Pricing Discrepancies on the Long Term Maintenance Computing Center Contract (TIR-NO-96-D-0021)

 

October 2001

 

Reference Number:  2002-10-008

 

This report has cleared the Treasury Inspector General for Tax Administration disclosure review process and information determined to be restricted from public release has been redacted from this document.

October 17, 2001

 

MEMORANDUM FOR CHIEF, AGENCY-WIDE SHARED SERVICES

 

FROM:     (for) Pamela J. Gardiner /s/ Scott E. Wilson

                 Deputy Inspector General for Audit

 

SUBJECT:     Final Audit Report - Pricing Discrepancies on the Long Term Maintenance Computing Center Contract (TIR-NO-96-D-0021) (Audit # 200110038)

 

This report presents the results of our review of the long term maintenance computing center contract.  The overall objective of this review was to determine whether an allegation regarding pricing discrepancies for contract TIR-NO-96-D-0021 could be substantiated.

In summary, we found that the contractually agreed upon price for specific contract line items was incorrectly priced by the contractor and/or its subcontractor.  Specifically, the Internal Revenue Service (IRS) was billed monthly for the yearly costs of maintenance coverage for nine contract line items.  Additionally, the IRS paid for a higher priced software upgrade than that provided by the contractor.  Approximately $580,000 was associated with these billing discrepancies.  We presented the results to an Assistant United States (U.S.) Attorney, who considered the prosecutable merits of the case.  After consulting with the contractor’s legal counsel, the Assistant U.S. Attorney declined civil and criminal prosecution.

Management’s Response:  Procurement management agreed with the results and conclusions presented in this report.  However, their avenues to recoup the costs are limited.  The contract is completed and the contractor holds no other contract with the IRS.  In addition, the contractor has filed for Chapter 11 in the U.S. Bankruptcy Court.  Procurement management and IRS legal counsel agree that it is not in the best interest of the IRS to expend resources to file and support a claim against the contractor through the Department of Justice and the bankruptcy court system.  As an alternative, the IRS did issue a letter to the contractor requesting an equitable adjustment.  However, given the contractor’s bankruptcy status, recouping any costs is unlikely and will be a lengthy process.  Management’s comments have been incorporated into the report where appropriate, and the full text of their comments is included as Appendix IV.

Copies of this report are being sent to the IRS managers who are affected by the   report recommendation.  Please contact me at (202) 622-6510 if you have questions or Daniel R. Devlin, Assistant Inspector General for Audit (Headquarters Operations and Exempt Organizations Programs), at (202) 622-8500.

Table of Contents

Background

Pricing Discrepancies With the Monthly Software Maintenance

The Internal Revenue Service Was Mischarged for a One-Time Software Upgrade

Recommendation 1

Appendix I – Major Contributors to This Report

Appendix II – Report Distribution List

Appendix III – Outcome Measures

Appendix IV – Management’s Response to the Draft Report

 

Background

The Internal Revenue Service (IRS) awarded a Long Term Maintenance Computing Center (LTMCC) contract to provide on-call remedial maintenance, preventive maintenance, and support services for Federal Information Processing resources at the Detroit and Martinsburg Computing Centers and the IRS National Headquarters.  Equipment and software coverage under this contract was needed to provide uninterrupted support for all equipment and software associated with the agency’s information processing system at these sites.

The LTMCC contract was competitively awarded to a contractor on June 1, 1996, through the 8(a) set-aside program.  The contract was for 1 year with the option to renew for 4 more years.  The software licensing and maintenance requirements portion of the contract was for firm fixed price indefinite delivery.

The audit work was performed from April to October 2000 at the IRS Procurement Office in Oxon Hill, Maryland.   The issuance of the audit report was delayed at the request of an Assistant United States (U.S.) Attorney who was considering the prosecutable merits of the case.

The scope of our audit was limited to reviewing this allegation and the events surrounding the contractor’s selection and administration of the contract.  Audit tests included reviewing contracting and subcontractor records and interviewing contracting personnel associated with the contract.  Since the audit was initiated in response to a complaint, we did not follow all of the standards for planning.  However, all other components of the audit were performed in accordance with Government Auditing Standards.

Pricing Discrepancies With the Monthly Software Maintenance

The Treasury Inspector General for Tax Administration (TIGTA) Office of Investigations received an allegation that the contractor had mischarged the IRS for monthly software maintenance fees.  As part of this review, the TIGTA subpoenaed select subcontractor records to try and substantiate the allegation.

The subpoenaed subcontractor records indicated that the IRS was mischarged on the following Contract Line Items (CLIN):  24075, 24085, 26030, 26035, 26066, 26067, 26068, 26069, and 23044.  The subcontractor records indicated that these services were provided to the contractor at a significantly lower cost than that for which the IRS was billed.

Prior to contract award, the contractor teamed with a subcontractor to help bid on the LTMCC contract.  The subcontractor had been the previous contractor on the LTMCC contract but was precluded from bidding on this contract because it had graduated from the 8(a) program.  As part of the teaming agreement, the subcontractor was responsible for all software maintenance and software management activities for the program.  The subcontractor was also responsible for providing proposal support for technical and cost proposals.

During the IRS’ solicitation for bids, there was confusion by prospective bidders regarding the pricing of CLINs and the information requested by the IRS.  Therefore, concurrent with a solicitation amendment, the IRS issued responses to contractor questions that notified prospective bidders to reflect monthly prices in bid submissions.

After the bidders submitted their best and final offers, the IRS price analyst reviewed the bids for price reasonableness.  The analyst compared the software maintenance and upgrade tables as one price between bidders and substantiated pricing consistency, price realism, and price reasonableness at the total price level.

Based on the best value determination, the contractor was awarded the contract in June 1996.  According to IRS contracting personnel, the contractor representation that the proposed fees were monthly, and that the fees consisted of the contractor’s cost plus a fixed percent mark-up, were material to the award decision.  At the time of award, CLINs 24075, 24085, 26030, 26035 were incorrectly priced.  The IRS subsequently modified the contract by adding CLINs 26066, 26067, 26068, 26069, and 23044 to the contract, and based the price reasonableness of these additional CLINs on the prior subcontractor contract prices.  However, this subcontractor had inappropriately priced these CLINs in the previous contract.

According to available documentation, it appears that the subcontractor advised the contractor in May 1997 about inadvertently charging the IRS the yearly estimates on a monthly basis for the nine CLINs.  However, we found no documentation that the contractor notified the IRS of the errors or that the contractor adjusted its monthly billings to compensate for the errors.  This practice of charging the annual maintenance fee on a monthly basis resulted in the IRS unnecessarily paying the contractor $433,000 over the life of the contract.

The Internal Revenue Service Was Mischarged for a One-Time Software Upgrade

The IRS paid for a higher-priced software upgrade than that provided by the contractor.  The IRS ordered a specific CLIN upgrade; however, the contractor replaced the item ordered by the IRS with another, lower-priced product.

In July 1997, the IRS ordered CLIN 30295 IBM SAA AD/CYCLE C/370 product upgrade for approximately $199,500.  The subcontractor notified the contractor that a different product was being proposed and that there was no CLIN for this upgrade in the original proposal.  The subcontractor stated that the proposed one-time charge was a completely different product from that stated in CLIN 30295.

Available documentation indicated that the subcontractor billed the contractor for the proposed software upgrade versus CLIN 30295.  The cost to the contractor for this one-time upgrade was $46,908.  Therefore, the estimated cost to the government should have been approximately $52,500, allowing the contractor a modest increase for general and administrative expenses and profit.  We found no indication that the contractor notified the IRS of the product differences.  As a result of these product differences, the IRS unnecessarily spent approximately $147,000 for this one-time software upgrade.

The mischarges on the software maintenance and the one-time upgrade have been discussed with an Assistant U.S. Attorney, who considered the prosecutable merits of the case.  After consulting with the contractor’s legal counsel, the Assistant U.S. Attorney declined civil and criminal prosecution.  This audit report is for informational purposes and whatever administrative action the IRS deems necessary. 

 Recommendation

1.      Procurement management should take the necessary administrative actions to recover the questioned costs of $580,000 associated with the pricing discrepancies for the monthly software maintenance and one-time upgrade.

Management’s Response:  Procurement management’s avenues to recoup the costs are limited.  The contract is completed and the contractor holds no other contract with the IRS.  Moreover, the contractor has filed for Chapter 11 in the U.S. Bankruptcy Court.  Procurement management and IRS legal counsel agree that it is not in the best interest of the IRS to expend resources to file and support a claim against the contractor through the Department of Justice and the bankruptcy court system.  As an alternative, the IRS issued a letter to the contractor requesting an equitable adjustment in the amount of $580,000.  However, given the contractor’s bankruptcy status, recouping any costs from the contractor is unlikely and will be a lengthy process.

Appendix I

 

Major Contributors to This Report

 

Maurice Moody, Assistant Inspector General for Audit (Headquarters Operations and Exempt Organizations Programs)

John Wright, Director

Nancy LaManna, Audit Manager

Terrey Haley, Senior Auditor
Bobbie Draudt, Auditor

 

Appendix II

 

Report Distribution List

 

Commissioner  N:C

Director, Procurement  A:P

Chief Counsel  CC

National Taxpayer Advocate  TA

Director, Legislative Affairs  CL:LA

Director, Office of Program Evaluation and Risk Analysis  N:ADC:R:O

Office of Management Controls  N:CFO:F:M

Audit Liaison – Director, Procurement  A:P

 

Appendix III

Outcome Measures

 

This appendix presents detailed information on the measurable impact that our findings will have on tax administration.  These benefits will be incorporated into our Semiannual Report to the Congress.

Type and Value of Outcome Measure:

·         Questioned Cost – Actual; $433,000 pricing discrepancies – monthly maintenance fees (see page 1).

·         Questioned Cost–Actual; $147,000 pricing discrepancies – software upgrade (see page 3).

Methodology Used to Measure the Reported Benefit:

§         Monthly Maintenance Fees:  We reviewed subpoenaed documents and determined that for nine contract line items the annual amount of maintenance was charged on a monthly basis.  For each of these nine contract line items, we calculated the difference between what the monthly maintenance should have been and what the IRS was invoiced, then multiplied the result by the contract life (60 months).

§         One-time Software Upgrade:  We used subcontractor documentation to ascertain what should have been charged for the product and allowed a modest 12 percent increase for general and administrative (G&A) expenses and profit.  We estimated the contractor’s cost at $52,500 ($46,908 plus the 12 percent G&A and profit increase, rounded); the IRS was invoiced for $199,500.  The difference is $147,000.

Appendix IV

Management’s Response to the Draft Report

 

The response was removed due to its size.  To see the complete response, please go to the Adobe PDF version of the report on the TIGTA Public Web Page.