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)