IG: IRS overuses cost-plus contracts

The Internal Revenue Service uses too many cost-plus contract and hasn't made enough of an effort to use contracts that put more risk on contractors, according to a report released today.

The Treasury Inspector General for Tax Administration found that 33 of 40 contracts were cost-plus or cost-reimbursement contracts, where the agency reimburses a contractor's costs and pays a fixed fee to the contractor, the report states. The contracts were awarded between February 2007 and January 2008 and were worth a total of $339 million.

“While the contract types we reviewed were not improper, these types of contracts present a greater risk of the IRS paying more for contracts than necessary,” said Russell George, the inspector general for tax administration.

The IRS included general operations and maintenance work as part of 18 of the 40 contracts, the report states. However, the service fixed prices for that type of work in only four of them. Agencies typically can settle on an accurate price for routine work because that work is very specific. The report also states that often the IRS’ files on contracts didn’t appropriately justify why the service used the cost-reimbursement structure rather than fixed-price.

The Federal Acquisition Regulation favors fixed-price contracts. However, the regulations also state that agencies should use cost-reimbursement contracts only when they can’t sufficiently set an accurate price because of various uncertainties.

A major cause for the IRS’ tendency to use cost-reimbursement contracts is that program managers first made a decision about contract types rather than collaborating with contracting officers, the report states. For all 40 contracts, the managers selected the contract type before sending the request to the procurement office, it states.

“The statements of work provided by the program offices are generally directed toward a certain type of contract, typically cost-reimbursement plus a fixed fee,” employees from the procurement office told the auditors.

The report recommends that IRS’ program managers work more closely with the service's procurement office when planning acquisition so they will choose the most appropriate contract type. It also recommends making better justifications for riskier contracts while having managers regularly assess whether a contract type still fits the work.

IRS officials agreed with the IG. The service is using more hybrid contracts, in which some elements of the contract are firm fixed-price, according to a letter from those officials in the report.

James Falcone, IRS’ chief of agencywide shared services, wrote that the IRS has improved its coordination with a contract review board. As a result, it has sent numerous acquisitions back to contracting officers to find a more appropriate contract for the work, he wrote. The service also is including more employee training about contract types and when to use them, he wrote.