High-Risk Series: Superfund Program Management (Letter Report, 02/01/97,
GAO/HR-97-14).

GAO reviewed the progress made in correcting weaknesses in the
Environmental Protection Agency's (EPA) management of the Superfund
program, focusing on EPA's: (1) limited recovery of Superfund cleanup
costs from responsible parties; and (2) inadequate controls over
contractors' costs.

GAO found that: (1) the magnitude of the hazardous waste problem calls
for the efficient use of available funds to protect the environment and
the public; (2) as GAO has reported in the past, however, certain
management problems have put this investment at risk; (3) since GAO's
1995 report, EPA and other federal agencies have taken steps toward
addressing these areas; (4) EPA has begun using a risk-based process to
set priorities and allocate some of its fiscal year 1996 cleanup funds
for those sites that are ready to begin the construction of the cleanup
method; (5) however, EPA's regions make the decisions to allocate the
funds for sites in the earlier phases of the cleanup process, and GAO's
recent review showed that EPA's regions varied in the extent to which
they consider risk in making their decisions; (6) other federal agencies
have made uneven progress in: (a) taking the first step toward setting
priorities, that is, developing a complete inventory of the waste sites
that need cleanup; and (b) implementing systems to rank sites for
cleanup according to risk; (7) EPA has made some improvements in its
cost recovery program; (8) EPA has continued to obtain legal agreements
with responsible parties to privately fund the majority of the cleanups;
(9) EPA enforcement officials point out, however, that this approach
generally leaves the more difficult cleanups for cost recovery action
and thus decreases their ability to recover past costs; (10) while some
costs are not expected to be recovered, EPA's historically low recovery
rate in part results from the agency's slow pace in completing action on
its 1992 proposed rule to increase the indirect costs that it could
recover; (11) for the past several years, EPA has focused attention on
strengthening its management of Superfund contracts; (12) EPA has
continued to exercise oversight, such as conducting reviews of its
regions' performance in this area, and made other improvements; and (13)
however, GAO's recent review found that in spite of the agency's
actions, several problems persist: (a) EPA's regions are still too
dependent upon the contractors' own cost proposals to establish the
price of cost-reimbursable work; (b) EPA continues to pay its cleanup
contractors a high percentage of total contract costs to cover
administrative expenses rather than ensuring that the maximum amount of
available moneys is going toward the actual cleanup work; and (c) littl*

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  HR-97-14
     TITLE:  High-Risk Series: Superfund Program Management
      DATE:  02/01/97
   SUBJECT:  Hazardous substances
             Contract administration
             Prioritizing
             Cost control
             Reimbursements to government
             Waste management
             Risk management
             Contract costs
             Administrative costs
             Waste disposal
IDENTIFIER:  Superfund Program
             High Risk Series 1997
             
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Cover
================================================================ COVER


High-Risk Series

February 1997

SUPERFUND PROGRAM MANAGEMENT

GAO/HR-97-14

Superfund Program Management


Abbreviations
=============================================================== ABBREV

  EPA -
  ARCS -
  OIG -
  RAC -
  DOE -

Letter
=============================================================== LETTER



February 1997

The President of the Senate
The Speaker of the House of Representatives

In 1990, the General Accounting Office began a special effort to
review and report on the federal program areas its work identified as
high risk because of vulnerabilities to waste, fraud, abuse, and
mismanagement.  This effort, which was supported by the Senate
Committee on Governmental Affairs and the House Committee on
Government Reform and Oversight, brought a much- needed focus on
problems that were costing the government billions of dollars. 

In December 1992, GAO issued a series of reports on the fundamental
causes of problems in high-risk areas, and in a second series in
February 1995, it reported on the status of efforts to improve those
areas.  This, GAO's third series of reports, provides the current
status of designated high-risk areas. 

This report describes our assessment of the progress made in
correcting weaknesses in the Environmental Protection Agency's (EPA)
management of the Superfund program.  Given the hundreds of billions
of dollars estimated to be needed to clean up hazardous waste sites,
the report focuses on the need for EPA and federal agencies to make
greater use of risk as a criterion in setting priorities for their
cleanup work.  The report also discusses EPA's limited recovery of
Superfund cleanup costs from responsible parties and inadequate
controls over contractors' costs. 

Copies of this report series are being sent to the President, the
congressional leadership, all other Members of the Congress, the
Director of the Office of Management and Budget, and the heads of
major departments and agencies. 

James F.  Hinchman
Acting Comptroller General
of the United States


OVERVIEW
============================================================ Chapter 0

The Environmental Protection Agency's (EPA) Superfund program began
in 1980 as a relatively short-term project to clean up abandoned
hazardous waste sites.  At that time, the country's hazardous waste
problems were thought to be limited.  Since then, thousands of waste
sites have been discovered.  Furthermore, cleaning up these
sites--many of which are owned by the federal government--has proved
to be far more complicated and costly than anticipated.  Recent
estimates show that cleaning up these sites could amount to over $300
billion in federal costs and many billions more in private
expenditures. 

Under the Superfund law, EPA can compel the private parties
responsible for abandoned or inactive hazardous waste sites to clean
them up, or it can conduct the cleanup and demand reimbursement of
its costs from the responsible parties.  Currently, EPA has
negotiated with private parties to do about 70 percent of the
cleanups.  To pay for EPA's cleanups, the agency draws on a
legislatively established trust fund that is primarily financed by a
tax on crude oil and certain chemicals and by an environmental tax on
corporations.\1 Federal agencies generally use their annual
appropriations to finance cleanups of the facilities under their
jurisdiction. 


--------------------
\1 In December 1995, the authority to collect these taxes expired,
and taxes are no longer being collected.  However, as of September
1995, the trust fund had an unappropriated balance of $2.9 billion. 
As a result, the fund could still be used to finance the Superfund
program. 


   THE PROBLEM
---------------------------------------------------------- Chapter 0:1

The magnitude of the nation's hazardous waste problem calls for the
efficient use of available funds to protect the environment and the
public.  As we have reported in the past, however, certain management
problems have put this investment at risk.\2 First, EPA and other
federal agencies have not consistently allocated their cleanup
resources to reduce the most significant threats to human health and
the environment.  For instance, EPA historically has not taken into
account on a consistent basis the relative risk of sites in
establishing priorities for its work.  Similarly, the government has
not had a priority-setting system for allocating the funds to clean
up federal hazardous waste sites nationwide.  Second, although EPA is
responsible for pursuing reimbursement when it funds a cleanup, the
agency has recovered from responsible parties only a fraction of the
moneys that it has spent.  Finally, while about half of the Superfund
program's budget annually goes to contractors, EPA has had
long-standing problems with controlling the contractors' costs. 


--------------------
\2 High-Risk Series:  Superfund Program Management (GAO/HR-93-10,
Dec.  1992) and High-Risk Series:  Superfund Program Management
(GAO/HR-95-12, Feb.  1995). 


   PROGRESS
---------------------------------------------------------- Chapter 0:2

Since our 1995 report, EPA and other federal agencies have taken
steps toward addressing these areas.  First, EPA has begun using a
risk-based process to set priorities and allocate some of its fiscal
year 1996 cleanup funds for those sites that are ready to begin the
construction of the cleanup method.  However, EPA's regions make the
decisions to allocate the funds for sites in the earlier phases of
the cleanup process, and our recent review showed that EPA's regions
varied in the extent to which they consider risk in making their
decisions.  Other federal agencies have made uneven progress in (1)
taking the first step toward setting priorities--that is, developing
a complete inventory of the waste sites that need cleanup--and (2)
implementing systems to rank sites for cleanup according to risk. 

Second, EPA has made some improvements in its cost recovery program. 
The agency has continued to obtain legal agreements with responsible
parties to privately fund the majority of the cleanups.  EPA
enforcement officials point out, however, that this approach
generally leaves the more difficult cleanups for cost recovery action
and thus decreases their ability to recover past costs.  While some
costs are not expected to be recovered, EPA's historically low
recovery rate in part results from the agency's slow pace in
completing action on its 1992 proposed rule to increase the indirect
costs that it could recover.  The agency's delay, in fact, has been a
costly one to the government.  When EPA proposed in 1992 to recover
more of its indirect costs, the agency estimated the cumulative value
of these costs at $1.1 billion.  In 3 years, the estimated value of
these excluded costs has grown to $3.8 billion, according to EPA. 

Finally, for the past several years, EPA has focused attention on
strengthening its management of Superfund contracts.  The agency has
continued to exercise oversight, such as conducting reviews of its
regions' performance in this area, and made other improvements. 
However, our recent review found that in spite of the agency's
actions, several problems persist:  (1) EPA's regions are still too
dependent upon the contractors' own cost proposals to establish the
price of cost-reimbursable work, (2) EPA continues to pay its cleanup
contractors a high percentage of total contract costs to cover
administrative expenses rather than ensuring that the maximum amount
of available moneys is going toward the actual cleanup work, and (3)
little progress has been made in improving the timeliness of audits
to verify the accuracy of billions of dollars in Superfund contract
charges. 


   OUTLOOK FOR THE FUTURE
---------------------------------------------------------- Chapter 0:3

Thus, despite many improvements, further actions are needed to
safeguard the investment of hundreds of billions of dollars.  EPA
needs to continue using risk as a criterion in setting priorities for
cleaning up sites and to ensure greater consistency in its regions'
use of risk in setting the priorities for initial cleanup work at
nonfederal sites.  Also, the federal government needs to complete its
inventory of the federal facilities requiring cleanup and
consistently implement a process to set cleanup priorities and
allocate funding for its sites nationwide. 

To help recover more of its program costs, EPA needs to move
expeditiously to increase the amount of indirect program costs that
can be recovered.  By the end of 1997, EPA officials said that they
plan to make changes in their accounting system and guidance that
will increase the recovery of indirect costs.  The officials
estimated that such changes could increase cost recoveries by as much
as $500 million (of the $3.8 billion in excluded indirect costs).  In
addition, EPA needs to establish specific goals and performance
measures that would allow it to more effectively evaluate its
performance in recovering costs. 

Finally, although EPA has been addressing the weaknesses in contract
management, the agency remains vulnerable to overpaying its
contractors and not achieving the maximum cleanup work with its
limited resources.  EPA needs to better estimate the costs of
contractors' work, use the estimates to negotiate reasonable costs,
provide contractors with appropriate incentives to hold down their
administrative expenses, and increase the timeliness of contract
audits. 


WEAKNESSES IN SUPERFUND PROGRAM
MANAGEMENT
============================================================ Chapter 1

Past waste management and disposal practices have allowed hazardous
substances to seep into the land and water at thousands of federally
and privately owned hazardous waste sites.  Cleaning up this
contamination will cost the federal government hundreds of billions
of dollars.  Given the limited resources available for cleanups, it
is essential that the government

  -- give greater and more consistent consideration to allocating
     cleanup dollars first to the sites that present the greatest
     threat to human health and the environment,

  -- replenish the trust fund by increasing to the maximum extent its
     recovery of costs from the parties responsible for cleaning up
     these sites, and

  -- spend its cleanup contract dollars wisely. 


   RISK PLAYS A LIMITED ROLE IN
   ALLOCATING RESOURCES
---------------------------------------------------------- Chapter 1:1

In the past, EPA did not set priorities according to the relative
health and environmental risks posed by waste sites.  Consequently,
EPA could not demonstrate that it was spending its Superfund
resources to achieve maximum protection.  EPA has a policy to
allocate its resources first to the sites that present the greatest
risk.  However, EPA's regions, which generally establish workload
priorities, were not consistent in using risk as a factor to set
their priorities.  This inconsistency was important because the
regions decide which sites move into the initial phases of cleanup,
such as conducting site studies to examine the nature and extent of
the contamination.  These sites in turn would continue to receive
priority for federal funds until cleanup is completed, which can take
years.  More recently, EPA and its regions have begun to take steps
to give greater consideration to the sites' relative risks when
setting priorities. 

Likewise, we have reported that the government does not have an
integrated system to set cleanup priorities in order to ensure that
other federal agencies involved in cleanups are efficiently spending
billions of dollars each year to identify and address their waste
sites.  For example, a critical first step in establishing priorities
is completing an inventory of sites.  However, even after 10 years,
federal agencies had made uneven progress in accomplishing this
task.\3

The government also does not have a good system for ranking sites
according to their relative health and environmental risks and using
the rankings to allocate funding to hazardous waste site
cleanups--either within individual agencies or across agency lines. 
The costs to clean up the Department of Energy's nuclear weapons
complex, for example, may run up to $265 billion.  However, we
reported that the agency was not setting priorities by comparing the
risks among sites.  Instead, the Department of Energy's program has
been driven by goals and milestones in interagency cleanup
agreements, which may not achieve the maximum protection of public
health and safety with the available resources. 


--------------------
\3 Federal Facilities:  Agencies Slow to Define the Scope and Cost of
Hazardous Waste Site Cleanups (GAO/RCED-94-73, Apr.  15, 1994). 


   EPA RECOVERS A SMALL FRACTION
   OF ITS CLEANUP COSTS
---------------------------------------------------------- Chapter 1:2

While EPA has successfully negotiated with private parties to do over
70 percent of the cleanups (worth an estimated $12 billion), it has
been less successful in recovering the costs from responsible parties
when the agency does the work.  Through the end of fiscal year 1995,
EPA had obtained agreements with responsible parties to recover only
$1.6 billion (14 percent) of the $11.6 billion the agency spent.  Of
course, not all costs are expected to be recovered.  In fact, EPA
enforcement officials point out that the agency's success in getting
responsible parties to privately finance most of the cleanup work
generally leaves the more difficult cases for cost recovery. 

Nevertheless, EPA, while it seeks to fully recover direct costs spent
at a site (including contract, personnel, and travel costs), has
excluded a significant portion of its indirect costs from the
agency's recovery efforts, such as the research and development costs
for new cleanup approaches.  As a result, through the end of fiscal
year 1992, EPA enforcement officials estimated that the agency had
excluded $1.1 billion. 

Second, EPA lacks (1) specific goals and performance measures that
could be used to improve the results of its cost recovery program,
(2) adequate management information to monitor progress against these
goals and measures, and (3) reliable financial information to monitor
the program's progress. 

Finally, the Superfund law further prevents EPA from recovering
millions of dollars annually by restricting the interest rates
charged to the responsible parties on recoverable costs.  The law
specifies that interest is to accrue from the date that EPA actually
spends the money or from the date that EPA demands payment from the
responsible parties, whichever is later.  EPA usually waits until
most reimbursable work at a site is completed before it negotiates
with the responsible party for repayment because it combines these
efforts to save on legal and other enforcement costs.  As a result,
this practice can postpone interest charges for several years. 
Furthermore, the Superfund law limits EPA to charging interest on
recoverable amounts to the government's borrowing rate, which is
lower than commercial borrowing rates.  This requirement, in effect,
results in an advantage to the parties that leave cleanup work to the
government.  Whereas the responsible parties that borrow money to
fund their own cleanups have to obtain financing from lenders at
commercial rates, the parties that reimburse EPA are charged the
government's lower borrowing rate. 


   WEAKNESSES IN CONTRACT
   MANAGEMENT COULD LEAD TO
   EXCESSIVE COSTS
---------------------------------------------------------- Chapter 1:3

For almost a decade, we have reported on major weaknesses in EPA's
management of Superfund contracts, primarily in reducing the agency's
exposure to excessive payments for contractors' work.\4

These weaknesses result from EPA's (1) heavy reliance on contractors
to do much of the work in the Superfund program and (2) the use of
cost-reimbursable contracts.  This type of contract requires special
oversight by the agency because it reimburses the contractors for all
allowable costs and gives them little incentive to control costs.  We
have repeatedly reported that EPA has not overseen its
cost-reimbursable contracts as necessary to prevent contractors from
overcharging the government. 

For example, we found in 1988 and 1991 that EPA had not protected
itself against potentially wasteful spending by independently
estimating how much the contracted work should cost.  Instead, the
agency was relying primarily on the contractors' own cost proposals
to establish budgets for its contracted work.  In response to these
reported weaknesses, EPA Superfund program officials in 1992 required
the staff, among other things, to independently prepare cost
estimates of contracted work and to use them in negotiating the
contractors' costs.  The agency also subsequently provided its staff
with guidance and training in preparing these estimates.  However,
EPA's internal reviews still found problems with the agency's
preparation of the estimates. 

We also reported in 1991 that EPA's Alternative Remedial Contracts
Strategy (ARCS) contractors were spending only two-thirds of their
total contract costs directly on cleanup work.  Another third of the
costs was going toward items such as managers' salaries, rents,
computers, telephones, and reports (called program management
costs).\5 After learning of these high indirect costs, the Congress
capped them for fiscal years 1994 and 1995 at 15 percent and 11
percent of the total contract cost, respectively.  As we reported in
1995, EPA worked with these contractors to get the contracts' costs
down, on average, to meet the annual targets.  However, the program
management costs for individual contracts still varied widely,
ranging up to 22 percent. 

We also reported on a large audit backlog of EPA contracts.\6

Audits are necessary for effective management and are a primary tool
for deterring and detecting waste, fraud, abuse, and mismanagement. 
With cost-reimbursable contracts, audits are performed to verify the
accuracy of the contractors' charges.  We identified several steps
that EPA and its Office of Inspector General (OIG) could take to
reduce the number of insufficient or untimely audits, such as
identifying and requesting the resources required to reduce the
backlog within a reasonable time. 


--------------------
\4 See Superfund Contracts:  EPA Needs to Control Contractor Costs
(GAO/RCED-88-182, July 29, 1988) and Superfund:  EPA Has Not
Corrected Long-Standing Contract Management Problems (GAO/RCED-92-45,
Oct.  24, 1991). 

\5 See Superfund:  EPA Has Not Corrected Long-Standing Contract
Management Problems (GAO/RCED-92-45, Oct.  24, 1991). 

\6 EPA's Contract Management:  Audit Backlogs and Audit Follow-Up
Problems Undermine EPA's Contract Management (GAO/T-RCED-91-5, Dec. 
11, 1990). 


PROGRESS MADE
============================================================ Chapter 2

EPA and the other federal agencies have taken initiatives to address
the areas that we have identified, but serious weaknesses remain that
leave the government vulnerable to wasteful spending. 


   RISK PLAYS MORE OF A ROLE IN
   ALLOCATING RESOURCES
---------------------------------------------------------- Chapter 2:1

EPA and the other federal agencies involved in cleaning up hazardous
waste sites have begun to establish risk-based priorities to allocate
their resources.  In fiscal year 1996, EPA had unstable funding and a
backlog of sites waiting to enter the construction phase of cleanup. 
As a result, EPA chose not to employ its previous practice of having
individual regions allocate these resources for the sites in their
respective states.  Instead, the agency established a panel, composed
of regional and headquarters representatives, to rank all of the
sites nationwide that needed federal funds to begin cleanup.  The
panel used five weighted criteria, four of which addressed health and
environmental risks, to rank the sites.  According to the EPA senior
manager in charge of the panel process, the panel results were
provided to the Assistant Administrator for Waste Management who then
used the results to allocate the available funds nationwide. 

Also, we found that EPA's regions, which allocate the funding for the
work done at sites before the actual cleanup begins, were not
consistent and varied in the extent to which they based their funding
allocations on risk.  Some regions said that they used teams to place
sites into different risk categories for allocating resources. 
Another region, however, used a less formal process than assigning
sites to specific categories to set priorities.  When the regions use
different approaches, EPA cannot be assured that it is consistently
addressing its worst sites first and achieving the maximum protection
with available funds. 

Other federal agencies have made uneven progress in identifying and
assessing their contaminated facilities.  For example, the four major
land management agencies in the Departments of the Interior and
Agriculture have made limited progress in completing an inventory of
potential mining waste sites.\7 The slow progress stems from a
variety of factors, such as limited resources and the low priority
that some agencies have assigned to this effort.  On the other hand,
the Departments of Defense and Energy and several other agencies have
made substantial progress in identifying sites with potential
hazardous waste problems.\8 Given the continuing restraint on federal
resources, it is even more important that the government rank sites
for cleanup on the basis of relative risk--something it cannot do
until a full inventory of sites is available. 

Moreover, the government has not developed an integrated approach for
setting federal cleanup priorities across agency lines on the basis
of relative risk, although individual agencies have made progress in
establishing their own approaches.  For example, we found that the
Departments of Defense and Energy had developed priority-setting
approaches, but neither has fully compared the risks agencywide. 
Thus, the agencies are unable to compare the risks for sites at
different facilities.  Furthermore, because agencies have
independently developed different approaches to set risk-based
priorities, interagency comparisons of risks are difficult.  Yet
setting priorities for federal cleanups is critical because nearly
$54 billion has already been budgeted, and the remaining cleanup work
may cost hundreds of billions of dollars more. 


--------------------
\7 Federal Land Management:  Information on Efforts to Inventory
Abandoned Hard Rock Mines (GAO/RCED-96-30, Feb.  23, 1996). 

\8 Federal Hazardous Waste Sites:  Opportunities for More
Cost-Effective Cleanups (GAO/T-RCED-95-188, May 18, 1995). 


   EPA HAS MADE LIMITED PROGRESS
   IN RECOVERING MORE COSTS
---------------------------------------------------------- Chapter 2:2

EPA has taken steps to improve its cost recovery program but still
needs to address several key problems.  The agency has adopted
procedures so that it can more accurately identify and report on the
costs that are and are not potentially recoverable.\9 As a result,
EPA has increased its ability to better focus its recovery efforts. 
The agency has also revised its approach to more efficiently allocate
about half a billion dollars in contractors' non-site-specific costs
so that the agency can now include these costs in its recovery
efforts. 

However, EPA has not completed action to make final its 1992 proposed
rule that would allow it to significantly increase the indirect costs
that the agency could recover from responsible parties.  Through the
end of fiscal year 1995, EPA enforcement officials estimated that
these excluded costs totaled more than $3.8 billion in indirect
costs--up from $1.1 billion just 3 years earlier.  (See fig.  1.)

   Figure 1:  Status of EPA's
   Efforts to Recover Superfund
   Program Costs Through Fiscal
   Year 1995 (Dollars in billions)

   (See figure in printed
   edition.)

Note:  EPA enforcement officials estimated all of the dollar values
except the value of the cost recovery settlements.  Of the $1.6
billion that EPA has legal agreements to recover, a total of $1.2
billion had been collected. 

Source:  GAO's presentation of data from EPA and the Treasury
Department. 

EPA postponed completing its rulemaking because, among other things,
the agency received many adverse comments from the private parties
that may pay these costs.  To expeditiously increase the indirect
costs that the agency can recover, EPA enforcement officials and the
Acting Chief Financial Officer said that they plan to make changes in
the program's accounting system and cost recovery guidance by the end
of 1997, rather than to continue moving forward with the rulemaking
approach.  EPA enforcement officials recently estimated that these
changes, if implemented as planned, could increase recoveries by as
much as $500 million.  The officials estimated that the remaining
$3.3 billion cannot be recovered, for example, because some of these
costs are linked to recovery cases that have already been settled or
because no financially viable party could be identified. 

In addition, EPA has not established specific goals and performance
measures that would allow the agency to more effectively evaluate its
performance in recovering costs.  These measures would also be useful
in assessing the reasons behind the program's continued low rate of
recovery.  EPA has agreements with responsible parties to recover
only 14 percent of the $11.6 billion that the agency has spent
through fiscal year 1995.  Instead of specific results-oriented goals
and performance measures, the agency continues to establish annual
targets that focus on the number of cases for which the regions
should decide how the agency should pursue cost recovery actions. 
EPA enforcement officials said that, while they consider their
current goals to be adequate, they are in the process of establishing
goals and measures under the Government Performance and Results
Act.\10

We also reported in 1995 that EPA's staff lacked the information
needed to efficiently perform Superfund cost recovery work.\11 The
limitations in the agency's automated information and financial
systems prevent cost recovery staff from relying on these systems to
provide all of the information needed to identify and report cost
recovery data.  As a result, staff must do excessive manual searches
and reconciliations to ensure that the information supporting cost
recovery cases is accurate, reliable, and complete.  The efficient
identification of supporting cost and cleanup documentation is
critical because if the information is not available, the government
can be prevented from recovering its costs.  While EPA has efforts
under way to improve its financial and management information
systems, the agency has not validated the effectiveness of these
actions. 


--------------------
\9 Superfund:  EPA Has Opportunities to Increase Recoveries of Costs
(GAO/RCED-94-196, Sept.  28, 1994). 

\10 This act requires EPA and other federal agencies to establish
long-term strategic plans that cover a period of at least 5 years, no
later than the end of fiscal year 1997.  These plans are to be the
starting point for agencies to set annual goals for programs and to
measure the programs' performance in achieving those goals. 

\11 Superfund:  System Enhancements Could Improve the Efficiency of
Cost Recovery (GAO/AIMD-95-177, Aug.  25, 1995). 


   EVEN WITH IMPROVEMENTS, SERIOUS
   WEAKNESSES REMAIN IN
   CONTROLLING CONTRACTORS' COSTS
---------------------------------------------------------- Chapter 2:3

Our recent work shows that EPA has improved its management of
Superfund contracts, but the agency is still vulnerable to paying
excessive contractors' costs because of (1) the poor quality of the
independent cost estimates that EPA prepares to evaluate the
contractors' proposed costs and the limited use EPA makes of these
estimates in negotiating the price of contracted work, (2) the large
amount of costs going toward remedial contractors' administrative and
other program management expenses rather than to conducting cleanup
work, and (3) the persistent and large backlog of the audits of the
costs that contractors have charged the government. 


      EPA'S COST ESTIMATES PROVIDE
      LITTLE CONTROL OVER CONTRACT
      COSTS
-------------------------------------------------------- Chapter 2:3.1

EPA regional contracting officials are generally preparing
independent estimates of the cost of Superfund contracted work, as
required.  However, we found that the poor and inconsistent quality
of the estimates often did not provide the government with a good
idea of what a contractor's work assignment should cost. 
Furthermore, EPA infrequently used these estimates to negotiate a
better contract price for the government.  This situation places the
government at risk of paying more than is reasonable or necessary to
accomplish Superfund work. 

EPA's own internal reviews have identified problems with the quality
of the agency's cost estimates for Superfund contracted work.  A 1995
review in one region found several examples of projects for which no
government cost estimates had been prepared.  In another region, EPA
found in 1996 that the contracting officers had inappropriately
revealed the government's cost estimate (i.e., its negotiating
position) to the contractors before the cost negotiation process. 
Other internal reviews found that some EPA cost estimates were not
detailed enough to meet the agency's standards for such estimates. 
Still another review raised questions about whether regional
contracting personnel had adequate expertise to prepare meaningful
cost estimates.  One review suggested that EPA may want to expand its
use of government expertise from sources such as the Army Corps of
Engineers, an agency that has extensive experience in contracting for
construction projects. 

Similarly, our recent review found problems with both the quality and
use of independent government cost estimates.  In developing cost
estimates, we found that EPA staff sometimes omitted key work steps
or made incorrect assumptions; in one case, a significant
mathematical error was made.  In other cases, EPA expressed these
estimates in such wide ranges of acceptable costs that the estimates
were not effective for evaluating the contractors' proposals. 
Besides this poor quality, our review also raises questions about how
well EPA staff members were using the estimates to negotiate the
contractors' costs.  We found that EPA usually (in 21 of 26 cases)\12
accepted the contractors' proposed costs unchanged--even though EPA's
estimates ranged from 48 percent below to 164 percent above the
contractor's proposed costs.  Furthermore, while EPA requires its
staff to justify any differences between its estimate and the
contractors' proposal, we found that EPA staff commented on the
differences but then usually deferred to the contractor's position,
stating that the contractor's cost appeared "fair and reasonable."


--------------------
\12 Our review included all of the government cost estimates prepared
in two regions for Superfund work assignments during the first 9
months of 1995. 


      SUPERFUND CONTRACTORS'
      PROGRAM MANAGEMENT COSTS
      REMAIN A CONCERN
-------------------------------------------------------- Chapter 2:3.2

While the annual average percentage of program management costs that
contractors charge EPA has declined, our work shows that EPA still
has some problems in controlling these costs.  First, our analysis
shows that only 7 of the 41 ongoing ARCS contracts have met the
agency's original 11-percent target for program management costs,
over the 10-year life of these contracts.  Almost half of these
contracts had cumulative program management costs that ranged from 15
to 22 percent, in part because EPA did not control these costs in the
early years of the contracts. 

Second, we found that EPA needs to continue controlling program
management costs as it begins awarding its next group of contracts,
known as Response Action Contracts (RAC).  After more than a year of
operation, EPA's first two active RAC contracts have incurred program
management costs of 21 and 38 percent.  EPA officials told us that
while they expect higher program management percentages early in a
contract before cleanup work is fully under way, they are concerned
about the high rate of these charges.  Moreover, the officials noted
that these contracts' first year of operation was during fiscal year
1996--when the agency operated for 8 months without a final budget. 
This unusual situation hampered the agency's ability to assign
cleanup work to these contractors and thus contributed to some of the
high program management costs. 

Finally, we found that one of EPA's key tools for controlling these
costs rewards those contractors with the highest costs.  EPA intended
the contracts to provide financial incentives (or award fees) to
encourage the contractors to control their program management costs. 
However, our analysis of EPA's data shows that the contractors with
the highest program management costs received the highest award fees
because the fees are calculated as a percentage of the program
management costs.  To illustrate, two of these contractors did about
$40 million worth of remedial work.  However, one contractor incurred
about $7 million in program management costs, while the other
contractor incurred about $4 million.  For their performance in
program management, EPA awarded about $300,000 to the first
contractor and about $155,000 to the second.  EPA officials said that
they plan to further explore this matter. 


      CONTRACT AUDIT BACKLOG
      CONTINUES TO PLACE SUPERFUND
      DOLLARS AT RISK
-------------------------------------------------------- Chapter 2:3.3

Finally, EPA has not made much progress in reducing the risk to
Superfund contract dollars resulting from insufficient or untimely
audits.  The backlog, which EPA's OIG attributes to a governmentwide
problem of limited audit resources, has remained steady at about 500
unfulfilled requests for audits.  The OIG audits about 15 percent of
the backlog and funds other agencies (in particular, the Department
of Defense) to do the remaining audits because the contractors
conduct more business with these other agencies.  EPA's audit needs,
however, must compete with the other demands within these agencies
for audit resources.  While more resources would help address this
problem, according to OIG officials, the agency also needs to compel
contractors to submit complete and timely documentation for the final
audit requests.  Our analysis of EPA's data shows that 54 percent of
the incurred-cost data submitted for audit are either inadequate or
untimely.  EPA and its OIG have recently completed a joint review to
try to correct the backlog and acknowledged that EPA needs to find a
way to devote more resources and take other actions to diminish the
audit backlog. 

While the audit backlog is not entirely within the agency's control,
the resulting lag in performing audits increases the vulnerability of
EPA's contracting dollars to waste, fraud, and abuse.  When the audit
of contracts is delayed by years, changes in personnel and old
documentation make it difficult for auditors to decide whether
contractors have charged only allowable costs.  Therefore, increasing
the agency's efforts and resources to reduce the audit backlog would
help to alleviate this risk. 


FURTHER ACTION NEEDED
============================================================ Chapter 3

While EPA has addressed weaknesses in its management of the Superfund
program, it needs to more effectively use its limited resources and
take additional steps to better control the program's costs. 


   RISK SHOULD DRIVE RESOURCE
   ALLOCATION
---------------------------------------------------------- Chapter 3:1

EPA needs to continue considering sites' relative risk in setting
priorities to allocate Superfund's limited resources.  EPA officials
have indicated that they will continue using the panel process to
rank sites by risk.  However, several years ago, when available
funding appeared insufficient, EPA set up a similar panel process but
never fully implemented it because the funding situation improved. 
Thus, we would like to see the agency continue using this approach
and make it an integral part of its program operations. 

Also, EPA needs to ensure that its regions are consistently
considering sites' relative risk when setting priorities for the
cleanup work they manage.  This action is important because the
regions' decisions affect which new sites can begin the early stages
of the cleanup process and eventually move into the national panel
process for funding.  Thus, without a consistent and broad
application of priority setting, EPA cannot ensure that it is
spending its resources in the most effective way to reduce risk. 

To set priorities for federal facilities, the government needs to
complete its inventory of the sites requiring cleanup.  Thus, we have
recommended that the Congress amend the Superfund law to require (1)
that agencies submit plans for completing their inventories to EPA
for review and approval, (2) that agencies report annually to EPA on
their progress in carrying out these plans, and (3) that EPA report
annually to the Congress on the agencies' progress.  Finally, the
federal government needs to establish a priority-setting process for
federal site cleanups based on relative risks, and agencies need to
consistently implement this process nationwide.  Otherwise, federal
agencies and the Congress will be hindered in making informed
decisions about the priority, pace, or level of federal cleanups. 


   EPA MUST IMPROVE ITS EFFORTS TO
   RECOVER MORE COSTS
---------------------------------------------------------- Chapter 3:2

Further improvements in cost recovery will depend on EPA's
expeditious expansion of the indirect program costs it recovers. 
Until then, the government will continue to lose the opportunity to
more fully recoup hundreds of millions of dollars.  In addition, EPA
enforcement officials said that their ability to recover costs will
depend on the effect of the agency's new administrative initiative to
waive a portion of the past and future costs that are attributable to
the parties that do not have the financial capability to pay their
share. 

To better track its progress in recovering past costs, EPA needs to
establish goals and performance measures for its efforts.  Also, EPA
needs to continue to collect better information on the success of its
cost recovery negotiations and on the recoverability of many of its
costs.  These actions would improve the agency's ability to evaluate
its accomplishments and forecast the amounts that it is likely to
recover.  The agency also needs to validate the improvements made to
its accounting system and complete its current initiative to improve
its information systems to support cost recovery efforts.  Finally,
as we have suggested in the past, the Congress may want to consider
revising the Superfund law's interest provisions to increase the
interest that EPA could charge on recoverable costs. 


   CONTINUED ATTENTION TO CONTRACT
   MANAGEMENT IS NEEDED
---------------------------------------------------------- Chapter 3:3

Although EPA has made progress in addressing some of its persistent
contract management weaknesses, the agency still needs to better
control its Superfund contractors' costs.  In particular, EPA needs
to improve the quality of its independent cost estimates and more
effectively use them to determine the scope and size of its
contractors' work budgets.  As suggested in EPA's internal reviews,
EPA may need to make greater use of available government expertise,
such as the Army Corps of Engineers, to help it improve this aspect
of contract management. 

EPA also needs to ensure that its contractors are reducing their
program management costs, so that the available funds are spent on
the actual cleanup work to the maximum extent possible.  Finally,
given the risk of fraud, waste, abuse, and mismanagement resulting
from the backlog of contract audits, EPA needs to ensure that its
contractors are submitting timely and complete final bills.  The
agency also needs to work with its OIG to decide how more resources
can be allocated to auditing contracts and whether EPA can assume
more audit responsibility for its contracts. 

In conclusion, until these steps are taken, the government remains at
risk of spending hundreds of billions of dollars in federally funded
cleanups--but not addressing the most significant threats to human
health and the environment.  At the same time, EPA loses the
opportunity to recover hundreds of millions more of its past costs
that could be returned to the Treasury.  In addition, the agency
remains vulnerable to inefficiently spending about half of its
Superfund program budget because of inadequate controls over its
contractors' costs. 


RELATED GAO PRODUCTS
============================================================ Chapter 4

Executive Guide:  Effectively Implementing the Government Performance
and Results Act (GAO/GGD-96-118, June 1996). 

Federal Facilities:  Consistent Relative Risk Evaluations Needed for
Prioritizing Cleanups (GAO/RCED-96-150, June 7, 1996). 

Superfund:  More Emphasis Needed on Risk Reduction
(GAO/T-RCED-96-168, May 8, 1996). 

State Cleanup Standards (GAO/RCED-96-98R, April 24, 1996). 

Superfund:  Implications of Key Reauthorization Issues
(GAO/T-RCED-96-145, April 24, 1996). 

Environmental Protection:  Selected Issues Related to EPA's Fiscal
Year 1997 Appropriations (GAO/T-RCED-96-164, April 17, 1996). 

Superfund:  How States Establish and Apply Environmental Standards
When Cleaning Up Sites (GAO/RCED-96-70FS, March 20, 1996). 

Superfund:  System Enhancements Could Improve the Efficiency of Cost
Recovery (GAO/AIMD-95-177, Aug.  25, 1995). 

Superfund:  Information on Current Health Risks (GAO/RCED-95-205,
July 19, 1995). 

Superfund:  EPA's Use of Risk Assessments in Cleanup Decisions
(GAO/T-RCED-95-231, June 22, 1995). 

Superfund:  Risk Assessment Assumptions and Issues
(GAO/T-RCED-95-206, May 24, 1995). 

Federal Hazardous Waste Sites:  Opportunities for More Cost-Effective
Cleanups (GAO/T-RCED-95-188, May 18, 1995). 

Superfund:  The Role of Risk in Setting Priorities
(GAO/T-RCED-95-161, April 5, 1995). 


1997 HIGH-RISK SERIES
============================================================ Chapter 5

An Overview (GAO/HR-97-1)

Quick Reference Guide (GAO/HR-97-2)

Defense Financial Management (GAO/HR-97-3)

Defense Contract Management (GAO/HR-97-4)

Defense Inventory Management (GAO/HR-97-5)

Defense Weapon Systems Acquisition (GAO/HR-97-6)

Defense Infrastructure (GAO/HR-97-7)

IRS Management (GAO/HR-97-8)

Information Management and Technology (GAO/HR-97-9)

Medicare (GAO/HR-97-10)

Student Financial Aid (GAO/HR-97-11)

Department of Housing and Urban Development (GAO/HR-97-12)

Department of Energy Contract Management (GAO/HR-97-13)

Superfund Program Management (GAO/HR-97-14)


























The entire series of 14 high-risk reports can be ordered by using the
order number GAO/HR-97-20SET. 


*** End of document. ***