly  account for equipment purchased by its contractors nor did it work with  SSC NOLA to ensure adequate monitoring of SEA-purchased equipment.  Specifically, Energy did not have a formal process to approve Westwood  equipment purchases prior to purchase. Additionally, Energy did not take  steps to ensure the contractor maintained accountability over equipment  while it was in its possession. Further, physical inventories of Westwood  and SEA purchased equipment were not completed until at least 8 months  following the expiration of the respective contracts.
Our analysis of documentation supporting Westwood’s invoices from  January 2002 through February 2005 found that Westwood purchased over  70 pieces of computer and computer-related items costing approximately  $62,000 and was subsequently reimbursed by Energy. Energy, however, did  not conduct an inventory of that equipment until December 2005, nearly 9  months after Westwood’s contract expired. Further, since Energy had not  previously obtained supporting documentation for Westwood’s equipment  purchases, Energy relied on Westwood to provide it with a listing of all  items purchased. During its inventory, Energy identified 13 missing items.  Our comparison of the inventory to Westwood’s billings for the equipment,  however, identified an additional 31 items that Westwood had not included  on its listing that also needed to be accounted for. Finally, we identified  over $31,000 in computer purchases that did not contain sufficient  supporting detail, such as a description of the items, serial numbers, or  model numbers, to be used to determine if the items were accountable  assets and, if so, if they were included on the inventory list. In response to  our inquiries, Energy made an effort to locate these additional items and  has indicated that several items have been found. Energy’s and its  contractor’s lack of accountability for the equipment over an extended  period put this equipment at risk of loss or misappropriation without  detection.
section_title: Inadequate Consideration of Subcontract Arrangements
paragraphs: Energy did not consistently obtain and review subcontract arrangements or  adequately consider the billing implications of the extensive use of  subcontracts by its prime contractors. Nearly $15 million of $92 million in  OWA program costs were incurred by subcontractors. However, neither  Energy nor SSC NOLA for SEA exercised sufficient management oversight  to be fully informed of the nature, extent, scope of services, and terms of  billings to the government for these services as well as the oversight the  prime contractor was to exercise over its subcontractors. Our review of  the subcontracting arrangements used by SEA and TDI identified  numerous subcontracting issues that were not addressed by Energy or, in  the case of SEA, by SSC NOLA or GSA.
Of the $29 million in labor billings by SEA, $10.1 million was provided by  subcontractors, including temporary staffing agencies. While Energy, SSC  NOLA, and GSA were aware that SEA utilized subcontracted labor, GSA’s  initial consideration of the use of subcontractors was given in 2000 as part  of SEA’s proposal under the BPA more than a year before the Energy task  orders and was not updated to reflect changes in SEA’s business partners or  the scope of work provided to Energy over time. To illustrate, SEA utilized  16 subcontractors to provide services to Energy, but only 5 of those  subcontractors, representing approximately 6 percent of total billings for  subcontractor services, were included in SEA’s proposal. Further, there  was no evidence that either SSC NOLA or GSA had been informed of the  extent to which SEA used subcontractors to provide OWA services or the  amount SEA paid for those services. SSC NOLA told us that it was  concerned that SEA did not separately identify the amount of charges  associated with subcontracted labor from other labor charges, but said that  GSA officials told it such a breakout was not necessary. SSC NOLA did not  pursue the issue again with either GSA or SEA.
Additionally, TDI billed Energy for services provided by Westwood from  February 2002 through September 2004 under an arrangement that TDI and  Westwood viewed as a prime contractor and subcontractor relationship.  However, we found that an agreement between TDI and Westwood  containing basic information, such as hourly billing rates by labor category,  allowable costs, and other basic terms and conditions for the period  Westwood provided services did not exist. Further, while Energy’s CO told  us he obtained and reviewed a price proposal submitted by Westwood for  this period, Energy did not take the appropriate steps to ensure the prices  were formalized into TDI’s prime contract with Energy or any other binding  agreement. Without an effective contractual agreement, including  negotiated rates, it was not possible for Energy to adequately review the  amounts TDI billed for costs attributed to Westwood.
section_title: Overall Contract Costs Were Not Effectively Monitored or Accurately Reported
paragraphs: Energy did not establish internal control monitoring practices to effectively  manage overall contract costs, including using contract ceilings to manage  and encourage cost-effectiveness. Further, Energy did not accurately  report contract costs in internal and external financial reports. We  identified instances of improper cost assignments between Energy  programs and a payment error that understated the program’s costs by  $2.5 million. This amount includes a processing error of $1.7 million we  identified during our review that had not been previously identified by  Energy.
subsections: section_title: Contract Ceilings Were Not Effectively Monitored
paragraphs: Energy failed to monitor cumulative contract costs adequately. Ceilings, or  caps, on total contract values and on certain contract components, such as  other direct costs, impose limits that help the government manage contract  costs. Contract ceilings are particularly valuable tools for monitoring time  and materials contracts, which have few other mechanisms for managing  cost-effectiveness. Our review of contract and interagency agreement  ceilings for the four major OWA contractors showed that the ceiling  amounts of certain contracts were increased numerous times. For  example, the amount for Westwood’s total contract ceiling was modified  six times, including four times during the last 9 months of the contract.  However, Westwood still exceeded the cost ceiling for other direct costs by  nearly $2 million by the end of the contract. Energy paid these amounts,  thereby reducing the value of the contract ceiling and further  demonstrating Energy’s lack of a proper control structure to manage  contract costs.
section_title: Contract Cost Reporting Was Flawed
paragraphs: Energy also did not properly track and report contract costs in internal and  external financial reports. Energy improperly assigned some costs of OWA  activities to other program reporting units and, in some cases, assigned the  costs of other program reporting units to OWA. For example, Energy  improperly assigned the costs of OWA services provided by Westwood to  other program reporting units, in effect using other programs’ funds to pay  for OWA activities. This occurred because Energy did not assign the costs  of the invoice according to services provided to each program, but instead  either divided the total cost of the invoice equally across all programs  receiving services or assigned costs based upon the amount of funds  available in the different program reporting units. At the end of Westwood’s  first contract, $1.6 million of costs associated with OWA activities were  assigned to other program reporting units, understating the OWA program  costs. Conversely, Energy, using similar methods, improperly used   $2.1 million of OWA funds to pay TDI costs through its second contract that  were unrelated to OWA activities, overstating the OWA program costs.  Assigning costs on a basis other than the actual cost of services not only  misstates program costs but also hinders the agency’s ability to adhere to  federal cost accounting standards.
In addition, Energy used $1.3 million of funds from two other Energy  program reporting units to pay for SEA services in fiscal years 2003 and  2004. Although the amount transferred was authorized by senior Energy  management, it was not reported externally in Energy’s September 30,  2004, report to Congress on EEOICPA expenditures. As a result, the cost  report was understated by $1.3 million.
We identified a total of $5.0 million (gross) in cost assignment errors and  reporting omissions. These errors, which were partially offsetting and  resulted in a net understatement of OWA program costs of $800,000,  prevented the agency and other interested stakeholders from knowing the  true cost of program activities at any given time.
We further identified a $1.7 million payment error related to SEA billings  that occurred in December 2004. GSA paid SEA for its services and was  reimbursed by SSC NOLA. SSC NOLA then received a reimbursement from  Energy through the intragovernmental payment process, but was not  reimbursed for the full amount owed it because of a processing error.  Neither SSC NOLA nor Energy identified the mistake. The error went  undetected by Energy because it did not reconcile reimbursements made to  SSC NOLA to appropriate supporting documentation in accordance with  Energy accounting policy. The error understated the OWA’s program costs  until it was corrected in September 2005 after we brought it to the attention  of the Defense Finance and Accounting Service, the Department of Defense  unit that handled SSC NOLA’s intragovernmental payment transactions.
section_title: Energy Made Millions of Dollars in Improper and Questionable Payments to Contractors
paragraphs: The fundamental internal control weaknesses associated with Energy’s  contract payment process contributed to $26.4 million in improper and  questionable payments to contractors that we identified as part of our  review. We employed a variety of forensic auditing techniques to assess the  validity of Energy payments for OWA activities and identified $24.4 million  in improper and questionable payments to contractors for direct labor  billed under improper labor categories and the inappropriate use of fully  burdened labor rates. We also identified $778,613 in improper and  questionable payments for other direct costs, including amounts for add- ons and base fees, and certain travel and related costs. Further, we  questioned whether certain other payments toward the end of the program  for furniture and computer equipment, totaling nearly $1.2 million, were an  efficient use of government funds. Given Energy’s poor control  environment and the fact that we only reviewed selected Energy payments,  other improper and questionable payments may have been made that have  not been identified.
Table 3 includes the net amount of improper and questionable payments  when we could determine a net amount. We use the gross amounts paid by  Energy when it was not practical for us to determine offsets or reductions  that might be due to the contractors in lieu of the amounts that Energy  paid. Any potentially recoverable amounts would need to be determined  after consideration of any reductions or offsets.
The following sections provide additional information on the improper and  questionable payments we identified.
subsections: section_title: Energy Made Improper and Questionable Payments for Labor Charges
paragraphs: A significant portion of OWA program expenditures was for labor provided  by contractors and their subcontractors. For the four major contractors  discussed in this report, Energy paid $45.3 million for contracted and  subcontracted labor, representing approximately 49 percent of total OWA  program costs reported by Energy. In light of Energy’s weak controls over  labor category requirements and insufficient observation and monitoring of  contracted services, we performed a variety of tests on the amounts billed  for labor. Our tests disclosed that certain contractors used inappropriate  labor categories for billing purposes, and as a result the government made  improper payments for those charges. We also found that some labor  billings could not be validated because of insufficient criteria for labor  category qualifications but were paid nonetheless. Additionally, Energy and  SSC NOLA paid prime contractors for subcontractor labor at fully  burdened labor rates instead of paying only the costs incurred by the prime  contractor and also paid time and a half for certain hours worked beyond a  standard 40-hour week, which was not in accordance with the contract.
subsections: section_title: Labor Categories
paragraphs: Westwood billed over half a million dollars of labor charges under labor  categories for which the employees were not qualified to be billed. We  reviewed résumés for 25 Westwood employees whose time was billed to  OWA. Our comparison of employee résumés to the qualifications that were  required under Westwood’s contract revealed that Westwood billed for 7  employees under labor categories and at billing rates for which the  employees were not qualified, resulting in $602,000 of improper payments  by Energy. For example, the analyst labor category required a college  degree and at least 5 years of experience in a specific field, such as health  or physical sciences or environmental studies. However, the employees we  reviewed who were billed as analysts did not have college degrees or did  not have the necessary years of experience. Westwood’s Project Manager  told us that he was unfamiliar with the minimum qualifications negotiated  under the contract. Further, Westwood management officials had not  previously compared the employees’ qualifications to the requirements  listed in the contract, but they told us they have since taken steps to screen  applicant qualifications.
We also identified $1.9 million of improper payments to SEA that resulted  from the use of inappropriate labor categories by SEA. Using data mining  and other forensic auditing techniques, we selected 94 individuals directly  billed by SEA and requested their personnel files in order to compare  education and experience qualifications to what the contract required.  Because personnel are often billed under more than one labor category  under the contract, the personnel files we requested represented 187  comparisons. However, as discussed later, we were only able to make 87  comparisons. For these 87, we identified the following instances of labor  costs billed under inappropriate labor categories, which resulted in  improper payments by Energy.
SEA billed approximately $970,930 under labor categories that did not  reflect actual duties performed. SEA had three consecutive program  managers who functioned as the project lead and were the main liaisons  between Energy and SEA officials. Yet these three managers were not  billed to the government under the program manager (average billing  rate of $106/hour) or project manager (average billing rate of $117/hour)  labor rates but rather as subject matter experts, which were billed at an  average rate of $205/hour. Project and program managers, according to  the labor descriptions under the contract, generally required the ability  to manage contract support operations, including organizing and  planning activities. On the other hand, a subject matter expert provides  assistance in “enhancing the alignment of Information Technology  strategy with business strategy” and “evaluates expectations for and  capabilities for the information management organization.”
In November 2005, we asked SEA officials why these project leads were  not billed under the less costly project or program manager labor  categories, but they offered no viable explanation. On March 23, 2006,  counsel to SEA told us that they disagreed with our view that these  were improper payments because the three individuals’ “ability to  manage was informed and enhanced by their expertise in engineering  and information technology.” Further, counsel to SEA said that “given  their extensive expertise in their fields, it seems appropriate for SEA to  have billed these senior personnel as subject matter experts.” We  disagree and find no basis for the government to have paid more for  program manager labor than the agreed rate for that labor category.
SEA also billed and Energy paid $649,182 for services provided by four  employees who were not qualified for the labor category under which  they were billed. Two employees were billed as systems engineers  (average billing rate of $85/hour) who did not meet the minimum 5 years  programming experience. They had 3 years or less of general computer  experience. A third employee did not have the years of experience  necessary to be billed as a case management technician, which required  a minimum number of years of medical records experience. The fourth  employee was billed as a senior computer scientist at an average billing  rate of $117/hour, but the documentation maintained in the employee’s  file did not provide adequate evidence that the employee met the  minimum 5 years of programming experience.
Charges for two other SEA employees, totaling $276,808, were billed as  graphics illustrators, although the job descriptions for these employees  indicate that they performed administrative support services, for  example, project scheduling, support activities, and making travel  arrangements and preparing travel-related paperwork. We found no  basis for these employees to be billed as graphics illustrators at an  average billing rate of $52/hour. Further, because general and  administrative costs, such as those associated with the administrative  duties performed by these two employees, are recoverable through a  component of the fully burdened labor rates used under the time and  materials task orders, the costs associated with these two  administrative employees may be duplicative.
Of the 187 total comparisons we initially planned to make, 72 comparisons  were not possible because certain labor category descriptions negotiated  for use under the BPA lacked sufficient criteria for assessing whether a  person was qualified to be billed at that labor category. In total, we  identified about one-third of the labor categories used by SEA, representing  $15.6 million in questionable payments by Energy, that did not include  sufficiently explicit descriptions of the requirements and duties of the  position for us to assess the appropriateness of the labor amounts billed for  these labor categories. For example, the description for senior  management analyst listed desirable skills and knowledge in the areas of  business and mathematics, for instance, but did not list education or years  of experience requirements. SEA billed $7.2 million, at an average hourly  billing rate of $90/hour, under that labor category. We found that billings in  this labor category included amounts for case processors (who generally  were registered nurses or had medical backgrounds) and records  management personnel (who generally had degrees in business or records  management).
Based upon discussions with both SEA and SSC NOLA officials and our  review of the BPA and underlying GSA schedule contract, we found that  labor categories reflecting the necessary duties, education, and skills  Energy required for the work performed did not exist under the GSA  contract, which was originally let solely for information technology  activities. Instead, SEA used labor categories that “best fit” the work  performed and that had what SEA considered to be an appropriate billing  rate for the services provided. GSA as the contracting officer did not amend  the contract to align labor category descriptions with the needs of the  government. While Energy developed a crosswalk of labor categories to  case processing job titles, this crosswalk did not specify skills or education  qualifications that would supplement those originally provided for under  SEA’s contract.
Further, an additional 28 labor category comparisons could not be made  because SEA either did not obtain or had not retained résumés and other  documents that evidenced independent validation by SEA (or confirmation  of validations performed by others) of employee skills, work experience,  and education  requirements for personnel it obtained through temporary  hiring agencies or other subcontractors. The 28 comparisons we made in  our review represented a portion of the $10.1 million in subcontracted  labor charged the government. After removing other improper and  questionable amounts noted elsewhere in this report to prevent double- counting, we consider $2.1 million of subcontracted labor billings to be  unsupported and therefore questionable payments by Energy. Without this  information, it would not be possible for us or others to determine if these  temporary personnel were billed under appropriate labor categories and at  appropriate billing rates.
section_title: Fully Burdened Labor Rates
paragraphs: SEA and Westwood used fully burdened labor rates that included base  wages plus fringe benefits, overhead costs, and profit to bill for  subcontracted labor but had no basis to do so under their contracts. This  practice resulted in over $4 million in “markups” on subcontracted labor  charges that were paid by Energy. Based on our analysis, Energy should  have paid only incurred costs for the subcontracted labor, which  represented amounts paid by the prime contractors for labor obtained from  temporary staffing agencies, other subcontractors, or independent  contractors. The following is a discussion of SEA and Westwood billing  practices and the resulting improper and questionable payments by SSC  NOLA and ultimately Energy.
Over 40 percent of SEA’s direct labor hours were provided by labor  obtained under arrangements with temporary staffing agencies. In total,  from December 2001 through December 2004, SEA paid subcontractors,  including temporary staffing agencies, $6.86 million for the services.  Instead of billing the government for this amount, SEA billed the  government $10.08 million for these services under fully burdened labor  rates, resulting in a markup of $3.22 million and improper and questionable  payments by SSC NOLA and ultimately Energy.
Energy inappropriately paid $7.12 million for work costing SEA   $4.47 million that was not contemplated at the time the labor rate  negotiations occurred. As previously noted in the background section, the  GSA Inspector General reviewed the three Energy task orders for SEA  services and reported that the case development activities performed by  temporary staffing agencies under the second and third task orders were  outside the scope of the underlying GSA FSS contract and a misuse of the  contract vehicle that was designed for information technology services.  These two task orders represented approximately 83 percent of total SEA  services provided to Energy. Because the services were outside the scope  of the underlying FSS contract, there was no basis for SEA to bill for the  subcontracted services at other than cost.
The contracting officer may add items not on the FSS only if all applicable  FAR requirements are followed. These requirements include publicizing the  government’s proposed contract action (FAR part 5), complying with the  full and open competition requirements  (FAR part 6), and meeting the  source selection requirements (FAR part 15). In addition, the contracting  officer should determine that the price of the items or services not on the  underlying GSA schedule contract—here, case processing activities  performed by labor obtained through temporary staffing agencies—is fair  and reasonable. None of these requirements were satisfied for the   $7.12 million of payments to SEA. Given that the FAR requirements were  not met for this out-of-scope work, the schedule rates were inapplicable.  Accordingly, the $2.65 million markup of subcontractor rates over cost was  not properly supported and was improper.
SEA also billed for subcontracted services that were within the scope of  work of the underlying contracts and task orders but may have been  inappropriately paid by Energy using fully burdened labor rates. The time  and material payment clause included in the SEA contracts, FAR 52.232-7,  states that “the Government will limit reimbursable costs in connection  with subcontracts to the amounts paid for supplies and services purchased  directly for the contract.” SEA paid $2.39 million for the subcontracted  labor under these agreements but billed the government $2.96 million for a  markup over cost of $569,798. There are currently differing views in the  contracting community (including government agencies) regarding how  the payment clause is to be applied by contracting agencies when paying  contractors for services provided by their subcontractors when the  contract is otherwise silent on this matter. The clause provides that based  on invoices or vouchers approved by the CO, the contractor will be paid an  hourly rate amount “computed by multiplying the appropriate hourly rates  prescribed in the Schedule by the number of direct labor hours performed.  The rates shall include wages, indirect costs, general and administrative  expenses, and profit.” The clause also provides that reimbursements to  contractors for subcontractor services shall be limited “to the amounts  paid.”
The view of some in the federal contracting community is that prime  contractors are to be paid for subcontractor labor based on the approved  fully burdened labor hour rates as if the prime contractor provided the  services directly through its employees, since these are the rates the  government agreed to pay for each labor category. Another view is that  contractors are to be reimbursed only for what they pay their  subcontractor for services. An amendment to the FAR has been proposed  that attempts to clarify the application of the clause. For the purpose of  this report, we have identified payments in the amount of $569,798 as  questionable based on the literal application of this clause with regard to  reimbursement to contractors for subcontractor services.
Westwood paid four independent contractors $2.23 million for services  provided, yet billed Energy $3.24 million using fully burdened labor rates  for a markup of $1.01 million. On October 21, 2002, Energy modified its  contract with Westwood to provide for a new labor category, senior  scientist, to be billed at a fully burdened labor rate of $250/hour. The senior  scientists were doctors who performed quality assurance review checks  over the case files before and after the files entered physician panel review.  Energy officials advised us that they negotiated this labor category and the  high hourly rate in order to ensure that they had full access to the medical  specialists necessary to meet the increased case-processing demands of the  program. Despite this fact, and that Westwood, in its cost justification to  add the senior scientist labor category, indicated that the senior scientists  would be added as employees, Westwood engaged them to work as  independent contractors.
When we inquired about the employment status of the senior scientists,  Westwood’s President told us they were full-time employees. However, the  documents we reviewed, including written agreements between the senior  scientists and Westwood, showed that Westwood engaged the senior  scientists as independent contractors at hourly rates ranging from  $110/hour to $200/hour and they were ineligible to participate in benefit  packages. In response to our request for Internal Revenue Service (IRS)  Form W-2, Wage and Tax Statements, for the senior scientists, Westwood  provided us instead with IRS Form 1099—MISC.  Form 1099 is used to  report amounts paid to independent contractors, not employees. Because  Westwood engaged these personnel contrary to the negotiations with  Energy and the terms of the contract, Westwood inappropriately billed the  government, and Energy improperly paid a $1.01 million markup for these  services.
section_title: Overtime Charges
paragraphs: Westwood billed and Energy improperly paid for hours beyond a standard  workweek at one and a half times the billing rate for the labor category  under the contract. Under its time and materials task orders, hours worked  were to be billed under the labor rates negotiated in the contract, and no  provision was made for overtime rates. Over the 4 years Westwood  provided services to OWA, it billed Energy for 168 hours at time and a half  for an incremental difference over the regular labor rate of $3,019.  Westwood’s President told us that the overtime payments were verbally  approved and allowed by Energy, which was evidenced by Energy’s  approval of Westwood invoices that clearly showed the number of hours  billed at time and a half. However, Westwood’s contractual agreement was  not modified to reflect this approval.
section_title: Energy Improperly Paid Contractor Fees and Other Direct Costs
paragraphs: Other direct costs, such as travel, purchases of equipment, and add-on  rates and base fees, for the four major contractors in this report totaled  approximately $10 million, or 11 percent, of total OWA program costs  reported by Energy. These costs are subject to a variety of terms and  conditions contained in the contracts and in the FAR. For example,  allowable fees are negotiated specifically for each contract. Also, the  contracts may have incorporated either the Federal Travel Regulation  (FTR) or the Joint Travel Regulations used by the Department of Defense,  which define allowable travel costs. For time and materials contracts, FAR  16.601(a)(2) and (b)(2) limit other direct costs to those separately  identifiable from costs included in its fully burdened labor rate. Because of  the weaknesses in Energy’s invoice review process identified in this report,  specifically the weaknesses related to Westwood’s invoices, and the  significant amounts of other direct costs billed to the government by both  SEA and Westwood, we obtained and reviewed the supporting  documentation for selected other direct costs these two contractors billed  the government. We also analyzed the fees TDI billed the government on its  invoices. We identified the following questionable and improper payments.
subsections: section_title: Add-on Rates and Base Fees
paragraphs: Energy made $557,429 in improper payments to Westwood for amounts the  contractor added to billings for other direct costs in the form of a 12  percent add-on rate. However, there is no provision in the contract to  justify such a charge. The contract provides that other direct costs were  not to exceed $120,000 in the base year, and did not provide for additional  amounts, such as fees, profits, or add-on rates. Additionally, when  determining the “best value” among the proposals provided in response to  Energy’s solicitation for the work, Energy deemed Westwood’s proposal of  a flat amount for other direct costs (with no add-on rates) to be in  conformance with the solicitation while a competitor’s addition of an add- on rate for general and administrative expenses was deemed contrary to  the solicitation.
Energy also improperly paid $98,305 in base fees to TDI. The base fee is  negotiated up front by Energy and TDI. It was calculated based on the level  of effort provided under the contract and was limited to 3 percent of the  estimated cost ($2,761,581) for a total of $82,847. The contract did not  distinguish between the level of effort provided by TDI and any other  contractor that TDI viewed as its subcontractor, including Westwood.  Westwood, in addition to its previously discussed prime contract with  Energy, provided services through TDI in what TDI and Westwood viewed  as a prime–subcontractor relationship. From March 2002 through  September 2004, TDI billed Energy for $181,152 in base fees that according  to TDI, represented base fees for both TDI and Westwood. Because the  base fee under the prime contract was limited to $82,847, TDI overbilled  and Energy improperly paid $98,305.
section_title: Per Diem, Commuting, and Travel Costs
paragraphs: Energy paid $12,418 for per diem and commuting costs billed by Westwood  related to the physician panels that were not allowed under Westwood’s  task orders, which incorporated the FTR. For example, Energy  improperly paid Westwood for per diem and commuting expenses of  physicians who lived in the local area and per diem to out-of-town  physicians for days that their own time records showed they did not work  (sometimes weeks at a time). We considered an additional $4,704 in  payments to be questionable because they were not properly supported in  order to determine whether the amounts billed were in accordance with  the FTR.
Energy also made $14,326 in improper and questionable payments for first- class airfare purchased by SEA. First-class airfare is prohibited by SEA’s  task orders that incorporate the Joint Travel Regulations except under  certain circumstances, and those circumstances must be clearly  documented in the travel voucher. Energy improperly paid $5,207 in airfare  when at least one leg of the trip was first class and was not justified in the  travel documentation supporting the trip. We also questioned payments of  an additional $9,119 in first-class airfare. The travel documentation  supporting these airfare costs contained some explanation for the use of  first class generally related to availability. For example, one traveler noted  “only first class available.” However, the travel regulations state that  travelers should determine travel requirements in sufficient time to reserve  and use coach accommodations. Therefore, we question whether the  travelers’ justifications were sufficient under the terms of the contract.
section_title: Other Miscellaneous Payments
paragraphs: We identified $91,431 in other miscellaneous payments that Energy  improperly made to Westwood and TDI. Of this amount, $45,631 was made  for duplicate and erroneous billings from Westwood. In one case, we found  that Westwood billed the government multiple times for the same cost for a  physician serving on review panels. The duplicate amounts for this one  physician equaled $28,783. Westwood also billed Energy for a plane ticket  that was never used and subsequently credited back to Westwood ($643) by  the airline and therefore should not have billed to Energy. These duplicate  and erroneous billings were likely not identified prior to payment because  Energy did not regularly obtain documentation supporting Westwood’s  invoices or sufficiently review the documentation it had received.
Additionally, TDI billed the government twice for work provided by its  subcontractor, Westwood, during the month of April 2004 instead of billing  the subcontractor’s April and May 2004 invoices. The subcontractor’s April  invoice included more costs than its May invoice; therefore, Energy  improperly paid an incremental amount of $19,277.
Energy also improperly paid at least $26,523 in other costs billed by  Westwood that were not permitted under the terms of the contract and the  FAR. The payments included $21,172 for monthly phone bills, $4,603 for  staff parking permits, and $748 for water cooler rentals.
section_title: Purchases of Certain Furniture and Equipment May Not Have Been an Efficient Use of Government Funds
paragraphs: We identified $1,162,919 in purchases of furniture and equipment and  related storage costs that may not have been an efficient use of government  funds given that Congress was giving consideration to transferring  responsibility for the program to another agency. As part of our review of  overall program costs, we noted a significant increase in program costs  during the last 6 months of the program beginning in July 2004. For  example, the amount of SEA’s invoices increased approximately 87 percent  from a monthly average of $1.2 million for the 6 months prior to July 2004  to $2.3 million for the following 3 months. The increase in program  spending followed a June 2004 transfer of $21.2 million to OWA. According  to Energy officials in a March 2004 testimony before the Senate Committee  on Energy and Natural Resources, Energy transferred the funds in part to  reduce the backlog of unprocessed applications by increasing the number  of case developers and assistants as well as the number of physicians  serving on the review panels.
In July 2004, Energy ordered $748,409 of modular furniture that was to be  installed in new work space to be occupied by claims processing personnel  provided by SEA. However, by August 2004, OWA had initiated a hiring  freeze. According to the program manager at the time, Energy was unable  to cancel the furniture order and the furniture was received in September  2004. Energy paid $6,060 a month through fiscal year 2005 to store the  furniture at a storage facility, incurring costs of $72,720 for 12 months. (See  fig. 3.) We noted that Energy prepaid the manufacturer $50,000 of  installation charges in 2004 even though the furniture was in storage for 12  months and not installed until February 2006, over a year and a half later,  for use by another Energy program. Total costs associated with the  furniture were $821,129, which we have classified as a questionable use of  government funds.
During this period of increased program spending, SEA more than tripled  its workforce supporting OWA at the direction of Energy. To equip these  personnel, SEA purchased and subsequently billed the government for 200  desktop computers, 5 laptop computers, 6 industrial copiers, and 4 fax  machines at a cost of $341,790. This equipment was ordered from June 21,  2004, through July 27, 2004, and SEA received all items by August 2004.  Because the program ceased new case processing and SEA began  downsizing its staff in November 2004, SEA only used these items in  support of the program for at most 5 months. According to Energy officials,  Energy took possession of the equipment from the contractor when SEA’s  contract ended on December 31, 2004. At the time of our inquiry nearly 8  months later, however, 134 items, with a cost of $241,725, were still unused  and located in storage rooms at Energy or could not be located.
section_title: Conclusion
paragraphs: The questionable and improper payments we identified during our review  represent nearly 30 percent of total program funds spent through  September 30, 2005. Given the lack of fundamental internal control over the  payment, monitoring, and reporting of contractor costs, and the fact that  we did not review all program payments, the amount of improper and  questionable payments could be even greater. Further, the control  weaknesses at Energy and SSC NOLA could be indicative of more systemic  problems at both organizations that could put other program funds at risk.  Correcting these problems will require a major reassessment of existing  practices, policies, and procedures and the overall control environment.  The success of this effort will depend on the level of commitment by senior  management in setting the “tone at the top” and working proactively to see  that the needed changes are effectively implemented.
section_title: Recommendations for Executive Action
paragraphs: We are making 16 recommendations to address the issues identified in this  report. We are making 14 recommendations to Energy to (1) improve  controls over the review and approval process for contractor invoices;   (2) strengthen accountability for government-owned equipment purchased  by contractors; (3) improve reporting and control of overall contract costs,  including subcontractor costs; and (4) pursue opportunities for recovery of  improper and questionable costs identified in this report. We are also  making 2 recommendations to SSC NOLA to reassess its procedures for  carrying out its responsibilities for delegated contract administration in  connection with interagency agreements.
To improve Energy’s controls over its review and approval process for  contractor invoices, we recommend that the Secretary of Energy instruct  the Deputy Secretary to:   Develop an assessment process to use as a basis for determining  reliance on and monitoring the performance of other federal agencies  that perform key contract management functions on Energy’s behalf,  such as monitoring contractor services, review and approval of invoices,  and approval of subcontractor agreements.
Establish policies and procedures for an effective review and approval  process for contractor invoices, including (1) conducting and  documenting observations (surveillance) of services provided by  contractors, (2) linking those observations to the invoice review and  approval process, (3) verifying labor hours are billed at appropriate  rates and that employees are qualified to perform the work consistent  with the terms of the underlying agreement, and (4) ensuring other  direct costs are properly supported and reviewed prior to payment.
Develop guidance for CORs or other payment/review officials that detail  appropriate steps for review and approval of invoices and appropriate  documentation of that review process.
Require timely and periodic reviews of contractual agreements,  especially time and materials contracts or task orders, including the  statements of work, to ensure that agreements continue to reflect both  the work that is being performed and the needs of the agency.
To strengthen Energy’s accountability for contractor-acquired government  property, we recommend that the Secretary of Energy instruct the Deputy  Secretary to establish or reinforce existing policies and procedures to:   Approve contractor equipment purchases prior to purchase.
Verify that contractors receive and safeguard the assets during the  operation of the program, including physical inventories or some other  process to validate that all assets paid for are accounted for.
Timely conduct physical inventories of contractor-acquired government  property upon taking possession of the equipment at the close of  contract, including resolving with the contractor any missing or  defective items.
To improve Energy’s reporting and control of time and materials and cost  reimbursement contract costs, including subcontractor costs, we  recommend that the Secretary of Energy instruct the Deputy Secretary to  establish or reinforce existing policies and procedures to:    Review subcontracts, including those for labor obtained through  temporary staffing agencies.
Require contractors to obtain formal approval in advance for significant  new subcontract agreements or changes to existing subcontract  agreements, such as significant changes in the nature, scope, or amount  of subcontracted activities, including labor obtained through temporary  staffing agencies.
Systematically monitor overall contract costs and require documented  justifications from contractors for increased ceiling amounts, as well as  specific documentation to support Energy’s approval of the increases  before incurrence of any costs beyond the ceiling.
Properly assign costs incurred to the correct program at the time of  payment and accurately report such costs in internal and external  financial reports.
Reinforce requirements for reconciliation of intragovernmental  payments for amounts due under interagency agreements to appropriate  supporting documentation.
To pursue opportunities for recovery of improper or questionable costs  identified in this report, we recommend that the Secretary of Energy in  coordination with the Administrator of General Services and, in relation to  SEA costs, the Commanding Officer, Space and Naval Warfare Systems  Center, New Orleans, to:   Determine, in consultation with DOJ, the amount, if any, of potentially  recoverable costs associated with the improper and questionable  payments for labor associated with SEA that we identified in this report  in light of the settlement agreement dated November 2005.
Determine whether the other improper and questionable payments of  contractor costs, including payments to SEA that are identified in this  report, should be reimbursed to Energy by any contractor.
In light of the findings in this report, we recommend that the Commanding  Officer,  Space and Naval Warfare Systems Center, New Orleans, reassess  the organization’s procedures for carrying out its delegated responsibilities  in connection with interagency agreements for delegated contract  administration responsibilities, including the following:  Assess the adequacy of the review and approval process for contractor  invoices, including (1) oversight and monitoring of contractor services  and linkage of these activities to the invoice review and approval  process, (2) verification that labor hours are billed in the appropriate  categories at the appropriate rates, and (3) determining that contractor  travel and other direct costs are in accordance with the contract and  applicable federal regulations.
Establish policies to document guidance sought from GSA and the  direction received on all matters of substance, including the use and  billing implications of subcontracted labor, and to communicate the  direction provided by GSA to the customer agency (e.g., Energy) for  consideration by the customer.
section_title: Agency Comments and Our Evaluation
paragraphs: In the letter transmitting its detailed written comments on a draft of this  report, Energy stated that it agreed with the spirit and intent of our  recommendations and that it will give careful consideration to each of  them. Energy also said it would revise its current policies or procedures as  appropriate and described corrective actions it had already undertaken to  improve its controls, including those over interagency contracting. In its  detailed comments, Energy agreed with some of our findings and disagreed  with others without specifically commenting on any of the 16  recommendations, including the 14 directed to Energy. In particular,  Energy (1) disagreed with our view that it was ultimately responsible for  the issues that we identified relating to payments and controls for SEA, a  contractor obtained through an interagency agreement; (2) stated that it  was engaging the Defense Contract Audit Agency (DCAA) to audit the costs  of two contractors that we reported as having a number of issues related to  improper payments, and that it considers this to be a control that addresses  some of our findings; (3) disagreed with our findings that Energy  improperly paid $557,429 to Westwood for add-on rates and $98,305 to TDI  for base fees; and (4) stated that its June 2004 transfer of $21.2 million was  proper and that the large purchases of furniture and equipment near the  end of the program were also proper. Energy also observed that the  November 29, 2005, settlement and release between the government and  SEA would appear to preclude the recovery of any additional money from  the contractor for the improper and questionable payments that we  identified in this report.
In written comments reprinted in appendix III, SSC NOLA stated that it  concurred with the two recommendations calling for it to reassess its  procedures for carrying out its responsibilities in connection with  interagency agreements and that it expects to complete actions on both  recommendations by August 1, 2006. SSC NOLA separately provided  technical comments, which we have incorporated as appropriate.
Energy took issue with a number of our findings related to SEA contract  payments because Energy did not agree that it had ultimate responsibility  for the contract with SEA. Energy stated that it was the responsibility of  the contractor to comply with the terms of its contract. Energy stated that  it is a customer of SSC NOLA and, as such, had no direct contractual  relationship with the contractor, SEA. Energy’s position is that SSC NOLA  was responsible for conducting appropriate oversight and administration  of contractor costs and that it had relied on SSC NOLA and GSA to ensure  that SEA complied with the terms of its contract. Energy further stated that  it deferred to SSC NOLA and GSA on issues with the SEA contract such as  labor categories, billing rates, qualifications of personnel, and  subcontractor arrangements and that those issues were the responsibility  of SSC NOLA and GSA, not Energy.
We disagree with Energy’s position that it had no responsibility as it relates  to the propriety of the payments made to SEA. As discussed in the  Background section of our report, in cases where authority for contract  oversight and administration is delegated among multiple agencies,  ultimate responsibility for the contract rests with the customer agency  (receiving agency), in this case Energy. Energy cannot assign or delegate  away its responsibilities through interagency agreements; the ultimate  responsibility for ensuring the success of the contracted efforts as well as  the propriety of payments remains with the receiving agency. In particular,  the Economy Act requires that agencies ordering and paying for services  under Economy Act agreements are responsible for ensuring that they  receive the required services and pay for actual costs that were incurred by  the performing agency, in this case SSC NOLA. While Energy may not  have had sole responsibility for ensuring that payments made to SEA were  proper, Energy was responsible for making sure that others were  adequately conducting work on its behalf to ensure that program funds  were not used to make questionable and improper payments.
Notwithstanding its stated view that it was the responsibility of others and  not Energy to conduct appropriate oversight and administration of the SEA  contract, Energy stated that it did conduct observations and monitoring of  SEA services. Energy further stated that it linked those observations to  amounts billed each month through multiple levels of metrics and the  contractor’s monthly cost report. However, we found that Energy did not  receive any of the SEA billings under the interagency agreement. Also, we  found that Energy had no processes in place to link the cost reports, any  metrics it may have produced, or any observations it may have made to  amounts that the contractor billed each month. Further, because  information in the contractor’s monthly cost report was not compared to  amounts billed each month, the procedures Energy described in its  comments would be of limited value as a control process against improper  payments and would not provide Energy with the necessary assurance that  amounts subsequently paid to the contractor were appropriate.
In response to a number of our findings related to improper payments  made to Westwood and TDI, Energy stated that it is currently having DCAA  audit these contracts. Energy further stated that these audits were initiated  as part of its “normal course of business” and anticipated that many of the  issues we cited would normally be identified as part of a DCAA audit. While  we agree that a DCAA audit of contract costs can provide a detective  control to help determine whether contractor costs were proper, reliance  on an after-the-fact audit is not an acceptable replacement for the type of  real-time monitoring and oversight of contractor costs-preventive controls- that we found to be lacking at Energy. Further, a DCAA audit of civilian  contractor costs is not automatic and requires an additional cost to the  government to procure. In addition, as stated in our report, the numerous  issues that we identified with Westwood and TDI occurred over a 4-year  period. It is important that Energy establish a control environment that  includes control activities that prevent questionable or improper payments  to begin with or that detects them soon after they occur so that they can be  resolved in a timely manner, thus ensuring program funds are fully  available to achieve the purposes of the program. Reliance on an audit by  DCAA in 2006 or later of contractor activity that began in 2001 is not an  efficient or effective approach to implementing proper internal controls  over payments to contractors.
Energy disagreed with our findings that it improperly paid $557,429 to  Westwood in the form of a 12 percent add-on rate and also improperly paid  $98,305 to TDI for base fees. Energy stated that Westwood had an approved  rate of 13 percent for general and administrative expense that was verified  by the CO in a DCAA pre-award audit. However, we found that the 13  percent general and administrative expense that Energy refers to was  evaluated in the context of a price proposal for a cost plus contract.  Further, under time and materials contracts like this one, general and  administrative expenses are typically included in the hourly rate associated  with each labor hour. While FAR 52.232-7 allows for “reasonable and  allocable” material handling costs, including general and administrative  expenses, for materials and subcontractors to the extent that they are  “clearly excluded from the hourly rate,” neither Westwood nor Energy  provided evidence during our review that any such costs were clearly  excluded from Westwood’s labor rates. Therefore we stand by our  conclusion that the 12 percent add-on rate to Westwood’s time and  materials contract was improper.
With respect to the improper payment to TDI of $98,305 in base fees,  Energy stated that our approach of adding TDI’s fee to the fees associated  with its subcontractor (Westwood) was not appropriate because there is no  “base fee” in Westwood’s contract. Energy’s stated basis for its position was  that the TDI contract was a cost-plus-award-fee type while TDI’s  subcontract with Westwood was a cost-plus-fixed-fee type contract, with  no base fee. However, as stated in our report, TDI did not have a  subcontract or other binding agreement with Westwood for services  Westwood provided to Energy that TDI subsequently included on its  invoices to Energy. Further, Energy’s contract with TDI limited the amount  of base fees to $82,847 applied to the level of effort (i.e., labor hours billed)  provided by TDI and made no distinction between hours incurred by the  prime contractor or any contractor viewed as a subcontractor. Thus, the  contract terms necessitate considering, as we did, the base fees of TDI and  Westwood together. As stated in our report, Energy paid a total of $181,152  in base fees when the maximum should have been $82,847, thus resulting in  improper payments of $98,305.
Energy stated that the information in our report showing that $21.2 million  in funds was transferred to OWA in June 2004 during the same time that  legislation was moving through Congress to transfer the administration of  the program to DOL implies that Energy’s ramp-up activities were  unsupportable. Energy also stated that using these funds to purchase  furniture and equipment in the summer of 2004 was consistent with  congressional approval of its reprogramming actions.
Our report does not imply that Energy’s ramp-up activities were  unsupportable. Our report provides extensive background information on  the program, including the June 2004 transfer of $21.2 million in funds to  OWA in an effort to clear the backlog of claims. This background  information was provided for context. As discussed in our report, however,  we did identify $1,162,919 in purchases of furniture and equipment and  related storage costs that may not have been an efficient use of government  funds given that Congress was giving consideration to transferring  responsibility for the program to another agency. As discussed in the  report, Energy ordered $748,409 of modular furniture in July 2004 that was  to be installed in new work space to be occupied by claims processing  personnel provided by SEA. However, by August 2004, OWA had initiated a  hiring freeze and therefore placed the furniture in a storage facility,  incurring costs of $72,720 for 12 months. Further, Energy paid the vendor  $50,000 up front in 2004 for installation charges even though the furniture  was not installed until February 2006, over a year and a half later, for use by  another Energy program.
Regarding our recommendation that Energy pursue opportunities for  recovery of labor and other SEA costs that we identified as improper or  questionable, Energy stated that the November 29, 2005, settlement  agreement and release between the government and SEA would appear to  preclude the recovery of any additional moneys for expenditures in support  of Energy’s programs. Our report stated that we did not determine whether,  or to what extent, the terms of the November 29, 2005, settlement and  release with SEA may affect any potential additional monetary recoveries  by the government for the questionable and improper payments made to  SEA that we identified. We also stated in our report that the release clause  of the settlement is limited to “covered conduct” investigated by the  government related to two areas: billing indirect labor costs as direct labor  costs and billing for employees in labor categories for which they were not  qualified. It is important that Energy consult with DOJ in order to  determine the recoverability of funds from SEA before concluding that the  funds are not recoverable. Therefore, we reaffirm our recommendation.
Discussions on other matters are provided following Energy's comments,  which are reprinted in appendix II. SSC NOLA's comments are reprinted in  appendix III.
As agreed with your offices, unless you publicly announce its contents  earlier, we plan no further distribution of this report until 30 days from its  date. At that time, we will send copies to the Secretary of Energy and the  Commanding Officer of SSC NOLA and interested congressional  committees. Copies will also be made available to others upon request. In  addition, the report will be available at no charge on the GAO Web site at  http://www.gao.gov.
If you or your staffs have any questions about this report, please contact  me at (202) 512-9508 or calboml@gao.gov. Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page  of this report. Major contributors to this report are acknowledged in  appendix IV.
section_title: Scope and Methodology
paragraphs: For this review, we considered costs recorded by the Office of Worker  Advocacy (OWA), the Department of Energy (Energy) office tasked with  administering Subtitle D of the Energy Employees Occupational Illness  Compensation Program Act of 2000 (EEOICPA) from October 2000 through  September 30, 2005. Our review focused primarily on costs incurred under  contracts for services by four contractors: Eagle Research Group, Inc.  (Eagle); Science and Engineering Associates, Inc. (SEA); Westwood Group,  Inc. (Westwood); and Technical Design, Inc. (TDI). In total, payments made  to these contractors represented approximately $55.5 million, or 60  percent, of total program costs reported by the EEOICPA program through  September 2005. Our work did not extend to the program costs for claims  research activities at Energy facilities. These activities were performed by  Energy’s major facility operating contractors that are subject to audit by  Energy’s Inspector General and to other reviews by Energy’s financial  management officials.
To assess the reliability of OWA cost data for purposes of our review, we  reviewed reconciliations of OWA costs to amounts in the audited  Statements of Net Cost for fiscal years 2001 through 2004. In addition, for  all OWA cost data for the period October 2000 through September 2005, we  (1) obtained electronic files of OWA costs and performed electronic testing  for obvious errors in accuracy and completeness, (2) reviewed supporting  documentation for selected payments to contractors and other vendors and  compared them to OWA cost data, and (3) reviewed documentation  obtained from selected contractors of cumulative billings for OWA costs  and compared these amounts to OWA cost data. Except for the cost  tracking and reporting issues identified in the internal control section of  this report and the questionable and improper payments that we identify,  and the effect of any future actions taken by the agency to recover any  improper payments, the OWA cost information we reviewed is considered  reliable for purposes of this report. We performed the majority of our work  in Washington, D.C., at Energy and Westwood. We also performed work at  SEA and TDI offices in Albuquerque, New Mexico. Additionally, we  observed Energy’s furniture inventory located in Laurel, Maryland.
To determine whether Energy’s internal controls provided reasonable  assurance that improper payments to contractors would not be made or  would be detected in the normal course of business, we used Standards for  Internal Control in the Federal Government as a basis to assess the  internal control structure—control environment, risk assessment  procedures, control activities, information and communications, and  monitoring efforts of Energy over its OWA program. Further, we reviewed  contractual agreements, including prime contracts with four contractors;  Energy’s interagency agreement with the Space and Naval Warfare Systems  Center, New Orleans, (SSC NOLA); and certain subcontract agreements  provided by prime contractors. We also considered (1) prior GAO reports  on the EEOICPA program, Subtitle D; (2) the results of the reviews by the  inspectors general of the General Services Administration (GSA)  (concerning SSC NOLA’s use of SEA’s schedule contract) and Energy  (concerning Energy’s use of interagency agreements); and (3) a prior audit  report of the Naval Audit Service concerning SEA services provided to SSC  NOLA. We obtained and reviewed current Energy policies regarding  contracting and financial management matters, including Energy’s  Acquisition Guide and accounting handbook. We also conducted  interviews with program, procurement, and financial management  personnel regarding policies and procedures that were in place over  contract payments, and walk-throughs of key processes, such as the  invoice review and approval process, to gain an understanding of Energy’s  controls over contract payments. We conducted similar interviews with  SSC NOLA and GSA officials to assess Energy’s contractual relationship  with its federal contracting partners. We compared Energy’s controls to  those recommended in our Standards for Internal Control in the Federal  Government.
To determine whether Energy’s payments to contractors were properly  supported and a valid use a government funds, we used a variety of data  mining, document analysis, and other forensic auditing techniques to  nonstatistically select transactions or groups of transactions for detailed  review. For the transactions we selected, we reviewed supporting  documentation to assess the appropriateness of payments based upon  contract documents and applicable federal regulations, such as the Federal  Acquisition Regulation (FAR), Federal Travel Regulation, and Joint  Travel Regulations. While we identified some payments as questionable or  improper, our work was not designed to identify all improper or  questionable payments or to estimate their extent.
For each of the major contracts, we obtained copies of invoices from the  contractor and compared the amounts to a listing of payments made by  Energy. In addition to this high-level analysis, we performed detailed tests  on labor and other direct costs, as described below.
subsections: section_title: Labor
paragraphs: We obtained an electronic file of all SEA labor charges, for both employees  and subcontracted labor, for analysis. Based upon our review of the file for  trends or anomalies, we nonstatistically selected 94 employees for testing.  SEA provided personnel files containing supporting documentation, such  as employee résumés, and company information, such as hire and  termination dates. Because each person may have been billed under more  than one labor category, we attempted to make 187 comparisons of  personnel information to labor category requirements. SEA was unable to  provide us with proper documentation of personnel obtained through  temporary hiring agencies, thus preventing us from making 28  comparisons. We could not make an additional 72 comparisons because the  contract’s labor categories did not contain adequate education or  experience requirements. We made 87 comparisons of employee  qualifications to labor category requirements.
To review Westwood labor charges, we obtained compensation  information, such as W-2s and 1099s, and compared certain amounts  reported to underlying payment records and amounts Westwood billed the  government for these costs. For 25 Westwood employees supporting OWA  activities, we compared their education and experience requirements as  documented on their résumés to the labor category requirements  negotiated in its contract.
We also compared the documentation of the two TDI employees’  qualifications to the contract labor category descriptions.
section_title: Other Direct Costs
paragraphs: Neither SEA nor Westwood provided a detailed list or breakdown of other  direct costs as part of its invoice to Energy; therefore, we performed a  preliminary review all the supporting documentation for these two  contractors’ other direct costs. From this documentation we identified a  high volume of the following types of transactions at each contractor, for  which we performed a more detailed review.
Payments for equipment and travel costs incurred by SEA. The  supporting documentation we reviewed for these costs included  expense vouchers, vendor invoices, travel authorization forms, and  plane ticket receipts and itineraries.
Payments for services provided by independent contractors incurred by  Westwood. These services were mainly provided by the physician panel  members. We obtained and reviewed the supporting invoices or other  documentation of time and costs for 6 of 167 physician panel members  billed. We chose these 6 physicians for detailed review because of the  high volume of charges or unusual charges that we noted during our  preliminary reviews of supporting documentation. We only considered  their billings for fiscal year 2004, the year of the highest physician panel  activity.
In addition to this review of payments made to the major contractors, we  analyzed other payments made by Energy in support of OWA. For example,  we requested supporting documentation for a nonstatistical selection of  payments based upon our analysis of payment information by payee and  amount. We also performed an analytical review of Department of Labor  (DOL) reimbursements under memorandums of understanding dated July  2001 and December 2004 for the operation of the EEOICPA resource  centers. These reimbursements totaled approximately $11 million and were  offset against costs for the Eagle contract and other OWA program  activities.
We reviewed the November 29, 2005, settlement agreement and release  between the Department of Justice and SEA resulting from investigations  by the government of alleged improper billing by SEA. We also reviewed  the related January 2006 administrative settlement agreement between the  Department of the Navy and SEA that provided for SEA to implement a  compliance program to ensure that it adheres to lawful and ethical  procedures and practices in all areas relating to its role as a government  contractor.
We provided Energy a draft of this report and SSC NOLA a draft of  applicable sections of this report for review and comment. Energy’s Deputy  Assistant Secretary of Planning and Administration, Office of Environment,  Safety and Health, and SSC NOLA’s Commanding Officer provided written  comments, which are reprinted in appendixes II and III, respectively.  Energy and SSC NOLA also provided technical comments, which we have  incorporated as appropriate. We also provided key officials of SEA,  Westwood, Eagle, and TDI with draft summaries of the findings noted in  this report relating to them. We incorporated as appropriate oral and  written comments we received on these draft summaries from  management officials from Westwood, Eagle, and TDI and from outside  legal counsel for SEA. We performed our work in accordance with  generally accepted government auditing standards in Washington, D.C., and  at three contractor locations from February 2005 through March 2006.
section_title: Comments from the Department of Energy
paragraphs: The following are GAO’s comments on the Department of Energy’s letter  dated April 20, 2006.
subsections: section_title: GAO Comments
paragraphs: 1. See the Agency Comments and Our Evaluation section. 2. We have not included the acquisition letter attached to this letter in this  report. The letter can be found on Energy’s Web site, www.doe.gov. 3. We did not assess or conclude on whether the government received  “good value” from the contract with SEA. The scope of our work was to  determine whether internal controls over program payments were  adequately designed, and if program payments were properly  supported as a valid use of government funds. We addressed financial  management practices and procedures and whether payments were  proper, not the value or quality of services received.  4. We modified the report for this additional information.  5. We disagree. Our report stated that the contract with Westwood did not  fully reflect actual duties that were subsequently performed and  provided three examples of such. The quotation provided by Energy in  its comments is from the statement of work section of the Westwood  contract entitled “Advisory Committee Activities” that only addresses  the work that Westwood should perform in support of the Advisory  Committee, and therefore this language does not address the other  activities Westwood performed.  6. Energy states that a complete cost proposal was obtained from  Westwood.  However, Energy does not address that our report stated  that Westwood’s cost proposal was not incorporated into the prime  contact with TDI nor was any other binding agreement created  between Energy and Westwood relative to its cost proposal. Thus, as  our report also stated, without an effective contractual agreement,  including negotiated rates, it was not possible for Energy to adequately  review the amounts TDI billed for costs attributed to what Energy  characterizes as the subcontractor, Westwood. We reaffirm this  position.   7. A formal agreement between a prime and a subcontractor not only  protects the interests of the parties involved, but also those of the  government. Additionally, as discussed in the Agency Comments and  our Evaluation section of our report, after-the-fact detective controls,  such as the Defense Contract Audit Agency audits are not a  replacement for real-time monitoring and oversight of contract costs.  8. At the time of our first inquiry, Energy told us it was still updating and  finalizing the locations and conditions of the government-owned  equipment that SEA purchased. On September 29, 2005, the Director of  the Office of Information Management within the Office of  Environment Safety and Health stated that “the identification and  recording process is still underway.” This was 8 months after expiration  of the SEA contract in December 2004. Our report also stated that an  inventory of contractor-purchased, government owned equipment that  Westwood purchased was not conducted until December 2005, nearly 9  months after Westwood’s contract expired, which Energy does not  dispute.   9. We did not review Energy’s work in 2006 to address the missing items.  10. We do not agree with Energy’s statement that “at no time did Energy  exceed a contractually negotiated and established contact ceiling.” Our  report stated that Energy did not establish internal control monitoring  practices to effectively manage overall contract costs, including using  contract ceilings to manage and encourage cost-effectiveness. We  found, for example, that Westwood was paid amounts that exceeded  the “not to exceed” ceiling on other direct costs each year under its first  contract, which covered the 3 ½  year period August 2001 through  February 2005 as well as under the second contract that began in  September 2004. As a specific example, the other direct cost ceiling  was $600,000 in year 3, but Westwood was paid $2,421,176, or  $1,821,176 more than the “not to exceed” limit per the contract.  11. Our report stated that the scope of our work was to determine whether  internal controls over program payments were adequately designed and  if program payments were properly supported as a valid use of  government funds. The furniture purchases were considered by us in  the context of both objectives. 12. Our report recognized that there are different interpretations of the  time and material payment clause (FAR 52.232-7). For purposes of our  report, we have based our findings on the literal application of this  clause. Further, as also stated in our report, we found that neither  Energy nor SSC NOLA for SEA exercised sufficient management  oversight to be fully informed of the nature, extent, scope of services,  and terms of billing to the government for subcontracted services. In  addition, we found inconsistencies in the  application of what Energy  refers to in its comments as its “method established for T&M contracts  of requiring both primes and subcontractors to be reimbursed for direct  labor based on their own established fully burdened labor rates.”  13. Energy originally told us that the hiring freeze instituted in August 2004  was because of the combination of a probable continuing resolution  and the possible transfer of the program to DOL. We modified the  report based on Energy’s written comments. 14. We modified the report to reflect that the $50,000 of up-front  installation charges were paid in 2004 even though the equipment “was  not installed until February 2006.” Notwithstanding this, the furniture  installation fee, like the furniture, did not benefit OWA but rather  another Energy program.   15. We did not review the procedures described as a corrective action to  address our finding that Energy’s monitoring of services provided  under the Westwood contract was insufficient. However, it will be  important that changes are made to comprehensively address the  conditions we found at the contractor and at Energy. Our report stated  that the productivity measures used by the contractor to monitor work  performed by physician panel members were developed based on the  hours actually billed on the invoices submitted by the physicians, and  therefore Energy had no independent baseline to measure productivity  or to assess the reasonableness of hours billed on the invoices  submitted by the physicians. Further, our report stated that doctors  who performed a quality check function on claims were also not  sufficiently monitored. Energy did not systematically observe the hours  worked and compare any observations to the amounts paid for those  hours, nor did it determine that Westwood was adequately monitoring  these services as a basis for its billings.  16. The contracting officer’s representative told us that supporting  documentation for Westwood’s invoices was not requested because of  the “voluminous amounts” of paper that Westwood would need to copy  and transmit to Energy each month. Our report stated that one of the  elements of the control weakness for other direct costs was that the  contractor was not required to report a detailed breakdown of its other  direct costs as stipulated by its contracts. Without this level of  information, it was not possible for Energy officials to effectively  review and approve these invoices for payment. Further, a substantial  portion of the amount billed by Westwood for other direct costs was for  temporary labor, and Energy’s controls would not, therefore, be  enhanced by the corrective action put in place covering purchases of  $50 or more. According to the implementation memo, this action is  intended to address purchases such as government-owned equipment  and travel, but does not specifically state whether temporary labor  would be covered. It will be important for Energy to take further  corrective actions that address enforcing its requirements for a detailed  breakdown of other direct costs as well as controls specifically  designed for temporary labor that are not covered by its new policy on  purchases.   17. We disagree. Our report stated that Energy improperly assigned the  costs of OWA services provided by Westwood to other program  reporting units, in effect using other programs’ funds to pay for OWA  activities. We found that these practices occurred throughout the 4  years of the program for both the Westwood and TDI contracts, not just  for “a short period” as Energy stated in its written comments.
section_title: Comments from the Space and Naval Warfare Systems Center, New Orleans
section_title: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Acknowledgments
paragraphs: In addition to the contact named above, staff members who made key  contributions to this report include Robert Owens, Assistant Director;  Marie Ahearn; Sharon O. Byrd; Richard Cambosos; Donald Campbell; Lisa  Crye; Tyshawn Davis; Timothy DiNapoli; Abe Dymond; Ryan Geach; Jason  Kelly; Dina Landoll; Patrick McCray; and Ruth S. Walk.