Watchdog recommends that EPA limit cost-plus-award-fee contracts

The Environmental Protection Agency might have wasted millions on excessive cost-plus-award-fee contracts, in part because of a lax and subjective rating system in which nearly all contractors were graded highly, according to a report issued this week by the agency's inspector general.

The IG reviewed nine such contracts and found that contractors were paid nearly $16 million in award fees during the past decade. The award-fee pool for those contracts was $20 million.

It's possible that not all of those added fees were justified, the IG said. EPA regularly gave contractors ratings of "exceeds expectations" or "outstanding," which facilitated the higher incentive fees, according to the report. A rating of "satisfactory" or lower disqualifies a contractor from receiving an award fee.

Of 956 final ratings, 85 percent were higher than satisfactory. According to the IG, the agency was unable to document the basis for these ratings, despite extra administrative costs associated with managing these contracts.

"The CPAF process is subjective in nature, and numerous personal judgments occurred without being documented," the report found. "Because EPA consistently provided high ratings, we believe award fees are more of an expectation for contractors than a factor that motivates excellence."

Such award-fee contracts include a base amount with the prospect of additional fees based on vendor performance as judged by EPA's Performance Evaluation Board.

Board members told the IG that they gave significant consideration to "end results and environmental outcomes" achieved by the contractors because factors such as timeliness, budget and results achieved often were unknown until a project was complete. Evaluation board members also acknowledged there was a tendency to nearly always award contractors some level of award fee because a satisfactory rating seems to have a negative connotation."

The IG did not attempt to gauge whether the rankings were accurate or the awards fees were duly earned, but the office did find that the limited documentation procurement officials used to measure performance often did not support the grade issued.

For example, a high rating on one contract was justified only with the following comment: "The project management was excellent with no problems encountered and costs were within scope of work." A project that merely encountered no problems or stayed within budget should have earned a grade of satisfactory, the IG said.

The report also found problems with the base fees paid by EPA. Agency acquisition regulations state that base fees cannot exceed 3 percent of the estimated cost of the contract, exclusive of the award fee. The IG noted, however, that five contracts that exceeded that amount, often by 1 percent to 2 percent.

"EPA employees were unaware of the limitation, and headquarters did not note the issue," the report said.

The IG estimated that EPA already wasted about $100,000 on excessive base fees and likely will overpay an additional $762,000 during the remaining life of the contracts if they are not modified.

In recent years, EPA has moved away from incentive-laden contracts, as many procurement officials have come to view competition as a more effective way to motivate performance. As of October 2006, the agency had 14 cost-plus-award-fee contracts valued at more than $4 billion.

The IG recommended that EPA use these contracts only after performing a cost-benefit analysis and getting approval from an agency manager. Award fees should be issued only after thorough documentation is provided, the report said.

EPA generally concurred with the recommendations. In a written response, Assistant Administrator Luis Luna said the agency intended to revise its Contracts Management Manual and Acquisition Handbook to "adequately address contract types and the need to use considerations such as risk and cost-benefit analyses when selecting the type of contract." EPA expects to complete its revisions by Sept. 30.