This report presents the results of our follow-up review of the corrective actions for the contract administration issues reported in our 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).

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 – Outcome Measures

Appendix V – Management's Response to the Draft Report

Executive Summary

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.

Objective and Scope

This audit was initiated as a follow-up to contract administration issues reported in the prior Service Center Mainframe Consolidation (SCMC) audit The Service Center Mainframe Consolidation Project Has Made Significant Progress, But Project Execution and Administration Risks Remain (Reference Number 199920068, dated September 1999).

The prior audit reported that controls over technical aspects of contract administration remain inadequate. We recommended that all delivery orders be defined by June 1999 and that proper contract administration procedures be followed.

The overall objective of the current audit was to determine whether Internal Revenue Service (IRS) management effectively addressed the reported contract administration issues and to quantify the resulting outcomes.

We conducted the audit between March and May 2000, in accordance with Government Auditing Standards. We gathered and reviewed information from the SCMC Project Office in McLean, Virginia; the IRS Procurement Office in Oxon Hill, Maryland; the Tennessee Computing Center in Memphis, Tennessee; and the Martinsburg Computing Center in Martinsburg, West Virginia.

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

Background

In 1995, the Office of Management and Budget issued Bulletin Number 96-02 providing a requirement for consolidation of data centers with large mainframe operations. In 1997, the IRS formed the SCMC Project Office with an objective to consolidate mainframe computers from 10 service centers into 2 computing centers. In addition, over 17,000 desktop computer terminals were to be replaced. The SCMC Project Office reported in March 2000 that the 5-year cost estimate for the SCMC Project was nearly $480 million, which includes extensive contractor support.

Results

The IRS began implementing corrective actions to address the contract administration issues that we previously reported. In the prior audit, we reported that goods and services estimated at $7 million were procured without the contracting officer’s authorization. Corrective action to address this issue was completed when the Assistant Commissioner (Procurement) reminded the SCMC Project Office and contractor staffs that the Contracting Officer is the only one authorized to obligate the Government. The remaining corrective actions were partially completed.

• The validation and reconciliation of the goods ordered and the validation of the pricing of the goods and services ordered have been completed, with the exception of third-party software (and related maintenance) and training.

As of April 19, 2000, 99 of 136 delivery orders had been completely or partially definitized resulting in cost savings of $40.2 million. Completion of definitization may result in additional cost savings.

• Verification of goods delivered and travel reports has been assigned to existing computing center personnel, but the responsibility for verifying contractor hours worked has not been assigned.

Definitization of All Delivery Orders for the Service Center Mainframe Consolidation Project Has Not Been Completed

Under the Service Center Support System contract used for mainframe consolidation, hardware and software purchases are charged based on a Firm Fixed Price (FFP), and services are charged based on the contractor’s level of effort. In a FFP environment, requirements need to be well defined to allow fair and reasonable prices to be negotiated. Undefinitized 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. This technique provides the Contracting Officer the flexibility to issue delivery orders quickly, but in a FFP environment, exposes the IRS to possible liability for additional costs if the pricing elements are not quickly finalized.

In the prior SCMC audit, we reported that delivery orders were not adequately definitized and recommended that all delivery orders be definitized by June 1999. To help accomplish this, we recommended that: 1) the SCMC Project Office validate the inventory of goods and services ordered for accuracy, quantity, etc. and 2) the Procurement Division validate the goods and services for pricing accuracy. With the exception of third-party software (and related maintenance) and training, these items have been completed. However, definitization has not been completed because the process of definitizing the contracts "after the fact" has been much more labor-intensive and time consuming than Procurement personnel originally anticipated. As of April 19, 2000, there were 136 delivery orders (valued at approximately $352.3 million) issued against the contract. The definitization status and approximate value of the 136 delivery orders are as follows:

• 74 ($178.9 million) were fully definitized.
• 25 ($80.8 million) were in the process of being definitized.
• 37 ($92.6 million) needed to be definitized or the status of definitization needed to be researched by Procurement personnel.

Delivery order definitization efforts completed as of April 2000 have resulted in cost savings of $40.2 million ($31.8 million in deobligated funds and $8.4 million in additional delivery order cost reductions). Completing the definitization of the remaining delivery orders could result in additional cost savings. We estimated the additional savings to be approximately $7.6 million if the savings occur at the same rate as savings from previously definitized delivery orders. See Appendix IV for the cost savings details.

1. The Chief, Agency-Wide Shared Services, should ensure that all current delivery orders are completely definitized and future delivery orders are timely definitized.

Management’s Response: The IRS has completed negotiation of outstanding issues, has implemented weekly reporting of undefinitized actions, and is finalizing all current and prior year delivery orders issued as undefinitized.

Invoices for Services Still Are Not Adequately Verified

On very large complex contracts, there should be Government Task Managers (GTMs) on site to report to the Contracting Officer’s Technical Representative (COTR). The GTMs verify labor hours worked, travel, etc. and report receipt and acceptance of these items to the COTR. Without the information GTMs provide, the COTRs cannot adequately verify the invoices. Inadequate verification of the invoices could lead to the IRS paying for services not received or for inappropriate travel costs.

In the prior SCMC audit, we reported that invoices for services and travel were not adequately verified and recommended that full-time GTMs be established. Management proposed to establish full-time GTMs by January 1, 1999. During the current audit, we found that full-time GTMs were not in place as proposed because the request for funding the positions was not approved.

Instead, the GTM responsibilities for verifying delivered goods and travel reports were assigned as additional duties to existing personnel at both computing centers. However, no one has been assigned to provide the information needed to verify the invoices for services. Consequently, these invoices are being paid without adequate verification. For Fiscal Year 1999, the major delivery orders issued for support services (labor and travel) included $21.4 million for labor, which were not adequately verified.

The SCMC Project Office is in the process of developing procedures for verifying the contractor hours worked. However, it is not certain when the procedures will be finalized and implemented. Without the information provided by the verification procedures or the GTMs, the COTRs cannot adequately verify the invoices for services. Inadequate verification of these invoices could lead to the IRS paying for services not received.

Recommendation

2. The Chief Information Officer should provide the resources needed to adequately verify the invoices for services.

Management’s Response: The IRS has established a process under which all SCMC contractor employee travel is pre-approved, formally designated 13 current staff members as GTMs at locations where contractor labor is routinely deployed, and developed written procedures requiring each contractor employee to submit a weekly report to the GTMs documenting hours worked and the work performed. The GTMs validate the reports. The COTR uses this information to approve invoices.

Conclusion

IRS management has made progress in improving contract administration; however, it must ensure that all delivery orders are completely definitized and that the resources needed to adequately verify invoices for services are provided to reduce the risk of incurring increased or inappropriate costs.

Detailed Objective, Scope, and Methodology

The overall objective of this audit was to determine whether Internal Revenue Service (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.

1. To determine whether all delivery orders (for goods and services) have been definitized and validated, we:

1. Obtained and reviewed the most current report that lists the delivery orders’ definitization and validation status.
2. Evaluated the results of the inventory verification/validation.

1. Reviewed the results of the comparison [performed by the Contracting Officer’s Technical Representative (COTR) Group] of what had been ordered to the delivery orders proposed by the vendor.
2. Reviewed the results of the physical inventory of all equipment delivered to and installed at the two computing centers.
3. Reviewed the results of the reconciliation between the delivery orders (test I.B.1.) and the physical inventory (test I.B.2.).

3. Reviewed the Procurement Division’s validation of pricing for goods and services.

1. Reviewed the negotiated price agreement(s) with the vendor for the delivery orders and determined the net adjustment of the delivery order(s) price (i.e., additional funds obligated or funds deobligated).
2. Requested the monthly briefings about the status of the validation. The briefings were to have been prepared by the Contracting Officer and the Chief, Tax Processing Systems Branch, and presented to the Director, Office of Tax Systems Acquisition.

3. Reviewed the adjustments made to the Service Center Mainframe Consolidation (SCMC) budget as a result of delivery order definitization.

1. Requested for review the financial settlement reached with the vendor by applying overpayments/underpayments to delivery orders or vouchers.
2. Reviewed SCMC Project Office budget documentation reflecting the additional obligation or deobligation of funds resulting from the price negotiations.

1. To evaluate IRS management’s actions to improve contract administration, we:
1. Determined whether full-time Government Task Managers (GTMs) and on-site support staff were in place to monitor and verify deliveries, hours worked by the contractor, and travel taken by the contractor for the SCMC Project.
1. Obtained a current SCMC Project organization chart to see which individuals were performing the GTM duties.
2. Requested a walk-through to determine how the COTRs monitored GTM activities to ensure that contractor hours worked were tracked and work performed for invoiced services was validated.
2. Determined what steps the Procurement Division took to ensure that the SCMC Project Office and contractor knew who was authorized to direct the contractor to perform work.

Major Contributors to This Report

Scott E. Wilson, Associate Inspector General for Audit (Information Systems Programs)

Gary V. Hinkle, Director

Danny R. Verneuille, Audit Manager

Mark K. Carder, Auditor

Dawn B. Smith, Auditor

Tina Wong, Auditor

Report Distribution List

Deputy Commissioner Modernization C:DM

Deputy Commissioner Operations C:DO

Chief Information Officer IS

Chief, Agency-Wide Shared Services A

Deputy Chief Information Officer, Operations IS

Director, Enterprise Operations IS:E

Director, Information Resources Management IS:IR

Director, Procurement A:P

Director, Mainframe Consolidation Project Office IS:E:CO

Director, Legislative Affairs CL:LA

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

Office of Management Controls CFO:A:M

Office of the Chief Counsel CC

National Taxpayer Advocate TA

Audit Liaisons:

Outcome Measures

This appendix presents detailed information on the measurable impact that our recommended corrective actions have had on tax administration. These benefits will be incorporated into our Semiannual Report to the Congress (SAR).

Definitization of all delivery orders for the Service Center Mainframe Consolidation (SCMC) Project has not been completed. To realize any additional cost savings, the Chief, Agency-Wide Shared Services, should ensure that all current delivery orders are completely definitized and future delivery orders are timely definitized.

We reported at the conclusion of 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) that delivery orders (goods and services contracted for) were not adequately definitized. We recommended that Internal Revenue Service (IRS) management ensure that all delivery orders be definitized by June 1999. The IRS has made some progress toward completing definitization of all delivery orders. As of April 19, 2000, the definitization status of the 136 delivery orders (valued at approximately $352.3 million) obligated under the Service Center Support System contract were as follows:

• 74 ($178.9 million) were fully definitized.
• 25 ($80.8 million) were in the process of being definitized.
• 37 ($92.6 million) needed to be definitized or the status of definitization needed to be researched by Procurement personnel.

Delivery order definitization efforts completed as of April 2000 have resulted in cost savings of $40.2 million ($31.8 million in deobligated funds from delivery orders and $8.4 million in 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.

Type of Outcome Measure:

• Cost Savings - Funds Put to Better Use (Actual and Potential)

Our audit of the IRS’ actions to correct reported SCMC contract administration issues identified the following value for the measure:

• Actual cost savings - definitization efforts as of April 2000 resulted in $40.2 million in cost savings: $31.8 million in deobligated funds from delivery orders and $8.4 million in additional delivery order cost reductions.

Note: In the prior SCMC report and the SAR for April 1, 1999 - September 30, 1999, we reported $19 million of the total cost savings of $40.2 million. The remaining

• Potential cost savings - 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.

For the $31.8 million in deobligated funds, we interviewed personnel and reviewed supporting documentation provided to us for the actual deobligated monies realized from delivery order definitization efforts as of April 2000. We compared the deobligated amounts on the SCMC Project Office budget documents to the related amounts on a delivery order modifications list from Procurement. The following is a summary of the details:

* The cost savings from these 14 fully definitized delivery orders totaled $22.1 million. ** The cost savings from these 8 delivery orders, which were in the process of being definitized, totaled $9.7 million.

For the $8.4 million in additional delivery order cost reductions, we reviewed a listing of delivery order modifications that showed decreases that were not included in the $31.8 million referred to above. The following is a summary of the details:

For the potential cost savings of approximately $7.6 million, we used the 74 fully definitized delivery orders to determine the cost savings rate. The cost of the 74 delivery orders prior to definitization was $229.7 million. We divided the amount deobligated from the 74 delivery orders ($22.1 million) by the cost (prior to definitization) of the 74 delivery orders ($229.7 million) to get a 9.6 percent savings rate. The savings rate was applied to the cost of the 62 undefinitized delivery orders ($180.5 million prior to definitization) to get a potential savings of $17.3 million. The $17.3 million was reduced by the $9.7 million deobligated from partially definitized delivery orders, thus, resulting in approximately $7.6 million in potential savings from completing definitization.

Management's Response to the Draft Report

The response has been 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.