oversight

Inspectors General: Contracting Actions By Treasury Office of Inspector General

Published by the Government Accountability Office on 1997-10-31.

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

               United States General Accounting Office

GAO            Report to the Chairman, Permanent
               Subcommittee on Investigations,
               Committee on Governmental Affairs,
               U.S. Senate

October 1997
               INSPECTORS
               GENERAL
               Contracting Actions By
               Treasury Office Of
               Inspector General




GAO/OSI-98-1
                   United States
GAO                General Accounting Office
                   Washington, D.C. 20548

                   Office of Special Investigations

                   B-278420

                   October 31, 1997

                   The Honorable Susan M. Collins
                   Chairman, Permanent Subcommittee on
                     Investigations
                   Committee on Governmental Affairs
                   United States Senate

                   Dear Madam Chairman:

                   This report responds to your May 6, 1997, letter and subsequent
                   discussions with your office requesting that we determine the facts and
                   circumstances surrounding the Department of the Treasury’s award of a
                   sole-source contract to Sato & Associates for a management study of
                   Treasury’s Office of Inspector General (OIG) and of a consulting services
                   contract to Kathie M. Libby, doing business as KLS, using other than full
                   and open competition. You also asked that we determine the nature and
                   purposes of trips to California by Treasury Inspector General (IG) Valerie
                   Lau since her appointment as IG.


                   In November 1994, shortly after her confirmation, Ms. Lau contacted
Results in Brief   Frank S. Sato1 to request that he perform a management review of the
                   Treasury OIG. She subsequently told the Treasury Procurement Services
                   Division (PSD) that she wanted Mr. Sato to perform a management review;
                   and on January 9, 1995, PSD awarded a sole-source management study
                   contract to Sato & Associates,2 on the basis of unusual and compelling
                   urgency. 41 U.S.C. section 253(c)(2); Federal Acquisition Regulation (FAR)
                   section 6.302-2. The original price of the Sato & Associates contract was
                   $88,566; and an exercised option increased the contract’s final cost to
                   $90,776. In response to questions, Ms. Lau stated that the need to limit
                   competition for the management study was urgent and compelling
                   because, among other reasons, the study would assist her as a new
                   appointee to quickly make reassignments in her senior executive ranks
                   and to marshal the resources needed to conduct financial audits required
                   by the Government Management Reform Act of 1994 and the Chief
                   Financial Officer Act of 1990.




                   1
                   Mr. Sato had formerly held IG positions at the Department of Transportation and the Veterans
                   Administration.
                   2
                    Frank Sato of Woodinville, Washington, created the name Sato & Associates specifically to conduct
                   the Treasury OIG management review.



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Although Ms. Lau’s stated reasons provide some support for her position,
based on a review of the contract justification and Ms. Lau’s rationale, we
believe that there was insufficient urgency to limit competition. Even
assuming that a limited competition was warranted, it is clear that the
agency violated the applicable statute and regulation by failing to request
offers from as many potential sources as was practical under the
circumstances. Ms. Lau was aware that at least three other former IGs had
performed similar management reviews of OIGs; and Mr. Sato, who told us
he had never performed a management review, subsequently contracted
with two of them to help him perform the Treasury OIG management
review.

On February 25, 1995, Mr. Sato submitted an unsolicited proposal for
$91,012 to the Department of the Interior OIG to contract for work similar
to that being done at the Treasury OIG. Rather than award a contract based
on Mr. Sato’s proposal, the Department of the Interior conducted a full and
open competition and, in June 1995, awarded a management study
contract to Sato & Associates for approximately $62,000 less than the
proposal. Although the objectives of the study and final report for the
Interior contract were substantially the same as those for the Treasury
contract, the final cost to Interior was $28,920. This suggests that the price
of Sato & Associates’ sole-source contract for the Treasury OIG effort was
artificially high.

Regarding the KLS contract, on September 12, 1995, PSD awarded a
time-and-materials, consulting services contract to Kathie M. Libby, doing
business as KLS.3 The contract, among other factors, called for KLS to
review and analyze a report prepared by the Office of Personnel
Management (OPM) on morale and diversity problems in the OIG office and
assist OIG managers and staff concerning goals identified in the OPM study.
The contract was awarded on the basis of unusual and compelling urgency
following limited competition.

Based on our investigation, we conclude that the justification for limiting
the competition was not reasonable. The primary reason advanced by Ms.
Lau for the urgency determination was the need to have the consultant
provide a briefing at an OIG management conference to be held a few days
after contract award. Ms. Lau wanted to convey to her managers that she
intended to correct problems identified in the OPM study. The KLS
consultants did attend the conference, but they were present for the

3
 Two other consultants—Leslie Williams and Stan Ridley—worked with Kathie Libby on the contract.
The name KLS consisted of the initials of the three consultants’ first names.



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             limited purpose of introducing themselves to the OIG staff and informing
             the staff that KLS would work with them to implement the OPM study
             recommendations. We believe that Ms. Lau’s ability to (1) convey to her
             managers that the problems identified in the OPM study would be
             addressed and (2) correct those problems would not have been seriously
             impaired had the announcement of the actual consultant been delayed a
             few months in order to obtain full and open competition. Ms. Lau could
             still have informed the conference participants that she intended to hire
             such a consultant expeditiously, and the actual hiring of the consultant
             would have demonstrated to her employees that she was serious in her
             intention to pursue the OPM recommendations.

             Further, the largest modification made to the contract with KLS was
             outside the scope of the contract. The OIG should have obtained this
             additional work through a separate, competitive procurement.

             We also identified a pattern of careless management in the procurement
             process and in oversight of performance under the contract. We found that
             the agency engaged in poor procurement planning in that it failed to fully
             understand its needs and clearly articulate those needs to the contractor.
             This resulted in five modifications with a fourfold increase in the
             contract’s total price and a 1-year extension to the period of performance.
             Further, the OIG paid for work that was not authorized by the contract or
             modifications. Payments were also made to KLS without verification that
             work had been done and without determining that documents for travel
             and transportation costs incurred by the contractor had been received.

             Regarding the IG’s travel, Ms. Lau made five trips to California between
             September 1994 and February 1997. Although it was alleged that the trips
             had been made at government expense to visit her mother who lives in
             northern California, all five trips were scheduled for work-related reasons.


             The Competition in Contracting Act of 1984 (CICA), 41 U.S.C. section 253,
Background   and the implementing FAR section 6.302 require full and open competition
             for government contracts except in a limited number of statutorily
             prescribed situations. One situation in which agencies may use other than
             full and open competition occurs when the agency’s need is of such
             unusual and compelling urgency that the government would be seriously
             injured unless the agency is permitted to limit the number of sources from
             which it solicits proposals. Even when an unusual and compelling urgency
             exists, the agency is required to request offers from as many potential



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                      sources as is practicable under the circumstances. 41 U.S.C. section
                      253(e); FAR section 6.302-2(c)(2). This means that an agency may limit a
                      procurement to one firm only when the agency reasonably believes that
                      only that firm can perform the work in the available time.


                      Based on our investigation, we believe there was insufficient urgency to
Sato & Associates     limit competition and that the sole-source contract to Sato & Associates
Contract              was not proper. The Treasury OIG violated the applicable statute and
                      regulation by failing to request offers from as many potential sources as
                      was practical. Ms. Lau knew of three other former IGs who had performed
                      similar management reviews. Indeed, Mr. Sato hired two of the former IGs
                      to assist him with the Treasury OIG review. Further, the cost of that review,
                      over $90,700, appears artificially high. After Mr. Sato submitted a
                      similar-costing proposal to Interior and after a full and open competition,
                      Interior awarded a similar contract to Mr. Sato at a final cost of about
                      $28,900.


Contract Background   Prior to being confirmed as Treasury IG on October 7, 1994, Ms. Lau
                      decided that a management review of the OIG would help her meet a
                      number of challenges in her new job. In November 1994, Ms. Lau
                      contacted Mr. Sato to request that he conduct the management review.
                      According to Ms. Lau, she first met Mr. Sato when she was a regional
                      official and Mr. Sato a national official of the Association of Government
                      Accountants; a professional relationship developed over the years through
                      functions related to that association.4 Mr. Sato had written to the White
                      House Personnel Office in May 1993 recommending Ms. Lau for an
                      appointment to an IG position.5

                      In November 1994, Ms. Lau talked with senior OIG managers about a
                      management review and advised them that she knew to whom she wanted
                      to award a contract. In early December 1994, she contacted Treasury’s PSD
                      to request assistance in awarding a management review contract. The
                      contracting officer provided her with an explanation of the requirements
                      to justify a sole-source contract. Thereafter, Ms. Lau told PSD that she

                      4
                       Ms. Lau said that this relationship continued when she served as director of the Western
                      Intergovernmental Audit Forum, as she considered Mr. Sato to be an important figure in the audit
                      community. Ms. Lau and Mr. Sato stated that they have not had social engagements other than one
                      occasion in 1996, after the contract had been completed, when Ms. Lau and her husband visited Mr.
                      Sato’s residence.
                      5
                       Ms. Lau does not recall asking him for a recommendation, and Mr. Sato does not recall the reason for
                      his writing to recommend Ms. Lau.



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                 wanted Sato & Associates to do the work. The Treasury contracting officer
                 subsequently prepared a Justification for Other Than Full and Open
                 Competition, also known as the justification and approval (J&A) document.
                 On December 12, 1994, PSD approved the J&A, authorizing a sole-source
                 award to Sato & Associates. When we asked the contracting officer why
                 she did not attempt to identify other individuals or companies that could
                 perform the contract, she stated that Ms. Lau had told her that Mr. Sato
                 “had unique capabilities which would preclude the award of a
                 management studies contract to anyone else.”


Contract Award   On January 9, 1995, Treasury’s PSD awarded a contract at the request of the
                 Treasury OIG to Sato & Associates to perform a management study of the
                 Treasury OIG. The contract specified that the contractor was to produce a
                 report within 13 weeks, which was to focus on the most efficient methods
                 of improving the organization and functioning of the operations of the OIG.
                 Specific areas to be reviewed included office management procedures and
                 practice, staffing, correspondence, automation, and personnel
                 management.

                 The contract was awarded without full and open competition on the basis
                 of unusual and compelling urgency. The J&A for the Sato contract provided
                 that “[t]he Government would be injured if the Inspector General is unable
                 to quickly assess any needs for management reform and make any
                 required changes that would ensure that she receives the appropriate staff
                 support for the implementation of her policies.” According to the
                 contracting officer, when she questioned Ms. Lau about the justification
                 for the Sato contract and whether an urgent need existed, Ms. Lau stated
                 that she did not want to divulge too much of “the internal goings-on” in the
                 Inspector General’s Office to the contracting officer. Ms. Lau merely
                 assured the contracting officer that the need was urgent.

                 In her August 27, 1997, deposition before the Permanent Subcommittee on
                 Investigations, Ms. Lau was asked to explain why the contract had been
                 awarded to Sato & Associates based on unusual and compelling urgency.
                 She stated the following:

                 “I was aware that the office had some major challenges to meet, that we needed to marshal
                 the resources to do the financial audits required by the Government Management Reform
                 Act. That we had some major work to do in terms of identifying the resources to do so. In
                 addition, as the newly appointed head of the Office of Inspector General, I had a 120 day
                 period before I would be able to make any major changes or reassignments of senior




                 Page 5                                 GAO/OSI-98-1 Treasury Office Of Inspector General
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executives, and that I wanted to do that as early as possible. I knew I was going into an
office with some issues that were getting scrutiny from Congress as well as others. I
believed that I needed to have a trusted and experienced group of professionals come in to
assist me to do that. I definitely felt that there was a compelling and urgent need, if you
want to use that terminology, because I wanted to ensure that I had, for example, some of
the major changes that were necessary to meet the CFO [Chief Financial Officers Act] audit
by the time the next cycle came around, which in Government fiscal years, the cycle ends
September 30th, and so the financial audits that would be required under that would have
to be planned and conducted within that time frame.”


Other than full and open competition is permitted when the agency has an
unusual and compelling urgency such that full competition would
seriously injure the government’s interest. We recognize that the
challenges Ms. Lau believed she faced and her express desire to make
management changes and develop strategies to deal with various audit
requirements as soon as possible after taking office, provide some support
for the OIG’s urgency determination. On the other hand, we are not aware
of facts establishing that Ms. Lau’s ability to perform her duties would
have been seriously impaired had the procurement of a consultant to
perform the management study been delayed by a few months in order to
obtain full and open competition. On balance, we believe that there was
insufficient urgency to limit competition. It is clear, however, that
irrespective of whether it would have been proper to limit competition,
issuance of a sole-source contract to Sato & Associates was not proper.

As discussed above, unusual and compelling urgency does not relieve an
agency from the obligation to seek competition. An agency is required to
request offers from as many potential sources as is practicable under the
circumstances. It may limit the procurement to only one firm if it
reasonably believes that only that firm can perform the work in the
available time. 41 U.S.C. section 253(c)(1).

The J&A stated that Sato & Associates had a predominate capability to
meet the Department of Treasury’s needs. However, Ms. Lau stated to us
that she knew at the time that former Inspectors General Charles
Dempsey, Brian Hyland, and Richard Kusserow6 had been awarded
contracts for management reviews.

We interviewed two of the three former Inspectors General—Messrs.
Dempsey and Hyland—that Ms. Lau knew had done management reviews.


6
Mr. Dempsey was a former IG at the Department of Housing and Urban Development and the
Environmental Protection Agency; Mr. Hyland was a former IG at the Department of Labor; and Mr.
Kusserow was a former IG at the Department of Health and Human Services.



Page 6                                     GAO/OSI-98-1 Treasury Office Of Inspector General
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                 Both stated that they could have met the IG’s urgent time frame to perform
                 the contract. In fact, they were hired by Mr. Sato to work on the Treasury
                 OIG contract, performing as consultants. We are aware of no reason why it
                 was impractical for the agency to have requested offers from at least the
                 three other known sources for the work Ms. Lau needed. Nor are we
                 aware of any reason why Sato & Associates was the only firm that could
                 have performed that work in the available time. In fact, Mr. Sato reported
                 to us that he had never performed a management review, while, as Ms. Lau
                 knew, Messrs. Dempsey, Hyland, and Kusserow had done so.
                 Consequently, we conclude that the agency acted in violation of 41 U.S.C.
                 section 253(e) and FAR section 6.302-2(c)(2) by failing to request offers
                 from other potential sources.


Contract Costs   The contract to Sato & Associates was awarded at a firm fixed price7 of
                 $88,566, which included estimated travel and per diem costs of $15,296.
                 The contract also contained an unpriced time-and-materials option8 to
                 assist in implementing recommendations made in the contract’s final
                 report. A second modification to the contract9 exercised that option and
                 raised the projected cost an estimated $24,760, for a total estimated
                 contract cost of $113,326. The actual amount billed to the government by
                 Mr. Sato for the fixed-price contract and the time-and-materials option
                 totaled $90,776.

                 Federal procurement policy seeks to ensure that the government pays fair
                 and reasonable prices for the supplies and services procured by relying on
                 the competitive marketplace wherever practical. We believe that the lack
                 of competition for the award of the Treasury OIG management study may
                 have been the reason for an artificially high price on the Sato & Associates
                 contract. On February 25, 1995, Mr. Sato submitted an unsolicited
                 proposal for $91,012 to the Department of the Interior’s OIG for a contract
                 similar to his Treasury contract. Rather than award a contract to Mr. Sato
                 based on this proposal, the Department of the Interior conducted a full
                 and open competition. In June 1995, Interior awarded a management study
                 contract to Sato & Associates for approximately $62,000 less than the offer
                 in Mr. Sato’s unsolicited proposal. The contract’s final cost was $28,920.

                 7
                  A firm-fixed-price contract provides for a price that is not subject to any adjustment on the basis of
                 the contractor’s cost experience in performing the contract. FAR section 16.202-1.
                 8
                  A time-and-materials contract provides for acquiring supplies or services on the basis of (1) direct
                 labor hours at specified fixed hourly rates and (2) materials at cost, including, if appropriate,
                 material-handling costs. FAR section 16.601.
                 9
                  The first modification related to the delivery of the final report and did not increase the contract cost.



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                      Our review of both management study contracts shows that they are
                      similar and that any dissimilarity does not explain a nearly threefold
                      higher cost of the Treasury contract over the Interior contract. The
                      Treasury and Interior contracts contained three identical objectives that
                      the contractor was to focus on in conducting the review and making
                      recommendations.10 They were to

                      “a. improve the day-to-day management of the Office of Inspector
                      General[,]
                      “b. optimize management techniques and approaches[, and]
                      “c. enhance the efficiency . . . [and] productivity of the . . . [OIG].”

                      The proposals and final reports submitted by the contractor were
                      substantially the same for both jobs. Mr. Sato’s final report for Treasury
                      included 30 recommendations; his Interior report had 26
                      recommendations. Eighteen of the recommendations in both reports were
                      substantially the same.

                      Messrs. Dempsey and Hyland worked with Mr. Sato on both the Interior
                      OIG and Treasury OIG contracts. Mr. Hyland stated to us that the scope of
                      work on the Interior contract was basically the same as that on the
                      Treasury contract. According to Mr. Dempsey, although he conducted
                      more interviews at Treasury than at Interior, the Treasury contract was
                      worth no more than $40,000, adding that he and Mr. Hyland could have
                      done “this job in 60 days at $40,000.”



KLS Contract

Contract Background   Ms. Lau told us that prior to her October 1994 confirmation she had
                      learned that OIG suffered severe morale and diversity problems. In the
                      spring of 1995, she requested OPM to conduct a workplace effectiveness
                      study of the OIG. The purpose of the resulting OPM report was to provide
                      the OIG with the necessary information on employee attitudes to assist it in
                      its efforts to remove obstacles to workplace effectiveness.

                      When Ms. Lau made that request, she had anticipated contracting with OPM
                      to develop an implementation plan based on the problems identified in the
                      initial study. However, in April 1995, OPM explained that it was unable to


                      10
                        The Treasury contract contained one additional objective, to improve the teamwork of the OIG staff.



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                 do any follow-on work because of reorganization and downsizing. Instead,
                 in July 1995, OPM provided Treasury OIG a list of 12 consultants who were
                 capable of doing the follow-on work.

                 On July 12, 1995, Ms. Lau’s staff gave her a list of 14 possible consultants
                 to perform the follow-on work—OPM’s list of 12 and 2 others with whom
                 the staff were familiar. Ms. Lau reviewed the list, added two names, and
                 instructed her special assistant to invite bids from at least the six
                 individuals she had identified on the list.11

                 On August 17, 1995, OPM conducted a preliminary briefing with senior OIG
                 staff concerning the nature of the OIG problems. Thereafter Ms. Lau told
                 PSD that an urgent need existed to hire a contractor to perform the
                 follow-on work. She wanted the contract awarded before the annual OIG
                 managers’ meeting scheduled for September 14, 1995, to prove to her
                 managers that she intended to fix the problems identified in the OPM study.
                 (The final report was furnished to the OIG on September 30, 1995; it
                 reported that OIG suffered from a lack of communication with its
                 employees, severe diversity problems, and a lack of trust employees had
                 toward management.)

                 OIG staff followed up with the six consultants identified by Ms. Lau. The
                 staff were unable to contact one consultant, and another consultant could
                 not provide a preliminary proposal by August 30, 1995. With respect to the
                 remaining four consultants, OIG staff met with each one to orally describe
                 the agency’s needs and request written proposals. Following receipt of the
                 proposals and oral presentations by the offerors, two OIG officials selected
                 Kathie M. Libby, doing business as KLS, a consultant from OPM’s list, as the
                 successful contractor. Although one OIG official told us that the evaluation
                 criteria used for evaluating the proposals were based on the OPM
                 recommendations, the other OIG official involved in the selection stated
                 that the selection was based only on a “gut instinct” that KLS would
                 provide a “good fit” with OIG and could do the work. Ms. Lau concurred
                 with the selection.


Contract Award   On September 12, 1995, a time-and-materials contract was awarded to
                 KLS. The original term of the contract was from date of award (Sept. 12,

                 11
                   Ms. Lau stated that she had no basis to evaluate the consultants. She merely reviewed the list, added
                 the names of two more individuals with whom she was familiar, marked four of the consultant names
                 with an “X”, and wrote a note to her special assistant that read, “. . . Invite bids from 3 write-ins [the
                 two names Ms. Lau added and one of the two names added by her staff] and those with X’s and any
                 who come highly recommended. We need to obligate this year!”



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1995) to September 30, 1996. The contract, among other things, called for
the contractor to attend the September 14, 1995, OIG conference; review
and analyze the OPM survey results; and provide assistance to managers
and staff on reaching the goals identified by OPM in its study. It was
expected that in the beginning stages of contract performance, KLS would
meet with OIG employees weekly, if not daily. Given the complexity of the
issues and the desire for lasting improvements, OIG anticipated that KLS’s
services would be required for as long as 1 year, although it was
anticipated that the services would be on an “on-call” basis during the final
stages of the contract.

The agency justified limiting the competition on the basis of unusual and
compelling urgency. The J&A provided as follows, “It is imperative that the
services begin no later than September 11, 1995, in order to have the
consultants provide a briefing to managers attending the September 14,
1995, OIG managers conference.” This determination reflected Ms. Lau’s
concern that while similar management studies had been conducted in the
past, historically there had been no follow-through on the studies’
recommendations. It also reflected her desire to show the OIG managers
continuity between the OPM survey results and the follow-up work. To that
end, the J&A noted that it was imperative that the employees view the
change process to be implemented by the consultants as an on-going
process rather than a series of “finger in the dike” actions.

Based on the results of our investigation, we conclude that the decision to
limit the competition was not reasonable. As explained previously, other
than full and open competition is permitted when the agency has an
unusual and compelling urgency such that full competition would
seriously injure the government’s interest. The agency’s urgency
determination was based upon Ms. Lau’s desire to have a management
consultant provide a briefing at a management conference to be held a few
days after contract award. The KLS consultants did attend the
management conference, but they were present for the limited purpose of
introducing themselves to the OIG staff and informing them that KLS would
work with them to implement the OPM study recommendations. Little else
was possible since, although OIG staff had received preliminary results
from the OPM study in August 1995, Ms. Libby informed us that it was not
until mid-October 1995, well after the OIG management conference, that the
KLS consultants received the study results and began work on the
contract.




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                                We recognize the importance of Ms. Lau’s desire for her managers to know
                                that she intended to implement the OPM study recommendations. However,
                                we do not believe Ms. Lau’s ability to convey that message at the
                                management conference and to correct the problems identified in the OPM
                                study would have been seriously impaired had the announcement of the
                                actual consultant been delayed by a few months in order to conduct a full
                                and open competition. Following discussion at the conference of the OPM
                                study, Ms. Lau could have announced that the agency was going to employ
                                a contractor with expertise in the field to perform follow-on work on the
                                OPM study and that the acquisition process would begin as soon as
                                practicable. The announcement of her plans, an expeditious initiation of
                                the acquisition process, and notification of her staff about the contract
                                award should have been sufficient to assure her employees that Ms. Lau
                                was serious about addressing the diversity and morale problems.


Contract Modifications and      When first awarded, the KLS contract had an estimated level of effort of
Costs                           $85,850. The original term of the contract was 1 year. By November 1,
                                1996, four modifications had increased the contract price to $345,050 (see
                                table 1). Modification 5 extended the contract through September 30, 1997,
                                at no additional cost.

Table 1: Cost Increases From
Modifications to KLS Contract   Contract and
                                modification number       Effective date            Amount          Contract price
                                Contract                       09/12/95              $85,850               $85,850
                                Mod 1                          11/22/95               30,800               116,650
                                Mod 2                          04/08/96               78,400               195,050
                                Mod 3                          09/12/96                1,400               196,450
                                Mod 4                          09/30/96              148,600               345,050
                                Mod 5                          11/01/96                     0              345,050

                                Federal procurement law requires that an agency conduct a separate
                                procurement when it wishes to acquire services that are beyond the scope
                                of an existing contract. A matter exceeds the scope of the contract when it
                                is materially different from the original contract for which the competition
                                was held. The question of whether a material difference exists is resolved
                                by considering such factors as the extent of any changes in the type of
                                work, the performance period, and costs between the contract as awarded
                                and as modified, as well as whether potential bidders reasonably would




                                Page 11                           GAO/OSI-98-1 Treasury Office Of Inspector General
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                  have anticipated the modification.12 In our view, the largest modification
                  (Modification 4) materially deviated from the original contract’s scope of
                  work and should have been the subject of a separate procurement action.

                  Modification 4 increased the contract price by $148,600 and extended the
                  contract period of performance by 6 months. About half of the work under
                  this modification was the same type of work that had been performed
                  under the original contract; however, the other half was beyond the
                  contract’s scope of work and would not reasonably have been anticipated
                  by potential bidders. It involved revising the OIG’s performance appraisal
                  system. Although the OPM study referenced employee concerns with the
                  OIG performance appraisal system, nothing in the contract called for the
                  contractor to work with OIG to modify that system. Ms. Libby herself stated
                  that Modification 4 significantly changed the original scope and contract
                  requirements and that she was surprised competition was not held for this
                  work. In our view, this modification was beyond the contract’s scope of
                  work and would not have been appropriate even if the OIG could have
                  justified its urgency determination for the original procurement.


Poor Management   In addition to legal improprieties in the manner in which the agency
Practices         awarded and assigned tasks under the contract, we found a pattern of
                  careless management in the procurement process and in oversight of
                  performance under the contract. We believe such careless management
                  could have contributed to an increased cost for the work performed under
                  the contract.

                  Good procurement planning is essential to identifying an agency’s needs in
                  a timely manner and contributes to ensuring that the agency receives a
                  reasonable price for the work. Little or no procurement planning took
                  place prior to making the award here. Although proposals were solicited
                  to do follow-on work relating to recommendations from an OPM study on
                  diversity and workplace morale, the OIG had not received the OPM study
                  and had only been briefed on the preliminary findings at the time of the
                  solicitation. The OIG therefore did not have sufficient information to
                  adequately identify its needs and clearly articulate a set of goals for the
                  change process to be implemented.

                  Furthermore, OIG did not prepare a written solicitation, including a
                  statement of work. One important purpose of a written statement of work


                  12
                   Stoehner Security Services, Inc., B-248077, B-248077.3, Oct. 27, 1992, 92-2 C.P.D. ¶ 285; Neil R. Gross
                  & Co., B-237434, Feb. 23, 1990, 90-1 C.P.D. ¶ 212.



                  Page 12                                       GAO/OSI-98-1 Treasury Office Of Inspector General
B-278420




is to communicate the government’s requirements to prospective
contractors by describing its needs and establishing time frames for
deliverables. The OIG instead relied upon oral communications and failed
to effectively communicate with the consultants from whom it solicited
proposals. Had the OIG waited until it received the OPM report, carefully
analyzed OPM’s recommendations, determined what it needed, and
adequately communicated these needs in a written solicitation, we believe
the OIG would have received a better proposal initially, and one that may
have been at a lower overall price.

In this regard, Ms. Libby explained to us that the OIG had not specifically
identified to her its needs and that she had misunderstood the work to be
performed as explained in her initial telephone conversation with the OIG.
Her proposal was based on her belief that the OIG already had management
task forces or employee groups studying what changes were needed to
address the issues raised in the OPM study and that KLS was to serve only
in an advisory capacity to those working groups. However, soon after
conducting her initial briefings, she learned that this was not the case and
that the work that needed to be done was different from what she believed
when she presented her proposal. As a result shortly after she began work,
Ms. Libby informed OIG that more work was necessary under the contract
than she had originally envisioned. This led to the first three modifications
under the contract.

Modification 1 was issued soon after the contract was awarded. It called
for KLS to design and conduct briefings with OIG staff both in headquarters
and in the field, adding $30,800 to the costs of the original contract.
Modification 2 also increased the level of effort, and added $78,400 to the
contract. According to a memorandum from the contracting officer, this
modification was necessary because KLS’s technical proposal had
suggested the establishment of one steering group whereas additional
groups were needed. The modification also significantly increased the
training hours to be expended by KLS. Modification 3 resulted from the
need to increase the amount of “other direct costs” to allow for travel and
material costs for KLS to contribute to the 1996 OIG managers’ conference.
Although each of these three modifications were within the scope of work
contemplated by the initial contract, this increased work was apparently
necessary because OIG had not adequately determined its requirements at
the beginning of the procurement process and conveyed them to KLS. Had
the agency adequately planned for the procurement and identified its
needs, this work could have been included in the original contract and the
modifications would not have been required.



Page 13                           GAO/OSI-98-1 Treasury Office Of Inspector General
                   B-278420




                   Similarly, had the OIG properly analyzed the OPM recommendations, it
                   could have determined whether revision of the performance appraisal
                   system should have been included in the scope of the original contract or
                   the work procured separately—thus eliminating Modification 4.
                   Furthermore, had the OIG determined the nature of the work involved in
                   revising the performance appraisal system, specific deliverables and time
                   frames for revising the performance appraisal system could have been
                   established. None of this was done in Modification 4, which merely stated
                   that the modification was “to complete change process transition to
                   include establishing a permanent self-sustaining advisory team, work with
                   in-house committees on complex systems changes, and to establish
                   procedures which will withstand changes in senior management
                   personnel.” An OIG official told us that revision to the performance
                   appraisal process had been on-going for 2 years and that the revisions to
                   the system had still not been completed as of June 1997.

                   We also identified management deficiencies in oversight of the work
                   performed under the contract. In several instances, KLS performed and
                   billed for work that was not included in the contract statement of work. As
                   stated previously, pursuant to Modification 4, KLS was authorized to make
                   revisions to the OIG performance appraisal system. However, prior to this
                   modification, one of KLS’s employees performed this type of service,
                   working with employee groups to address generic critical job elements
                   and standards, rating levels, and an incentive award system to complement
                   the performance appraisal system. Furthermore, the OIG official
                   responsible for authorizing payment performed under the contract told us
                   that she did not verify that any work had been performed under the
                   contract prior to authorizing payment. She also told us that she did not
                   determine whether documentation for hotel and transportation costs
                   claimed by KLS had been received even though she authorized payment
                   for these travel expenses.


                   Allegations concerning IG Lau’s trips to California suggested that she had
California Trips   used these trips, at taxpayers’ expense, to visit her mother, a resident of
                   the San Francisco Bay area. A review of Ms. Lau’s travel vouchers revealed
                   that she had made 22 trips between September 1994 and February 1997 (30
                   months)—5 to California of which 3 included stops in San Francisco.




                   Page 14                          GAO/OSI-98-1 Treasury Office Of Inspector General
                                            B-278420




                                            During the three trips that included San Francisco, Ms. Lau took a total of
                                            9 days off.13 During these 9 days, she charged no per diem or expense to
                                            Treasury. Her travel to California, including the San Francisco area, was
                                            scheduled for work-related reasons. See table 2.


Table 2: Treasury IG’s Trips to California
Washington, DC—
departure and return          Purpose of trip                                   California destination             Time off taken
07/02 - 08/95                Speak/participate in annual Association of         San Diego                          None
                             Government Accountants Professional
                             Development Conference
09/16 - 26/95                Speak at Western Intergovernmental Audit           —                                  09/16/95
                             Forum, Honolulu, HI                                                                   (1 day)

                             Visit San Francisco Regional Office                Oakland/San Francisco              09/23/95
                                                                                                                   (1 day)
03/19 - 28/96                Visit Los Angeles Field and San Francisco          Los Angeles/                       03/23 - 27/96
                             Regional offices                                   San Francisco                      (5 days)

                             Speak before state and county audit
                             associations
11/15 - 20/96                Meet with OIG Audit Issue Development              San Francisco                      11/15 - 16/96
                             Group                                                                                 (2 days)
01/27 - 02/01/97             Speak at Western Intergovernmental Audit           Los Angeles/ San Diego             None
                             Forum; meet with Justice, Customs, OIG
                             officials and staff; tour Customs facilities



                                            We conducted our investigation from May 13 to October 8, 1997, in
Methodology                                 Washington, D.C., and Seattle, Washington. We interviewed Treasury
                                            officials, including current and former OIG officials, and contractors and
                                            staff involved in the two procurements discussed in this report. We
                                            reviewed pertinent government regulations, OIG contract files, OIG
                                            contracting policies and procedures, and Interior OIG documents
                                            concerning Sato & Associates’ review of its operation. We also reviewed
                                            Ms. Lau’s financial disclosure statements, travel vouchers, and telephone
                                            logs. Finally, we reviewed prior GAO contracting decisions relevant to the
                                            subject of our investigation.


                                            As arranged with your office, unless you announce its contents earlier, we
                                            plan no further distribution of this report until 30 days after the date of


                                            13
                                              As a presidential appointee, the IG does not accumulate personal leave, is on call 24 hours a day, and
                                            takes personal time off as needed.



                                            Page 15                                       GAO/OSI-98-1 Treasury Office Of Inspector General
B-278420




this letter. At that time, we will send copies of the report to interested
congressional committees; the Secretary of the Treasury; and the
Inspector General, Department of the Treasury. We will also make copies
available to others on request. If you have any questions concerning our
investigation, please contact me or Assistant Director Barney Gomez on
(202) 512-6722. Major contributors are listed in appendix I.

Sincerely yours,




Director
Office of Special Investigations




Page 16                            GAO/OSI-98-1 Treasury Office Of Inspector General
Page 17   GAO/OSI-98-1 Treasury Office Of Inspector General
Appendix I

Major Contributors to the Report


                        Norman M. Burrell, Senior Investigator in Charge
Office of Special       Ned M. Friece, Senior Investigator
Investigations,         M. Jane Hunt, Senior Communications Analyst
Washington, D.C.        Barbara W. Alsip, Communications Analyst

                        Aldo A. Benejam, Senior Attorney
Office of the General   Barry L. Shillito, Senior Attorney
Counsel




(600442)                Page 18                          GAO/OSI-98-1 Treasury Office Of Inspector General
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