Audit 398231

Condition: During our testing of contracts entered into by MEC under its agreement with Montana Disaster and Emergency Services (DES), we noted that MEC did not include the required indemnification clause in contracts funded, in whole or in part, with federal funds. The omitted language would have held the Federal Government, its employees and/or their contractors, DES, its employees and/or their contractors harmless from liability to third parties for claims asserted under such contracts Criteria: The agreement with DES requires that MEC include all applicable federal contract terms for all contracts for which federal funds are received. Specifically, if MEC contracts with any contractor or vendor for performance of any portion of the work required under the agreement, MEC must incorporate into its contract with such contractor or vendor an indemnification clause holding the Federal Government, its employees and/or their contractors, DES, its employees and/or their contractors, and MEC and its employees and/or their contractors harmless from liability to third parties for claims asserted under such contract. Cause: MEC did not update its standard contract templates to incorporate the indemnification clause required by the Agreement and did not have a review process in place to verify that all required federal terms were included in contracts with contractors and vendors. Effect: By failing to include the required indemnification clause, MEC is not in compliance with the terms of the Agreement and has potentially exposed the Federal Government, and DES to increased legal and financial risk in the event of third-party claims arising from contractor performance under these contracts. This noncompliance could result in questioned costs or other remedial action by the DES or FEMA. Recommendation: We recommend that MEC: 1. Revise its standard contract and purchase document templates to incorporate the required indemnification clause for all contracts funded with federal funds under this Agreement. 2. Implement a review and approval process to ensure all required federal contract provisions, including the indemnification clause, are included in applicable contracts prior to execution. 3. Provide training to staff responsible for procurement, contracting, and grant administration on the Agreement’s federal flow-down requirements. Management’s Response: Management concurs with the finding. MEC will revise its standard contract templates to include the required indemnification clause, implement a checklist and review process for all federally funded contracts, and provide training to relevant staff on the Agreement’s federal contract term requirements.