Inspectors General: Contracting Actions By Treasury Office of Inspector
General (Letter Report, 10/31/97, GAO/OSI-98-1).

Pursuant to a congressional request, GAO reviewed the award of a
sole-source contract to Sato & Associates for a management study of the
Department of the Treasury's Office of Inspector General (OIG) and of a
consulting services contract to Kathie M. Libby, doing business as KLS,
using other than full and open competition. GAO also reviewed the nature
and purpose of trips to California made by Treasury Inspector General
(IG) Valerie Lau since her appointment.

GAO noted that: (1) shortly after her confirmation as Inspector General,
Ms. Lau notified the Treasury Procurement Services Division (PSD) that
she wanted Sato to perform a management review; (2) PSD awarded a
sole-source management study contract to Sato on the basis of unusual
and compelling urgency; (3) although Ms. Lau stated that the need to
limit competition was urgent because of the need to make reassignments
in the senior executive ranks and to marshal the resources needed to
conduct audits, there was insufficient urgency to limit competition; (4)
the price of Sato's contract for the Treasury OIG effort appears to be
artificially high, in light of the fact that the firm performed a
similar review of the Department of the Interior OIG for approximately
$62,000 less; (5) in September 1995 PSD awarded a time-and-materials,
consulting services contract to Libby to review and analyze an Office of
Personnel Management (OPM) report on morale and diversity problems in
the OIG office and assist OIG managers and staff concerning goals
identified in the OPM study; (6) the contract was awarded on the basis
of unusual and compelling urgency following limited competition; (7) the
justification for limiting competition was not reasonable, since Ms. Lau
could still have conveyed to her managers that the problems identified
in the OPM study would be addressed and corrected those problems, had
the consultant selection been delayed a few months to obtain full and
open competition; (8) the largest modification made to the KLS contract
was outside the scope of the contract and should have been obtained
through a separate, competitive procurement; (9) GAO identified a
pattern of careless management in the procurement process and in
oversight of performance under the KLS contract; (10) OIG failed to
fully understand and articulate its needs, resulting in a fourfold
increase in the contract's total price and a 1-year extension to the
period of performance; (11) OIG paid for work that was not authorized,
and payments were made without verification that work had been done and
without determining that travel and transportation costs documents had
been received; and (12) all five of Ms. Lau's trips to California made
between September 1994 and February 1997 were scheduled for work-related
reasons.

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

 REPORTNUM:  OSI-98-1
     TITLE:  Inspectors General: Contracting Actions By Treasury Office 
             of Inspector General
      DATE:  10/31/97
   SUBJECT:  Inspectors general
             Ethical conduct
             Management consultants
             Certificates of urgency
             Irregular procurement practices
             Sole source procurement
             Contract costs
             Travel allowances
IDENTIFIER:  California
             
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Cover
================================================================ COVER


Report to the Chairman, Permanent Subcommittee on Investigations,
Committee on Governmental Affairs, U.S.  Senate

October 1997

INSPECTORS GENERAL - CONTRACTING
ACTIONS BY TREASURY OFFICE OF
INSPECTOR GENERAL

GAO/OSI-98-1

Treasury Office Of Inspector General

(600442)


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

  CICA - Competition in Contracting Act
  COTR - Contracting Officer's Technical Representative
  FAR - Federal Acquisition Regulation
  GAO - General Accounting Office
  IG - Inspector General
  J&A - justification and approval document
  OIG - Office of Inspector General
  OPM - Office of Personnel Management
  OSI - Office of Special Investigations
  PSD - Procurement Services Division

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


B-278420

October 31, 1997

The Honorable Susan M.  Collins
Chairman, Permanent Subcommittee on
 Investigations
Committee on Governmental Affairs
United States Senate

Dear Madam Chairman: 

This report responds to your May 6, 1997, letter and subsequent
discussions with your office requesting that we determine the facts
and circumstances surrounding the Department of the Treasury's award
of a sole-source contract to Sato & Associates for a management study
of Treasury's Office of Inspector General (OIG) and of a consulting
services contract to Kathie M.  Libby, doing business as KLS, using
other than full and open competition.  You also asked that we
determine the nature and purposes of trips to California by Treasury
Inspector General (IG) Valerie Lau since her appointment as IG. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

In November 1994, shortly after her confirmation, Ms.  Lau contacted
Frank S.  Sato\1 to request that he perform a management review of
the Treasury OIG.  She subsequently told the Treasury Procurement
Services Division (PSD) that she wanted Mr.  Sato to perform a
management review; and on January 9, 1995, PSD awarded a sole-source
management study contract to Sato & Associates,\2 on the basis of
unusual and compelling urgency.  41 U.S.C.  section 253(c)(2);
Federal Acquisition Regulation (FAR) section 6.302-2.  The original
price of the Sato & Associates contract was $88,566; and an exercised
option increased the contract's final cost to $90,776.  In response
to questions, Ms.  Lau stated that the need to limit competition for
the management study was urgent and compelling because, among other
reasons, the study would assist her as a new appointee to quickly
make reassignments in her senior executive ranks and to marshal the
resources needed to conduct financial audits required by the
Government Management Reform Act of 1994 and the Chief Financial
Officer Act of 1990. 

Although Ms.  Lau's stated reasons provide some support for her
position, based on a review of the contract justification and Ms. 
Lau's rationale, we believe that there was insufficient urgency to
limit competition.  Even assuming that a limited competition was
warranted, it is clear that the agency violated the applicable
statute and regulation by failing to request offers from as many
potential sources as was practical under the circumstances.  Ms.  Lau
was aware that at least three other former IGs had performed similar
management reviews of OIGs; and Mr.  Sato, who told us he had never
performed a management review, subsequently contracted with two of
them to help him perform the Treasury OIG management review. 

On February 25, 1995, Mr.  Sato submitted an unsolicited proposal for
$91,012 to the Department of the Interior OIG to contract for work
similar to that being done at the Treasury OIG.  Rather than award a
contract based on Mr.  Sato's proposal, the Department of the
Interior conducted a full and open competition and, in June 1995,
awarded a management study contract to Sato & Associates for
approximately $62,000 less than the proposal.  Although the
objectives of the study and final report for the Interior contract
were substantially the same as those for the Treasury contract, the
final cost to Interior was $28,920.  This suggests that the price of
Sato & Associates' sole-source contract for the Treasury OIG effort
was artificially high. 

Regarding the KLS contract, on September 12, 1995, PSD awarded a
time-and-materials, consulting services contract to Kathie M.  Libby,
doing business as KLS.\3 The contract, among other factors, called
for KLS to review and analyze a report prepared by the Office of
Personnel Management (OPM) on morale and diversity problems in the
OIG office and assist OIG managers and staff concerning goals
identified in the OPM study.  The contract was awarded on the basis
of unusual and compelling urgency following limited competition. 

Based on our investigation, we conclude that the justification for
limiting the competition was not reasonable.  The primary reason
advanced by Ms.  Lau for the urgency determination was the need to
have the consultant provide a briefing at an OIG management
conference to be held a few days after contract award.  Ms.  Lau
wanted to convey to her managers that she intended to correct
problems identified in the OPM study.  The KLS consultants did attend
the conference, but they were present for the limited purpose of
introducing themselves to the OIG staff and informing the staff that
KLS would work with them to implement the OPM study recommendations. 
We believe that Ms.  Lau's ability to (1) convey to her managers that
the problems identified in the OPM study would be addressed and (2)
correct those problems would not have been seriously impaired had the
announcement of the actual consultant been delayed a few months in
order to obtain full and open competition.  Ms.  Lau could still have
informed the conference participants that she intended to hire such a
consultant expeditiously, and the actual hiring of the consultant
would have demonstrated to her employees that she was serious in her
intention to pursue the OPM recommendations. 

Further, the largest modification made to the contract with KLS was
outside the scope of the contract.  The OIG should have obtained this
additional work through a separate, competitive procurement. 

We also identified a pattern of careless management in the
procurement process and in oversight of performance under the
contract.  We found that the agency engaged in poor procurement
planning in that it failed to fully understand its needs and clearly
articulate those needs to the contractor.  This resulted in five
modifications with a fourfold increase in the contract's total price
and a 1-year extension to the period of performance.  Further, the
OIG paid for work that was not authorized by the contract or
modifications.  Payments were also made to KLS without verification
that work had been done and without determining that documents for
travel and transportation costs incurred by the contractor had been
received. 

Regarding the IG's travel, Ms.  Lau made five trips to California
between September 1994 and February 1997.  Although it was alleged
that the trips had been made at government expense to visit her
mother who lives in northern California, all five trips were
scheduled for work-related reasons. 


--------------------
\1 Mr.  Sato had formerly held IG positions at the Department of
Transportation and the Veterans Administration. 

\2 Frank Sato of Woodinville, Washington, created the name Sato &
Associates specifically to conduct the Treasury OIG management
review. 

\3 Two other consultants--Leslie Williams and Stan Ridley--worked
with Kathie Libby on the contract.  The name KLS consisted of the
initials of the three consultants' first names. 


   BACKGROUND
------------------------------------------------------------ Letter :2

The Competition in Contracting Act of 1984 (CICA), 41 U.S.C.  section
253, and the implementing FAR section 6.302 require full and open
competition for government contracts except in a limited number of
statutorily prescribed situations.  One situation in which agencies
may use other than full and open competition occurs when the agency's
need is of such unusual and compelling urgency that the government
would be seriously injured unless the agency is permitted to limit
the number of sources from which it solicits proposals.  Even when an
unusual and compelling urgency exists, the agency is required to
request offers from as many potential sources as is practicable under
the circumstances.  41 U.S.C.  section 253(e); FAR section
6.302-2(c)(2).  This means that an agency may limit a procurement to
one firm only when the agency reasonably believes that only that firm
can perform the work in the available time. 


   SATO & ASSOCIATES CONTRACT
------------------------------------------------------------ Letter :3

Based on our investigation, we believe there was insufficient urgency
to limit competition and that the sole-source contract to Sato &
Associates was not proper.  The Treasury OIG violated the applicable
statute and regulation by failing to request offers from as many
potential sources as was practical.  Ms.  Lau knew of three other
former IGs who had performed similar management reviews.  Indeed, Mr. 
Sato hired two of the former IGs to assist him with the Treasury OIG
review.  Further, the cost of that review, over $90,700, appears
artificially high.  After Mr.  Sato submitted a similar-costing
proposal to Interior and after a full and open competition, Interior
awarded a similar contract to Mr.  Sato at a final cost of about
$28,900. 


      CONTRACT BACKGROUND
---------------------------------------------------------- Letter :3.1

Prior to being confirmed as Treasury IG on October 7, 1994, Ms.  Lau
decided that a management review of the OIG would help her meet a
number of challenges in her new job.  In November 1994, Ms.  Lau
contacted Mr.  Sato to request that he conduct the management review. 
According to Ms.  Lau, she first met Mr.  Sato when she was a
regional official and Mr.  Sato a national official of the
Association of Government Accountants; a professional relationship
developed over the years through functions related to that
association.\4 Mr.  Sato had written to the White House Personnel
Office in May 1993 recommending Ms.  Lau for an appointment to an IG
position.\5

In November 1994, Ms.  Lau talked with senior OIG managers about a
management review and advised them that she knew to whom she wanted
to award a contract.  In early December 1994, she contacted
Treasury's PSD to request assistance in awarding a management review
contract.  The contracting officer provided her with an explanation
of the requirements to justify a sole-source contract.  Thereafter,
Ms.  Lau told PSD that she wanted Sato & Associates to do the work. 
The Treasury contracting officer subsequently prepared a
Justification for Other Than Full and Open Competition, also known as
the justification and approval (J&A) document.  On December 12, 1994,
PSD approved the J&A, authorizing a sole-source award to Sato &
Associates.  When we asked the contracting officer why she did not
attempt to identify other individuals or companies that could perform
the contract, she stated that Ms.  Lau had told her that Mr.  Sato
"had unique capabilities which would preclude the award of a
management studies contract to anyone else."


--------------------
\4 Ms.  Lau said that this relationship continued when she served as
director of the Western Intergovernmental Audit Forum, as she
considered Mr.  Sato to be an important figure in the audit
community.  Ms.  Lau and Mr.  Sato stated that they have not had
social engagements other than one occasion in 1996, after the
contract had been completed, when Ms.  Lau and her husband visited
Mr.  Sato's residence. 

\5 Ms.  Lau does not recall asking him for a recommendation, and Mr. 
Sato does not recall the reason for his writing to recommend Ms. 
Lau. 


      CONTRACT AWARD
---------------------------------------------------------- Letter :3.2

On January 9, 1995, Treasury's PSD awarded a contract at the request
of the Treasury OIG to Sato & Associates to perform a management
study of the Treasury OIG.  The contract specified that the
contractor was to produce a report within 13 weeks, which was to
focus on the most efficient methods of improving the organization and
functioning of the operations of the OIG.  Specific areas to be
reviewed included office management procedures and practice,
staffing, correspondence, automation, and personnel management. 

The contract was awarded without full and open competition on the
basis of unusual and compelling urgency.  The J&A for the Sato
contract provided that "[t]he Government would be injured if the
Inspector General is unable to quickly assess any needs for
management reform and make any required changes that would ensure
that she receives the appropriate staff support for the
implementation of her policies." According to the contracting
officer, when she questioned Ms.  Lau about the justification for the
Sato contract and whether an urgent need existed, Ms.  Lau stated
that she did not want to divulge too much of "the internal goings-on"
in the Inspector General's Office to the contracting officer.  Ms. 
Lau merely assured the contracting officer that the need was urgent. 

In her August 27, 1997, deposition before the Permanent Subcommittee
on Investigations, Ms.  Lau was asked to explain why the contract had
been awarded to Sato & Associates based on unusual and compelling
urgency.  She stated the following: 

     "I was aware that the office had some major challenges to meet,
     that we needed to marshal the resources to do the financial
     audits required by the Government Management Reform Act.  That
     we had some major work to do in terms of identifying the
     resources to do so.  In addition, as the newly appointed head of
     the Office of Inspector General, I had a 120 day period before I
     would be able to make any major changes or reassignments of
     senior executives, and that I wanted to do that as early as
     possible.  I knew I was going into an office with some issues
     that were getting scrutiny from Congress as well as others.  I
     believed that I needed to have a trusted and experienced group
     of professionals come in to assist me to do that.  I definitely
     felt that there was a compelling and urgent need, if you want to
     use that terminology, because I wanted to ensure that I had, for
     example, some of the major changes that were necessary to meet
     the CFO [Chief Financial Officers Act] audit by the time the
     next cycle came around, which in Government fiscal years, the
     cycle ends September 30th, and so the financial audits that
     would be required under that would have to be planned and
     conducted within that time frame."

Other than full and open competition is permitted when the agency has
an unusual and compelling urgency such that full competition would
seriously injure the government's interest.  We recognize that the
challenges Ms.  Lau believed she faced and her express desire to make
management changes and develop strategies to deal with various audit
requirements as soon as possible after taking office, provide some
support for the OIG's urgency determination.  On the other hand, we
are not aware of facts establishing that Ms.  Lau's ability to
perform her duties would have been seriously impaired had the
procurement of a consultant to perform the management study been
delayed by a few months in order to obtain full and open competition. 
On balance, we believe that there was insufficient urgency to limit
competition.  It is clear, however, that irrespective of whether it
would have been proper to limit competition, issuance of a
sole-source contract to Sato & Associates was not proper. 

As discussed above, unusual and compelling urgency does not relieve
an agency from the obligation to seek competition.  An agency is
required to request offers from as many potential sources as is
practicable under the circumstances.  It may limit the procurement to
only one firm if it reasonably believes that only that firm can
perform the work in the available time.  41 U.S.C.  section
253(c)(1). 

The J&A stated that Sato & Associates had a predominate capability to
meet the Department of Treasury's needs.  However, Ms.  Lau stated to
us that she knew at the time that former Inspectors General Charles
Dempsey, Brian Hyland, and Richard Kusserow\6 had been awarded
contracts for management reviews. 

We interviewed two of the three former Inspectors General--Messrs. 
Dempsey and Hyland--that Ms.  Lau knew had done management reviews. 
Both stated that they could have met the IG's urgent time frame to
perform the contract.  In fact, they were hired by Mr.  Sato to work
on the Treasury OIG contract, performing as consultants.  We are
aware of no reason why it was impractical for the agency to have
requested offers from at least the three other known sources for the
work Ms.  Lau needed.  Nor are we aware of any reason why Sato &
Associates was the only firm that could have performed that work in
the available time.  In fact, Mr.  Sato reported to us that he had
never performed a management review, while, as Ms.  Lau knew, Messrs. 
Dempsey, Hyland, and Kusserow had done so.  Consequently, we conclude
that the agency acted in violation of 41 U.S.C.  section 253(e) and
FAR section 6.302-2(c)(2) by failing to request offers from other
potential sources. 


--------------------
\6 Mr.  Dempsey was a former IG at the Department of Housing and
Urban Development and the Environmental Protection Agency; Mr. 
Hyland was a former IG at the Department of Labor; and Mr.  Kusserow
was a former IG at the Department of Health and Human Services. 


      CONTRACT COSTS
---------------------------------------------------------- Letter :3.3

The contract to Sato & Associates was awarded at a firm fixed price\7
of $88,566, which included estimated travel and per diem costs of
$15,296.  The contract also contained an unpriced time-and-materials
option\8 to assist in implementing recommendations made in the
contract's final report.  A second modification to the contract\9
exercised that option and raised the projected cost an estimated
$24,760, for a total estimated contract cost of $113,326.  The actual
amount billed to the government by Mr.  Sato for the fixed-price
contract and the time-and-materials option totaled $90,776. 

Federal procurement policy seeks to ensure that the government pays
fair and reasonable prices for the supplies and services procured by
relying on the competitive marketplace wherever practical.  We
believe that the lack of competition for the award of the Treasury
OIG management study may have been the reason for an artificially
high price on the Sato & Associates contract.  On February 25, 1995,
Mr.  Sato submitted an unsolicited proposal for $91,012 to the
Department of the Interior's OIG for a contract similar to his
Treasury contract.  Rather than award a contract to Mr.  Sato based
on this proposal, the Department of the Interior conducted a full and
open competition.  In June 1995, Interior awarded a management study
contract to Sato & Associates for approximately $62,000 less than the
offer in Mr.  Sato's unsolicited proposal.  The contract's final cost
was $28,920. 

Our review of both management study contracts shows that they are
similar and that any dissimilarity does not explain a nearly
threefold higher cost of the Treasury contract over the Interior
contract.  The Treasury and Interior contracts contained three
identical objectives that the contractor was to focus on in
conducting the review and making recommendations.\10 They were to

"a.  improve the day-to-day management of the Office of Inspector
General[,]
"b.  optimize management techniques and approaches[, and]
"c.  enhance the efficiency .  .  .  [and] productivity of the .  . 
.  [OIG]."

The proposals and final reports submitted by the contractor were
substantially the same for both jobs.  Mr.  Sato's final report for
Treasury included 30 recommendations; his Interior report had 26
recommendations.  Eighteen of the recommendations in both reports
were substantially the same. 

Messrs.  Dempsey and Hyland worked with Mr.  Sato on both the
Interior OIG and Treasury OIG contracts.  Mr.  Hyland stated to us
that the scope of work on the Interior contract was basically the
same as that on the Treasury contract.  According to Mr.  Dempsey,
although he conducted more interviews at Treasury than at Interior,
the Treasury contract was worth no more than $40,000, adding that he
and Mr.  Hyland could have done "this job in 60 days at $40,000."


--------------------
\7 A firm-fixed-price contract provides for a price that is not
subject to any adjustment on the basis of the contractor's cost
experience in performing the contract.  FAR section 16.202-1. 

\8 A time-and-materials contract provides for acquiring supplies or
services on the basis of (1) direct labor hours at specified fixed
hourly rates and (2) materials at cost, including, if appropriate,
material-handling costs.  FAR section 16.601. 

\9 The first modification related to the delivery of the final report
and did not increase the contract cost. 

\10 The Treasury contract contained one additional objective, to
improve the teamwork of the OIG staff. 


   KLS CONTRACT
------------------------------------------------------------ Letter :4


      CONTRACT BACKGROUND
---------------------------------------------------------- Letter :4.1

Ms.  Lau told us that prior to her October 1994 confirmation she had
learned that OIG suffered severe morale and diversity problems.  In
the spring of 1995, she requested OPM to conduct a workplace
effectiveness study of the OIG.  The purpose of the resulting OPM
report was to provide the OIG with the necessary information on
employee attitudes to assist it in its efforts to remove obstacles to
workplace effectiveness. 

When Ms.  Lau made that request, she had anticipated contracting with
OPM to develop an implementation plan based on the problems
identified in the initial study.  However, in April 1995, OPM
explained that it was unable to do any follow-on work because of
reorganization and downsizing.  Instead, in July 1995, OPM provided
Treasury OIG a list of 12 consultants who were capable of doing the
follow-on work. 

On July 12, 1995, Ms.  Lau's staff gave her a list of 14 possible
consultants to perform the follow-on work--OPM's list of 12 and 2
others with whom the staff were familiar.  Ms.  Lau reviewed the
list, added two names, and instructed her special assistant to invite
bids from at least the six individuals she had identified on the
list.\11

On August 17, 1995, OPM conducted a preliminary briefing with senior
OIG staff concerning the nature of the OIG problems.  Thereafter Ms. 
Lau told PSD that an urgent need existed to hire a contractor to
perform the follow-on work.  She wanted the contract awarded before
the annual OIG managers' meeting scheduled for September 14, 1995, to
prove to her managers that she intended to fix the problems
identified in the OPM study.  (The final report was furnished to the
OIG on September 30, 1995; it reported that OIG suffered from a lack
of communication with its employees, severe diversity problems, and a
lack of trust employees had toward management.)

OIG staff followed up with the six consultants identified by Ms. 
Lau.  The staff were unable to contact one consultant, and another
consultant could not provide a preliminary proposal by August 30,
1995.  With respect to the remaining four consultants, OIG staff met
with each one to orally describe the agency's needs and request
written proposals.  Following receipt of the proposals and oral
presentations by the offerors, two OIG officials selected Kathie M. 
Libby, doing business as KLS, a consultant from OPM's list, as the
successful contractor.  Although one OIG official told us that the
evaluation criteria used for evaluating the proposals were based on
the OPM recommendations, the other OIG official involved in the
selection stated that the selection was based only on a "gut
instinct" that KLS would provide a "good fit" with OIG and could do
the work.  Ms.  Lau concurred with the selection. 


--------------------
\11 Ms.  Lau stated that she had no basis to evaluate the
consultants.  She merely reviewed the list, added the names of two
more individuals with whom she was familiar, marked four of the
consultant names with an "X", and wrote a note to her special
assistant that read, ".  .  .  Invite bids from 3 write-ins [the two
names Ms.  Lau added and one of the two names added by her staff] and
those with X's and any who come highly recommended.  We need to
obligate this year!"


      CONTRACT AWARD
---------------------------------------------------------- Letter :4.2

On September 12, 1995, a time-and-materials contract was awarded to
KLS.  The original term of the contract was from date of award (Sept. 
12, 1995) to September 30, 1996.  The contract, among other things,
called for the contractor to attend the September 14, 1995, OIG
conference; review and analyze the OPM survey results; and provide
assistance to managers and staff on reaching the goals identified by
OPM in its study.  It was expected that in the beginning stages of
contract performance, KLS would meet with OIG employees weekly, if
not daily.  Given the complexity of the issues and the desire for
lasting improvements, OIG anticipated that KLS's services would be
required for as long as 1 year, although it was anticipated that the
services would be on an "on-call" basis during the final stages of
the contract. 

The agency justified limiting the competition on the basis of unusual
and compelling urgency.  The J&A provided as follows, "It is
imperative that the services begin no later than September 11, 1995,
in order to have the consultants provide a briefing to managers
attending the September 14, 1995, OIG managers conference." This
determination reflected Ms.  Lau's concern that while similar
management studies had been conducted in the past, historically there
had been no follow-through on the studies' recommendations.  It also
reflected her desire to show the OIG managers continuity between the
OPM survey results and the follow-up work.  To that end, the J&A
noted that it was imperative that the employees view the change
process to be implemented by the consultants as an on-going process
rather than a series of "finger in the dike" actions. 

Based on the results of our investigation, we conclude that the
decision to limit the competition was not reasonable.  As explained
previously, other than full and open competition is permitted when
the agency has an unusual and compelling urgency such that full
competition would seriously injure the government's interest.  The
agency's urgency determination was based upon Ms.  Lau's desire to
have a management consultant provide a briefing at a management
conference to be held a few days after contract award.  The KLS
consultants did attend the management conference, but they were
present for the limited purpose of introducing themselves to the OIG
staff and informing them that KLS would work with them to implement
the OPM study recommendations.  Little else was possible since,
although OIG staff had received preliminary results from the OPM
study in August 1995, Ms.  Libby informed us that it was not until
mid-October 1995, well after the OIG management conference, that the
KLS consultants received the study results and began work on the
contract. 

We recognize the importance of Ms.  Lau's desire for her managers to
know that she intended to implement the OPM study recommendations. 
However, we do not believe Ms.  Lau's ability to convey that message
at the management conference and to correct the problems identified
in the OPM study would have been seriously impaired had the
announcement of the actual consultant been delayed by a few months in
order to conduct a full and open competition.  Following discussion
at the conference of the OPM study, Ms.  Lau could have announced
that the agency was going to employ a contractor with expertise in
the field to perform follow-on work on the OPM study and that the
acquisition process would begin as soon as practicable.  The
announcement of her plans, an expeditious initiation of the
acquisition process, and notification of her staff about the contract
award should have been sufficient to assure her employees that Ms. 
Lau was serious about addressing the diversity and morale problems. 


      CONTRACT MODIFICATIONS AND
      COSTS
---------------------------------------------------------- Letter :4.3

When first awarded, the KLS contract had an estimated level of effort
of $85,850.  The original term of the contract was 1 year.  By
November 1, 1996, four modifications had increased the contract price
to $345,050 (see table 1).  Modification 5 extended the contract
through September 30, 1997, at no additional cost. 



                                Table 1
                
                Cost Increases From Modifications to KLS
                                Contract

Contract and modification      Effective                      Contract
number                              date         Amount          price
-------------------------  -------------  -------------  -------------
Contract                        09/12/95        $85,850        $85,850
Mod 1                           11/22/95         30,800        116,650
Mod 2                           04/08/96         78,400        195,050
Mod 3                           09/12/96          1,400        196,450
Mod 4                           09/30/96        148,600        345,050
Mod 5                           11/01/96              0        345,050
----------------------------------------------------------------------
Federal procurement law requires that an agency conduct a separate
procurement when it wishes to acquire services that are beyond the
scope of an existing contract.  A matter exceeds the scope of the
contract when it is materially different from the original contract
for which the competition was held.  The question of whether a
material difference exists is resolved by considering such factors as
the extent of any changes in the type of work, the performance
period, and costs between the contract as awarded and as modified, as
well as whether potential bidders reasonably would have anticipated
the modification.\12 In our view, the largest modification
(Modification 4) materially deviated from the original contract's
scope of work and should have been the subject of a separate
procurement action. 

Modification 4 increased the contract price by $148,600 and extended
the contract period of performance by 6 months.  About half of the
work under this modification was the same type of work that had been
performed under the original contract; however, the other half was
beyond the contract's scope of work and would not reasonably have
been anticipated by potential bidders.  It involved revising the
OIG's performance appraisal system.  Although the OPM study
referenced employee concerns with the OIG performance appraisal
system, nothing in the contract called for the contractor to work
with OIG to modify that system.  Ms.  Libby herself stated that
Modification 4 significantly changed the original scope and contract
requirements and that she was surprised competition was not held for
this work.  In our view, this modification was beyond the contract's
scope of work and would not have been appropriate even if the OIG
could have justified its urgency determination for the original
procurement. 


--------------------
\12 Stoehner Security Services, Inc., B-248077, B-248077.3, Oct.  27,
1992, 92-2 C.P.D.  ï¿½ 285; Neil R.  Gross & Co., B-237434, Feb.  23,
1990, 90-1 C.P.D.  ï¿½ 212. 


      POOR MANAGEMENT PRACTICES
---------------------------------------------------------- Letter :4.4

In addition to legal improprieties in the manner in which the agency
awarded and assigned tasks under the contract, we found a pattern of
careless management in the procurement process and in oversight of
performance under the contract.  We believe such careless management
could have contributed to an increased cost for the work performed
under the contract. 

Good procurement planning is essential to identifying an agency's
needs in a timely manner and contributes to ensuring that the agency
receives a reasonable price for the work.  Little or no procurement
planning took place prior to making the award here.  Although
proposals were solicited to do follow-on work relating to
recommendations from an OPM study on diversity and workplace morale,
the OIG had not received the OPM study and had only been briefed on
the preliminary findings at the time of the solicitation.  The OIG
therefore did not have sufficient information to adequately identify
its needs and clearly articulate a set of goals for the change
process to be implemented. 

Furthermore, OIG did not prepare a written solicitation, including a
statement of work.  One important purpose of a written statement of
work is to communicate the government's requirements to prospective
contractors by describing its needs and establishing time frames for
deliverables.  The OIG instead relied upon oral communications and
failed to effectively communicate with the consultants from whom it
solicited proposals.  Had the OIG waited until it received the OPM
report, carefully analyzed OPM's recommendations, determined what it
needed, and adequately communicated these needs in a written
solicitation, we believe the OIG would have received a better
proposal initially, and one that may have been at a lower overall
price. 

In this regard, Ms.  Libby explained to us that the OIG had not
specifically identified to her its needs and that she had
misunderstood the work to be performed as explained in her initial
telephone conversation with the OIG.  Her proposal was based on her
belief that the OIG already had management task forces or employee
groups studying what changes were needed to address the issues raised
in the OPM study and that KLS was to serve only in an advisory
capacity to those working groups.  However, soon after conducting her
initial briefings, she learned that this was not the case and that
the work that needed to be done was different from what she believed
when she presented her proposal.  As a result shortly after she began
work, Ms.  Libby informed OIG that more work was necessary under the
contract than she had originally envisioned.  This led to the first
three modifications under the contract. 

Modification 1 was issued soon after the contract was awarded.  It
called for KLS to design and conduct briefings with OIG staff both in
headquarters and in the field, adding $30,800 to the costs of the
original contract.  Modification 2 also increased the level of
effort, and added $78,400 to the contract.  According to a memorandum
from the contracting officer, this modification was necessary because
KLS's technical proposal had suggested the establishment of one
steering group whereas additional groups were needed.  The
modification also significantly increased the training hours to be
expended by KLS.  Modification 3 resulted from the need to increase
the amount of "other direct costs" to allow for travel and material
costs for KLS to contribute to the 1996 OIG managers' conference. 
Although each of these three modifications were within the scope of
work contemplated by the initial contract, this increased work was
apparently necessary because OIG had not adequately determined its
requirements at the beginning of the procurement process and conveyed
them to KLS.  Had the agency adequately planned for the procurement
and identified its needs, this work could have been included in the
original contract and the modifications would not have been required. 

Similarly, had the OIG properly analyzed the OPM recommendations, it
could have determined whether revision of the performance appraisal
system should have been included in the scope of the original
contract or the work procured separately--thus eliminating
Modification 4.  Furthermore, had the OIG determined the nature of
the work involved in revising the performance appraisal system,
specific deliverables and time frames for revising the performance
appraisal system could have been established.  None of this was done
in Modification 4, which merely stated that the modification was "to
complete change process transition to include establishing a
permanent self-sustaining advisory team, work with in-house
committees on complex systems changes, and to establish procedures
which will withstand changes in senior management personnel." An OIG
official told us that revision to the performance appraisal process
had been on-going for 2 years and that the revisions to the system
had still not been completed as of June 1997. 

We also identified management deficiencies in oversight of the work
performed under the contract.  In several instances, KLS performed
and billed for work that was not included in the contract statement
of work.  As stated previously, pursuant to Modification 4, KLS was
authorized to make revisions to the OIG performance appraisal system. 
However, prior to this modification, one of KLS's employees performed
this type of service, working with employee groups to address generic
critical job elements and standards, rating levels, and an incentive
award system to complement the performance appraisal system. 
Furthermore, the OIG official responsible for authorizing payment
performed under the contract told us that she did not verify that any
work had been performed under the contract prior to authorizing
payment.  She also told us that she did not determine whether
documentation for hotel and transportation costs claimed by KLS had
been received even though she authorized payment for these travel
expenses. 


   CALIFORNIA TRIPS
------------------------------------------------------------ Letter :5

Allegations concerning IG Lau's trips to California suggested that
she had used these trips, at taxpayers' expense, to visit her mother,
a resident of the San Francisco Bay area.  A review of Ms.  Lau's
travel vouchers revealed that she had made 22 trips between September
1994 and February 1997 (30 months)--5 to California of which 3
included stops in San Francisco. 

During the three trips that included San Francisco, Ms.  Lau took a
total of 9 days off.\13 During these 9 days, she charged no per diem
or expense to Treasury.  Her travel to California, including the San
Francisco area, was scheduled for work-related reasons.  See table 2. 



                                     Table 2
                     
                        Treasury IG's Trips to California

Washington, DC--
departure and                             California
return              Purpose of trip       destination         Time off taken
------------------  --------------------  ------------------  ------------------
07/02 -08/95        Speak/participate in  San Diego           None
                    annual Association
                    of Government
                    Accountants
                    Professional
                    Development
                    Conference

09/16 -26/95        Speak at Western      --                  09/16/95
                    Intergovernmental                         (1 day)
                    Audit Forum,
                    Honolulu, HI          Oakland/San         09/23/95
                                          Francisco           (1 day)
                    Visit San Francisco
                    Regional Office

03/19 -28/96        Visit Los Angeles     Los Angeles/        03/23 -27/96
                    Field and San         San Francisco       (5 days)
                    Francisco Regional
                    offices

                    Speak before state
                    and county audit
                    associations

11/15 -20/96        Meet with OIG Audit   San Francisco       11/15 -16/96
                    Issue Development                         (2 days)
                    Group

01/27 -02/01/97     Speak at Western      Los Angeles/San     None
                    Intergovernmental     Diego
                    Audit Forum; meet
                    with Justice,
                    Customs, OIG
                    officials and staff;
                    tour Customs
                    facilities
--------------------------------------------------------------------------------

--------------------
\13 As a presidential appointee, the IG does not accumulate personal
leave, is on call 24 hours a day, and takes personal time off as
needed. 


   METHODOLOGY
------------------------------------------------------------ Letter :6

We conducted our investigation from May 13 to October 8, 1997, in
Washington, D.C., and Seattle, Washington.  We interviewed Treasury
officials, including current and former OIG officials, and
contractors and staff involved in the two procurements discussed in
this report.  We reviewed pertinent government regulations, OIG
contract files, OIG contracting policies and procedures, and Interior
OIG documents concerning Sato & Associates' review of its operation. 
We also reviewed Ms.  Lau's financial disclosure statements, travel
vouchers, and telephone logs.  Finally, we reviewed prior GAO
contracting decisions relevant to the subject of our investigation. 


---------------------------------------------------------- Letter :6.1

As arranged with your office, unless you announce its contents
earlier, we plan no further distribution of this report until 30 days
after the date of this letter.  At that time, we will send copies of
the report to interested congressional committees; the Secretary of
the Treasury; and the Inspector General, Department of the Treasury. 
We will also make copies available to others on request.  If you have
any questions concerning our investigation, please contact me or
Assistant Director Barney Gomez on (202) 512-6722.  Major
contributors are listed in appendix I. 

Sincerely yours,

Director
Office of Special Investigations


MAJOR CONTRIBUTORS TO THE REPORT
=========================================================== Appendix I


   OFFICE OF SPECIAL
   INVESTIGATIONS, WASHINGTON,
   D.C. 
--------------------------------------------------------- Appendix I:1

Norman M.  Burrell, Senior Investigator in Charge
Ned M.  Friece, Senior Investigator
M.  Jane Hunt, Senior Communications Analyst
Barbara W.  Alsip, Communications Analyst


   OFFICE OF THE GENERAL COUNSEL
--------------------------------------------------------- Appendix I:2

Aldo A.  Benejam, Senior Attorney
Barry L.  Shillito, Senior Attorney

*** End of document. ***