[Final Audit Report on the Award and Administration of Contract No. 1425-2-CC-40-12260 With Environmental Chemical Corporation Related to the Summitville Mine Site Cleanup, Bureau of Reclamation]
[From the U.S. Government Printing Office, www.gpo.gov]

Report No. 96-I-313

Title: Final Audit Report on the Award and Administration of Contract
        No. 1425-2-CC-40-12260 With Environmental Chemical Corporation Related
       to the Summitville Mine Site Cleanup, Bureau of Reclamation

Date:  March 14, 1996

                  **********DISCLAIMER**********

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printed version.

A printed copy of this report may be obtained by referring to the PDF file or by calling the Office
of Inspector General, Logistical Services Branch at (202) 219-3840.
                  ******************************

United States Department of the Interior
OFFICE OF THE INSPECTOR GENERAL
Washington, D.C. 20240

MEMORANDUM

TO:                 The Secretary

FROM:               Wilma A. Lewis 
                    Inspector General

SUBJECT SUMMARY:    Final Audit Report for Your Information - "Award and
                    Administration of Contract No. 1425-2-CC-40-12260
                    Environmental Chemical Corporation Related to the
                    Summitville Mine Site Cleanup, Bureau of Reclamation"
                    (No. 96-I-313)

Attached for your information is a copy of the subject final report.               

In December 1992, the Environmental Protection Agency selected the Bureau of
Reclamation to assist in the cleanup of the Summitville Mine site because the
Bureau already had a firm under contract, Environmental Chemical Corporation,
that the Agency believed could provide the necessary services and because the

Agency believed that the Bureau had the necessary contract management resources
to administer the contract The Bureau's contract with the Corporation, enacted in
July 1992, had been awarded under the Small Business Administration's section 8(a)
program for socially and economically disadvantaged contractors. The purpose of

hazardous waste sites (Summitville was not part of this contract) and was for an
amount not to exceed $500,000. After entering into agreements with the Agency, the
Bureau and the Small Business Administration executed nine delivery orders,
through September 14, 1995, for $69 million with the Corporation for work on the
Summitville cleanup project The total cost of the Summittville cleanup is estimated
at $120 million.

We concluded that the Bureau did not ensure that costs to the Government resulting
from the award of delivery orders under the contract were fair and reasonable. This
occurred because the Bureau did not (1) adequately evaluate the Corporation's
proposed costs; (2) evaluate the efficiency and effectiveness of the Corporation's
purchasing system; (3) and consider alternative contractors for portions of the
cleanup effort. As a result, the amount billed by the Corporation for the period
ending December 31, 1994, which was based on negotiated contract rates exceeded
actual costs by $5.3 million. This amount was in addition to profit negotiated into
contract prices.  Further, we believe that, because the delivery orders for the
Summitville project were beyond the scope of the initial contract award, the Bureau             
      should have performed further analyses of the qualifications of the Corporation and              
      the method of procurement.  For example, the fact that the Corporation
      subcontracted most of the production work for three delivery orders, totaling $12.5
      million, suggests that the Bureau may have had the opportunity to reduce costs by I
      contracting directly with the subcontractors, thereby avoiding the Corporation's               
      overhead and profit on these orders,

Regarding contract administration, we found that the Bureau did not establish formal
written inspection procedures or document the Corporation's performance to ensure
that hours, equipment, and materials billed were accurate and reasonable. Also, on

four occasion, the Bureau incurred costs on the Summitville cleanup project in
excess of funds that were authorized.  Finally, the Bureau paid a fee to the
Corporation that may represent an unallowable interest payment or additional profit
that was not authorized under the contract.
 

In its response to a draft of our report the Bureau stated that the report did not
fully recognize the "potential catastrophic conditions" and the `imperative nature" of
the situation and disagreed with many of the report's conclusions and 6 of our 10
recommendations. Based on the Bureau's response, we made revisions to the report
and three recommendations, considered four recommendations resolved and
implemented and requested the Bureau to provide a response to the revised
recommendations and to reconsider its response to the remaining three
recommendations.                                                                       I

If you have any questions concerning this matter, please contact me at (202) 208-                 
5745.

Attachment



United States Department of the Interior
OFFICE OF THE INSPECTOR GENERAL
Washington, D.C. 20240

Memorandum

To:       Assistant Secretary for Water and Science

From:          Judy Harrison  
          Acting Assistant Inspector General

Subject: Final Audit Report on the Award and Administration of Contract      
No. 1425-2-CC-40-12260 With Environmental Chemical Corporation
Related to the Summitville Mine Site Cleanup, Bureau of Reclamation
(No. 96-I-313)

This report presents the results of our audit of the Bureau of Reclamation's award
and administration of the portion of Contract No. 1425-2-CC-40-12260 with
Environmental Chemical Corporation pertaining to the cleanup of the Summitville
Mine site near South Fork, Colorado. The objective of the audit was to determine
whether the Bureau: (1) awarded delivery orders under the contract in accordance
with the Federal Acquisition Regulation and (2) adequately managed contract
activities and monitored contractor performance.

On July 7, 1992, the Bureau awarded a contract in an amount not to exceed $500,000
to the Corporation under the Small Business Administration's Section 8(a) program
for socially and economically disadvantaged contractors. The purpose of the contract
was to provide assistance to the Bureau in the cleanup of various hazardous waste
sites. The Bureau was not involved in the cleanup of the Summitville Mine site at
the time the initial contract was awarded to the Corporation. In December 1992, the
Environmental Protection Agency selected the Bureau to perform the cleanup of the
site because the Bureau already had a firm under contract, the Corporation, that the
Agency believed could provide the necessary services. The Agency also believed that
the Bureau had the necessary contract management resources to administer the
project. Subsequently, the Bureau and the Small Business Administration executed
nine delivery orders with the Corporation for work on this project, under which the
Corporation reported $59 million of expenditures through June 30, 1995.

We concluded that the Bureau did not ensure that costs to the Government resulting
from the award of delivery orders under the contract were fair and reasonable. This
occurred because the Bureau did not: (1) adequately evaluate the Corporation's
proposed costs; (2) evaluate the efficiency and effectiveness of the Corporation's
purchasing system; and (3) consider alternative contractors for portions of the
cleanup effort. As a result, the amount billed by the Corporation for the period
ending December 31, 1994, which was based on negotiated contract rates, exceeded
actual costs by $5.3 million. This amount was in addition to profit negotiated into
contract prices for labor, overhead, and general and administrative expenses. We
believe that, if the Bureau had performed more thorough analyses of the
Corporation's proposed costs and of the Corporation's purchasing system, these
excess costs could have been avoided. Further, we believe that, because the delivery
orders for the Summitville project were beyond the scope of the initial contract
award, the Bureau should have performed further analyses of the qualifications of
the Corporation and the method of procurement. For example, the fact that the
Corporation subcontracted most of the production work for three delivery orders,
totaling $12.5 million, suggests that the Bureau may have had the opportunity to
reduce costs by contracting directly with the subcontractors, thereby avoiding the
Corporation's overhead and profit on these orders.

Regarding contract administration, we found that the Bureau did not establish formal
written inspection procedures or document the Corporation's performance to ensure
that hours, equipment, and materials billed were accurate and reasonable. Also, the
Bureau, on four occasions, incurred costs on the Summitville cleanup project in
excess of funds that were authorized.  Finally, the Bureau paid a fee to the
Corporation that may represent an unallowable interest payment or additional profit
that was not authorized under the contract.

We made 10 recommendations to address weaknesses in the award of the delivery
orders and in the administration of contract activities.

On September 20, 1995, we discussed a preliminary draft of this report with officials
from the Bureau's Upper Colorado Region, who disagreed with the preliminary draft
findings. Regional officials stated that the deficiencies we reported occurred because
the Bureau had not adequately documented decisions and actions. Subsequently, we
provided the Bureau with revised preliminary drafts of the report and obtained
additional comments, which were considered and incorporated into the draft report
as appropriate.

In the November 30, 1995, response to the draft report from the Acting
Commissioner, Bureau of Reclamation (Appendix 4), the Bureau indicated
concurrence with Recommendations A. 1, A.2, A.6, and C.2, which we considered
resolved and implemented.  However, the Bureau did not concur with
Recommendations A.3, A.4, A.5, B. 1, C. 1, and C.3. Based on the response, we
revised Recommendations A.4, A.5, and C.3 and requested that the Bureau provide
a response to the revised recommendations and reconsider its response to the
remaining three recommendations, which are unresolved (see Appendix 6).

In accordance with the Departmental Manual (360 DM 5.3), we are requesting a
written response to this report by May 13, 1996. The response should provide the
information requested in Appendix 6.

The legislation, as amended, creating the Office of Inspector General requires
semiannual reporting to the Congress on all audit reports issued, actions taken to
implement audit recommendations, and identification of each significant
recommendation on which corrective action has not been taken.

cc: Commissioner, Bureau of Reclamation

 

 
CONTENTS

Page

INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

BACKGROUND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
OBJECTIVE AND SCOPE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
PRIOR AUDIT COVERAGE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

FINDINGS AND RECOMMENDATIONS . . . . . . . . . . . . . . . . . . . . . . . . . 4

A. DELIVERY ORDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...4
B. CONTRACT MONITORING . . . . . . . . . . . . . . . . . . . . . . . . . . ...17
C. CONTRACT FINANCING . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...20

OTHER MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...25

APPENDICES

1. SUMMARY OF INTERAGENCY AGREEMENTS USED TO
  FUND THE SUMMITVILLE MINE SITE CLEANUP . . . . . . . . 26
2. DELIVERY ORDERS ISSUED BY THE BUREAU OF
  RECLAMATION TO ENVIRONMENTAL CHEMICAL
  CORPORATION THROUGH JUNE 30, 1995 . . . . . . . . . . . . . . 27
3. UNAUTHORIZED EXPENDITURES BY THE BUREAU OF
  RECLAMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...28
4. BUREAU OF RECLAMATION RESPONSE . . . . . . . . . . . . . . . . . 29
5. ENVIRONMENTAL PROTECTION AGENCY RESPONSE . . . . . 38
6. STATUS OF AUDIT REPORT RECOMMENDATIONS . . . . . . . . . 40

 


INTRODUCTION

BACKGROUND

In 1986, Summitville Consolidated Mining Company, Inc., started open-pit mining
at the Summitville Mine near South Fork, Colorado. The Mine was a large tonnage,
open-pit heap leachl gold mine covering about 1,400 acres. A cyanide heap leaching
process was used to recover gold and silver. In this process, a solution of sodium
cyanide is used to leach gold from the ore when sprinkled on, and percolated down
through, the heaped ore. The cyanide solution penetrates the ore heap, leaching out
gold and silver, as well as copper, zinc, cadmium, manganese, and other heavy
metals.

The Mining Company filed for bankruptcy in December 1992. Because the Mining
Company's bond with the State of Colorado was not sufficient to pay for the cleanup
of the Summitville site and because the State was not capable of responding to the
emergency situation, the State requested assistance from the Environmental
Protection Agency (the Agency). In a 1993 briefing document, the Agency said that
this assistance would help "prevent catastrophic release of hazardous substances to
the environment causing serious environmental damage"; that is, the groundwater
could be contaminated by toxic pollutants such as cyanide and heavy metals.

On December 16, 1992, the Agency took control of the site to provide removal and
remediation  action under the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980 (42 U.S.C. 9605), as amended by the
Superfund Amendments and Reauthorization Act of 1986 (Public Law 99-499). The
next day, the Agency entered into the first of five interagency agreements (Appendix
1) with the Bureau of Reclamation to clean up the site. The agreements describe
specific tasks to be performed at the site and identify the available funding. In June
1993, the Agency estimated the total cost of the cleanup at $120 million. As of
September 1995, the Agency had authorized over $96 million for the project under
the five interagency agreements for removal action (time-critical emergency
response), site remediation, water treatment, biotreatment of the heap leach pad.
and remedial action for the waste pile at the Cropsy site.2

lIn a typical heap leaching operation, low-grade ore is extracted from a large open-pit mine and
placed in a large pile, or heap.

2The waste pile at the Cropsy site was composed of approximately 6.5 million tons of low grade ore,
overburden, and waste rock excavated from the main Mine pit during operations. It covered
approximately 39 acres and was piled as high as 150 feet from the bottom of the old Cropsy Creek
drainage bed in which it was placed.

1



 
i

According to Agency officials, the Agency selected the Bureau for this project
because it believed that the Bureau was in a position to react timely to the
emergency. Specifically, the Agency was aware that the Bureau already had a firm,
Environmental Chemical Corporation (the Corporation), under contract, and the
Agency believed that the Corporation could provide the necessary services. Also, the
Agency believed that the Bureau had the necessary contract management resources
to administer the project. The Agency's oversight of the Bureau's participation in
this project is the subject of a separate review by the Agency's Office of Inspector
General.

On July 7, 1992, the Bureau had awarded an indefinite delivery, indefinite quantity3
contract (No. 1425-2-CC-40-12260) in an amount not to exceed $500,000 for the
Corporation to provide:  (1) hazardous waste site assessments; (2) remedial
investigations and feasibility studies; (3) implementation of remediation plans; and
(4) assistance to the Bureau in the cleanup of hazardous waste sites on Federal,
Department of the Interior, or Bureau land. The contract was awarded under the
Small Business Administration's Section 8(a) program for socially and economically
disadvantaged contractors.  The Bureau was not involved with cleanup of the
Summitville Mine site at the time the initial contract was awarded to the
Corporation. The Bureau and the Small Business Administration subsequently
modified the contract to raise the ceiling through the issuance of delivery orders
and/or contract modifications for work at the Summitville Mine and for other work
not related to the Summitville project.

As of September 14, 1995, the Bureau had issued 26 delivery orders under the
contract for about $72 million (Appendix 2). Nine orders for $69 million were for
the Summitville cleanup, and expenditures reported under these orders through
June 30, 1995, were approximately $59 million. Seventeen orders for $2.6 million
were for work not related to the Summitville project.

OBJECTIVE AND SCOPE

The audit objective was to determine whether the Bureau: (1) awarded delivery
orders under the contract in accordance with the Federal Acquisition Regulation and
(2) adequately managed contract activities and monitored contractor performance.
We performed a separate audit of the amounts billed to the Bureau by the

3According to the Code of Federal Regulations (48 CFR 16.504(a)), "An indefinite quantity contract
provides for an indefinite quantity, within stated limits, of specific supplies or services to be
provided
during a fixed period, with deliveries to be scheduled by placing orders with the contractor." The
Code (48 CFR 16.504(b)) further states, "Funds for other than the stated minimum quantity are
obligated by each delivery order, not by the contract itself." The Code (48 CFR 16.506(d)(3)) also
states that orders placed under indefinite delivery contracts are to contain the item number and
description, quantity, and unit price.

2



 
Corporation under Contract No. 1425-2-CC-40-12260. The results of that audit were
issued in a separate report (No. 96-E-48) on October 13, 1995. Our current audit
focused on delivery orders awarded to the Corporation from December 1992 through
July 1995.

Our audit included site visits to: (1) the Bureau's contracting office in Salt Lake
City, Utah, and the office of the Bureau Contracting Officer's technical
representative in Provo, Utah; (2) the Corporation's corporate headquarters in
Burlingame, California, and project office in Del Norte, Colorado; and (3) the
Summitville Mine site.

This audit was made in accordance with the "Government Auditing Standards,"
issued by the Comptroller General of the United States. Accordingly, we included
such tests of records and other auditing procedures that were considered necessary
under the circumstances. We did not evaluate the Bureau's overall system of
internal controls because our review was limited to the award and administration of
one contract. However, the weaknesses related to this transaction are discussed in
the Findings and Recommendations section of this report. The recommendations,
if implemented, should improve internal controls on this project.

PRIOR AUDIT COVERAGE

Neither the General Accounting Office, the Office of Inspector General, nor the
Defense Contract Audit Agency (the cognizant audit agency for Environmental
Chemical Corporation) has issued any audit reports on the Bureau of Reclamation's
administration of the contract for the Summitville cleanup. However, the Defense
Contract Audit Agency issued, on March 9, 1992, the audit report titled "Report on
Review of Proposal Under Solicitation No. DACA87-92-R-0020, Environmental
Chemical Corporation, Burlingame, California" (No. 4281-92121000006) and issued,
on September 1, 1992, the audit report titled "Report on Audit of Proposal for Initial
Pricing Under Solicitation No. DACA05-92-R-O092, Environmental Chemical
Corporation (ECC), Environmental Division, Burlingame, California" (No. 4281-
92A21OOOO28). Both reports discussed costs proposed by the Corporation for U.S.
Department of Defense contracts.



 


FINDINGS AND RECOMMENDATIONS

A. DELIVERY ORDERS

The Bureau of Reclamation did not ensure that costs to the Government resulting
from the award of delivery orders under the indefinite delivery, indefinite quantity
contract to the Corporation were fair and reasonable. This occurred because the
Bureau did not:  (1) adequately evaluate the Corporation's proposed costs for
personnel, prices for equipment, and indirect costs; (2) evaluate the efficiency and
effectiveness of the Corporation's purchasing system; and (3) consider alternative
contractors for portions of the cleanup effort. As a result, the amount billed by the
Corporation for the period ending December 31, 1994, which was based on
negotiated contract rates, exceeded actual costs by $5.3 million. This amount was
in addition to profit negotiated into contract prices for labor, overhead, and general
and administrative expenses. We believe that, if the Bureau had performed more
thorough analyses of the Corporation's proposed costs and of the Corporation's
purchasing system, these excess costs could have been avoided. Further, we believe
that subcontracting by the Corporation of most of the production work for three
delivery orders, totaling $12.5 million, indicates that the Bureau may have had the
opportunity to further reduce costs by contracting directly with the subcontractors,
thereby avoiding the Corporation's overhead and profit on these orders.

Cost and Price Analyses

The Bureau's analyses of the Corporation's overall proposed contract prices and
individual cost elements were not sufficiently supported or based on current
information. The Code of Federal Regulations (48 CFR 15.805-1) states:

When cost or pricing data are required, the contracting officer shall make
a cost analysis to evaluate the reasonableness of individual cost elements.
In addition, the contracting officer should make a price analysis to ensure
that the overall price offered is fair and reasonable. When cost or pricing
data are not required, the contracting officer shall make a price analysis to
ensure that the overall price offered is fair and reasonable.

The Code (48 CFR 15.805-5) also states that when cost or pricing data are required,
the contracting officer "shall request a field pricing report (which may include an
audit . . .) before negotiating any contract. . . in excess of $500,000, . . . unless
information available to the contracting officer is considered adequate to determine
the reasonableness of the proposed cost or price." A July 13, 1993, memorandum
signed by the Bureau's Contracting Officer stated that a formal audit by the Office
of Inspector General would not be obtained, since adequate information was already

4



 


available to establish the reasonableness of the amount of compensation for the work
to be performed by the contractor.

The Contracting Officer said that the Bureau had performed an evaluation of the
proposed rates for personnel and equipment. However, there was no documentation
to substantiate the Bureau's evaluation. In that regard, our separate audit (No. 96-
E-48) of amounts billed by the Corporation from December 4, 1992, through
December 31, 1994, disclosed that the Corporation's billings for direct costs, which
were based on negotiated contract rates, exceeded actual direct costs by $1.2 million,

The Contracting Officer relied on incomplete and outdated information to negotiate
indirect cost rates for the entire contract period. The data relied upon were
contained in Defense Contract Audit Agency audit reports issued on March 9 and
September 1, 1992.  The audits covered indirect cost rates proposed in
U.S. Department of Defense contracts and were based on the Corporation's costs for
1991. The audits did not cover the overhead rate proposed for the Summitville
project. Moreover, the Defense Contract Audit Agency reports stated that "rates
were based on 1991 costs and did not reflect forecasted conditions for 1992 and
future years." Accordingly, the Agency reports did not recommend that the audited
indirect cost rates be used for 1992 and beyond. Moreover, the negotiated rates
were based on a much smaller business base than what the Corporation actually
experienced. Specifically, the Corporation's reported annual revenues increased
significantly from 1991 through 1994, which we believe should have resulted in a
commensurate reduction in the Corporation's indirect cost rates because the indirect
costs would have been spread over a much larger revenue base. Based on our
separate audit (No. 96-E-48) of amounts billed by the Corporation for the period
ending December 31, 1994, we found that the Corporation's billings for indirect
costs, based on the negotiated rates, exceeded actual indirect costs by $4.1 million.

Purchasing System

The Code of Federal Regulations (48 CFR 44.301 and 44.302) requires that the
contracting agency conduct a complete review of the contractor's purchasing system
to evaluate the efficiency and effectiveness with which the contractor spends
Government funds and complies with Government policy when subcontracting. The
review is required for each contractor whose sales to the Government, using other
than sealed bid procedures, are expected to exceed $10 million during the next
12 months. The Code (48 CFR 44.303) further states that "special attention shall be
given," among other things, to the degree of price competition obtained and the
methods of obtaining accurate, complete, and current cost or pricing data. However,
according to a Bureau contract specialist, the Bureau did not perform or request an
evaluation of the Corporation's purchasing system for the Summitville project
because it did not anticipate the extent of the Corporation's involvement. We
determined that the Corporation's competitive purchasing procedures were deficient

5



 
in that they consisted of obtaining price quotations over the telephone and checking
catalogs for published prices but did not contain a dollar threshold for requiring
formal advertising, formal requests for price quotes, or written proposals from
suppliers.

We performed a limited review of purchase orders placed by the Corporation to
determine whether it obtained Bureau approval for all purchases (Bureau and
Corporation officials said that they had agreed that all purchases would be approved
in advance by the Bureau) and whether the Corporation was using competitive
purchasing procedures. We found that the Corporation did not always: (1) obtain
proapproval from the Bureau for all purchases; (2) obtain competitive quotes;
(3) update price quotes; or (4) justify sole source purchases.  We reviewed
31 purchase orders, valued at approximately $466,000, for the billing cycle of
October 15 through 28, 1994, and noted a total of 22 deficiencies in 20 of the orders,
valued at approximately $257,000. Specifically, price quotes were not current (4 to
11 months old) on six orders; Bureau proapproval was not obtained for seven orders;
there was no justification for the sole-source purchase of one order; and competition
was inadequate (less than three price quotations) on eight orders. For example, the
Corporation obtained only one quote for the rental of dump trucks. Based on our
analysis, we concluded that the Corporation's purchasing procedures and practices
did not ensure that prices paid were the most economical.

Contractor Selection

Regarding the selection of the Corporation, the Bureau provided no documentation
to indicate that it or the Environmental Protection Agency had considered using
sources other than the Corporation for the nine delivery orders issued to the
Corporation for the Summitville cleanup work. The Code (48 CFR 9.1) requires a
determination of a prospective contractor's responsibility. That is, an agency should
determine whether the organization possesses the necessary resources (or the ability
to obtain them), administrative organization, and record of performance to provide
the desired services. Also, the Code (48 CFR 19.6) contains a similar requirement
for contracts awarded under the Small Business Administration's Section 8(a)
program. The Federal Acquisition Regulation requires these determinations to be
made before the award of the contract. As such, these determinations would not
have addressed the ability of the Corporation to complete most of the delivery orders
for the Summitville project because the work was beyond the scope of the initial
contract. We believe that because the delivery orders for Summitville were beyond
the scope of the initial contract award, the Bureau should have performed further
analyses of the qualifications of the Corporation and the method of procurement.
For example, three of the nine orders were for nonwater treatment work that the
Corporation apparently did not have the resources to perform. As a result, the
Corporation subcontracted for most of the work. Although subcontracting is an
acceptable means of obtaining services, it raises the question, particularly in the

6



 
absence of any documentation, of whether sufficient consideration is being given by
the Bureau to the possibility of contracting directly with other companies to perform
work on the Summitville project.

The three delivery orders dealing with nonwater treatment activities totaled $12.5
million as follows: No. 12, $1,948,242 for filling a mine opening; No. 13, $8,554,364
for removing waste ore and overburden; and No. 25, $2 million for providing
biotreatment4 of the heap leach pad. The type of work done under these three
orders was significantly different from the emergency water treatment work that the
Corporation had performed previously at the site. However, there was no
documentation to indicate that the Bureau had performed an evaluation to assess the
Corporation's ability to perform the work required under these orders.

A Bureau contract specialist stated that awarding a separate contract for the work
under these delivery orders would extend the procurement cycle because he believed
that the Corporation could subcontract for the work more quickly than the Bureau.
However, if timing was critical in the award of these orders--that is, if the need for
services was of such "unusual and compelling urgency" that the Government would
be injured unless allowed to limit the sources--the Bureau would have been
permitted under the Code (48 CFR 6.302-2) to limit sources and negotiate with any
qualified contractor that could satisfy the Government's requirements. Moreover,
we found no documentation to support the statement that awarding the delivery
orders to the Corporation shortened the procurement cycle.  In fact, the time
required by the Bureau to award other contracts for similar work at the Summitville
site was only 2 months, which was in compliance with established milestones for the
project.

The Corporation's use of subcontractors for these three delivery orders resulted in
an additional layer of direct costs, overhead, general and administrative expenses,
and profit that may have increased costs unnecessarily. The $10.5 million for
Delivery Orders 12 and 13 was for production work and for indirect costs and profit.
The Corporation subcontracted most of the production work under these two
delivery orders. The Corporation said that it also planned to subcontract most of the
production work under Delivery Order 25.

The three delivery orders for which subcontracting was used are detailed as follows:

- The Bureau issued Delivery Order 12 to the Corporation on October 1, 1993,
for plugging the Reynolds adit.5  Subsequently, the Corporation awarded a

4Biotreatment is a process whereby organisms are inserted into the contaminated waste piles. The
organisms then ingest the contaminants, thus eradicating the contaminants from the waste pile.

5An adit is a nearly horizontal opening by which a mine is entered, drained, or ventilated.

7



 


subcontract to Intermountain Mine Services for the production work. The Bureau
issued the delivery order to the Corporation knowing that the Corporation had
designated Intermountain Mine Services as the subcontractor on July 7, 1993. Total
expenditures under Delivery Order 12 were $1,948,242, most of which was for
subcontractor costs.

- The Bureau issued Delivery Order 13 to the Corporation on October 4, 1993,
for waste removal at the Cropsy site. Total expenditures under this delivery order
were $8,554,364. The Corporation did not own the equipment necessary to perform
the production work; consequently, the Corporation subcontracted most of the
production work.

We compared the Corporation's production costs on Delivery Order 13 for waste
removal at the Cropsy site (Phase I) with those of another contractor (Rust
Remedial Services) that performed similar work at the site (Phase II). Our
comparison showed that the Corporation's unit costs were substantially higher than
the costs that Rust Remedial Services charged for similar work. Had Rust Remedial
Services completed work under Phase I at the same rate that it used on Phase II, the
total costs to the Government would have been several million dollars less than the
amount paid to the Corporation.

- The Bureau issued Delivery Order 25 on June 9, 1995, for an initial amount
of $2 million (available funding for contractors is $4.7 million) for biotreatment of
the heap leach pad.  The Corporation's conceptual work plan verified that
essentially all of the tasks under the delivery order would be subcontracted.
Therefore, the Bureau knew that the Corporation would subcontract for the
production work. Thus the Corporation essentially has been acting as a contract
administrator for the Bureau for this delivery order and will continue in this capacity
until July 1996.

Recommendations

We recommend that the Commissioner, Bureau of Reclamation:

1. Request an audit of the Corporation's current direct costs and indirect cost
rates and continue to analyze and consider the need for further auditing for future
work.

2. Ensure that future contract rates negotiated with the Corporation, including
proposed indirect cost rates for 1995 and future years, are made provisional pending
the results of an audit of the rates cited in Recommendation 1.

3. Conduct a review of the Corporation's purchasing system to determine the
improvements needed to increase competition.

8

 
4. Prepare an analysis of the unfinished work and the conditions of the
Summitville Mine site to determine an efficient and effective acquisition strategy for
completion of the project.

5. Determine, based on the analyses cited in Recommendation 4, what, if any,
portion of the work the Bureau, the Corporation, and/or another contractor should
perform. This determination may require the Bureau to close out current delivery
orders with the Corporation and employ competitive bidding procedures.

6. Use competitive contracting procedures for the balance of work at the
Summitville site unless sole source procurements are justified.

Bureau of Reclamation Response and Office of Inspector General Reply

In its November 30, 1995, response to the draft report (Appendix 4), the Bureau
concurred with Recommendations 1, 2, and 6 but did not concur with
Recommendations 3, 4, and 5.6 In "Additional Comments" attached to its response,
the Bureau also took issue with other aspects of the draft report. In a separate
response, the Agency supported these and all other positions taken by the Bureau
(Appendix 5). Based on the Bureau's response, we consider Recommendations 1,
2, and 6 resolved and implemented and Recommendations 3, 4, and 5 unresolved
(Appendix 6). Those aspects of the draft report with which the Bureau expressed
disagreement are discussed below.

Introduction

Bureau Response. At the beginning of its response, the Bureau acknowledged
that "other contracting methods and procedures could have been utilized on the
Summitville Project," but justified its actions based on "the limited information
available and the conditions existing at the time, as well as the long-range plan for
remediation at the site." The Bureau added that the audit report "does not fully
recognize the potential catastrophic conditions and the imperative nature of the
situation ."

Office of Inspector General Reply.  We do not question the catastrophic
conditions, the emergency nature of the situation, and the corresponding need to act
quickly at the outset. We assume, however, that at some point short of the 2 1/2 -
3 year mark--which is when the audit took place--the emergency situation had been
abated. Indeed, the audit report issued by the Agency's Office of Inspector General

on January 22, 1996 (No. ElSFG5-08-0032-6400019), noted that in September 1993,

lead responsibility for the Summitville cleanup was transferred at the Agency from

6Based on the Bureau's  comments, Recommendations 4 and 5 have been revised to clarify our
position.
               9

 




Region 8's Emergency Response Branch to its Superfund Remedial Branch with a
memorandum stating that "[emergency water management operations at the site are
now an established `routine,'" and that the Emergency Response Branch's
involvement was for emergency or time-critical remedial actions. We found no
indication, however, that the Bureau had taken steps to address the types of
deficiencies identified in our report, even after September 1993.

Recommendation 1. Concurrence.

Bureau Response. Although the Bureau concurred with Recommendation 1, it
disagreed with our comments regarding the inadequacy of its review of the
Corporation's cost and price proposal. Noting that "[t]he actual work performed at
Summitville was not envisioned at the time the contract was awarded and it was
anticipated that the orders under the contract would be relatively small and
intermittent," the Bureau maintained that the analysis of the contractor's proposal
was performed, consistent with the Federal Acquisition Regulation, "at a level
considered reasonable for the anticipated work."

Office of Inspector General Reply. We recognize that the full magnitude of the
project may not have been envisioned by the Bureau at the outset when the initial
delivery order (No. 5) for site assessment in the amount of $7,000 was issued on
December 8, 1992. However, Delivery Order 6, issued for $95,000 on December 12,
1992, was increased to $4.7 million by March 11, 1993, and subsequently increased
to a total of $6.8 million by May 25, 1993. In fact, a Bureau engineer had estimated
on December 10, 1992--2 days prior to the issuance of Delivery Order 6--that the
costs of the first 3 1/2 months of work under that delivery order would be $4 million.
Delivery Order 6 was followed by another delivery order (No. 9), issued for
$5,000,000 on May 5, 1993, and subsequently modified 10 times over the next 2 years
(in amounts ranging from $1 million to $6 million) to a total of about $40 million.
Further, in June 1993, the Agency estimated the total cost of the cleanup at $120
million. Thus, by July 13, 1993, when the Contracting Officer opted not to obtain
an Office of Inspector General audit of the contractor's rates, we believe that it
should have been apparent that orders under the contract would not in fact be
"relatively small and intermittent." In any event, the fact that the project was
significantly larger than originally envisioned and the Bureau acknowledged that its
analysis of the contractor's cost and price proposal was designed for a contract of a
much smaller magnitude demonstrate that further documented analyses should have
been performed to determine whether continued use of the Corporation under time-
and-materials delivery orders and at initial negotiated rates was the most efficient,
effective, and appropriate way to complete the project.

10

 
Recommendation 3. Nonconcurrence,

Bureau Response.  While agreeing to "discuss the issues of obtaining and
maximizing competition with the contractor," the Bureau expressed the view that a
review of the Corporation's purchasing system "is neither prudent nor required at
this time." The Bureau maintained that a system review: (1) "does not assure
certification, nor does it assure that a contractor will continue to use acceptable
procurement methods"; and (2) is generally not performed for a specific contract.
According to the Bureau, these factors, together with the "declining" role of the
Corporation at Summitville, militate against conducting such a review in light of the
costs and resources that would be necessary to do so.

Office of Inspector General Reply. The Bureau's objection to conducting a
system review is not supported by the rationale upon which it relies. First, the fact
that a system review would not guarantee a perfect system or one that would be
invulnerable to a contractor intent on breaking rules and regulations is hardly reason
to disregard evaluations and analyses designed to promote efficient and effective
operations. A mere "discussion" with the contractor--particularly here, where
deficiencies have been identified in the Corporation's purchasing system that remain
undisputed by the Bureau--is insufficient to protect the Government's interests. By
contrast, the regulations that govern the recommended system review include
procedures to help ensure the correction of weaknesses in the system, as well as
sanctions for noncompliance with requirements (48 CFR 44.3).

Second, while the Federal Acquisition Regulation notes that a system review is not
"generally" performed for a specific contract, we suggest that the contract with the
Corporation was not a routine contract. As of September 14, 1995, the Bureau had
issued nine separate delivery orders under the contract for work related to the
Summitville cleanup, each for distinct tasks, for a cumulative total of $69 million.
The tasks included work performed by the Corporation, as well as work performed
by subcontractors, and represented only a little more than half of the estimated $120
million value of the entire project. In addition, the delivery orders were modified
on numerous occasions to increase the contractual ceiling by amounts as great as $6
million in one modification. Where, as here, delivery orders are "time-and-materials"
orders, there is little incentive for a contractor to control costs because the
contractor realizes increased profits as costs increase. According to the Code of
Federal Regulations (48 CFR 16.601(b)(l)), in such cases, "Appropriate Government
surveillance of contractor performance is required to give reasonable assurance that
efficient methods and effective cost controls are being used." These factors, together
with the previously referenced deficiencies in the Corporation's purchasing system,
counsel against reliance on the cited provision of the Federal Acquisition Regulation
to avoid conducting a purchasing system review.

11

 
Finally, the Bureau cited the "declining" role of the Corporation at Summitville, and
the cost and resources necessary to conduct a system review as reasons justifying its
opposition to review. However, the Bureau did not provide any supporting cost or
work progress information that would permit the type of cost-benefit analysis that
it suggested. Indeed, while the Corporation's role in the Summitville project maybe
declining in relative terms, the information available to us as of September 1995
indicated that, 2 1/2 to 3 years after issuance of the first delivery order,
approximately $47 million of the estimated $120 million of work on the project
remained to be completed. Thus, without more information, there is no basis upon
which one could reasonably conclude that the undisclosed cost of conducting a
system review, to which the Bureau refers, would be unwarranted when considered
against the benefits of such a review.

In view of the foregoing, we request that the Bureau reconsider its response to this
recommendation or suggest a more reasonable alternative than the one it proposes
that would provide greater assurance that the Corporation follows proper purchasing
procedures.

Recommendation 4. Nonconcurrence.

Bureau Response. Noting that the draft audit report erroneously cited 48 CFR
15.804-4--which requires a technical analysis of a contractor's proposal--as support
for requiring a technical analysis of the contractor and its ability to perform, the
Bureau maintained that it was unaware of a regulatory requirement to formally
perform and document the type of analysis recommended. Instead, the Bureau cited
48 CFR 9 for the regulations that govern review of a contractor's ability to perform,
noting that a contractor's resources to perform work include the ability to
subcontract, as well as to lease and rent equipment when necessary.

Further, while the Bureau agreed that formal documentation of its decisions and
rationale could be improved, and stated that this aspect of the Summitville operation
was being improved, the Bureau did not agree that the Corporation's involvement
in biotreatment work was not analyzed. According to the Bureau, "A formal
documented analysis is not in the contract file, but prior to taking action,
Reclamation and the Agency fully discussed the requirements of the work and
options before deciding on a final course of action." The Bureau did not believe that
"recreating those discussions and considerations would be a meaningful and valuable
use of resources. "

Office of Inspector General Reply. The Bureau correctly noted that the draft
report erroneously cited 48 CFR 15, rather than 48 CFR 9, in connection with the
recommended assessment of the contractor's ability to perform the work.
Nonetheless, this technical error should not overshadow the substance of the

12

 
problem discussed in the report regarding the absence of documented analyses or the
importance of the recommendation.

The essence of our concern is that the Bureau provided no documentation from
which one could conclude that it or the Agency had considered using sources other
than the Corporation for the nine delivery orders issued to the Corporation for the
Summitville project. The issue is one of ensuring that the Government's interests
are protected to the greatest extent possible, from the standpoint of both the
contractor's ability to perform the work as well as the cost effectiveness of the
project. By analyzing and comparing what the Corporation has to offer with that of
other contractors, achievement of this goal is fostered.

As the Bureau acknowledged in attempting to defend what we found to be a
deficient analysis of the contractor's proposal, "The actual work performed at
Summitville was not envisioned at the time the contract was awarded and it was
anticipated that the orders under the contract would be relatively small and
intermittent" (see Bureau's Additional Comments). Indeed, the contract between the
Bureau and the Corporation to which the Summitville project was appended was
initially slated as not to exceed $500,000. The Summitville cleanup, however, is
estimated at $120 million. Expenditures under individual delivery orders ranged
from approximately $6,000 to approximately $40 million. In view of the vast
difference between the tasks originally anticipated and what ultimately resulted, and
because some of the work under the delivery orders was beyond the scope of the
initial contract, we believe that the Bureau should have performed further analyses
to determine whether a change in acquisition strategy was warranted.

The Bureau and the Agency may well have "fully discussed the requirements of the
work and options" before deciding that the delivery order for the biotreatment work
should be given to the Corporation. In the absence of any documentation, however,
we could not evaluate the sufficiency of any such review. As to documentation, the
Code of Federal Regulations (48 CFR 4.803) provides examples of records normally
contained in contract files, including source selection documentation and the
contracting officer's determination of the contractor's responsibility. Further, Part
9.105-2(b) states that "documents and reports supporting a determination of
responsibility or nonresponsibility, including any preaward survey reports and any
applicable Certificate of Competency, must be included in the contract file." The
Bureau's contract files did not contain any documentation to suggest that the Bureau
had performed an assessment of the Corporation's ability to perform the tasks
encompassed by the more expansive Summitville project.

Finally, we agree that a contractor may legitimately subcontract to obtain resources
necessary to perform a job consistent with a finding of responsibility. We also do not
question whether the Corporation competitively awarded the major subcontracts
cited in the report. Instead, our reference to the extent of subcontracting is simply

13



 


to suggest that there may have been opportunities for the Bureau to award some of
the work competitively at the Summitville site.

We have revised our report and recommendation to correct the technical error cited
by the Bureau and to clarify our position. The Bureau is requested to respond to
the revised recommendation.

Recommendation 5. Nonconcurrence.

Bureau Response. The Bureau stated that the major reasons for using the
Corporation for work that "ultimately required considerable subcontracting" were to
"coordinate interfacing activities at Summitville, accommodate funding, and minimize
the procurement cycles." The Bureau further stated that its actions "helped keep the
project on schedule, thus minimizing overall monetary and environmental impacts."
According to the Bureau, its work load has increased and its construction contracting
staff in the Upper Colorado Region has decreased by more than 30 percent as a
result of Federal downsizing of personnel.

Regarding the expedited procurement methods, the Bureau said in its "Additional
Comments" that Title 48, Part 6.302.2, of the Code, which the report cited as
providing authority for using expedited procurement methods, does not allow sole
source procurements or eliminate the need to take time to prepare and review
proposals and obtain higher level justifications and approvals. The Bureau further
stated that the report's comparison of the work performed by Rust Remedial
Services with the work performed by the Corporation for waste removal at the
Cropsy site was not relevant because of differences in requirements.

Office of Inspector General Reply. The Bureau indicated that one of the main
reasons for using the Corporation for the ongoing work at Summitville was to
"coordinate interfacing activities." However, the Agency stated that it selected the
Bureau for the Summitville project in part because of the Bureau's contract
management resources. It appears from the Bureau's response that it has contracted
some of the responsibility for administering the project to the Corporation, especially
in view of the recent reductions to the Region's contracting staff. We believe that
if, in fact, the Corporation is performing increased work related to contract
administration, the Bureau should use the results of the analysis in Recommendation
4 to also assess its administrative capabilities and to determine the best way to obtain
all necessary services. Therefore, we have revised this recommendation to address
these concerns, and the Bureau is requested to respond to the revised
recommendation.

As to expedited procurement methods and the Rust Remedial Services comparison,
we used the particular Code citation and discussed the similar work performed by
Rust Remedial because we believe they demonstrated that there were means and

14

 




opportunities for the Bureau to seek competition for some of the work performed
at the Summitville site. Regarding the Bureau's statement that our comparison of
the work performed by the Corporation with the work of Rust Remedial for waste
removal at the Cropsy site did not consider "numerous factors that make the tasks
incomparable," our analysis did not show differences significant enough to negatively
impact the results of our comparison. As the Bureau stated in its response, both
tasks were for the removal of material from the same general location. In that
regard, in response to our specific inquiry, the Agency's Remedial Project Manager
for the Summitville project told us that the work done by Rust Remedial on its
competitively awarded contract was basically the same as the work performed at the
site by the Corporation. The Bureau also stated that we did not consider the effects
of differing climatic conditions in our comparison. During our analysis of the two
tasks, we could not find any documentation to support a cost impact attributable to
climatic conditions. Nonetheless, we believe that climatic conditions would have
some impact on the tasks, and we factored out snow removal in our analysis to
accommodate some of the climatic differences. The Bureau also said that our report
implies that "the Corporation's costs would have been less had [the Corporation]
owned the necessary equipment yet compares the Corporation's costs to those of
Rust Remedial Services who rented the majority, if not all, of [its] heavy construction
equipment." However, the Bureau's statement has no bearing on our analysis because
we compared overall prices, which included all appropriate costs.

Additional Comments

Background

Bureau Response.

Our report states that the initial contract between the Bureau

and the Corporation, which was awarded on July 7, 1992, contained a limit "not to
exceed $500,000." The Bureau responded that it could not find such a statement in
the contract, but that the $500,000 figure appeared only in the Price Negotiation
Memorandum as an "estimated" contract amount. Based on the contention that
$500,000 represented only an estimate of the orders for the first year of the contract,
the Bureau recommended that we delete our statement from the report.

Office of Inspector General Reply.  On page 2 of the document entitled
"Solicitation, Offer, and Award," which was signed by the Bureau's Contracting

Officer on July 7,
"Amount," states,

Delivery Orders

1992, and by the Corporation on June 16, 1992, block 22, entitled
"NTE [Not to Exceed] $500,000."

Bureau Response. Our draft report stated that the overrecovery of contract
costs was "in addition to profit which was based on [a percentage] of the total direct
costs." Noting that the Corporation's profit varies depending on the circumstances,

15

 
the Bureau suggested that the statement be revised to read, "This amount was in
addition to any profit paid directly under the delivery orders."

Office of Inspector General Reply. The contract provides the percentage of the
rate of profit, and the contract's supporting schedule of line item costs describes how
profit is applied to the basic rate and to the associated indirect costs. Accordingly,
in order to be more precise, we have revised page 4 of our report as follows:

This amount was in addition to profit negotiated into contract prices for
labor, overhead, and general and administrative expenses.

Cost and Price Analyses

Bureau Response. Although concurring with Recommendation 2, the Bureau
noted that the overrecovery of indirect costs cited in our report maybe "considerably
overstated' because a considerable portion of the $4.1 million classified as excess
represents the Corporation's cost for one item that may be approved by the
cognizant Department of Defense contracting officer, in accordance with the Federal
Acquisition Regulation. The Bureau stated that the Federal Acquisition Regulation-
required Department of Defense approval process is ongoing. The Bureau also
suggested that the only basis for our disallowance of the cost of the one item was
"the lack of current approval."

Office of Inspector General Reply.  The Defense Logistics Agency is the
cognizant Department of Defense entity responsible for approving the item cited
above for the Corporation. By letter dated July 11, 1995, to the Corporation, the
Defense Logistics Agency provided the monetary range for the item cited above,
The letter further stated that the amount the Corporation proposed for this item
"well exceeds" any quotation provided to the Corporation, and that it is "clearly
unreasonable and not in the government's best interests. " In addition, the letter
stated that any approval of the item presented would be prospective in nature, and
thus any costs incurred by the Corporation with respect to this item prior to approval
would be disallowed.

In response to our inquiry on January 25, 1996, the Administrative Contracting
Officer, Defense Logistics Agency, advised us that the Corporation had not
submitted any further information to substantiate its initial proposal for the item
cited above, nor had it sought to reverse the Defense Logistics Agency's decision.
Accordingly, the position of the Defense Logistics Agency has not changed since July
11, 1995. The Administrative Contracting Officer also reiterated that any future
submission by the Corporation would not result in a retroactive approval.

Based on these statements and our separate audit of the Corporation's costs, we
believe that the amount we cited as overrecovered indirect costs is appropriate.

16

 


B. CONTRACT MONITORING

The Bureau did not establish formal written inspection procedures or document the
Corporation's performance on cleanup of the Summitville Mine to ensure the
accuracy of hours charged for personnel and equipment usage and the accuracy of
reported quantities of chemicals consumed for cleanup operations. The Bureau used
an indefinite delivery, indefinite quantity contract with time-and-materials7 delivery
orders for the cleanup effort. Under this type of contracting arrangement, the
Corporation was paid at fixed hourly rates for certain work performed and for the
costs of supplies used. However, although the interagency agreements required daily
on-site inspections of the contractor's work, the Bureau's inspectors were not on-site
daily. In addition, the Bureau did not provide its inspectors with written inspection
procedures to evaluate contractor performance. As a result, the Bureau did not
ensure that all hours and quantities reported by the Corporation were accurate and
reasonable.

Time-and-materials delivery orders provide little incentive for contractors to control
costs because each unit of cost generates a corresponding unit of profit for a
contractor. Since the Bureau used time-and-materials delivery orders for the cleanup
effort at the Summitville Mine site, the Bureau was required by the Code (48 CFR
16.601(b)(l)) to provide appropriate oversight of the Corporation's performance "to
give reasonable assurance that efficient methods and effective cost controls [were]
used." However, we found that the inspectors' monitoring activities were informal
and did not include systematic and regular verifications of personnel, equipment
usage, and materials consumed.  For example, for the billing period of August 18
through September 5, 1993, the Corporation's daily inspection reports did not
indicate that inspectors had verified personnel, equipment usage, or the amount of
chemicals consumed. Further, the Bureau's inspectors may have been discouraged
from identifying and reporting deficiencies in the Corporation's activities to the
Bureau Contracting Officer's technical representative for subsequent corrective
action. In that regard, the chief inspector told us that he was instructed by his
supervisor not to tell the Corporation what resources were required or to "interfere"
with its decisions on these matters. In addition, based on interviews with Bureau
inspectors, we determined that, while Corporation personnel were on site two shifts
a day, Bureau inspectors were not always on-site daily and usually were on-site for
only one shift when they were present.

7According to the Code of Federal Regulations (48 CFR 16.601(a)), "A time-and-materials contract
provides for acquiring supplies or services on the basis of (1) direct labor hours at specified fixed
hourly rates that include wages, overhead, general and administrative expenses, and profit and (2)
materials at cost."

17

 
Recommendation

We recommend that the Commissioner, Bureau of Reclamation, implement
site-specific inspection procedures to provide reasonable assurance that contractors
use efficient methods and effective cost controls.  Procedures should include
verifications of number of personnel, equipment usage, and materials consumed
during production; measurements of resources used against contract performance
criteria; and provisions to correct deficiencies when inspectors encounter inefficient
uses of contractor personnel, equipment, or materials.

Bureau of Reclamation Response and Office of Inspector General Reply

Bureau Response.  In its November 30, 1995, response to the draft report
(Appendix 4), the Bureau did not concur with our recommendation, stating that its
inspection procedures are "consistent with those typically used for the type of work
and conditions at the site"; that its inspectors are "experienced and well trained"; that
the procedures utilized provide "sufficient verification of resources used"; and that
the work is under "regular review and evaluation."

In its "Additional Comments," the Bureau noted that the daily report for water
treatment and other unidentified inspection reports provide "a written procedure of
items to be checked." The Bureau maintains that "[w]ater treatment facilities
typically operate with minimal inspection other than quality control tests on effluent,"
but that even more vigorous testing is being performed at Summitville to meet
Colorado requirements. The Bureau added that compliance with those standards is
independently checked downstream by the Technical Assistance Group and the U.S.
Geological Survey.

The Bureau further noted that the water quality standards "inherently provide
consumption control," because of the detrimental effect that overusage or underusage
of chemicals can have on water quality.  According to the Bureau, practical
considerations such as transportation and lack of alternative markets also serve to
prevent the misuse of materials at the site. Finally, the Bureau stated that, because
all contractors are required to shuttle to and from the site and must log in and out,
there is a "proven method of verifying personnel at the site."

Office of Inspector General Reply. The Bureau's response does not address our
concerns, and we therefore request the Bureau to reconsider its position.

The Bureau's reliance on effluent monitoring, which it characterizes as providing "the
primary monitoring for the facility," is insufficient because the monitoring procedures
described relate primarily to qualitative aspects of the water treatment project.
While we do not question the Bureau's efforts in this regard, the testing of effluent
does not ensure that efficient methods were used by the Corporation or that effective

18

 


controls to promote such methods were in place. The water quality could be perfect
while the means used to achieve that quality could be laden with costly inefficiencies.

Regarding written procedures, our review of the daily reports cited by the Bureau
concluded that they were essentially a record of observation of ongoing site activities,
The reports did not record the measurement by Bureau personnel of resources used
by the Corporation to perform these activities or compare them against any
preestablished written inspection criteria. Indeed, Bureau inspectors advised us that
their inspection procedures did not include physical verifications of personnel,
equipment usage, or chemicals consumed for water treatment, and the Bureau could
provide no documentation to support such inspections. Since the inspectors did not
have written procedures to help them perform their inspections, there was minimal
assurance that the Corporation used efficient methods or effective cost controls.

We also do not have any reasonable assurance of efficiency and effectiveness by
virtue of the Bureau's suggestion that the water standards "inherently provide
consumption control" or that practical considerations "virtually eliminate the
possibility of the materials being used for other purposes or stolen." Such
assumptions, which clearly do not encompass the entire spectrum of possible
inefficiencies, cannot substitute for actual inspections.

Finally, we do not believe that a log of the time and date of all personnel entering
and leaving the site, which is prepared by the Corporation--whose actions are the
subject of the Bureau's monitoring responsibilities--provides sufficient assurance to
the Government that the Corporation is working efficiently and effectively.

In short, according to the Code of Federal Regulations (48 CFR 16.601(b)(l)):

A time and materials contract provides no positive profit incentive to the
contractor for cost control or labor efficiency. Therefore, appropriate
Government surveillance of contractor performance is required to give
reasonable assurance that efficient methods and effective cost controls are
being used.

19

 
C. CONTRACT FINANCING

Based on our review of the Corporation's invoices and the Bureau's actual monthly
charges, we concluded that, on four occasions, the Bureau incurred costs to clean up
the Summitville Mine site in excess of funds that were authorized and available
under interagency agreements with the Agency.  The interagency agreements
established the terms and conditions by which the Bureau of Reclamation and the
Agency were to conduct business in accomplishing the Summitville Mine cleanup
operations. The agreements included funding thresholds within which the Bureau was
to operate. However, on four occasions the Bureau, anticipating additional funds
from the Agency, authorized the Corporation to continue working on the project
after all funds available under the agreements had been expended. The unfunded
expenditures could have created an Anti-Deficiency Act violation if the Agency had
not provided additional funds to the Bureau.8

Regarding funding, the Bureau's Contracting Officer said that the Agency told the
Bureau not to interrupt the work and that funds would be made available.
Consequently, between March 15 and April 14, 1994, the Corporation continued to
work and submit invoices to the Government, even though funds under the Bureau's
interagency agreement with the Agency had been depleted. For example, notations
on the Corporation's invoices stated, "Invoices held due to lack of funds" and "Held
for funding mod." We determined that unfunded expenditures reached a high of
$5.2 million on April 14, 1994 (Appendix 3). When the Bureau received funds from
the Agency on April 15, 1994, the contract specialist recommended payment of five
invoices that had been received during the period when the funds were not available.

In addition, the Bureau paid the Corporation a fixed fee under Delivery Order 13.
The Bureau's reasons for paying the fee, as cited in the negotiation memorandum,
were: (1) "slowness of the receipt of funding from EPA [Environmental Protection
Agency]" and (2) "the contractor was forced to finance a good portion of the work
while awaiting funding from EPA." However, the Code of Federal Regulations (48
CFR 32.704 (a)(iv)(B) and (C)) states that "the contractor is entitled by the contract
terms to stop work when the funding or cost limit is reached" and that "any work
beyond the funding or cost limit will be at the contractor's risk." Furthermore, the
Code of Federal Regulations (48 CFR 31.205-20) states that "interest on borrowings
(however represented), bond discounts, costs of financing and refinancing capital .
. . are unallowable."

8The Anti-Deficiency Act prohibits government officials from making or authorizing payments for
goods or services unless funds have been appropriated and are available to satisfy the expenditures
in full (see 31 U.S.C. 1341).

20



 
If the fee was payment for other than financing costs, it may have resulted in
additional profit for the Corporation. However, the contract prices negotiated in
April 1993 specified that the Corporation would not receive profit for work that was
subcontracted, and almost all of the work under Delivery Order 13 was
subcontracted. In addition, the fixed fee was negotiated after the work under the
delivery order was substantially complete. Therefore, based on information we have,
we question whether payment of the fixed fee was appropriate because it appears to
represent either compensation for financing costs, which is unallowable, or additional
profit paid to the Corporation that was not authorized under the contract.

Recommendations

We recommend that the Commissioner, Bureau of Reclamation, direct appropriate
staff to:

1. Establish controls to ensure that contracting officers do not allow contractors
to continue work after funding for a project is no longer available.

2. Coordinate with the Agency on the amount, availability, and timing of
funding to avoid interruptions of work on the project.

3. Obtain a Solicitor's opinion as to whether the payment of the fixed fee was
appropriate. If the payment was not appropriate, the amount of the fee should be
recovered from the Corporation.

Bureau of Reclamation Response and Office of Inspector General Reply

In the November 30, 1995, response to the draft report (Appendix 4), the Bureau did
not  concur  with Recommendation  1 and indicated compliance with
Recommendations 2 and 3. In the draft report, Recommendation 3 did not require
a Solicitor's opinion.  Based on the Bureau's response, we have revised
Recommendation 3 to  require such an opinion,  Accordingly, we consider
Recommendation 2 resolved and implemented and Recommendations 1 and 3
unresolved (Appendix 6).

Recommendation 1. Nonconcurrence.

Bureau Response.  The Bureau acknowledged that "there were cash flow
problems between EPA [the Environmental Protection Agency] and Reclamation
that resulted in a period when there were insufficient funds under the inter-agency
agreement to cover the costs being incurred by the contractor," and that
"Reclamation's procedures also may have impacted that funding flow." The Bureau
also acknowledged that it was cognizant of the "potential problems that could be
incurred' by allowing the Corporation to proceed in the absence of adequate funds

21

 
in the interagency agreement.  However, the Bureau did not concur with our
recommendation. The Bureau maintained that funds were available within the
Agency but were not transferred because of internal difficulties. The Bureau further
maintained that, given the "catastrophic" environmental damage that could have
occurred if work was interrupted, the continuation of work was appropriate under
the Economy Act and other unidentified laws and regulations.

The Bureau also noted that it has sought to improve its administration of hazardous
waste agreements by delegating "authority and responsibility" to the particular
Bureau office charged with administering the contract at issue. The Bureau
concluded that "it has provided as much control as is reasonable in regard to this
matter," and that "no further controls are considered necessary" because the
contracting officers and others are knowledgeable about the applicable acquisition
procedures and are expected to act in accordance with the applicable laws and "good
business judgment."

Finally, the Bureau implied that our recommendation is inconsistent with prior
Office of Inspector General audits conducted between 1988 and 1993 of the Bureau's
Superfund interagency agreements. In prior audits, the Bureau noted, we
recommended that the Bureau obtain amendments from the Agency to cover costs
incurred that exceeded the amount authorized in the agreements.

Office of Inspector General Reply. We request the Bureau to reconsider its
position. The Economy Act authorizes an agency to order goods or services from
another agency if "amounts are available" and "the agency or unit to fill the order is
able to provide the ordered goods or services" (31 U.S.C. 1535(a)(l,3)).
Furthermore, an order placed or agreement made under the auspices of the
Economy Act "obligates an appropriation of the ordering agency or unit," although
the amount is deobligated if the agency or unit filling the order has not incurred
obligations to provide or make arrangements to provide the requested goods or
services (31 U.S.C. 1535(d)). In the circumstances presented here, the Bureau
incurred an obligation for additional services by authorizing the Corporation to
proceed with work at a time when no authority existed under the interagency
agreements which would obligate the Agency to reimburse the Bureau for this
additional work. Thus, the Bureau had "obligated" an appropriation at a time when
funds were not "available," a situation not authorized by the Economy Act or any
other statute or regulation of which we are aware. Had the Agency ultimately not
paid the Bureau, the Bureau could have been in violation of the Anti-Deficiency Act.

The possibility of an Anti-Deficiency Act violation cannot be dismissed casually. The
Agency's Office of Inspector General report noted:

"[I]t was a struggle every time" the Region had to obtain additional funding
from Headquarters staff, according to the site team leader. For example,

22

 


Region 8 staff told us that Headquarters staff considered discontinuing
Summitville funding and was continuously reevaluating Summitville's
priority. Regional staff told us they did not believe that Headquarters staff
had placed a high priority on providing the needed funding for Summitville
after the initial emergency response action.  Regional staff and
Headquarters staff delayed funding even though Headquarters staff were
aware of Summitville needs based on the "Summitville Mine Site Project
Plan" that included approximate funding for possible site actions.

We do not question the seriousness of the situation at Summitville. Of course, as
noted earlier, according to the Agency's Office of Inspector General, the emergency
appears to have been abated by September 1993. Moreover, we can find no
authority for the Bureau to have authorized and incurred obligations for work at a
time when it was unable to pay for such work. That is why we have recommended
both that controls be established to ensure against the continuation of work without
adequate funding, and that there be better coordination with the Agency of the
amount, availability, and timing of funding so as to avoid the interruption of work.
Although the Bureau indicated that it expects the administration of the interagency
agreements to be greatly improved by one measure that it has taken, its
nonconcurrence with this recommendation, together with the rest of its response,
provides little assurance that it will implement the controls necessary to ensure that
its officials not only are knowledgeable about the acquisition procedures but also
follow them.

The circumstances reflected in our audit of the Bureau's Superfund interagency
agreements are entirely dissimilar to the situation at issue here. Regarding the
Superfund agreements, the Bureau had incurred and paid costs in excess of the
amount authorized by the agreements. We therefore recommended that the Bureau
seek an amendment to the appropriate agreements to increase its authorized amount
so that it could be reimbursed for the funds that it had expended and thus be paid
for the work performed, as authorized under Section 107 of the Superfund Act. At
no time had the Bureau incurred costs beyond those for which funds were available.

Recommendation 3. Compliance.

Bureau Response.  The Bureau stated that it had complied with our
recommendation to determine whether the fee was appropriate, because the
Contracting Officer had reexamined the conditions surrounding the fee to be paid
under Delivery Order 13 and determined that profit was "allowable." Although a
prior agreement prohibited profit on subcontracted work, the Bureau stated that the
restriction applied only to time and materials type delivery orders, such as Delivery
Orders 9 and 12. According to the Bureau, pricing for Delivery Order 13, by
contrast, was actual costs for the work, which permits profit or a fixed fee of up to
10 percent under 48 CFR 15.903 (d)(l) (iii). The Bureau concluded that the profit/fee

23

 
I

on Delivery Order 13 was lower than the percentage rate cited in the Code and was
therefore allowable. The Bureau further stated that because profit/fee is negotiable
and it has reached final agreement on Delivery Order 13, it is bound by its
agreement and has no legal recourse.

Office of Inspector General Reply. Based on the Bureau's response, we have
three concerns, and we have revised our recommendation to request that the Bureau
obtain a determination from the Office of the Solicitor on the propriety of the
payment.

First, on February 11, 1994, after the work under Delivery Order 13 was completed,
the Corporation negotiated for additional payment, which was reflected in the
memorandum for the February negotiations as follows:

During negotiations, the Corporation presented a strong case for a higher
payment since they were not adequately compensated for [a service
performed under the contract].

However, as reflected in our report (see Finding C), payment to a contractor for
such a service is prohibited by the Federal Acquisition Regulation. Thus, if the
payment to the Corporation for Order 13 included costs for such a service, that
portion is improper and should be recouped.

Second, we have reviewed the delivery order documents for Orders 9, 12, and 13 and
find no significant differences among them. In each, the Corporation billed the
Bureau on a time-and-materials basis using rates negotiated in April 1993, which
included a provision for profit. We have found no documentation reflecting separate
price negotiations prior to the start of Delivery Order 13 specifying that this order
was to be based on actual costs rather than time and materials. It would thus
appear that payment for Order 13 should be made on the same basis as payment for
Orders 9 and 12.

Third and related to point two, if Order 13 were to be based on actual costs rather
than on time and materials, but the rates billed by the Corporation for Order 13
included profit, then the Corporation's bill is excessive. As noted above, the rates
for Order 13 were the same as for Orders 9 and 12, and those rates included profit.
Thus, the payment would have been additional profit. The Bureau, then, should seek
legal advice from the Solicitor regarding the recoupment of all or a portion of the
payment.

24

 
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OTHER MATTERS

Part of our audit scope included a review of whether the Bureau complied with the
Federal Acquisition Regulation when it determined that the Corporation could
contract for both a Focused Feasibility Study for water treatment and the follow-on
production work for water treatment. According to the Code of Federal Regulations
(40 CFR 300.430(e)), "The primary objective of the feasibility study (FS) is to ensure
that appropriate remedial alternatives are developed and evaluated such that relevant
information concerning the remedial action options can be presented to a decision-
maker and an appropriate remedy selected." The Code (48 CFR 9.505-1) further
states that "a contractor that provides systems engineering and technical direction for
a system but does not have overall contractual responsibility for its development, its
integration, assembly, and checkout or its production shall not (1) be awarded a
contract to supply the system or any of its major components or (2) be a
subcontractor or consultant to a supplier of the system or any of its major
components." The Bureau's Contracting Officer told Corporation officials that this
would not be an issue because the Bureau would prepare the detailed specifications
for the work. Our review of this matter is ongoing, and the results of our review will
be reported at a later date.

25



 
I

APPENDIX 1

SUMMARY OF INTERAGENCY AGREEMENTS USED TO
FUND THE SUMMITVILLE MINE SITE CLEANUP

        Authorized
Agreement No.   Budget

DW14953609    $20,086,900
DW14953651    51,882,435

DW14953700     6,000,000
DW14953701    5,000,000
DW14953702   13,550,000

Total

$96,519,335

Purpose

Removal action (emergency response)
Site remediation (primarily water
treatment)
Water treatment
Biotreatment of the heap leach pad
Waste removal at the Cropsy site (Phase
III)

26

 
APPENDIX 2

Delivery
Order NO.l

1 2 3 4 5 6 9 10 11 12 13 14 16 17 18 19 20 21 22 23 24 25 26 27 28 29 Total

   DELIVERY ORDERS ISSUED BY THE
BUREAU OF RECLAMATION TO ENVIRONMENTAL
CHEMICAL CORPORATION THROUGH JULY 24, 1995

Date of    Initial
    Order Amount

12/8/92
12/12/92
5/5/93

10/1/93
10/4/93

$7,000
95,000
5,000,000

500,000
4,000,000

9/22/94    3,000,000

6/9/95    2,000,000
7/24/95    1,000,000
7/24/95    5,528,546

Final Reported
Expenditures2

$5,908
6,815,562
39,557,451

1,948,242
8,554,364

2,349,646

TBD
TBD

TBD

$59,231,173

Order

$118,424
18,750
58,804
62,325
  5,908
6,815,562
40,000,000
26,240
52,335
2,096,114
8,554,364
776,620
27,807
18,708
  7,318
140,000
577,782
3,000,000
1,000,000
15,000
  TBD
2,000,000
1,000,000
25,897
5,528,546
80,000
$72,006,504

Description

Freeport Center
PCB soil & casing
Precious metals
Byers drum removal
Initial site assessment
Assume water treatment
Develop water treatment
Anderson & Sons Site
Remove temporary storage fat.
Reynolds adit plugging
Cropsy (Phase I)
Hansen Container Site
Tech. asst. reclaim barrel site
Drainage & sediment control
Formaldehyde spill
Sandy Site
90th South Battery Site
Water treatment/sludge mgt.
Vandenberg AFB
Sampling at Midvale Slag
Monitoring at Midvale Slag
Heap leach biotreatment
Cropsy (Phase III)
Groundwater sampling/analysis
Continue water treatment
Sediment control

1As of September 14, 1995, nine delivery orders (Nos. 5, 6, 9, 12, 13, 21, 25, 26, and 28) had been
issued for the

Summitville Mine cleanup. Delivery Orders 7, 8, and 15 have been canceled.
2Included in this column are expenditures for delivery orders related to the Summitville Mine
cleanup only. On October
13, 1995, we issued Audit Report 96-E-48, which discussed the eligibility of reported expenditures
for Federal
reimbursement.

                   27

 


APPENDIX 3

  Date

March 4, 1993

May 31, 1993

September 13, 1993

April 14, 19943

UNAUTHORIZED EXPENDITURES BY THE
  BUREAU OF RECLAMATION

Interagency
Agreement
Amount     Bureau    Unauthorized
Authorized1   Expenditures 2  Expenditures

$2.9 million   $3.3 million   $.4 million

7.4 million   7.6 million    .2 million

12.6 million   13.4 million   .8 million

31.2 million   36.4 million   5.2 million

lInteragency Agreement Nos. DW14953609 and DW14953651.

2Expenditures were determined from the Bureau's monthly actual charges by job number and cost
center and from the Corporation's invoices.

3The Bureau's expenditures exceeded funds authorized under interagency agreements for the period
March 15 through April 14, 1994. The shortage reached a peak of $5.2 million on April 14, 1994.
The Bureau received $9 million under the interagency agreement on April 15, 1994.

28

 
  

To:

From:

       o             [NOTE: THE INSPECTOR
               GENERAL HAS REDACTED
               FROM THIS RESPONSE

       PROPRIETARY INFOR-
       MATION PERTAINING
       TO THE CONTRACTOR
       AND  ITS ACTIVITIES.]

29

 
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30

 
3

7

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33 -



 
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35



 


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APPENDIX 5
Page 2 of 2



39

 
APPENDIX 6

STATUS OF AUDIT REPORT RECOMMENDATIONS

  Finding/
Recommendation
  Reference

Al, A.2, A.6, and C.2

A.3, B.1, and C.1

A.4, A.5, and C.3

Status      Action Required

Implemented  No further action is required.

Unresolved   Reconsider the recommendations,
       and provide a plan identifying
       actions to be taken, target dates
       for implementation, and titles of
       officials responsible for
       implementation.

Unresolved   Respond to the revised
       recommendations, and provide a
       plan identifying actions to be
       taken, target dates for
       implementation, and titles of
       officials responsible for
       implementation. If nonconcurrence
       is indicated, provide specific reasons
       for the nonconcurrence.

40

 


ILLEGAL OR WASTEFUL   ACTIVITIES
   SHOULD BE REPORTED TO
THE OFFICE OF INSPECTOR GENERAL BY:

Sending written documents to:             Calling:

Within the Continental United States

U.S. Department of the Interior         Our 24-hour
Office of Inspector General           Telephone HOTLINE
1550 Wilson Boulevard             1-800-424-5081 or
Suite 402                  (703) 235-9399
Arlington, Virginia 22210

TDD for hearing impaired
(703) 235-9403 or
1-800-354-0996

Outside the Continental United States

Caribbean Region

U.S. Department of the Interior         (703) 235-9221
Office of Inspector General
Eastern Division - Investigations
1550 Wilson Boulevard
Suite 410
Arlington, Virginia 22209

North Pacific Region



U.S. Department of the Interior         (700) 550-7279 or
Office of Inspector General           COMM 9-011-671-472-7279
North Pacific Region
238 Archbishop F.C. Flores Street
Suite 807, PDN Building
Agana, Guam 96910