The Treasury Communications System (TCS) contract was awarded to TRW, Inc. in September 1995 and this contractor took full control of managing the Department of the Treasury’s communications network in August 1996. The TCS contract is for the design, implementation, management, operation, maintenance, and enhancement of a "worldwide" communications network for the Department and its bureaus. The TCS is the largest civilian centrally managed and secure network in operation today. In January 1999, the TCS served over 6,000 locations nationwide with approximately 150,000 users. The Internal Revenue Service (IRS) usage encompasses a significant portion of the contract.

The overall objective of this review was to assess the effectiveness of internal controls for controlling the initiation, acceptance, and payment for the work done under the TCS contract.

We found that the Department of the Treasury and the IRS have taken action to improve the administration of the TCS contract. The Treasury TCS Program Management Office and several IRS employees were co-located with the contractor in order to manage the contract better and be more effective in resolving problems. During June through December 1998, the Contracting Officer assessed approximately $170,000 in credits on the billing invoices when the contractor failed to timely complete the work requests. Additionally, the IRS removed, from monthly maintenance, equipment that was located at the TCS warehouse and not in use, which saved approximately $114,000 a month in maintenance costs. While much progress has been made, we identified the following additional opportunities for improvements in monitoring and administering the TCS contract.

The IRS is not properly verifying invoices for the TCS contract to ensure that all costs are appropriate. We identified approximately $633,000 in questionable or unnecessary costs for circuits and equipment maintenance. These charges will cost the IRS approximately $5.5 million over 5 years, using a present value factor that assumes the maintenance costs increase by 2 percent each year and a federal funds rate of 5 percent. We questioned these costs because we could not locate the circuits or equipment, could not identify the specific piece of equipment during our site verifications, or found the charges were for sites no longer occupied by the IRS. Additionally, the IRS is paying approximately $13,000 a month for maintenance of metal cabinets and racks. These charges will cost the IRS approximately $720,000 over 5 years, using a present value factor that assumes the maintenance costs increase by 2 percent each year and a federal funds rate of 5 percent. We believe these are unnecessary charges and all equipment of this type should be removed from maintenance coverage. When we brought these problems to the attention of program personnel, they told us there were not enough resources to perform a complete verification of the invoices each month. However, because of the problems identified during our audit and the cost savings associated with them, we believe the IRS needs to more aggressively monitor and verify its portion of the TCS costs.

While some improvement has been made, the contractor is still, on average, completing service requests 75 days after the IRS’ requested operational dates. We noted that the delays in completing service requests have cost the IRS additional maintenance charges of approximately $55,000. To assist in completing new requests, the IRS has implemented a process where the requests are prioritized. Additionally, during June through December 1998, the IRS implemented a penalty system in which it credited the contractor’s invoices when service requests were not completed by the agreed to date. Procurement officials informed us they believe the invoice credits brought emphasis to the issue and the Government received the performance improvement it wanted. However, we believe continued improvement is necessary because delays in completing service requests could negatively affect the IRS’ operations and hinder its tax processing activities.

We believe that Information Systems management should ensure that an in-depth analysis is performed on TCS invoices to identify billings for circuits and equipment that no longer exist. Also, a process should be implemented to ensure that the IRS is receiving the appropriate credits when billing issues arise. Additionally, Procurement management should ensure that appropriate invoice credits are imposed when the contractor does not meet established completion dates.

Management’s Response: The Director of Procurement indicated IRS management is working with Treasury representatives and the contractor to create an invoice that is easier to verify. In addition, the IRS has switched to a cost-plus-award-fee arrangement that will allow the contractor to earn a higher fee for improved performance. If this incentive method does not work, IRS management will reconsider imposing invoice credits.

Office of Audit Comment: As of the date of this report, the Information Systems organization had not responded to our November 26, 1999, request for written comments on the findings and recommendations contained in a draft of this report.