oversight

NSF Needs Stronger Controls Over Battelle Memorial Institute Award for the National Ecological Observatory Network

Published by the National Science Foundation, Office of Inspector General on 2017-05-12.

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

NSF Needs Stronger Controls Over
Battelle Memorial Institute Award
for the National Ecological
Observatory Network




May 12, 2017

OIG 17-3-004

AT A GLANCE
NSF Needs Stronger Controls Over Battelle Memorial Institute
Award for the National Ecological Observatory Network
Report No. OIG 17-3-004
May 12, 2017

WHY WE DID THIS INSPECTION
NSF developed five new policy and implementing guidance documents from 2014 to 2016 to address OIG and
National Academy of Public Administration recommendations to strengthen controls over its large facility
construction projects. In March 2016, NSF selected Battelle Memorial Institute (Battelle) as the new managing
organization for National Ecological Observatory Network (NEON) construction and operation and put in
place an initial construction cooperative agreement. The Battelle award was made after NSF developed its new
policies. We examined this award to assess NSF’s progress toward putting its new policies into practice.
WHAT WE FOUND
NSF strengthened some controls over the Battelle award, such as reviewing reasonableness of certain
proposed costs and retaining a portion of contingency. In addition, NSF reviewed Battelle’s proposed use of
management fee and incorporated management fee terms and conditions into the Battelle awards, including
requiring Battelle to report on the use of all management fee expended. However, NSF did not fully comply
with new policy and implementing guidance to strengthen controls. Specifically, NSF awarded funding to
Battelle before completing the cost proposal review documents and was still determining the total estimated
cost of NEON in the fall of 2016. NSF also did not have policies in place to prevent the use of its management
reserve for costs that do not benefit the award. In addition, although prohibited by policy and/or implementing
guidance, management fee was based on a percentage of total estimated project cost, was not finalized before
work started, and was allowed to be used for charitable contributions.

This occurred in part because NSF decided that it had to expedite the award to replace NEON, Inc., which
NSF determined could not complete construction. Given the NEON project’s prior challenges and its
transition to a new management company, it is critical that NSF exercise strong management over the project
as it moves forward.
WHAT WE RECOMMEND
We made recommendations that NSF strengthen controls over the Battelle project and develop procedures to
ensure that controls are in place prior to awarding future large facility awards.
AGENCY RESPONSE
NSF responded that it needed to transition the project quickly to avoid further negative impact to the NEON
project and that its expedited evaluation and award process was rigorous, detailed, and well documented. NSF
agrees with all but one of our recommendations and is already developing corrective actions.
FOR FURTHER INFORMATION, CONTACT US AT (703) 292-7100 OR OIG@NSF.GOV.
MEMORANDUM


DATE:	                May 12, 2017

TO:	                  Martha A. Rubenstein
                      Office Head and Chief Financial Officer
                      Office of Budget, Finance, and Award Management


FROM:	                Mark Bell
                      Assistant Inspector General
                      Office of Audits

SUBJECT:	             Final Report No. 17-3-004, NSF Needs Stronger Controls Over Battelle
                      Memorial Institute Award for the National Ecological Observatory Network

Attached is the final report on the subject inspection. We have included NSF’s response to the draft
report as an appendix.

This report contains two recommendations aimed at strengthening NSF’s controls over the NEON
project and ensuring controls are in place prior to awarding future large facility awards. NSF generally
agreed with our recommendations. In accordance with OMB Circular A-50, Audit Followup, please
provide our office with a written corrective action plan to address the report’s recommendations. In
addressing the report’s recommendations, this corrective action plan should detail specific actions and
associated milestone dates. Please provide the action plan within 60 calendar days of the date of this
report.

We appreciate the courtesies and assistance NSF staff provided during the inspection. If you have
questions, please contact Elizabeth Goebels, Director, Performance Audits, at (703) 292-8483.

cc:	           Christina Sarris      Elizabeth Goebels      Matthew Hawkins
               Marie Maguire         Steven Ellis           Louise Nelson
               Allison Lerner        Jeffery Lupis          Charlie Zeigler
               Fae Korsmo            William Kinser         Alexander Wynnyk
               Robert Hengst         Anna-Lee Misiano       James Leland Olds
               Muriel Poston         James Deshler          Roland Roberts
               Susan Carnohan        Linda Burch            John Anderson
               Ken Chason            Ann Bushmiller         Joann Ferrini-Mundy
               John Veysey
TABLE OF CONTENTS
Background ......................................................................................................................................... 1

Results of Inspection ......................................................................................................................... 2

  NSF Strengthened Some Controls Over Battelle Award ........................................................... 3

  NSF Awarded Funding to Battelle Prior to Finalizing the Total Estimated Costs

  of the Project ................................................................................................................................... 4

  NSF Lacks Controls Over Use of Management Reserve ........................................................... 8

  NSF Implemented Controls Over Contingency Funds Provided to Battelle After Award..... 9

  NSF Could Improve Compliance with Management Fee Policy .............................................. 9

  Other Matter: Financial Viability Assessment ..........................................................................13

Conclusion .........................................................................................................................................14

Recommendations...........................................................................................................................14

OIG Evaluation of Agency Response .............................................................................................15

Appendix A: Agency Response .......................................................................................................16

Appendix B: Objectives, Scope, and Methodology ......................................................................22

Appendix C: OIG Contact and Staff Acknowledgments ..............................................................23



ABBREVIATIONS
Battelle               Battelle Memorial Institute
BEI                    Battelle Ecology Institute
CAAR                   Cost Analysis and Audit Resolution Branch
CSB                    Cooperative Support Branch
DACS                   Division of Acquisition and Cooperative Support
GAO                    Government Accountability Office
LSST                   Large Synoptic Survey Telescope
NAPA                   National Academy of Public Administration
NEON                   National Ecological Observatory Network
Background
The National Science Foundation (NSF) was established in 1950 as an independent agency responsible
for promoting the nation’s progress in the fields of science, technology, engineering, and mathematics.
Since its beginning, NSF has supported transformative scientific and engineering projects that have
produced path-breaking discoveries and new technologies in such areas as molecular biology and
geosciences, manufacturing, computer science, and nanotechnology. NSF-supported advances in these
fields continue to keep the country at the leading edge of discovery, while also enhancing the social and
economic growth of the nation. To support the scientific and engineering enterprise, NSF frequently
funds the development of large-scale, multiuser scientific facilities.

NSF developed five new policy and implementing guidance documents from 2014 through 2016 1 to
address Office of Inspector General (OIG) and National Academy of Public Administration (NAPA)
recommendations to strengthen controls over its large facility construction projects. The Battelle
Memorial Institute (Battelle) construction and operations awards — hereafter referred to collectively as
the “Battelle award” — for the National Ecological Observatory Network (NEON) project was made
after NSF developed its new policies to strengthen management of these projects. Due to our concerns
with NSF’s oversight of the NEON project, we examined this award to assess NSF’s progress toward
putting its new policies into practice.

NEON Project

NEON was initially a $433.8 million project, which was to be constructed by NEON, Inc. over a 5-year
period from August 2011 through July 2016. Its purpose is to improve understanding of biology;
emerging disease; water use; invasive species; and agriculture, forestry, and urban land-use by installing
monitoring sites, including towers and instrumentation, across the United States. The project is designed
to enable the research community to ask and address questions on a regional to continental scale to
increase understanding of the effects of ecological change, land-use change, and invasive species
patterns.

Beginning in 2011, auditors identified flaws in NEON, Inc.’s proposed construction budget. Auditors
issued three inadequacy memos over a 4-month period in 2011 and issued an adverse opinion on the
proposed budget in 2012 because the NEON, Inc. proposal did not form an acceptable basis for
negotiation of a fair and reasonable price. The proposal included $154 million in questioned and
unsupported costs (36 percent of the total budget). None of the proposed cost elements for labor,
overhead, equipment, and other costs reconciled to the supporting data in the proposed budget.




1
 The most current versions of these documents at the time of the Battelle award were: 1) Large Facilities Manual, June
2015; 2) Negotiation, Award and Payment of Management Fee, August 31, 2015; 3) DACS Cooperative Support Branch
Standardized Cost Analysis Guidance, March 1, 2016; 4) Budget Contingency Obligation and Allocation, April 30, 2016; and
5) Guidance on Pre and Post-award Cost Monitoring Procedures for Large Facility Construction and Operations Awards
Administered by CSB, September 15, 2015.



1      NSF.GOV/OIG | OIG 17-3-004
In May 2015, NSF became concerned with schedule variances in NEON’s earned valued management
reports. When NSF management went on-site to NEON, Inc., in June 2015, project officials informed
NSF that the project was facing a potential $80 million cost overrun. As a result, in July 2015, NSF de­
scoped the project, which resulted in decreasing the number of monitoring sites from 106 to 82,
decreasing the scientific instruments at the sites, and removing an experimental component of the
project. According to a panel of outside experts, if NEON is further de-scoped, the project will not meet
its full scientific requirements. In December 2015, NSF decided that it needed to replace NEON, Inc. as
the managing organization for the Observatory to get the project back on track. In March 2016, NSF
selected Battelle as the new managing organization.

In February 2016, prior to being selected for the award, Battelle proposed completing NEON
construction for $110 million. According to NSF, it fully expected that these estimated costs were
provisional due to the limited time Battelle had to fully vet cost, schedule, and resource information, and
that there would be negotiated deviations from the $110 million figure prior to award.

By March 2016, NSF selected Battelle as the new managing organization for NEON construction and
operation and put in place an initial construction cooperative agreement. In an effort to get new
management in place expeditiously because construction was ongoing, the initial award established a
90-day transition period during which the final costs to construct and operate NEON were to be
negotiated with NSF. As previously stated, NSF noted that this arrangement was planned “since costs
presented during selection could only be provisional given the urgent need to get new management in
place.” The award agreement stated the targeted completion date to finalize the total estimated costs was
May 20, 2016.

As management of NEON transitioned from NEON, Inc. to Battelle, NSF determined it would need
additional funding to complete NEON. On June 29, 2016, the NSB approved an increase of $35.5
million for NEON construction, raising the total estimated costs of the NEON project to $469.3 million.
The revised total project cost also included $3.2 million in management reserve held by NSF to manage
risks identified by the agency, as opposed to funds for risks that were held and managed by Battelle.
NSF notified Congress in July 2016 that it would transfer funding from its Research and Related
Activities account to its Major Research Equipment and Facilities account to cover the increased costs.
At the time of the NSB approval and notification to Congress, NSF was still negotiating the final total
estimated costs for the Battelle award. In addition, NSF was determining final contingency amounts at
the end of our fieldwork on October 13, 2016.

Results of Inspection
NSF followed certain strengthened key management procedures during the Battelle award, such as
reviewing proposed costs, obtaining an independent cost estimate, including management fee terms and
conditions in Battelle’s award, and retaining a portion of contingency. However, NSF did not have
complete project cost information, did not have management reserve policies in place, and did not fully
apply other key management fee policies and procedures. This occurred in part because of NSF’s
decision to expedite the award to replace NEON, Inc., which NSF determined could not complete
construction. NSF also determined that further delays in transitioning to a new awardee — and the



2     NSF.GOV/OIG | OIG 17-3-004
associated additional costs NSF would incur if such a transition required halting the construction process
— would have further increased the potential of cost overruns. Given the NEON project’s prior
challenges and its transition to a new management company, it is critical that NSF exercise strong
management over the project as it moves forward.

NSF Strengthened Some Controls Over Battelle Award
NSF strengthened some controls over the Battelle award, such as reviewing reasonableness of certain
proposed costs and retaining a portion of contingency. In addition, NSF reviewed Battelle’s proposed
use of management fee and incorporated management fee terms and conditions into the Battelle awards,
including requiring Battelle to report on the use of all management fee expended.

NSF Assessed Reasonableness of Some of the Costs Proposed by Battelle

In response to a 2012 NSF OIG alert memo, 2 NSF agreed to complete a Cost Proposal Review
Document (CPRD) for each large facility proposal to ensure that a thorough and well-documented
record exists of NSF’s determination that proposed costs are reasonable. The CPRD is NSF’s analysis of
whether an awardee’s proposed costs are reasonable and describes NSF’s plans for oversight of the
award. In June 2014, NSF issued its first version of the NSF DACS Cooperative Support Branch
Standardized Cost Analysis Guidance. The guidance requires grants officers for large facilities to sample
certain proposed costs, such as labor and equipment costs; obtain an independent cost assessment; 3 and
complete a CPRD.

At NSF’s request, Booz Allen Hamilton completed an independent cost estimate of the Battelle
construction proposal in March 2016. NSF included the results of this assessment in its CPRD for the
construction award as required. In addition, the grants officer reviewed the reasonableness of certain
proposed costs and completed a CPRD.

NSF Retained a Portion of Contingency

Contingency is part of the awardee’s proposed budget estimate to cover future costs associated with
events that might occur in the future and which could increase the costs of the approved project. We
have recommended since 2012 that NSF strengthen controls over contingency funds, including for NSF
to retain a portion of contingency funds. In December 2015, NAPA recommended NSF “retain control
of a portion of an award recipient’s contingency funds and distribute them with other incremental funds
as needed.”

On April 30, 2016, NSF issued Budget Contingency Obligation and Allocation, which implemented the
NAPA recommendation to retain a portion of contingency. This new guidance requires the NSF Large
Facility Office and Chief Financial Officer to approve the allocation of contingency to the awardee and

2
 OIG 12-6-001, NSF’s Management of Cooperative Agreements
3
 According to the Government Accountability Office (GAO), the most comprehensive of the GAO Cost Estimating and
Assessment Guide’s assessment tools is the independent cost estimate.




3     NSF.GOV/OIG | OIG 17-3-004
determine which portion to retain at NSF. Battelle’s proposal requested $8.9 million in contingency. We
found NSF complied with this new guidance for the construction award when allocating $1 million of
the requested $8.9 million in construction contingency to Battelle and retaining the rest. Specifically,
both the Large Facility Office and Chief Financial Officer approved the $1 million allocation prior to its
release to Battelle.

NSF Followed Some of its Management Fee Policies

NSF followed some of its management fee policies. For example, NSF reviewed Battelle’s proposed use
of management fee and incorporated management fee terms and conditions into the Battelle awards,
including requiring Battelle to report on the use of all management fee expended.

On August 31, 2015, NSF issued its standard operating guidance on management fee, Negotiation,
Award and Payment of Management Fee. The guidance requires the NSF grants officer to require that
the awardee set forth their management fee request in writing. NSF did receive and review this written
documentation from Battelle. Further, the management fee guidance requires the grants officer to
include specific management fee terms and conditions in the award letter including requiring the
awardee to report on all management fee expended under the agreement 60 days prior to the end of the
performance period covered by the management fee. NSF included these terms and conditions in both
the construction and operations award letters.

NSF Awarded Funding to Battelle Prior to Finalizing the Total Estimated Costs of
the Project
NSF awarded funding to Battelle before completing the cost proposal review documents. In addition,
although NSF awarded the construction and operations award in the spring of 2016, NSF was still
determining the total estimated cost of NEON in the fall of 2016, as shown in Figure 1.




4     NSF.GOV/OIG | OIG 17-3-004
Figure 1: Timeline of NEON Project Activities




Source: NSF OIG depiction of NSF and NSF OIG data




5     NSF.GOV/OIG | OIG 17-3-004
NSF Did Not Fully Complete Reviews of Construction and Operations Funding Prior to Award

NSF’s DACS Cooperative Support Branch Standardized Cost Analysis Guidance, March 1, 2016, 4 states
that as part of the CPRD approval, the grants officer must assess and determine that a project’s estimated
costs are reasonable prior to making an award to support construction of a particular facility. As
previously discussed, NSF’s grants officer completed a CPRD for the construction award. However, the
Director of DACS did not approve the CPRD until June 22, 2016, after NSF awarded funding for the
construction award to Battelle in March 2016, and after the May deadline by which NSF said it would
finalize costs.

NSF continued to negotiate the final total estimated costs of the construction award after it was made,
including final contingency amounts. According to NSF, Battelle’s original proposed costs were
provisional, and NSF needed to award funds prior to finalizing total costs due to the urgent need to get a
new management organization in place for NEON in the middle of construction. The original award to
Battelle targeted May 2016 as the completion date to finalize project costs for the award. Due to
changing award amounts, the Battelle construction award incorrectly lists the total projected cost of the
award agreement at $111,633,195 instead of $117.6 million due to system limitation issues associated
with the NSF automated award system.
NSF also requires a CPRD for operations awards valued at more than $100 million, but as of August 30,
2016, NSF had not completed a CPRD for the NEON operations award. NEON operations are expected
to cost more than $172.2 million over 26 months, and as of July 2016, NSF had awarded nearly $7
million in operations funding to Battelle without completing the CPRD for operations. Without a CPRD
prior to the start of the operations award, NSF may provide funding to Battelle for costs that are not
necessary, reasonable, or allowable. Additionally, NSF must ensure it commits sufficient funding to
cover operation costs.

Proposed Construction Budget for NEON Included Unsupported Costs

As previously mentioned, the NSF grants officer assessed the reasonableness of Battelle’s proposed
costs and documented her conclusions in a CPRD. However, we found costs in Battelle’s proposed
construction budget for equipment, materials and supplies, sub-awards, consultants, and other direct
costs were not supported with adequate documentation. The CPRD noted a total of $2.5 million (25
percent) of $10 million in sampled costs that were not supported by vendor quotes or historical cost
information.

For $892,000 of the unsupported costs, Battelle gave its NSF grants officer additional information, such
as the dollar amounts of past purchases, to support the amount requested. However, Battelle did not
provide the grants officer the purchase orders or invoices to confirm these amounts. The grants officer
stated she took some of Battelle’s proposed amounts at face value because, in her view, the amounts
were low risk, and NSF needed to make the award quickly.


4
    NSF first issued the guidance in June 30, 2014.




6        NSF.GOV/OIG | OIG 17-3-004
The NSF program officer responsible for monitoring the Battelle award reviewed the remaining $1.6
million of the unsupported costs. The program officer’s determination on whether the proposed costs
were reasonable consisted of an email stating that the requested costs “seemed reasonable.” The
program officer did not have any written documentation to support his conclusion and told us that he
determined the reasonableness of costs based on his past experiences.

According to NSF internal guidance, it is acceptable to rely on personal knowledge and expert opinion
when analyzing costs; however, the guidance also requires that “the basis for any conclusions must be
documented.” Further, the GAO Cost Estimating and Assessment Guide states that “…because of its
subjectivity and lack of supporting documentation, expert opinion should be used sparingly and only as
a sanity check.”

According to NSF, varying levels of support were available for the elements of costs, which it believes
is understandable considering the abbreviated time available to finalize the award. They indicated they
had to use the best information available at the time of the award to assess reasonableness.

However, it is crucial that NSF ensure Battelle’s proposed costs are supported and include detailed cost
information so NSF can award sufficient funding to accomplish the NEON’s objectives. Supporting
documentation helps ensure costs are reasonable and allocable to the award — without such
information, there is a greater risk that inappropriate charges could be made.

NSF Review of Proposed Subcontract and Consultant Services is Incomplete

The NEON award is currently being executed by Battelle while NEON, Inc., now known as Battelle
Ecology Institute (BEI), serves as a subcontractor. The nature of the relationship between NEON, Inc.,
Battelle, and other organizations working on the NEON construction determines how certain indirect
costs should be applied to the award and when certain changes require NSF approval. The proposed
budget includes more than              for subcontracts and consultant services.

NSF’s CPRD notes that NEON, Inc. had problems in the past with the consistent classification of
consulting and contract costs and the application of indirect rates to these costs. Past Cost Analysis and
Audit Resolution Branch (CAAR) 5 reviews noted NSF was concerned that NEON, Inc.’s treatment of
consulting services could potentially distort the allocation base of indirect expenses and could increase
the indirect costs charged to the Battelle award. Specifically, indirect costs apply to the full amount of
consultant services but only apply to the first $25,000 of subawards.

Further, NSF’s cooperative agreement includes certain terms and conditions for subcontracts.
Specifically, the cooperative agreement states, “Prior approval by the cognizant NSF Program Officer
and the NSF Grants and Agreements Officer is required for: i. Re-budgeting of funds among
subawardees/subcontractors exceeding $250,000 at the Level 2 WBS [Work Breakdown Structure].”


5
  In the spring of 2017, NSF reorganized CAAR into two new branches: the Cost Analysis and Preaward Branch (CAP) and
the Resolution and Advanced Monitoring Branch (RAM).




7     NSF.GOV/OIG | OIG 17-3-004
NSF acknowledged in its CPRD the importance of properly classifying costs to ensure consistent
application of indirect costs. However, as noted in the CPRD, further analysis and coordination within
NSF is required to ensure Battelle is consistently and properly classifying consultant service costs.
Accordingly, NSF cannot be sure Battelle or BEI is not misclassifying its more than              in
subcontracts and consultant services costs.

In addition, BEI-specific costs reflected the NSF-approved provisional indirect cost rate            percent
previously negotiated with NEON, Inc. According to NSF management, the evolving relationship and
structure between Battelle and BEI may result in changes to this rate. This matter is still being reviewed
by the agency.
Without a complete review of costs, fully supported costs in the proposed budget, and finalized indirect
cost information, NSF cannot be assured that it is allocating sufficient funding to complete the project’s
objective or that costs are reasonable.

NSF Lacks Controls Over Use of Management Reserve
NSF is maintaining a $3.2 million management reserve held by the agency (as opposed to Battelle), for
the NEON project to cover risk identified by the agency, such as environmental compliance and
potential liabilities. According to the GAO Cost Estimating and Assessment Guide, while management
reserve is typically held at a high level, “it must be identified and accounted for at all times.”

NEON is the first large facility project for which NSF has held management reserve. However, NSF had
not developed policies and procedures before implementing the management reserve process. Unlike
budget contingency, NSF does not have policies and procedures for how it can use the management
reserve or who at NSF can approve its use. NSF also does not have a mechanism to track how it uses the
funds. The head of the Large Facilities Office confirmed that NSF did not have policies for oversight
and use of the management reserve. He also said that NSF senior management has not decided how the
reserve funds will be allocated if project risks do not materialize.

As a result, NSF lacks controls to prevent the management reserve from being used for costs that do not
benefit the NEON award. Additionally, without appropriate procedures to control when and how NSF
spends management reserve, there is a risk that sufficient reserve funds may not remain for risks that
occur later in the project.

In February 2017, NSF stated it had not yet allocated any of the management reserve to the directorate
overseeing NEON, and that NSF “will not obligate any portion of the management reserve until a bona
fide need is realized that aligns with the NSF-held risks and uncertainties previously identified.” The
Foundation agreed it should develop standard internal operating guidance before NSF obligates any of
the management reserve.




8     NSF.GOV/OIG | OIG 17-3-004
NSF Implemented Controls Over Contingency Funds Provided to Battelle After
Award
The contingency management plan and change process are important controls to help ensure that
contingency funds are spent properly. The contingency management plan describes how the recipient
will manage and allocate contingency; the Large Facilities Manual indicates such a plan should be
completed before an awardee expends construction funds. However, NSF awarded $1 million in
contingency to Battelle for its construction award without having finalized the contingency management
plan/change control process required by NSF’s Large Facilities Manual. In September 2016, the head of
the Large Facilities Office stated the contingency management plan had not been finalized. He explained
that this is why the reference to the change control documents in the Battelle construction award state
“TBD” [to be determined].

In response to our discussion draft report, NSF notified us that Battelle and NSF had finalized the
change management plan on November 15, 2016, after our fieldwork ended. In addition, NSF stated it
awarded the $1 million in contingency to Battelle because it believed the risk of mismanagement of the
contingency was low due to existing NSF controls; specifically, Battelle is required to report monthly on
its contingency use and is operating under the contingency management plan of NEON, Inc., the
previous managing organization.

NSF did not include in the construction award terms and conditions the threshold amount at which
Battelle would need approval from NSF to expend contingency. As a result of our inspection, the NSF
grants officer promptly modified the construction award agreement to require NSF to approve
contingency expenditures of $150,000 or more.

Since the end of our fieldwork, NSF has addressed our concerns over contingency. However, to
strengthen its oversight over contingency in the future, NSF should ensure the contingency management
plan and terms and conditions are finalized prior to award to help ensure that contingency funds are
spent properly.

NSF Could Improve Compliance with Management Fee Policy
In December 2014, NSF issued a new management fee policy to strengthen its oversight over awardees’
use of management fee. The fee policy was subsequently updated and finalized in June 2015. We
reviewed the inclusion and proposed use of             of management fee —                for
construction and              for operations — in the Battelle award to determine if NSF followed its
June 2015 management fee policy7 and NSF’s guidance implementing that policy. 8

As previously discussed, we found NSF followed some of its management fee policies, such as requiring
Battelle to report on the use of all management fee expended. However, we also found that NSF waived

6
  After our fieldwork ended, NSF decreased the management fee for the operations award to        .

7
  Large Facilities Manual, NSF 15-089, June 2015.

8
  NSF’s Standard Operating Guidelines Negotiation, Award and Payment of Management Fee, 2015-1.





9     NSF.GOV/OIG | OIG 17-3-004
or did not require full compliance with other management fee policy and/or implementing guidance.
Specifically, NSF allowed management fee to be used for charitable contributions and at award issuance
based management fee on a percentage of total estimated project cost. In addition, work started under
the award before management fee amounts were finalized. As a result, management fee could be used
for expenses that do not directly relate to the construction and operations of NEON. 9

NSF Use of Management Fee

In 2015, the NSF Director and the National Science Board (NSB) requested NAPA review several issues
related to our audit findings, including NSF’s cost surveillance approaches under cooperative
agreements and the agency’s oversight of contingency and management fee. In its December 2015
report, NAPA recommended that NSF discontinue including management fee in NSF awards. NSF
committed to implementing all NAPA recommendations “in some form.”

According to NSF, NSF studied NAPA’s recommendations and determined the costs typically covered
by management fees could not be covered by other cost categories such as indirect costs. Further, NSF
stated it found that not allowing fee for performance of work could disadvantage NSF awardees and
would not incentivize highly qualified organizations to compete to manage NSF projects. As a result, in
a November 2016 presentation to the NSB, NSF stated that it is not discontinuing management fee and
instead plans to adopt fees consistent with those typically provided in government contracting.

NSF Granted Waiver to Allow Use of Management Fee for Charitable Contributions

Management fees, unlike profits or incentive fees, have long been recognized as a means to provide the
awardee with funds for the limited purpose of covering certain unallowable ordinary and necessary
expenses needed to maintain financial viability. 10 Rather than limiting “ordinary and necessary”
expenses to those necessary for “financial viability,” NSF’s June 2015 policy more broadly allows
“management initiative and investments that will directly or indirectly benefit the NSF-funded activity.”
However, NSF’s implementing guidance prohibits the use of management fee for certain activities, such
as charitable contributions.




9
  The American Innovation and Competitiveness Act of 2017 states, “It is the sense of Congress that – the Foundation should
implement an award fee policy that ensures…funding of necessary and appropriate expenses directly related to the
construction and operation of major multi-user research facilities.” We note that this Act was enacted in January 2017 and
was not in effect at the time of NSF’s decision regarding charitable contributions.
10
   See NSF OIG White Paper on Management Fee (Nov. 24, 2014); General Accounting Office [now Government
Accountability Office] (GAO)1982 report entitled Fee Guidelines Still Needed for Government-Sponsored Nonprofit
Organizations, GAO/PLRD-82-54 (July 1982). We note that in addition to management fee use for ordinary and necessary
expenses to maintain financial viability, management fee has traditionally been used for certain operating capital
expenditures.




10     NSF.GOV/OIG | OIG 17-3-004

NSF will permit Battelle to spend $578,000 of the $             in management fee for the construction
award and $862,000 11 of the              in management fee for the operations award on charitable
contributions, which is prohibited in NSF’s implementing guidance. As permitted in its implementing
guidance, NSF officials authorized waivers to allow Battelle to use management fee for charitable
contributions. The DACS Director granted a waiver in July 2016 to allow Battelle to use its construction
management fee on charitable contributions and another waiver in November 2016 to allow use of its
operations management fee on charitable contributions.

The DACS Director acknowledged in the waiver that implementing guidance differed from NSF’s
policy (contained in NSF’s Large Facilities Manual) on charitable contributions, and expressly granted
a deviation from the guidance. 12 We are concerned that this discrepancy could create confusion about
whether NSF prohibits the use of management fee for charitable contributions.

NSF officials told us that charitable contributions were an important component of Battelle’s core
mission, and that Battelle typically receives fees that it can use without restriction, including for
charitable contributions. NSF officials told us that management fee helps ensure that high quality
organizations, such as Battelle, will compete to run NSF facilities. They also said that if NSF did not
allow management fee, NSF’s “interests” would not be served.

NSF officials also referred to Battelle’s procurement contract awards as part of the rationale for
exempting Battelle from the restriction on charitable contributions. However, this is an imperfect
comparison. The Federal Acquisition Regulation governs procurement contracts and authorizes profit
and incentive-type fees that the contractor can use without restriction. By contrast, management fee
awards under NSF cooperative agreements are governed by NSF policy for limited purposes and use.

Due to NSF’s exemptions, Battelle can spend $1.4 million for charitable contributions. However, if the
total project cost increases, the amount available for charitable contributions could increase due to the
percentage-based management fee amount.

NSF indicated it would include examples of inappropriate uses of management fees in its revised policy.
However, it is unclear whether NSF would prohibit the use of management fee for charitable
contributions in its revised policy. It is noteworthy that the American Innovation and Competitiveness
Act of 2017 states, “It is the Sense of Congress that … the Foundation should implement an award fee
policy that ensures more transparency and accountability in the funding of necessary and appropriate
expenses directly related to the construction and operation of major multi-user research facilities.” 13
NSF’s waiver acknowledged the charitable contributions were not for the direct benefit of the NSF
funded activity.

11
   After our fieldwork ended, NSF decreased the amount of the management fee for the operations award to                  .
Battelle did not submit a revised management fee proposal; accordingly, it is unclear how much Battelle will spend on
charitable contribution for the operations award.
12
   The Large Facilities Manual requires “expenditures of management fee . . . [to] directly or indirectly benefit the NSF-
funded activity,” but does not exclude using management fee for charitable contributions. In contrast, SOG 15-1 states that
management fee shall not be used for general charitable contributions.
13
   Pub. L. No. 114-329. § 110(e)(1)




11     NSF.GOV/OIG | OIG 17-3-004
NSF Approved Management Fee Based on a Percentage of Costs

At the time of award, management fee in the Battelle award was based on a percentage of estimated total
project costs, although both NSF policy and implementing guidance prohibit basing management fee
solely on a percentage of total estimated project cost. According to NSF’s Large Facility Manual, “…
agreement on management fee amounts shall be completed and a specific dollar amount established
prior to the initiation of work under an award.” NSF’s implementing guidance, NSF’s Standard
Operating Guidelines Negotiation, Award and Payment of Management Fee, 2015-1 clarifies that “Fee
amounts shall not be based solely on a percentage of the estimated costs.”

NSF implementing guidance allows the Director of the DACS to waive management fee requirements.
However, the DACS Director did not issue a waiver to allow NSF to base Battelle’s management fee on
a percentage of estimated total project costs as opposed to a specific dollar amount prior to the initiation
of work under the award.

The management fee structure does not give Battelle an incentive to control costs. Because Battelle’s
management fee is based on a flat percentage, if NEON project costs rise, the                    management
fee for construction and the proposed                  management fee for operations could be higher.
Finally, it is worth noting that the fee Battelle is receiving is substantially larger than what NSF usually
pays. Management fee for the Battelle award is                of total estimated project costs; historically,
management fee on NSF awards has ranged between 0 and 1 percent of total estimated project costs.

Work Started under Battelle Award Prior to NSF Finalizing Management Fee Amounts

Both NSF policy and implementing guidance require NSF to review the awardee’s management fee
proposal to determine the need for and specific amount of the fee before the awardee begins work.
NSF’s Large Facility Manual states, “Agreement on management fee amounts shall be completed and a
specific dollar amount established prior to the initiation of work under an award.”

However, work started under the NEON construction award in March 2016 and the operations award in
May 2016 before management fee amounts were finalized. Specifically, NSF awarded $1,114,876 in
management fee for the construction award between March 2016 and July 2016 before finalizing
Battelle’s management fee and waiving its management fee policy in a July 26, 2016 memo. NSF also
awarded $263,508 in management fees to the Battelle operations award between May 2016 and July
2016 without NSF finalizing fee amounts. Our review of NSF’s July 2016 memorandum confirmed that
the memorandum did not address the basis for allowing work to begin prior to establishing the
management fee.

Further, NSF continues to negotiate the final total estimated project costs for both the construction and
operations awards. As a result, the award agreements indicate that NSF may adjust the management fee
amount.




12    NSF.GOV/OIG | OIG 17-3-004

NSF Awarded Management Fee to Battelle without Drawdown Schedule

Battelle did not submit a drawdown schedule detailing when it would request management fee for its
construction and operations awards and the amounts it expected to request, as required by NSF’s
implementing guidance. According to NSF’s implementing guidance, “Awardees shall include in their
fee proposal a Schedule for drawing fee, based on the organization’s approved use of fee and
approximately when those needs are expected to arise or must be met.” NSF’s deviation memo did not
address the agency’s rationale for awarding management fee absent the required drawdown schedule. As
a result, NSF has less insight into when and how Battelle is using the management fee.

Other Matter: Financial Viability Assessment
A financial viability assessment evaluates key indicators that rate an entity’s financial capability.
According to NSF’s March 1, 2016 DACS Cooperative Support Branch Standardized Cost Analysis
Guidance, the grants officer is required to request that CAAR, which is under the Division of Institution
and Award Support, conduct this assessment for non-profits that have NSF large facility awards. 14
However, the grants officer did not request that CAAR conduct the financial viability assessment for
Battelle; instead, the Cooperative Support Branch (CSB), which is under the DACS, conducted this
review during NSF’s selection process for a new management entity for the NEON project. The DACS
Director stated that CAAR did not conduct the financial viability review because NSF had to rely on an
expedited process to review the Battelle award.

A CAAR financial viability assessment evaluates an organization’s current ratio (current assets divided
by current liabilities), annual revenues or losses, liquid assets, and notes to financial statements. If
CAAR’s initial analysis identifies concerns, CAAR may require additional information to assess the
organization’s financial viability such as cash flow forecasts or projections; names of potential investors
or backers; future funding increments or pending proposals and likelihood of funding, loans, advances,
and lines of credit; details on liabilities; or notes payable held by principals of the organization.

The CSB review did not find any material financial issues that would affect Battelle’s ability to
successfully execute the NEON award. To complete its review, CSB reviewed past A-133 audit reports,
indirect cost rate information, prior awardee performance reports, and information from cognizant
agencies. Although CSB’s documentation indicates it reviewed Battelle’s current ratios, notes to the
financial statements, and annual revenues/losses, it did not document a review of Battelle’s liquid assets.
CAAR staff explained that it would be important to review Battelle’s liquid assets to determine whether
Battelle could use those assets to sustain any losses throughout the NEON award. CSB’s documentation
does not say that it reviewed other information such as cash flow forecasts or the likelihood of future
funding; CSB also did not recommend any extra steps to protect NSF’s interests.

NSF’s DACS Cooperative Support Branch Standardized Cost Analysis Guidance states that where
CAAR deems an awardee to have limited financial viability, the NSF grants officer must take steps to
protect NSF’s interests, such as including prior approval of amounts advanced or special payment

14
     NSF first issued the guidance in June 30, 2014.




13        NSF.GOV/OIG | OIG 17-3-004

provisions. Without a CAAR financial viability review, NSF may not identify situations in which it is
necessary to take steps to protect its interests.

Conclusion
Given the NEON project’s prior challenges — which include millions in cost overruns, reduced
scientific benefits, and the transition to a new management company — the risk of future challenges is
significant, and the project’s ability to absorb further cost or scope reductions is quite limited. It is
therefore critical that NSF exercise strong management over the project as it moves forward.

We recognize that NSF concluded it needed to take swift action to get a new managing organization in
place to continue construction. However, it also has a responsibility to ensure the financial viability of
the project. By not following many of its new policies and procedures, NSF may put NEON at risk for
future cost increases or additional de-scoping, both of which would undermine the project’s ability to
deliver transformative science.

Recommendations
1. We recommend that the NSF Chief Financial Officer strengthen controls over the Battelle project to
include:

     1.	 Developing policies and procedure for NSF’s use of management reserve.
     2.	 Enforcing NSF’s current management fee policies and procedures, including:
            a.	 Disallowing Battelle’s use of management fee for charitable contributions.
            b.	 Awarding management fee for ordinary and necessary expenses for a specific amount,
                 not based on a percentage of total estimated costs.
            c.	 Finalizing the management fee amounts for operations and construction as soon as
                 possible.
            d.	 Requesting and reviewing a draw down schedule from Battelle for the construction and
                 operations award.
     3.	 Finalizing the Cost Proposal Review Document for operations.
     4.	 Ensuring a complete review of BEI’s and Battelle’s relationship and thoroughly reviewing
         consultant services and subcontracts.
     5.	 Finalizing total estimated costs for the construction and operations award.
     6.	 Completing a more thorough financial viability assessment.

2. We recommend the NSF Chief Financial Officer develop procedures to ensure that controls are in
place prior to awarding future large facility awards including:

     1.	   Award amounts including management fees are established.
     2.	   Cost Proposal Review Documents are completed.
     3.	   Costs are adequately supported.
     4.	   Contingency management plans are developed.




14     NSF.GOV/OIG | OIG 17-3-004

     5. Contingency thresholds and terms and conditions are included in award agreements.
     6. Thorough financial viability assessments are completed by CAP.

OIG Evaluation of Agency Response
NSF responded that it needed to transition the project quickly to avoid further negative impact to the NEON
project and that its expedited evaluation and award process was rigorous, detailed, and well documented.
While NSF determined that it needed to transition the project quickly, NSF also has a responsibility to ensure
the financial viability of the NEON project. As documented in the audit report, NSF did not fully comply
with new policy and implementing guidance to strengthen controls, which may put the NEON project at risk.

NSF agrees with all but one of our recommendations and is already developing corrective actions. NSF did
not agree to disallow Battelle’s use of management fee for charitable contributions. NSF’s decision is in
contrast with NSF’s implementing guidance, which prohibits the use of management fee for charitable
contributions. Also we note that continued use of management fee for this purpose does not appear
consistent with congressional intent expressed in section 110(e)(1)(B) of the American Innovation and
Competitiveness Act of 2017, which contemplates use of fees for “expenses directly related to the
construction and operation of major multi-user research facilities.” We note that this Act was enacted in
January 2017 and was not in effect at the time of NSF’s decision regarding charitable contributions.
NSF’s response is included in its entirety in Appendix A.




15     NSF.GOV/OIG | OIG 17-3-004

      NATIONAL SCIENCE FOUNDATION
NSF
      OFFICE OF INSPECTOR GENERAL


 Appendix A: Agency Response 



                            National Science Foundation
                            4201 Wilson Boulevard, Arlington, Virginia 22230




            Memorandum

            DATE:           May 8, 2017


            TO:             Mark Bell
                            Assistant Inspector General
                            Office of Audits


            FROM:           Martha A. Rubenstein
                            Chief Financial Officer andb;(J   Head
                            Office of Budget, Finance and Award Management (BFA)


            SUBJECT: 	      NSF's Response to OIG Official Draft Report, NSF Needs Stronger Controls Over
                            Batte/le Memorial Institute Award for the Notional Ecological Observatory
                            Network




            Thank you for the opportunity to provide comments on the Official Draft of the Office of
            Inspector General (OIG) Report regarding NSF controls over the Battelle Memorial Institute
            (Banelle) Award for the National Ecological Observatory   Network (NEON).    In our view, the
            Official Draft Report does not fully capture the circumstances that required NSF to act
            expeditiously to successfully transition an at-risk project In the middle of construction. These
            circumstances required that we implement streamlined procedures, yet those procedures were
            rigorous, documented, and ensured the proper stewardship of Federal funds. To accurately
            reflect NSF's position on this matter, we request that the following Agency Response summary
            be included, as stated here, in the "At a Glance" sectlon of the Report:


                    NSF believes It was necessary to complete a successful transition of the project as
                    quickly as possible, without further negative impact to cost or schedule. Our expedited
                    evaluation and award process was rigorous, well documented, and included the
                    evaluation of detailed budget information that ensured a reasonable cost and fee was
                    established for both construction and initial operations. NSF agrees with all but one of
                    the OIG recommendations and is already developing corrective actions.


            Our response to the Draft Report Is provided in two parts. First, we address the
            recommendations set forth in the Draft Report, and note that with one exception, NSF agrees
            with the recommendations; they are consistent with actions already taken or agency procedures
            already in place for managing major facility awards. Second, we address key issues raised within
            the body of the Draft Report that are not addressed through the    recommendations.

            Since this Initial response is based on the text of the Draft Report provided to date, we would
            also request the opportunity to update our comments based on any further substantive
            revisions to the Report prior to issuance. Considering the fact that the Draft Report raises Issues
            concerning the financial viability of the awardee that will be publicly posted by the OIG, we also




 16   NSF.GOV/OIG I OIG 17-3-004
      NATIONAL SCIENCE FOUNDATION
NSF
      OFFICE OF INSPECTOR GENERAL




            request that consideration be given to a process that would allow the awardee to respond
            directly to aspects of the Draft Report.


            Part I:   NSF's Responses to the OIG's Recommendations


            Following careful review of the OIG's recommendations, NSF's responds as follows:


            OIG Recommendation 1: We recommend that the NSF Chief Financial Officer strengthen
            controls over the Battelle project to include:


            1.1       Developing policies and procedures for NSF's use of management reserve.


                      NSF Response: Agree. NSF agrees that management reserve policies and procedures
                      will be finalized prior to the transfer of any funds used for that purpose. Since there
                      have been no calls on management reserve and funds will not be obligated before these
                      procedures are finalized, no risk to the agency currently exists. The target date for
                      completion of policies and procedures is July 31, 2017.


            1.2       Enforcing NSF's current management fee policies and procedures including:


                      a.   Disallowing Battelle's use of management fee for charitable contributions.


                      NSF Response: Disagree. Battelle is an applied science and technology development
                      company established as a nonprofit charitable trust exempt from taxation under Section
                      501(c)(3) of the Internal Revenue Code because it is organized for charitable, scientific
                      and education purposes. NSF executed a deviation to internal agency policies and
                      procedures that properly documented the need to provide a reasonable fee to Battelle
                      to complete the NEON project, including uses of fee consistent with the organization's
                      mission. To void NSF's agreement with Battelle to provide fee as currently established
                      in the NEON awards would not provide a positive incentive for Battelle's successful
                      completion of the NEON project. Further, it is noted that, through the terms of the
                      implementing cooperative support agreements, Battelle is still restricted on Its use of
                      fee (Including for alcoholic beverages, entertainment, or lobbying activities as set forth
                      at 2 C.F.R. § 200.450, as appropriate to the recipient type). The award terms further
                      require Battelie to separately track and make available information to NSF on the actual
                      uses of fee and NSF retains the authority to reduce fee for non-compliance with these
                      restrictions.


                      b.   Awarding management fee for ordinary and necessary expenses for a specific
                           amount, not based on a percentage of total estimated costs.


                      NSF Response: Agree. Although a percentage formula was Initially used by Battelle t o
                      calculate proposed fee under the construction and initial operations awards, which i s
                      consistent with established commercial practices, t h e final fees under both awards set
                      forth were fixed dollar amounts (not percentages) that were identified by Battelle for
                      discrete uses that were reviewed for appropriateness by NSF. Fee Is not subject to



                                                                                                                   2




 17   NSF.GOV/OIG I OIG 17-3-004
      NATIONAL SCIENCE FOUNDATION
NSF
      OFFICE OF INSPECTOR GENERAL




                  revision based on actual costs incurred, but may be re negotiated by NSF and Battelle
                                                                           -




                  based on changed work requirements.


                  c.   Finalizing the   m anagement   fee amounts for operations and construction as soon as
                       posslble.


                  NSF Response: Agree. Management fee amounts for initial operations and construction
                  were finalized concurrent with the finalization of costs for both awards, prior to
                  Issuance of the Official Draft Report.


                  d.   Requesting and reviewing a draw down schedule from Battelle for the construction
                       and operations award.


                  NSF Response: Agree. NSF agrees that a draw down schedule was not initially
                  established as required by agency procedures. We appreciate the OIG bringing this
                  matter to our attention, and we have since requested that Sattel le provide a proposed
                  draw down schedule for NSF's consideration. We note that this matter relates only to
                  the timing of fee distribution during the performance period, and has no bearing on the
                  fee amount, which as previously stated is established as a fixed dollar amount.


            1.3   Finalizing the Cost Proposal Review Document (CPRD) for operations.


                  NSF Response : Agree. The CPRD for initial operations was definltized on November 6,
                  2016.


            1.4   Ensurng a complete review of Battelle Ecology lnc.'s (BEi's) and Battelle's relationship
                          i




                  and thoroughly reviewing consultant services and subcontracts.


                  NSF Response: Agree. As more fully addressed in a subsequent section of this
                  document, the BFA Division of Institution and Award Support (DIAS) is responsible to
                  provide oversight of awardee and 5ubawardee cost Information to ensu re proper review
                  of costs for reasonableness, allowability, and allocability.


            1.5   Finalizing total estimated costs for the construction and operations award.


                  NSF Response: Agree. The construction award amount was finalized on July 27, 2016,
                  with the exception of thr ee specific anticipated adjustments that represented a small
                  portion of the work effort (approximately $BM of the $125M esti mate). These
                  requirements were subsequently definitized in December 2016. The initial operations
                  award was definitized in November 2016.


                  Prior to definitization, NSF established initial incremental funding amounts for release to
                  Batte lie to ensure continued critical performance requirements pending award
                  finali2ation. These increments were evaluated for reasonableness by      NSF, were limited
                  in th eir duration, and were executed with the explicit understanding that the




                                                                                                               3




 18   NSF.GOV/OIG I OIG 17-3-004
      NATIONAL SCIENCE FOUNDATION
NSF
      OFFICE OF INSPECTOR GENERAL




                    increments would be superseded by final negotiated amounts after the final budget
                    review.


           1.6 	    Completing a more thorough financial viability assessment.


                    NSF Response: Agree. NSF completed a review of the financial viability of Battelle prior
                    to award of the construction and initial operations awards, and considers that review to
                    be adequate to determine the financial viability of the awardee. However, since NSF is
                    currently in the process of negotiating an award supplement with Battelle for extended
                    NEON operations, the agency will ensure that additional financial viability reviews will
                    be conducted in coordination with BFA's DIAS.


            OIG Recommendation 2. We recommend the NSF Chief Financial Officer develop procedures to
                                                i
            ensure that controls are in place pr or to awarding future large facility awards including:


            2.1 	   Award amounts including management fees are established.
            2.2 	   Cost Proposal Review Documents are completed.
            2.3 	   Cost are adequately supported.
            2.4 	   Contingency management plans are developed.
            2.5 	   Contingency thresholds and terms and conditions are included in award agreements
            2.6 	   Thorough financial viability are completed by the Cost Analysis and Pre-Award Branen
                    (CAP).


            NSF Response: Agree in principle to Recommendation 2, sub-part.s 1·6. The controls
            enumerated above are consistent with procedures already in place at NSF. The OIG's emphasis
            for this recommendation is that these controls are in place prior to awarding future major
            facility requirements. We fully concur with the intent of this recommendation, with the caveat
            that NSF (like all Federal agencies) requires the flexibility to deviate from standard operating
            procedures when those deviations are warranted due to the exigency of the circumstance, are
            fully documented, and include controls to ensure proper management of the project and
            associated costs.


            Part II: NSF's Responses to KeyIssues in the OIG's Draft Report


            In addition to our responses to the recommendations set forth in the Draft Report, and to
            provide context, NSF also considers it important to address a number of issues raised within the
            body of the Draft Report but not brought forward in the recommendations. Most significantly,
            NSF notes that the most current construction performance metrics (Earned Value Management
            data), with less than one year remaining in the construction stage, indicate an on-budget
            completion of the NEON project under Battelle's management.


            The Draft Report states that NSF did not fully comply with its policies by awarding funds prior to
             the definitization of costs and before having policies In place to properly manage management
            reserves. In fact, NSF acted properly in providing initial funding prior to definitizing final award
            costs. To have suspended construction pending award finalization would have added millions of
            dollars In additional costs that were avoided by NSF's action. The authority for awardees to



                                                                                                                   4




 19   NSF.GOV/OIG I OIG 17-3-004
      NATIONAL SCIENCE FOUNDATION
NSF
      OFFICE OF INSPECTOR GENERAL




            expend funds prior to finalization of award amounts is recognized for financial assistance awards
            at 2 C.f.R. § 200.458 (Pre-award costs) and more generally, 42 U.S.C. § 1870(c). NSF fully
            documented the need to place initial funding under the initial award to meet critical near term
            requirements pending definitization through the Award Memorandum signed by the Division
            Director, BFA Division of Acquisition and Cooperative Support. Further, NSF imposed more
            rigorous controls than standard for financial assistance awards by providing initial funding
            through an award action that limited Battelle work effort to the minimum requirements
            necessary to continue progress under the project without further impacting cost and schedu'le.
            Initial Increments of funds were based on estimates that were reviewed for reasonableness by
            the Grants Officer and included not-to-exceed amounts for each increment approved. Although
            the OIG indicates that an excessive period lapsed prior to finalization of costs, most costs
            associated with construction, and all costs associated with operations, were finalized within the
            180-day standard for undefinitized award actions that is used by the Department of Defense,
            the Department of Energy, and the National Aeronautics and Space Administration.


            The Draft Report states that fee was based on a percentage of cost, not definitized before work
            began, and was allowed to be used for charitable contributions. NSF agrees that initial releases
            o f fee were proposed by the awardee as a percentage of cost pending finalization of the award.
            However, fee was set forth in the initial award as a specific dollar amount, and the final fee was
            definitized based on specific dollar amounts for each category of fee use in accordance with
            agency policy. Providing initial increments of fee to allow work to proceed under the project
            had no negative impact on the fee amount. Fee does not vary based on Incurred cost and is
            only subject to re-negotiation if the work effort (scope) under the award is re-negotiated and
            agreed to by both parties. An approved policy deviation was issued to al low fee to be used for
            charitable contributions. NSF determined the fee under the award to be reasonable, and to
            have denied Battelle, as a charitable trust organization, to receive a fee or to use it for charitable
            contributions, would have been unreasonable. Although the OIG states that the fee paid to the
            awardee Is higher than fees under similar large facility awards, NSF considers the fee to be i n
            line with fees paid to organizations completing similar projects under awards made b y other
            Federal agencies. Not providing adequate fees to organizations consistent with fees generally
            paid by the government for the construction and operation of facilities will not encourage highly
            qualified organizations to compete for NSF awards. We also note that NSF will continue to
            provide guidance on inappropriate uses of fee under the award and will require fee use to be
            separately tracked.


            The Draft Report infers that a thorough cost analysis was not completed. Costs proposed by
            Battelle for completion of both construction and initial operations were thoroughly reviewed by
            NSF In accordance with agency procedures for financial assistance awards. A CPRD was
            completed and documented the reasonableness of all categories of cost. Consistent with other
            estimates for large complex projects that include unique requirements, the amount of available
            information associated with each category of cost varied dependent on multiple factors,
            including the availability of historic information versus use of parametric or engineering
            estimates for supplies or services where such information was not available. However, NSF




                                                                                                                 5




 20   NSF.GOV/OIG I OIG 17-3-004
      NATIONAL SCIENCE FOUNDATION
NSF
      OFFICE OF INSPECTOR GENERAL




            determined that all categories of costs were sufficiently estimated to establish a reasonable
            total cost for each award. Part of the NSF's Grants Officer's final determination of cost
            reasonableness for the construction award was also informed by an Independent Cost Estimate
            (ICE) contracted by NSF, which was reconciled as part of the cost analysis process and
            documented in the CPRD.


            Finally, the Draft Report concludes that NSF does not have proper controls In place to monitor
            or evaluate key aspects of the award, including controls to properly monitor classification of
            costs associated with subcontract and consultant services, manage the use of contingency, or
            evaluate the financial viability of the awardee. To address these concerns, we first note that
            NSF has controls in place to monitor classification of costs including subcontract and consultant
            services. NSF continues to negotiate the indirect cost rates and monitor the costs that are
            burdened and non-burdened for Battelle Ecology Incorporated, which is where the classification
            concerns originated. Further, under strengthened NSF procedures, the awards are subject t o
            Incurred cost audits to ensure proper classification of costs. Contingency is also closely
            monitored. As noted by the OIG in the Draft Report, NSF determined that adequate internal
            controls were in place to minimiz.e risk associated with providing the initial amount of
            contingency, which was necessary to permit Battelle to properly manage identified project risks
            pending definitization of costs. These controls included monthly reports covering all
            contingency use and t he continued use of the Configuration Control Plan (which included NSF
            approval thresholds) of the predecessor organization pending finalization of an updated plan
            from Battelle. Related to the determination of the financial viability of the awardee, as
            acknowledged in the Draft Report, NSF determined to make an award decision using an
            alternate and expedited approach i n consideration of the exigent circumstances and urgent
            need to select a new organization to complete the NEON project. The use of this alternate
            approach was documented by the agency. NSF relied heavily on the expertise of Battelle's
            cognizant audit agency, the Defense Contract Audit Agency, in determining that Battelie is a
            financially viable organization. As of the date of the award decision, Battelle was ranked 27' of
                                                                                    •d
            the top 100 U.S. Federal Government contractors. It is now ranked 23 based on the most
            current information available.




            cc:   Christina Sarris      Elizabeth Goebels      Matthew Haw kins
                  Marie Maguire         Steven Ellis           Louise Nelson
                  Allison Lerner        Jeffery Lupis          Charlie Zeigler
                   Fae Korsmo          William Kinser          Alexander Wynnyk
                   Robert Hengst       Anna-lee Misiano        James Leland Olds
                   Muflel Poston        James Deshler          Roland Roberts
                   Susan Carnohan       Linda Burch




                                                                                                                6




 21   NSF.GOV/OIG I OIG 17-3-004
Appendix B: Objectives, Scope, and Methodology
The objectives of this inspection were to (1) determine whether NSF is following its policies and procedures when
awarding the Battelle construction and operations awards, (2) determine how NSF is implementing recent NSF
OIG and National Academy of Public Administration recommendations during the Battelle award, and (3)
determine whether NSF is adequately monitoring the Battelle award. We conducted this inspection from August
2016 to October 13, 2016, in accordance with the Quality Standards for Inspection and Evaluation, issued by the
Council of Inspectors General on Integrity and Efficiency.




22    NSF.GOV/OIG | OIG 17-3-004

Appendix C: OIG Contact and Staff Acknowledgments
OIG Contact:

Elizabeth Goebels, Director, Performance Audits, (703) 292-8483, egoebels@nsf.gov

Staff Acknowledgments:

In addition to the contact named above, Marie Maguire, Deputy Assistant Inspector General for Audits;
Elizabeth Argeris, Communications Analyst; and Keith Nackerud, Independent Report Referencer,
made key contributions to this report.




23    NSF.GOV/OIG | OIG 17-3-004

24   NSF.GOV/OIG | OIG 17-3-004