2022-002 The District did not have adequate internal controls for ensuring compliance with wage rate requirements. Assistance Listing Number and Title: 84.041 ? Impact Aid Federal Grantor Name: Office of Elementary and Secondary Education, U.S. Department of Education Federal Award/Contract Number: N/A Pass-through Entity Name: N/A Pass-through Award/Contract Number: N/A Known Questioned Cost Amount: $0 Background The objective of the Impact Aid program is to provide financial assistance to local educational agencies whose local revenues or enrollments are adversely affected by federal activities. These activities include the federal acquisition of real property, or the presence of children residing on tax-exempt federal property or residing with a parent employed on tax-exempt federal property (?federally connected? children). Payments are made based on the number of federally connected children reported on an annual application, with additional funds provided for certain federally connected children with disabilities. During the 2021-2022 school year, the District received $16,655,945 in Impact Aid funds. Federal regulations require award recipients to establish and follow internal controls that ensure compliance with program requirements. These controls include understanding grant requirements and monitoring the effectiveness of established controls. Under federal wage rate requirements, also known as the Davis-Bacon Act, contractors and subcontractors that work on projects financed with more than $2,000 of federal money must pay laborers and mechanics wage rates that the U.S. Department of Labor considers being similar to what local workers have been paid for similar projects. For construction contracts subject to these wage rate requirements, the District must include a provision that the contractor and subcontractor comply with those requirements and the Department of Labor?s regulations. This includes a requirement for the contractor and its subcontractors to submit to the District weekly, for each week in which any contract work is performed, certified payroll reports. These reports must include a copy of the payroll and a signed statement of compliance. Description of Condition The District hired contractors for three projects?one to implement improvements at a high school, one to design and build a new middle school, and one to replace the roofs at two buildings. During the 2021-2022 school year, the District paid contractors about $9.5 million from its Impact Aid award for work on these projects. Our audit found the District did not have adequate internal controls for ensuring compliance with federal prevailing wage rate requirements. Specifically, the District did not: ?Include the required prevailing wage rate clauses in the contracts with two of the contractors ?Collect weekly certified payroll reports from the contractors and their subcontractors to confirm they paid laborers proper prevailing wages We consider these deficiencies in internal controls to be a material weakness, which led to material noncompliance. The issue was not reported as a finding in the prior audit. Cause of Condition District management lacked oversight of contracts to ensure that the required prevailing wage language was included in its entirety for all projects receiving federal funding. Additionally, the District relied on contractors and subcontractors to submit weekly certified payrolls to the Washington State Department of Labor and Industries (L&I) website. Although staff said they checked that weekly certified payrolls were uploaded to the L&I system before the District paid the contractors, this process was not documented. Further, staff did not know the District needed to obtain all certified payroll reports each week. Effect of Condition Without adequate internal controls that ensure it includes the prevailing wage rate clauses in its contracts and collects all weekly certified payroll reports, the District cannot demonstrate it complied with federal wage rate requirements. The District could also be liable for paying any additional wages if the contractors and subcontractors did not pay prevailing wage rates to laborers working on the contracts. During the audit period, the District was required to collect certified payroll reports from contractors and subcontractors on three projects. We tested two contractors and seven subcontractors and found the District should have obtained a total of 133 weekly certified payroll reports, but did not collect any during the audit period. Although the District subsequently collected all weekly certified payroll reports that the contractors submitted to the L&I system, 127 of them only referenced state requirements and did not include federal prevailing wage rate requirements. Recommendation We recommend the District develop internal controls that ensure compliance with federal wage rate requirements. This should include inserting the complete prevailing wage clauses into contracts and implementing effective monitoring processes to collect and review all weekly certified payroll reports timely from contractors and subcontractors. District?s Response The Central Kitsap School District concurs with this finding. Auditor?s Remarks We thank the District for its cooperation throughout the audit and the steps it is taking to address these concerns. We will review the status of the District?s corrective action during our next audit. Applicable Laws and Regulations Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance), section 516, Audit findings, establishes reporting requirements for audit findings. Title 2 CFR Part 200, Uniform Guidance, section 303, Internal controls, describes the requirements for auditees to maintain internal controls over federal programs and comply with federal program requirements. The American Institute of Certified Public Accountants defines significant deficiencies and material weaknesses in its Codification of Statements on Auditing Standards, section 935, Compliance Audits, paragraph 11. Title 29 CFR, Section 3.3 ? Weekly statement with respect to payment of wages, and Section 3.4 ? Submission of weekly statements and the preservation and inspection of weekly payroll records, establish requirements for contractor or subcontractor submission of weekly certified payroll reports. Title 29 CFR, Section 5.5 ? Contract provisions and related matters establishes the requirements for the contracting officer to insert in full in any contract in excess of $2,000 which is entered into for the actual construction, alteration and/or repair, including painting and decorating, of a public building or public work, or building or work financed in whole or in part with federal funds the clauses listed, which includes but is not limited to the minimum wages to be paid and payrolls and basic records to be maintained (submission of weekly certified payrolls).