oversight

Human Resources Solutions' Pricing Methodologies

Published by the Office of Personnel Management, Office of Inspector General on 2015-06-02.

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

          U.S. OFFICE OF PERSONNEL MANAGEMENT 

             OFFICE OF THE INSPECTOR GENERAL 

                      OFFICE OF AUDITS 





                             HUMAN RESOURCES SOLUTIONS' 

                               PRICING METHODOLOGIES 

                                              Report Number 4A-HR-00-13-055 

                                                       June 2, 2015 





                                                                 --CAUTION -­
This audit report has been distributed to Federal officials who are responsible for the administration of the audited program This audit report may contain
proprietary data which is protected by Federal law ( 18 U.S.C . 1905). Therefore, while this audit report is available under the Freedom of Information Act and
made available to the public on the OIG webpage (http /lw ww.opm.gov/our-inspector-general), caution needs to be exercised before releasing the report to the
general public as it may contain proprietary information that was redacted from the publicly distributed copy.
             EXECUTIVE SUMMARY 

                              Human Resources Solutions' Pricing Methodologies

Repot·t No. 4A-HR-00-13-055                                                                           June 2, 2015



Why Did We Conduct The Audit?             What Did We Find?

The objective of our audit was to         We detennined that HRS needs to strengthen its controls to ensure
assess how Human Resources                that its fees charged to customer agencies are accurately recovering
Solutions (HRS) develops their prices     costs of products and setv ices. Our audit identified two areas
for products and setvices. We             requiring improvement, as follows:
accomplished this by evaluating
HRS 's pricing models to detennine if     1. 	 Pricing Methodologies Were N ot Fully Supported
they were accurately recovering costs        • 	 The Resource M anagement Group of HRS did not have
of products and setvices they provide.           documented policies and procedures outlining how they
                                                 developed their pricing m ethodologies; was unable to
What Did We Audit?                               explain how they allocated the Cost Pool 4 (expense)
                                                 amounts to HRS programs; and allocated $708,000 more
The Office of the Inspector General              than the Cost Pool 4 amount shown on the suppoti
(OIG) has completed a perfotmance                provided.
audit ofHRS 's pricing                       • 	 The USA Leaming, Staff Acquisition, Training and
methodologies. Our audit fieldwork               Management Assistance Program (TMAP) , and Human
was conducted from June 26 through               Resource Strategy program areas did not have sufficient
November 20,2014 at OPM                          documentation to suppoti their pricing methodologies.
headquarters, located in Washington,
D .C.                                     2. 	 Prices for Fiscal Years (FY) 20 13 and 2014 Services Were Not
                                             Fully Suppotied
                                             • 	 The Administrative Law Judges program area provided
                                                 suppoti that did not directly relate to m ost of the expense
                                                 categories used in Cost Pools 1 and 2 for FY 20 13.
                                             • 	 The TMAP, Westem Center/Custom Solutions, Eastem
                                                 Center/Training Delivety, Federal Executive Branch, and
                                                 Assessment and Evaluation Branch program areas did not
                                                 have sufficient documentation to suppoti prices charged to
                                                 custom ers in FY 2014.




 Michael R. Esser
Assistant Inspector General
for A udits
                                                                           Repoti N o. 4A-HR-00-13-055
         ABBREVIATIONS

AEB       Assessment and Evaluation Branch
ALJ       Administrative Law Judges
ECTD      Eastern Center/Training Delivery
FEI       Federal Executive Institute
FMM       Financial Management Manual
FY        Fiscal Year
GAO       U.S. Government Accountability Office
GS        General Schedule
HR        Human Resource
HRS       Human Resources Solutions
OIG       Office of the Inspector General
OPM       U.S. Office of Personnel Management
RMG       Resource Management Group
SICFG     Standards for Internal Control in the Federal
          Government
TMAP      Training and Management Assistance Program
U.S.C.    United States Code
WCCS      Western Center/Custom Solutions




                     ii
                                 TABLE OF CONTENTS 



                                                                                                                                  Page 

         EXECUTIVE SUMMARY ......................................................................................... i 


         ABBREVIATIONS ..................................................................................................... ii 


I. 	     BACK GROUND .......................................................................................................... 1 


II. 	    OBJECT IVE, SCOPE, AND METHODOLOGY ....................................................8 


III. 	   AUDIT FINDINGS AND RECO MMENDATIONS............................................... 11 

         1. 	 Pricing Methodologies Were Not Fully Supported ............................................... 11 

         2. 	 Prices for Fiscal Year s 2013 and 2014 Services Were Not Fully 

              Suppotted ............................................................................................................... 15 


IV. 	    MAJOR C ONTRIBUTORS TO TillS REPORT .................................................. 19 


         APPENDIX (Huma n R esources Solutions' r esponse to our draft r eport, received 

         April17, 201 5) 


         REPORT FRAUD, WAST E, AND MI SMANAGEMENT 

                                     I. BACKGROUND 



This final audit rep01t details the findings, conclusions, and recommendations resulting from om
perf01m ance audit of Human Resom ces Solutions' (HRS) pricing methodologies. The audit was
perf01m ed by the U.S. Office of Personnel Management's (OPM) Office of the Inspector
General (OIG), as authorized by the Inspector General Act of 1978, as amended.

This audit was initiated an d conducted based on the results of the HRS risk assessment
perf01m ed in fiscal year (FY) 2013 by OIG's Intemal Audits Group. The purpose of th e risk
assessm ent was to understand HRS 's operations and dete1mine areas of high risk. We identified
HRS 's pricing methodologies as a high-risk activity because a majority ofHRS program groups
rely upon a costing tool to detennine the price stiuctme, or fee , charged to its customer agencies.
HRS is required by statute to set the price of its products at a level that enables it to recover the
actual costs in administering the program. Consequently, it was imp01tant to ensm e that the
pricing structure used is accm ate. Om assessment discovered instances where program groups
were not able to provide full supp01ting documentation for their pricing m ethodologies.

Human Resources Solutions

HRS provides products and services that assist Federal agencies in achieving their Inissions. 

This is done by helping agencies provide human resom ce solutions to develop leaders, develop a 

"high quality" sector workforce, an d ti·ansfOim into high perfonning organizations. HRS also 

assists agencies in attracting and acquiring specific talent. 


HRS operates under OPM's Revolving Fund Authority, 5 United States Code (U.S .C.) 

1304 (e)(1). This allows HRS to perf01m personnel managem ent services at an agency's request. 

The requests are fon nalized through an interagency agreem ent. 1 As a revolving fund program, 

HRS recovers costs of operations by man aging agency reimbm sable agreem ents from Federal 

customers. Specifically, the Revolving Fund Authority states: 


         "The fund shall be credited with­
                 (A) advances and reimbm sements from available funds of the Office or other
                 agencies, or from other som ces, for those services an d supplies provided at rates



1
  An interagency agreement consists of a standard form7600A and a 7600B. The 7600A is the partnership section of
the interagency agreement. It sets the relationship betv.•een the agencies by identifying the agencies entering into the
agreement, the authority pennitting the agreement, and the agreement action, period, and type. The 7600B is the
fimding section that creates a fiscal obligation between the Requesting Agency and Servicing Agency. The 7600B
identifies the specific Requesting Agency requirements and identifies the roles and responsibilities for both trading
partners to ensure effective management of the order and use of the related fimds.


                                                           1                               Report No. 4A-HR-00-13-055
                  estimated by the Office as adequate to recover expenses of operations (including
                  provision for accrued annual leave of employees and depreciation of
                  equipment) … .”

HRS has variations in the costing methodologies2 and pricing structures for the different services
it provides to Federal agencies, which are described below.

Resource Management Group

The Resource Management Group (RMG) is the support function under HRS. RMG provides
comprehensive, direct, corporate level financial and budget support to HRS’s leadership and
senior program managers. The primary function of RMG is to report the financial status of
HRS’s program offices to HRS, and allocate costs through a monthly Financial Snapshot
Report.3 The Financial Snapshot Report is a collection of financial data obtained from OPM’s
Consolidated Business Information Systems’ Oracle Business Intelligence Enterprise Edition
Report and HRS project and labor codes4.

RMG models their Financial Snapshot Report to reflect HRS’s pricing methodology framework.
RMG does not create pricing; however, the Financial Snapshot Report has a great impact on how
prices are determined by HRS’s program groups.

HRS’s expenses are labeled as cost pools, of which they have four:

    		 Cost pool 1 is for direct expenses incurred by the program that are directly chargeable to 

        the customer for the product or service received. Examples include: direct labor, 

        supplies and materials, and costs for contractors providing deliverable services. 

    		 Cost pool 2 is for indirect expenses incurred by the program and are indirectly charged to 

        the customer for the service or product received. Examples are employee training, leave, 

        contractors that provide service to the program rather than the customer, and facilities’ 

        costs. 

    		 Cost pool 3 is for indirect expenses incurred by HRS as a general cost of operating as a 

        whole. Indirect expenses/overhead includes costs to cover HRS support, management 

        and headquarter salaries, and contracts for services provided to all of HRS. 




2
  OPM’s Financial Management Manual defines costing methodology as a formal process for accumulating costs
and assigning costs and should include the full cost of resources that directly or indirectly contribute to the
production of the goods/services. The methodologies should be appropriate for the respective area and should be
consistently implemented and followed.
3
  The Financial Snapshot Report is an Excel Spreadsheet.
4
  HRS project and labor codes are created by RMG. RMG assigns customized project codes to help them allocate
project costs to HRS programs. Labor codes are for salaries and benefits.


                                                        2	                             Report No. 4A-HR-00-13-055
    		 Cost pool 4 is for OPM’s indirect expenses which are expenses incurred by OPM as a
        general cost of operating OPM as a whole. OPM’s indirect expenses include OPM
        information technology contracts and salaries of OPM’s central human resource
        employees. Cost Pool 4 is assessed by the Chief Financial Officer and provided to RMG.

Retained Earnings is not a cost pool; however, it is included in RMG’s Financial Snapshot
Report. RMG created a cost methodology, based on five scenarios5, to allocate Cost Pools 3 and
4 to each program group within HRS.

Assessment and Evaluation Branch

The Assessment and Evaluation Branch (AEB) provides organizational assessments, customer
surveys, program evaluations, competency models, GAP analysis6, and leadership assessment
services to Federal agencies.

AEB’s prices are based on consulting rates and estimated hours to complete their services. The
consulting rates for FY 2014 were determined in the fourth quarter of FY 2013 using the prior
year’s salaries and benefits.

The FY 2014 hourly consulting rates were:

    		   Branch Manager (General Schedule (GS) 15) = $300
    		   Senior Psychologist (GS 14) = $265
    		   Expert Psychologist (New GS 14 and high tenure GS 13) = $225
    		   Staff Psychologist (GS 13 and high tenure GS 12) = $200
    		   Psychologist (GS 5 through 12) = $165
    		   Psychologist Tech = $100
    		   Student Psychologist = $130

Eastern Center/Training Delivery

The Eastern Center/Training Delivery (ECTD) is a leadership development training facility.
They offer open enrollment, single agency, and online/blended courses, leadership assessments,
coaching, Leadership Education and Development Certificates, and management conference
services.




5
  RMG’s five scenarios are methods of allocating Cost Pool 3 and 4 to HRS programs. Cost Pools 3 and 4 are 

allocated to HRS’s programs based on the expenses and revenue of the program.


6
  A GAP analysis is the comparison of actual performance with potential performance. 



                                                       3	                             Report No. 4A-HR-00-13-055
When generating pricing for customer agencies, ECTD develops single customer agency and
multiple customer agency spreadsheets to document the direct costs, indirect costs, and fees
associated with the services rendered for that given year. All costs associated with the project
are individually labeled and calculated within the spreadsheets. The spreadsheets help ECTD
monitor the costs during the course of the project and to see if the prices provided to the
customer recovers all costs accurately. ECTD established their FY 2014 prices for their
customer agencies by analyzing the spreadsheets from previous fiscal years.

Federal Executive Institute

The Federal Executive Institute (FEI) is a leadership development training facility that provides
three separate lines of business: (1) Leadership for a Democratic Society, (2) open enrollment
courses, and (3) customized courses and executive coaching.

When generating pricing for customer agencies, FEI develops excel spreadsheets to document
the direct costs, indirect costs, and fees associated with the services rendered for that given year.
All costs associated with the project are individually labeled and calculated within the
spreadsheets. The spreadsheets help FEI monitor the costs during the course of the project and
to see if the price provided to the customer recovers costs accurately. FEI established their FY
2014 prices for their customer agencies by analyzing spreadsheets from previous fiscal years.

Human Resource Strategy

Human Resource (HR) Strategy provides workforce planning, performance management,
organizational design, and position/classification services to Federal agencies.

HR Strategy’s prices are based on consulting rates and estimated hours to complete their
services. The consulting rates are determined using prior year’s salaries and benefits and an
overlay cost7. HR Strategy estimates the hours it takes to complete their products and services
for the year. The estimated hours are set the summer before the fiscal year starts and are based
on historical information from prior years. HR Strategy uses monthly billing spreadsheets for
each of their three solution groups: Organizational Design and Position Classification,
Workforce and Succession Planning, and Performance Management to track the actual hours and
labor expenses billed to a project to help them determine whether their estimates and
assumptions need to be updated in the following year.

The FY 2014 billing rate structure consisted of the following five tiers:
    GS 7 through 9 = $140 per hour
    GS 11 = $165 per hour

7
    The overlay cost is made up of Cost Pools 2, 3, and 4.


                                                             4                Report No. 4A-HR-00-13-055
      GS 12 = $185 per hour
      GS 13 = $205 per hour
      GS 14 and 15 = $225 per hour

Staff Acquisition

Staff Acquisition provides recruitment services, customized human resource training, human
resource technical training, and customized examining and assessment solutions to Federal
agencies.

Annually, Staff Acquisition uses a Pricing Analysis spreadsheet to perform the calculations
needed for its inputs and to develop the prices for their products and services. The prices that
were developed in the pricing analysis spreadsheet were transferred to Staff Acquisition’s pricing
guide, titled Human Resources Solution Fiscal Year 2014 Pricing Guide for Examining,
Training, and Other Staff Acquisition Services, and which communicates prices to customers.

Training and Management Assistance Program

The Training and Management Assistance Program (TMAP) provides assisted acquisition
services in the areas of human capital strategy, learning management systems, recruitment and
branding, and employee training solutions to Federal agencies.

TMAP assesses a management fee to the requesting agencies for providing its assisted
acquisition services. Based on the amount of the contract cost, which is provided by the selected
vendor, a rate from the management fee structure is used to calculate the management fee. The
management fee is then added to the contract cost to determine the total amount that will be
charged to the requesting agency.

The FY 2014 management fee structure consisted of the following seven tiers:

      Less than $250,000 = 12 percent
      $250,000 to $749,999 = 10 percent
      $750,000 to $999,999 = 8 percent
      $1.0 to $4.99 million = 6 percent
      $5.0 to $9.99 million = 4 percent
      $10.0 to $19.99 million = 3 percent
      $20 million and over = 2.5 percent




                                                5                          Report No. 4A-HR-00-13-055
Within the management fee structure, TMAP also has the ability to apply exceptions when
deemed necessary. When exceptions are applied, they should be approved by the Vendor
Management Branch Chief and documented in the project file.

USA Learning

USA Learning is the Federal government’s online education and training platform. The program
has two business lines: Learning Management System (LMS) and the Knowledge Portal. LMS
provides “off-the-shelf” training to customer agencies. Knowledge Portal is an open-source tool
that allows small agencies to operate in a shared environment, reducing costs of hosting,
helpdesk, and the development and implementation of enhancements customized to the customer
agencies.

For FY 2014, USA Learning charged customer agencies a fee of 10 percent of the direct costs
associated with a project for LMS, and 15 percent of the direct costs associated with a project for
Knowledge Portal. These fees are expected to cover all expenses to operate USA Learning.

Western Center/Custom Solutions

The Western Center/Custom Solutions (WCCS) program area provides custom leadership
development and training solutions for the Federal government.

Their primary focus is providing customized training for single agencies. When generating
pricing for customer agencies, WCCS develops a Custom Costing Tool and Pricing Grid for
Costing Tool8 (costing tools) for the purpose of documenting the direct costs, indirect costs, and
fees associated with the services rendered during FY 2014. All costs associated with their
project are individually labeled and calculated within the costing tools. After consulting with the
customer agency for their requirements, direct program costs are manually input into the costing
tools. The indirect costs, combined with the direct costs for the project, are then calculated to
create the price charged to the customer agency.

Administrative Law Judges

The Administrative Law Judges (ALJ) is a program offered under HRS that has sole authority
for administering, planning and directing nationwide recruitment, examination, and employment
for ALJs throughout the Federal government.9 ALJs ensure fairness in administrative
proceedings for Federal government agencies.

8
 The Custom Costing Tool and Pricing Grid for Costing Tool are Excel spreadsheets.


9
 5 U.S.C. § 1104(a)(2) delegated OPM authority over the ALJ program and mandates that OPM develop and 

administer the ALJ examination.




                                                     6                             Report No. 4A-HR-00-13-055
The amount Federal agencies are required to reimburse OPM is calculated by taking the
estimated total costs of the ALJ program and assessing each agency a share of the total costs,
based on the number of ALJs the agency employs.10 ALJ bills their customers annually in the
fourth quarter of the fiscal year. They are able to use actual costs for the first through third
quarters of the year when billing customers; however, costs are projected for the fourth quarter.




10
     5 Code of Federal Regulations § 930.203 describes how agencies will be charged for the ALJ program.


                                                          7                             Report No. 4A-HR-00-13-055
   II. OBJECTIVE, SCOPE, AND METHODOLOGY 


Objective
The objective of our audit was to assess how HRS develops their prices for products and
services. We accomplished this by evaluating HRS's pricing models to detennine if they were
accurately recovering costs of products and services they provide. The recommendations
included in this final rep01i address this objective.

Scope and Methodology
We conducted this perfonnance audit in accordance with generally accepted govemment
auditing standards as established by the Comptroller General of the United States. These
standards require that we plan and perfonn the audit to obtain sufficient, appropriate evidence to
provide a reasonable basis for our findings and conclusions based on our audit objective.

The scope of our audit covered the price methodologies for 10 HRS program areas. Specifically:

   • 	 The scope for the following nine HRS program areas, covered the price methodologies
       used from October 1, 2013 to September 30, 2014:

           1. 	   Resource Management Group
           2. 	   Assessment and Evaluation Branch
           3. 	   Eas tem Centerffraining Delive1y
           4. 	   Federal Executive Institute
           5. 	   Human Resource Strategy
           6. 	   Staff Acquisition
           7. 	   Training and Management Assistance Program
           8. 	   USA Leaming
           9. 	   Westem Center/Custom Solutions

   • 	 The scope for the Administrative Law Judges program covered the FY 2013 price per
       judge used to bill Federal agencies.

We perf01med our audit fieldwork from June 26 through November 20, 2014 at the OPM
headqumiers, located in Washington, D.C.




                                                 8	                        Report No. 4A-HR-00-13-055
To accomplish our audit objective noted above, we:

      Interviewed HRS personnel;
      Assessed the reasonableness of the costing tools used by the HRS programs to develop
       prices; and
      Sampled and tested the accuracy of the program areas’ prices charged to customers.

In planning our work and gaining an understanding of HRS’s pricing methodologies, we
considered, but did not rely on, HRS’s internal control structure to the extent necessary to
develop our audit procedures. These procedures were mainly substantive in nature. We gained
an understanding of management procedures and controls to the extent necessary to achieve our
audit objective. The purpose of our audit was not to provide an opinion on internal controls, but
merely to evaluate controls over the processes that were included in the scope of our audit.

Our audit included such tests and analysis of HRS’s supporting documentation provided for their
pricing methodologies and other procedures as we considered necessary under the circumstances.
The results of our review and tests indicate that with respect to the items tested, HRS needs to
strengthen its controls to ensure that fees charged to customer agencies are accurately recovering
costs of products and services.

In conducting the audit, we relied to varying degrees on computer-generated data. Due to the
nature of the audit, we did not verify the reliability of the data generated by the systems
involved. However, nothing came to our attention during our audit testing utilizing the
computer-generated data to cause us to doubt its reliability. We believe that the data was
sufficient to achieve our audit objective.

In performing our audit work, we used Microsoft Excel to randomly select samples for testing in
order to accomplish our audit objective. Our sampling methodologies consisted of the following
projects that started in FY 2014:

      15 out of 68 projects for AEB;
      6 out of 285 projects for ECTD;
      9 out of 50 projects for FEI;
      15 out of 57 projects for HR Strategy;
      12 out of 36 projects for Staff Acquisition;
      6 out of 51 projects for TMAP; and
      25 out of 238 projects for WCCS.

The samples selected during our review were not statistically based. Consequently, the results
from our samples were not projected to the populations.


                                                9                          Report No. 4A-HR-00-13-055
The preliminary results of our audit were discussed with HRS officials at an exit conference held
on November 20, 2014, and were presented in a draft audit report dated March 19, 2015. HRS’s
comments in response to the draft report were considered in preparing our final report and are
included as an Appendix.




                                               10                         Report No. 4A-HR-00-13-055
 III. AUDIT FINDINGS AND RECOMMENDATIONS

For the areas described below, we determined that HRS needs to strengthen its controls to ensure that its
fees charged to customer agencies are accurately recovering costs of products and services. For those
program areas not specifically identified in a finding below, it was determined that their process was
adequate for that particular objective.

1.		 Pricing Methodologies Were Not Fully Supported

   While assessing the reasonableness of the costing tools that were used to develop FY 2014 

   prices, we determined that pricing methodologies, including cost inputs, were not fully 

   supported. 


   RMG did not have documented policies and procedures outlining how to prepare the Financial
   Snapshot Report. The Financial Snapshot Report is the document used by the program areas to
   assist in developing their pricing methodologies. We were also unable to determine how RMG
   allocates the Cost Pool 4 amounts to HRS programs. Specifically, we could not determine how
   “Full-Time Employees” were used when calculating Cost Pool 4 allocation amounts. Lastly,
   RMG used an incorrect amount for Cost Pool 4 to allocate costs to the programs. The amount
   used was $708,000 more than the amount shown on the documentation provided. HRS stated
   that the difference was due to indirect rent; however, no supporting documentation was provided.

   In addition, we found that USA Learning, Staff Acquisition, TMAP, and HR Strategy did not
   have sufficient documentation to support their pricing methodologies. Specifically:

       		 USA Learning provided us with a memorandum explaining the concept behind their
           pricing methodologies; however, no financial data could be produced to support the
           methodology described in their memorandum.

       		 Staff Acquisition generally documented their costing calculations; however, they could
           not provide documentation to support the use of a 40 percent employee benefit rate that
           was used.

       		 TMAP provided their 2012 sensitivity analysis to support the methodology used to
           develop their management fee structure, which outlined their market research,
           assumptions, and breakeven point to cover their projected costs for FY 2012. However,
           they could not provide documentation to support the data used in the sensitivity analysis.
           The results in the sensitivity analysis did not specifically break out a management fee
           structure and we were unable to determine how the analysis supported the FY 2014 fee
           structure.



                                                 11 	                         Report No. 4A-HR-00-13-055
     • 	 HR Strategy's salruy ammmts used on their three billing spreadsheets, which are used in
         the methodology to determine their consulting rates,11 did not agree to supporting
         documentation. In addition, they could not provide supp01t for the calculation of their
         FY 2014 tiered billing rates.12 Specifically, we were not provided the f01mulas and the
         supp01ting documentation used for the tiered billing rates.

Details of our review were provided to HRS separate from this rep01t.

                              5 US. C. Section 1304(e)(3)(A) states that customers must reimburse
                              HRS "for those services and supplies provided at rates estimated by the
Support for HRS
                              Office as adequate to recover expenses of operation ...."
    Pricing
Methodologies Not
                          OPM's Financial Management Manual (FMM), Chapter 7, states " The
  Maintained
                          RF [Revolving Flmd] is required to operate on a break-even basis over a
                          reasonable period of time by charging users for allowable costs as
established under OPM Special Authority and other Federal auth orities. The RF will ensure that
billing rates only recover allowable costs and ru·e adj usted at least annually to eliminate any
smplus . However, if the RF accumulates a smplus for the period covered this represents the
Federal shru·e of billings claimed for reimbursement, the RF needs to adjust billing rates to
eliminate smpluses, or if the inverse is hue, and a deficit occurs, billings need to be adj usted to
recapture lost previous under billings. "

According to HRS ' s Pricing Methodology, dated August 6, 2013 , each pricing methodology
should follow the basic framework. Relevant steps include:

     • 	 " Each price should be based on expenses for that solution ... the total projected expenses
         should be app01tioned out based on what percentage of expenses each product or service
         generates."
     • 	 "Make adjustlnents to unit pricing if appropriate ... it is appropriate to adjust unit pricing
         to reflect lower costs resulting from economies of scale. When adj ustlnents to unit
         pricing are made the rationale and calculations should be documented and the adj usted
         pricing structure should be applied lmif01mly to federal customers."
     • 	 " Review and adj ust if necessruy ... adjustments based on more qualitative factors rather
         that quantitative factor should be accounted for. However, deviations should be
         explained and justified."
     • 	 " Document the results ... constant evaluation of past data to better infonn future
         decisions ... should maintain a database of expenses, lmits of service provided, prices,

11
   Consulting rates are based off ofprior year' s salaries and benefits and an overlay cost that consists of 

Cost Pools 2, 3, and 4. 

12
   FY 2014 tiered billing rates are the rates used to charge HR Strategy's customers. 



                                                           12 	                              Report No. 4A-HR-00-13-055
       and revenue calculations. Any adjustment made as a result of analysis of the data should
       also be documented in order to preserve a history for future reference.”

The U.S. Government Accountability Office’s (GAO) Standards for Internal Control in the
Federal Government (SICFG) states that, “Internal control and all transactions and other
significant events need to be clearly documented, and the documentation should be readily
available for examination. The documentation should appear in management directives,
administration policies, or operating manuals and may be in paper or electronic form. All
documentation and records should be properly managed and maintained.”

GAO’s SICFG also states that “Control activities are the policies, procedures, techniques and
mechanisms that enforce management’s directives … Control activities occur at all levels and
functions of the entity. They include a wide range of diverse activities such as approvals,
authorizations, verifications, reconciliations, performance reviews, maintenance of security, and
the creation and maintenance of related records which provide evidence of execution of these
activities as well as appropriate documentation.” Examples of control activities are: reviews by
management at the functional or activity level, control over information processing, proper
execution of transactions and events, and appropriate documentation of transactions and internal
control.

If there is no documented guidance regarding the process for creating RMG’s Financial Snapshot
Report, no documented process to allocate their Cost Pool 4 amounts, and support for pricing
determinations are not maintained, then there is no assurance that the costs being allocated to
HRS programs are accurate. This could result in HRS not properly pricing its services charged
to customer agencies, which could lead to customer agencies being under- or over-charged.

Recommendation 1

We recommend that HRS develop policies and procedures for creating the monthly Financial
Snapshot Report by RMG. The policies and procedures should include a discussion of
documentation retention, underlying assumptions, and the methodology used to develop and
allocate the cost pools.

HRS’s Response:

 “HRS does not concur with this recommendation. While HRS agrees that methodology for
financial management reporting should be documented, the underlying issue will only be
resolved by developing a standardized report from the financial system of record [Consolidated
Business Information Systems] (CBIS). The Monthly Financial Snapshot Report is an internal
ad-hoc management execution report only intended to close the gap between reports currently



                                               13                          Report No. 4A-HR-00-13-055
available from the CBIS financial system of record and HRS's financial management reporting
requirements. The Monthly Financial Snapshot Report is formatted as a spreadsheet, and while
the formulas in each cell demonstrate the underlying methodology, this format is not conducive
to documenting every cell's calculation in text format.

HRS agrees that the requirements for reporting this critical financial information should be fully
documented. HRS has requested a standard report be developed in the CBIS financial system of
record containing all data points and cost allocations required to successfully manage
reimbursable product lines. Numerous discussions have taken place on this topic, and HRS fully
supports working with the Office of the Chief Financial Officer's CBIS Team on the
development of a standard report to eliminate the need for the ad-hoc Monthly Financial
Snapshot Report.”

OIG Comment:

Based on HRS’s proposed corrective action plan to eliminate the Monthly Financial Snapshot
Report and implement a standard CBIS report, policies and procedures are still needed that
include a discussion of documentation retention and any underlying assumptions of the data
points and cost allocations.

Recommendation 2

We recommend that HRS develop policies and procedures for the determinations of fees charged
by its program areas to customer agencies. The policies and procedures should include a
discussion of document retention, underlying assumptions, and the methodology used to
determine its rates.

HRS’s Response:

HRS concurs with this recommendation.

“we agree that we need to strengthen practices related to the review and retention of
documentation supporting pricing calculations.

HRS's Pricing Methodology document provides guidelines for pricing calculations to ensure
customers are accurately charged for the services provided. Billing processes and systems
established in cooperation with the OCFO ensure customers are billed on an accurate and timely
basis. While the pricing methodology established by HRS is followed by each of the practice
areas, complete supporting documentation has not been maintained consistently. As




                                                14                         Report No. 4A-HR-00-13-055
   recommended, we will develop policies and procedures to formalize the review process and
   standardize the retention of supporting documentation and underlying assumptions."

   OIG Comment:

   In addition to the con ective actions outlined by HRS, they should also ensm e that their policies
   and procedmes include the methodology used to detennine the rates they charge customers for
   th e services they provide.

   Recommendation 3

   We recommend that HRS su·engthen their intemal conu·ols to ensm e that the inputs used in
   HRS ' s pricing calculations are properly reviewed, approved, and documented.

   HRS's Response:

   HRS concms with this recommendation.

   "HRS will fonnalize an annual review process to ensm e each practice ar ea is adhering to HRS'
   guidelines and maintaining appropriate documentation. We will also u·ain staff on establishing
   and maintaining accm ate and thorough documentation of pricing calculations, supp01ting
   documentation and lmderlying assumptions."

2. 	 Prices for Fiscal Years 2013 and 2014 Services Were Not Fully Supported

   We fmmd that ALJ did not have sufficient documentation to supp01t prices charged to customers
   in FY 2013 . Specifically, ALJ provided documents to supp01t Cost Pools 1 and 2 for FY 2013;
   however, we were lmable to detennine how the documents supp01ted 24 out of 25 of the expense
   categories used in Cost Pools 1 and 2.

   In addition, we found that TMAP, WCCS, ECTD, FEI and AEB did not have sufficient 

   documentation to supp01t prices charged to customers in FY 2014. Specifi cally: 


       • 	 Three out of 15 AEB projects sampled had costs that were
           inconsistently rmmded and there was no documentation to
                                                                                 Prices for FY 2013
           supp01t the rounding m ethodology. In addition, 5 of the 15
                                                                                 and 2014 Services
           AEB proj ects sampled used estimated costs that were not
                                                                                      were Not
           supported in the price development.
                                                                                     Supported




                                                   15 	                        Report No. 4A-HR-00-13-055
    		 One out of six TMAP projects sampled did not have documentation to support the
        project costs (i.e., costing tools and interagency agreements). TMAP stated that they
        created this project in error. TMAP provided a Consolidated Business Information
        System screenshot that stated the project is "in progress"; however, there was no
        confirmation that the project was cancelled.

    		 Two out of 25 WCCS projects sampled did not have documentation (i.e., costing tools
        and interagency agreements) to support how the projects’ pricing was determined. In
        addition, 15 out of 25 WCCS projects sampled did not have documentation to support all
        the inputs in the costing tools which were used to develop the FY 2014 prices.

    		 Three out of six ECTD projects sampled did not have documentation to support the
        Materials and Printing costs used in the FY 2014 costing tools.

    		 Three out of nine FEI projects sampled did not have documentation (i.e., costing tools
        and interagency agreements) to support how the projects’ pricing was determined. In
        addition, six out of nine FEI projects sampled did not have support for five of the inputs
        in the costing tools which were used to develop the FY 2014 prices.

    		 We were unable to trace the FY 2014 developed prices from the costing tools to the
        actual prices charged to the customer agencies for four out of six ECTD projects
        sampled and three out of nine FEI projects sampled. Specifically, interagency
        agreements that were provided as support for the actual prices charged covered multiple
        projects; however, there was no way to identify how these projects related to the
        interagency agreements provided.

Details of our review were provided to HRS separate from this report.

5 U.S.C. Section 1304(e)(3)(A) states that customers must reimburse HRS “for those services
and supplies provided at rates estimated by the Office as adequate to recover expenses of
operation ... .”

OPM’s FMM, chapter 7, states “The RF [Revolving Fund] is required to operate on a break-even
basis over a reasonable period of time by charging users for allowable costs as established under
OPM Special Authority and other Federal authorities. The RF will ensure that billing rates only
recover allowable costs and are adjusted at least annually to eliminate any surplus. However, if
the RF accumulates a surplus for the period covered this represents the Federal share of billings
claimed for reimbursement, the RF needs to adjust billing rates to eliminate surpluses, or if the
inverse is true, and a deficit occurs, billings need to be adjusted to recapture lost previous under
billings.”


                                                16 	                        Report No. 4A-HR-00-13-055
According to HRS’s Pricing Methodology, dated August 6, 2013, each pricing methodology
should follow the basic framework. Relevant steps include:

   		 “Each price should be based on expenses for that solution … the total projected expenses
       should be apportioned out based on what percentage of expenses each product or service
       generates.”
   		 “Make adjustments to unit pricing if appropriate … it is appropriate to adjust unit pricing
       to reflect lower costs resulting from economies of scale. When adjustments to unit
       pricing are made the rationale and calculations should be documented and the adjusted
       pricing structure should be applied uniformly to federal customers.”
   		 “Review and adjust if necessary … adjustments based on more qualitative factors rather
       that quantitative factor should be accounted. However, deviations should be explained
       and justified.”
   		 “Document the results … constant evaluation of past data to better inform future
       decisions … should maintain a database of expenses, units of service provided, prices,
       and revenue calculations. Any adjustment made as a result of analysis of the data should
       also be documented in order to preserve a history for future reference.”

GAO’s SICFG states that, “Internal control and all transactions and other significant events need
to be clearly documented, and the documentation should be readily available for examination.
The documentation should appear in management directives, administration policies, or
operating manuals and may be in paper or electronic form. All documentation and records
should be properly managed and maintained.”

GAO’s SICFG also states that, “Control activities are the policies, procedures, techniques and
mechanisms that enforce management’s directives … Control activities occur at all levels and
functions of the entity. They include a wide range of diverse activities such as approvals,
authorizations, verifications, reconciliations, performance reviews, maintenance of security, and
the creation and maintenance of related records which provide evidence of execution of these
activities as well as appropriate documentation.” Examples of control activities are: reviews by
management at the functional or activity level, control over information processing, proper
execution of transactions and events, and appropriate documentation of transactions and internal
control.

As a result of HRS not having proper supporting documentation for the pricing of its program
areas, customer agencies may be under- or over-charged. In addition, since we cannot determine
if the program areas’ prices of their projects are reasonably related to their costs, HRS may not
be properly pricing its services charged to their customer agencies.




                                               17 	                        Report No. 4A-HR-00-13-055
Recommendation 4

We recommend that HRS develop policies and procedures that include a discussion of
documentation retention for the methodology and applicable supporting documents used to
determine its prices charged to customer agencies.

HRS’s Response:

HRS concurs with this recommendation.

“Improvement to retention policies and procedures related to pricing calculations would be both
appropriate and beneficial. HRS will formalize a document management plan to support our
pricing methodology, including data or other files used to calculate prices. This will include a
standardized naming system, folders, and location for documentation retention purposes. We
will also train staff to ensure they possess adequate knowledge of documentation retention
policies and procedures.”

Recommendation 5

We recommend that HRS strengthen their internal controls to ensure that projects are properly
reviewed and approved to prevent projects created in error.

HRS’s Response:

HRS concurs with this recommendation.

“System controls are currently in place to prevent any charges, revenues, or other transactions
against any projects once a project is identified as an error in data entry; however, we are not
able to show the project as "Canceled" in the system of record (CBIS). HRS is working with the
Office of Chief Financial Officer's CBIS Team to resolve this issue.”




                                               18                         Report No. 4A-HR-00-13-055
IV. MAJOR CONTRIBUTORS TO THIS REPORT


INTERNAL AUDITS GROUP

           , Auditor

          , Auditor

         , Auditor

          , Auditor

         , Auditor-in-Charge




                , Senior Team Leader

                , Group Chief




                                       19   Report No. 4A-HR-00-13-055
                                                        APPENDIX 

                                          Received on April17, 2015 


                         UNITED S TATES OFFICE OF PP-RSONNEL M ANAGBMENT 

                                           Wa~ltiJJgton, DC 20415 



Uu man Rcsoun::es
    SoJUIIOIIS




       MEMORANDUM FOR:
                                         Grouf) Chief, Internal Audits Group


       FROM:
                                          I   p y   '    '     I                anagement Services


       SUBJEC1':                          Draft Report on the Audit of Human Resources Solutions'
                                          Pricing Methodologies (Repon No. 4A-HR-00-13-055)


       Thank you for providing us the opportunity to respond to the Office ofthe Inspec tor
       General (OlG} draft repot1, Audit of Human Resources Solutions' Pricing Methodologies
       (Repott No. 4A-J-I R-00-13..{)55).

        We recognize that even the most weiJ run programs benefit from external evaluations and
        V.'C appreciate your input ns we co ntinue to enhance our progratns. Our responses to yo\tr
        recommendations are provided below and a technical comment is included as a footno lc. 1


        Recomm end ut ion I : We recommend that I IRS develop policies and procedures for
        creating the monthly Financial Snt~pshot Report by H RS' Resource Managemen t Group
        (RMG). Tite policies and procedure should include a discussion of documentation
        retention, underlying assumptions and the methodo logy used to develop and allocate the
        cost pools.

        M.nnngemen t R es ponse   Ill   R eeo mm e nd nl io n I :
        HRS does not co ncur with this recommendation. While HRS agrees that methodology for
        financial management reporting should be documented , the underlying issue will only be
        resolved by developing a standardized report from the financial system ofrecord (CBJS).
        The Monthly Financial Snapshot Repo rt is an internal ad-hoc management execution rePQrt
        only intended to close the gap between repons Clln'ently available from the CBIS financial
        system o f record and HRS ' financial management reporting requ irements. The Monthly
        Fi iUIIIciul Snapshot Report is formatted as a spreadsheet, and while the fonnulns in each



                    F ootnote # 1 Redacted by OIG. Not rele\·;mt to F inal Repo11.




                                                              20                           Report No. 4A-HR-00-13-055
cell demonstrate the underlying methodology, this format is not conducive to documenting
every cell's calculation in text formal.

HRS agrees that the requirements for reporting this critical financial information
should be fully documented. HKS has requested a standard report be developed in
the CBIS itnancial system of record containing all data points and cost allocations
required to successfully manage reimbursable product Hues. Numerous discussions
have taken place on thls topic, and HRS fully supports working with the Offi ce of
the Chief Financial Officer's CBI Team on the development of a standard report to
eliminate the need for the ad-hoc Monthly Financial Snapshot Report.

Recommendation 2: We recommend that HRS develop policies and procedures for the
detenninntions of fees charged by its program areas to customer agencies. The policies and
procedures should include a discussion of documentation retention, underlying
assumptions. and the methodology used to detemljne its rates.

Management Resnonse to Recommendation 2:
I IRS concurs. While HRS has appropriate controls in place to ensure that the fees charged
by program areas to customer agencies accurately recover the costs of products and services
providt:d, we agree that we need to strengthen practices related to the review and retention
of documentation supporting pricing calculations.

J IRS' Pricing Methodology document provides gu idelines for pricing calculations
to ensure customers are accurately charged for the services provided. Billing
processes and systems established in cooperation with the OCFO ensure customers
are billed on an accurate and timely basis. While the pricing methodology
established by HRS is followed by each of the practice areas, complete supporting
documentation has not been maintained consistently. As recommended, we will
develop policies and procedures to formalize the review process and standardize the
retention of supporting documentation and underlying assumptions.

Recomment.htlion 3: We recommend thnt I IRS strengthen their internal controls to ensure
that the inputs used in HRS's pricing calculations are properly reviewed, approved, and
documented.

Mana~:emcnt Res ponse to Recommendation 3:
I IRS concurs. Again, while the pricing methodology established by HRS is
followed by each of the practice areas, complete supporting documentation has not
been maintained consistently. IIR v.ljll formalize an annual review process to
ensure each practice area is adhering to HRS' guidelines and maintaining
appropriate documentation. We will also train staff on establishing and maintaining
accurate and thorough documentation of pncing calculations, supporting
documentation and underlying assumptions.




                                               21                                 Report No. 4A-HR-00-13-055
Rccommendn lio n 4: We rc¢Ommcnd that JIRS develop policies nnd procedures that 

include a discussion ofdocumentation retention for the methodology and applicable 

supporting document~ used to determine its prices charged to customer agencies. 


Manngeme nt Hcs ponse In Recommend nli on 4 ; 

IIRS concurs Improvement to retention policies nnd procedures related to pricing 

calculations would be both appropriate and beneficial IIRS will fonn ali:.-.e a 

document munagernent plan to support our pricina methodology, including data or 

other files used to calculate prices. This will include a stundardizcd naming sy tern, 

folders, and location for documentution retention purposes. We will also train stafT 

to ensure Ihey possess adtl<.Juatc knowledge of documentation retention policies and 

procedures . 


Recommendation S: We recommend that HRS strengthen their internal controls to ensure 

that project<~ are properly reviewed and approved to prevent projects created in error. 


Manage men t      f{ c~non   e lo Reco mm e ndation S; 

IIRS concurs. System controls are currently in pluce to prevent any charges, revenues, or 

other tranl>acltons against any projeciS once u project is identified os an error m data entry~ 

however, we ore not able to show the ptojectns "Canceled" in the system of record (CBIS). 

HRS is ~.. orking with the Office of Chief Financial Officer's CBIS Team to resolve this 

issue. 



We appreciare the opportunity to rcsp<Jnd to this droll re_    . If ou have an    uestions 

regarding our response. please eonract                  nt 



cc: 	      Kathleen M. McGettigan
           Deputy Associate Director, Human Resources Solutions

           JosephS. KcMedy 

           Associate Director. 1-b1man Resources Solutions 


           Ma•·k W. Uimbert 

           Associate Director, Merit System Accountability and Compliance 


           Janet L. Homes 

           Director, Internal Oversight and Compliance 





                                                    22 	                             Repoxt No. 4A-HR-00-13-0 55
                                                                                                                         



                                       Report Fraud, Waste, and 

                                           Mismanagement 


                                                  Fraud, waste, and mismanagement in
                                               Government concerns everyone: Office of
                                                   the Inspector General staff, agency
                                                employees, and the general public. We
                                              actively solicit allegations of any inefficient
                                                    and wasteful practices, fraud, and
                                               mismanagement related to OPM programs
                                              and operations. You can report allegations
                                                          to us in several ways:


                        By Internet: 	             http://www.opm.gov/our-inspector-general/hotline-to-
                                                   report-fraud-waste-or-abuse


                          By Phone: 	              Toll Free Number:                              (877) 499-7295
                                                   Washington Metro Area:                         (202) 606-2423


                           By Mail:                Office of the Inspector General
                                                   U.S. Office of Personnel Management
                                                   1900 E Street, NW
                                                   Room 6400
                                                   Washington, DC 20415-1100
                     
                                                                                                                         
                                                                                                                         


                                                             -- CAUTION --
This audit report has been distributed to Federal officials who are responsible for the administration of the audited program. This audit report may
contain proprietary data which is protected by Federal law (18 U.S.C. 1905). Therefore, while this audit report is available under the Freedom of
Information Act and made available to the public on the OIG webpage (http://www.opm.gov/our-inspector-general), caution needs to be exercised
before releasing the report to the general public as it may contain proprietary information that was redacted from the publicly distributed copy.

                                                                       23 	                                    Report No. 4A-HR-00-13-055