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
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)