[Survey Report on Recovery of Overhead Costs by the Bureau of Land Management]
[From the U.S. Government Printing Office, www.gpo.gov]

Report No. 99-i-393

Title: Survey Report on Recovery of Overhead Costs by the Bureau
       of Land Management

Date:  March 31 1999




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U.S. Department of the Interior
Office of Inspector General



SURVEY REPORT
RECOVERY OF OVERHEAD COSTS BY THE
BUREAU OF LAND MANAGEMENT


REPORT NO. 99-I-393

MARCH 1999




MEMORANDUM

             TO:  The Secretary

           FROM:  Robert J. Williams
                  Acting Inspector General

SUBJECT SUMMARY:  Final Survey Report -
                  "Recovery of Overhead Costs by the
                  Bureau of Land Management" (No. 99-i-393)

Attached for your information is a copy of the subject final
survey report.  This report presents the results of our review of
the Bureau of Land Management's recovery of reimbursable overhead
costs through the application of its indirect cost rate.  The
objective of our audit was to determine whether the Bureau
accurately computed and properly applied the indirect cost rate.

We found that the Bureau did not accurately compute and properly
apply the indirect cost rate to recover the total reimbursable
overhead costs of providing services to organizations and
individuals during fiscal year 1997.  This deficiency occurred
because  the Bureau (1) based the indirect cost rate on estimated
costs and limited the rate to 18 percent and (2) used an
unsupported rate (less than 18 percent) to assess overhead costs
to two other bureaus and the road maintenance program. As a
result, the Bureau did not recover fiscal year 1997 costs of more
than $386,000.

In its response, the Bureau did not state specific concurrence or
nonconcurrence with the report's two recommendations or provide
information on the actions taken or planned to implement the
recommendations.  Based on the response, we considered both
recommendations unresolved and requested that the Bureau
reconsider its responses to both recommendations.

If  you have any questions concerning this matter, please contact
me at (202) 208-4252.


Attachment




                                                W-IN-BLM-002-98-D
SURVEY REPORT

Memorandum

     To:  Director, Bureau of Land Management

   From:  Robert J. Williams
          Assistant Inspector General for Audits

Subject:  Survey Report on Recovery of Overhead Costs by the
          Bureau of Land Management (No. 99-i-393)

INTRODUCTION

This report presents the results of our review of the Bureau of
Land Management's recovery of overhead costs through its indirect
cost rate.  The objective of our audit was to determine whether
the Bureau accurately computed and properly applied the indirect
cost rate.

BACKGROUND

The Bureau of Land Management, as custodian of 264 million acres
of public land and an additional 300 million acres of subsurface
mineral resources, conducts programs and activities that provide
benefits to organizations and individuals beyond the benefits
received by the general public.  For example, when the Bureau
processes a mineral patent application, the applicant receives a
benefit not received by the general public.  Federal law and
policy require the Bureau to recover the full costs, including
overhead costs, for conducting these programs and activities.  In
fiscal year 1997, the Bureau recovered overhead costs of $2.5
million for services provided to organizations and individuals.
The amount collected generally represented 18 percent of the
costs incurred for those activities for which the Bureau
determined that it would impose charges.

In fiscal year 1997, the Bureau reviewed its procedures for
assessing and collecting costs to determine whether the
procedures adequately provided for full cost recovery.
Specifically, the Bureau formed a Revenue Enhancement Team, which
studied cost recovery.  The results of the study were presented
in Bureau Instruction Memorandum No. 98-97, dated April 17, 1998,
which required each State Director to develop cost recovery plans
for their respective programs and projects.[1]  Also during our
survey, the Bureau was reviewing the indirect cost rate charged
to outside organizations and individuals.  In conjunction with
the Bureau's review, the Office of the Solicitor issued an
opinion dated December 5, 1996, on the Bureau's efforts to
recover the costs from outside individuals and organizations for
processing minerals documents, which stated that the Bureau has
the authority to recover costs for those specific activities for
which costs had not been collected.  According to the opinion,
these activities included conducting inspection and enforcement
work, reviewing bonds for sufficiency, and reviewing lessee
qualifications for mineral leasing.

SCOPE OF SURVEY

We performed our survey from February through May 1998 at the
Bureau's National Business Center in Denver, Colorado. To
accomplish our objective, we reviewed the methodology for
determining the Bureau's indirect cost rate, the support for the
rate calculation based on Bureau cost data for fiscal year 1997,
and laws and regulations concerning cost recovery.  We also
tested selected transactions to review the Bureau's application
of the indirect cost rate.  We conducted the survey 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 to accomplish
the objective.  We also reviewed the Departmental Report on
Accountability for fiscal year 1997, which includes information
required by the Federal Managers' Financial Integrity Act of
1982, and the Bureau's annual assurance statement on management
controls for fiscal year 1997 to determine whether any reported
weaknesses were within the objective and scope of our review.
Neither the Accountability Report nor the Bureau's assurance
statement reported control weaknesses in the Bureau's recovery of
overhead costs.

PRIOR AUDIT COVERAGE

Neither the Office of Inspector General nor the General
Accounting Office has issued any reports on the Bureau's recovery
of overhead costs through an indirect cost rate during the past 5
years.

RESULTS OF SURVEY

The Bureau of Land Management did not accurately compute and
properly apply the indirect cost rate to recover the total
reimbursable overhead costs of providing services to
organizations and individuals during fiscal year 1997.  Office of
Management and Budget Circular A-25 ("User Charges"), the
Departmental Manual (346 DM), and the Federal Land Policy
Management Act of 1976 require the Bureau to recover the overhead
costs incurred when performing work for others.  However, the
Bureau (1) based the indirect cost rate on estimated costs and
limited the rate to 18 percent and (2) used an unsupported rate
(less than 18 percent) to assess overhead costs to two other
bureaus and the road maintenance program. As a result, the Bureau
did not recover fiscal year 1997 costs of more than $386,000.

Circular A-25 states, "When a service . . . provides special
benefits to an identifiable recipient beyond those that accrue to
the general public, a charge will be imposed (to recover the full
cost to the Federal Government for providing the special benefit,
or the market price)."  In addition, the Departmental Manual
states, "Recovered costs will include both direct and indirect
costs of the performing bureau . . . in furnishing the services."
Finally, the Federal Land Policy and Management Act authorizes
the Bureau to establish fees and charges based on actual costs,
excluding "management overhead."[2]

The Bureau computed its indirect cost rate for fiscal year 1997
as follows:

-------------------------------------
|Total Overhead Costs Less Management
|          Overhead Costs
-------------------------------------
         Total Direct Costs
-------------------------------------


-------------      ------------------
|$171,548,015 less    = 18.55
|   $45,584,476      percent
-------------      ------------------
    $678,953,082
-----------------      --------------

To determine management overhead costs, the Bureau had to
estimate the costs based on historical data.  Prior to fiscal
year 1995, the Bureau's financial system identified management
overhead costs separately.  However, since fiscal year 1995, the
Bureau has had to estimate the costs.

Although the Bureau calculates a rate each year, the Bureau's
budget office, in accordance with established practice, limits
the indirect cost rate to 18 percent.  Bureau officials told us
that the indirect cost rate was limited to 18 percent to avoid
complaints from client organizations about increasing the rate
and that the rate had been set at 18 percent for at least 15
years.  As a result of limiting the fiscal year 1997 indirect
cost rate to 18 percent, we estimated that the Bureau did not
recover overhead costs of $76,400.  This amount was derived by
applying the .55 percent difference between the rates to the
estimated total direct costs of $13.9 million[3] for reimbursable
work.  Since the actual amount of management overhead costs was
not available, we could not estimate the full cost impact of
using estimated management overhead costs.

The Bureau also used an unsupported indirect cost rate of 3.5
percent to charge two bureaus for technical support services
provided to those bureaus under a Bureau of Land Management
contract and 5 percent for road maintenance services.
Specifically, for the contract services, Bureau officials agreed
to lower the 18 percent indirect cost rate to 3.5 percent to
reflect the minimum amount of administrative effort required by
the contract.  Although the Bureau indicated that the rate should
be lowered from the standard 18 percent, it could not provide us
with documentation as to how the 3.5 percent rate was determined,
and the contract did not specify a rate.  Therefore, overhead
costs of $113,755 (based on the difference between the 3.5
percent rate and the standard 18 percent rate applied to direct
costs of $784,514[4]) were not recovered by the Bureau for fiscal
year 1997.

For the road maintenance services, the Bureau included 5 percent
in its calculation of the road maintenance fee.  According to
Bureau officials, the Bureau used 5 percent as required by
then-existing legislation.  However, the 5 percent requirement
was repealed with enactment of the Federal Land Policy Management
Act of 1976. Therefore, overhead costs of $196,297 (based on the
difference between the 5 percent rate and the standard 18 percent
rate applied to direct costs of $1,509,977) were not recovered by
the Bureau for fiscal year 1997.

Recommendations

We recommend that the Director, Bureau of Land Management:

1. Identify management overhead costs and use the resultant cost
data in calculating the Bureau's indirect cost rate.

2. Discontinue the practice of limiting the indirect cost rate to
ensure that all overhead costs are properly recovered.

Bureau of Land Management Response and Office of Inspector
General Reply

In the March 19, 1999, response (Appendix 2) to the draft report
from the Acting Director, Bureau of Land Management, the Bureau
did not state specific concurrence or nonconcurrence with the
recommendations and also did not provide detailed information on
the actions taken or planned to implement the recommendations.
Accordingly, we request that the Bureau reconsider its responses
to both recommendations, which are unresolved (see Appendix 3).

Recommendation 1.  Concurrence/nonconcurrence not stated.

Bureau Response.   The Bureau said that it had undertaken a
"major exercise" during the last half of fiscal year 1998 "to
come up with a verifiable, justifiable overhead rate method for
each year."  The Bureau further stated, "A rate of 18.55 percent,
as mentioned in your [Office of Inspector General] report, was
established for FY [fiscal year] 1999."  The Bureau further
stated that it would review and adjust the rate at the beginning
of each fiscal year.

Office of Inspector General Reply.  The Bureau did not include
detailed information on the actions it has taken "to come up with
a verifiable, justifiable overhead rate method for each year."
Our report stated that the Bureau had computed an indirect cost
rate of 18.55 percent for fiscal year 1997 but that it had to
estimate its management overhead costs based on historical data.
Consequently, we could not determine whether the rate that the
Bureau established for 1999 was based on a new computation which
included actual management overhead costs as a result of its
"major exercise" to develop a "verifiable, justifiable overhead
rate method" or on the rate it had calculated in 1997.
Accordingly, we request that the Bureau provide additional
details on its method of identifying management overhead costs
and of including such costs in its annual rate calculation.

Recommendation 2.  Concurrence/nonconcurrence not stated.

Bureau Response.   The Bureau stated that it will continue "in
some circumstances" to apply an indirect rate of less than the
current year general indirect rates "where appropriate
justification can be demonstrated and documented."  The Bureau
further stated that it "should have some flexibility to limit or
waive the overhead rate when a project has significant benefit"
to the Bureau that "outweighs the overhead assessment."

Office of Inspector General Reply.   We agree that some
flexibility is needed to limit or waive the rate when a lower
rate can be justified and documented.  However, we could not
determine from the response whether the annual indirect cost rate
established by the Bureau would be limited to 18 percent or what
criteria would be used for limiting or waiving the rate.
Therefore, we request clarification regarding the Bureau's
policies and procedures for establishing and applying indirect
cost rates, including the circumstances under which the use of an
indirect rate that is lower than the current year's rate would be
appropriate.

In accordance with the Departmental Manual (360 DM 5.3), we are
requesting a written response to this report by May 10, 1999.
The response should provide the information requested in
Appendix 3.

The legislation, as amended, creating the Office of Inspector
General requires semiannual reporting to the Congress on all
audit reports issued, the monetary impact of audit findings
(Appendix 1), actions taken to implement audit recommendations,
and identification of each significant recommendation on which
corrective action has not been taken.

We appreciate the assistance of Bureau personnel in the conduct
of our audit.

*FOOTNOTES**

[1]:The memorandum did not address the issues discussed in the
Results of Survey section of this report.

[2]:Management overhead as interpreted by the Bureau includes
overall program management and support that would include
providing overall program planning and direction, developing
program policies and procedures, and preparing and executing
program budgets.

[3]:We estimated the direct costs of $13.9 million by dividing
the recovered overhead costs of $2.5 million by 18 percent.

[4]:We estimated direct costs of $784,514 by dividing the
recovered overhead costs of $27,458 by 3.5 percent.



APPENDIX 1


CLASSIFICATION OF MONETARY AMOUNTS


Finding
Potential
Additional
Revenues

Collection of Overhead Costs

$386,452


APPENDIX 2
Page  1  of  2

APPENDIX 2
Page  1  of  2

APPENDIX 2
Page  1  of  2

APPENDIX 3


STATUS OF SURVEY REPORT RECOMMENDATIONS


Finding/Recommendation
Reference

Status

Action Required

1 and 2

Unresolved.

Provide a response to the recommendations.  If concurrence is
indicated, provide information on the actions taken or planned,
including target dates and titles of officials responsible for
implementation.  If nonconcurrence is indicated, provide reasons
for the nonconcurrence.



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