The Internal Revenue Service (IRS) is in the process of consolidating the mainframe computer operations used to process tax data. The consolidation involves moving mainframe processing from the IRS’ 10 service centers to new mainframe computers located in 2 computing centers—the Tennessee Computing Center and the Martinsburg Computing Center. As of March 2000, the 5-year cost estimate for the consolidation project was nearly $480 million, which includes extensive contractor support.

The overall objective of this audit was to determine whether IRS management effectively addressed contract administration issues reported in the prior audit The Service Center Mainframe Consolidation Project Has Made Significant Progress, But Project Execution and Administration Risks Remain (Reference Number 199920068, dated September 1999) and quantify the resulting outcomes. The prior audit reported that controls over technical aspects of contract administration remain inadequate.

The IRS began work to address the contract administration issues from our prior report. Although corrective actions have not been completed as planned, the IRS has already realized measurable outcomes. However, further delays in completing the corrective actions increase the risks of incurring additional or inappropriate costs.

In the prior audit, we reported that delivery orders were not adequately definitized and recommended that IRS management ensure that all delivery orders were definitized by June 1999. Undefinitized delivery orders are those in which the contractor has been authorized to begin work, but the cost of the work has only been proposed and not negotiated. Since the prior audit, inventory reconciliation and price validation have been completed for all delivery orders, except for third-party software (and related maintenance) and training. The process of definitizing the contracts "after the fact" has been much more labor-intensive and time consuming than Procurement personnel originally anticipated. Consequently, 62 of 136 delivery orders (about $173.4 million of $352.3 million) are not completely definitized. Definitization efforts as of April 2000 have resulted in $40.2 million in cost savings, of which $31.8 million have been deobligated. The remaining $8.4 million represents additional delivery order cost reductions. Completion of definitization may result in additional cost savings of approximately $7.6 million if the savings occur at the same rate as savings from previously definitized delivery orders.

The prior audit recommended that the Service Center Mainframe Consolidation Project Office provide full-time, on-site Government Task Managers (GTMs) to verify invoices for delivered goods, services (labor), and travel. However, full-time GTMs were not hired. Instead, the tasks of verifying delivered goods and travel costs were assigned as additional duties to employees at the computing centers, but no one was assigned to verify invoices for services. For Fiscal Year 1999, the major delivery orders issued for support services (labor and travel) included $21.4 million in labor, which were not adequately verified. Inadequate verification of invoiced services could lead to the IRS paying for services not received.

The Chief, Agency-Wide Shared Services, should ensure that all current delivery orders are completely definitized and future delivery orders are timely definitized, and the Chief Information Officer should provide the resources needed to adequately verify the invoices for services.

Management’s Response: Management agreed and has taken action on our recommendations. Management’s complete response to the draft report is included as Appendix V.