Report No: 18-98-004-03-370
Date Issued: January 27, 1998
| This consulting services engagement was
performed by Tichenor & Associates, CPAs, under contract to the Office
of Inspector General, and, by acceptance, it becomes a report of the Office
of Inspector General.
/ s /
Assistant Inspector General for Audit U.S. Department of Labor |
William R. Tichenor Business:
(703) 490-1004
Jonathan D. Crowder Metro:
(703) 352-1417
James M. Anderson Fax:
(703) 491-9426
Deirdre McKenna Reed E-Mail:
tichassoc@aol.com
January 23, 1998
Mr. John J. Getek
Assistant Inspector General for Audit
Office of Inspector General
U.S. Department of Labor
200 Constitution Ave. NW, Rm S-5022
Washington, DC 20210
Dear Mr. Getek:
Pursuant to Task Order No. J-9-G-5-0010-210, we have completed a consulting services engagement in which we, in consultation with your Director, Office of Grant and Contract Audits, worked closely with a U.S. Department of Labor (DOL) Office of the Solicitor (SOL) attorney, the National Office of Job Corps, and the assigned Employment and Training Administration (ETA) Contracting Officer, in reaching a Settlement Agreement on unpaid costs totaling about $2.3 million claimed for reimbursement by The Wackenhut Corporation, Inc. (Wackenhut). The unpaid claimed costs were for the operation of Job Corps centers located in McKinney, Texas (Job Corps Contract No. JC-2-48-00033) and Guthrie, Oklahoma (Job Corps Contract No. JC-0-40-00066), plus termination and settlement costs applicable to the two contracts. The McKinney contract was terminated "for convenience of the Government" effective March 31, 1995; the Guthrie contract expired effective June 30, 1995.
The primary purpose of this engagement was to provide technical assistance to DOL's Office of Job Corps, the assigned ETA Contracting Officer, and the assigned SOL attorney in preparation for either: (1) a negotiated Settlement Agreement; (2) assignment of the case to an independent party under the Alternative Disputes Resolution (ADR) process; and/or (3) preparation for a formal hearing before the DOL Board of Contract Appeals. Wackenhut had requested that the National Office of Job Corps use the ADR process to help resolve longstanding differences between the Dallas Regional Office of Job Corps and Wackenhut regarding the allowability of the unpaid costs claimed for reimbursement.
The engagement was performed in accordance with consulting services standards established by the American Institute of Certified Public Accountants, and with the Government Auditing Standards (1994 Revision) issued by the Comptroller General of the United States, except that the scope of our engagement did not include expressing a formal written opinion on the reasonableness and allowability
1
In lieu of a preparing a comprehensive written report, your office requested that we first provide a comprehensive on-site briefing to OIG and the SOL attorney on the results of our review (in order for the SOL attorney to negotiate a possible settlement with Wackenhut on the disputed claimed costs which had been incurred by Wackenhut more than 2 years ago). Based on our in-depth briefing, and the Settlement Agreement subsequently reached by DOL and Wackenhut, OIG determined that the need for a comprehensive written report no longer existed.
Some of the more significant matters discussed in our in-depth briefing (which included a review of our detailed supporting workpapers) conducted at Wackenhut during the week of December 15, 1997, are summarized below:
With only a few minor exceptions, the costs claimed by Wackenhut appear to have been expended on necessary services related to the operation of the Job Corps centers and for the health and benefit of the program participants. Our observations in this area were consistent with the findings of an earlier limited-scope audit conducted by DOL/OIG/ Region VI; the OIG Dallas office reviewed some of the same invoices we looked at, and also identified only minor amounts of unallowable/unsupported costs.
On several occasions, Job Corps/Region VI improperly reduced the contract value and funds available on both contracts without a corresponding reduction in the contract scope of work, in apparent violation of Job Corps' own regulations and Federal contract law, most notably, the imposition of "Mandatory Inflationary Constraints." These reductions were one of the major factors contributing to Wackenhut's cost overruns which, in turn, were the primary reasons cited by Job Corps/Region VI for not authorizing payment of Wackenhut's outstanding invoices.
Modification No. 49 to the McKinney contract improperly decreased the contract value and funds available for the Forms Distribution Center by $539,693. According to the Job Corps/Region VI Director, these funds had been "mistakenly" added to the contract by Modification No. 47. However, our review of the contract files disclosed that the funds in question had not been added to the contract because the "draft" Modification No. 47 referred to by the Job Corps/Region VI Director (which would have added these funds to the contract) was never formally issued. Although Wackenhut reported this matter to Job Corps/Region VI officials on several occasions, no action was taken to correct the mistake. Had Job Corps/Region VI officials corrected this problem when it was first called to their attention, Wackenhut would not have been in a cost overrun situation. As discussed above, Wackenhut's cost overruns were the primary reasons cited by Job Corps/Region VI for not authorizing payment of Wackenhut's outstanding invoices.
During the last year of the Guthrie contract, Job Corps/Region VI directed Wackenhut to perform extensive additional maintenance on a number of older buildings (some dating back to the 1890s)
2
Wackenhut failed to comply with the "LIMITATION OF COST" (LOC) and "LIMITATION OF FUNDS" (LOF) provisions in both contracts. These provisions required the contractor to notify Job Corps/Region VI in writing when it had reason to believe that the costs it would incur in the next 60 days, plus that already incurred, would exceed 75 percent of the contract value and available funds. Our analysis of the monthly financial reports (ETA 2110s) submitted by Wackenhut showed that the conditions requiring such formal written notifications were in effect for over 2 years on the McKinney contract, and at least 18 months on the Guthrie contract, before the contracts were terminated/completed. However, we found no evidence that Job Corps/Region VI ever raised the issue of noncompliance with Wackenhut on either contract until after the contracts were terminated/completed. Rather, Job Corps/Region VI continued to routinely pay Wackenhut's invoices. In fact, we believe that the various items discussed above, plus Job Corps/Region VI's failure to fund the contracts on a timely basis, were major factors contributing to Wackenhut's noncompliance. In addition, we believe that Job Corps/Region VI's failure to acknowledge and act on the existence of the triggering event for the LOC and LOF provisions of the contracts tacitly waived the contract requirements. Nevertheless, because of Wackenhut's failure to submit accurate monthly financial reports during the last few months of the Guthrie contract, thus not providing Job Corps with timely data on the magnitude of the eventual contract overrun, we discussed with the SOL attorney the fact that Wackenhut should share in the cost overrun on the Guthrie contract.
On the basis of our briefing and a review of our detailed supporting workpapers, the SOL attorney determined that it would be in the best interests of both the Federal Government and Wackenhut to attempt to reach a negotiated settlement while the technical assistance team was available to assist in the negotiations. The actual negotiations, which took place on December 17, 1997, were attended by officials from OIG, SOL, Wackenhut, Wackenhut's outside legal counsel, and the Tichenor technical assistance team. We generally assisted in the negotiations by providing information to the SOL attorney (who consulted with Job Corps and the assigned ETA Contracting Officer) for use in arriving at the amount of the DOL offers, and in evaluating the merits of and making recommendations to the SOL attorney on Wackenhut's counter-offers.
The SOL attorney, with the telephonic approval of Job Corps and the assigned ETA Contracting Officer, reached a mutually satisfactory Settlement Agreement with Wackenhut officials in which DOL agreed to pay Wackenhut the sum of $2,100,000 no later than 45 days from the date of the agreement (December 17, 1997), and both parties agreed that, upon payment of this amount, all issues relating to the two referenced contracts would be resolved, and each party would release the other from any claims, causes
3
The technical assistance team prepared Attachments B and C for the SOL attorney, Job Corps and the assigned ETA Contracting Officer, which summarize the negotiated settlement, by contract, including the amount of negotiated reductions in claimed costs, the composition of the negotiated reductions, the final negotiated contract amounts, and the actual dollar value of negotiated savings to the Government.
The combined actual dollar value of the savings negotiated on the two contracts totals $582,608. The total savings is comprised primarily of (1) reductions in the total amounts of the two contracts ($205,992), and (2) the amount of allowable costs not claimed by the contractor, including interest costs to which Wackenhut would otherwise have been entitled under the Prompt Payment Act ($376,616). Some of the savings in the latter category were achieved because the SOL attorney adopted and used a negotiation strategy that precluded the contractor from claiming additional allowable costs (e.g., interest on unpaid invoices pursuant to the Prompt Payment Act).
We appreciate the opportunity to have worked with your office on this consulting services engagement, particularly the close working relationship we had with your staff and the SOL attorney.
Sincerely,
/ s /
William R. Tichenor, Partner
TICHENOR & ASSOCIATES
Attachments:
Memorandum of Understanding
Data and Calculations Related to the McKinney Job Corps Center
Contract Settlement Agreement on December 17, 1997
Data and Calculations Related to the Guthrie Job Corps Center
Contract Settlement Agreement on December 17, 1997
4
MEMORANDUM OF UNDERSTANDING
Page 1 of 2
NEGOTIATION RESULTS:
| Total Contractor Costs Billed to DOL | $ 33,206,818 |
| Add: Additional Termination Costs Billed Just Prior to Negotiations | 49,628 |
| Total Contractor Costs Billed | $ 33,256,446 |
| Less: DOL Payments | -32,577,901 |
| Total Unpaid Billings Subject to Negotiations | $ 678,545 |
| Less: Negotiated Lump Sum Payment to Contractor | -650,000 |
| Negotiated Reduction | $ 28,545 |
| Composition of Negotiated Reduction:
Unallowable Costs Questioned by Technical Assistance Team
|
$ 8,190
20,355 $ 28,545 |
FINAL CONTRACT MODIFICATION COMPOSITION:
| Contract Amount Through Modification No. 50 | $ 32,632,591 |
| Add: Erroneous Reduction for Forms Distribution Center (Mod. #49) | 539,693 |
| Adjusted Contract Amount | $ 33,172,284 |
| Add: Allowable Termination Costs in Excess of Contract Amount | 55,617 |
| FINAL CONTRACT AMOUNT | $ 33,227,901 |
| Reconciliation:
DOL Payments Prior to Negotiations
|
$ 32,577,901
650,000 $ 33,227,901 |
Page 2 of 2
| Unallowable Costs Questioned by Technical Assistance Team | $ 8,190 |
| Negotiated Savings Attributable to Missing Property | 20,355 |
| Employee EEO Suit Settlements Allowable But Not Claimed | 88,000 |
| Allowable G&A on EEO Suit Settlements Not Claimed | 2,640 |
| Legal Fees Related to Criminal Investigation of Executive
Vice President
by OIG/OI and FBI Not Claimed by Contractor, But Are Allowable Because Contractor Is Not the Target of the Investigation |
77,000 |
| Allowable G&A Not Claimed on Legal Fees Related to Criminal
Investigation |
2,310 |
| Avoidance of Interest on Billings Outstanding Since May 1996 | 64,212 |
| Total Negotiated Savings | $ 262,707 |
Page 1 of 2
NEGOTIATION RESULTS:
| Total Contractor Costs Billed to DOL | $ 39,692,154 |
| Add: Additional Termination Costs Billed Just Prior to Negotiations | 52,946 |
| Add: Additional Medical Costs Billed Just Prior to Negotiations | 27,052 |
| Total Contractor Costs Billed | $ 39,772,152 |
| Less: DOL Payments | -38,144,705 |
| Total Unpaid Billings Subject to Negotiations | $ 1,627,447 |
| Less: Negotiated Lump Sum Payment to Contractor | -1,450,000 |
| Negotiated Reduction | $ 177,447 |
| Composition of Negotiated Reduction:
Contractor Assumption of Share of Cost Overrun |
$ 177,447 |
FINAL CONTRACT MODIFICATION COMPOSITION:
| Contract Amount Through Modification No. 63 | $ 38,815,374 |
| Add: Allowable Termination Costs Previously Billed
Additional Allowable Termination Costs Claimed |
229,975
52,946 |
| Adjusted Contract Amount | $ 39,098,295 |
| Add: Additional Medical Expenses
Inflationary Constraint for PY 1994 Restore Outreach, Admissions and Placement Reduction - Mod. No. 61 Unfunded Maintenance Directed by DOL Unfunded Security Directed by DOL |
27,052
229,729 71,214 105,415 63,000 |
| FINAL CONTRACT AMOUNT | $ 39,594,705 |
| Reconciliation:
DOL Payments Prior to Negotiations
Final Contract Amount |
$ 38,144,705
1,450.000 $ 39,594,705 |
Page 2 of 2
| Negotiated Reduction - Contractor Share of Cost Overrun | $ 177,447 |
| Avoidance of Interest on Billings Outstanding Since June 1996 | 142,454 |
| Total Negotiated Savings | $ 319,901 |
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