2022-003 The District overcharged indirect costs to the program and did not have adequate internal controls for ensuring compliance with wage rate requirements. Assistance Listing Number and Title: 84.425, COVID-19 Education Stabilization Fund Federal Grantor Name: U.S. Department of Education Federal Award/Contract Number: N/A Pass-through Entity Name: Office of Superintendent of Public Instruction Pass-through Award/Contract Number: 84.425D-120442, 84.425D-130149, 84.425U-138108, 84.425U-137137, 84.425W-459516, 84.425U-140604, 84.425U-712302 and 84.425U-712146 Known Questioned Cost Amount: $34,682 Background The objectives of the Education Stabilization Fund (ESF) program are to prevent, prepare for, and respond to the COVID-19 pandemic. In fiscal year 2022, the District spent $6,243,051 of its ESF awards. This included $3,695,292 in the Elementary and Secondary School Emergency Relief Fund (ESSER I and II) subprogram (84.425D), $2,541,227 in the American Rescue Plan Elementary and Secondary School Emergency Relief (ARP ESSER/ESSER III) subprogram (84.425U), and $6,531 in the American Rescue Plan Elementary and Secondary School Emergency Relief ? Homeless Children and Youth (ARP ? HCY I and II) subprogram (84.425W). Federal regulations require recipients to establish and maintain internal controls that ensure compliance with program requirements. These controls include understanding grant requirements and monitoring the effectiveness of established controls. Allowable Costs/Cost Principles Federal regulations establish principles and standards for determining allowable direct and indirect costs for federal awards. The Office of Superintendent of Public Instruction establishes the indirect cost rate for each award, and districts cannot exceed this approved rate when claiming reimbursement. If there are changes to the rate during a multi-year award, districts must adjust the amount claimed, if needed, to ensure they do not exceed the approved rate. Wage Rate Requirements 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 Allowable Costs/Cost Principles Although the District?s internal controls were adequate for ensuring it materially complied with the program?s allowable activities and allowable costs requirements, the District charged the incorrect indirect cost rate for its ESSER II award. Wage Rate Requirements The District hired a contractor to update the heating, ventilation and air condition controls in three schools to improve air quality and circulation to prevent the spread of COVID-19. During the 2021-2022 school year, the District paid $627,519 from its ESSER II award for work the contractor and its subcontractors performed on this project. 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 collect weekly certified payroll reports from the contractor and its subcontractors to confirm they paid laborers proper prevailing wages. We consider this deficiency in internal controls to be a material weakness, which led to material noncompliance. These issues were not reported as a finding in the prior audit. Cause of Condition Allowable Costs/Cost Principles Management and staff did not know the District needed to manually adjust its OSPI-issued restricted indirect cost rate for ESSER awards that covered two fiscal years. Wage Rate Requirements The District relied on the contractor and subcontractors to submit weekly certified payroll to the Washington State Department 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 contractor, this process was not documented. Further, staff did not know the District needed to obtain all certified payroll reports each week. Effect of Condition and Questioned Costs Allowable Costs/Cost Principles The District charged $34,682 more in indirect costs than allowable because it did not charge the correct indirect cost rate for its ESSER II program. We are questioning these costs. Wage Rate Requirements Without adequate internal controls that ensure it 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 contractor 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 one project. We tested the contractor and four subcontractors and found the District should have obtained 19 weekly certified payroll reports, but did not collect any during the audit period. Since the contractor and subcontractors had submitted all required payroll reports for the projects to L&I, the District subsequently collected them during our audit. Recommendation Allowable Costs/Cost Principles We recommend the District ensure it uses the correct OSPI-issued restricted indirect cost rate for the fiscal period when charging costs to the program. Wage Rate Requirements We recommend the District develop internal controls that ensure compliance with federal wage rate requirements. This should include 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 2 CFR Part 200, Uniform Guidance, section 403, Factors affecting allowability of costs, describes the cost principles for how direct and indirect costs should be charged to federal programs. 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, establishes 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 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).