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

Report No. 99-i-627

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



Date:  June 29, 1999




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


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


REPORT NO. 99-I-627

JUNE 1999







MEMORANDUM

             TO:  The Secretary

           FROM:  Robert J. Williams
                  Acting Inspector General

SUBJECT SUMMARY:  Final Audit Report - "Oglala Sioux Rural Water
                  Supply System, Mni Wiconi Rural Water Supply
                  Project, Bureau of Reclamation" (No. 99-i-627)

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 Oglala 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 Oglala Sioux Tribe. The results of
the audits of the other Project sponsors have been presented in
separate reports. The audit of the Mni Wiconi Project was
requested by three members of the Congress. 

We found that cost overruns totaling an estimated $49.7 million
will occur in constructing the Oglala Sioux Rural Water Supply
System as currently designed.  Further, the Tribe is likely to
exceed its percentage allowance for noncontract activities, which
we estimate would increase the cost overruns by $12.9 million, to
a total of $62.6 million.  These overruns will occur because the
costs for some of the System components were underestimated;
other components were not included in Bureau of Reclamation's May
1993 Final Engineering Report; and the Bureau and the Tribe did
not ensure that the System was planned, designed, and constructed
as described in the Report.  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 totaling about $48.7 million were generally expended in
accordance with Federal law, regulations, and the cooperative
agreements between the Bureau and the Tribe.  However, we
questioned noncontract costs of about $1,154,000 that were not
allowable under Federal criteria and the cooperative agreements,
were not adequately supported by the Tribe's accounting records,
or were not in compliance with provisions of the cooperative
agreements or the indirect cost rate agreements.

Based on the Bureau's response to the draft report, we considered
the report's seven recommendations resolved but not implemented.

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


Attachment

cc: Chief of Staff 
Assistant Secretary for Water and Science
Assistant Secretary for Indian Affairs
Commissioner, Bureau of Reclamation
Deputy Commissioner for Indian Affairs
Office of Communications
bcc:IG
AIGA
OIG sub/chron
AD chron
AAD-Duff
WR-Moberly


                                             W-IN-BOR-004-98(A)-R


Memorandum

     To:  Assistant Secretary for Water and Science

   From:  Robert J.  Williams
          Assistant Inspector General for Audits

Subject:  Audit Report on the Oglala Sioux Rural Water Supply
          System, Mni Wiconi Rural Water Supply Project, Bureau 
          of Reclamation (No. 99-i-627)

This report presents the results of our audit of the cost of
constructing the Oglala Sioux Rural Water Supply 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 actual or projected System cost overruns and
(2) determine whether the costs incurred by the Oglala Sioux
Tribe were expended in accordance with Federal law, regulations,
and funding agreements.  Our review of the Tribe was performed as
part of our audit of the four non-Federal sponsors of the
Project, including the Tribe.  The results of our review of the
other Project sponsors have been presented in separate reports.
The audit of the Mni Wiconi Project was undertaken at the request
of three members of the Congress.

Based on our review, we found that cost overruns totaling an
estimated $49.7 million will occur in constructing the Oglala
Sioux Rural Water Supply System as currently designed.  This
amount consists of $16.3 million expended for System components
completed or under construction and $33.4 million for future
construction.  Furthermore, the Tribe is likely to exceed its
percentage allowance for noncontract activities, which we
estimate would increase the cost overruns by $12.9 million, to a
total of $62.6 million.  These overruns will occur because the
costs for some of the components were underestimated; other
components were not included in the Bureau's May 1993 Final
Engineering Report; and the Bureau and the Tribe did not ensure
that the System was planned, designed, and constructed as
described in the Report.  As a result, we believe that the System
as currently designed cannot be completed within the existing
appropriation ceiling.

We also found that the costs incurred by the Tribe under
construction contracts for the System ($34.3 million) and for
related noncontract activities, such as design, geotechnical
design, archaeology, inspection, and investigation (totaling
$14.4 million), were generally expended in accordance with
Federal law, regulations, and funding agreements.  However, our
review of costs of $15.6 million incurred by the Tribe for other
noncontract activities (contract and easement administration and
training) identified expenditures that were not allowable under
Office of Management and Budget Circular A-87 or the cooperative
agreements, were not supported by the Tribe's accounting records,
or were not in compliance with the provisions of the cooperative
agreements or the indirect cost rate agreements.  We believe that
the questioned expenditures occurred because the Bureau and the
Tribe did not clearly establish in the funding agreements the
amounts and the types of costs that can be charged to the System
or ensure that the indirect cost charges were based on the
approved rates.  As a result, of the costs of $660,728 tested for
compliance, we classified $64,919 as cost exceptions because they
were not applicable to the System and $266,228 as unsupported
costs because of a lack of documentation showing the relationship
of the costs to the System.  Also, of the costs of $486,722
charged to an administrative account established under the 1994
cooperative agreement, we questioned $366,428  because the
expenditures did not meet the terms of the agreement.  Further,
we classified indirect costs totaling $456,531 as cost exceptions
because the Tribe did not adjust its charges to the System for
its indirect costs when the final indirect costs rates were
approved.

To address the estimated cost overruns, we recommended that the
Bureau (1) request an increase in the authorization ceiling or
negotiate with the Tribe to reduce System costs by modifying or
eliminating System components, (2) negotiate a requirement in its
ongoing and future cooperative agreements to establish a cost
accounting system for construction projects, and (3) provide
increased monitoring of System expenditures.  Regarding the cost
compliance issues, we recommended that the Bureau (1) modify the
cooperative agreements to identify the type and amounts of
allowable costs for contract and easement administration and
training and (2) instruct the Tribe to reimburse the System or
provide support for the cost exceptions and unsupported costs
identified by our review.

In the May 25, 1999, response (Appendix 5) to the draft report
from the Commissioner, Bureau of Reclamation, the Bureau
concurred with Recommendations A.1, A.3, B.1, B.2, B.3, and B.4,
and nonconcurred with Recommendation A.2.  However, we believe
that the actions proposed in the Bureau's response meet the
intent of  Recommendation A.2.  Therefore, based on the response,
we consider all of the recommendations resolved but not
implemented. Accordingly, the recommendations will be referred to
the Assistant Secretary for Policy, Management and Budget for
tracking of implementation (see Appendix 7).

On May 27, 1999, we received a response from the President of the
Oglala Sioux Tribe, which nonconcurred with our findings on cost
compliance but did not address our finding on project cost
overruns.  We have considered the Tribe's comments in preparing
our final report and have revised the amount reported as
unsupported costs based on additional documentation provided by
the Tribe.

Since the report's recommendations are considered resolved, no
further response to the Office of Inspector General is required
(see Appendix 7).

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 the 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 our audit.

CONTENTS
                                                    Page

INTRODUCTION                                           1

BACKGROUND                                             1

OBJECTIVES AND SCOPE                                   2

PRIOR AUDIT COVERAGE                                   3

FINDINGS AND RECOMMENDATIONS                           4

A.PROJECT COST OVERRUNS                                4
B.COST COMPLIANCE                                      9

APPENDICES

1.CLASSIFICATION OF MONETARY AMOUNTS                  19
2.AGREEMENTS BETWEEN THE OGLALA SIOUX TRIBE 
     AND THE BUREAU OF RECLAMATION                    20
3.COSTS CONTRIBUTING TO PROJECTED OVERRUN             21
4.REVIEW OF SELECTED ACCOUNTS                         22
5.BUREAU OF RECLAMATION RESPONSE                      23
6.OGLALA SIOUX TRIBE RESPONSE                         28
7.STATUS OF AUDIT REPORT RECOMMENDATIONS              37

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 provide a
safe and adequate municipal, rural, and industrial water supply
to both Indian and non-Indian residents of South Dakota.
Initially, the Project included the Oglala Sioux Rural Water
Supply System, the West River Rural Water System, and the
Lyman-Jones Rural Water System.  In 1994, the West River and the
Lyman-Jones Systems were merged into one system, known as the
West River/Lyman-Jones Rural Water System.  The Mni Wiconi Act
Amendments of 1994 (Public Law 103-434, Title 8) added
construction of the Rosebud Sioux and the Lower Brule Sioux Rural
Water Systems to serve the respective reservations, thereby
increasing the number of Project "sponsors" to four.  The
amendments also raised the authorized appropriation ceiling for
the Project from $87.5 million to $263.2 million, subject to cost
indexing,[1] and provided that the systems would generally be
constructed in accordance with the Project's Final Engineering
Report, dated May 1993.  The Report also established the
appropriation ceilings for each sponsor's water system and for
the core pipeline system, which is being constructed by the
Oglala Sioux Tribe.

The core system, which is estimated to cost $98.4 million
(indexed to October 1999), is shared by the four project sponsors
and serves as the main diversion of Missouri River water that is
conveyed to each of the sponsor's respective distribution
systems.  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 (Public Law 93-638), as amended, to provide funds
for planning, designing, constructing, operating, maintaining,
and replacing their respective systems.  Separate cooperative
agreements were authorized for planning, designing, and
constructing the West River/Lyman-Jones System, with the Project
sponsor responsible for 20 percent of these costs.  In addition,
the Project sponsor is solely responsible for the cost of
operating, maintaining, and replacing the System.  The Bureau of
Reclamation serves as the oversight agency for the Project, with
the authority to enter into cooperative agreements and to provide
the technical and administrative oversight needed to complete the
planning, design, and construction of the Project.  The Bureau's
oversight includes reviewing and approving reports, construction
plans, specifications, work schedules, fund requests, and change
orders.  The Bureau has entered into three cooperative agreements
with the Tribe since the Project's inception (see Appendix 2).

The overall Project includes a water treatment plant, 4,500 miles
of pipeline, 60 booster pump stations, and 35 water storage
reservoirs.  The Project will ultimately serve more than 50,000
people, including more than 40,000 Indians on the three
reservations.  In its "Master Plan,"[2] the Bureau estimated that
the total cost to complete the Project would be $387 million, or
$60 million more than the indexed Project cost of $327 million.
The projected overrun was attributable to the Oglala Sioux and
the Lower Brule Sioux Systems.  In the "Master Plan," the Bureau
also estimated that at current funding levels, the $327 million
would not be fully 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 charges to the
sponsors.

The Oglala Sioux Rural Water Supply System as authorized includes
about 560 miles of pipelines, 30 booster pump stations, and 27
water storage reservoirs and will serve approximately 21,000
people on the Pine Ridge Indian Reservation.  The cost of the
Oglala System, originally estimated at $145.3 million in the
Final Engineering Report, was indexed in the "Master Plan" to
$175.2 million (October 1999 dollars). As of September 30, 1998,
about $71.8 million (41 percent of the estimated costs) had been
allocated, and about $67.4 million (38 percent of the estimated
cost) had been expended.[3]

OBJECTIVES AND SCOPE

The objectives of our audit, which was conducted at the request
of three members of the Congress, were to (1) identify the source
of any actual or projected cost overruns and (2) determine
whether the costs incurred by the Tribe were made in accordance
with Federal law, regulations, and funding agreements.  Our audit
of the 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 Project sponsors have been presented in
separate reports.

To accomplish our audit objectives, we reviewed applicable
legislation and Federal, Department of the Interior, and Tribal
regulations and policies governing the authorization and
management of the System.  In addition, we reviewed the Indian
Self-Determination and Education Assistance Act, as amended, and
documents and financial activities related to the System, such as
procurement practices, correspondence, System reports,
engineering estimates, bid abstracts, contracts, and invoices. We
also reviewed the Tribe's financial statements and compliance
reviews of the System performed by the Tribe's contracted
accounting firm.  Further, we interviewed Bureau program and
Tribal personnel to obtain an understanding of the System's
financial management and accounting systems; personnel from the
engineering firm contracted by the Tribe to plan, design, and
manage the System's construction; and members of the public
accounting firm that performed the Tribe's annual financial audit
and compliance reviews of the System's expenditures.  Our audit
encompassed construction activities and records from the System's
inception in 1991 through September 30, 1998, including the
Bureau's cost estimates to complete the System.  Our compliance
testing of the System's accounting records included the period of
January 1995 through September 1998.  Our compliance testing did
not include accounting periods prior to January 1995 except for
our review of the Tribe's indirect cost charges because of the
lack of availability of the records at the Tribal offices.

The audit was made, as applicable, 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.  As part of the
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 review. 

Our analysis of the financial status of the Oglala Sioux Rural
Water Supply 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, additions, and deletions of construction
components; revisions of cost estimates based on more current
data; increases in the authorized Project ceiling; and efforts by
the Bureau and the Tribe to implement cost-saving measures.  In
this regard, the Bureau issued, in December 1998, the draft "Mni
Wiconi Rural Water Supply Project Cost Containment Report," which
presents various options for reducing Project costs.

The audit was conducted from August 1998 through March 1999 and
included visits to the Bureau of Reclamation's Great Plains
Regional Office in Billings, Montana; the Bureau's Dakotas Area
Office in Bismarck, North Dakota; the Oglala Sioux's Tribal
Office in Pine Ridge, South Dakota; the Oglala Sioux Rural Water
Supply System's Administrative Office in Kyle, South Dakota; the
offices of the Tribe's engineering firm, in Helena, Montana; and
the Tribe's accounting firm in Albuquerque, New Mexico. As part
of our audit, we reviewed the Tribe's system of internal controls
over its accounting for and management of Federal funds as they
relate to the Oglala Sioux Rural Water Supply System.  We found
that the Tribe had not established the controls needed to ensure
that only those segments of the System identified in the Final
Engineering Report were constructed and that the percentage
allowances for noncontract costs were kept within the percentages
established in the Report.  These weaknesses are addressed in the
Findings and Recommendations section of this report.  Our
recommendations, if implemented, should improve the internal
controls in these areas. 

PRIOR AUDIT COVERAGE

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

**FOOTNOTES**

[1]:Cost indexing is the process of updating the Congressionally
authorized appropriation ceiling for changes generally
attributable to economic factors, usually inflation.  The
Project's indexed appropriation ceiling through October 1999 is
estimated to be $327 million.

[2]:The "Master Plan," dated May 1998, 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" projected
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 plans to update the "Master
Plan" periodically.

[3]:These amounts include $3.1 million for administration and
oversight charges by the Bureau.

FINDINGS AND RECOMMENDATIONS

A.PROJECT COST OVERRUNS

We found that cost overruns totaling an estimated $49.7 million
will occur in constructing the Oglala Sioux Rural Water Supply
System if construction is completed as currently designed (see
Appendix 3).  This amount consists of cost overruns of $16.3
million for System components completed or under construction and
$33.4 million for future construction. Furthermore, the Tribe is
likely to exceed its percentage allowance for noncontract
activities, which we estimate would increase the cost overruns by
$12.9 million, to a total of $62.6 million.  The Mni Wiconi
Project Act of 1988, as amended (Title 8 of Public Law 103-434),
established the Mni Wiconi Rural Water Supply Project's May 1993
Final Engineering Report as the criterion for planning,
designing, and constructing the Oglala Sioux System.  In
addition, the cooperative agreements between the Bureau of
Reclamation and the Tribe stated that the Bureau was to ensure
that the System was planned, designed, and constructed as
generally described in the Final Engineering Report.  However,
cost overruns will occur because the costs for some components
were underestimated; other components were not included in the
Report; and the Bureau and the Tribe did not ensure that the
System was planned, designed, and constructed as described in the
Report.  As a result, the System as currently designed cannot be
completed within the existing appropriation ceiling.

Construction Costs 

The costs incurred for some construction components of the Oglala
Sioux Rural Water Supply System exceeded the estimates in the May
1993 Final Engineering Report because the cost estimates were
understated, the components were expanded, and/or the components
had been "overlooked" and not included in the Final Engineering
Report.  These components included buildings; pipelines; and a
water treatment plant that will be used to manage, operate, and
maintain the System.  The Bureau and the Tribe believed that the
increased costs were necessary and generally allowable under the
Mni Wiconi Project Act, as amended. Therefore, the Bureau
approved these additional costs but did not seek increases in the
authorized appropriation ceiling to reflect the increased costs
associated with these components.

Underestimated Costs.  During our review, we compared the
contracted construction costs with the field costs[4] for the
components as outlined in the Final Engineering Report.  Based on
our review, we found that costs for some components exceeded the
costs in the Report by a total of $8.6 million.  The
underestimated costs  resulted from changes in quantities and
prices of materials and/or in the design specifications.  For
example:

-The cost of the Missouri River water intake for the core system
increased by $1.9 million because the intake site was changed
from the Oahe Dam site identified in the Report to Echo Point on
the Missouri River below the Dam, which increased the costs for
the intake to the water treatment plant and for the building that
houses the pumping station.

-The cost of the core system's water treatment plant increased by
$1.5 million because the treatment plant's location, floor plan,
and elevation and the requirements for the associated lagoons
were not known or defined when the Report was prepared.

-The cost of the completed portion of the pipeline for the
Kadoka-to-Pine Ridge segment of the distribution system increased
by $2 million, primarily because 25,402 additional feet of pipe
were needed ($300,000), pumping station costs were increased
($400,000), appurtenances and contingencies costs were increased
($300,000), and the costs of service lines and residential
connections were higher than estimated ($1 million).

-The cost of the Oglala Interim and Slim Butte components under
the Prairie Winds Development increased the cost of the
distribution system by $579,880 because the actual composite unit
cost of $5.05 exceeded the unit cost of $3.15 in the Report for
305,200 feet of pipe.

Additional or Expanded Components.  Subsequent to the issuance of
the Final Engineering Report, the Bureau and the Tribe determined
that components needed to manage, operate, and maintain the
System had been "overlooked" and that other components needed to
be expanded.  Based on our review, we identified additional costs
of $7.7 million for components that were not included in the
Report or that were expanded.  These costs  included the
following:

- The water distribution system for the Prairie Winds
Development,[5] which consisted of additional residential housing
and a casino development in the western area of the Pine Ridge
Reservation, added about $1.1 million to the cost of the System.

- An administrative office building in Kyle and an operation and
maintenance building in both Kyle and Pine Ridge were added at a
total cost of about $4 million.  System officials stated that the
exclusion of these buildings from the Report was an "oversight"
and that the Bureau agreed to and approved the funding for
construction of the buildings.

Noncontract Costs

Neither the Bureau nor the Tribe adequately monitored noncontract
expenditures to ensure that the percentage allowances for these
activities as established in the Report would not be exceeded.
This occurred because the Bureau did not require, and the Tribe
did not establish, a cost accounting system or structure to
monitor the costs incurred for the System in relationship to the
Report's estimates.  The Report established an allowance of 39.2
percent for noncontract costs for the System.  Table 9[6] of the
Report further established percentage allowances for specific
activities such as design, geotechnical, archaeological,
construction observation, contract administration, and training.
Based on our analysis, we concluded that when compared with the
percentage allowances in the Report, the expenditures for all
activities except for contract administration, easement
administration, and training were generally within the expected
range, considering that construction of the System was only about
25 percent complete.  However, we determined that expenditures
for contract administration, easement administration, and
training were substantially higher than the percentage allowances
and will exceed the estimated amounts for these activities unless
they are curtailed significantly.  Table 9 of the Report
indicates that the costs for contract administration, easement
administration, and training should be 13.2 percent, 1.25
percent, and 2 percent, respectively, of the contract costs.  To
determine whether the expenditures for these activities were
within these allowances, we multiplied the Tribe's overall rate
of 14.45 percent[7] by the contract costs incurred through
September 30, 1998, and compared this amount ($4.9 million) with
the amount recorded in the Tribe's accounting records for
contract and easement administration and training ($15.6
million).  Based on this comparison, we found that the amount
expended was more than three times the amount allotted for these
activities. 

Bureau and Tribal officials told us that noncontract costs,
especially for contract administration, easement administration,
and training, were generally higher during the early stages of a
project and that they expected these costs to decrease
significantly as the System is constructed.  Although we agree
that the costs for these activities may decrease, we concluded
that the expenditures incurred through September 30, 1998 ($15.6
million), were disproportionately high when compared with the
computed allowance ($4.9 million).  Also, based on the Tribe's
expenditures to date, we determined that only $0.5 million[8]
remains available for these activities if the System's costs are
to stay within the allowance percentages established in the
Report.  Since the amount available is less than the average
amounts spent ($2.8 million) on these activities during the last
3 years,[9] we concluded that the funds for these activities
could be depleted by the end of fiscal year 1999 unless there is
a significant reduction in the Tribe's expenditures or additional
funds are appropriated.

We identified two factors that contributed to the Tribe's
expenditures exceeding the allowance percentages established in
the Report.  First, from the beginning of System construction,
the Tribe expended funds for contract administration staff and
training that far exceeded the amounts expected based on the
construction funding levels.  For example, Tribal accounting
records showed that the Tribe expended $4.9 million on contract
administration, easement administration, and training, including
about $1 million for public involvement, through September 30,
1994, while construction during this period totaled only $2.1
million.  In addition, the public involvement program, initiated
in June 1991 as a short-term measure to inform Tribal members of
the System's benefits, is an ongoing program and represents
approximately 30 percent of the contract administration and
training costs under the latest cooperative agreement.
Furthermore, as discussed in the section "Cost Compliance" of
this report, a high percentage of the costs tested in these
categories were questioned.

Estimated Future Costs

During our review, we received estimates of future costs from the
Tribe and the Tribe's contracted engineering firm related to the
System's construction.  Since the estimates were based mainly on
technical analyses, we were not able to confirm that the costs
were reasonable and accurate.  However, based on the data
obtained, we identified estimated future costs of $33.4 million
for components whose costs were underestimated or were not
included in the Final Engineering Report (see Appendix 3).  For
example:

- The engineering firm estimated that additional costs of $18.2
million may be incurred for the core system construction because
pumping stations, reservoirs, and pipelines are more expensive
than anticipated in the Report.  This amount included $806,500
for 23,784 linear feet of additional pipe that was not included
in the Report.

- Additional costs of $1.9 million may be incurred because the
Tribe raised its Tribal Employment Rights Office tax in August
1998 from 2 percent as included in the Report to 4 percent.

- An additional operation and maintenance building will be
constructed in Wanblee, South Dakota, at a cost of $900,000 for
the northwest boundary of the System's operation. This component
was not included in the Report.

- A water storage reservoir estimated to cost $750,000 is planned
for the Prairie Winds Development to accommodate future growth
resulting from the casino operations.  The Director of the Water
Supply System said that the Tribe has offered to pay for half of
the additional costs associated with this reservoir.  This water
storage reservoir was not included in the Report.

- The Tribe may incur additional estimated costs of $8.8 million
for noncontract activities associated with the additional future
increases in contract costs based on the 39.2 percent allowance
in the Report.

Recommendations

We recommend that the Commissioner, Bureau of Reclamation:

1. Request additional funding needed to construct the Oglala
Sioux Rural Water Supply System as currently planned or negotiate
with the Oglala Sioux Tribe to determine which components can be
modified or eliminated to stay within the legislatively
established construction cost limitation.

2. Negotiate with the Tribe to establish a requirement in the
current and future cooperative agreements to establish a cost
accounting system for the Oglala Sioux Rural Water Supply System.
The accounting system should allow the tracking of expenses and
budgets as they relate to the Project in its entirety and to the
specific construction and noncontract components, thereby
enabling the Bureau to monitor costs effectively.

3. Monitor the costs being incurred by the Oglala Sioux Tribe to
ensure that the System is built as generally described in the
Final Engineering Report and subsequent cooperative agreements
and that the costs associated with the various activities are
within the established allowances as negotiated in the
cooperative agreements.

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 1 and 3 but did not concur with
Recommendation 2. Regarding Recommendation 2, the Bureau stated
that instead of requiring the Tribe to establish a cost
accounting system, it will negotiate with the Tribe "to provide
more detailed schedules in support of fund requests to allow more
effective tracking of expenses and budgets." We believe that this
proposed action meets the intent of the recommendation to improve
the effectiveness of the Bureau's monitoring.  As such, we
consider all three recommendations resolved but not implemented
(see Appendix 7).

**FOOTNOTES**

[4]:As outlined in the Final Engineering Report, field costs were
the 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."  The Report
defined contingencies 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."

[5]:The Prairie Winds Development consists of three components:
the White Clay/Wakpamni, the West Boundary, and the Pine Ridge to
Slim Butte.  Only the White Clay/Wakpamni, also referred to as
the Oglala Interim component, and the Pine Ridge-to-Slim Butte
component were included in the Final Engineering Report.  After
inclusion of the Report in the Mni Wiconi Act Amendments of 1994,
the distribution system for the Prairie Winds Development
required additional expansion.  Accordingly, the West Boundary
Pipeline, also referred to as the Casino Pipeline, was added, and
the Pine Ridge-to-Slim Butte component nearly doubled in size.

[6]:Table 9 presents a summary of the computations used to
determine the project cost estimates for the Mni Wiconi Rural
Water Supply Project.  The noncontract rate of 39.2 percent
included an allowance of 4 percent for the Bureau's oversight
responsibilities.  Since the Report did not contain a line item
for the Bureau's allocation, the Tribe allocated 1 percent from
each of the following cost categories: construction observation,
contract administration, investigation and archaeology, and
easements.

[7]:The 14.45 percent rate consists of 12.2 percent for contract
administration, 0.25 percent for easement administration, and 2
percent for training.  The percentages for contract
administration and easement administration do not include the 1
percent allowance for the Bureau's oversight responsibilities. 

[8]:We calculated the allowable contract administration, easement
administration, and training costs based on rates in Table 9 in
the Report; deducted the annual costs expended for these
activities; and adjusted the remaining amounts according to the
annual composite indices used by the Bureau for the Project.

[9]:During 1996, 1997, and 1998, the Tribe expended $2.9 million,
$2.3 million, and $3.2 million, respectively, for these
activities.

B.COST COMPLIANCE

We found that costs of $34.3 million[10] incurred by the Tribe
under construction contracts for the Oglala Sioux Rural Water
Supply System and of $14.4 million10 for related noncontract
activities, such as design, geotechnical design, archaeology,
inspection, and investigation, were generally expended in
accordance with Federal law, regulations, and cooperative
agreements. However, based on our review of costs of $15.6
million incurred by the Tribe for other noncontract activities
(contract and easement administration, training, and indirect
costs), we identified expenditures that were not allowable under
Office of Management and Budget Circular A-87 and the cooperative
agreements, were not supported by the Tribe's accounting records,
or were not in compliance with the provisions of the cooperative
agreements or the indirect cost rate agreements.  Cost compliance
requirements are established through Office of Management and
Budget circulars, the Tribe's Financial Manual, cooperative
agreements, and negotiated indirect cost rate agreements.  We
believe that the questioned expenditures were incurred because
the Bureau and the Tribe did not clearly establish in the funding
agreements the amounts and the types of costs that could be
charged to the System and ensure that the indirect cost charges
were based on the approved rates.  As a result, of the direct
costs of $660,728 tested, we classified $64,919 as cost
exceptions because they were not applicable to the System and
$266,228 as unsupported costs because of a lack of documentation
showing the relationship of the costs to the System.  In
addition, we questioned $366,428 of the $486,722 of direct Tribal
administration costs, which consisted of cost exceptions of
$140,349 because, in our opinion, they were not related to the
Tribe's administration of nonconstruction contracts and
unsupported costs of $226,079 because we could not readily trace
these costs to specific expenditures.  Finally, we classified
$456,531 of indirect costs as a cost exception because the Tribe
did not adjust its charges to the approved final indirect costs
rates.

Contract Administration and Training

We judgmentally tested, based on the dollar significance of
transactions, costs of $660,728, or approximately 34 percent, of
the $1,920,607 expended by the Tribe in seven[11] of its
administrative accounts for the period of January 1995 through
September 1998.  Based on this review, we questioned costs
totaling $334,934, which consisted of cost exceptions of $64,919
and unsupported costs totaling $266,228.  The 1994 cooperative
agreement between the Bureau and the Tribe stipulates that
administrative costs incurred by the Tribe be reasonable and
allocable to the work performed under the agreement.  The
agreement also states that Office of Management and Budget
Circular A-87 should be used as the criterion for determining the
allowability of costs, provided that the circular does not
conflict with the terms of the Indian Self-Determination and
Education Assistance Act (Public Law 93-638), as amended.  In
addition, the Tribe's Financial Management System Manual
incorporates Office of Management and Budget Circular A-87 and
recommends that "program directors operating under a [Public Law
93-] 638 contract . . . refer to OMB [Office of Management and
Budget] Circular A-87 as a general guide in the allowability of
costs charged to the contract."[12]

Cost Exceptions.  We identified cost exceptions of $64,919
pertaining to expenditures that are unallowable under Office of
Management and Budget Circular A-87, the Tribe's Financial
Manual, and the cooperative agreement as follows:

- Travel costs of $13,489 incurred for items such as Tribal
government activities or  incorrect per diem rates.  Although the
Tribe's compliance reviews had questioned some of the costs for
those trips, such as for an airline ticket, per diem, or lodging,
the reviews did not question the entire cost of the trip.

- In our opinion, costs totaling $51,430 were not allocable to
the System as follows:  $17,610 for items such as quilts,
beadwork, and crafts; $14,127 for Tribal government; $10,359 for
flowers and funeral services; $3,114 for gifts and video games;
and $6,220 for  miscellaneous items, such as a duplicate payment
and expenditures associated with the operation and maintenance
agreement.

Unsupported Costs.  We identified unsupported costs totaling
$266,228 as follows:

- Travel costs of $36,742 were not supported by documentation
such as receipts for costs incurred or travel reports showing
that the trip was System related.

- Documentation for costs of $229,486 was insufficient for us to
determine whether the expenditures were allocable to the System.
The unsupported costs consisted of $85,382 for food and grocery
purchases; $61,170 for art purchases; $65,339 for sponsorship
payments; and $17,595 for unsupported training, meetings, and
Tribal payments. 

In addition, we noted a general increase in the extent of
unsupported expenditures since 1995, specifically in the areas of
food/grocery, art, and sponsorship payments, as noted in the
following chart:

----------------------------------------------------
|Description  |1995   |1996   |1997   |1998   |Total
----------------------------------------------------
Food,        $8,504  $9,652  $33,122 $34,104 $85,382
groceries
----------------------------------------------------
Art                           56,570  4,600   61,170
----------------------------------------------------
Sponsorships |6,405  |9,522  |16,786 |32,626 |65,339
----------------------------------------------------
Total     |$14,909|$19,174|$106,478|$71,330|$211,891
----------------------------------------------------

Fiscal year 1995 was the last year whereby the Bureau and the
Tribe negotiated a funding modification that allocated specific
dollars to contract administration activities, including public
involvement-type expenditures.  We believe that the expenditures
listed in the chart occurred because the Bureau and the Tribe did
not clearly establish the amounts and the types of eligible costs
in the funding agreements.

Tribal Office Administration Account

Of the $486,722 that was charged to an administrative account
established under the 1994 cooperative agreement, we questioned
$366,428.  Bureau officials stated that when the agreement was
formulated, the Tribe indicated its intent to administer the
subcontracts for nonconstruction type activities, such as
planning, designs and specifications, and construction
management, directly from the Tribal offices and not through the
Oglala Sioux Rural Water Supply System "Board and their staff."
Accordingly, the cooperative agreement (No. 4-FC-60-04080)
included a provision (Clause IV.C.2.) that stated, "The Tribe's
administrative cost for subcontracted nonconstruction items
(engineering planning, designs and specifications, construction
management) shall not exceed 5 percent of the value of any
contract authorized [and that] the Tribe will not assess an
administrative fee on the construction contracts authorized by
this agreement."  To implement the provision, the Tribe
established an account titled "Administration," with a budget of
5 percent of nonconstruction contract costs to defray the Tribe's
costs for labor, travel, and miscellaneous expenses (office
setup) that were directly attributable to its efforts to
administer subcontracts and that were not included in the Tribe's
indirect cost rate.  Bureau officials told us that their
understanding was that the Tribe was to bill the System for these
services on an actual cost basis, not on a flat 5 percent rate.
However, the System's Director told us that he believed the Tribe
was allowed a 5 percent fee for these services and that the Tribe
therefore did not bill for actual costs but instead provided the
"Administration" account to the System to charge "general"
expenses, which we found were not related to the Tribe's
administration of nonconstruction contracts.  For example, based
on our review of the charges to the account totaling $260,643[13]
for the 9-month period ending September 30, 1998, we classified
costs totaling $140,349 as cost exceptions.  These costs
consisted of $21,940 for quilts, arts and crafts, paintings,
sculptures, and beadwork; $48,945 for public involvement
activities, such as sponsorships, honoraria, pow wows, rodeos,
and youth activities; $7,852 for food/groceries and banquets; and
$61,612 for travel of project staff that was not related to the
Tribe's administration of nonconstruction contracts.

We were not able to determine whether the $226,079 charged to the
Administration account for the period prior to January 1998 was
related to the System because several adjusting journal entries
were not adequately supported in the Tribe's accounting records.
Therefore, costs that were charged to the System were not
identifiable.  As such, we classified costs of $226,079 as
unsupported.

Indirect Costs

The Tribe recovers its indirect costs applicable to Federal
funding agreements through the application of indirect cost rates
that are approved by the Office of Inspector General.  Initially,
an annual provisional rate is negotiated based on estimates of
operating costs.  When actual costs are known, a final rate is
negotiated, and billing adjustments are to be made to reflect the
final rate.  Rates for 1996, 1997, and 1998 had not been
finalized as of September 30, 1998.  However, we found that the
Tribe did not adjust its indirect cost billings to reflect the
Tribe's final rates for  1991  through 1995,  which  were  from
1.4 percent  to 8.8 percent lower than the provisional rates.  As
a result, the Tribe overcharged the System by $456,531, as shown
in the following chart:

--------------------------------------------------------
|Using Final Rates  |     Using
|                   |Provisional Rates
--------------------------------------------------------
|     |         |Indirect |         |          |
|     |         |Costs    |         |Indirect  |Overcharges
|Year |Percent  |         |Percent  |Costs     |
--------------------------------------------------------
1991   21.50     $59,838   22.90      $84,997    $25,159
--------------------------------------------------------
1992   18.70     206,021   27.40      322,230    116,209
--------------------------------------------------------
1993   20.60     281,849   29.40      358,576     76,727
--------------------------------------------------------
1994   22.40     436,028   27.30      518,392     82,364
--------------------------------------------------------
1995   21.80    |493,095  28.70     |649,167    |156,072
--------------------------------------------------------
Total           |$1,476,831       |$1,933,362  |$456,531
--------------------------------------------------------

Tribal officials told us that the provisional indirect cost rates
charged to the System were not adjusted to the final approved
rates because of a decision (and subsequent settlement) by the
United States Court of Appeals for the  Tenth Circuit in a
lawsuit (Ramah Navajo Chapter vs.  Babbitt) involving the
underrecovery of actual Tribal costs associated with the
activities.  However, based on information from our Office of
General Counsel, we disagree that the Court's decision and the
settlement entitle the Tribe to keep the indirect costs that it
overcharged.  Instead, we believe the Court concluded in its
decision that the process used to calculate the indirect cost
rates, which included all Federal programs in the direct cost
base, prevented the plaintiffs from fully recovering their
indirect costs because other Federal agencies did not always pay
their share of the costs.  Also, based on the Court's ruling, the
parties to the suit negotiated a partial settlement (approved by
the Court on May 14, 1999) for the period of fiscal years 1989
through 1993 in which the defendants agreed to pay money damages
on the plaintiffs' claim that this methodology violated Public
Law 93-638.  As such, we concluded  that neither the Court's
decision in the Ramah Navajo case nor the partial settlement
addresses whether an Indian organization may recover indirect
costs based on estimates and therefore does not preclude
adjustment of the Oglala Sioux indirect cost charges based on the
final rates.

Recommendations 

We recommend that the Commissioner, Bureau of Reclamation:

1. Negotiate a contract modification with the Oglala Sioux Tribe
to provide for the types and amounts of allowable costs related
to contract administration and training and ensure that Bureau
officials incorporate this information in future agreements.

2. Instruct the Oglala Sioux Tribe to reimburse the System for
the cost exceptions of $64,919 and to reimburse or provide
documentation for the unsupported costs of $266,228 identified by
our review.  Also, any supporting documentation provided by the
Tribe should be reviewed, and a final determination on the amount
of unsupported costs to be reimbursed should be made.

3. Instruct the Oglala Sioux Tribe to bill for the Tribe's
administrative cost for subcontracted nonconstruction items
(engineering, planning, designs and specifications, and
construction management) on an actual cost basis and ensure that
the Tribe reimburses or provides support for cost exceptions of
$140,349 and unsupported costs of $226,079 identified by our
review of the Administration account.

4. Instruct the Oglala Sioux Tribe to reimburse the Water Supply
System for the indirect cost overcharges totaling $456,531 and
ensure that indirect cost charges for 1996 and subsequent years
are adjusted to approved final indirect cost rates based on
actual 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 all four recommendations.  As such, we consider
all recommendations resolved but not implemented (see Appendix
7).

Oglala Sioux Tribe Response and Office of Inspector General Reply

In the May 27, 1999, response (Appendix 6) to the draft report
from the President of the Oglala Sioux Tribe, the Tribe generally
disagreed with our finding on cost compliance but did not address
the finding on project cost overruns.  The Tribe included
specific comments on our report.  These comments and our replies
are presented in the paragraphs that follow.

Cost Exceptions

The Tribe stated that the Oglala Sioux Rural Water Supply System
"disputes that any repayment to the Bureau of Reclamation is
required for cost exceptions" totaling $64,919, and it provided
"supporting documentation" and other information regarding the
basis for its changes to the cooperative agreement for community
involvement, training, travel, and committee stipends.  However,
we did not find the "supporting documentation" or the
explanations in the Tribe's response sufficient to resolve any of
the cost exceptions.

Oglala Sioux Tribe Response.  Regarding the cost exceptions for
community involvement, the Tribe stated that cooperative
agreement funds are used for "an outreach program to disseminate
information to the public and to provide an avenue for public
comments to the program staff and program Steering Committee."
In addition, the Tribe stated that "the program was implemented
due to the reluctance by the public to accept the program on the
reservation" and is "an effective method of providing interaction
with the public and obtaining ideas and perceptions about the
program from the Tribal membership."  The Tribe stated:

Use of federal funds for public involvement is consistent with
the intent of the 1994 amendments to Public Law 93-638, the
Indian Self-Determination and Education Assistance Act, where
Tribes were given broad latitude in the expenditure of 93-638
funds.  Under these amendments, Tribes were generally given the
flexibility in the expenditure of funds as deemed necessary by
the Tribes to achieve program goals and objectives.  [Emphasis
added.]

The Tribe also stated that Office of Management and Budget
Circular A-87 "further support[s] flexibility in the expenditure
of such funds" and permits the use of funds for public relations,
which include  "`activities dedicated to maintaining the image of
the governmental unit or maintaining or promoting understanding
and favorable relations with the community or public at large or
any segment of the public.'"  In addition, the Tribe stated that
"the report categorized community involvement costs by
identifying certain costs as exceptions, without an explanation
as to the difference in the costs incurred that were not
excepted."

Office of Inspector General Reply. We acknowledge that the
establishment of an outreach program was necessary to provide the
public with accurate information on the project and to clear up
several misconceptions that apparently existed during the early
years of the project.  We also acknowledge that both the Indian
Self-Determination and Education Assistance Act, as amended, and
Office of Management and Budget Circular A-87 provide some
flexibility on the use of Federal funds.  However, the Act
specifically states that the funds must be used "to achieve
program goals and objectives," and Circular A-87 states that "a
cost is allowable for Federal reimbursement only to the extent of
benefits received by Federal awards."  Based on these criteria,
we classified as "cost exceptions," those costs for which there
was no clear relationship or benefit to the project.  These costs
included gifts (which are specifically disallowed by Circular
A-87) such as toys, quilts, jewelry, video games, and beadwork;
flowers and food for wakes; and special events such as meetings
to discuss other tribal programs and functions, which were
unrelated to the System's construction.  We did not take
exception to community involvement costs when there was a clear
and documented relationship to the project, such as costs
incurred for community involvement meetings; advertising for the
project; and placement of information booths for disseminating
information about the project at rodeos, pow-wows, or other
public events. 

Oglala Sioux Tribe Response.  Regarding the cost exceptions for
training, the Tribe provided documentation with its response to
"support that all costs incurred were for the benefit of the
program in full compliance with the BOR [Bureau of Reclamation]
agreement."  The Tribe also stated that although "the audit
report listed check number 2001 as one of the items excepted,"
that check was "voided and replaced by check number 2002."

Regarding the cost exceptions for travel, the Tribe stated that
"the program was not charged for this travel and BOR [Bureau of
Reclamation] did not pay for any of the costs excepted."
According to the Tribe, program expenditures were reduced for
these costs "through adjusting journal entries to the accounting
records to transfer such costs to the Tribe's general fund or
program generated revenues."  The Tribe stated that it provided
"copies of the work papers for the adjusting entries."

Office of Inspector General Reply.  The documentation provided by
the Tribe did not substantiate that the training and travel
costs, which included attendance at the National Congress of
American Indians and Little Bighorn meetings, were related to the
project.  Also, although Check No. 2001 in the amount of $1,574
for training costs had been voided and replaced with Check No.
2002, System expenditures were not properly adjusted. We
determined that an adjustment of only $250 was made to System
expenditures, resulting in an overcharge of $1,324.

Regarding the adjusting journal entries for the travel costs, our
review of the  journal entries determined that none of the travel
costs classified as cost exceptions were included in the journal
entries.

Oglala Sioux Tribe Response.  Regarding the cost exceptions for
committee stipend, the Tribe provided documentation with its
response to "support that all costs incurred were for the benefit
of the program, except costs . . .  for $3,200 which was for
contracted services for the operation and maintenance program and
was corrected by [an] adjusting journal entry to transfer the
costs from the operation and maintenance program to the program."

Office of Inspector General Reply.  The cost exceptions we
identified included stipend payments for Tribal members attending
the Teton Sioux National, the Black Hills Sioux Treaty Council,
and the Crazy Horse Planning Commission meetings, for which there
was no demonstrated relationship or benefit to the project.

Regarding the operation and maintenance costs included in these
charges, the Tribe's response was not clear on the nature of the
adjustment.   According to the response, incorrect charges of
$3,200 were corrected by an adjusting journal entry transferring
the costs from the operation and maintenance program "to the
program." (Emphasis added.)  However, if the transfer was to the
program rather than from the program,  the  exception would be
doubled because operation and maintenance costs are not allowed
under the cooperative agreement.

Unsupported Costs

Oglala Sioux Response.  The Tribe provided documentation with its
response that, according to the Tribe, would "substantiate that
the costs were incurred for the benefit of the program."

Office of Inspector General Reply.  The documentation provided by
the Tribe was sufficient to support charges for two items
totaling $3,787, and we have revised the audit report
accordingly.  However, the other documentation was not sufficient
to substantiate that the remaining unsupported costs of $266,228
were related to the project.  For example, these costs included
$85,382 for groceries and other food purchases for which the
documentation submitted did not identify the specific event for
which the purchases were made.  Furthermore, grocery and food
purchases were made on a frequent basis, often several times a
week, and in some cases, it appears that the purchases were for
meals for a few individuals.  We believe that the Bureau should
obtain assurance from the Tribe that all unsupported costs were
incurred for the benefit of the Project.

Administrative Costs

Oglala Sioux Tribe Response.  The Tribe acknowledged that the
cooperative agreement permitted it to assess administrative costs
of up to 5 percent of nonconstruction contract costs for the
management of subcontracts for nonconstruction type activities,
but it stated that it allowed the program to use these funds for
other activities.  Specifically, the Tribe stated:

In an effort to permit the program increased funding for direct
services, the Tribe waived the five percent administrative fee
and allowed the program to expend a similar amount for general
direct services in lieu of the fee.  This is generally the
explanation for the five percent administrative fee in the audit
report.  The program does not dispute the audit findings that
general direct expenditures were charged to an administrative
account.  

According to the Tribe, Bureau of Reclamation officials were
advised of, and did not object to, this policy.

The Tribe further stated that although it had "waived the
administrative cost charges to the program for subcontracted
nonconstruction items, [it] did incur costs related to this
administration . . . [which] could have been charged to the
program."  Specifically, the Tribe identified administration
costs totaling $636,176 for the period January 1, 1995, through
September 30, 1998, consisting of $121,055 for "Contract
Management," $131,503 for "Financial Management," and $383,618
for "General Management."  According to the Tribe, these
administrative costs exceeded the 5 percent limitation in each
year, which "eliminates the requirement of documenting
unsupported expenditures for administration in the audit report."

Further, in response to Recommendation 3 concerning
administrative costs, the Tribe stated that the program "agrees
to bill for Tribal administrative costs as recommended in the
audit report."  However, the Tribe requested that "the
administrative costs previously incurred as identified in [its
response] be accepted as permitted in the cooperative agreement,
rather than to require the Tribe to reimburse for any audit
exceptions or unsupported costs."

Office of Inspector General Reply.  We disagree that the use of
these funds for "direct services" was proper.  The cooperative
agreement authorized the use of these funds for the specific
purpose of reimbursing the Tribe for costs incurred in
administering subcontracts for nonconstruction type activities
that were not covered by the Tribe's indirect cost rate, and
there was no documentation in the files indicating that the
Bureau had approved the use of these funds for other purposes.
In addition, the provision in the cooperative agreement states
that the administrative costs "shall not exceed 5 percent of the
value of any contract authorized," indicating that the Tribe was
to be reimbursed only for the actual administrative costs
incurred. Furthermore, we found that the costs charged to the
administrative account were for the same types of expenses such
as food and groceries, public involvement, and quilts and
paintings that we classified as cost exceptions and unsupported
costs in prior sections of our report.

We also disagree that the Tribe has incurred sufficient "costs
related to this administration . . . [which] could have been
charged to this program."  The contract management, financial
management, and general management costs identified in the
Tribe's response are included in the Tribe's indirect cost rates;
therefore, charging these costs directly to the project would
result in a duplicate charge.  

Indirect Costs

Oglala Sioux Tribe Response.  The Tribe disagreed with our
recommendation that it should reimburse the Water Supply System
for indirect cost overcharges totaling $456,531, stating the
following:  

The program disputes that any overcharges occurred in the
indirect cost charges during 1991 through 1995.  The 1988
amendments (Public Law 100-472) to the Indian Self-Determination
and Education Assistance Act precludes the Department of the
Interior from such adverse adjustments as recommended in the
audit report.  

The Tribe also provided a "legal opinion from the leading expert
on indirect cost issues" that "strongly supports the program's
position that any repayment of indirect costs would be a
violation of law."[14]

Office of Inspector General Reply.  We disagree that requiring
repayment of the indirect cost overcharges would be a violation
of law or, as stated in the legal opinion obtained by the Tribe,
contrary to the court's decision in the Ramah Navajo case.  Our
comments, based on advice from our Office of General Counsel on
the specifics of the Tribe's response, are included in the
paragraphs that follow.

We believe that these indirect cost charges were properly
questioned pursuant to the terms of the indirect cost rate
agreements between the Office of Inspector General and the Oglala
Sioux Tribe.  The agreements (Section II, para. D.) provide, in
regard to provisional-final rates, that "[w]ithin 6 months after
year end, a final rate proposal must be submitted based on actual
costs before a final rate can be negotiated.  Billings and
charges to contracts and grants must be adjusted if the final
rate varies from the provisional rate. . . .[I]f the final rate
is less than the provisional rate, the organization will be
required to pay the difference back to the funding agency."
(Emphasis added.)  This clause in the agreements reflects the
fact that the establishment of indirect costs under a
provisional-final rate agreement is a twofold process whereby
estimated costs are accepted provisionally to allow organizations
to recover their indirect costs as they are incurred during the
period of performance.  Subsequently, the indirect cost rate is
adjusted to reflect actual costs incurred.   

Neither the 1988 amendments (Public Law 100-472) to the Indian
Self-Determination and Education Assistance Act nor the Tenth
Circuit's decision in Ramah Navajo Chapter v. Lujan, 112 F.3d
1455 (10th Cir. 1997), authorizes the Tribe to retain indirect
cost monies that exceed actual costs and that were calculated
based on the Tribe's  provisional rather than the final rate.
The 1988 amendments to the Act (25 U.S.C. 450j-1(d)(1)) included
a provision eliminating the adverse impact of the theoretical
overrecovery adjustment that had been used to calculate indirect
costs under the fixed-with-carry-forward rate type.  As such,
this  provision has no applicability to provisional-final rates
and thus no bearing on whether the Tribe can retain the indirect
cost charges at issue here.[15]  Furthermore, the Act itself (25
U.S.C. 450j-1(a)(3)(A)) recognizes that reimbursement for
indirect costs is based not on estimated costs but rather on
costs "incurred by the tribal contractor in connection with the
operation of the Federal program, function, service, or activity
pursuant to the contract."  (Emphasis  added.)

Likewise, the Court's decision in Ramah Navajo Chapter did not
address the issue of whether a tribe is entitled to payments
based on its estimated rather than actual indirect costs.
Rather, the decision held only that it was improper for the
Office of Inspector General to include in the direct cost base
Federal programs which did not include full funding for their
share of indirect costs, thereby reducing the amount of funding
to the plaintiffs for their indirect cost pool.  Consequently,
according to our Office of General Counsel, the Ramah Navajo
Chapter decision does not provide a basis for the Tribe to retain
the indirect cost overcharges identified in the report.

**FOOTNOTES**

[10]:Our review did not include a technical evaluation or a test
of reasonableness of the extent of expenditures incurred in these
categories, since these issues should be evaluated by the Bureau.

[11]:The seven accounts were Administration, Community
Involvement/Outreach, Training, Travel, Committee/ Advisory,
Committee/Elderly, and Committee/Steering.

[12]:Although Public Law 93-638, as amended, refers to contracts,
we believe that the cooperative agreements for the planning,
design, and construction of the Water Supply System are under the
purview of the same guidelines.

[13]:The $260,643 included costs of $36,171 that we classified as
cost exceptions or unsupported costs as part of our judgmental
sampling of the seven contract and easement administration and
training accounts.  The $36,171 is not included in the cost
exceptions of $140,349.

[14]:We did not include a copy of the legal opinion in our report
but considered the opinion in addressing the Tribe's response.  

[15]:According to our Office of General Counsel, the "theoretical
overrecovery" adjustment had been determined using the amount of
indirect costs that should have been reimbursed rather than the
amount of indirect costs that were actually reimbursed and
therefore required Indian organizations to repay, through a
carry-forward adjustment, the indirect costs that they never
received.  In contrast, the Tribe is not being asked to repay
amounts that they never received but rather to repay amounts
received that exceeded the Tribe's actual costs, as reflected in
the Tribe's final rate.


APPENDIX 1

CLASSIFICATION OF MONETARY AMOUNTS


----------------------------------------------------
|Questioned Costs
----------------------------------------------------
|                             |Cost     |Unsupported
|Finding                      |Exceptions|Costs
----------------------------------------------------
Cost Compliance
----------------------------------------------------
Contract    | $64,919     $266,228
Administration|
and         |
Training    |
----------------------------------------------------
Tribal      | 140,349     226,079
Office      |
Administration|
Account     |
----------------------------------------------------
Indirect    | 456,531
Costs       |
----------------------------------------------------
Total    |   |$661,799 |$492,307
----------------------------------------------------

APPENDIX 2

AGREEMENTS BETWEEN THE OGLALA SIOUX TRIBE AND
THE BUREAU OF RECLAMATION

------------------------------------------------------------
|                           |Agreement |     |Completion|Amount
|  Purpose of Agreement     |Number    |Status|Date     | of
|                           |          |     |       |Agreement
------------------------------------------------------------
Needs assessment, water conservation plan, design criteria, etc.
for the Oglala Sioux Rural Water Supply System on the Pine
Ridge Indian Reservation in South Dakota.Additional modifications
were added to start  0-FC-60-  Closed 09/30/94 $7,895,329
construction of the 01660 White Clay/Wakpamni water system and
distribution systems and rehabilitation of existing systems and
to fund noncontract administrative and other costs.
------------------------------------------------------------
Complete Final Engineering Report and National Environmental
Policy Act documents for Mni Wiconi Project, which includes
the Oglala Sioux Rural  2-FC-60-  Closed 09/30/93 1,050,000
Water Supply System and  02530 the West River/Lyman-Jones
Rural Water System in South Dakota.
------------------------------------------------------------
Activities needed to complete the planning, final design and
specifications, and  4-FC-60-   Open  09/30/03 construction of
the Oglala  04080  82,108,000 Sioux Rural Water Supply System,
both core and distribution systems.
------------------------------------------------------------
Total amount of       |                   |$91,053,329
agreements            |                   |
------------------------------------------------------------

COSTS CONTRIBUTING TO PROJECTED OVERRUN

------------------------------------------------------------
|Costs Through September 1998 
------------------------------------------------------------
Final            |        |Estimated|Total Description      
 Engineering     |Total   |Future   |System
Report           |Costs   |Costs    |Increase
                 |        |         |
Added to         |        |         |
Exceeded         |        |         |
------------------------------------------------------------
Administration and operation and     $4,000,778
$4,000,778$900,000 $4,900,778
maintenance buildings
------------------------------------------------------------
Surface water intake      $1,933,6111,933,611      1,933,611
------------------------------------------------------------
Water treatment plant
1,486,8881,486,888          1,486,888
------------------------------------------------------------
Pipelines, pumping stations, reservoirs              75,210
75,210   18,154,20718,229,417
for core system
-------------------------------------------------------------
Easements payments                           163,504
163,504  225,000   388,504
-------------------------------------------------------------
Additional residence connections            100,000   100,000
-------------------------------------------------------------
Prairie Winds Development    1,142,183579,880          750,000
2,472,063
                                                    1,722,063
-------------------------------------------------------------
Constructed/under construction Kadoka to
2,037,6542,037,654          2,037,654 Pine Ridge1
-------------------------------------------------------------
Upgrade of existing systems                 558,907   558,907
-------------------------------------------------------------
Distribution system expansions due to     1,609,806 1,609,806
population increase in Bennet County
-------------------------------------------------------------
Noncontract costs related to above          2,186,2642,448,742
13,458,665
construction                               4,635,0068,823,659
-------------------------------------------------------------
Wastewater study                            400,000   400,000
-------------------------------------------------------------
Water trucks prior to operation and          215,019
215,019            215,019
maintenance agreement
-------------------------------------------------------------
Increase in TERO by  2 percent2    |       |        |
|1,872,899|1,872,899
-------------------------------------------------------------
Subtotal  | $7,707,748$       $        $33,394,478$49,664,211
 8,561,98516,269,733
-------------------------------------------------------------
Noncontract costs exceeding  percentage      |
|12,954,564|12,954,564|     |12,954,564
allowance3         |        |         |
--------------------------------------------------------------
Total                                |
|$7,707,748|$21,516,549|$29,224,297|$33,394,478|$62,618,775
--------------------------------------------------------------


1Consists of the fully constructed Kyle North, Kyle to Sharps I,
Kyle to Sharps II, American/Porcupine, and Porcupine
East/Manderson South segments and the Sharps to Porcupine segment
that is under construction and will be completed in 1999.

2The TERO (Tribal Employment Rights Office) tax rate increase of
2 percent was calculated based on construction funding remaining
within the existing appropriation ceiling.

3We compared the noncontract expenditures calculated by using the
percentage allowance per Table 9 in the Final Engineering Report
(less the 4 percent allowance for the Bureau) with the costs
recorded in the Tribe's financial system to determine the amount
exceeding the Report allowance through September 1998.  We
recognize that noncontract expenditures are to some extent front
loaded. Therefore, the $12.9 million can be reduced if the System
expends funds for the remainder of the construction period at an
amount that is lower than the percentage allowance provided for
in the Report.


APPENDIX 4

REVIEW OF SELECTED ACCOUNTS

-----------------------------------------------------------------
                                   |   Questioned Costs        No
-----------------------------------------------------------------
|         |Account |Amounts|Cost    |Unsupported|     |Exceptions
|   Accounts       |Totals  |Reviewed|Exceptions|Costs |Total
|Noted
-----------------------------------------------------------------
Administration     $459,263 $282,001$27,035  $138,331
$165,366$116,635
-----------------------------------------------------------------
Community          434,546  127,617 20,485   88,498    108,983
18,634
Involvement
-----------------------------------------------------------------
Training           497,737  139,948 3,879    18,109    21,988
117,960
-----------------------------------------------------------------
Travel             312,732  72,696  9,318    14,910    24,228
48,468
-----------------------------------------------------------------
Elder Committee    16,585   1,725   100      1,425     1,525
200
-----------------------------------------------------------------
Advisory           97,125   2,750   200      1,750     1,950
800
Committee
-----------------------------------------------------------------
Steering           102,619  33,991  3,902    3,205     7,107
26,884
Committee
-----------------------------------------------------------------
     Total       |
|$1,920,607|$660,728|$64,919|$266,228|$331,147|$329,581
-----------------------------------------------------------------
Percent of Total |
     Amounts     |          100.00% 9.83%    40.29%    50.12%
49.88%
     Reviewed    |
-----------------------------------------------------------------
Percent of       |
         Accounts         | 100.00%  34.40%  3.38%    13.86%
17.24%  17.16%
              Total       |
-----------------------------------------------------------------

|Transactions   |Transactions Questioned
-----------------------------------------------------------------
   Accounts       |Total  |Reviewed|Exceptions|Unsupported|Total|
-----------------------------------------------------------------
Administration    2,641   124     19        60       79        45
-----------------------------------------------------------------
Community         1,318   103     23        69       92        11
Involvement
-----------------------------------------------------------------
Training          715     52      6         17       23        29
-------------------------------------------------------
Travel            2,014   70      22        19       41        29
-----------------------------------------------------------------
Elder Committee    151     6       1          3         4       2
-----------------------------------------------------------------
Advisory           701     17      1         10       11        6
Committee
-----------------------------------------------------------------
Steering                     33      6          5     11
Committee         662                                          22
-----------------------------------------------------------------
Total|       |       |405    |78        |183       |261      |144
     |             |8,202  |       |          |        |        |
-----------------------------------------------------------------
Percent of Total Transactions |                           100.00%
19.26%     45.18%   64.44%    35.56%
Reviewed     |
-----------------------------------------------------------------

Percent of|Total|            100.00% 4.94%   0.95%      2.23%
3.18%     1.76%
Transactions|
-----------------------------------------------------------------

APPENDIX 5
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APPENDIX 5
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APPENDIX 5
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APPENDIX 5
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APPENDIX 5
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APPENDIX 6
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APPENDIX 6
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APPENDIX 6
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APPENDIX 6
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APPENDIX 6
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APPENDIX 6
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APPENDIX 6
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APPENDIX 6
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APPENDIX 6
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APPENDIX 6
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APPENDIX 7

STATUS OF AUDIT REPORT RECOMMENDATIONS


Finding/Recommendation
Reference

Status

Action Required

A.1, A.2, and A.3

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.

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