Issue Date
June 6, 2008
Audit Report Number
2008-AT-1008
TO: Jose R. Rivera, Director, Community Planning and Development, San Juan
Field Office, 4ND
FROM: James D. McKay, Regional Inspector General for Audit, 4AGA
SUBJECT: The Municipality of Carolina, Puerto Rico, Needs to Improve Procurement of Its
Housing Rehabilitation Activities
HIGHLIGHTS
What We Audited and Why
We audited the Municipality of Carolina’s (Municipality) Community
Development Block Grant (Block Grant) program. We selected the Municipality
for review as part of our strategic plan. The objective of the audit was to
determine whether the Municipality complied with HUD and its own regulations,
procedures, and instructions related to the administration of the Block Grant
program.
What We Found
The Municipality generally complied with requirements of the Block Grant
program. However, we found deficiencies associated with the procurement of its
housing rehabilitation activities. The Municipality awarded 65 housing
rehabilitation contracts totaling more than $400,000 without following HUD and
its own procurement requirements. As a result, it obtained goods and services
without full and open competition. In addition, the Municipality did not support
the reasonableness of more than $81,000 in Block Grant disbursements.
What We Recommend
We recommend that the Director of the San Juan Office of Community Planning
and Development require the Municipality to provide support showing the
eligibility and reasonableness of more than $81,000 or reimburse the Block Grant
program from nonfederal funds. The director should also require the Municipality
to implement procurement procedures and controls that comply with HUD
requirements to ensure that goods and services are obtained at the most
advantageous terms and in a manner providing full and open competition.
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 directive issued because of the
audit.
Auditee’s Response
We discussed the findings with the Municipality and HUD officials during the
audit. We provided a copy of the draft report to Municipality officials on April
30, 2008, for their comments and discussed the report with the officials at the exit
conference on May 8, 2008. The Municipality did not provide written comments
to our report and informed us that it will address the recommendations directly
with the San Juan Office of Community Planning and Development.
2
TABLE OF CONTENTS
Background and Objectives 4
Results of Audit
Finding 1: The Municipality Did Not Comply with Procurement Requirements 5
Scope and Methodology 8
Internal Controls 9
Appendixes
A. Schedule of Questioned Costs 10
B. Criteria 11
3
BACKGROUND AND OBJECTIVES
The Municipality of Carolina (Municipality) is an entitlement recipient administering more than
$18.9 million in Community Development Block Grant (Block Grant) funds approved by the
U.S. Department of Housing and Urban Development (HUD) during the past four years. HUD’s
Integrated Disbursement and Information System reflected Block Grant expenditures exceeding
$9 million during fiscal years 2005 and 2006 for the following activities:
Block Grant activity Fiscal year 2005 Fiscal year 2006
Planning and administration $1,068,851 $912,044
Housing rehabilitation 661,859 974,575
Public facilities and improvements 744,687 1,653,056
Public services 107,193 253,182
Section 108 loan repayments 1,378,270 1,341,912
Total $ 3,960,860 $ 5,134,769
The Municipality’s Community Planning and Development Office was responsible for
administering the Block Grant program. Its books and records for the Block Grant programs are
maintained at Ignacio Arzuaga Street, Carolina, Puerto Rico.
We audited the Municipality’s Block Grant program as part of the HUD Office of the Inspector
General (OIG) strategic plan. The Municipality was selected for review based on a risk
assessment.
The objective of the audit was to determine whether the Municipality complied with HUD and
its own regulations, procedures, and instructions related to the administration of the Block Grant
program.
4
RESULTS OF AUDIT
Finding 1: The Municipality Did Not Comply with Procurement
Requirements
The Municipality awarded 65 housing rehabilitation contracts totaling more than $400,000
without following HUD and its own procurement requirements. This noncompliance occurred
because the Municipality believed that competitive procurement was unfeasible. As a result, it
obtained goods and services without full and open competition. In addition, the Municipality did
not support the reasonableness of more than $81,000 in Block Grant disbursements.
Procurement Standards Not
Followed
Program regulations provide that recipients shall comply with HUD procurement
standards contained in 24 CFR [Code of Federal Regulations] 85.36. The
standards include conducting procurements using full and open competition, fully
documenting all procurement activities, and obtaining price or rate quotations
from an adequate number of qualified sources. In addition, the Municipality’s
procurement regulation requires the grantee to obtain at least three quotations or
cost proposals for construction or rehabilitation work that does not exceed
$100,000.
We analyzed 65 housing rehabilitation contracts paid between July 2006 and
September 2007. There were procurement deficiencies in all 65 contracts
reviewed. The Municipality did not obtain price or rate quotations from an
adequate number of qualified sources and did not provide documentation
explaining the rationale used for the contractor selection.
A Municipality official informed us that noncompetitive procurement was used by
selecting the contractor from a prequalified list and awarding the contract based
on the availability of the contractor. 1 Thus, the Municipality did not ensure that
the procurement of its housing rehabilitation activities complied with HUD
requirements. It did not provide evidence that it created an environment that
permitted full and open competition or that HUD authorized the use of
noncompetitive procurement.
The Municipality also maintained that competitive procurement would be
burdensome to the program because the dwelling units were scattered throughout
1
The contract amount was determined using the Municipality’s independent cost estimate.
5
the city and the amount of the repair work was under $10,000. However, it did
not provide documentation explaining how competitive procurement would
adversely affect the housing rehabilitation activities.
Unsupported Administrative
Expenditures
The Municipality awarded 65 contracts and paid $407,322 for housing
rehabilitation efforts within the Municipality. Although the Municipality
prepared independent cost estimates for each dwelling unit, it did not provide
adequate support showing the reasonableness of more than $81,000 in
administrative (overhead and profit) costs paid with Block Grant funds.
Therefore, HUD had no assurance of the reasonableness and propriety of the
costs.
The Municipality added a 25 percent markup to the total estimated amount of the
repair work. 2 Municipality officials informed us that the markup was associated
with the contractor’s administrative costs and that this amount (25 percent
markup) was adopted after a September 2005 meeting with the housing
rehabilitation contractors. The Municipality did not provide documentation
showing how the markup was determined or the basis used to determine its
reasonableness. Therefore, the reasonableness of the administrative costs was not
supported.
Conclusion
The Municipality did not provide evidence that it created an environment that
permitted full and open competition as required by HUD. It did not provide
adequate support showing the reasonableness of more than $81,000 in Block
Grant disbursements. This noncompliance occurred because the Municipality
believed that competitive procurement was unfeasible. As a result, HUD lacked
assurance that services were obtained at the most advantageous terms and in a
manner providing full and open competition or in accordance with HUD
requirements.
2
A fixed priced contract was awarded for the totality of the repair work cost estimate plus the 25 percent markup.
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Recommendations
We recommend that the Director of the San Juan Office of Community Planning
and Development
1A. Require the Municipality to provide support showing the eligibility and
reasonableness of $81,143 spent on administrative costs or reimburse the
Block Grant program from nonfederal funds. Any amounts determined
ineligible must be reimbursed to the Block Grant program from nonfederal
funds.
1B. Require the Municipality to implement procurement procedures and
controls that comply with HUD requirements to ensure that goods and
services are obtained at the most advantageous terms and in a manner
providing full and open competition.
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SCOPE AND METHODOLOGY
The audit objective was to determine whether the Municipality complied with HUD and its own
regulations, procedures, and instructions related to the administration of the Block Grant
program. To accomplish our objective, we
• Obtained and reviewed relevant HUD regulations and Municipality guidelines;
• Interviewed HUD and Municipality officials;
• Reviewed monitoring and independent accountant reports;
• Reviewed the Municipality’s files and records, including general ledgers;
• Performed site inspections of Block Grant activities; and
• Reviewed the Municipality’s controls related to the administration of its Block Grant
program.
We obtained a list of housing rehabilitation (citywide) grants the Municipality disbursed between
July 1, 2006, and September 30, 2007. During this period, the Municipality disbursed 65
housing rehabilitation grants totaling $407,322. We reviewed the 65 housing rehabilitation
grants to determine whether the procurement process followed by the Municipality met HUD
standards.
To achieve our audit objectives, we relied in part on computer-processed data contained in the
Municipality’s database. Although we did not perform a detailed assessment of the reliability of
the data, we performed a minimal level of testing and found the data to be adequate for our
purposes. The results of the audit apply only to the items selected and cannot be projected to the
universe or population.
The audit generally covered the period July 1, 2006, through September 30, 2007, and we
extended the period as needed to accomplish our objectives. We conducted our fieldwork from
November 2007 through March 2008 at the Municipality’s offices in Carolina, Puerto Rico.
We performed our review in accordance with generally accepted government auditing standards.
8
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, and
• Compliance with applicable laws and regulations.
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
objectives:
• Compliance with laws and regulations - Policies and procedures that
management has implemented to reasonably ensure that resource use is
consistent with laws and regulations.
• Safeguarding of resources - Policies and procedures that management has
implemented to reasonably ensure that resources are safeguarded against
waste, loss, and misuse.
We assessed the relevant controls identified above.
A significant weakness exists if management controls do not provide reasonable
assurance that the process for planning, organizing, directing, and controlling
program operations will meet the organization’s objectives.
Significant Weaknesses
Based on our review, we believe the following item is a significant weakness:
• The Municipality did not follow HUD procurement requirements when
awarding 65 contracts totaling more than $400,000 (see finding 1).
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APPENDIXES
Appendix A
SCHEDULE OF QUESTIONED COSTS
Recommendation
number Unsupported 1/
1A $81,143
_______
Total $81,143
1/ Unsupported costs are those costs charged to a HUD-financed or HUD-insured program
or activity when we cannot determine eligibility at the time of audit. Unsupported costs
require a decision by HUD program officials. This decision, in addition to obtaining
supporting documentation, might involve a legal interpretation or clarification of
departmental policies and procedures.
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Appendix B
CRITERIA
Federal Regulations at 24 [Code of Federal Regulations] 85.36(b)(9)
Grantees and subgrantees will maintain records sufficient to detail the significant history of
procurements. These records will include but are not necessarily limited to the following:
rationale for the method of procurement, selection of contract type, contractor selection or
rejection, and the basis for the contract price.
Federal Regulations at 24 [Code of Federal Regulations] 85.36(c)(1)
All procurement transactions will be conducted in a manner providing full and open competition.
Federal Regulations at 24 [Code of Federal Regulations] 85.36(d)(4)(i)
Procurement by noncompetitive proposals may be used only when procurement through small
purchase procedures is unfeasible and one of the following applies: (1) item is available only
from a single source, (2) a public emergency or exigency exists, (3) the awarding agency
authorizes it, or (4) competition is deemed inadequate after solicitation from various sources.
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The Municipality of Carolina, Puerto Rico, Needs to Improve Procurement of Its Housing Rehabilitation Activities
Published by the Department of Housing and Urban Development, Office of Inspector General on 2008-06-06.
Below is a raw (and likely hideous) rendition of the original report. (PDF)