CONTRACT COST STATEMENT

Transcription

1 Lockwood, Andrews & Newnam, Inc. Austin, Texas Lockwood, Andrews & Newnam, Inc. CONTRACT COST STATEMENT For the Period February 5, May 31, 2009 November 23, 2009

2 TABLE OF CONTENTS Independent Accountant s Report... 1 LAN Contract Cost Statement For Contractor Services For The Period February 5, May 31, LAN Notes To Contract Cost Statement For Contractor Services For The Period February 5, May 31, Independent Accountant s Report On Internal Control Over The Preparation Of The Contract Cost Statement For Contractor Services... 6 LAN Schedule Of Findings And Questioned Costs Relating To The Contract Cost Statement For Contractor Services For The Period February 5, May 31, i

3 INDEPENDENT ACCOUNTANT S REPORT To Capital Metropolitan Transportation Authority: Austin, Texas We have examined Lockwood, Andrews & Newnam Inc. s (LAN) compliance with specific contractual requirements, as described in Note 1, regarding the accompanying Contract Cost Statement (Statement) for Program Management Support Consultant (PMSC) services for Implementation of Capital Metro Long-Range Transit Plan Projects, for the period February 5, 2005 through May 31, LAN s management is responsible for compliance with those requirements. Our responsibility is to express an opinion on LAN s compliance based on our examination. Except as described below, our examination was conducted in accordance with attestation standards established by the American Institute of Certified Public Accountants (AICPA) and the standards applicable to attestation engagements contained in Government Auditing Standards, issued by the Comptroller General of the United States and, accordingly, included examining, on a test basis, evidence about LAN s compliance with those requirements and performing such other procedures as we considered necessary in the circumstances. We believe that our examination provides a reasonable basis for our opinion. Our examination does not provide a legal determination on LAN s compliance with specified requirements. Our examination considered LAN s compliance, in all material respects, with the following: (a) financial reports and related items such as elements, accounts, or funds are fairly represented in accordance with the Code of Federal Regulations (CFR) and the accounting practices prescribed or permitted by the Capital Metropolitan Transportation Authority (Capital Metro); (b) financial information is presented in accordance with contract provisions; and (c) LAN has adhered to specific financial compliance requirements. Our examination also included procedures to determine any applicable adjustments necessary pursuant to provisions included in the Capital Metro-LAN Contract number Our examination disclosed the following material noncompliance with contractual requirements applicable to LAN during the period February 5, 2005 May 31, We identified certain unallowable costs included in the Statement as described in the attached Schedule of Findings and Questioned Costs Relating to the Statement for the Contractor Services for the period February 5, 2005 May 31, Because of a lack of adequate records, we were unable to form an opinion regarding whether certain labor, subconsultant, and overhead costs were incurred in accordance with Note 1, as described in the attached Schedule of Findings and Questioned Costs Relating to the Statement for the Contractor Services for the period February 5, 2005 May 31, Offices in 16 states and Washington, DC 1 η

4 In our opinion, except for the effects of the unallowable costs as discussed in the fourth paragraph, and except for the effects of matters we might have discovered had we been able to apply adequate procedures to labor, subconsultant, and overhead costs as discussed in the fifth paragraph, LAN complied, in all material respects, with the aforementioned requirements for the period February 5, 2005 May 31, In accordance with Government Auditing Standards, we have also issued our report dated November 23, 2009, on our consideration of LAN s internal control over preparation of the Statement, for PMSC services, and on our tests of its compliance with certain provisions of laws, regulations, contracts, and other matters. The purpose of that report is to describe the scope of our testing of internal control over preparation of the Statement and compliance with certain provisions of laws, regulations, contracts, and other matters and the results of that testing, and not to provide an opinion on the internal control over preparation of the Statement or on compliance. That report is an integral part of an examination performed in accordance with Government Auditing Standards and should be considered in assessing the results of our examination. This report is intended solely for the information and use of Capital Metro Board of Directors and Management and the management of LAN and is not intended to be, and should not be, used by anyone other than these specified parties. Austin, Texas November 23,

5 LOCKWOOD, ANDREWS & NEWNAM, INC. CONTRACT COST STATEMENT FOR CONTRACTOR SERVICES FOR THE PERIOD FEBRUARY 5, 2005 MAY 31, 2009 Direct Office Labor $ 389,109 Direct Field Labor 1,097,734 Overhead 2,256,158 Total Labor Costs 3,743,001 Travel 158,539 Subconsultants 7,451,979 Other Direct Costs 687,109 Fixed Fee 525,404 Total Cost Billed to Capital Metro $ 12,566,032 This statement should be read only in connection with the accompanying notes to the statement. 3

6 LAN NOTES TO CONTRACT COST STATEMENT FOR CONTRACTOR SERVICES FOR THE PERIOD FEBRUARY 5, MAY 31, 2009 NOTE 1 - BASIS OF PRESENTATION The accompanying Contract Cost Statement (Statement) for Contractor Services has been prepared by management of Lockwood, Andrews, & Newnam, Inc. (LAN) in accordance with the Code of Federal Regulations (CFR) and the accounting practices prescribed or permitted by the Capital Metropolitan Transportation Authority (Capital Metro). Management believes that financial information has been accurately presented in accordance with established and stated criteria and that management has adhered to specific financial reporting requirements of the contract. The Statement covers the period of February 5, 2005 May 31, This period reflects the start of the contract between LAN and Capital Metro for the provision of Program Management Support Consultant (PMSC) services for Implementation of Capital Metro Long-Range Transit Plan Projects, (Capital Metro contract number 62629) through May 31, 2009, the start of an examination engagement conducted by Clifton Gunderson LLP on behalf of Capital Metro. NOTE 2 LABOR AND OVERHEAD Labor is for actual LAN employees only and includes only time spent on the PMSC services. LAN submits monthly invoices with copies of employee timesheets following the month in which the services are provided. Overhead is charged at fixed rates that were set at the beginning of the contract period for office and field personnel. These rates have been consistent during the contract period. The office overhead rate of percent was applied to the total direct office employee costs of $389,109 and an overhead rate of percent was applied to the total direct field employee costs of $1,097,734 for the contract period. NOTE 3 TRAVEL These are the travel expenses of LAN employees incurred during the course of the contract period. NOTE 4 SUBCONSULTANTS Subconsultant expenses include reimbursable time, general expenses and travel expenses for all subconsultants of LAN. The three largest subcontractors represent approximately 80 percent of all subcontractor expenses. NOTE 5 OTHER DIRECT COSTS Other direct costs represent the administrative costs such as office space lease, furniture, phones, and other miscellaneous costs incurred by LAN on behalf of Capital Metro. 4

7 NOTE 6 FIXED FEE The fixed fee paid to LAN is calculated each year based on the estimated direct labor and overhead costs of LAN for the coming year. For the period February 5, 2005 May 31, 2009, the fee was 10 percent of the total estimated direct labor and overhead costs. This information is an integral part of the accompanying statement. 5

8 INDEPENDENT ACCOUNTANT S REPORT ON INTERNAL CONTROL OVER THE PREPARATION OF THE CONTRACT COST STATEMENT FOR THE CONTRACTOR SERVICES To Capital Metropolitan Transportation Authority Austin, Texas We have examined Lockwood, Andrews & Newnam Inc. s (LAN) compliance with specific contractual requirements regarding the accompanying Contract Cost Statement (Statement) for Program Management Support Consultant (PMSC) services for Implementation of Capital Metro Long-Range Transit Plan Projects, for the period February 5, 2005 through May 31, Our examination report was qualified due to material noncompliance with specific requirements and lack of adequate records. We conducted our examination in accordance with the attestation standards established by AICPA and the standards applicable to attestation engagements contained in Government Auditing Standards, issued by the Comptroller General of the United States. Internal Control Over Preparation of the Contract Cost Statement In planning and performing our examination, we considered LAN s internal control over the preparation of the Statement, in order to determine our examination procedures for the purpose of expressing our opinion on LAN s compliance with specific requirements and not to provide assurance on the internal control over the preparation of the Statement. Accordingly, we do not express an opinion on the effectiveness of LAN s internal control over the preparation of the Statement. A control deficiency exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis. A significant deficiency is a control deficiency, or combination of control deficiencies, that adversely affects the entity s ability to initiate, authorize, record, process, or report financial data reliably in accordance with generally accepted accounting principles such that there is more than a remote likelihood that a misstatement of the Contract Cost Statement that is more than inconsequential will not be prevented or detected by the entity s internal control. We consider the deficiencies described in the accompanying schedule of findings and questioned costs to be significant deficiencies in internal control over the preparation of the Statement (See Findings 1 through 4). A material weakness is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the Statement will not be prevented or detected by the entity s internal control. Of the significant deficiencies described above, we consider Findings 1, 2, 3, and 4 to be material weaknesses. Offices in 16 states and Washington, DC 6 η

9 Our consideration of internal control over the preparation of the Statement was for the limited purpose described in the first paragraph of this section and would not necessarily identify all deficiencies in internal control that might be significant deficiencies or material weaknesses. Compliance and Other Matters As part of obtaining reasonable assurance about whether LAN s Contract Cost Statement is free of material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, and contracts, noncompliance with which could have a direct and material effect on the determination of reported amounts in the Contract Cost Statement. However, providing an opinion on compliance with those provisions was not an objective of our examination, and accordingly, we do not express such an opinion. The results of our tests disclosed instances of noncompliance or other matters that are required to be reported under Government Auditing Standards and which are described in the accompanying schedule of findings and questioned costs as Findings 1 through 4. LAN s response to the findings identified in our examination is described in the accompanying schedule of findings and questioned costs. We did not audit LAN s response and, accordingly, we express no opinion on it. This report is intended solely for the information and use of Capital Metro Board of Directors and Management and the management of LAN and is not intended to be, and should not be, used by anyone other than these specified parties. Austin, Texas November 23,

10 Lockwood, Andrews & Newnam, Inc. SCHEDULE OF FINDINGS AND QUESTIONED COSTS RELATING TO THE CONTRACT COST STATEMENT FOR CONTRACTOR SERVICES FOR THE PERIOD FEBRUARY 5, MAY 31, 2009 Finding 1 Subconsultant Costs (Material Weakness) Criteria The Capital Metropolitan Transportation Authority (Capital Metro) contract number (Contract) between Capital Metro and LAN, dated February 2, 2005, Exhibit E, section 46 states, The Authority shall make monthly payments to the Contractor when requested as work progresses, in amounts determined to be allowable by the Authority in accordance with the cost principles and procedures in Federal Acquisition Regulation Part 31 in effect on the date of this contract. Federal Acquisition Regulations (FAR) Part mandated that domestic travel adhere to Federal Travel Regulations as prescribed by the General Services Administration and international travel adhered to Maximum Travel Per Diem Allowances for Foreign Areas prescribed by the Department of State. FAR 31 also defined allowable costs for various categories. The Contract utilized the United States General Services Administration Optional Form 60 to document the agreed-upon employee/subconsultant rates and the amount of hours that were estimated to be spent on the project. These forms were updated annually and were included in contract modifications each year. The estimated number of hours was based on the percentage of time that LAN and Capital Metro agreed each employee/subconsultant would spend on the project for the upcoming year, which would be documented along with the actual rate to be charged on the Form 60 applicable to the contract time period in which the employee/subconsultant was working on the project. Condition We reviewed $4,375,452 in subconsultant invoices. This amount represents approximately 60 percent of the total subconsultant expenditures. Of that amount we found that LAN invoiced Capital Metro for the following unallowable costs: Error Type Total Travel Expenditures $ 21,062 Duplicate Time Entries 1,933 Rate charged differs from rate listed on Form 60 73,723 Timesheet not provided by the subconsultant 3,195 Other 1,395 TOTAL $ 101,308 None of the subconsultants followed the requirement that the first and last day of travel per diem amounts should only be charged at 75 percent of the maximum allowed amount as provided by the Federal Travel Regulations. We also found instances where hotel rates exceeded the maximum without written justification for the excess. 8

11 The unallowable costs related to duplicate time entries resulted from an employee completing a timesheet inaccurately and from duplicate charges for the same time charged to LAN (and subsequently to Capital Metro) on two different invoices. We found that there were several instances where the rate invoiced for a subconsultant did not agree to the rate listed on the applicable Form 60. These differences resulted in a net excess charge to Capital Metro. The remaining unallowable expenses were due to charges that either did not have supporting documentation such as timesheets or receipts, or mathematical errors. This finding is based on all information provided as of November 7, LAN provided the auditors with additional information on November 11, 2009; however, Capital Metro agreed that this information should be provided to Capital Metro personnel to be considered by them as part of the contract close out process that will be conducted subsequent to the issuance of this report. Cause LAN does not have adequate controls in place to ensure that subconsultant invoices are accurate, completely supported, or in compliance with the travel criteria outlined in the contract with Capital Metro. While we noted that several costs were questioned by the Capital Metro Contract Administrator, the review and approval process, which includes the Project Director, did not identify these errors. Specifically in the case of travel, it appears that staff responsible for reviewing invoices was not aware of all travel allowance rules. Duplicate time entries were due to a few instances where an employee s expense was either reported on two invoices or it appeared that the employee charged the time to two different projects, with Capital Metro as one of those projects. A large part of the unallowed expenses relating to a difference in the Form 60 and the rate on the invoice was due to a difference in rate charged for one employee. There was also one invoice reviewed that neared the end of an annual work plan where it appears that the subconsultant used the wrong rates on that invoice. The remaining differences appear to be due to a difference in the estimation of an employee rate for the year and the actual rate. The Contract Administrator had printed an exchange between himself and the LAN project manager discussing that the Form 60s were estimates based on anticipated increases in pay for the year and, as such, variations from the estimate provided on the Form 60s would exist. There were some instances, most of which were related to travel, where receipts were not present to support the charge. In addition, there were minor mathematical errors contained in some of the invoice calculations. Effect LAN invoiced Capital Metro for $101,308 in unallowable expenses. Recommendation LAN and Capital Metro should ensure that staff members responsible for reviewing invoices are aware of all requirements for reimbursing travel expenditures. For contracts that require a significant amount of travel, management might find it useful to provide a checklist each year with allowed rates. LAN should require its subconsultants to promptly submit their invoices to avoid any duplicated charges for subconsultant time. 9

12 LAN should ensure that it submits revised Form 60 s to Capital Metro when salary changes occur for its employees and employees of subconsultants. LAN should request that their subconsultants obtain duplicate copies of travel receipts when lost or missing. Capital Metro contract administration should consider periodic, audits of selected invoices throughout the year to ensure that all costs are adequately supported and any rate differences are adequately explained. Management Response from Capital Metro All unallowable costs charged to Capital Metro will be recovered through invoice to LAN or through withholding from LAN s final payment. Procurement has added the inclusion of a Contract Management Plan in each new contract as part of the Contract Administrator s procedures. The CMP captures contractual requirements, monitoring responsibility/frequency, and location(s) of required contract documentation. This process began with contracts awarded after July Management Response from LAN As stated in the auditor s comments, specific clarifications and additional documentation provided by LAN have not been included in this report. We believe this information, once reviewed by Capital Metro, will significantly reduce the amounts currently considered unallowable. For example: Regarding rates invoiced for a sub-consultant that did not agree with the rates listed on the Form 60, it should be noted that the Form 60 proposal format provided by Capital Metro requests average rates per hour during the annual work plan (AWP) period, typically October through September of the following year. As explained to Capital Metro, our sub-consultants typically make annual salary and rate adjustments during the spring of each year. As a result, they were required to project average labor rates during each AWP by assuming salary/rate adjustment percentages well in advance of when personnel performance was assessed and appropriate adjustments were actually made. The actual labor rates after each firm s annual adjustments may have been higher than the average rates shown on the Form 60, but the actual labor rates before the annual adjustments were typically lower, resulting in actual average rates over the AWP year that were in accordance with the Form 60. Regarding sub-consultants not following the requirements related to maximum hotel rates and first and last day travel per diem amounts, it should be recognized that specific travel arrangements were frequently requested by Capital Metro project management in order to reduce total cost to the agency. For example, personnel were often requested to leave for business travel very early in the morning (often 3:30 or 4:00 AM) in order to attend morning meetings while avoiding the cost of hotels the night before. Accordingly, it is not unreasonable for these personnel to receive a full day per diem. When hotel stays were required, sub-consultant personnel were often requested to stay in a particular hotel because of a meeting scheduled at or near the facility, thereby avoiding local transportation charges. 10

13 LAN disagrees with the auditor s statement that we do not have controls in place to ensure that sub-consultant invoices are accurate and completely supported. Once sub-consultant invoices were received by LAN, they were reviewed separately by two persons with knowledge of the contract and the project work. First, they were reviewed by the project Administrative Professional for completeness, including invoice numbers, dates, and supporting documentation. Second, they were reviewed by the Project Manager for reasonableness based on the actual work progress achieved, compliance with the approved rates, and status relative to the approved budgets. It should also be noted that the time allowed for LAN administrative personnel to administer the project and our numerous sub-consultants during each AWP was dictated directly by Capital Metro. While we recognize that our invoice review processes and controls are subject to human error, we are pleased to note that final unallowable costs will represent a very low percentage of the total sub-consultant costs invoiced to Capital Metro. Auditor s Follow-Up Comment We concluded that the unallowable costs were due to inadequate internal controls because the controls in place did not detect the pass through of unallowable costs to Capital Metro. In addition, as previously mentioned above, this finding is based on the information that LAN provided as of November 7, LAN provided the auditors with additional information on November 11, 2009; however, Capital Metro agreed that this information should be provided to Capital Metro personnel to be considered by them as part of the contract close out process that will be conducted subsequent to the issuance of this report. Finding 2 Consultant and Subconsultant rates (Material Weakness) Criteria The Contract used the United States General Services Administration Optional Form 60 to document the budgeted costs for the project for each upcoming year. As part of these modifications, LAN and Capital Metro agreed to include a miscellaneous funding category for unexpected costs or increases in work. Before use of these funds was allowed, however, a Form 60 should have been completed, estimating the cost. Condition We found that several LAN (contractor) and subconsultant employees were either not included on the applicable Form 60 or the detail on the forms was not sufficient for us to verify employee rates. Cause The approval process for additional work was often made and communicated informally between the LAN and Capital Metro project managers through or verbal discussions, often without formal documentation or notification to the contract administrator. Effect We identified that there was a total of $1,403,801 in contract expenses that were not identified on any of the Form 60s approved as part of the contract. Of this total, $386,118 was billed for LAN employees and $1,017,683 was billed for subconsultant expenses (or 24 percent of total tested expenses). As a result of the lack of documentation on Form 60s we could not verify that $1,403,801 in expenses was invoiced at the agreed-upon rate. 11

14 Recommendation Capital Metro should formalize the process for making additions, deletions or changes to contracted personnel or services allowing contract administrators access to the information for verification purposes and to ensure rates and estimated hours are formally agreed-to by both parties. In addition, to ensure that contractors are adequately reviewing and monitoring charges from subconsultants, Capital Metro should require evidence of periodic, detailed reviews of invoices. Reviews should be documented in such a way that Capital Metro project and contract managers can review the errors found and corrective action can be taken by the contractor and subconsultants. LAN should be more diligent about documenting which subconsultants will be working on the project, the amount of hours estimated that they will spend, and the rate at which they will be charged to the project. It is understandable that not every specific subconsultant can be named on the Form 60s, however, if the specific subconsultant names are not to be used on the Form 60, LAN should require its subconsulting companies to include employee disciplines on their invoices so it is clear to the contract administrator the rate that applies to each subconsultant. Management Response from Capital Metro We are in agreement with the recommendation. Procurement now adds all new subcontractors to the contract by contract modification. Project Manager training will be provided by Procurement in FY2010 and this will be reinforced. Management Response from LAN LAN agrees with the auditor that requiring specific names on the Form 60s submitted by our sub-consultants would assist Capital Metro in confirming the invoice rates. We intend to implement this recommendation on future contracts of this type. LAN disagrees with the auditor s statement that the approval process was often made or communicated informally through verbal discussions between LAN and Capital Metro project management without formal documentation. While verbal discussions related to Capital Metro s work scope and LAN s fee proposal occurred frequently (facilitated by our co-location in a single project office), proposals and approvals were consistently documented in Form 60s and/or correspondence. Copies of this documentation were provided to the auditor. Auditor s Follow-Up Comment We considered correspondence to be an informal form of communication for changes to contract personnel and assignments. It was also not common practice to print and document those exchanges in the invoice documentation or to include the contract administrator in the process. It is important to keep all parties, including the contract administrator, informed of additions/deletions/changes to the contract. Instances such as a loss in key personnel or any contract disputes could have put both parties at risk if reliance was placed solely on s and verbal discussions. Finding 3 Other Direct Costs (Material Weakness) Criteria The Contract between Capital Metro and LAN dated February 2, 2005, Exhibit E, section 46 states that The Authority shall make monthly payment to the Contractor in amounts determined to be allowable by the Authority in accordance with the cost principles and procedures in FAR Part 31 in effect on the date of this contract. 12

15 FAR Part (b)(1) states that Rental costs are allowable to the extent that the rates are reasonable at the time of the lease decision, after consideration of (i) (ii) (iii) (iv) (v) Rental costs of comparable property, if any; Market conditions in the area; The type, life expectancy, condition, and value of the property leased; Alternatives available; and Other provisions of the agreement. Condition The major expenses in the other direct cost category relate to the lease of office space and charges for equipment such as phones, furniture, and a copier/printer/scanner/fax. We reviewed leases for the office space, computers, and copier/printer/scanner/fax. No information was provided by LAN to validate the expenses for computers, furniture, or phones. Of the two leases we reviewed for the office space and copier/printer/scanner/fax, we noted differences between the actual cost to LAN and the amount charged to Capital Metro, although the difference for the copier/printer/scanner/fax was not significant. Cause According to LAN, some rates were different from actual costs based on verbal agreements between LAN and Capital Metro; however no contractual documentation was provided evidencing agreement to rate modifications or the justification for any excess costs. LAN also did not provide information for some of the expenditures so we were unable to determine the actual cost. Effect The lease agreement between LAN and the office building owner states that LAN paid an average of $1.71 per square foot for the space used to support the Capital Metro Light Rail Project Team over the life of the project, but charged Capital Metro $2.28 per square foot, which results in an excess charge of approximately $95,189. The amount in equipment costs for which LAN provided no support is detailed below: Equipment Type Amount charged to Capital Metro Computers $ 38,801* Furniture 107,035 Phones 9,762 TOTAL $ 155,598 *$13,593 of this amount appears to be a one-time purchase Recommendation LAN should ensure that all variable or per unit, reimbursable expenses are properly documented on a relevant basis (i.e. employee rate, square foot, etc). Doing so would remove any ambiguity as to the amount agreed upon and charged. In addition, all supporting documentation and agreements for amounts that are not at actual cost should be retained and formally agreed upon. 13

16 Capital Metro should require its contractors to be more specific about the unit costs for other miscellaneous costs. In addition, any costs to be reimbursed at an amount other than actual cost should be formally documented in an agreement on an appropriate basis (i.e. square foot, units, etc.) instead of a total cost. Management Response from Capital Metro Procurement and the Project Director intend to meet with LAN prior to January 13, 2010 to review additional supporting documentation on these elements. Capital Metro will require reimbursement on all unsupported costs and allow costs that are supported through documentation or a reasonable allocation method. The final agreement on these costs will be incorporated into the contract close out documents. Management Response from LAN LAN disagrees with the auditor s statement that excess amounts have been charged to Capital Metro for other direct costs. Agreed-to amounts were both documented in our Form 60 proposals and accepted by Capital Metro in each annual work plan authorization. We have consistently adhered to the terms of these agreements and limited our invoice amounts accordingly. This was done in spite of our own analysis which revealed that our actual costs to provide Capital Metro with project office space, computers, furniture, phones and phone service were far in excess of the amounts invoiced and recuperated. These costs include, among others: Significant additional costs related to build-out and cabling of the project office space; Long distance phone charges associated with Capital Metro project personnel; and, LAN IT support to troubleshoot and resolve problems with Capital Metro s internal communication software. We will be pleased to review and discuss this analysis with Capital Metro at their convenience. However, LAN recognizes that we assumed considerable risk in accepting the amounts documented for other direct costs and at this time we seek no additional compensation above and beyond these agreed-to amounts. Auditor s Follow-Up Comment Any cost analysis performed by LAN was not provided to the Auditor. Our analysis included consideration for the build-out cost of the leased space as it was documented in the lease agreement between LAN and the property owner. It did not, however, include any cabling costs, other long distance phone charges or LAN IT support as documentation of these expenses was not provided to us. Finding 4 Audited Overhead Costs (Material Weakness) Criteria The Contract between Capital Metro and LAN dated February 2, 2005, Exhibit E, section 44 (c) requires LAN to submit indirect cost rates based on actual cost experience for the previous fiscal year within 90 days after the expiration of each of its fiscal years to establish the indirect cost rate. Condition LAN provided an audited statement of its indirect costs to Capital Metro at the beginning of the contract that was based on their 2004 fiscal year, but has not provided such information for each of the subsequent fiscal years, as required by the Contract. According to both LAN and Capital Metro staff, an agreement was reached to use the 2004 rates for the entire contract period. However, the Contract was not modified to reflect this agreement. 14

17 Cause LAN and Capital Metro contract administration staff independently provided corroborating testimonial evidence that the rates established at the beginning of the contract were to carry through the entire contract without adjustments, making it unnecessary to review the audited indirect cost rates each year; however, the agreement was not documented in the actual contract. Effect LAN and Capital Metro have not complied with the requirements of the contract that require the review and agreement of indirect costs on an annual basis. In addition, without the contractually required audit reports, LAN can not ensure that they are charging the correct indirect cost rates to Capital Metro, nor can Capital Metro ensure that they are paying the correct indirect rates. Recommendation Capital Metro should ensure that LAN complies with the requirements of the Contract. If modifications are agreed to by LAN and Capital Metro, they should ensure that the Contract is modified to reflect the agreed-upon changes. Management Response from Capital Metro Procurement concurs with the recommendation. The contract should have been modified to reflect the OH rates that would carry through the term of the contract. In the future this type of requirement will be included in the Contract Management Plan template mentioned in Management response to Finding 1. Management Response from LAN LAN confirms our agreement with Capital Metro that the indirect rates established at the beginning of the contract were to carry through the entire contract without adjustments. We also concur that this agreement should have been documented in the contract language. We are willing to modify the contract to reflect this agreement. Should Capital Metro determine that LAN must provide actual indirect rates for fiscal years 2005 through 2009, we would be pleased to submit our audited rates for consideration and adjustment of amounts due to LAN. 15