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 [email protected]. 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 [email protected]

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)

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For more information, contact Linda Calbom at (202) 512-9508 or
[email protected]. For more information, contact Linda Calbom at (202)
512-9508 or [email protected].

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. ***