    Department of Energy, Office of Worker Advocacy: Deficient
    Controls Led to Millions of Dollars in Improper and Questionable
    Payments to Contractors (31-MAY-06, GAO-06-547).

    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.
    -------------------------Indexing Terms-------------------------
    REPORTNUM:   GAO-06-547
        ACCNO:   A54999
      TITLE:     Department of Energy, Office of Worker Advocacy:
    Deficient Controls Led to Millions of Dollars in Improper and
    Questionable Payments to Contractors
         DATE:   05/31/2006
      SUBJECT:   Accountability
    	     Claims processing
    	     Compensation claims
    	     Contract costs
    	     Contract oversight
    	     Contractor payments
    	     Contractors
    	     Cost analysis
    	     Erroneous payments
    	     Federal funds
    	     Interagency relations
    	     Internal controls
    	     Questionable payments
    	     Workers compensation
    	     Program costs

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    GAO-06-547

         * Report to Congressional Requesters
              * May 2006
         * Department of energy, office of worker advocacy
              * Deficient Controls Led to Millions of Dollars in Improper and
                Questionable Payments to Contractors
         * d06547.pdf
              * Report to Congressional Requesters
                   * May 2006
              * Department of energy, office of worker advocacy
                   * Deficient Controls Led to Millions of Dollars in Improper
                     and Questionable Payments to Contractors
              * Contents
                   * Results in Brief
                   * Background
                        * Roles and Responsibilities under Interagency Agreement
                          with SSC NOLA
                        * Government Settlement Agreement and Release with SEA
                        * Internal Control
                   * Energy Did Not Establish Effective Controls over Payments to
                     Contractors or Overall Contract Costs
                        * Effective Review and Approval Process for Contractor
                          Payments Was Not Established
                             * Contractor Services Billed Were Not Sufficiently
                               Monitored
                             * Labor Categories and Certain Other Activities Were
                               Not Verified against the Contract
                             * Other Direct Costs Were Not Adequately Reviewed
                        * Accountability for Equipment Purchased by Contractors
                          Was Not Maintained
                        * Inadequate Consideration of Subcontract Arrangements
                        * Overall Contract Costs Were Not Effectively Monitored
                          or Accurately Reported
                             * Contract Ceilings Were Not Effectively Monitored
                             * Contract Cost Reporting Was Flawed
                   * Energy Made Millions of Dollars in Improper and Questionable
                     Payments to Contractors
                        * Energy Made Improper and Questionable Payments for
                          Labor Charges
                             * Labor Categories
                             * Fully Burdened Labor Rates
                                  * SEA
                                  * Westwood
                             * Overtime Charges
                        * Energy Improperly Paid Contractor Fees and Other Direct
                          Costs
                             * Add-on Rates and Base Fees
                             * Per Diem, Commuting, and Travel Costs
                             * Other Miscellaneous Payments
                        * Purchases of Certain Furniture and Equipment May Not
                          Have Been an Efficient Use of Government Funds
                   * Conclusion
                   * Recommendations for Executive Action
                   * Agency Comments and Our Evaluation
              * Scope and Methodology
              * Comments from the Department of Energy
              * Comments from the Space and Naval Warfare Systems Center, New
                Orleans
              * GAO Contact and Staff Acknowledgments

    Report to Congressional Requesters

    May 2006

    DEPARTMENT OF ENERGY, OFFICE OF WORKER ADVOCACY

    Deficient Controls Led to Millions of Dollars in Improper and Questionable
    Payments to Contractors

    Contents

    Tables

    Figures

    May 31, 2006Letter

    The Honorable Charles E. Grassley Chairman Committee on Finance United
    States Senate

    The Honorable Jeff Bingaman Ranking Minority Member Committee on Energy
    and Natural Resources United States Senate

    The Honorable Jim Bunning United States Senate

    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.1 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.2
    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.3 In October 2004, EEOICPA
    was amended to repeal Subtitle D and add a new Subtitle E to be
    administered by the Secretary of Labor.4

    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, 2005.5 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.

    Results in Brief

    Energy's control environment over payments to contractors and overall
    contract costs was not effective in reducing the risk of improper
    payments. Energy did not establish fundamental control activities, such as
    an effective review and approval process for contractor invoices that
    enabled it to verify that goods and services billed for had actually been
    received and charged at the agreed-upon amounts. Specifically, contractor
    services were not adequately monitored, labor rates were not verified, and
    other direct costs lacked adequate supporting documentation. Through an
    interagency agreement, SSC NOLA was responsible for the review and
    approval of Science and Engineering Associates, Inc. (SEA), invoices,
    among other administrative duties, but did not adequately perform this
    function. For example, the SSC NOLA official responsible for observing
    services made no site visits to SEA's main performance location after
    February 2004, when SEA more than tripled its workforce assigned to the
    program, and made only periodic visits before that time. Energy, however,
    took no steps to assure itself that SSC NOLA was properly carrying out its
    responsibilities. Energy also did not have sufficient controls over
    equipment purchased by contractors for the program and, as a result, could
    not fully account for equipment during the program or at the expiration of
    the contracts. Additionally, Energy and its contracting partners, the
    General Services Administration (GSA) and SSC NOLA, did not adequately
    assess subcontracted activity, which represented nearly $15 million in
    payments by the program. Further, Energy made errors in reporting total
    contract costs in its internal and external financial reports, and did not
    effectively monitor cumulative contract costs-an important step in
    managing overall contract costs, particularly for time and materials
    contracts.

    These fundamental internal control weaknesses and Energy's poor overall
    control environment made Energy highly vulnerable to improper payments and
    contributed to $26.4 million in improper and questionable payments to
    contractors that we identified through a variety of forensic auditing
    techniques. Of these improper and questionable payments, $24.4 million
    related to labor charges. These included $2.5 million in improper payments
    to certain contractors under inappropriate labor categories, including
    employees in labor categories for which they were not qualified or that
    did not reflect the duties they actually performed. Payments for labor
    charges further included $17.7 million in questionable payments where, for
    example, the labor category descriptions provided insufficient criteria by
    which to assess whether the person was qualified under that labor
    category. In addition, Energy paid two contractors for subcontracted labor
    costs using fully burdened labor rates-rates that included base wages plus
    fringe benefits, overhead costs, and profit-for which there was no basis
    under the contracts. This resulted in more than $4.2 million in improper
    and questionable payments by Energy. We also identified $778,613 in
    improper and questionable payments for other direct costs, including
    amounts for add-on charges and other fees not provided for in the
    contracts, first-class travel, and unallowable per diem and commuting
    costs. We found, for instance, that Energy paid contractor charges for per
    diem for out-of-town personnel for weeks at a time when time records we
    reviewed showed that they were not working. Finally, we questioned whether
    more than $1 million in payments for furniture and office equipment
    purchased toward the end of the program, much of which was not used by
    OWA, was an efficient use of government funds. These improper and
    questionable payments for contract costs 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 we only reviewed selected program payments.

    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 payments 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.

    In 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. However, Energy took issue
    with our core finding that it was responsible for its program activities
    carried out through the cooperation of other agencies and contractors
    through use of an interagency agreement. It also disagreed with some of
    our other findings, including those related to improper payment of certain
    contractor fees. In addition, Energy described some of the corrective
    actions it is implementing to improve its controls, including those over
    interagency contracting.

    We continue to believe that Energy cannot assign or delegate away its
    responsibility for ensuring the success of contracted efforts as well as
    the propriety of payments under interagency agreements. Also, we stand by
    our assessment of the improper and questionable nature of certain fees
    Energy paid to its contractors. Our more detailed responses to these
    comments are provided in the Agency Comments and Our Evaluation section of
    this report and in appendix II.

    SSC NOLA concurred with our recommendations and indicated that it has
    plans to complete actions on the recommendations by August 1, 2006.

    Background

    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.6 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.7 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.8 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.

    Figure 1: Significant 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.

    Table 1: Total Program Costs for October 2000 through September 30, 2005

                       Activity                      Amount   Major contractors
                                                               performing these
                                                                  activities
    Managed and operated 11 resource centers $11,817,528  Eagle Resource Inc.
                                                             ($10.4 million)
    Researched cases and exposure records at  29,081,346  Primarily performed
    Energy offices                                        by major

                                                             facility operating
                                                             contractorsa
    Prepared/assembled cases, including the   34,321,660  Science and
    associated furniture and office space                 Engineering
    for personnel; developed and maintained
    the Case Management System                            Associates, Inc.b

                                                             ($31.5 million)
    Established physician panels to review    13,611,440  Westwood Group, Inc.
    cases, staffed the EEOICPA hotline,
    supported the Advisory Committee, and                 ($10.3 million)
    provided program and administrative
    personnel                                             Technical Design,
                                                             Inc.

                                                             ($3.3 million)
    Other (such as travel for federal          3,485,097
    employees and information technology
    management beginning in June 2004)
    Total program costs reported by Energy   $92,317,071
    through September 30, 2005
    Major contracts GAO reviewed                          $55,500,000

    Source: GAO.

    aEnergy's major facility operating contractors, in general, operated
    national laboratories and performed the EEOICPA case research activities.
    They are subject to audit by Energy's Inspector General and were not
    considered in our review.

    bIncludes $28.8 million under Energy's interagency agreement with SSC NOLA
    and $2.7 million under Energy's contract with SEA.

    Through multiple contracts in some cases, four major contractors performed
    the majority of OWA's program activities.

    o 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)9 contract.

    o 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).

    o 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.

    o 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.10 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.11 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.12 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.

    Table 2: Descriptions of Contract Vehicles Used by Energy for the OWA
    Program

    Contract     Description    Applications  Benefits and  Constraints/government
    vehicle                                       risks          requirements
    Cost           A contract     Appropriate    Benefits:     May be used only when
    reimbursement: that provides  when                         the contractor's
    cost plus      for the        uncertainties  Allows the    accounting system is
    incentive fee  payment of the involved in    government to adequate for
    and cost plus  contractor's   contract       meet complex  determining allowable
    award fee      allowable      performance do or unique     costs under the
                   incurred costs not permit     requirements. contract and
    Cost plus      to the extent  costs to be                  appropriate government
    incentive fee  prescribed in  estimated with May encourage surveillance or
                   the contract,  sufficient     economic,     oversight will be
    $0.9 million   not to exceed  accuracy to    efficient,    provided.
                   a ceiling.     use a          and effective
    Contractor:                   fixed-price    performance   Cost plus incentive
                   Cost plus      contract.      when a cost   fee:
    TDI            incentive fee:                reimbursement
                                  Cost plus      contract is   Fee adjustment formula
    Cost plus      Provides for   incentive fee: necessary.    should provide an
    award fee $2.4 an initially                                incentive that will be
    million        negotiated fee May be used    Risk:         effective over the
                   that is later  when a target                full range of
    Contractor:    adjusted by a  cost and a     Shifts cost   reasonably foreseeable
    TDI            formula.       fee-adjustment risk from the variations from the
                                  formula that   contractor to contract's target
                   Cost plus      are likely to  the           cost.
                   award fee:     motivate the   government.
                                  contractor to                Cost plus award fee:
                   Provides for a manage
                   fee consisting effectively                  Any additional
                   of a base      can be                       administrative effort
                   amount and an  negotiated.                  and cost required to
                   award amount                                monitor and evaluate
                   based upon a   Cost plus                    the contractor's
                   judgmental     award fee:                   performance are
                   evaluation by                               justified by the
                   the            Appropriate                  expected benefits.
                   government.    when the work
                                  does not lend
                                  itself to
                                  developing
                                  incentive
                                  targets.
    Time and       Contract that  May be used    Benefit:      May be used only after
    materials      provides for   only when it                 the contracting
    $52.2 million  direct labor   is not         Can fulfill a officer determines
                   hours billed   possible at    special need. that no other contract
    Contractors:   at fixed       the time of                  type is suitable, and
    SEA (under     hourly rates   placing the    Risk:         the contract must
    both the       that include   contract to                  include a ceiling
    interagency    wages,         estimate       Does not      price that the
    agreement and  overhead,      accurately the provide a     contractor exceeds at
    direct         general and    extent or      positive      its own risk.
    contract)      administrative duration of    profit
    Westwood Eagle expenses, and  the work or to incentive for The government must
                   profit and     anticipate     contractor to provide appropriate
                   contractors'   costs with any control       surveillance to ensure
                   materials at   reasonable     costs.        the contractor is
                   cost.          degree of                    using efficient
                                  confidence.                  methods and effective
                                                               cost controls.

    Source: GAO analysis of Federal Acquisition Regulation.

    Note: Based on Federal Acquisition Regulation (FAR) subparts 16.4 and
    16.6, as well as Energy's Acquisition Guide. The FAR is promulgated at 48
    C.F.R. ch. 1.

    Roles and Responsibilities under Interagency Agreement with SSC NOLA

    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
    2005.13 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.

    Government Settlement Agreement and Release with SEA

    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 2005.14 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.15 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.16 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 Act17 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.

    Internal Control

    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. S: 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.18 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.19 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.

    Energy Did Not Establish Effective Controls over Payments to Contractors
    or Overall Contract Costs

    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.

    Effective Review and Approval Process for Contractor Payments Was Not
    Established

    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.

    Contractor Services Billed Were Not Sufficiently Monitored

    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."20

    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.21 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.

    o 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.

    o 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.

    Labor Categories and Certain Other Activities Were Not Verified against
    the Contract

    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 resumes 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.22 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:

    o Implementing physician panels, which included retaining doctors and
    coordinating the flow of cases between panel members.

    o 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.

    o 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.

    Other Direct Costs Were Not Adequately Reviewed

    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.

    Figure 2: Westwood Group, Inc., Invoice for Services Provided to OWA in
    October 2004

    Note: "DPLH" stands for Direct Productive Labor Hours and represents the
    number of hours charged in each labor category.

    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.

    Accountability for Equipment Purchased by Contractors Was Not Maintained

    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.23 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.

    Inadequate Consideration of Subcontract Arrangements

    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.24 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.

    Overall Contract Costs Were Not Effectively Monitored or Accurately
    Reported

    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.

    Contract Ceilings Were Not Effectively Monitored

    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.

    Contract Cost Reporting Was Flawed

    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.

    Energy Made Millions of Dollars in Improper and Questionable Payments to
    Contractors

    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.

    Table 3: Summary of Improper and Questionable Payments

          Type of Cost              Improper Questionable       Total
    Labor
                          Labor categoriesa    $2,498,920 $17,686,892 $20,185,812
                          Fully burdened        3,661,429     569,798  $4,231,227
                          labor rates
                          Overtime charges          3,019                  $3,019
                          Subtotal                                    $24,420,058
    Other direct costs
                          Add-on charges and     $655,734                $655,734
                          base fees
                          Per diem and             12,418      $4,704     $17,122
                          commuting costsa
                          First-class               5,207       9,119     $14,326
                          travela
                          Other                    91,431                 $91,431
                          miscellaneous
                          payments
                          Subtotal                                       $778,613
    Inefficient use of
    government funds
                          Furniture                          $821,129    $821,129
                          Equipment                           341,790    $341,790
                          Subtotal                                     $1,162,919
    Total                      $6,928,158  $19,433,432 $26,361,590

    Source: GAO.

    aThe amounts reported for these categories represent the gross amount paid
    by Energy to its contractors and therefore do not reflect any reductions
    or offsets that may be due the contractors for the goods and services that
    were provided. Any potentially recoverable amounts would need to be
    determined after consideration of these reductions or offsets.

    The following sections provide additional information on the improper and
    questionable payments we identified.

    Energy Made Improper and Questionable Payments for Labor Charges

    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.

    Labor Categories

    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 resumes for 25 Westwood employees whose time was billed to OWA.
    Our comparison of employee resumes 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.

    o 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.

    o 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.

    o 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 resumes 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.

    Fully Burdened Labor Rates

    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.

    SEA

    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 52.232-7,25
    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.26 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

    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.

    Overtime Charges

    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.

    Energy Improperly Paid Contractor Fees and Other Direct Costs

    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.

    Add-on Rates and Base Fees

    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.27 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 $98,305.28

    Per Diem, Commuting, and Travel Costs

    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.29 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.30

    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.31 Therefore, we question whether the
    travelers' justifications were sufficient under the terms of the contract.

    Other Miscellaneous Payments

    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.

    Purchases of Certain Furniture and Equipment May Not Have Been an
    Efficient Use of Government Funds

    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.32 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.33

    Figure 3: Unused Modular Furniture in Storage Facility

    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.

    Conclusion

    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.

    Recommendations for Executive Action

    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:

    o 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.

    o 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.

    o 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.

    o 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:

    o Approve contractor equipment purchases prior to purchase.

    o 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.

    o 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:

    o Review subcontracts, including those for labor obtained through
    temporary staffing agencies.

    o 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.

    o 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.

    o Properly assign costs incurred to the correct program at the time of
    payment and accurately report such costs in internal and external
    financial reports.

    o 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:

    o 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.

    o 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:

    o 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.

    o 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.

    Agency Comments and Our Evaluation

    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 responsibilities34 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.35 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.

    Linda M. Calbom Director, Financial Management and Assurance

    Appendix I  Scope and Methodology

    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 2004.1 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.

    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 resumes, 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 resumes 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.

    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.

    o 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.

    o 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.

    Appendix II  Comments from the Department of Energy

    The following are GAO's comments on the Department of Energy's letter
    dated April 20, 2006.

    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  1/2 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.

    Appendix III  Comments from the Space and Naval Warfare Systems Center, New
    Orleans

    Appendix IV  GAO Contact and Staff Acknowledgments

    Linda Calbom, (202) 512-9508 or calboml@gao.gov

    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.

    (190135)

    www.gao.gov/cgi-bin/getrpt? GAO-06-547GAO-06-547
    .www.gao.gov/cgi-bin/getrpt?.

    To view the full product, including the scope To view the full product,
    including the scope

    and methodology, click on the link above. and methodology, click on the
    link above.

    For more information, contact Linda Calbom at (202) 512-9508 or
    calboml@gao.gov. For more information, contact Linda Calbom at (202)
    512-9508 or calboml@gao.gov.

    Highlights of GAO-06-547GAO-06-547 , a report to congressional requesters
    Highlights of , a report to congressional requesters

    MaMay 2006

    DEPARTMENT OF ENERGY, OFFICE OF WORKER ADVOCACY

    Deficient Controls Led to Millions of Dollars in Improper and Questionable
    Payments to Contractors

    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.

    GAO makes 16 recommendations to help Energy and SSC NOLA strengthen
    controls over payments to contractors and to mitigate the risks of paying
    improper contract costs in the future. While Energy accepted the
    recommendations, it took issue with several of GAO's findings, including
    GAO's view of its responsibility for activities carried out through an
    interagency agreement. SSC NOLA concurred with the recommendations GAO
    made to it. GAO reaffirms its findings and recommendations.

    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.

    Summary of Improper and Questionable Payments

    Source: GAO.

    aThe amounts reported for these categories represent the gross amount paid
    to Energy to its contractors and therefore do not reflect any reductions
    or offsets that may be due the contractors for the goods and services that
    were provided. Any potentially recoverable amounts would need to be
    determined after consideration of these reductions or offsets.

    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.
    *** End of document. ***