oversight

Contract Closeout Audit of Office of Educational Research and Improvement Contract No. RJ96006501 At Northwest Regional Educational Laboratory.

Published by the Department of Education, Office of Inspector General on 2002-09-12.

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

                       Contract Closeout Audit of
            Office of Educational Research and Improvement
                       Contract No. RJ96006501
             At Northwest Regional Educational Laboratory




                                     FINAL AUDIT REPORT
                                       ED-OIG/A07-C0008
                                        September 2002



Our mission is to promote the efficiency,                 U.S. Department of Education
effectiveness, and integrity of the                         Office of Inspector General
Department’s programs and operations.                     Kansas City, Missouri Office
                                          NOTICE
             Statements that managerial practices need improvements, as well as other
                           conclusions and recommendations in this report
           represent the opinions of the Office of Inspector General. Determinations of
 corrective action to be taken will be made by the appropriate Department of Education officials.

          In accordance with Freedom of Information Act (5 U.S.C. § 552), reports
             issued by the Office of Inspector General are available, if requested, to
members of the press and general public to the extent information contained therein is not subject to
                                      exemptions in the Act.
                                       Contract Closeout Audit of
                           Office of Educational Research and Improvement
                                       Contract No. RJ96006501
                            At Northwest Regional Educational Laboratory



                                            Table of Contents




Executive Summary .................................................................................. 1

Background.............................................................................................. 3

Audit Results............................................................................................ 4

         Finding 1 - NWREL Received Payments That Exceeded
         Authorized Amounts........................................................................ 4

         Auditee Comments and OIG Response ............................................. 6

         Finding 2 - NWREL Improperly Claimed Excess Indirect
         Costs on Subcontracts, and Understated Amounts Included In Its
         Indirect Cost Rate Proposals ............................................................ 7

         Auditee Comments and OIG Response ............................................. 9

Audit Objective, Scope, & Methodology ....................................................10

Statement on Management Controls ..........................................................13

Appendix A - NWREL's Job Summary Report ...........................................14

Appendix B - NWREL's Response to Draft Report.....................................15




                                             ED-OIG A07-C0008
                                    Contract Closeout Audit of
                        Office of Educational Research and Improvement
                                    Contract No. RJ96006501
                         At Northwest Regional Educational Laboratory




                                     Executive Summary


We reviewed the Office of Educational Research and Improvement (OERI) contract held by Northwest
Regional Educational Laboratory (NWREL) to determine the accuracy and reasonableness of costs
incurred for products and services provided. Except as noted below and within the context of our
scope of work described in the report, we found that the costs billed by NWREL were materially
reasonable and accurate.


The Federal Acquisition Regulation limits the Government's payment obligation to an amount authorized
in the contract or any subsequent modifications to the contract. The final modification on the contract
limited the Department's payment obligation to $29,836,858. NWREL billed the Department and
received payments exceeding this amount by $320,195.


NWREL did not ensure that all costs that should have been excluded from indirect costs were identified
to prevent NWREL from claiming indirect costs on these amounts. Amounts on subcontracts exceeding
$25,000 were not always coded properly before they were entered into NWREL's accounting system.
 As a result, NWREL improperly claimed indirect costs on amounts in excess of allowable limits, and
understated amounts included in its indirect cost rate proposals submitted to the Department.


We recommend that the Chief Financial Officer (CFO) take action to ensure that NWREL refunds
$320,195 in overpayments, and no further payments are made without authorization. We also
recommend that the CFO require NWREL to improve its internal controls over the processing of
subcontracts to ensure that excess indirect costs are not claimed and, as appropriate, submit amended
indirect cost rate proposals to the Indirect Cost Group (ICG), Office of the Chief Financial Officer
(OCFO).


NWREL officials concurred with our recommendation to return amounts received in excess of the


ED-OIG                                   A07-C0008                                             Page 1
contract authorization and have changed its cash receipts system to better identify deposits from the
U.S. Treasury. However, they stated the overpayments occurred because they received advances in
excess of the contract value, not as payments for amounts billed as stated in our finding. We agree that
NWREL was operating under an advance payment system; however, contract payments into the
advance account were generated based on NWREL's vouchers reporting contract expenditures.
NWREL was also responsible for spending down the advance account at the close of the contract.


NWREL officials also indicated that indirect costs were improperly claimed on subcontracts over
$25,000, and corrective action had been taken to strengthen internal controls in this area.




ED-OIG                                    A07-C0008                                             Page 2
                                              Background


NWREL is a private, nonprofit corporation located in Portland, Oregon, and primarily serves the states
of Alaska, Idaho, Montana, Oregon, and Washington. Its clients include five state education agencies,
over 500 local school districts, 26 private and parochial schools, 34 intermediate and county education
agencies, and 76 colleges and universities. In furtherance of its mission to improve educational results
for children, youth, and adults by providing research and development assistance in delivering equitable,
high quality educational programs, NWREL conducts six programs in research and development, and
five in training and technical assistance. NWREL is funded through a variety of public and private
sources including federal, state and local agencies, institutions of higher education, and businesses.
Although each program has its own specific grants and contracts, the Lab's primary source of funding is
through OERI.


Contract No. RJ96006501 is a cost-reimbursement plus fixed fee contract. OERI and the Contract
and Purchasing Operations, OCFO were responsible for overseeing the contract. The period of
performance of the contract was from December 11, 1995 - December 10, 2000, but extended
through September 2001 for additional work. The following table summarizes the costs incurred and
paid.


    1.   Final award authorization                                                        $29,836,858
    2.   Labor costs incurred                                             $10,790,488
    3.   Other direct costs incurred                                        9,839,659
    4.   Indirect cost expense                                              8,474,723
    5.   Total contract costs reported on Job Summary Report                               $29,104,870
    6.   Budgeted Fee                                                         $869,035
    7.   Amount actual costs incurred exceeded authorized1                     137,047
    8    Net Fee Earned                                                                        $731,988
    9.   Total contract costs plus fee                                                     $29,836,858
    10. Contract payments made through ED PMS                             $10,321,721
    11. Contract payments made through EDCAPS                              19,835,332

1
 A fee adjustment of $137,047 was made on the Job Summary Report; however, NWREL officials informed us that the
amount the contract was overspent was actually $139,995.


ED-OIG                                      A07-C0008                                                Page 3
 12. Total payments made against the contract                                         $30,157,053




                                          Audit Results


Except as noted below and within the context of our scope of work described in the report, we found
that the costs billed by NWREL were materially reasonable and accurate. NWREL needs to improve
its management controls over accounting for contract costs billed to the Department because it violated
the Federal Acquisition Regulation (FAR) when it failed to account for payments received that
exceeded the authorized amount of the contract. In addition, NWREL improperly billed the
Department for excess indirect costs claimed for subcontract amounts exceeding $25,000, and
understated its negotiated general and administrative expenses (G&A) indirect cost rate.



Finding No. 1 – NWREL Received Payments That Exceeded Authorized Amounts



NWREL billed for and received $320,195 in excess of the authorized amount of the contract.
NWREL billed the Department for amounts more than allowable limits because of errors in recording
advances and payments in its accounting system. As a result, NWREL is liable for all payments
received that exceeded the authorized amount.


The Government's Payment Obligation is Limited to Authorized Amounts


FAR 17.106-1(g) Payment limit states that:


        The contracting officer shall limit the Government's payment obligation to an amount
        available for contract performance. The contracting officer shall insert the amount for
        the first program year in the contract upon award and modify it for successive program
        years upon availability of funds.


Contract Modification No. 24, dated September 13, 2001, limits the Government's payment obligation
to $29,836,858. NWREL's Job Summary Report (Appendix A) stated that the funded value of the


ED-OIG                                   A07-C0008                                                Page 4
contract was $29,836,858.


NWREL Billed the Government and Received Payment for Contract Costs That Exceeded
Authorized Amounts


NWREL's job summary report identified total expenses incurred for the contract of $29,836,858. This
agreed with the amount authorized by the Contracting Officer on the final modification. After reviewing
general ledger detail, vouchers, and departmental records, we determined that NWREL received
payments totaling $30,157,053, which is $320,195 in excess of the authorization.


NWREL Failed To Properly Record Amounts In Its Accounting System Which Resulted In
Overpayments Totaling $320,195


NWREL's management controls did not ensure that contract invoices were properly recorded in its
accounting system. Timely reconciliations were not completed to avoid billing and receiving payments in
excess of authorized limits. NWREL informed us that:


        [t]he effort to reconcile this was considerable . . . NWREL's system for recording cash
        receipts created difficulty in determining which entries were the original cash receipt and
        which entries were reclasses or transfers between accounts.


In February 1998, NWREL switched from the automated FEDWIRE method of payments which were
made through the Department's (ED) Payment Management System (PMS) to the advanced payment
method made through the Education Central Automated Processing System (EDCAPS), Contract
Purchasing Support System (CPSS). EDPMS operated through April 24, 1998, when it was replaced
by EDCAPS. During our review, we found the following examples of improperly recorded amounts.


    •   NWREL had submitted an invoice for an advanced payment amount of $532,886 that
        was not recorded in its accounting system.


    •   NWREL had received payment for four invoices totaling $74,733 that it did not record
        as revenue received.


Because NWREL failed to properly record these and other amounts in its accounting system, it
received payments in excess of the authorized amount of the contract totaling $320,195.



ED-OIG                                     A07-C0008                                              Page 5
The Department failed to prevent the overpayments because during the system conversion it recorded
the unliquidated obligations from PMS in EDCAPS before applying all the payments. Instead of
identifying the overpayments to NWREL, the EDCAPS system showed an unexpended obligation in
excess of $1.9 million. According to NWREL's Director of Finance, the Department contributed to
NWREL's reconciliation problems because payments made through EDCAPS were deposited in its
general account rather than the account established for advanced payments (as mandated by the
contract) which required NWREL to make additional entries to transfer the cash receipts. NWREL
was not providing clear and consistent descriptions for these entries in its system.


Recommendations


The CFO should require NWREL to:


       1.1       Develop polices and procedures to improve its system for accounting for
             billings, and contract payments and advances received.


       1.2      Return payments totaling $320,195 received in excess of authorized limits   to
             the Department of Education.2


NWREL's Comments


NWREL concurred that the contract payments were difficult to reconcile because of problems with the
Department’s payment systems and NWREL’s cash receipts system. Accordingly, NWREL has
revised its cash receipts system to better identify deposits from the U.S. Treasury. In addition,
NWREL emphasized that the payments were recorded in their system as advances, not as payments for
amounts billed. They stated that all advances were recorded in their accounting system and the amount
remaining was classified as a liability. The full text of NWREL's comments is included as Appendix B of
this report.


OIG Response


We agree that NWREL was operating with an advance payment of $1.8 million. However, contract
payments into the advance account were generated based on NWREL's vouchers reporting contract
expenditures. NWREL was also responsible for spending down the advance account at the close of the




ED-OIG                                   A07-C0008                                               Page 6
contract. We did not determine all accounting misclassifications, but had noted that the above amounts
were not recorded in the contract’s revenue account. As stated in the report, NWREL indicated it had
returned the contract overpayment to the Contracting Officer.



Finding No. 2 – NWREL Improperly Claimed Indirect Costs on Subcontracts Amounts
Exceeding Allowable Limits, and Understated Amounts Included In Its Indirect Cost Rate
Proposals



NWREL's management controls did not ensure that all costs that should have been excluded from
indirect costs were identified to prevent NWREL from claiming indirect costs on these amounts.
Amounts on subcontracts exceeding $25,000 were not always coded properly before they were
entered into NWREL's accounting system. As a result, NWREL improperly claimed indirect costs on
amounts in excess of allowable limits, and understated amounts included on its indirect cost rate
proposals submitted to the Department.


Office of Management and Budget (OMB) Circular A-122 Prescribes the Basis for Allocating
Indirect Costs


Attachment A of the Final Revision of OMB Circular A-122, Cost Principles for Non-Profit
Organizations, subparagraph C.1 defines indirect costs as "those that have been incurred for common or
joint objectives and cannot be readily identified with a particular final cost objective" (e.g., the contract).
 The Circular, at subparagraph D.3.f., describes the basis used to allocate indirect costs to a contract.


        Indirect costs shall be distributed to applicable sponsored awards and other benefitting
        activities within each major function on the basis of [modified total direct costs] MTDC.
         MTDC consists of all salaries and wages, fringe benefits, materials and supplies,
        services, travel, and subgrants and subcontracts up to the first $25,000 of each
        subgrant or subcontract (regardless of the period covered by the subgrant or
        subcontract) . . . the portion in excess of $25,000 shall be excluded from MTDC.
        [Emphasis added.]



2
 NWREL informed us on May 3, 2002, that it had sent the contracting officer a check for $324,845.61. The amount
reflected a preliminary determination of overpayment that was subsequently refined.


ED-OIG                                       A07-C0008                                                  Page 7
FAR 31.201-2(d) states that "[a] contractor is responsible for accounting for costs
appropriately . . . ."


NWREL Claimed Excess Indirect Costs On Subcontracts, and Understated Amounts Included
In Its Indirect Cost Rate Proposals


NWREL's Job Summary Report categorized $9,839,659 as other direct costs (ODC) incurred and
billed to the Department. We statistically selected a sample of ODC records and verified that the costs
were supported and allowable. However, we found that NWREL improperly claimed indirect costs on
subcontract amounts greater than $25,000. In an attempt to identify the remaining subcontracts over
$25,000, we expanded our review to include 100 percent of all subcontractors included in the
transactions identified as service contractors, and other services - subcontracts smaller/greater than
$25,000. (See the Scope and Methodology Section for additional information on sampling
methodology.)


NWREL included a line item for subcontract amounts greater than $25,000 in its indirect cost rate
proposals submitted to the Department. Since NWREL did not always properly identify these amounts,
this line item was also understated.


NWREL's Management Controls Did Not Ensure That Subcontract Costs Were Accounted
for Appropriately


NWREL procedures relating to the processing of subcontracts were inadequate. NWREL had a
written policy that subcontract amounts exceeding $25,000 were to be coded to preclude claiming
indirect costs. Purchasing officials informed us that they coded purchase orders in adherence to this
policy. However, we found at least two instances of incorrect coding, and not all subcontracts were
routed through the purchasing office.


Failing to Account For Costs Appropriately Resulted in NWREL Claiming $16,346 in Excess
Indirect Costs and Understating Amounts In Its Indirect Cost Rate Proposals Submitted To
the Department


As a result of failing to properly code all subcontract costs exceeding $25,000 before entering into its
accounting system, NWREL improperly claimed G&A expenses on subcontract costs totaling $71,970.
 We determined that NWREL improperly claimed $16,346 in excess indirect costs ($15,870 plus fee



ED-OIG                                    A07-C0008                                             Page 8
of $476)3 for those subcontract amounts exceeding $25,000.


As a result of failing to properly code all subcontract costs exceeding $25,000 before entering into its
accounting system, NWREL understated these amounts on its indirect cost rate proposals. MTDC was
overstated as the amounts on the proposals were used to reduce MTDC. Since MTDC are the
denominator in the indirect cost rate, the negotiated G&A indirect cost rates may have been
understated.


Recommendations


The CFO should require NWREL to:


         2.1 Develop policies and procedures to ensure that subcontract amounts
             exceeding $25,000 are coded properly to preclude improperly claiming
             indirect costs.4


         2.2 Submit corrected indirect cost rate proposals to the Director, Financial
             Improvement and Post Audit Operations.


NWREL's Comments


NWREL stated that the amounts in question were not material to the contract or its indirect cost
proposal. NWREL has taken corrective action to improve its internal controls in this area. The full text
of NWREL's comments is included as Appendix B of this report.


OIG Response


As a result of NWREL's actual costs exceeding the authorized award amount, we are not requesting
that NWREL refund the improperly claimed indirect costs. We are recommending that NWREL
consult with the Director, Financial Improvement and Post Audit Operations, for determination of the
effect on negotiated indirect cost rates.


3
  As explained elsewhere in the report, NWREL's actual costs exceeded the authorized award amount by $139,995. As
a result, we are not requesting that it refund the improperly claimed indirect costs.
4
  On March 19, 2002, NWREL informed us that "As a result of this review, we will be reviewing purchase order coding
to ensure that it complies with our internal controls and we will add a new general ledger account to properly classify
service contracts in excess of $25,000."


ED-OIG                                         A07-C0008                                                    Page 9
                       Audit Objective, Scope, and Methodology


The objective of the audit was to determine whether costs claimed were incurred, allowable, and
adequately supported. We focused our review on the following areas.


    •   Accumulating and Reporting Contract Costs
    •   High-risk Cost Categories
    •   Contract Payments


    To accomplish our objective, we:


    •   Interviewed NWREL's management officials and staff, and reviewed written policies
        and procedures to gain an understanding of its system for accumulating and reporting
        contract costs.
    •   Reviewed Contract No.RJ96006501, including the statement of work.
    •   Reviewed the audit reports for the year ended August 31, 2001, prepared by
        NWREL's Independent Public Accountants.
    •   Reviewed an August 1998 performance report prepared by NWREL's Independent
        Public Accountant.
    •   Reviewed laws and regulations to gain an understanding of allowable costs.
    •   Traced vouchers and payment data from the Department's records to NWREL's
        general ledger detail to verify payments received.


We statistically selected a systematic random sample of 31 employees from a universe of 310
employees to verify employment. We statistically selected a random sample of 41 from a universe of
20,581 labor records--total labor costs incurred were $10,790,488--and traced them to timesheets
and labor rates contained in human resources records to verify time charged and labor rates. We
stratified a universe of 26,382 ODC records--total costs incurred were $9,839,659-- into populations
according to risk, and statistically selected random samples containing a total of 86 records. We traced
the records to supporting documentation to verify that costs claimed were incurred, allowable, and
adequately supported. The following table summarizes the labor and ODC samples.



ED-OIG                                   A07-C0008                                             Page 10
                                 Job Category On          Records Number of            Dollar
                                  NWREL's Job               in    Records in         Value In
 Transaction Description         Summary Report           Sample Population          Population
 Labor Costs                  Direct Labor                                          $10,790,488
    Employees                  Verified Employment              31            310
    Labor charges               Verified time & rates           41         20,581
 Independent Contractors      Service Contracts                 10            640 $ 1,021,518
 Temporary Services           Service Contracts                 10          1,284 $      517,726
 Staff Travel                 Travel & Transport                20          6,563 $ 1,636,441
 Other Travel                 Travel & Transport                10          2,600 $      976,018
 Subcontracts < $25,000       Other Services                      4             50 $     307,830
 Conference Expenses          Other Services                    10          1,689 $      665,996
 Other Services – Other       Other Services                    10          1,261 $      282,017
 Other Supplies               Supplies and Materials            10          1,239 $      618,534
 Subcontracts >= $25,000 Expenses w/o IDC                         2             16 $     133,205


We judgmentally selected 32 ODC/subcontract records and traced them to supporting documentation
to verify G&A indirect costs claimed. We reviewed payroll tax and fringe benefit indirect cost rates to
determine if they were reasonable.


NWREL chose to allocate indirect facility/occupancy expenses using a direct allocation method rather
than an indirect cost rate. We reviewed one month's allocation of facility/occupancy (rent, telephone,
and computer network) costs to verify that the allocation method was reasonable, and costs claimed as
other direct costs were not also included in indirect costs.


We relied extensively on computer-processed data extracted by NWREL for use in analyzing costs
billed to the contract. We tested the accuracy, authenticity, and completeness of the data by comparing
source records to computer data, and comparing computer data to source records. Based on these
tests and assessments, we concluded that data were sufficiently reliable to be used in meeting the audit’s
objective.


The audit covered the contract period December 11, 1995 - September 30, 2001. We performed



ED-OIG                                    A07-C0008                                              Page 11
fieldwork on-site at NWREL's offices in Portland, Oregon, during the periods January 14-18, 2002,
and January 28 - February 5, 2002. We conducted our exit conference with NWREL on April 30,
2002. We conducted the audit in accordance with government auditing standards appropriate to the
scope of review described above.




ED-OIG                                  A07-C0008                                          Page 12
                            Statement on Management Controls


As part of our review, we gained an understanding of NWREL's management control structure, as well
as its policies, procedures, and practices applicable to the scope of the audit. Our purpose was to
assess the level of control risk for determining the nature, extent, and timing of our substantive tests. We
assessed the significant controls in the following categories:


    •   Direct Labor
    •   Other Direct Costs
    •   Indirect Costs


Because of inherent limitations, a study and evaluation made for the limited purpose described above
would not necessarily disclose all material weaknesses in the management controls. However, our
assessment disclosed management control weaknesses that adversely affected NWREL's ability to
administer the contract effectively. These weaknesses included improperly claiming costs in excess of
the authorized limit, and improperly claiming indirect costs on subcontract amounts over $25,000.
These weaknesses and their effects are fully discussed in the Audit Results section of this report.




ED-OIG                                     A07-C0008                                              Page 13
                    Appendix A

           NWREL's Job Summary Report
         (Costs incurred by category, plus fee)


                    As of 12/31/01




ED-OIG           A07-C0008                        Page 14
ED-OIG   A07-C0008   Page 15
This page was removed because it contains proprietary information.
                    Appendix B

         NWREL's Response to the Draft Report




ED-OIG           A07-C0008                      Page 15
            NORTHWEST REGIONAL EDUCATIONAL LABORATORY
                   REPORT DISTRIBUTION SCHEDULE
                     Audit Control Number A07-C0008

                                                                 No. of Copies

Auditee

Dr. Carol F. Thomas                                                   2
Executive Director
Northwest Regional Educational Laboratory (NWREL)
101 SW Main Street, Suite 500
Portland, OR 97204

Primary Action Official

Mr. Jack Martin                                                       1
Chief Financial Officer
U.S. Department of Education
FOB 6, Room 4E319
400 Maryland Avenue, S.W.
Washington, D.C. 20202-4300

Philip Maestri, Director                                              1
Financial Improvement and Post Audit Operations
Office of the Chief Financial Officer

Glenn Perry, Director                                                 1
Contracts and Purchasing Operations
Office of the Chief Financial Officer

Collateral Action Official

Grover J. Whitehurst                                                  1
Assistant Secretary
Office of Educational Research and Improvement

Electronic Copies of Report

William D. Hansen, Deputy Secretary                                   1
John Danielson, Chief of Staff                                        1
Eugene Hickok, Under Secretary                                        1
John Gibbons, Director, Communications                                1
Clay Boothby, Acting DAS, Legislation & Congressional Affairs         1
Laurie M. Rich, AS, Intergovernmental and Interagency Affairs         1
Michelle Douglas and Carolyn Adams, OGC Correspondence Control        1
Mary Baltimore, OERI, Audit Liaison Officer       1
Charles Miller, OCFO, Audit Liaison Officer       1

William Haubert                                   1
Office of the General Counsel

Office of Inspector General (Electronic Copies)

Inspector General                                 1
Deputy Inspector General                          1
Assistant Inspector General for Audit             1
Assistant Inspector General for Investigations    1
Headquarters and Regional Audit Managers          1 each
L'Wanda Rosemond, General Operations Branch       1