Issue Date
April 25, 2008
Audit Report Number:
2008-AO-1003
TO: Nelson Bregon, General Deputy Assistant Secretary, D
FROM: Rose Capalungan, Regional Inspector General for Audit, GAH
SUBJECT: The Mississippi Development Authority, Jackson, Mississippi, Homeowners
Assistance Program Contract Included Ineligible Provisions
HIGHLIGHTS
What We Audited and Why
We audited the State of Mississippi’s Development Authority’s (Authority)
Homeowners Assistance Program (Program), managed by Reznick Group and
Reznick Mississippi, LLC (contractor). We initiated the audit in conjunction with
the Office of Inspector General (OIG) Gulf Coast Region’s audit plan and
examination of relief efforts provided by the federal government in the aftermath
of Hurricanes Katrina and Rita. During a separate review of the Authority’s
administration of its Program, we found that the Authority paid its contractor for
contingency amounts. We initiated this audit to determine whether the Authority
ensured that the contingency amounts were eligible and supported.
What We Found
The Authority executed a contract, which included an ineligible provision that
allowed its contractor to bill and receive payment for ineligible and unsupported
contingency amounts. The Authority paid these amounts to its contractor because
it was unaware of federal prohibitions. As a result, the Authority paid its
contractor more than $3.9 million for ineligible and unsupported contingency
amounts during the period May 10, 2006, to August 29, 2007. In addition,
$243,210 in contingency amounts in the contract remained unpaid and could be
put to better use.
What We Recommend
We recommend that the U.S. Department of Housing and Urban Development’s
(HUD) General Deputy Assistant Secretary for Community Planning and
Development require the Authority to repay the Program from nonfederal funds
more than $3.9 million, which it disbursed for ineligible and unsupported
contingency amounts; cease from making further contract payments for $243,210
in contingency amounts, which could be put to better use; and develop and
implement a process to ensure that all future contracts and amendments involving
State of Mississippi Community Development Block Grant disaster recovery
funds do not include such ineligible provisions and amounts.
For each recommendation without a management decision, please respond and
provide status reports in accordance with HUD Handbook 2000.06, REV-3.
Please furnish us copies of any correspondence or directives issued because of the
audit.
Auditee’s Response
During the audit, we provided the results of our review to the Authority’s
management. We also provided our draft audit report to HUD’s staff during the
audit. We conducted an exit conference with the Authority’s management on
April 7, 2008.
We asked the Authority’s executive director to provide written comments to our
discussion draft audit report by April 11, 2008. However, we agreed to a request
to extend that date to April 18, 2008. The executive director provided written
comments to the discussion draft audit report, dated April 18, 2008. The
Authority generally agreed with our finding and has begun to take action to
resolve the issue. Based on Authority’s verbal comments, we made adjustments
to the tone of the first significant weakness cited under the Internal Controls
section of this report. The complete text of the written response, along with our
evaluation of that response, can be found in appendix B of this report.
2
TABLE OF CONTENTS
Background and Objectives 4
Results of Audit
Finding 1: The Authority’s Homeowners Assistance Program Contract Included 5
Ineligible Provisions
Scope and Methodology 9
Internal Controls 10
Appendixes
A. Schedule of Questioned Costs and Funds to Be Put to Better Use 12
B. Auditee Comments and OIG’s Evaluation 13
C. Billed Contingency Amounts 20
3
BACKGROUND AND OBJECTIVE
The State of Mississippi (State) received more than $5 billion in Community Development Block
Grant (CDBG) disaster recovery funds for hurricane recovery efforts. The Mississippi
Development Authority (Authority) is responsible for administering the recovery efforts.
On January 13, 2006, the Authority distributed a request for proposal to nine firms to provide
professional accounting services for the Homeowners Assistance Program (Program). It also
posted the request for proposal on the Web sites of the Authority, the governor’s office, the
Mississippi Bankers’ Association, and the Mississippi Society of Certified Public Accountants.
The Authority received four responses and considered all of the responses before choosing
Reznick Group, P.C. (contractor), on January 27, 2006. The contractor was hired to develop and
provide phase I and mobilization services for the Authority’s Program and immediately began
working on the project. Due to emergency conditions, the contractor submitted an initial task
order for $250,000 on February 2, 2006. The Authority approved this contract on February 3,
2006, with a term of February 1 to April 1, 2006.
On February 21, 2006, the Authority executed an emergency procurement of a fixed
compensation professional services contract with the contractor for an estimated $280,000,
which covered the period January 30 to April 1, 2006. Contract amendments were prepared. On
March 15, 2006, amendment #1 increased the scope of services and contract amount to $1.1
million. Amendment #2, dated April 14, 2006, increased the scope of services and the contract
amount to more than $48.8 million. This second amendment also included a compensation
budget that contained a 5 percent contingency. Amendment #3 did not have any monetary
effect, but it and amendment #4 were signed by Reznick Mississippi, LLC (contractor).
Amendment #4, dated February 14, 2007, increased the scope of services and the total estimated
contract amount to more than $88.2 million. The following table details the contract and
contingency amounts.
Original/ Total contract amount Total contingency
Date amount
amendment # (including contingency )
Feb. 21, 2006 Original $280,000 None
Mar. 15, 2006 1 $1,100,000 None
Apr. 14, 2006 2 $48,852,282 $2,272,918
Dec. 28, 2006 3 No change No change
Feb. 14, 2007 4 $88,262,352 $4,150,588
As of August 29, 2007, the Authority had disbursed more than $82 million to pay its contractor’s
costs for the Program, of which more than $3.9 million was for contingency amounts.
During a separate review of the Authority’s administration of its Program, we found that the
Authority paid its contractor for contingency amounts. We initiated this audit to determine
whether the Authority ensured that the contingency amounts were eligible and supported.
4
RESULTS OF AUDIT
Finding 1: The Authority’s Homeowners Assistance Program Contract
Included Ineligible Provisions
The Authority executed a fixed compensation contract, which included an ineligible provision
allowing its contractor to bill and receive payment for ineligible and unsupported contingency
amounts. The Authority paid these amounts to its contractor because it was unaware of federal
prohibitions. As a result, it paid its contractor more than $3.9 million in ineligible contingency
amounts during the period May 10, 2006, to August 29, 2007. In addition, $243,210 in
contingency amounts in the contract remained unpaid and could be put to better use. Since the
Authority allowed the prohibited provision and payments, it had fewer funds available for
homeowner grants and oversight of the Program.
The Contractor’s Proposal
Included Contingency Amounts
The contractor’s proposal included “an overall contingency amount of 5% of
project cost to cover unforeseen events that may occur.” The Authority accepted
the request for proposal, which allowed contingency amounts to be included in
the contract. While a contingency amount was a part of contractor’s proposal, the
Authority and contractor did not include it in the initial contract. Instead, a
“Contingency 5%” was included in the compensation budget of amendment #2,
and the contractor began billing for it beginning April 6, 2006, which was before
amendment #2 was executed. Further, except for the heading in amendment #2’s
compensation budget entitled “Contingency 5%,” the contract did not explain the
amounts which were calculated as 5 percent of the estimated costs.
Federal Cost Principles
Prohibit Contingency
Provisions
Office of Management and Budget (OMB) Circular A-87, “Cost Principles for
State, Local, and Indian Tribal Governments,” clearly states: “Contingency
provisions. Contributions to a contingency reserve or any similar provision made
for events the occurrence of which cannot be foretold with certainty as to time,
intensity, or with an assurance of their happening, are unallowable.” The
Authority was required to follow OMB Circular A-87 because HUD’s funding
approval documentation for the Program required the Authority to comply with
5
OMB circulars. Further, HUD required the Authority “to pay particular attention
to…OMB Circular A-87 pertaining to cost principles.” Since the contractor’s
proposal indicated that the contingency amount was for unforeseen events, and
OMB Circular A-87 states that such provisions are unallowable, the amounts paid
for the “Contingency 5%” to the contractor are ineligible.
A Fixed Compensation
Contract Was Procured
The Authority declared that its initial contract with the contractor was an
emergency procurement of a fixed compensation professional services contract.
As described in the Mississippi Personal Services Contract Procurement
Regulations (Procurement Regulations), a firm fixed-price contract1 provides a
price that is not subject to adjustment because of the variations in the contractor’s
cost of performing the work specified in the contract. Since the contingency
amount was calculated as a percentage of the contractor’s accrued billable hours
per functional category plus other expenses, it violated the State’s definition of
firm fixed-price contract. The Authority’s request for proposal states: “Hourly
rates shall include all overhead, direct, indirect, fringe and other miscellaneous
expenses.” Although the Authority declared the initial contract a fixed
compensation contract, by including “Contingency 5%” in amendment #2, the
terms of the contract were changed to reflect a cost-plus-a-percentage-of-cost
contract.
A Cost-Plus-a-Percentage-of-
Cost Contract Shall Not Be
Used
HUD’s State CDBG regulations state that a cost-plus-a-percentage-of-cost
contract shall not be used. In addition, the State’s Procurement Regulations state
that the use of any type of contract is permissible except for a cost-plus-a-
percentage-of-cost contract, which agencies are urged to avoid. A cost-plus-a-
percentage-of-cost contract is one in which, before beginning the work, the parties
agree that the fee will be a predetermined percentage of the total cost of the work.
Since amendment #2 included the contingency amount, which was calculated as a
percentage of billable hours, and cost-plus-a-percentage-of-costs contracts are
prohibited, the contingency amounts paid are ineligible.
1
The State’s Procurement Regulations do not include fixed compensation contract as a contract type. They list five
contract types: firm fixed-price contract, fixed-price contract with price adjustment, definite quantity contract,
indefinite quantity contract, and requirements contract.
6
The Authority Paid for
Contingency Amounts
Beginning with the invoice period April 6 to April 30, 2006, the Authority paid its
contractor a contingency amount equal to 5 percent of the total amount billed.
The contractor billed and the Authority paid more than $3.9 million2 of the
contingency amounts on invoices from May 10, 2006, through August 29, 2007.
Another $243,210 in contingency amounts remained under the contract and had
not been invoiced as of August 29, 2007.
Contingency Amounts Paid
Were Unsupported
The contractor also did not provide support for the contingency amounts. For
costs to be allowable, OMB Circular A-87 requires that they be adequately
documented. The Authority did not require the contractor to provide supporting
documentation for unforeseen events, nor did the invoices include support for the
contingency amounts. As a result, the Authority could not support the more than
$3.9 million it paid.
The Authority Was Unaware of
Federal Regulations
The Authority included ineligible contingency amounts and paid them without
support because it was unaware of federal requirements. Normally, State CDBG
requirements allow the Authority to select whether it will follow its own
administrative requirements or federal requirements. The Authority chose to
follow its own requirements for the State CDBG program, and its requirements
did not include references to OMB circulars. However, HUD’s funding approval
documentation for the State CDBG disaster recovery funds, dated April 11, 2006,
required the Authority to comply with OMB Circular A-87. Confusion occurred
because the initial contract was executed on February 21, 2006, which was before
the funding approval. The funding approval documentation was received and
signed by the Authority before amendment #2 was executed on April 14, 2006. In
addition, the contractor billed for the contingency amounts beginning April 6,
2006, with invoices 373461 and 373461A before amendment #2 was approved.
The Authority should have been aware of the requirements and removed the
contingency amount from the contract before the execution of amendment #2 and
the payment of invoices.
2
See appendix C for a table of the invoices and ineligible contingency amounts.
7
Authority monitoring staff were also unaware that OMB Circular A-87 applied.
In addition, a monitoring staff member claimed to have questioned the purpose
and necessity of the contingency amount after it was established but was told by
Authority management that it was a part of the contract and would not be
removed.
Conclusion
The Authority entered into a contract, which contained an ineligible provision that
allowed its contractor to bill for more than $3.9 million in ineligible and
unsupported contingency amounts. The Authority paid these amounts to its
contractor because it was unaware of federal prohibitions. In addition, $243,210
in contingency amounts in the contract remained unpaid and could be put to better
use. Since the Authority allowed the prohibited contract provision and paid the
ineligible and unsupported amounts, it had fewer funds available for homeowner
grants and oversight of the Program.
Recommendations
We recommend that HUD’s General Deputy Assistant Secretary for Community
Planning and Development require the Authority to
1A. Repay the $3,907,378 disbursed for ineligible contingency amounts to its
Homeowners Assistance Program from nonfederal funds.
1B. Cease any future payments to its contractor for $243,210 in contingency
amounts.
1C. Develop and implement a process to ensure that all future contracts and
amendments involving State CDBG disaster recovery funds do not include
ineligible contingency amounts.
8
SCOPE AND METHODOLOGY
We performed our audit work between December 2006 and December 2007 at the Authority’s
and contractor’s offices in Jackson, Mississippi, and HUD’s New Orleans, Louisiana, and
Jackson, Mississippi, field offices.
To achieve our objective, we
• Selected all fiscal year 2006 invoices that the contractor submitted to the Authority.
• Obtained a complete listing of disbursement transactions for the fund dedicated to the
Authority’s management of the Program.
• Examined the invoices, analyzed the supporting documents for expenses, and reviewed
relevant files.
• Reviewed applicable criteria including OMB Circular A-87, “Cost Principles for State,
Local, and Indian Tribal Governments”; contracts (and amendments) executed between
the Authority and the contractor; the Authority’s and contractor’s travel policies and
procedures; and the Authority’s HUD-approved action plan and amendments.
• Held discussions with Authority staff regarding their methods of reviewing and paying
invoices and accounting for payments made to the contractor.
• Interviewed the appropriate contractor staff regarding their preparation and submission of
invoices to the Authority.
• Held discussions with headquarters officials from the Office of Community Planning and
Development.
The audit covered the period May 10, 2006, through August 29, 2007. We conducted the audit
in accordance with generally accepted government auditing standards.
9
INTERNAL CONTROLS
Internal control is an integral component of an organization’s management that provides
reasonable assurance that the following objectives are being achieved:
• Effectiveness and efficiency of operations,
• Reliability of financial reporting,
• Compliance with applicable laws and regulations, and
• Safeguarding resources.
Internal controls relate to management’s plans, methods, and procedures used to meet its
mission, goals, and objectives. Internal controls include the processes and procedures for
planning, organizing, directing, and controlling program operations. They include the systems
for measuring, reporting, and monitoring program performance.
Relevant Internal Controls
We determined the following internal controls were relevant to our audit objective:
• Program operations - Policies and procedures that management has
implemented to reasonably ensure that persons are eligible to participate in
the additional compensation grant program.
• Validity and reliability of data - Policies and procedures that management
has implemented to reasonably ensure that valid and reliable data within
the management information system are obtained, maintained, and fairly
disclosed in reports.
• Compliance with laws and regulations - Policies and procedures that
management has implemented to reasonably ensure that CDBG disaster
fund use is consistent with HUD’s laws and regulations.
• Safeguarding resources - Policies and procedures that management has
implemented to reasonably ensure that CDBG disaster funds are
safeguarded against waste, loss, and misuse.
We assessed the relevant controls identified above.
A significant weakness exists if internal controls do not provide reasonable
assurance that the process for planning, organizing, directing, and controlling
program operations will meet the organization’s objectives.
10
Significant Weakness
Based on our review, we believe the following items are significant weaknesses:
• The Authority’s procurement controls did not ensure that its contract did not
include ineligible contingency provisions (finding 1).
• The Authority lacked adequate controls to ensure that monitoring staff were
aware of federal regulations to ensure that the Authority did not pay for
ineligible provisions (finding 1).
11
APPENDIXES
Appendix A
SCHEDULE OF QUESTIONED COSTS
AND FUNDS TO BE PUT TO BETTER USE
Recommendation Ineligible Funds to be put
number 1/ to better use
2/
1A $3,907,378
1B $243,210
1/ Ineligible costs are costs charged to a HUD-financed or HUD-insured program or activity
that the auditor believes are not allowable by law; contract; or federal, state, or local
policies or regulations.
2/ Recommendations that funds be put to better use are estimates of amounts that could be
used more efficiently if an Office of Inspector General (OIG) recommendation is
implemented. This includes reductions in outlays, deobligation of funds, withdrawal of
interest subsidy costs not incurred by implementing recommended improvements,
avoidance of unnecessary expenditures noted in preaward reviews, and any other savings
which are specifically identified. In this instance, if the Authority implements our
recommendation, it will not expend funds for contingency amounts, an ineligible cost.
12
Appendix B
AUDITEE COMMENTS AND OIG'S EVALUATION
Ref to OIG Evaluation Auditee Comments
Comment 1
13
Ref to OIG Evaluation Auditee Comments
Comment 2
Comment 1
Comment 3
14
Ref to OIG Evaluation Auditee Comments
Comment 3
Comment 2
Comment 1
Comment 1
Comment 1
15
Ref to OIG Evaluation Auditee Comments
Comment 3
Comment 3
16
Ref to OIG Evaluation Auditee Comments
Comment 4
17
Ref to OIG Evaluation Auditee Comments
Comment 2
18
OIG Evaluation of Auditee Comments
Comment 1 We acknowledge the Authority’s efforts to provide relief to the Mississippi Gulf
Coast after the devastation of Hurricane Katrina. We thank the Authority for its
positive response and agreement with the finding. We understand the initial
urgency of the circumstances and the confusion that prevailed. We recognize that
the Authority took prompt action to cease payments for the contingency amount,
obtained reimbursement for contingency amounts paid to Reznick, and agreed to
resolve any issues with the “5% contingency fee.”
Comment 2 The Authority agrees that it was unaware of federal prohibitions against
contingency fees, which became applicable after the contract execution. We
agree that the HUD funding approval document was signed after the contract was
executed; however, the funding approval document was signed on April 13, 2006,
a day before amendment #2 was executed, and its conditions apply to all
expenditures of disaster recovery funds. Since the Authority should have been
aware of the requirements of OMB Circular A-87 when the funding approval
document was signed, the contract terms of amendment #2 should have been
modified to remove any ineligible provisions.
Comment 3 We are pleased that the Authority has implemented new monitoring controls and
processes to ensure that contingency amounts are not included in fixed-price
contracts, ensured that no future invoices containing ineligible contingency
amount charges will be paid, and taken steps to ensure that compliance is verified
through monitoring efforts. However, these monitoring controls and processes
have not been verified by HUD OIG. Although, the Authority asserts that the
“Contingency 5% amount” appears to be a price adjustment clause, the Authority
acknowledges that the contract was not implemented as a price adjustment and
contingency amounts were billed. Therefore, we disagree that the Authority had
sufficient procurement controls to prevent an ineligible contingency provision
from being included in its contract. Additionally, we do not assert that the
contract is illegal. We only state that the contract, which the Authority has
previously informed HUD OIG is a “firm fixed-price contract”, violates (or
doesn’t agree with) the State’s definition of a firm fixed-price contract. To
prevent similar problems from occurring on future emergency procurements, we
reiterate our recommendation concerning the Authority’s procurement controls.
Comment 4 We acknowledge that the Authority’s monitoring staff recognized a potential
problem with the 5 percent contingency charge despite its lack of knowledge of
federal regulations; however, when the matter was presented to Authority
management, the finding was overridden, and nothing was done to remove the
contingency amount or renegotiate the contract with Reznick. We recognize that
the Authority took action to adequately train its monitoring staff on regulatory
compliance measures and provided the monitoring team with independence,
which is necessary for the team to perform its function and responsibilities.
19
Appendix C
BILLED CONTINGENCY AMOUNTS
Contingency amount
Maximum Amount
amount per Ineligible amount paid remaining per
contract contract
Invoice date Invoice number 5 percent
Not dated 373461A $ 5,001
May 10, 2006 373461 150,020
June 6, 2006 374967 122,162
June 20, 2006 375763 146,171
July 10, 2006 377310 106,948
July 21, 2006 377987 118,013
July 31, 2006 378964 130,585
Aug. 10, 2006 379840 142,693
Aug. 15, 2006 380151 56,673
Sept. 12, 2006 382785 150,467
Oct. 6, 2006 386578 102,347
Nov. 6, 2006 387685 260,406
Nov. 17, 2006 388356 143,231
Nov, 30, 2006 389095 128,419
Jan. 12, 2007 391408 112,721
Jan. 31, 2007 392735 202,636
Feb. 16, 2007 394181 186,610
Mar. 14, 2007 3996687 140,171
Mar. 26, 2007 398606 211,473
Apr. 10, 2007 400414 143,502
May 15, 2007 410425 110,190
May 22, 2007 410843 201,375
June 14, 2007 411755 102,098
June 27, 2007 412827 132,060
July 17, 2007 414311 212,605
July 27, 2007 415371 180,709
Aug. 29, 2007 417898 208,091
$4,150,588 $3,907,378 $243,210
20
The State of Mississippi's Homeowners Assistance Program Contract Included Ineligible Provisions
Published by the Department of Housing and Urban Development, Office of Inspector General on 2008-04-25.
Below is a raw (and likely hideous) rendition of the original report. (PDF)