This report presents the results of our review on whether the Internal Revenue Service (IRS) received goods and services as stipulated in the PRIME contract and at the proper price. In summary, we determined that the lack of a stable program management organizational structure is hindering the administration of the PRIME contract.

In commenting on a draft of this report, IRS management concurred with our findings and agreed to take corrective actions on most of our recommendations. IRS management believes that the Contracting Officer (CO) has not been managing the budget but rather monitoring the available funding and recommending the reallocation of funds to cover shortfalls. Management stated that the Business Systems Modernization Office (BSMO) budget staff is responsible for managing the budget and relies on the support of the CO. We agree that the BSMO is the appropriate function to manage the budget; however, at the inception of our review, the BSMO had not been established and the CO stated that he was managing the budget. We believe that, with the establishment of the BSMO, the appropriate personnel will now be overseeing the budget process. Management’s comments have been incorporated into the report where appropriate, and the full text of their comments is included as an appendix.

Executive Summary

Objective and Scope

Background

Results

Conclusion

Appendix I – Detailed Objective, Scope, and Methodology

Appendix II – Major Contributors to This Report

Appendix III – Report Distribution List

Appendix IV – Management’s Response to the Draft Report

Executive Summary

The PRIME contract will be used to design and develop an information system that allows the Internal Revenue Service (IRS) to effectively and efficiently process tax information, provide customer service, and maintain accurate financial records. The PRIME contract is an Indefinite Delivery Indefinite Quantity contract under which cost reimbursable, fixed price, time and materials, and performance-based task orders may be issued. As requirements are determined, a task order is issued to the contractor to perform the work. Once the work is completed, the user function inspects and either accepts or rejects the goods or services. The overall objective of this review was to determine if the IRS received goods and services as stipulated in the PRIME contract and at the proper price.

We determined from the task orders reviewed that the IRS is properly accepting goods and services from the PRIME contractor and that the Contracting Officer’s Technical Representatives (COTR) were questioning costs invoiced by the PRIME contractor. Although the IRS is receiving and accepting goods and services at the appropriate price, we identified that undefinitized task orders are being issued and program oversight is lacking.

We determined that 25 of the 29 task orders reviewed, totaling $62 million in obligations, had been issued undefinitized. Task orders had not been definitized because requirements were vague, incomplete, or constantly changing, and the rates for consultants, sub-contractors, and profit percentages had not been agreed upon.

Undefinitized task orders provide the Contracting Officer (CO) the flexibility to issue task orders quickly so that work may begin. An undefinitized task order allows the contractor to be reimbursed for allowable costs up to a limitation amount stated in the task order. However, the government’s negotiating position is diminished as work is completed under an undefinitized task order since the contractor must be reimbursed for allowable costs incurred. Therefore, the contractor has little incentive to quickly negotiate the terms and conditions.

The PRIME contract is expected to span several years and is in the preliminary phases. Procurement management has asserted that the practice of issuing undefinitized orders will cease as the contract progresses. Since the PRIME contract is expected to span several years and is in the preliminary phases, we plan to assess the reasonableness of using undefinitized orders and associated risks in a subsequent audit.

A stable program management organizational structure has not been established to oversee the systems modernization effort, and this has impacted the administration of the PRIME contract. The Treasury Inspector General for Tax Administration issued a report to the IRS addressing the need to implement a program management organizational structure to oversee system modernization. We believe the establishment of this organizational structure will provide better oversight to the modernization efforts, as well as assist in the administration of the PRIME contract. However, additional steps are needed after the structure has been established to facilitate administration of the PRIME contract.

We determined the acceptance criteria developed in the task orders we reviewed were not specific enough to effectively evaluate the goods received. Without specific acceptance criteria, the government’s ability to accept work products that meet program needs is limited. We also determined that the Procurement function is providing input to the program management plan and the CO is helping maintain the budget for the PRIME program. We believe that the CO has other contracting responsibilities and should not be resolving budget issues. These duties are better suited for personnel in the program management office.

Procurement management should work with the program office and the contractor to definitize the current task orders as quickly as possible and seek to issue definitized task orders as the contract progresses. Once a program management office has been established, Procurement management should assist the program office in ensuring acceptance criteria are descriptive enough to effectively evaluate the work products received and relinquish the duties of managing the budget for the PRIME program.

Management’s Response: The IRS has made significant progress in the area of program management for Business Systems Modernization. The IRS has developed performance-based templates to improve the specificity of requirements, negotiated rates with the contractor, and elevated the priority of task order definitization. The performance-based templates should ensure that acceptance criteria are descriptive. IRS management agrees that it is not a CO’s responsibility to manage the budget. However, they believe that the CO has not been managing the budget but rather monitoring the available funding and recommending the reallocation of funds to cover shortfalls. Management stated that the Business Systems Modernization Office (BSMO) budget staff is responsible for managing the budget and relies on the support of the CO.

Office of Audit Comment: At the inception of our review, the BSMO had not been established and the CO stated that he was managing the budget. We believe that, with the establishment of the BSMO, the appropriate personnel will now be overseeing the budget process.

Objective and Scope

The overall objective of this review was to determine if the Internal Revenue Service (IRS) received goods and services as stipulated in the PRIME contract and at the proper price. Our review evaluated the process used to accept goods and services. This review did not evaluate the quality of the goods or services received. The audit work was performed from December 1999 to March 2000 at IRS Procurement offices in the Washington, D.C. area. We reviewed contract files for all 29 task orders that had been awarded at the time of our review. The audit was performed in accordance with Government Auditing Standards.

Details of our audit objective, scope, and methodology are presented in Appendix I. Major contributors to this report are listed in Appendix II.

Background

The PRIME contract will be used to design and develop an information system that allows the IRS to effectively and efficiently process tax information, provide customer service, and maintain accurate financial records. It is estimated that this contract could span 15 years at a cost of up to $5 billion. The contract was awarded to Computer Sciences Corporation in December 1998.

The PRIME contract is an Indefinite Delivery Indefinite Quantity (IDIQ) contract, which permits flexibility in both quantities and delivery scheduling and limits the government’s obligation to a minimum quantity. Under this IDIQ contract, cost reimbursable, fixed price, time and materials, and performance-based task orders may be issued.

Task orders and IDIQ contracts are used when the government has a general idea of the services it will need but does not know the specific requirements needed. The requirements and cost/pricing arrangements are negotiated on a task order by task order basis. As these requirements are determined, a task order is issued to the contractor to perform the work. Once the work is completed, the user function inspects and either accepts or rejects the goods or services.

Results

We determined from the task orders reviewed that the IRS is properly accepting goods and services from the PRIME contractor. Work products were generally received on schedule, and the Contracting Officer’s Technical Representatives (COTR) were properly reviewing and accepting products. When applicable, the COTRs were also questioning and rejecting costs invoiced by the PRIME contractor.

While the IRS appears to be receiving and accepting goods and services at the appropriate price, we identified a high number of undefinitized task orders and a lack of overall program oversight.

Undefinitized Task Orders Are Being Issued

We determined that 25 of the 29 task orders reviewed, totaling $62 million in obligations, had been issued undefinitized. Procurement officials asserted that vague, incomplete, or constantly changing requirements have resulted in the use of undefinitized task orders. The Contracting Officer (CO) also explained that the task orders had not been definitized because the rates for consultants, sub-contractors, and profit percentages had not been agreed upon. The CO explained that the contractor had not provided adequate documentation to evaluate the proposed rates.

The use of undefinitized task orders provides the CO the flexibility to issue task orders quickly but exposes the IRS to unnecessary effort and possible liability for additional costs if the pricing elements are not quickly finalized. Federal Regulations preclude agencies from entering into undefinitized contract actions without proper justification and provide that definitization should occur within 180 days after the contractual action or before completion of 40 percent of the work to be performed, whichever occurs first. None of the task orders reviewed had exceeded these criteria.

An undefinitized task order allows the contractor to be reimbursed for allowable costs up to a limitation amount stated in the task order. However, the government’s negotiating position is diminished as work is completed under an undefinitized task order since the contractor must be paid allowable costs incurred. Therefore, the contractor has little incentive to quickly negotiate terms and conditions.

For example, a task order with an initial limit of $1 million was issued for key technology elements of the Modernization Blueprint and Blueprint 2000 without the contractor’s fixed fee (profit) being specified. The fee was to be based on a graduated structure linked to various delivery dates and paid after acceptance of the documents. However, the deliverables were accepted even though the fee had not been agreed to, which diminished the government’s negotiating position relating to the graduated fee structure.

Procurement management has asserted that the practice of issuing undefinitized task orders will cease as the contract progresses. Since the PRIME contract is expected to span several years and is in the preliminary phases, we plan to re-evaluate management’s use of undefinitized task orders in a subsequent audit. However, emphasis should be placed on timely definitizing existing contractual actions.

1. Procurement management should work with the program office and the contractor to definitize the current task orders and seek to issue definitized task orders as the contract progresses.

Management’s Response: The IRS has developed performance-based templates to improve the specificity of requirements and capture desired outcomes. In addition, the Procurement organization has negotiated rates with the contractor, and these rates have been used to definitize current task orders and issue definitized new task orders. Further, IRS and contractor executives have prioritized task order definitization and are meeting to monitor definitization status.

Lack of a Stable Program Management Organizational Structure Is Hindering the Administration of the PRIME Contract

The IRS has not established a stable program management organizational structure for systems modernization. Without a fully functional program management office, aspects of administering the PRIME contract are being hindered, including the development of specific acceptance criteria and management of the budget.

We determined the acceptance criteria developed in the task orders we reviewed were not specific enough to effectively evaluate the goods received. The program area is an integral part of the procurement process and is responsible for providing the technical expertise during contract administration. This includes developing acceptance criteria to be used by the COTR to effectively evaluate a product received from the contractor to ensure it meets program needs. Without an organizational structure to assist in developing specific acceptance criteria, the IRS may not be receiving products that meet the modernization goals.

The government is entitled to reject work that does not strictly comply with contract requirements if the requirements are specifically called out in the contract and can be measured. If the requirements are not specifically present in the contract and cannot be measured, the government can reject the work only if it will not be suitable for its intended purpose.

The acceptance criteria in the PRIME task orders provide that the government will review deliverables to ensure completeness, accuracy, and compliance with the requirements specified in the statement of work. However, the requirements in the statement of work were not specific and could not be measured. For instance, one task order requires the contractor to create or update Software Requirements Specification documents. The scope of work does not provide any other information on what this deliverable should contain. Therefore, the IRS cannot determine if the deliverable is accurate and complete since it is not specific as to whether the deliverable should be a new or updated deliverable. Nor can it determine if the deliverable complies with the statement of work, as there are no specifics in the statement of work to measure against. Therefore, the government will have to accept the work unless it can show the work is not suitable for its intended purpose.

Another function of the program management office is managing the budget for the program and obtaining adequate funding when needed. To obtain funding for the PRIME program, management plans are prepared and submitted through the IRS, the Department of the Treasury, the Office of Management and Budget, the General Accounting Office, and the Congress for approval to obtain the next phase of funding needed to move forward with the program. The Congress releases funding for short periods of time, and the PRIME program must show what it has accomplished through the management plans before the new request is approved.

Because the organizational structure for the program management office has not been established, the Procurement function is providing input to the program management plan and the CO is helping maintain the budget for the PRIME program. We believe that the CO has other contracting responsibilities and should not be resolving budget issues. We believe personnel in the program office have a better insight into user needs and should assume these responsibilities.

The Treasury Inspector General for Tax Administration (TIGTA) issued a report to the IRS that concludes, without a stable program management organizational structure, the IRS has not been able to request the release of Information Technology Investment Account (ITIA) funds timely. We also believe the delays in receiving funding are impacting the IRS’ ability to monitor contract performance.

One aspect of contract administration is to monitor the contractor’s "burn rate" to determine when the contractor will run out of funds. According to the CO, the "burn rate" was a weekly estimate, which did not always accurately reflect the actual costs incurred.

We believe the establishment of a stable program management organizational structure will provide better oversight to the modernization efforts, as well as assist in the administration of the PRIME contract. As noted earlier, the TIGTA issued a report addressing the need to establish a program management organizational structure. The following recommendations are steps to improve the administration of the PRIME contract once the program management structure has been established.

Recommendations

2. Procurement management should assist the program office in ensuring acceptance criteria in the task orders are descriptive enough to effectively evaluate the work products received.

Management’s Response: The IRS has developed performance-based templates to ensure acceptance criteria are descriptive. The templates include criteria for measuring whether desired outcomes are achieved.

3. Procurement management should relinquish their duties of managing the budget and only assist the program office with budget concerns with the program.

Management’s Response: IRS management agrees that it is not a CO’s responsibility to manage the budget. However, they believe that the CO has not been managing the budget but rather monitoring the available funding and recommending the reallocation of funds to cover shortfalls. The Business Systems Modernization Office (BSMO) budget staff is responsible for managing the budget and relies on the support of the CO.

Office of Audit Comment: At the inception of our review, the BSMO had not been established and the CO stated that he was managing the budget. We believe that, with the establishment of the BSMO, the appropriate personnel will now be overseeing the budget process.

Conclusion

The practice of not definitizing a contract places the IRS at risk for incurring additional costs due to a diminished negotiating position and unnecessary effort. Although the practice of issuing undefinitized tasks early in the contract may be justified, Procurement and program management should seek to minimize the issuance of undefinitized tasks. Also, the lack of an organizational structure for the program management office is hindering the administration of the PRIME contract. We believe the establishment of a stable program management office will result in development of descriptive acceptance criteria in the task orders and better management of the budget for the program.

Detailed Objective, Scope, and Methodology

The overall objective of this review was to determine if the Internal Revenue Service (IRS) received goods and services as stipulated in the PRIME contract and at the proper price. To accomplish this objective, we:

1. Determined if the receipt and acceptance process provides adequate assurance that the IRS is paying only for goods and services that have been received in accordance with contract terms.
0. Identified that 29 task orders had been issued at the time we began our review.
1. Reviewed the acceptance criteria in the task order to determine if specific acceptance procedures are established for each task order.
2. Reviewed the contract milestones and determined whether the IRS received the deliverables as scheduled and evaluated the process used by the program office to accept the deliverables.
3. Determined how the IRS deals with products that do not pass acceptable standards.
4. Interviewed Contracting Officer’s Technical Representatives (COTR) to determine whether the IRS is requesting additional deliverables not specified in the task order.
5. Determined whether points of contact have been established in field locations to expedite the receipt and acceptance process.
2. Determined whether the IRS was properly invoiced for goods and services received under the PRIME contract.
0. Determined how the COTR is verifying and accepting labor categories and hours billed by the contractor.
1. Determined whether COTRs are tracking costs incurred by the contractor to the planned work schedule to ensure project and funding are progressing on schedule ("burn-rate").
2. To verify whether the contractor was appropriately paid, we judgmentally traced 7 of 37 invoices with disallowed costs to the Automated Financial System to determine whether only allowed costs were paid.

1. Determined whether contract/task order modifications were appropriate and definitized task orders.
1. Analyzed dates and reasons for modifications.
2. Determined whether costs associated with the modifications were appropriate and properly justified.

Major Contributors to This Report

Maurice S. Moody, Associate Inspector General for Audit (Headquarters Operations and Exempt Organizations Programs)

John Wright, Director

Nancy LaManna, Audit Manager

Terrey Haley, Senior Auditor

Anna Ugoletti, Senior Auditor

Chinita Coates, Auditor

Report Distribution List

Deputy Commissioner Operations C:DO

Chief, Agency-Wide Shared Services A

Director, Procurement A:P

Office of the Chief Counsel CC

Director, Legislative Affairs CL:LA

Director, Office of Program Evaluation and Risk Analysis M:OP

Office of Management Controls CFO:A:M

National Taxpayer Advocate C:TA

Audit Liaison: Director, Procurement A:P

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.