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.
Pricing Discrepancies With
the Monthly Software Maintenance
The Internal Revenue
Service Was Mischarged for a One-Time Software Upgrade
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
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.
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 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.
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
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
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
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.