oversight

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)

                                                                 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