Water Resources:

Costs of the Fountain Valley Authority Pipeline

RCED-88-125: Published: Jul 13, 1988. Publicly Released: Jul 13, 1988.

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In response to a congressional request, GAO examined the Bureau of Reclamation's construction of the Fountain Valley pipeline in Colorado to determine: (1) why there was an increase in the pipeline project's total cost; (2) whether the Bureau had the legal authority to charge overhead costs to the pipeline operator; and (3) the equity of the Bureau's overhead charges.

GAO found that: (1) about $12.3 million of the project's $13.9-million total cost increase was due to increases in construction costs; (2) the overhead rate in the preliminary contract estimate was too low; (3) the construction contract legally authorized the Bureau to charge overhead costs to the pipeline operator; (4) although the direct overhead and noncontract costs were appropriate for the project, the Bureau's Missouri Basin Region overcharged the operator more than $500,000 in indirect overhead charges between 1981 and 1986; (5) the Region improperly applied an allocation rate in 1981 when distributing overhead costs among individual projects; (6) the Region used three different methods to allocate indirect costs to the operator; and (7) the Region did not comply with generally accepted accounting principles. GAO also found that regional officials agreed to: (1) recompute the pipeline's cost allocations using each of the three methods it applied during the project's life; (2) correct the erroneous rate applied in 1981; (3) exclude inequitable indirect overhead cost shifts; and (4) provide the recomputation to the operator and determine the amount of indirect overhead costs the operator should reasonably pay.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: A Bureau of Reclamation task force was established to make recommendations on overhead and general administrative expenses. According to the Bureau, the task force report was issued and recommendations implemented by September 1990. If GAO undertakes any future work involving cost allocation, it will consider how effective the changes were in establishing an uniform cost allocation method.

    Recommendation: To ensure that all Bureau regions are using an appropriate and uniform cost allocation method, recording and reporting reliable project cost data, and complying with accounting principles for federal agencies, the Secretary of the Interior should direct the Commissioner, Bureau of Reclamation, to select and approve an indirect overhead cost allocation method that is equitable to all projects and direct all regional office administrators to use the approved method consistently.

    Agency Affected: Department of the Interior

  2. Status: Closed - Implemented

    Comments: The Bureau's task force studied the allocation of indirect overhead costs and made recommendations to the Commissioner of Reclamation on September 4, 1990. If GAO undertakes any future work involving cost allocation, it will consider how effective the changes were in establishing an uniform cost allocation method.

    Recommendation: To ensure that all Bureau regions are using an appropriate and uniform cost allocation method, recording and reporting reliable project cost data, and complying with accounting principles for federal agencies, the Secretary of the Interior should direct the Commissioner, Bureau of Reclamation, to require Missouri Basin regional administrators to stop the practice of shifting indirect overhead costs among projects to avoid exceeding project budgetary limits, and thereby bring the Region's accounting practices into conformance with prescribed accounting principles.

    Agency Affected: Department of the Interior

 

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