oversight

2001 Virtual Data Center Transformation Task Order.

Published by the Department of Education, Office of Inspector General on 2004-08-10.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

a
                            UNITED STATES DEPARTMENT OF EDUCATION
                                          OFFICE OF INSPECTOR GENERAL



                                                  August 10, 2004

                                                                                     Control Number
                                                                                     ED-OIG/A02-D0015

Jack Martin, Chief Financial Officer
Office of the Chief Financial Officer
U.S. Department of Education
400 Maryland Avenue, S.W.
Washington, D.C. 20202

Dear Mr. Martin:

This Final Audit Report presents the results of our audit of the 2001 Virtual Data Center
Transformation Task Order (Task Order). An electronic copy has been provided to your Audit
Liaison Officer. The objectives of our audit were to determine (1) if the Task Order was
negotiated and awarded in accordance with the Federal Acquisition Regulation (FAR) and other
Federal regulations; (2) if the first 14 Task Order modifications were properly executed; (3) the
effectiveness of the monitoring by U.S. Department of Education (Department), Federal Student
Aid (FSA), of Computer Sciences Corporation’s Monthly Progress Reports, to ensure that the
Department appropriately modified the Task Order based on computer usage trends; (4) if the
Statement of Objectives (SOO) and related contract documents contained adequate performance
measures; and (5) if the actual billed rates were consistent with the agreed rates of the Task
Order and its modifications.

A draft of this report and, subsequently, a re-draft of one sub-finding were provided to the Chief
Financial Officer (CFO) for comment. The CFO concurred with one of our recommendations
but did not concur with our other two recommendations. We have summarized the CFO’s
comments after the Recommendations section, and we have included both of the CFO’s
responses as Attachments A and B to this report.

                                                 BACKGROUND

The Higher Education Amendments of 1998 (Public Law 105-244, enacted October 7, 1998)
established a Performance-Based Organization (PBO) to manage operational functions
supporting the programs authorized under Title IV of the Higher Education Act of 1965, as
amended (HEA). Subject to the authority of the Secretary, the PBO exercises independent
control of its budget allocations and expenditures, personnel decisions and processes,
procurements, and other administrative and management functions.

The responsibilities of the PBO include integrating the information systems supporting the
Federal student financial assistance programs; implementing an open, common, integrated
                           400 Maryland Avenue, S.W., Washington, D.C. 20202-1510

      Our mission is to ensure equal access to education and to promote educational excellence throughout the Nation.
Final Report: Audit of the VDC Transformation Task Order                 ED-OIG/A02-D0015

system for the delivery of student financial assistance under Title IV; and developing and 

maintaining a student financial assistance system that contains complete, accurate, and timely 

data to ensure program integrity. 


The Office of Management and Budget (OMB) issued Bulletin No. 96-02, “Consolidation of
Agency Data Centers,” on October 4, 1995. The Bulletin requires that agencies, including the
Department, consolidate their data centers by June 1998. This OMB requirement resulted in the
establishment of the Virtual Data Center (VDC).

In February 1997, the General Services Administration (GSA) selected Computer Sciences
Corporation (CSC) as one of three VDC contract vendors. In October 1998, the Department
awarded CSC four task orders, under GSA’s Federal Computer Acquisition Center Government
Wide Agency Contract program, to provide a consolidated data center. GSA delegated authority
to the Department for negotiating any additional task orders and modifications under the GSA
contract. Ultimately, the Department awarded a total of eight task orders. In September 2001,
the Department re-negotiated the eight task orders to consolidate them into one Task Order
amounting to an estimated $493 million, including option years.

The objective of the Task Order was to provide efficient consolidated data center operations and
to provide services and support to FSA systems that share common requirements. Also, the Task
Order was designed to reduce costs by utilizing the central location of the CSC’s Virtual Data
Center in Meriden, Connecticut.

The Department did not consider other contractors when awarding the Task Order in 2001.
Instead, the Department awarded the Task Order (ED-01-GS-0002) under GSA’s Government
Wide Agency Contract. The cost of the eight prior task orders was reduced from approximately
$71 million per year to $56 million per year. This firm fixed unit price Task Order extends
through September 30, 2005, with options through September 30, 2011.

                                          AUDIT RESULTS

We found the Department negotiated and awarded the Task Order in accordance with the FAR
and other Federal regulations, the first 14 Task Order modifications were properly executed, and
the actual billed rates were consistent with the agreed rates of the Task Order and its
modifications. However, our evaluation of FSA’s monitoring of CSC’s Monthly Progress
Reports on computer usage disclosed the Department could improve the efficiency of the Task
Order with additional performance measures to identify utilization of VDC servers. Also, the
SOO and related contract documents contained inadequate performance measures. We found
that the Task Order lacked a performance-based disincentive to encourage the contractor to
increase efficiency and maximize performance. In addition, customer satisfaction surveys
completed by Business Owners, Departmental employees responsible for projects run at the
VDC, were an ineffective monitoring tool, primarily due to a lack of response by the Business
Owners.




                                                2

Final Report: Audit of the VDC Transformation Task Order                                ED-OIG/A02-D0015

Finding           The 2001 Task Order lacked adequate performance measures.

The performance measures for the Task Order were inadequate because they did not monitor
underutilization of servers, the Task Order did not include a performance-based disincentive to
encourage the contractor to increase efficiency and maximize performance, and Business
Owners’ customer satisfaction surveys were ineffective. As a result, the Department paid a fixed
price for underutilized servers, paid an incentive fee that contained little disincentive for poor
performance, and paid a portion of the incentive fee based on ineffective customer satisfaction
surveys.

The primary performance measure for the Task Order was system availability. This performance
measure represented 60 percent of CSC’s incentive fee, and in general, this performance measure
was met. However, additional performance measures could have been included to improve the
efficiency of the Task Order.

         Performance measures did not monitor underutilization of servers.

The performance measures set forth in the Task Order focused on the availability of the data
systems, but not on the underutilization of the data systems. The Department or CSC could have
achieved cost savings by modifying and/or consolidating underutilized servers. Server
consolidation would have resulted in an adjustment to the amount of available space the
Department paid for, thus saving the Department money. An additional performance measure to
monitor server underutilization would aid in identifying servers for consolidation and could
reduce the cost of operating the VDC.

The SOO states that the objective of the VDC is to provide efficient services to the Department
through a performance-based contract that reduces costs while improving services. Further, the
SOO required CSC to perform continuous analysis and develop recommendations for
improvements in overall efficiency, and to make required Task Order adjustments. A
performance measure for monitoring underutilization trends could have assisted CSC and the
Department in accomplishing this requirement.

FAR § 37.601 states, “Performance-based contracting methods are intended to ensure that
required performance quality levels are achieved and that total payment is related to the degree
that services performed meet contract standards.” 1

Per Section 142(c)(1) of the HEA, the Chief Operating Officer of the PBO “shall, to the extent
practicable, maximize the use of performance-based servicing contracts, consistent with
guidelines for such contracts published by the Office of Federal Procurement Policy, to achieve
cost savings and improve service.”

The VDC servers included Enterprise servers, which were used for mainframe applications such
as the National Student Loan Data System; New Technology (NT) servers, which were used for

1
  Unless otherwise specified, regulatory citations to the FAR are to the September 2001 edition, as issued by the 

General Services Administration, Department of Defense, and National Aeronautics and Space Administration, 

including all Federal Acquisition Circulars through 97-27.




                                                          3
Final Report: Audit of the VDC Transformation Task Order                  ED-OIG/A02-D0015

applications such as the Student Aid Internet Gateway (SAIG) Mailboxes; and UNIX servers
used for applications such as the Free Application for Federal Student Aid (FAFSA on the web,
or FOTW). We reviewed the Monthly Progress Reports’ Infrastructure Availability Summaries
for peak usage during the period, December 2001 through February 2003. We found peak usage
for Enterprise servers remained consistent throughout the year, using almost all the available
space, while peak usage for NT and UNIX servers, non-mainframes, was more variable.

For the 15 months tested, peak usage for 22 of 44 non-mainframe servers was significantly
below the amount of available space. (Only non-mainframe servers with at least six months of
peak usage reported were included in these numbers, and 7 of the 22 non-mainframe servers used
more than 60 percent of available space for at least one month.) Under the definition we used, a
server would have low peak usage if, for at least 80 percent of the months reported, the highest
percentage of its use was less than 60 percent of the available space. For example, the Schools
Portal Channel server had low peak usage because it used less than 6 percent of its available
space for 12 of the 15 months tested. Further, the Schools Portal Channel server used less than 3
percent, on average, of its available space during the months of October, November, and
December 2002.

We recognize that system availability was critical to the Department and an important 

performance measure. We also recognize that the Department conducted quarterly capacity 

planning meetings, which included reviews of system utilization in relation to availability. 

However, because the Task Order did not include a performance measure to identify 

underutilization, the Department continued to pay a firm fixed unit price for minimally used 

servers. 


       The Task Order lacked a performance-based disincentive.

The Task Order included a performance-based incentive fee, providing an additional payment of
up to 1.9 percent of the base Task Order amount. However, the Task Order lacked a
performance-based disincentive, to reduce the base amount paid to CSC if it performed poorly.
A disincentive based on performance measures would further encourage the contractor to
increase efficiency and maximize performance, as urged by the HEA, FAR, and guidance issued
by the Office of Federal Procurement Policy (OFPP):

   • 	 Under FAR § 37.601(c), “Performance-based contracts . . . [s]pecify procedures for
       reductions of fee or for reductions to the price of a fixed-price contract when services are
       not performed or do not meet contract requirements . . . .”

   • 	 Under FAR § 37.602-4, “To the maximum extent practicable, performance incentives,
       either positive or negative or both, shall be incorporated into the contract to encourage
       contractors to increase efficiency and maximize performance . . . .”

   • 	 Section 142(c)(1) of the HEA requires the Chief Operating Officer to maximize the use
       of performance-based servicing contracts, to the extent practicable, consistent with
       guidelines published by the OFPP.




                                                4
Final Report: Audit of the VDC Transformation Task Order                ED-OIG/A02-D0015

   • 	 A Guide to Best Practices for Performance-Based Service Contracting, issued by OFPP,
       provides, in its Appendix 3, the following minimum mandatory performance-based
       service contracting requirement: “If the acquisition is either critical to agency mission
       accomplishment or requires relatively large expenditures of funds, positive and negative
       incentives tied to the Government [Quality Assurance] plan measurements.”

The Task Order did not include a performance-based disincentive, but was structured with an
incentive fee of 1.9 percent of the Task Order’s base amount. The amount of this additional
payment, at the time of our audit, was based on four performance measures: availability (60
percent), Business Owner surveys (15 percent), Contract Officer Representative’s Discretion (15
percent), and General Manager surveys (10 percent). Successful performance under these
measures would be a basis for a proportional incentive payment to CSC. Therefore, the
incentive fee, not the Task Order’s base amount, would be reduced if CSC did not satisfy these
measures.

       Business Owners’ customer satisfaction surveys were ineffective.

Performance measures for Business Owners’ customer satisfaction surveys were ineffective
because a large percentage of Business Owners did not respond to the surveys, a non-response to
a survey was considered to be a positive response, and the results of the survey were not
accurate. These surveys represented 15 percent of the 1.9 percent incentive fee pool.

We found 82 percent of the Business Owners’ customer satisfaction surveys were not returned 

for the 239 projects run at the VDC during the period, October 2002 through July 2003. Non-

responses were considered positive responses for calculating the incentive fee. One Business 

Owner, who did not respond to the surveys, stated he was not aware that he failed to respond. 


We judgmentally selected the two Business Owners with negative responses to the February-
March 2003 Customer Satisfaction Survey. Neither of these Business Owners responded to the
survey, but their responses were recorded as negative responses. Both Business Owners stated
that their projects had not yet been run at the VDC at the time of the survey. The recorded
responses were not accurate.

FAR § 37.602-1(b)(2) states, “When preparing statements of work, agencies shall, to the 

maximum extent practicable . . . [e]nable assessment of work performance against measurable 

performance standards . . . .” 


The practice of considering all non-responses as positive responses did not enable an assessment
of work performance, because the results of the assessment may not have been accurate.




                                               5

Final Report: Audit of the VDC Transformation Task Order                  ED-OIG/A02-D0015

Recommendations:

We recommend that the Chief Financial Officer ensure that any re-negotiation of the Task Order,
and all similar performance-based Task Orders and contracts, include performance measures to

1.1 	   Monitor data on system usage to optimize server infrastructure;
1.2 	   Establish one or more performance-based disincentives, to the maximum extent
        practicable, that reduce the base amount paid to the contractor if it performs poorly; and
1.3 	   Assess customer satisfaction by using more effective methods.

CFO’s response:

We provided a draft of this report to the CFO for comment. Based on the CFO’s comments
(Attachment A), we made changes to our report’s sub-finding associated with Recommendation
1.2, “The Task Order lacked a performance-based disincentive.” We provided a draft of the
revised sub-finding and recommendation to the CFO and received additional comments
(Attachment B).

In his comments, the CFO stated that the VDC project management team is managing the
contract according to the appropriate performance measure and provides awards to the vendor
commensurate with the quality of the product that is delivered. The CFO stated, in response to

    • 	 Recommendation 1.1, that no additional performance measures are appropriate for a
        contract of this nature. The objective of the contract is to make computing resources
        available for FSA systems. Since CSC cannot control factors that influence utilization, a
        utilization performance measure would not be appropriate. Contracting officers
        constantly monitor performance measures, not only to ensure that CSC is meeting the
        measures, but also to ensure that appropriate measures are contained in the contract. The
        contracting officers receive monthly system status reports (which include the information
        about server utilization used by the OIG auditors to identify the finding), and quarterly
        capacity planning reviews (meetings) are held for each application. If it is determined
        that the measures do not adequately meet the objectives of the contract, a change to the
        contract is negotiated. CSC recently consolidated functions onto servers that resulted in
        the retirement of 18 servers. Among other objectives, this consolidation was intended to
        reduce costs by eliminating or consolidating underutilized servers.

    • 	 Recommendation 1.2, as revised, (see Attachment B), that meaningful incentives and
        disincentives are a strong determinant to safeguarding against poor performance and that,
        if the Department elects to re-compete the FSA data center requirements, it will examine
        whether disincentives are an appropriate motivator for increasing efficiency and
        maximizing performance. However, the CFO also states that the Department is
        negotiating in a sole-source environment where the VDC contractor is neither motivated
        nor obligated to accept disincentives. The CFO also contended to that it would not be
        practicable to incorporate disincentives in a re-negotiation with the current VDC
        contractor while attempting to negotiate a better price.




                                                 6
Final Report: Audit of the VDC Transformation Task Order                 ED-OIG/A02-D0015

   • 	 Recommendation 1.3, that he concurred the surveys were not a strong determinant for
       awarding incentive payments. The CFO will examine better methods for ensuring
       customer satisfaction.

OIG’s reply:

We considered the CFO’s response, and made a change to our finding and recommendations. In
response to the CFO’s comments on

   • 	 Recommendation 1.1, the basis for our finding on server utilization was the monthly
       Infrastructure Availability Summaries, which reported peak usage. However, as of June
       2003, this information was no longer reported by CSC. As a result, the contracting
       officers could not determine utilization properly. We agree that CSC cannot control
       FSA’s need to use server space at the VDC; however the SOO does require CSC to
       perform continuous analysis, to develop recommendations for improvements in overall
       efficiency and to make required Task Order adjustments. The performance measure we
       recommend would help FSA measure CSC’s success in accomplishing this requirement,
       and it would help FSA avoid overpaying for server availability. As we cite in our report,
       under FAR § 37.601(c) performance-based contracts “[s]pecify procedures for reductions
       of fee or for reductions to the price of a fixed-price contract when services are not
       performed or do not meet contract requirements . . . .” The example that the CFO
       provides of a recent consolidation of functions supports the value of the performance
       measure we recommend and the need to use that measure on an ongoing basis.

   • 	 Recommendation 1.2, we have revised our report and recommendation to clarify that
       performance-based disincentives are needed to increase the efficiency of the Task Order.
       FAR § 37.602-4, supports our position, and states, “To the maximum extent practicable,
       performance incentives, either positive or negative or both, shall be incorporated into the
       contract to encourage contractors to increase efficiency and maximize performance.”
       Any re-competition or re-negotiation of the Task Order should include a consideration of
       the use of performance-based disincentives, to the maximum extent practicable, as
       encouraged by the regulations. These performance-based disincentives could provide
       greater assurance that critical systems at the VDC are available to meet the Department’s
       mission.

   • 	 Recommendation 1.3, we agree that the CFO should evaluate customer satisfaction by
       examining more effective methods. However, our finding addressed the practices of the
       Task Order’s survey, not the usefulness of customer satisfaction surveys in general. The
       CFO’s examination to determine better methods for ensuring customer satisfaction could
       include customer satisfaction surveys, as long as the surveys were properly managed and
       monitored. We have changed the wording of our Recommendation 1.3, from “effective
       survey methods” to “effective methods”, so that our recommendation does not appear to
       imply that a survey is the only effective method to assess customer satisfaction.




                                                7

Final Report: Audit of the VDC Transformation Task Order                  ED-OIG/A02-D0015

                                      OTHER MATTERS


The Department did not consider other contractors when it restructured the prior eight task orders
into one Task Order. During our review of the contract files, we found indications that the
Department decided not to re-compete the prior eight task orders because the revised Task Order
resulted in an estimated $15 million in savings per year. We could not determine whether
greater savings could have been achieved through new competition. Though we did not find that
FSA’s decision violated the FAR or any applicable statute, by considering one contractor, FSA
may have missed an opportunity to realize greater savings.

                         OBJECTIVES, SCOPE, AND METHODOLOGY

The objectives of our audit were to determine

   1. 	    If the 2001 VDC Task Order was negotiated and awarded in accordance with the
           FAR and other Federal regulations,

   2. 	    If the first 14 Task Order modifications were properly executed,

   3. 	    The effectiveness of the FSA’s monitoring of CSC’s Monthly Progress Reports to
           ensure that the Department appropriately modified the Task Order based on computer
           usage trends,

   4. 	    If the SOO and related contract documents contained adequate performance 

           measures, and 


   5. 	    If the actual billed rates were consistent with the agreed rates of the Task Order and
           its modifications.

To accomplish our audit objectives, we reviewed contract files and invoices maintained by
Contracts and Purchasing Operations. We also interviewed the past and present contracting
officers, the past and present Contracting Officer’s Representatives, and other Department
officials associated with the administration and monitoring of the Task Order. Additionally, we
reviewed meeting minutes, incident reports, information obtained from the Federal Student Aid
Internet, and from the period, December 2001 to February 2003, Monthly Progress Reports’
Infrastructure Availability Summaries for peak usage. We did not test the reliability of the data
provided in the Infrastructure Availability Summaries because our objective was to determine the
effectiveness of the FSA’s monitoring of reports that it received and not the reliability of the
underlying data. We reviewed the FAR, OFPP publications, and industry news articles, as
applicable to our audit.

We judgmentally sampled four Department employees (Business Owners) responsible for
projects run at the VDC, based on the high dollar volume of their VDC operations, and two
Business Owners, based on low usage. In addition, we judgmentally selected two Business
Owners because of their negative responses to the February-March 2003 Business Owner’s
customer satisfaction surveys. Lastly, we interviewed two FSA General Managers, the VDC
manager for the Department, and CSC representatives.


                                                8
Final Report: Audit of the VDC Transformation Task Order                           ED-OIG/A02-D0015

We obtained and reviewed the 21 Public Vouchers, from August 2001 to February 2003, 2
totaling $91,319,168, and the respective supporting documentation. We also reviewed the first
14 modifications to the Task Order to determine whether they had been executed appropriately
by the Department.

We conducted the audit in accordance with generally accepted government auditing standards
appropriate to the scope of the audit described above. We conducted fieldwork at FSA’s offices
in Washington, D.C., during the period, June 9, 2003, through September 12, 2003. We held the
exit conference on November 12, 2003.

                             STATEMENT ON MANAGEMENT CONTROLS

We did not assess the adequacy of management controls in the administration of the Task Order.
We limited our review to gaining an understanding of the invoice payment controls. We relied
on substantive testing of the invoice payments based on the public vouchers, other supporting
documentation, and interviews of contract personnel in order to conclude that the controls were
adequate for invoice payments for the Task Order.

                                   ADMINISTRATIVE MATTERS

Corrective actions proposed (resolution phase) and implemented (closure phase) by your office
will be monitored and tracked through the Department’s Audit Accountability and Resolution
Tracking System (AARTS). ED policy requires that you develop a final corrective action plan
(CAP) for our review in the automated system within 30 days of the issuance of this report. The
CAP should set forth the specific action items, and targeted completion dates, necessary to
implement final corrective actions on the finding and recommendations contained in this final
audit report.

In accordance with the Inspector General Act of 1978, as amended, the Office of Inspector
General is required to report to Congress twice a year on the audits that remain unresolved after
six months from the date of issuance.

In accordance with the Freedom of Information Act (5 U.S.C. §552), reports issued by the Office
of Inspector General are available to members of the press and general public to the extent
information contained therein is not subject to exemptions in the Act.




2
 Although the Task Order was signed in September 2001, ED paid the last vouchers of the previous Task Orders
under the future Task Order.


                                                       9
Final Report: Audit of the VDC Transformation Task Order               ED-OIG/A02-D0015

We appreciate the cooperation given us during this review. If you have any questions, please
call Daniel P. Schultz, Regional Inspector General for Audit, at (212) 637-6271.

                                            Sincerely,

                                                /s/

                                            Helen Lew
                                            Assistant Inspector General for Audit


cc: Theresa S. Shaw 

    Chief Operating Officer 

    Federal Student Aid





                                              10

Final Report: Audit of the VDC Transformation Task Order                                                                     ED-OIG/A02-D0015

                                                                  Attachment A



                                       UNITED STATES DEPARTMENT OF EDUCATION

                                                     OFFICE OF THE CH IEF FINANCIAL OFFICER

                                                                                                THe: CHIEF FIN.o.NCl.o\.L. OFl'lCER


                                                              MAY - 5 2OO~



               TO:               Helen Lew


               FROM :            ::':'::::77:J;;r'dh
               SUBJECT;           Draft AUdi4eport Virtual Data Cellfer (VDC) Tralls/ormatioll Task
                                  Order. Control Number ED-OIG/A02-DOOIS

               This memorandum responds to the Office of the Inspector General (OIG) suhject Draft
               Audit Report. dated March 18. 2004. The purpose of the audit was to review the VDC
               Task Ordcr (contract) to detennine if it was properly negotiated and executcd; the
               effectiveness of the Department's monitoring of compute r usage trends; whether the
               contract contained adequate perfomlanee measures; and, if billed rates were consistent
               with the agreed rates in the contract.

               In gcncral, the OIG fou nd thai the Depanment negotiated and executed the VDC contract
               and all modifications properl y and that all billed ratcs we re consistent with the agreed
               rates of the contract. However, the OIG review found that the VDC contract lacked
               adequate perfo nnance measures because they do not monitor underu tilization ofservers.
               As a result. the Department paid a fix ed price for underutilized servers, paid an incentive
               fee that contained little disincentive for poor perfonnance, and paid a ponion of the
               incentive fcc based on ineffecti ve customer satisfaction surveys. Recommendations have
               been provided regarding monitoring computer usage and the perfonnance measures
               currentl y under the contrac t.

                The following addresses each of the OIG recommendations.

                Recommendation 1.1               Monitor data on system usage to optimize server infrastructurc.

                Contracti ng offi cers constantl y monitor perfonnanee measures, not only to ensure that
                contractors are meeting the measures, hut also to ensure that the appropriate measures arc
                contained in the contract. If i! is detennined that what is being measured is not
                adequately meeting the objectives of the contract, a change to the contract is negotiated.
                The VDC contract was awarded to perfonn a single service. to make computing resources
                avai lable fo r Federal Student Aid (FSA) systems to operate. The single perfonnance
                measure fo r this service (the only output provided by the contract). as is the casc with
                most CompUler facilities. is 10 measure system availability. Thc availability needed for
                one system is not necessarily the availability ncooed for another. At the VDC, there arc


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Final Report: Audit of the VDC Transformation Task Order                                   ED-OIG/A02-D0015

                                                 Attachment A


                                                                                                         2

             three service levels, and FSA systems have a service level assigned to each of them, No
             additional perfonnance measures would be appropriate for a contract of this nature.

             Server uti lization was also monitored. The YOC contracting officer received monthly
             reports regarding system status, including utilization for each computing resource. This
             rcpon was the source of infonnation used by the auditors to identify low utilization as an
             issue.

             When FSA migrated its systems to the VDC. each system was organized into its own task
             order. Whi le this migration did provide some efficiencies and reduction in cost, each
             system was still on its own servers, mainframes. elc. The goal orlhe VDC
             transfonnalion task was 10 combine these contracts and provide further consolidation of
             the servers and reduction in costs of more than 15% .

              This lransfonnalion was successful, but during this same period, the FSA Modernization
              contractor was developing systems. When a system was designed, the computing
              resources were identified by the Modernization contractor and procured by the VDC on
              behalf of the Depanment. The Schools Portal, identified in the audit, is one such case
              where the computing resources were specified. Others included. but ate not limited to,
              the Student'S Ponal, eCam pus Based System and cZAudit. The VDC contractor recently
              completed a technology refresh that consolidated functions onto servers that resulted in
              18 servers retiring. The primary objectives of the refresh were to: I) replace old
              technology with new technology; 2) eliminate or consolidate underu tilized servers to
              more efficiently utilize servers and reduce costs to FSA (ie. reduction to each system
              fixed unit- price); and. 3) simplify the environment so it could be managed more
              efficiently and for less cost.

              Additionally. for each application, the VDC Project Management team and the contractor
              perfonn a quanerly capacity planning review. In these meetings. past utilization is
              reviewed and future utilization needs or changes are discussed and planned. Changes to
              uti lization are typi cally driven by new requirements from the business, new features in an
              application, or some other external event that may cause usage to increase (i.e .• a
              marketing campaign may driVe traffic to a paniculat web site). At times, business
              utilization of an application is not well known in advance, and th is can cause eith er the
              need to add capacity or an unexpected amount of spate capacity.

              As previously stated, a perfomlance measure for utilization wou ld not be an appropriate
              measure of the service being delivered if for no other reason than the VDC contractor
              would not have control over the factors that could in n uence utilization.
Final Report: Audit of the VDC Transformation Task Order                                  ED-OIG/A02-D0015

                                                Attachment A


                                                                                                          J

             Recommendation 1.2 - Establish a performance-based incentive fee thai encourages the
             contractor 19 increase efficiency and to maximize performance.

             The incentives placed in the VDC contract were not for the purpose of increasing the
             contractor's efficiency. T he conlracl lypc selected (fixed-price) provides sufficient
             incen tive. Fixed price contracts motivate the contractor to max imize efficiency in order
             10 increase profit margins. For every dollar saved, the contractor makes an additional
             dollar in profit. Perfomlancc-based incentives in Federal con tracts are meant to motivate
             a contractor to deliver added value to the Government. Relative incentives offered for
             improVed performance, qual ity, or timeliness is an example. We therefore, believe that
             the incentives offered encourage maximum performance. The incentive fee 0[60% is
             direc::tly linked to the ultimate purpose of the VDC contract: availability of computing
             resources. This incen tive rewards the YDC contractor for exceeding the agreed upon
             service levels of99.7 and 99.9 percent availabi lity. The remai ning 40% incentive is to
             reward the YDC contractor for its ability to satisfy the users.

             What is suggested by the OlG fi nding is that the inccntives should be higher. Providing
             increased incentives, as the OIG finding suggests, would not be pruden!. Any addi tional
             incentives or increased incentives would not achieve added value.

             Recommendation 1.3 - Assess customer satisfaction by using more effective survey
             methods.

             We concur that surveys are not a strong detenninant for rewarding incentives. Without
             control over the process and the ability to ensure complete feedback, errors are possible.
             Contract incentives must be based on fonnulas as is the case o f the contract incentive to
             ensure system availabili ty. We will examine better methods for ensuring customer
             satisfaction.

             In summary. OCFO believes that the VDC project management team is managing the
             co ntract accordi ng to the appropriate perfonnance measure and provides awards to the
             vendor commensurate with the quality of the product that is delivered.

             Thank you for this opportunity \0 respond. Should you have questions. please contact
             Glenn Perry. Director, C PO at (202) 708-8488.
Final Report: Audit of the VDC Transformation Task Order                                         ED-OIG/A02-D0015

                                                        Attachment B


                            UNITED STATES DEPARTMENT OF EOUCATION




                                           JUl - 8       ~



                                Helen Lew
                                Assistant Inspector G<:nWlI for Audit

         FR.O~I                 MMm;"            }./Jr,,,'/::
        SUBJECT'                Revi5ed Drfn Audit ;epon, }OO/ YirlUal /)(Jill Cemrr
                                Tum'forma/ion Task Order. Control Number EO-0 1GiA02_DOOI S


        This memorandum respooos to the Office of Inspector General (DIG) revisions to the
        subject audit sub-r'nding. '1"1-w; Task Order lacked a performooce-ba5ed disinccnliYe:'
        and Recommendation 1.2. In your revioed rqlQrt. you state in summary. that \be Virtual
        Dala ("emcr (VDC) T ran. formation Task Order (Task Order) lacked a p"rformar.ce_based
        dISincentive 10 reduce the base .mount paid to the VDC contractor if it performed poorly_
        You argue that a disincemive ba5edon performance measu= would furm.r encourage
        Ihe contrac:tor to inc"'ase efficiency and m .. imize performance.

        As a ",.ull of this funher finding. the DIG revise, Recommeooalion 1,2 to ensurctbal
        any retlegotiation of the Task Ord .... and all similar performance-based lask order. and
        contracts. include performance m=ure. to establish one or more performance-based
        di<incentiv •• that reduce the bas<: amount p;-oid to the conlroctor if it perfOmlS poorly,

        In gon(1"".l1. negoltialing meaningful iocenti, 'es and disincentives in a competitive
        contracting environment is a strong determinant 10 safeguarding against poor
        p"rformance. The VDC contract currently bas options through Seplember 30. 2011. The
        Depanment sinmhaneously seels to ",negotiate with the VDC co~t.-actor fo< beeler
        pricing ar.<! to .ondu., marl<1   "'''''.,-e"
                                                   to delennine the ~vailabilily of sources capable of
        performing full -service data center ,crvices. (flhe Depanment eleCIS to re_comp<1e the
        FSA dallo center requirements based Oil findings from the mmel research. tb.
        Dep;-ortment (f.ctoring in customary practices in the commercial mark<1) will examine
        whether disincemives 3K an appropriate mOlivator for increasing efficiency and
        ma.imizing performance_

         Howe"cr. to cn g.~c in. ",-negotiation with the current VDC contraclor to incorporate
         dISincent ives while al1empling to n'goliate beller pricing is nol praMicablc, The
         Department is negotiating in a sole-source e""ironmenl where the VDC contractor is
         neither motivated nor obligatooto comply wi,h accepting di.incen,ives; or. if 'he VDC
         contmc'or awee. wi,h imposed di$iotcen'ivcs, ,he VOC con''''''lOr could alternatively,
         request a re_negotiation of the ince'1ives and/or feasibly mark_up the proposed pricing to


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                                                          ~       -
                                       .... YlA!<tlA"" .. U'" W''''''''''TO><, O.C. 10>0>· ' _
                                                               ....


                          400 Maryland Avenue, S.W., Washington, D.C. 20202-1510


     Our mission is to ensure equal access to education and to promote educational excellence throughout the Nation.
Final Report: Audit of the VDC Transformation Task Order                                  ED-OIG/A02-D0015

                                                 Attachment B
                                                                                             ,
 Kcount fOlr any potential loss in rev...,u". As mentioned in our earlier response. the
 incentives in pi""", are appropriate for th e service 1",-,,15 negotiated.

 The Corrective Action P lan has been modified to incorporate an action item in    respo~
 IG Tevise(\ Re«ItnmendatiOl1 1.2. and is at=hod 10 this memorandum .

 llIanl< you for !his o pportuni ty 10 respond. Should)'Ou have questions, please contact
 G lenn PCfT)', D irector. CPO at (202) 24 5-6289.

 Auao:hmenl




The CFO’s Attachment to Attachment B was not included with this report since it relates to a separate
process from the audit report process.