UNITED STATES DEPARTMENT OF EDUCATION

OFFICE OF INSPECTOR GENERAL

August 24, 2007

Control Number
ED-OIG/A19G0006
Lawrence Warder
Acting Chief Operating Officer
Federal Student Aid
Union Center Plaza III
830 First Street, N.E.
Washington, DC 20002

Dear Mr. Warder:

This Final Audit Report, entitled Controls Over Contract Monitoring for Federal Student Aid
Contracts, presents the results of our audit. The purpose was to determine whether Federal
Student Aid’s (FSA) contract monitoring process ensures (1) contractors adhere to the
requirements of the contract, and (2) FSA receives the products and services intended. Our
review included evaluation of the 10 FSA contracts for which the highest amount of payments
were made during Fiscal Year (FY) 2005.

BACKGROUND

In April 2005, the Secretary of Education delegated procurement authority to the Chief Operating
Officer (COO) in FSA, to procure property and services in the performance of functions
managed by FSA as a performance based organization. Even though FSA has its own
procurement authority, it is obligated to follow the Department of Education’s (Department)
policies and procedures, in addition to its own FSA-specific policies and procedures.

Contract management staff includes the Contracting Officer (CO), Contract Specialist (CS), and
the Contracting Officer’s Representative (COR). The CO has overall responsibility for contract
management. However, the contract monitoring process is a team effort between the CO, CS,
and COR. Contract monitoring is based on the terms and conditions in each contract, the
requirements set forth in the Federal Acquisition Regulation (FAR), and the Department’s and
FSA’s policies and procedures.

For FY 2005, payments under Department contracts totaled $1,474,385,045. Payments to FSA
contracts totaled $843,696,458.09 (57 percent). During the year, FSA was responsible for 95 of

The Department of Education's mission is to promote student achievement and preparation for global competitiveness by fostering educational
excellence and ensuring equal access.
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ED-OIG/A19G0006 Page 2 of 20

519 total active contracts (18 percent). FSA was the Principal Office (PO) with the highest
amount of contract payments for FY 2005, and was responsible for the second highest amount of
active contracts during the year.

AUDIT RESULTS

We found FSA’s contract monitoring process did not always ensure contractors adhered to
contract requirements and FSA received the products and services intended. FSA staff did not
always follow established regulations, policies or procedures in 9 out of 10 contracts reviewed.
Specifically, we found FSA staff did not always ensure appropriate review and approval of
invoices, appropriately communicate acceptance/rejection of deliverables, issue modifications
for contract changes, and appropriately issue or sign COR appointment letters. This occurred
because FSA staff were not always familiar with applicable policies and procedures, and due to
resource limitations.

In its response to the draft audit report, FSA concurred with the recommendations. The complete
text of the response is included as Attachment 3 to this report.

FINDING - Improvements Were Needed in Monitoring of FSA Contracts

We noted at least one area where improvements were needed in contract monitoring for 9 of the
10 contracts reviewed. Specifically, we noted that FSA staff did not always:

1. Ensure appropriate review and approval of invoices (9 contracts),

2. Appropriately communicate acceptance/rejection of deliverables (5 contracts),
3. Issue and/or sign modifications for contract changes (3 contracts), and
4. Appropriately issue and/or sign COR appointment letters. (2 contracts)

FAR Section 1.602-2 states,

Contracting officers are responsible for ensuring performance of all necessary

actions for effective contracting, ensuring compliance with the terms of the
contract, and safeguarding the interests of the United States in its contractual
relationships.

Department Directive (Directive) OCFO [Office of the Chief Financial Officer]:2-108, Contract
Monitoring for Program Officials, dated September 16, 2004, Section II, states,

The policy of the Department is: (a) to monitor every contract to the extent
appropriate to provide assurance that the contractor performs the work called for
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ED-OIG/A19G0006 Page 3 of 20

in the contract; and (b) to develop a clear record of accountability for

performance.
Details on the issues noted in each area follow. Attachment 2 includes details of issues noted for
each contract.

Issue 1 – FSA Staff Did Not Ensure Invoices Were Properly Reviewed and Approved

In 9 out of the 10 contracts reviewed, we noted the COs and/or COR staff did not follow
applicable policies and procedures for processing invoices. Specifically, we found FSA staff did
not ensure invoices were reviewed and approved by the COs, and incentive payments were
verified by appropriate staff.

Invoices Were Not Properly Reviewed and Approved by Contracting Officers

In 9 out of 10 contracts reviewed, we found the COs were not properly involved in the invoice
approval process. (ED99DO0002, ED01GS0002, ED03CO0102/0002, ED04CO0004,
ED04GS0002, ED04PO0377, ED04PO1805, ED05CO0008, PM95009001)1

All of the COs for these contracts stated that the CORs, along with the FSA budget office, are
responsible for processing invoices. Specifically, we found when invoices are received they are
sent directly to the FSA budget office. The invoices are then routed to the responsible COR for
proper verification. The COR verifies the invoice and creates a receipt in the Contracts
Purchasing and Support System (CPSS).2 The COR then sends the invoice and supporting
documentation to the budget office, indicating that it is acceptable to proceed with approval and
payment of the invoice. The budget office posts the receipt in CPSS and approves the invoice
for payment in the Department’s Financial Management System Software (FMSS).3

Directive Section VII.N.4 states,

The CO is responsible for approving a contractor’s invoices for payment, but

usually after review and advice from the COR in conjunction with the CO’s own
analysis concerning the contents of the invoice/voucher and the contractor’s
performance relative to what is being billed.

FSA stated the invoice approval process was transferred to FSA’s budget office in 2002 as a
result of resource and workload issues in the Acquisitions office. FSA agreed that COs should be
involved in the invoice process and noted they were in the process of implementing a policy in
which the COs would assume responsibility for both receipt and invoice approval. Warrants that
were issued for the budget office to approve payments will be withdrawn.

Incentive Payments Were Not Verified by Appropriate Staff

1
Contract numbers are provided parenthetically for each issue area. See Attachment 1 for a list of the contracts
reviewed, and Attachment 2 for details of the issues noted by contract.
2
CPSS is a component system of the Department of Education Central Automated Processing System (EDCAPS).
3
Invoices are approved in both CPSS and FMSS.
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In 1 of the 10 contracts reviewed, we found FSA did not ensure that incentive payments were
verified by appropriate staff. (ED04CO0004) The COR directed Office of Inspector General
(OIG) staff to a Program Analyst in the Contract Performance & Analysis Group to discuss how
to verify the incentive payment from one of the invoices reviewed. The Program Analyst could
not assist us and had to seek the assistance of the Independent Verification & Validation (IV&V)
contractor to explain how the incentive payment was calculated. In addition, the IV&V
contractor stated that she verified all of the incentive payments during our scope period, and that
they were in the process of transitioning so that FSA will understand how to verify the payments
when the IV&V contract ends.

Directive Section VII.G.2.d states,

There are many varieties of payment provisions that might be incorporated into
contracts depending on the nature of the work and other factors. It is the
responsibility of the COR to become familiar with the payment provisions
applicable to each contract he or she must monitor. . . . The COR must review
invoices individually and collectively as part of the responsibility to monitor the
contractor’s progress in performing under the contract.

FAR Section 7.503 (a) states,

Contracts shall not be used for the performance of inherently governmental

functions.

Section 7.503 Part C.12.VII states inherently governmental functions include,

Determining whether contract costs are reasonable, allocable, and allowable….

FSA did not agree and stated that while the IV&V contractor did verify the formula and resulting
calculations, the decision to make payment remained a COR recommendation and required
budget office approval. OIG did not agree with FSA’s response based on the fact that the COR
stated he relies on his staff for proper review of invoices, which is the basis for his payment
decision.

FSA did not fulfill its responsibility to ensure payments to contractors were appropriate. As a
result, FSA lacks assurance that payments are proper and its interests are protected.

Issue 2 – FSA Staff Did Not Appropriately Communicate Acceptance/Rejection of

Deliverables

In 5 out of the 10 contracts reviewed, we noted CORs did not adequately recommend
acceptance/rejection of deliverables. (ED01GS0002, ED03CO0102/0002, ED04CO0004,
ED04GS0002, ED04PO0377)
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Directive Section VII.N.2 states,

Only a CO can formally accept or reject deliverables. However, with respect to

deliverables which the contractor must send directly to the COR, the COR will
recommend acceptance or rejection to be furnished in writing to the CO.

Directive Section V.I states,

The CO is the Government’s exclusive agent as party to a contract—

the contractor is the other party – and therefore the only person with the authority
to enter into, administer, and terminate contracts and make related determinations
and findings. The CO responsible for a particular contract is named in the
contract.

FSA’s COR Contract Monitoring Handbook, dated April 7, 2005, Section 28.0,
Deliverable Acceptance/Payment, states,

The contractor may be required to send deliverables either to the COR or to the
CO. For deliverables sent to the COR, the COR generally is responsible for
conducting the inspection and recommending acceptance to the CO. Only a CO
can formally accept or reject deliverables. However, with respect to deliverables
which the contractor must send directly to the COR, the COR will recommend
acceptance or rejection in writing to the CO.

FSA’s COR Contract Monitoring Handbook, Section 28.0, also provides an example of a
contract deliverable inspection worksheet, which the COR should use to communicate details of
acceptance/rejection of deliverables to the CO.

In three contracts reviewed, the CORs stated they accept deliverables for the contracts, not the
COs. (ED03CO0102/0002, ED04GS0002, ED04PO0377) In one of these contracts, the COR
stated she returns deliverables to the contractor if necessary and has the contractor resubmit them
with the changes made. (ED04GS0002) In another contract, the Program Manager indicated he
was “informally” rejecting about one report per month, providing written comments to the
contractor and asking them to resubmit with appropriate changes made. (ED04PO0377) By
sending deliverables back to the contractor for correction, the COR and Program Manager were,
in effect, rejecting the deliverables. The CO was not involved in the rejection of these
deliverables in either contract.

In one contract reviewed, the COR stated he recommended acceptance of deliverables to an

employee within FSA’s budget office who is responsible for approving invoices. Specifically,
recommendation of acceptance of deliverables is communicated to the “designated CO” in the
budget office instead of the CO who actually administers the contract. (ED04CO0004)
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In one of the contracts reviewed, the COR stated that acceptance of deliverables was indicated in
CPSS. Prior to the payment of invoices, a receipt for the invoice is created in CPSS and a
recommendation of acceptance is noted on the receipt. However, we found this process did not
specifically document the COR’s recommendation for acceptance or rejection of specific
deliverables. (ED01GS0002)

Without appropriate communication of deliverable acceptance/rejection, FSA may have

difficulty pursuing action against a contractor for nonperformance. Acceptance or rejection of
deliverables by unauthorized personnel may compromise efforts to enforce contract
requirements.

FSA stated existing staffing levels limit the level of involvement from the COs. Specifically, the
COs were involved in cases where the deliverables did not meet the standards in the contracts as
identified by the COR. In cases where the COR recommended acceptance, no further action was
required by the CO to demonstrate acceptance except by receipt approval in the system.
However, this specific approval was made by FSA’s budget office instead of the CO. FSA
concurred it was not an effective procedure and stated they were in the process of implementing
a policy where the Administrative Contracting Officer approves all receipts and therefore
systemically accepts deliverables.

Issue 3- FSA Staff Did Not Appropriately Issue and/or Sign Modifications For Contract
Changes

In 3 of the 10 contracts reviewed, modifications were not appropriately issued and/or signed for
significant contract changes. Directive Section VII.I, “Initiating Changes to a Contract,” states,

Few contracts go to completion without some type of change or modification.

The COR should anticipate the likely need for modifications and be prepared to
deal with a variety of situations which seem to call for a formal change to the
contract. Only a CO can issue modifications to the contract. A modification can
be accomplished in accordance with a contract provision or by mutual agreement
between the Government and the contractor.

In 1 contract, 5 out of 72 bilateral modifications were not signed by the contractor.

(ED01GS0002) In addition, the CO did not give proper notification regarding termination of
Virtual Data Center (VDC) printing services that were no longer deemed necessary. FSA staff
stated they verbally communicated to the contractor on February 18, 2005, that certain VDC
printing services were no longer needed, effective February 28, 2005, however, this change was
never incorporated into a written modification.

In another contract, the deliverables schedule was modified by the COR, without the CO issuing
a modification. (ED04GS0002) As a result, nine deliverables were submitted past their official
due dates. FSA agreed with this issue, and stated the CO did not delegate authority to the COR
as it relates to changing the deliverable schedule(s). FSA also stated in this case, while fully
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ED-OIG/A19G0006 Page 7 of 20

within the COs authority for a unilateral modification, it appears that changes were made outside
of the appropriate process.

In one contract, the modification assigning a new COR was not issued timely. (ED04CO0004)
The COR was officially appointed on January 1, 2004. The modification was issued on
November 28, 2005, which is almost two years later than the COR appointment date.
Modifications are issued to ensure that all commitments of the contractor and the Government
are met according to contract requirements. Without issuing modifications for relevant contract
changes, the Government cannot ensure that its needs and interests are protected.

Issue 4- FSA Staff Did Not Appropriately Issue and/or Sign COR Appointment Letters
Timely

In 2 of the 10 contracts reviewed, COR appointment letters were not issued and/or signed in a
timely manner by the COR. Directive Section VI.C.2-3 states the CO,

2. Ensures that the COR is designated for each contract. 3. Issues to the COR
for
each contract a memorandum outlining the COR’s basic contract monitoring
responsibilities and limitations, and explains this information to the extent judged
appropriate. COR appointment letters are issued not later than seven (7) days
from the date of the contract award.

Directive Section VI.E.1 states the COR

Ensures receipt of appointment memorandum from the CO by no later than seven

(7) days from the date of the award. Reads, signs and returns one copy of the
original memorandum to the CO for inclusion in the official contract file within
ten (10) days of receipt of the memorandum.

Specifically, we noted the following:

• In two contracts, a COR delegation letter was not found in the contract files for the
original COR. (ED03CO0102/0002, ED04CO0004 )

• In one contract, the current COR of the contract was officially appointed on January
1, 2004; however, the appointment letter was not signed until July 9, 2004.
(ED04CO0004)

The COR appointment memorandum reminds the COR of his/her responsibilities and limitations
in the monitoring process. The memorandum includes such things as training and certification
requirements, monitoring and communication responsibilities, and actions the COR does not
have the authority to perform. Without issuing and signing these documents timely, the CO does
not have assurance that the COR understands the extent and limitations of his/her responsibilities
and authority.
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ED-OIG/A19G0006 Page 8 of 20

Summary

Improvements were needed in monitoring by FSA staff for 9 of the 10 contracts reviewed. FSA
staff did not always follow established regulations, policies, and procedures. FSA staff did not
appropriately review and approve invoices or appropriately communicate acceptance/rejection of
deliverables. In addition, FSA staff did not always issue and/or sign modifications for contract
changes. Finally, COs did not ensure COR appointment letters were issued and/or signed timely.

As a result, FSA lacks assurance that payments are proper and its interests are protected.
Contract actions by unauthorized personnel may compromise efforts to enforce contract
requirements. By not issuing modifications for relevant contract changes, the Government
cannot ensure that its needs and interests are protected. Untimely issuance and/or signoff of
COR appointment memoranda could result in confusion over the responsibilities and limitations
of the COR’s duties.

Recommendations

We recommend that the Acting Chief Operating Officer, take actions to:

1.1 Develop and implement a process to ensure COs conduct proper analysis and approval of
invoices.

1.2 Ensure contract staff have the technical expertise needed to adequately verify payments.

1.3 Develop and implement a process to ensure acceptance/rejection of deliverables is

appropriately communicated by the COR to the CO. Ensure the CORs provide written
recommendations of deliverable acceptance/rejection to the COs. This could include the
use of the deliverable inspection worksheet that is suggested in the FSA COR Contract
Monitoring Handbook.

1.4 Ensure the CO is the only individual communicating acceptance/rejection to the

contractor.

1.5 Ensure formal modifications are issued for relevant contract changes. Issue modifications
for the contracts noted above with regard to deliverable termination and changes in
deliverable due dates. (ED01GS0002, ED04GS0002)

1.6 Ensure COR appointment letters are issued timely by the CO, and signed and returned
timely by the COR. Review all FSA contracts to ensure that all current CORs have
received an appointment letter and that a signed copy is included in the contract file.

FSA Comments
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ED-OIG/A19G0006 Page 9 of 20

In its response to the draft audit report, FSA concurred with the recommendations. FSA stated it
has implemented an Acquisition Policy Letter that lays out the manner in which deliverable
receipt and vendor invoices are to be processed. FSA stated that, in accordance with the new
policy, COs have assumed responsibility for approval of receipts and invoices, and are the only
individuals that communicate acceptance and rejection of deliverables.

FSA stated that while it concurred with the recommendation to ensure formal modifications are
issued for relevant contract changes, it did not believe that modifications for the noted contracts
were appropriate. FSA stated the COR overstepped the authority delegated to them and the CO
determined the changes were not reasonable. As a result, FSA stated the contractors would be
held to the contract requirements as they exist.

FSA stated it reviewed contract files to ensure the appropriate COR was appointed in CPSS and
that all had received delegations of their authority placed in the contract files.

The complete text of the response is included as Attachment 3 to this report.

OBJECTIVES, SCOPE, AND METHODOLOGY

The objectives of our audit were to determine whether FSA’s contract monitoring process
ensures (1) contractors adhere to the requirements of the contract, and (2) FSA receives the
products and services intended. To accomplish our objectives we performed a review of internal
control applicable to the process for monitoring contracts within FSA. We interviewed FSA staff
to obtain an understanding of the process. We evaluated prior audits and reviews relating to the
contract monitoring process to determine possible vulnerabilities and any areas that required
audit follow-up. We reviewed requirements in the FAR and Department and FSA policy and
procedures related to the contract monitoring process. We reviewed contract files maintained by
FSA staff, and other related materials that supported the contract monitoring process for a sample
of contracts as further described below.

We focused our review on contracts that were active during the period October 1, 2004, through
September 30, 2005. We obtained a listing of contract payments for FY 2005 for all principal
offices from OCFO staff. The listing was extracted from FMSS, a component of EDCAPS. In
order to focus our review on contracts with significant activity that were most likely to require
active contract monitoring, we refined this list to eliminate payments that represented
interagency, purchase orders, and other types of payments, and those that totaled less than
$100,000 for a particular contract during the year. In total, we identified 9,080 payments to 519
different contracts that totaled $1,474,385,044 for the year.

We determined that FSA had the second highest number of payments of any PO (1,689 or 18.6
percent), the second highest number of active contracts (95 or 18 percent), and the highest
amount of payments during the year ($843,696,458.09 or 57 percent). We selected FSA for
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ED-OIG/A19G0006 Page 10 of 20

review because it represented a significant number of the active contracts and amount of
payments during the scope period.

We selected for further review the 10 FSA contracts with the highest amount of contract
payments for the year. These contracts totaled $557,196,291.91 or 66 percent of the
$843,696,458.09 total payments to FSA contracts. These contracts were judgmentally selected
for review to provide coverage of the highest amount of contract payments. See Attachment 1
for a list of the contracts selected for review, and the number and dollar value of FY 2005
payments to those contracts.

During our review, we relied on computer-processed data obtained from EDCAPS/FMSS

representing contract payments for FY 2005. To assure ourselves of the completeness of this
data, we compared the contracts listed with payments to lists of active contract awards from
Contracts and Acquisition Management’s (CAM) website as of November 2004 and November
2005 -- a total of 996 unduplicated items. We found that 629 of the active awards as of those two
dates were included in the list of contracts with payments during FY 2005. For the 367 contracts
in the two lists from CAM’s website that were not included in the listing of contract payments,
we found that 251 were multiple award task orders or blanket purchasing agreements under
which separate orders would be placed. These awards would not have payments. Of the
remaining 116 awards, 3 were small purchases and not considered contracts for the purposes of
our review. Payments under these purchases in FY 2005 were not material. All other contracts
were either awarded after or ended before FY 2005, or no payments were made under these
contracts during FY 2005. Based on this analysis, we determined the listing of contract
payments was complete for the purposes of our audit.

To evaluate the accuracy of the information contained in the contract payments listing received
from OCFO for the 10 contracts reviewed, we confirmed the payment amounts with the hard
copy invoices in the contract files, and with payment information included in CPSS, another
component of EDCAPS. We did not note any exceptions. Based on these analyses, we
determined the computer-processed data used was sufficiently accurate and reliable for the
purposes of our review.

We conducted fieldwork at Department offices in Washington, DC, during the period June 7,
2006, through February 6, 2007. We held an exit conference with FSA staff on June 1, 2007.
Our audit was performed in accordance with generally accepted government auditing standards
appropriate to the scope of the review described above.

ADMINISTRATIVE MATTERS

Corrective actions proposed (resolution phase) and implemented (closure phase) by your office
will be monitored and tracked through the Department’s Audit Accountability and Resolution
Tracking System (AARTS). Department policy requires that you develop a final corrective
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ED-OIG/A19G0006 Page 11 of 20

action plan (CAP) for our review in the automated system within 30 days of the issuance of this
report. The CAP should set forth the specific action items, and targeted completion dates,
necessary to implement final corrective actions on the findings and recommendation contained in
this final audit report.

In accordance with the Inspector General Act of 1978, as amended, the Office of Inspector
General is required to report to Congress twice a year on the audits that remain unresolved after
six months from the date of issuance.

Statements that managerial practices need improvements, as well as other conclusions and
recommendations in this report, represent the opinions of the Office of Inspector General.
Determinations of corrective action to be taken will be made by the appropriate Department of
Education officials.

In accordance with the Freedom of Information Act (5 U.S.C. § 522), reports issued by the
Office of Inspector General are available to members of the press and general public to the extent
information contained therein is not subject to exemptions in the Act.

We appreciate the cooperation provided to us during this review. Should you have any
questions concerning this report, please call Michele Weaver-Dugan at (202) 245-6941.
Please refer to the control number in all correspondence related to the report.

Sincerely,

George A. Rippey /s/

Acting Assistant Inspector General for Audit

cc: Patrick Bradfield, FSA Acquisition Group

Tony Magro, Audit Liaison Officer

Attachments
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ED-OIG/A19G0006 Page 12 of 20

Attachment 1: Contracts Included in the Audit

Contract Number Vendor Name Number of FY Total Amount of

2005 Payments Payments
ED99DO0002 ACCENTURE 102 $90,825,120.17
ED00CO0038 NCS PEARSON 64 $19,202,765.08
COMPUTER
SCIENCES
ED01GS0002 CORPORATION 40 $54,184,007.93
ELECTRONIC
DATA SYSTEMS
ED03CO0102/0002 CORPORATION 25 $3,054,909.51
ACS EDUCATION
ED04CO0004 SOLUTIONS 54 $234,015,577.64
APPLIED
ENGINEERING
MANAGEMENT
ED04GS0002 CORP 87 $7,964,179.22
PHOENIX
PROGRAMMING
ED04PO0377 SERVICES 27 $4,214,148.04
ED04PO1805 NCS PEARSON 28 $2,656,417.40
ED05CO0008 NCS PEARSON 28 $128,949,557.92
PM95009001 NCS PEARSON 31 $12,129,609.00
Total number/amount of FY 2005 486 $557,196,291.91
payments
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Attachment 2: Issues Noted by Contract

ED99DO0002 – Accenture, $90,825,120.174

1. The CO was not involved in the invoice approval process.

The COR stated the invoice is received in the budget office, and then sent to the COR for
authorization and approval. The COR creates a receipt in CPSS, and sends an email to the
budget office authorizing the payment to be made.

ED01GS0002 – Computer Sciences Corporation, $54,184,007.93

1. The CO was not involved in the invoice approval process.

The CO stated that he was not really involved in the invoice process and that the contracts
staff has very little involvement with invoicing. The CO said that he only hears from the
COR regarding the invoice if there is a problem. The COR stated she and the budget office
handled the invoices.

2. The COR did not appropriately communicate acceptance/rejection of deliverables.

The CO stated he did not receive a recommendation to accept deliverables from the COR.
The COR stated acceptance of deliverables was indicated in CPSS. Prior to the payment of
invoices, a receipt for the invoice is created in CPSS, and a recommendation of acceptance of
deliverables is noted on the receipts in CPSS. However, we found this process did not
specifically document the COR’s recommendation for acceptance or rejection of specific
deliverables.

3. FSA staff did not issue and/or sign modifications for contract changes.
Five out of 72 bilateral modifications were not signed by the contractor. The modifications
resulted in material and non-administrative changes to the contract, which included
increasing funding and extending the contract end date. In addition, one modification was
never issued for a contract change. A brief description of each modification is noted below:

• Modification #65, dated 6/30/2005, de-obligated funds from the contract and reduced the
dollar value of line item no. 91 of the contract by $230,000. The CS faxed the
modification signed by FSA to the contractor on 6/30/2005 and asked that the contractor
sign and fax it back.

• Modification #58, dated 5/31/2005, incorporated proposal RGCA 2692. The CS faxed
the modification signed by FSA to the contractor on 5/31/2005 and asked that the
contractor sign and fax it back.

• Modification #70, dated 9/30/2005, revised the contract by reducing funding from line
no. 91 by $2,872,117.

4
Amounts listed represent the FY 2005 payments made under each contract.
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• Modification #71, dated 9/30/2005, funded VDC operations in the amount of

$31,616,816.

• Modification #72, dated 10/25/2005, changed the contract expiration date.

• A modification was not issued regarding the termination of Pell/Central Processing

System printing services. FSA stated the contractor was verbally informed during a
meeting on February 18, 2005, however the termination notice was never issued in
writing.

ED03CO0102/0002 – Electronic Data Systems Corporation, $3,054,909.51

1. The CO was not involved in the invoice approval process.

The COR stated he recommended acceptance to and the invoice is paid by the budget office.
The CO only finds out that the invoice has been paid after the invoice has been processed for
payment. The CO also mentioned that the individual in the budget office was designated as a
CO to approve all FSA invoices for payment.

2. The COR did not appropriately communicate acceptance/rejection of deliverables.

The COR stated that he was the final stop for deliverables. The CO confirmed that this was
the process followed.

3. FSA staff did not issue and/or sign COR appointment letters timely.
The COR appointment letter for the original COR could not be located in the contract files.
During the review, the new COR and the CO both stated they could not locate the original
COR appointment letter.

ED04CO0004 – ACS Education Solutions, $234,015,577.64

1. The CO was not involved in the invoice approval process.

The CO stated that the COR and budget office handle the invoices, and that she had no
knowledge of the process.

2. FSA did not ensure that incentive payments were verified by appropriate staff.
The COR stated he relies on staff to properly validate invoices prior to his approval of
payment. The COR directed OIG staff to a Program Analyst in the Contract Performance &
Analysis Group to discuss how to verify the cohort incentive payment from one invoice
during FY 2005. The Program Analyst had to seek the assistance of one of FSA’s IV&V
contractors to explain how the incentive payment was calculated. The contractor stated that
she verified the incentive payment during our scope period, and that they were in the process
of transitioning so that FSA will understand how to verify the payment when the IV&V
contract ends.

3. The COR did not appropriately communicate acceptance/rejection of deliverables.

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The COR stated he recommended acceptance of deliverables to a “designated CO” within the
budget office who is responsible for approving invoices instead of the CO who administered
the contract. The COR noted he thought this accelerated the process.

4. FSA staff did not issue and/or sign modifications for contract changes.
The modification assigning a new COR was not issued timely. It was effective on November
28, 2005, almost two years later than the COR appointment date.

5. FSA staff did not issue and/or sign COR appointment letters timely.
The COR Appointment Letter for the current COR was signed on July 9, 2004. The current
COR officially replaced the previous COR on January 1, 2004. The COR appointment letter
was signed approximately six months later.

In addition, a COR delegation letter could not be located for the original COR of this
contract. FSA stated that a COR delegation letter was issued, but was apparently misplaced.

ED04GS0002 – Applied Engineering Management Corporation, $7,964,179.22

1. The CO was not involved in the invoice approval process.

The CO stated that he was not involved with the invoice process. The invoices are submitted
to the COR who reviews the invoices and approves them for payment by entering a receipt in
CPSS. Once the COR clears the invoice for payment in CPSS, the invoice is processed
through the budget office.

2. The COR did not appropriately communicate acceptance/rejection of deliverables.

The COR stated she accepted deliverables for this contract instead of the CO. The COR also
stated that she returns deliverables with comments if necessary and has the contractor
resubmit them with the changes made. By doing this, she is in essence inappropriately
rejecting the deliverables. The CO stated that since this is a smaller contract compared to the
others he is the CO for, he delegated the majority of the monitoring to the COR.

3. FSA staff did not issue modifications/task orders for contract changes.
The deliverable schedules for the contract were modified by the COR without the CO issuing
a formal modification. Also, as a result of the COR informally changing the deliverable
schedule, nine deliverables were submitted past their original due dates. Details are included
in the table below:

Deliverable Name Original Due Date Received Date Days Late

NSLDS Maintenance Quarterly update Annually received; N/A-see footnote5
Plan submitted on 7/5/05 below.
and 8/2/05(final)
Application Software Quarterly update Annually received; last N/A-see footnote
Maintenance Plan submitted on 7/5/05 below.
5
Based on the fact that the contract did not have an exact due date for quarterly submissions, we were unable to determine how
many days the deliverable was late.
Final Audit Report
ED-OIG/A19G0006 Page 16 of 20

System Performance Quarterly update Received semi- N/A-see footnote 5 on

Monitoring Plan annually; last page 15.
submitted on 3/5/06
TO2- Application 12/31/2004 3/26/2005 85
Software
TO2- Final Detail 10/26/2004 3/25/2005 150
Design Document
T02- Final System 10/26/2004 3/25/2005 150
Intergration Test Plan
TO6- Application 12/31/2004 5/21/2005 141
Software
TO6- Final Detail 10/8/2004 11/12/2004 35
Design Document
TO6-Final Integration 10/8/2004 11/12/2004 35
Test Plan

ED04PO0377 – Phoenix Programming Services, $4,214,148.04

1. The CO was not involved in the invoice approval process.

The CO stated that although he was not involved in the process, he was aware that this was
supposed to be his responsibility. Invoices are submitted to the COR, who reviews and
approves them through CPSS, and the invoices are then processed through the budget office.

2. The COR did not appropriately communicate acceptance/rejection of deliverables.

The COR stated she accepted deliverables for this contract and not the CO. Furthermore, the
Program Manager indicated he was “informally” rejecting about one report per month,
providing written comments to the contractor and asking them to resubmit with appropriate
changes made. Neither acceptance nor rejection was ever communicated to the CO.

ED04PO1805 – NCS Pearson, $2,656,417.40

1. The CO was not involved in the invoice approval process.

The CO stated that he and the CS did not receive invoices. Invoices are sent to the COR,
who enters them into CPSS and approves them for payment. The COR confirmed this
information and stated that she and the budget office process the invoices.

ED05CO0008 – NCS Pearson, $128,949,557.92

1. The CO was not involved in the invoice approval process.

The CO stated that the budget office receives the invoices and sends them to the COR for
review and approval. The CO also stated that contract staff have not been involved in the
approval process, and that it is the COR’s and budget office’s function.
Final Audit Report
ED-OIG/A19G0006 Page 17 of 20

PM95009001 – NCS Pearson, $12,129,609.00

1. The CO was not involved in the invoice approval process.

The CO stated that contract staff are not involved with the invoice process. He stated that
this is a function of the COR and the budget office. The COR creates a receipt in CPSS, and
the budget office approves the invoice for payment.
Final Audit Report
ED-OIG/A19G0006 Page 18 of 20

Attachment 3: FSA Response to Draft Report

TO: Michelle Weaver-Dugan

Director, Operations Internal Audit Team
Office of Inspector General

FROM: Lawrence A. Warder

Acting Chief Operating Officer

SUBJECT: Response to Draft Audit Report – Controls Over Contract Monitoring for Federal
Student Aid Contracts Control Number ED-OIG/A19-G0006

Thank you for the opportunity to respond to Draft Audit Report, Control Number ED-OIG/A19-
G0006, entitled Controls Over Contract Monitoring for Federal Student Aid Contracts. We
concur with your recommendations for improvements in the contract monitoring process and
provide the following responses to the individual recommendations.

OIG Recommendations

1.1 Develop and implement a process to ensure COs conduct proper analysis and approval
of invoices.

Federal Student Aid Response – Federal Student Aid concurs with this recommendation.
Although the Administrative Contracting Officer (ACO) is responsible for all facets of contract
performance, ACOs were not approving payment in the financial system, which ultimately
demonstrates acceptance of deliverables and authorization to release payment. In most cases, the
individual with the knowledge about the contract requirements and acceptability of the invoice,
the ACO, was not involved in the invoice process. Federal Student Aid Acquisitions has
implemented Acquisition Policy Letter 07-001, effective February 16, 2007, which lays out the
manner in which deliverable receipt and vendor invoices are to be processed. ACOs assumed
responsibility for approval of receipts and invoices on March 26, 2007.

1.2 Ensure contract staff has the technical expertise needed to adequately verify payments.

Federal Student Aid Response – Federal Student Aid concurs with this recommendation. The
Contracting Officer’s Representative (COR) delegations for all identified contracts clearly
identify the limits of the authority assigned to them. The CORs shall continue to enter receipts
into the Oracle system and have received training prior to their appointments. CORs recommend
acceptance and the Contracting Officer (CO) accepts/rejects the deliverables. COs will
communicate to vendors in cases where final deliverables do not meet the standards in the
contracts as identified by the COR. In cases where the COR recommends acceptance, no further
action is required by the CO to demonstrate acceptance except by receipt approval in the system.
All COs have received training in the Oracle receipts and invoice modules to ensure that they can
both accept receipts for deliverables that meet contract requirements and process the appropriate
Final Audit Report
ED-OIG/A19G0006 Page 19 of 20

payments through the Department’s finance system. This training was conducted on March 6,
2007. ACOs assumed responsibility for approval of receipts and invoices for their contracts on
March 26, 2007.

1.3 Develop and implement a process to ensure acceptance/rejection of deliverables is

appropriately communicated by the COR to the CO. Ensure the CORs provide written
recommendations of deliverable acceptance/rejection to the COs. This could include the
use of the deliverable inspection worksheet that is suggested in the FSA COR Contract
Monitoring Handbook.

Federal Student Aid Response – Federal Student Aid concurs with this recommendation.
Federal Student Aid Acquisitions has implemented Acquisition Policy Letter 07-001 effective
February 16,2007 that lays out the manner in which deliverable receipt and vendor invoices are
to be processed. This process includes the requirement for the COR to email the CO upon
completing a receipt for goods or services in the Oracle system. ACOs assumed responsibility
for approval of receipts and invoices on March 26, 2007. A Federal Student Aid working group
has reworked the COR Contract Monitoring Handbook into the Acquisition Process Handbook.
The next release will incorporate the revised deliverable receipt process. COR training currently
being established within the Department will include all aspects of COR responsibilities.

1.4 Ensure the CO is the only individual communicating acceptance/rejection to the

contractor.

Federal Student Aid Response – Federal Student Aid concurs with this recommendation. The
Department does not require formal acceptance of deliverables except through the approval of
invoices. Effective April 1, 2007, only the ACO communicates acceptance through invoice
approval. Rejections of deliverables/invoices are handled exclusively by the ACO per
Acquisition Policy Letter 07-001.

1.5 Ensure formal modifications are issued for relevant contract changes. Issue
modifications for the contracts noted above with regard to deliverable termination and
changes in deliverable due dates. (ED01GS0002, ED04GS0002)

Federal Student Aid Response – Federal Student Aid concurs with this recommendation.
However, Federal Student Aid does not believe that contract modifications for the noted
contracts are appropriate. In these contracts, the COR overstepped the authority delegated to
them. In such a situation, if the CO determines the action reasonable, a modification will be
issued to reflect the change. In cases where the CO determines the change was not reasonable,
as in these two contracts, the contractor will be held to the contract requirement, as they exist.
COs are responsible for maintaining their assigned contracts, which include the issuance of
contract modifications for all contract actions regardless of size or dollar value. This has always
been the case.

1.6 Ensure COR appointment letters are issued timely by the CO, and signed and returned
timely by the COR. Review all FSA contracts to ensure that all current CORs have
received an appointment letter and that a signed copy is included in the contract file.
Final Audit Report
ED-OIG/A19G0006 Page 20 of 20

Federal Student Aid Response – Federal Student Aid concurs with this recommendation.
Federal Student Aid undertook the task of reviewing contract files to ensure that the appropriate
COR was appointed in the Contract and Purchasing Support System (CPSS) and that all had
received delegations of their authority placed in the contract files. The Director of Contracts,
with all COs, began this review on March 13, 2007. We are currently analyzing the system data
and comparing it to the actual appointments. The system should correctly reflect COR
appointments by July 31, 2007.

Attachment
Policy Letter 07-001