[Audit Report on the Lower Brule Sioux Rural Water System, Mni Wiconi Rural Water Supply Project, Bureau of Reclamation]
[From the U.S. Government Printing Office, www.gpo.gov]

Report No. 99-i-588

Title: Audit Report on the Lower Brule Sioux Rural Water System,
       Mni Wiconi Rural Water Supply Project, Bureau of Reclamation

Date:  June 24 1999




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



AUDIT REPORT
LOWER BRULE SIOUX RURAL WATER SYSTEM,
MNI WICONI RURAL WATER SUPPLY PROJECT,
BUREAU OF RECLAMATION


REPORT NO. 99-I-588

JUNE 1999





MEMORANDUM


             TO:  The Secretary

           FROM:  Robert J. Williams
                  Acting Inspector General

SUBJECT SUMMARY:  Final Audit Report - "Lower Brule Sioux Rural
                  Water System, Mni Wiconi Rural Water Supply
                  Project, Bureau of Reclamation" (No. 99-i-588)

Attached for your information is a copy of the subject final
audit report. The objectives of the audit were to (1) determine
whether the costs incurred by the Lower Brule Sioux Tribe to
plan, design, and construct its portion of the Mni Wiconi Rural
Water Supply Project were expended in accordance with Federal
law, regulations, and funding agreements and (2) identify the
source of any incurred or projected cost overruns.  The audit was
performed as part of our audits of the four non-Federal sponsors
of the Project, including the Lower Brule Sioux Tribe. The
results of the audits of the other Project sponsors will be
presented in separate reports. The audit of the Mni Wiconi
Project was requested by three members of the Congress.

We found that a $7.1 million cost overrun was projected for the
Lower Brule Sioux Rural Water System and that the actual overrun
could be substantially higher if expenditures for noncontract
activities are not controlled.  An overrun is projected because
the cost estimate for the System was not based on a thorough
assessment of the Lower Brule Sioux Tribe's water needs and
related construction costs, the Bureau of Reclamation approved
construction of additional items that were not included in the
Final Engineering Report, and the Tribe and its engineering firm
and the Bureau  incurred noncontract costs at a rate
significantly higher than the rate stipulated in the cooperative
agreement between the Bureau and the Tribe.  However, our
analysis of the financial status of the System was based on
expenditures, cost estimates, and other financial and planning
data available as of September 30, 1998.  As such, our
conclusions regarding any actual or projected cost overruns may
be affected by subsequent events concerning the cost and design
of the System.  These events include modifications to, additions
to, and deletions of construction components; revisions of cost
estimates based on current data; increases in authorized Project
costs attributable to cost indexing; and efforts by the Bureau
and the Tribe to implement cost-saving measures.  In that regard,
the Bureau issued a draft Cost Containment Report in December
1998, which includes various options for reducing System costs.

We also found that costs incurred for the construction of the
System were generally expended in accordance with Federal law,
regulations, and the 1995 cooperative agreement between the
Bureau and the Tribe.  However, we found that operation and
maintenance costs of $155,000 were improperly charged to
construction and administrative costs of $98,000 were not
adequately supported.  This occurred because the Tribe did not
establish sufficient procedures and controls for charging costs
to the proper accounts and the Bureau did not ensure that the
costs charged and reported were reasonable and in accordance with
the purposes and terms of the agreement.

In its response to the draft report, the Bureau concurred with
seven of the report's eight recommendations and partially
concurred with one recommendation. Based on the response, we
considered the seven recommendations resolved but not implemented
and requested the Bureau to provide additional information for
the remaining recommendation.

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


Attachment

cc: Assistant Secretary for Water and Science
Assistant Secretary for Indian Affairs
Commissioner, Bureau of Reclamation
Chief of Staff
Deputy Commissioner for Indian Affairs
Office of Communications




                                             W-IN-BOR-004-98(C)-R
Memorandum

     To:  Assistant Secretary for Water and Science

   From:  Robert J. Williams
          Assistant Inspector General for Audits

Subject:  Audit Report on the Lower Brule Sioux Rural Water
          System, Mni Wiconi Rural Water Supply Project, Bureau
          of Reclamation (No. 99-i-588)

This report presents the results of our audit of the cost of
constructing the Lower Brule Sioux Rural Water System, which is
part of the Mni Wiconi Rural Water Supply Project, located in
South Dakota.  The objectives of the audit were to (1) identify
the source of any incurred or projected cost overruns and (2)
determine whether the costs incurred by the Lower Brule Sioux
Tribe to design and construct its portion of the Project were
expended in accordance with Federal law, regulations, and funding
agreements.  Our review was performed as part of our audit of the
four non-Federal sponsors of the Mni Wiconi Project, including
the Lower Brule Sioux Tribe.  The results of our review of the
other Project sponsors will be presented in separate reports.
The audit of the Project was undertaken at the request of three
members of the Congress.

Based on our review, we found that a cost overrun of $7.1 million
is projected for the Lower Brule System and that the actual
overrun could be substantially higher if expenditures for
noncontract activities are not controlled.  An overrun is
projected because the cost estimate for the System was not based
on a thorough assessment of the Tribe's municipal, rural, and
industrial water needs and related construction costs and the
Bureau of Reclamation approved construction of additional items
that were not included in its May 1993 Final Engineering Report,
which was the criterion for construction of the Project.  In
addition, the Bureau, the Tribe, and the Tribe's engineering firm
incurred noncontract costs at a rate significantly higher than
the 39.2 percent rate stipulated in the Report and in the 1995
cooperative agreement between the Bureau and the Tribe.  As a
result, additional funding authorization will be needed to
complete the System as currently designed by the Tribe's
engineering firm.

We reviewed costs of $1,596,304, or approximately 71 percent, of
the costs of $2,252,630 charged to construction of the Lower
Brule System through September 30, 1998, and found that the costs
incurred for construction of the System were generally expended
in accordance with Federal law, regulations, and terms of the
cooperative agreement.  However, we identified operation and
maintenance and administrative expenditures that were not
classified or charged in accordance with the terms of the
agreement or Office of Management and Budget Circular A-87, "Cost
Principles for State, Local, and Indian Tribal Governments." We
also identified other administrative costs that were not
adequately supported.  In addition, we found that the Tribe had
not established procedures and controls to ensure that costs were
charged to the proper accounts and that the Bureau had not
ensured that the costs charged and reported  were reasonable and
in accordance with the purposes and terms of the agreement.  As a
result, of the $1,596,304 reviewed, we questioned costs of
$253,525, which consisted of cost exceptions of $155,451 and
unsupported costs of $98,074.

To address the cost overruns, we recommended that the Bureau (1)
ensure that costs for future rural water systems are based on
analyses of participating entities' municipal, rural, and
industrial water needs; (2) determine the amount of additional
funding needed to construct the System as revised by the Tribe's
engineer; (3) request the funding needed to construct the revised
System or negotiate with the Tribe to determine how the System
can be modified to keep costs within the legislatively authorized
amount; and (4) work with the Tribe and the Tribe's engineering
firm to determine how future noncontract costs can be controlled
or reduced. To address the questioned costs, we recommended that
the Bureau (1) instruct the Tribe to correct the improper charges
for operation and maintenance expenditures of $155,451, (2)
instruct the Tribe to reimburse the Bureau or provide support for
the unsupported costs of $98,074, (3) work with the Tribe to
improve controls to ensure that System charges are in accordance
with the terms of the cooperative agreement, and (4) negotiate
with the Tribe to institute accounting and administrative
procedures that enable costs to be monitored more effectively.

In the May 25, 1999, response (Appendix 5) to the draft report
from the Commissioner, Bureau of Reclamation, the Bureau
concurred with Recommendations A.2, A.3, A.4, B.1, B.2, B.3, and
B.4 and partially concurred with Recommendation A.1.  Based on
the response, we consider Recommendations A.2, A.3, A.4, B.1,
B.2, B.3, and B.4 resolved but not implemented.  Accordingly,
these recommendations will be referred to the Assistant Secretary
for Policy, Management and Budget for tracking of implementation.
Also based on the response, the Bureau is requested to provide
additional information for Recommendation A.1 (see Appendix 6).

In accordance with the Departmental Manual (360 DM 5.3), we are
requesting a written response to this report by July 26, 1999.
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, 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 and Tribal personnel in
the conduct of this audit.


CONTENTS


                                           Page

INTRODUCTION                                  1

BACKGROUND                                    1
OBJECTIVES AND SCOPE                          2
PRIOR AUDIT COVERAGE                          4

FINDINGS AND RECOMMENDATIONS                  5

A. PROJECT COST OVERRUN                       5
B. COST COMPLIANCE                           12

APPENDICES

1. CLASSIFICATION OF MONETARY AMOUNTS        17
2. SUMMARY OF COSTS CONTRIBUTING TO OVERRUN   8
3. ACTUAL NONCONTRACT COST RATES FOR FISCAL
     YEARS 1996 TO 1998                      19
4. SUMMARY OF QUESTIONED COSTS               20
5. BUREAU OF RECLAMATION RESPONSE            21
6. STATUS OF AUDIT REPORT RECOMMENDATIONS    26


INTRODUCTION


BACKGROUND

The Mni Wiconi Project Act of 1988 (Public Law 100-516)
authorized and directed the Secretary of the Interior to
construct the Mni Wiconi Rural Water Supply Project to ensure a
safe and adequate municipal, rural, and industrial water supply
for both Indian and non-Indian residents of South Dakota.  The
Act authorized construction of the Oglala Sioux Rural Water
System to serve the Oglala Sioux Tribe on the Pine Ridge Indian
Reservation and the West River and Lyman-Jones Rural Water
Systems to serve residents in seven counties[1] in southwestern
South Dakota.  In 1994, the West River Rural Water System and the
Lyman-Jones Rural Water System were incorporated into a single
system, known as the West River/Lyman-Jones Rural Water System.
The Mni Wiconi Act Amendments of 1994 (Title 8 of Public Law
103-434) added the construction of the Rosebud Sioux Rural Water
System and the Lower Brule Sioux Rural Water System to serve the
respective reservations. The Amendments also raised the
construction authorization ceiling for the Project from $87.5
million to $263.2 million, subject to indexing,[2] and provided
that the Project would generally be constructed in accordance
with the Project's May 1993 Final Engineering Report.

The Act, as amended, also authorized the Secretary to enter into
cooperative agreements with the three tribes subject to the
provisions of the Indian Self-Determination and Education
Assistance Act of 1975 (Public Law 93-638), as amended, and
provide funds for planning, designing, constructing, operating,
maintaining, and replacing the tribal portions of the Project.  A
separate cooperative agreement was authorized for the planning,
design, and construction of the West River/Lyman-Jones System,
with the Project sponsor responsible for 20 percent of these
costs.  In addition, the Project sponsor was solely responsible
for the cost of operating, maintaining, and replacing the System.
As the agent for the Secretary, the Bureau of Reclamation
provides oversight for the Project and has the authority and
responsibility to enter into cooperative agreements and to
provide the technical and administrative oversight necessary to
complete the planning, design, and construction of the Project.
The Bureau's oversight included review and approval of reports,
construction plans, specifications, work schedules, fund
requests, and change orders.

The overall Project, which includes a water treatment plant, 60
booster pump stations, 35 water storage reservoirs, and
approximately 4,500 miles of pipeline, will ultimately serve more
than 50,000 people, including more than 40,000 Indians on the
three reservations.  In its May 1998 "Master Plan,"[3] the Bureau
estimated that the total costs to complete the Project would be
$387 million, or $60 million more than the indexed Project costs
of $327 million.  The projected overrun was attributable to the
Oglala Sioux and Lower Brule Sioux Systems.  In the "Master
Plan," the Bureau also estimated that at current funding
levels,[4] the $327 million would not be appropriated until 2006.
However, the authorization to appropriate funds for the Project
expires in 2003.  As of September 30, 1998, the Bureau had
allocated Federal funds of $107.5 million to Project sponsors,
including $4.3 million for Bureau administration and oversight
expenses charged to the sponsors.

The Lower Brule Sioux Rural Water System as authorized was
estimated to cost about $6.2 million, or about 2.4 percent of the
total cost of the Project.  The System consists of about 197
miles of pipeline that enable water to be delivered to and within
the boundaries of the Lower Brule Sioux Reservation; 2 booster
pumps; and 1 water storage reservoir.  The System will serve
approximately 2,000 people on the Reservation.  The May 1998
"Master Plan" indexed the cost of the System from $6.2 million to
$8.1 million (October 1999 dollars). However, estimated costs for
the System have increased to $15.2 million, or about $9 million
more than the original estimate and $7.1 million more than the
$8.1 million indexed amount determined by the Bureau.  Funding
for the System began in fiscal year 1995. As of September 30,
1998, the Tribe had received funds totaling about $3.5 million
(approximately 23 percent of the revised estimated cost for the
System), and about $2 million (13 percent of the revised
estimated cost) had been expended.

OBJECTIVES AND SCOPE

The objectives of the audit were to (1) identify the source of
any actual or projected cost overruns and (2) determine whether
the costs incurred by the Lower Brule Sioux Tribe to design and
construct its portion of the Project were expended in accordance
with Federal law, regulations, and funding agreements.  Our audit
of the Lower Brule Sioux Tribe was performed as part of our audit
of the four non-Federal sponsors of the Project.  The results of
the audits of the other three sponsors of the Project will be
presented in separate reports.  The audit  of the Mni Wiconi
Project was requested by three members of the Congress.

Our audit was performed from September 1998 to March 1999 and
included fieldwork at the Lower Brule Sioux Reservation in South
Dakota.  The scope of audit included a review of records and
expenditures for the Lower Brule System from initial planning in
fiscal year 1993 through fiscal year 1998.  To accomplish our
objectives, we interviewed personnel from the Lower Brule Sioux
Tribe and from the Bureau's offices in Billings, Montana;
Bismark, North Dakota; and Pierre, South Dakota.  We also
interviewed personnel from the Tribe's engineering firm in
Mitchell, South Dakota, and the Tribe's certified public
accounting firm in Chamberlain, South Dakota.  We reviewed
applicable legislation, including the Mni Wiconi Project Act of
1988; Title 8 (Mni Wiconi Act Amendments) of the Yavapai-Prescott
Indian Tribe Water Rights Settlement Act of 1994 (Public Law
103-434) and related Congressional hearings; and the Indian
Self-Determination and Education Assistance Act (Public Law
93-638), as amended.  In addition, we reviewed the Bureau's May
1998 "Master Plan," the Bureau's December 1998 draft Mni Wiconi
Rural Water Supply Project Cost Containment Report, the Project's
quarterly financial reports, the cooperative agreement between
the Bureau and the Tribe, and the Project's May 1993 Final
Engineering Report.  We also reviewed the Tribe's financial
statements and supporting documentation, procurement procedures,
annual workplans, the initial August 1996 and the revised
February 1997 Needs Assessment for the Lower Brule Rural Water
System,[5] the cost reduction plan, and construction bid
documents.

Our analysis of the financial status of the System was based on
expenditures, cost estimates, and other financial and planning
data available as of September 30, 1998.  As such, our
conclusions regarding any actual or projected cost overruns may
be affected by subsequent events concerning the cost and design
of the System.  These events include modifications to, additions
to, and deletions of construction components; revisions of cost
estimates based on current data; increases in authorized Project
costs attributable to cost indexing; and efforts by the Bureau
and the Tribe to implement cost-saving measures.  In that regard,
the Bureau issued a draft Cost Containment Report in December
1998, which includes various options for reducing Project costs.

Our audit was conducted 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 our audit objectives.  As
part of our audit, we reviewed the Secretary's Annual Statement
and Report to the President and the Congress, required by the
Federal Managers' Financial Integrity Act, for fiscal years 1994
and 1995; the Departmental Reports on Accountability for fiscal
years 1996 and 1997, which include information required by the
Act; and the Bureau's annual assurance statements on management
controls for fiscal years 1997 and 1998.  Based on those reviews,
we determined that no material weaknesses were reported that
directly related to the objectives and scope of our audit.  In
addition, we reviewed the Tribe's single audit reports for fiscal
years 1996 and 1997 and the certified public accountant's working
papers for the Tribe's fiscal year 1997 single audit and found
that this documentation did not disclose any reportable
conditions[6] or material weaknesses[7] related to the System.
We also reviewed the Tribe's internal controls related to the
System to the extent necessary to accomplish our audit objectives
and found weaknesses in the areas of accounting for and managing
the Federal funds advanced to the Tribe for construction of the
System.  The internal control weaknesses are discussed in the
Findings and Recommendations section of this report.  The
recommendations, if implemented, should improve the internal
controls in these areas.

PRIOR AUDIT COVERAGE

During the past 5 years, neither the Office of Inspector General
nor the General Accounting Office has issued any reports on the
Mni Wiconi Rural Water Supply Project.

**FOOTNOTES**

[1]:The seven counties are Haakon, Jackson, Jones, Lyman,
Mellette, Pennington, and Stanley.

[2]:Indexing is the process of updating the Congressionally
authorized appropriation ceiling of a project for changes
generally attributable to economic factors, usually inflation.

[3]:The "Master Plan" established the construction schedule for
each segment of the Project and documented historical and
projected costs to enable the Bureau and Project sponsors to
track the status of the Project.  The "Master Plan" also enabled
the Bureau and Project sponsors to estimate the effect of changes
in annual appropriations and prices on the construction schedule.
The "Master Plan" included a Project construction ceiling of $327
million, indexed through October 1999, as presented in Bureau
budget documents for fiscal year 2000.  The "Master Plan" also
included a breakdown of this ceiling for individual Project
sponsors.  The total estimated Project costs of $387 million were
based on information provided by Project sponsors.  The Bureau
said that it plans to update the "Master Plan" periodically.

[4]:In fiscal years 1996 through 1998, annual funding levels for
the Project averaged about $25 million.

[5]:The Needs Assessment determined the current and future
municipal, rural, and industrial water needs of the Tribe and
includes cost estimates for the alternatives proposed to meet
those needs.

[6]:Statement on Auditing Standards No. 60, "Communication of
Internal Control Structure Related Matters Noted in an Audit,"
issued by the American Institute of Certified Public Accountants,
states that "reportable conditions" are matters coming to the
auditor's attention that, in the auditor's judgment, should be
communicated to agency management.  These matters relate to
significant deficiencies in the design or operation of the
agency's internal control structure that could adversely affect
the agency's ability to record, process, summarize, and report
financial data consistent with the assertions of management in
the financial statements.

[7]:Statement on Auditing Standards No. 60 states that a
"material weakness" is a reportable condition in which the design
or operation of one or more of the specific internal control
structure elements does not reduce to a relatively low level the
risk that errors or irregularities in amounts which would be
material to the financial statements being audited may occur and
not be detected within a timely period by employees in the normal
course of performing their assigned functions.

FINDINGS AND RECOMMENDATIONS

A.  PROJECT COST OVERRUN

The Bureau of Reclamation has projected a $7.1 million cost
overrun for the Lower Brule Sioux Rural Water  System.  However,
the actual overrun could be substantially higher unless
expenditures for noncontract activities are controlled.  The Mni
Wiconi Rural Water Supply Act, as amended (Title 8 of Public Law
103-434), established the May 1993 Final Engineering Report as
the criteria for planning, designing, and constructing the
System.  The Report's estimated costs for the System were $6.2
million, subject to indexing, including noncontract costs of 39.2
percent.  The indexed costs, as determined by the Bureau for
fiscal year 2000, totaled $8.1 million (October 1999 dollars).
In addition, the cooperative agreement between the Bureau and the
Lower Brule Sioux Tribe stipulated that the Bureau, as the
oversight agency, ensure that the System was planned, designed,
and constructed as generally described in the Final Engineering
Report.  However, the costs for the System are projected to
exceed the Bureau's cost estimate because (1) the Tribe's cost
estimate was not based on a thorough assessment of its municipal,
rural, and industrial water needs and related construction costs;
(2) the Bureau approved construction of additional items that
were not included in the Final Engineering Report; and (3) the
Bureau, the Tribe, and the Tribe's engineering firm incurred
noncontract costs at a rate significantly higher than the 39.2
percent rate stipulated in the cooperative agreement.  As a
result, the Bureau will need to request from the Congress an
increase in the costs authorized for the System of at least $7.1
million to complete the System as currently designed.

Needs Assessment

The Tribe did not ensure that the cost estimate for the System
included in the May 1993 Final Engineering Report was reasonable.
Specifically, the Tribe did not actively participate in Mni
Wiconi Project meetings or hire an engineering firm to prepare a
needs assessment during the planning phase of the Project.
Instead, the $6.2 million cost estimate[8] included in the Final
Engineering Report and subsequently incorporated into the Mni
Wiconi Project Act was prepared by the engineering firm for the
Oglala Sioux Tribe without the benefit of an assessment of the
Lower Brule Sioux Tribe's funding and municipal, rural, and
industrial water needs.  An adequate needs assessment upon which
to plan and design the System was not available until March
1997.[9]

We found that except for the pump stations, the costs for all
other construction items for the System were underestimated.
Based on our review and a comparison of the original construction
field cost estimate of  $4,477,511 and the Tribe's engineering
firm's estimate of  $9,936,580, we determined that construction
field costs were underestimated by $5,459,069, or an increase of
122 percent over the original field cost estimate (see Appendix
2).  The underestimated costs resulted primarily from a
combination of two factors:  (1) changes in the estimated feet of
pipe, the diameter of the pipe required, and/or the estimated
cost per linear foot of pipe and (2) the addition of distribution
system service connections that, if included, were not
specifically identified in the original field cost estimate.  For
example:

- The costs to construct the four segments of the "core"
system[10] necessary to convey Mni Wiconi Project water to the
Lower Brule Sioux Reservation were underestimated by $1,624,838,
or 100 percent.

- The costs to construct the pipeline to distribute water
throughout the Reservation were underestimated by $2,705,531, or
220 percent.

Additional Construction Items

After issuance of the May 1993 Final Engineering Report, the
Tribe and the Bureau agreed to the need for an
administration/operations and maintenance building and a new
water treatment plant.  Funding, in whole or in part, was
approved by Bureau officials, who believed that the items were
necessary for the efficient operation of the System (see Appendix
2).  The estimated costs for these additional items were
$1,270,000 as follows:

- The Bureau and the Tribe determined that an
administration/operations and maintenance building, estimated to
cost $1,044,000, including noncontract costs, was needed to plan,
construct, operate, and maintain the System.  According to Bureau
officials, the exclusion of the cost of this building from the
$6.2 million cost estimate in the Final Engineering Report was an
"oversight."

- In 1995 and in 1997, the U.S. Environmental Protection Agency
determined that the Tribe's existing water treatment plant,[11]
the primary source of water for the System, did not meet safe
drinking water standards and that a new water treatment plant was
needed.  In response, the Tribe entered into agreements with
several Federal agencies, including the Bureau, to provide
funding for the construction of a new treatment plant.  The
estimated costs for constructing and outfitting the new plant
were about $1.6 million, with the Bureau/Mni Wiconi Project
portion estimated to be $226,000, including noncontract costs, of
which $90,000 was formally approved by the Bureau.  The need to
replace the plant was not foreseen when the Final Engineering
Report was prepared in 1993.  However, we determined that if the
plant is not replaced, the quantity of safe drinking water
available from the System will be inadequate to meet the needs of
the Reservation.

Noncontract Costs

The cooperative agreement for the design and construction of the
System designates the Bureau as the oversight agency and requires
the Tribe to "make every effort to keep its administrative
[noncontract] costs within the estimates shown in the [Final
Engineering] Report," which provided for a noncontract cost rate
of 39.2 percent of construction field costs.  However, for the
3-year period ending September 30, 1998, the Tribe incurred
noncontract costs of $1,353,187, or about $450,000 annually,
which represented 150 percent of the construction field costs of
$899,443 incurred during that period (see Appendix 3) and
approximately $1 million more than would have been expected based
on the noncontract rate of 39.2 percent to construction field
costs.

Bureau officials and the Tribal engineer told us that noncontract
costs, especially those for planning, design, and administration,
were normally high at the beginning of a project because of the
"high start-up costs."  In the case of the System, the high costs
resulted from completing the engineering planning work required
prior to construction and from coordinating project activities
with multiple sponsors.  We agree that noncontract costs are
higher at the beginning of a project but believe that the
noncontract costs incurred for the System exceeded a level that
could be sustained.  We also believe that these costs have to be
controlled if they are to approximate the 39.2 percent rate
provided for in the Final Engineering Report.  Since the Tribe
did not account for noncontract costs on the basis of the nine
categories[12] provided in the Final Engineering Report, we were
not able to directly compare proposed with actual noncontract
costs by category.  However, for the purposes of our analysis, we
grouped noncontract costs into three categories:  tribal-related
costs, engineering-related costs, and Bureau oversight and
technical review charges.

Tribal-Related Costs.  For the 3-year period ending September 30,
1998, the Tribe incurred Tribal-related noncontract costs of
$792,831, which were more than half of the noncontract costs
incurred and about 88 percent of construction field costs.  Of
the $792,831, costs of approximately $503,174 were incurred in
fiscal years 1996 and 1997, prior to the start of construction in
September 1997.  In fiscal year 1998, Tribal-related noncontract
costs totaled $289,657.  However, we found that a high percentage
of these costs were fixed; that is, they did not vary with the
level of construction.  Of the $289,657, costs of $151,427, or 52
percent, consisted of salaries and fringe benefits for permanent
employees[13] and vehicle and general office costs, all of which
were fixed costs.  Given the high percentage of fixed costs, we
believe that the Tribal-related rate of noncontract costs will
remain high unless the level of funding received by the Tribe
increases.  We also found that of the $792,831 incurred by the
Tribe during the 3-year period, costs of $253,525 were not
related to construction of the System or supported with adequate
documentation (see Finding B).

Engineering-Related Costs.  Through September 30, 1998, the Tribe
paid $407,423 to its engineering firm for general project
assistance and design and construction services,[14] or 45
percent of construction field costs.  An official of the
engineering firm said that the engineering-related costs have
been higher than anticipated because of (1) problems and delays
in reaching agreement among the four sponsors on pipeline routes
and construction schedules, which necessitated design changes;
(2) the addition of the new water treatment plant and the
administration/operation and maintenance building; and (3) the
need for the firm to be more involved in coordinating activities
among the Tribe, the Bureau, and the other sponsors and Federal
agencies and in assisting the Tribe in preparing System-related
documents, such as work plans and budgets, since the Tribe did
not have staff with the expertise to perform these duties.  The
engineer also stated that although several portions of the System
had been designed, only one portion of the System had been
constructed.  The engineer stated that while he expected the 45
percent rate for engineering-related services to decrease as
construction increased, the engineer did not believe that the
Tribe would be able to meet the overall 39.2 percent noncontract
cost rate.

Bureau Oversight and Technical Review Costs.  Through September
30, 1998, the Bureau charged $152,933, or an overall rate of 17
percent, of construction field costs for oversight and technical
review.  A Bureau engineer stated that the rate for Bureau costs
has been higher than the 4 percent rate anticipated in the Final
Engineering Report because of the limited construction costs for
the System against which to apply Bureau charges.  The engineer
also stated that higher Bureau charges resulted from the
additional work required by Bureau engineering and contracting
personnel to contract with the Tribe's construction enterprise.
Since the Tribe has required that construction of the System be
performed by the construction enterprise and not be bid
competitively, the Bureau has had to negotiate the prices for
each construction item rather than to accept a competitive bid
for a total contract price.  The Bureau engineer stated that the
Bureau's portion of the noncontract cost rate should decrease as
construction costs increase.

Regarding the high rate of noncontract costs, the Bureau, in its
December 1998 draft Cost Containment Report, stated that the
Tribe was "not on an equal footing" with the other sponsors with
respect to noncontract costs and that the Tribe would have a
"difficult time staying within the limit of 39.2 percent for
non-contract costs" because of the limited amount of annual
funding received.  Under an agreement among Mni Wiconi Project
sponsors, only about 2.37 percent of the Project's annual
appropriation would be allocated to the Tribe based on the
percentage of the costs of the System to total Project costs
($6,232,000 divided by $263,241,000).  With annual Project
appropriations averaging about $25 million for fiscal years 1996
through 1998, the Tribe could expect to receive only about
$593,000 annually.[15] If the Tribe continues to spend about
$450,000 annually on noncontract activities, it will exceed the
39.2 percent rate for noncontract costs provided for in the Final
Engineering Report unless it receives annual funding of about
$1.6 million.

We believe that given the limited amount of funding received, the
Bureau and the Tribe need to work together to identify areas
where cost savings can be achieved, particularly for noncontract
activities.  In that regard, we believe that the Tribe, the
Tribe's engineering firm, and the Bureau need to review those
noncontract costs over which they have direct control and
determine what actions can be taken to maintain current levels or
reduce these costs.  Without a reduction in noncontract costs, it
is doubtful that the System can be constructed within the revised
cost estimate of $15.2 million.

Recommendations

We recommend that the Commissioner, Bureau of Reclamation:

1. Implement corrective actions to ensure that the estimated
costs for future rural water systems are based on a thorough
analysis and review of the participating entities' municipal,
rural, and industrial water needs.

2. Determine the amount of additional funding needed to construct
the Lower Brule Sioux Rural Water System, as revised by the Lower
Brule Sioux Tribe's engineer, based on reasonable estimates of
the amount of annual funding the Tribe can expect to receive and
the level of future noncontract costs.

3. Request the additional funding needed to construct the revised
Lower Brule Sioux Rural Water System or negotiate with the Lower
Brule Sioux Tribe to determine what features or segments of the
System will be modified or eliminated so that the costs of the
System are within the legislatively authorized amount.

4. Work jointly with the Lower Brule Sioux Tribe and the Tribe's
engineering firm to determine the corrective actions that can be
taken to control or reduce future noncontract costs.

Bureau of Reclamation Response and Office of Inspector General
Reply

In the May 25, 1999, response (Appendix 5) to the draft report
from the Commissioner, Bureau of Reclamation, the Bureau
concurred with Recommendations 2, 3, and 4 and partially
concurred with Recommendation 1.  Based on the response, we
consider Recommendations 2, 3, and 4, resolved but not
implemented and  request that the Bureau provide additional
information for Recommendation 1 (see Appendix 6).

Regarding Recommendation A.1, the Bureau stated:

Many of the single-purpose rural water projects that [the Bureau
of] Reclamation has recently become involved with, including the
Mni Wiconi Project, have not been advanced for congressional
authorization through the Administration.  Pre-authorization
planning of these projects has been undertaken by project
sponsors, States or tribes, with little or no Reclamation
planning involvement. Hence, Federal standards for water resource
project planning, including the determination of municipal,
rural, and industrial needs, are rarely met.  Reclamation's
involvement in rural water project planning, design, and
construction will be an ongoing dialogue within the Department of
the Interior and the Administration.  It will also likely be a
focal point at an oversight hearing to be held by the House
Resources Committee, Water and Power Subcommittee.  Reclamation
will continue to base its involvement in rural water development
on the direction of the Congress as established by law.

The Bureau further stated that it could not provide a target date
for implementing the recommendation because "this issue is
potentially subject to action by both the Administration and the
Congress and not within Reclamation's influence."

We acknowledge the difficulties inherent in the Bureau's assuming
oversight authority over projects that are in various stages of
planning, design, and construction at the time of Bureau
involvement and recognize that such difficulties occurred in the
Lower Brule System.  However, we believe that once the Bureau
assumes responsibility for a project, it should take prompt
action to ensure that the project cost estimate is supportable
and based on a thorough analysis of the project sponsor's water
needs.  For the Lower Brule System, the Bureau did not obtain
documentation regarding the basis for the original $6.2 million
cost estimate and therefore did not notify the sponsors and the
Congress of probable overruns.  However, we believe that the
Bureau, in the future, should obtain and review all pertinent
planning and design documents upon which estimated costs are
based.  These reviews are within the Bureau's oversight
responsibilities, which include the timely notification to
project sponsors and the Congress of planning, design, or
engineering deficiencies that could result in cost overruns.

We did not review the Bureau's involvement with the Lower Brule
Tribe before the Lower Brule System was authorized.  However, we
found that the Bureau provided Project and non-Project funding
totaling $461,000 to the Rosebud Tribe for Project
planning-related activities before the Rosebud Rural Water System
was authorized.  Although the Rosebud  Sioux Water System was
authorized at the same time as the Lower Brule System, similar
funding was not provided to the Lower Brule Tribe.  We believe
that to the extent permissible, the Bureau should provide
assistance to project sponsors during the planning phases of a
project.  We request that the Bureau identify what actions it
will take to ensure that project cost estimates are reasonable
and supportable for future rural water systems.

**FOOTNOTES**

[8]:The $6.2 million estimate consisted of $4,477,511 for
construction field costs and $1,755,184 for noncontract costs.
The Final Engineering Report defined field costs as contract
costs for a construction component, including 23.75 percent for
appurtenant items and contingencies.  The Report defined
appurtenant items as "items that were not specifically identified
in the cost estimating procedures because the item does not
represent a significant cost . . . [including] such things as
valves along the pipeline, miscellaneous electrical wiring in the
pump stations, tees, bends, and other necessary, but minor
components of the constructed project." Contingencies were
defined as costs incurred for "unforeseen circumstances during
construction . . . such as an unexpected excavation into rock
along the pipeline route where no rock was anticipated or the
need to build a stronger foundation at the treatment plant
because unusual soil conditions were discovered."  The Report
defined noncontract costs as those costs incurred prior to and
during construction that relate primarily to engineering and
administration of construction.

[9]:A needs assessment submitted to the Bureau in August 1996 was
not approved.  A revised needs assessment submitted to the Bureau
in February 1997 was approved in March 1997.

[10]:The four Tribal "core" system segments allowed for Project
water to be delivered to or near the Lower Brule Sioux
Reservation, whereas the distribution system pipelines transport
the water within the boundaries of the Reservation to homes and
ranches.

[11]:The Tribe's February 1997 Needs Assessment stated that the
plant provided about 300 gallons of the 498 gallons of water per
minute necessary to meet the needs of the Lower Brule System.

[12]:The nine categories and corresponding rates in the May 1993
Final Engineering Report were contract administration (13.2
percent), easements (1.25 percent), geotechnical (.50 percent),
archeological (1.25 percent), design surveys (1 percent),
investigations/Bureau oversight and technical review (4 percent),
design (6 percent), construction observation (10 percent), and
training (2 percent).

[13]:For fiscal year 1998, salaries for permanent employees
consisted of $36,480 for one-half the salary and related fringe
benefits for the program director and the secretary, $67,646 for
the salaries and fringe benefits for two inspectors and an
easement coordinator, $42,559 for office-related costs, and
$4,742 for vehicle operation costs.

[14]:According to the Tribe's engineering firm, general project
assistance services included providing Tribal officials with
engineering advice and consultation to assist them in the
performance of their duties and the preparation of work plans,
budgets, needs assessments, water conservation plans, and other
services necessary to assist the Tribe in developing the System.
Design and construction services included providing the civil,
structural, mechanical, and electrical engineering services
needed to develop the System.

[15]:The amounts received by the Tribe for the past 2 years have
exceeded the amounts provided for in the agreement among the
Project sponsors.  The Tribe received allotments of $690,521 in
fiscal year 1997 and $987,037 in fiscal year 1998.  The Tribe
also received transfers from West River/Lyman-Jones Systems,
Inc., of $500,000 in fiscal year 1997 and $800,000 in fiscal year
1998 to help fund construction work.

B.  COST COMPLIANCE

Costs incurred for the construction of the Lower Brule Sioux
Tribe Rural Water System were generally expended in accordance
with Federal law, regulations, and the 1995 cooperative agreement
between the Bureau of Reclamation and the Lower Brule Sioux
Tribe.  However, the Tribe did not properly classify or charge
operation and maintenance and administrative costs and did not
have adequate support for other recorded administrative costs.
The cooperative agreement and Office of Management and Budget
Circular A-87, "Cost Principles for State, Local, and Indian
Tribal Governments," provide criteria for the classification,
allowability, reasonableness, and documentation of costs.  The
cooperative agreement also states that the Bureau would provide
administrative and technical oversight of construction of the
System.  However, the Tribe did not establish sufficient
procedures and controls for charging costs to the proper
accounts, and the Bureau did not ensure that the costs charged
and reported were reasonable and in accordance with the purposes
and terms of the agreement.  As a result, of the $1,596,304
reviewed, we questioned costs of $253,525, which consisted of
cost exceptions of $155,451 and unsupported costs of $98,074 (see
Appendix 4).

We judgmentally tested, based on dollar significance, costs of
$1,596,304, or approximately 71 percent, of the costs of
$2,252,630 charged to construction of the System through
September 30, 1998.  Our tests included a review of personnel and
related fringe benefit costs; costs related to vehicles,
equipment, and water management committees; and all costs
pertaining to engineering and construction.  We did not review
the administrative costs of $152,933 charged by the Bureau to
oversee the planning, design, and construction of the System
because these costs accounted for only about 7 percent of the
$2,252,630 of System costs.

Cost Exceptions

In August 1995, the Bureau and the Tribe entered into a
cooperative agreement to plan, design, and construct the System.
The agreement, which incorporated by reference Office of
Management and Budget Circular A-87,[16] provides that funds
advanced under the agreement can be used only for approved work.
The agreement did not authorize expenditures for operation and
maintenance, but in September 1995, the Tribe and the Bureau
entered into a separate cooperative agreement for the operation
and maintenance of the System.  In addition, the funding for
construction and for operation and maintenance of the System
comes from two different appropriations.  According to the
General Accounting Office's "Principles of Federal Appropriations
Law," the shifting of funds between appropriations is prohibited
without statutory authority, and no evidence of such statutory
authority was provided.  In addition, Chapter 2, B.3, of the
Principles of Federal Appropriation Law states that recipients of
grant funds are expected to use the funds for the purpose for
which they were awarded and that "an expenditure which is not for
grant purposes is not an allowable cost and may not be charged to
the grant."  Accordingly, the Bureau may not authorize the use of
construction funds for maintenance and operation of the System.
Of the $1,596,304 reviewed, we questioned operation and
maintenance costs of $155,451 that had been charged to
construction of the System as follows:

Vehicle-Related Costs.  We took exception to vehicle-related
costs of $72,629, which consisted of $46,527 for the purchase in
April 1996 (approximately 1 1/2 years before construction began)
of two pickup trucks that were used exclusively by the Tribe's
Rural Water Office Operations and Maintenance Branch and $26,102
for gasoline, insurance, and maintenance costs for Operations and
Maintenance Branch vehicles.  The costs of the two trucks had
been charged to the Equipment Repair and Maintenance Account and
not to a vehicle or equipment purchase account.

Personnel-Related Costs.  We took exception to personnel-related
costs of $61,480, which consisted of (1) $38,398 for salaries of
two construction inspectors, (2) $20,501 for 50 percent of the
Office of Rural Water Director's salary and fringe benefits for
fiscal year 1997, (3) $1,831 for travel costs of Operations and
Maintenance Branch personnel for fiscal years 1996 and 1997, and
(4) $750 for Christmas bonuses paid to Operations and Maintenance
Branch personnel in fiscal year 1997.  Tribal personnel told us
that the construction inspectors who were hired in August 1996
performed operation and maintenance work until construction began
in September 1997.  In addition, the Tribe allocated 50 percent
of the Director's salary to operation and maintenance in fiscal
years 1996 and 1998 but charged the Director's total salary to
construction in fiscal year 1997. Because there was no
documentation to support that all of the Director's time was
construction related in fiscal year 1997, we believe that half of
the Director's salary should have been allocated to operation and
maintenance.

Office Equipment and Operating Costs.  We took exception to
office equipment and operating costs of $18,342.  Of this amount,
$8,942 was half of the costs for two computers and a copier that
were used jointly by the Operations and Maintenance and the
Design and Construction Branches but that were charged entirely
to construction.  The amount questioned was based on the Tribe's
50 percent allocation of personnel-related costs to operation and
maintenance.  We also took exception to $4,331 for furniture,
consisting of $1,727 for items that could not be located and
$2,604 for items used by the Tribal Administration Office; $3,384
for a printer used exclusively by the Tribe's alcoholism program;
and $1,685 for Operations and Maintenance Branch supplies.

Administrative Costs.  We took exception to $3,000 charged to the
construction of the System that was paid to the Tribe for
accounting services provided to the Operations and Maintenance
Branch for fiscal year 1995.

Unsupported Costs

Office of Management and Budget Circular A-87, Attachment A,
Section C, states that to be allowable under Federal awards,
costs "must be adequately documented."  We identified costs of
$98,074 that were not documented to show how the amounts charged
related to the construction of the System as follows:

Cultural Resource Officer.  We could not locate and the Tribe did
not provide documentation for costs of $73,074 for the salary and
fringe benefits of the former Cultural Resource Officer that
identified the work performed and how it related to the System.

Water Management Committees.  The Tribe did not have adequate
documentation showing that payments totaling $25,000, $22,000 for
stipends  and $3,000 for related secretarial services, were for
work related to the System.  These costs included $18,000 for
stipends to Mni Wiconi Steering Committee members and $3,000 for
related secretarial services for the period February 1995 to
April 1996, during which time the Steering Committee conducted
its business during Tribal Council meetings.  We could not find,
and the Tribe did not provide, separate minutes of meetings for
the Steering Committee showing that business related to the
System was conducted to justify the payment of stipends.  We also
questioned Water Advisory Board stipends of $4,000.  Tribal
personnel told us that the Tribal Council established the Board,
which was paid stipends for all of fiscal year 1996.  However,
the Tribe did not provide minutes of Board meetings from October
1995 to January 1996 and from June to September 1996 indicating
that meetings were held and the nature of the business conducted
at the meetings.

Classification and Documentation of Costs

Neither the Tribe nor the Bureau adequately reviewed System
expenditures to ensure that costs were properly classified,
allowable,  necessary, and  adequately documented.  We also noted
that the Tribe did not have adequate written procedures or
instructions regarding the classification, allowability,
reasonableness, and documentation of costs.  Further, the Bureau
was not provided with, and did not formally request, sufficiently
detailed information to enable it to readily evaluate System
expenditures.  We found that neither the cooperative agreement,
which incorporates by reference Office of Management and Budget
Circular A-87, nor the Tribal Fiscal Management Policy[17]
provided detailed instructions on classifying and accounting for
System costs to ensure consistency.  For example, the Policy did
not include a chart of accounts or detailed descriptions of the
types of costs to be charged to each account.  In addition, the
Policy did not address adequate separation of duties.  We noted
that the members of the Mni Wiconi Steering Committee who
reviewed the costs and the members of the Tribal Council[18] who
approved the costs were the same individuals.[19]  We also noted
that there were no written procedures describing the duties and
responsibilities of the Steering Committee and the Tribal Council
for reviewing and approving the costs to ensure that they were
allowable and related to the purposes of the System.  As a result
of the inadequate accounting and review procedures and the
inadequate separation of duties between the Steering Committee
and the Council, the former Director of the Tribe's Office of
Rural Water was able to charge operation and maintenance costs to
the System's construction program without Tribal officials taking
exception to the charges.

The Bureau also did not detect the inappropriate charges.  Prior
to January 1997, the Bureau was provided only with summary
financial data that were not sufficient to allow it to determine
the appropriateness and allocability of the costs reported.
Although more detailed quarterly financial data were provided to
the Bureau as of January 1997, these data were not summarized by
budget item or on the basis of the noncontract cost categories in
the Final Engineering Report.  However, Bureau employees did not
formally request sufficient clarifying information to enable them
to readily analyze or compare the costs with the amounts budgeted
and to identify which activities were contributing to the high
level of noncontract costs and bring this matter to the attention
of Tribal officials.

We believe that both the Tribe and the Bureau need to negotiate
on the level of financial information to be provided to serve the
needs of both the Tribe and the Bureau.  The information provided
should allow the Tribe and the Bureau to review System
expenditures to ensure that (1) only necessary costs are charged
to construction, given the limited amount of funding for the
System; (2) problem areas are identified and addressed quickly;
and (3) areas where savings can be achieved, particularly savings
in noncontract costs, are identified.  In that regard, we believe
that the Tribe, the Tribe's engineering firm, and the Bureau need
to review those noncontract costs over which they have direct
control and determine what actions can be taken to maintain
current levels or reduce these costs.  Without a reduction in
noncontract costs, we do not believe that the System can be
constructed within the revised estimated costs of $15.2 million.

Recommendations

We recommend that the Commissioner, Bureau of Reclamation:

1. Instruct the Lower Brule Sioux Tribe's Rural Water System
Operations and Maintenance Branch to reimburse the Design and
Construction Branch for operations and maintenance expenditures
of $155,451 that were charged improperly.

2. Instruct the Lower Brule Sioux Tribe to reimburse the Bureau
or provide support for the unsupported costs of $98,074
identified by our review.

3. Work with the Lower Brule Sioux Tribe to improve controls over
costs charged to construction of the Lower Brule System to ensure
that amounts charged for reimbursement are allowable and
necessary and in accordance with the terms of the cooperative
agreement.

4. Institute accounting and review procedures through negotiation
with the Lower Brule Sioux Tribe to enable both the Tribe and the
Bureau to account for and monitor System costs more effectively.

Bureau of Reclamation Response and Office of Inspector General
Reply

In the May 25, 1999, response (Appendix 5) to the draft report
from the Commissioner, Bureau of Reclamation, the Bureau
concurred with the four recommendations.  Based on the response,
we consider the recommendations resolved but not implemented (see
Appendix 6).


**FOOTNOTES**

[16]:Circular A-87, Attachment A, Section E, states that
personnel, material, equipment, and travel costs must be
identified specifically to the performance of Federal awards.

[17]:The Tribe's undated Fiscal Management Policy was in effect
until August 1998, when it was superseded by the Tribal Financial
Management Policies and Procedures.

[18]:Tribal regulations require at least two Council members to
approve an expenditure.

[19]:-On February 22, 1995, the Tribal Council established itself
as the Mni Wiconi Steering Committee to "oversee the Mni Wiconi
Rural Water Supply System Project on the Lower Brule
Reservation."


APPENDIX 1

CLASSIFICATION OF MONETARY AMOUNTS


Finding
Cost Compliance
Cost Exceptions
Unsupported Costs
Total
Questioned
Costs

$155,451

98,074

$253,525


*The questioned costs are detailed in Appendix 4.

APPENDIX 2


SUMMARY OF COSTS CONTRIBUTING TO OVERRUN

----------------------------------------------------------------
|         |Tribal   |         |Percent
|         |Engineer's|        |Increase/
|Original |Estimate |Difference|(Decrease)
|Estimate |         |         |
----------------------------------------------------------------
Lower Brule System "Core"
System
Pipeline Segments:
----------------------------------------------------------------
Vivian to Reliance        |$1,254,503$2,066,276$811,7731     65%
----------------------------------------------------------------
Reliance to West Brule    |170,953   516,299   345,346  2   202%
----------------------------------------------------------------
Kennebec to Reservation   |202,662   255,106    52,444  3    26%
----------------------------------------------------------------
Highway 83/County Line    ||         |415,275  |415,2754
Road                      ||         |         |
----------------------------------------------------------------
Subtotal                |$1,628,118$3,252,956$1,624,838 100%
----------------------------------------------------------------
Distribution System      $1,230,073$3,935,604$2,705,531  5  220%
Pipelines
----------------------------------------------------------------
Pump Stations               660,000   421,000  (239,000) 6 (36%)
----------------------------------------------------------------
Reservoirs                   |100,000  |420,000  |320,0007  320%
----------------------------------------------------------------
Subtotal                |$1,990,073$4,776,604$2,786,531 140%
----------------------------------------------------------------
Cumulative Subtotal    |$3,618,191$8,029,560$4,411,369 122%
----------------------------------------------------------------
Appurtenant Items @12.5     |452,274  |1,003,695|551,421
Percent                     |         |         |
----------------------------------------------------------------
Subtotal                |$4,070,465$9,033,255$4,962,790
----------------------------------------------------------------
Contingencies @ 10 Percent  |407,046  |903,325  |496,279
----------------------------------------------------------------
Subtotal Field Costs    |$4,477,511$9,936,580$5,459,069 122%
----------------------------------------------------------------
Noncontract Costs @ 39.2    |1,755,184|3,895,139|2,139,955
Percent                     |         |         |
----------------------------------------------------------------
Subtotal                |$6,232,695$13,831,719$7,599,024
----------------------------------------------------------------
Additional Items Not in    |
Final                      |
Engineering Report         |
----------------------------------------------------------------
1.  Water Treatment     |          226,000 8 226,000
Plant                   |
----------------------------------------------------------------
2.  Administration      |          |1,044,0009|1,044,000
Building/Shop           |          |         |
----------------------------------------------------------------
Subtotal                        1,270,0001,270,000
----------------------------------------------------------------
Adjustment to Reconcile to |
Bureau                     |          $72,281   $72,281
"Master Plan" Amount       |
----------------------------------------------------------------
Total                 ||$6,232,695|$15,174,000|$8,941,305
----------------------------------------------------------------



1Differences in pipe size and  pipe prices and a 17,670 foot
reduction in the quantity of pipe.

2Differences in pipe size and pipe prices and 33,460 additional
feet of pipe.

3Differences in pipe size and  pipe prices and a 23,632 foot
reduction in the quantity of pipe.

4No separate amount cited in original estimate.  The $415,275 is
the engineer's estimated cost for installing 73,500 feet of
6-inch pipe adjacent to County Line Road in exchange for West
River/Lyman-Jones System, Inc., installing about 7 miles of
8-inch pipe in the Fort Hale area.

5Differences in pipe size and pipe prices and 388,318 additional
feet of pipe.

6Increase in number of pump stations from two to three, but
reductions in size and estimated costs.

7Increase in number of reservoirs from one to two, increasing one
reservoir from 100,000 gallons to 450,000 gallons, and paying the
Oglala Sioux Tribe $50,000 to increase another reservoir by
100,000 gallons.

8Of the estimated water treatment plant costs of $1,579,000,
costs of $226,000, consisting of construction costs of $162,356
and noncontract costs of $63,644 ($162,356 x .392), will be
charged to the Lower Brule System.

9This amount includes estimated construction costs of $750,000
and noncontract costs of $294,000 ($750,000 x .392).


APPENDIX 3


ACTUAL NONCONTRACT COST RATES
FOR FISCAL YEARS 1996 TO 1998


----------------------------------------------------------
|1996   |1997   |1998     |Total
----------------------------------------------------------
Noncontract Costs
----------------------------------------------------------
Tribal-Related Costs | $194,684$308,490$289,657[1]$792,831
----------------------------------------------------------
Engineering-Related     | 40,082  235,234 132,107  407,423
Costs                   |
----------------------------------------------------------
Bureau Oversight and    |
Technical               | 20,375[2]83,521 49,037   152,933
Review Costs            |
----------------------------------------------------------
Subtotal              | |$255,141|627,245|470,801
----------------------------------------------------------
Cumulative Total     |         |$882,386|$1,353,187
----------------------------------------------------------

----------------------------------------------------------
Annual Construction                61,186  838,257
Costs
----------------------------------------------------------
Cumulative Total     |         |$61,186|$899,443
----------------------------------------------------------
Noncontract Cost Rates            1,442% [3]  150% [4]
----------------------------------------------------------

**FOOTNOTES**

[1]:Amount consists of $151,427 for salaries and fringe benefits
for permanent employees and office and vehicle costs, $72,991 for
salary and fringe benefits for the Cultural Resource Officer and
consultant costs, $40,624 for Mni Wiconi Steering Committee and
other advisory committee stipends, $20,097 for equipment, and
$4,518 for clerical expenses.

[2]:Includes Bureau fiscal year 1995 charges of $10,266.

[3]:The actual noncontract rate of 1,442 percent through fiscal
1997 was determined by dividing total noncontract costs of
$882,386 by total construction costs of $61,186.

[4]:The actual noncontract rate of 150 percent through fiscal
year 1998 was determined by dividing total noncontract costs of
$1,353,187 by total construction costs of $899,443.

APPENDIX 4


SUMMARY OF QUESTIONED COSTS


-----------------------------------------------------------------
|Questioned Costs
-----------------------------------------------------------------
|                               |Costs    |Cost     |Unsupported|
|    Title/Description          |Incurred |Exceptions|Costs     |
|                               |         |        |
|Balance
-----------------------------------------------------------------
Office of Rural Water Program Costs
-----------------------------------------------------------------
Office of Rural Water        | $87,060  $20,501 1         $66,559
Program Director             |
-----------------------------------------------------------------
Cultural Resource Officer    |  73,074                 $73,074  2
-----------------------------------------------------------------
Pipe Inspectors              |  84,765   38,398 3          46,367
-----------------------------------------------------------------
Steering Committee and       |  99,423           25,000   474,424
Advisory Board               |
-----------------------------------------------------------------
Other Salaries               |  83,443                     83,443
-----------------------------------------------------------------
Other Fringe Benefits        |  14,918                     14,918
-----------------------------------------------------------------
Cultural Resource Consulting | 161,878   72,629            89,249
and Vehicles                 |
-----------------------------------------------------------------
Travel and Training          |  38,171   2,581  5          35,590
-----------------------------------------------------------------
Legal Fees and Rent          |  19,185                     19,185
-----------------------------------------------------------------
Office Equipment and         |  83,498   18,342            65,156
Supplies                     |
-----------------------------------------------------------------
Office Costs                 |  38,547                     38,547
-----------------------------------------------------------------
Administrative Costs         | | 8,868   |3,000   |             |
| |         |        |          |5,868
-----------------------------------------------------------------
Subtotals                |$792,830   $155,451 $98,074    $539,306
-----------------------------------------------------------------
Design and Engineering Costs    407,423                   407,423
-----------------------------------------------------------------
Construction                    |899,4436                |899,443
-----------------------------------------------------------------
Subtotals                  |$2,099,697                 $1,846,172
-----------------------------------------------------------------
Bureau of Reclamation           152,933                   152,933
Facilitation Costs
-----------------------------------------------------------------
Total Costs           | |$2,252,630|$155,451|$98,074  |$1,999,105
-----------------------------------------------------------------



1Amount consists of salary plus fringe benefits for fiscal year
1997.

2Amount consists of salary plus fringe benefits for fiscal years
1997 and 1998.

3Amount consists of salaries plus fringe benefits for fiscal
years 1996 and 1997.

4Amount consists of $18,000 of Steering Committee stipends,
$4,000 of Water Advisory Board stipends, and $3,000 of
secretarial services.

5Amount consists of $1,831 for travel-related costs and $750 for
Christmas bonuses.

6Amount includes $61,186 of construction mobilization costs.

APPENDIX 5
Page  1  of 5

APPENDIX 5
Page  1  of 5

APPENDIX 5
Page  1  of 5

APPENDIX 5
Page  1  of 5

APPENDIX 5
Page  1  of 5

APPENDIX 5
Page  1  of 5

APPENDIX 6



STATUS OF AUDIT REPORT RECOMMENDATIONS


Finding/Recommendation
Reference

Status

Action Required
A.1
Management concurs; additional information needed.
The Bureau should provide a plan identifying actions to be taken
to ensure that cost estimates are reasonable and supportable for
future rural water system projects.  The plan should include
target dates and titles of officials responsible for
implementation.

A.2, A.3, A.4, B.1,
B.2, B.3, and B.4

Resolved; not implemented.
No further response to the Office of Inspector General is
required.  The recommendations will be referred to the Assistant
Secretary for Policy, Management and Budget for tracking of
implementation.




ILLEGAL OR WASTEFUL ACTIVITIES SHOULD BE REPORTED

TO THE OFFICE OF INSPECTOR GENERAL BY:

Sending written documents to:



Within the Continental United States

U.S. Department of the Interior
Office of Inspector General
1849 C Street,N.W.
Mail Stop 5341
Washington, D.C. 20240

Calling:

Our 24 hour
Telephone HOTLINE
1-800-424-5081 or
(202) 208-5300

TDD for hearing impaired
(202) 208-2420 or
1-800-354-0996



Outside the Continental United States


Caribbean Region

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

Calling:
(703) 235-9221


North Pacific Region

U.S. Department of the Interior
Office of Inspector General
North Pacific Region
238 Archbishop F.C. F'lores Street
Suite 807, PDN Building
Agana, Guam 96910


Calling:
(700) 550-7428 or
COMM 9-011-671-472-7279