oversight

The City of Durham, North Carolina, Did Not Comply with All Federal Procurement Requirements

Published by the Department of Housing and Urban Development, Office of Inspector General on 2008-09-24.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                                                                Issue Date
                                                                        September 24, 2008
                                                                Audit Report Number
                                                                        2008-AT-1015




TO:         Gary Dimmick, Director, Office of Community Planning and Development, 4FD



FROM:       James D. McKay, Regional Inspector General for Audit, 4AGA

SUBJECT: The City of Durham, North Carolina, Did Not Comply with All Federal
          Procurement Requirements

                                   HIGHLIGHTS

What We Audited and Why

             We audited the City of Durham (City), North Carolina’s HOME Investment
             Partnerships (HOME) program. Our audit objective was to determine whether the
             City complied with applicable federal procurement requirements with respect to
             its homeowner rehabilitation activity. This is the second of two audits of the
             City’s program.


 What We Found


             The City did not advertise for homeowner rehabilitation contractors as required.
             Also, it did not take necessary affirmative steps to ensure that minority firms,
             women’s business enterprises, and labor surplus area firms were used when
             possible. This condition occurred because the City lacked adequate procedures to
             ensure compliance with all applicable federal procurement regulations. As a
             result, it could not support that the program activities were subject to full and
             open competition. In addition, it could not ensure that minority firms, women’s
             business enterprises, and labor surplus area firms were given proper
             consideration.
What We Recommend


           We recommend that the U.S. Department of Housing and Urban Development
           (HUD) require the City to provide documentation to support that the HOME
           program homeowner rehabilitation activities, totaling $790,364 for fiscal years
           2006 and 2007, were awarded to the most responsible firm with a proposal that
           was most advantageous to the program, considering price and other factors. We
           also recommend that HUD require the City to develop and implement procedures
           to ensure that future services for homeowner rehabilitation are procured in
           accordance with applicable federal procurement requirements.

           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


           We provided the draft report to the City on August 28, 2008, and discussed the
           findings with City officials at an exit conference on September 4, 2008. The City
           provided its written comments on September 11, 2008. It generally expressed
           agreement with the finding.

           The complete text of the City’s response, along with our evaluation of that
           response, can be found in appendix B of this report.




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                           TABLE OF CONTENTS

Background and Objectives                                                         4

Results of Audit
      Finding 1: The City Did Not Procure Homeowner Rehabilitation Services in
      Accordance with All Requirements                                            5

Scope and Methodology                                                             7

Internal Controls                                                                 8

Appendixes
   A. Schedule of Questioned Costs                                                9
   B. HOME Homeowner Rehabilitation Activities for Fiscal Years 2006 and 2007    10
   C. Auditee Comments and OIG’s Evaluation                                      11




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                     BACKGROUND AND OBJECTIVES

The U.S. Department of Housing and Urban Development (HUD) has designated the City of
Durham (City) as a participating jurisdiction eligible to receive annual Office of Community
Planning and Development funding. HUD awarded the City’s HOME Investment Partnerships
(HOME) program $1.3 million in funding for fiscal year 2006 and $1.2 million for fiscal year
2007. The City is governed by a mayor and a seven-member city council. A city manager
appointed by the city council oversees the day-to-day functions of the City. The City administers
the HOME program through its Department of Community Development. A director manages
the daily operations of the department, which maintains its records at 401 Lakewood Avenue,
Durham, North Carolina.

The HOME program was created by Title II of the Cranston-Gonzalez National Affordable
Housing Act, as amended, and is regulated by 24 CFR [Code of Federal Regulations] Part 92.
HOME funds are awarded annually as formula grants to participating jurisdictions. Eligible uses
of these funds include homeownership downpayment, tenant-based assistance, housing
rehabilitation, assistance to homebuyers, and new construction of housing. HOME funding may
also be used for site acquisition, site improvements, demolition, relocation, and other necessary
and reasonable activities related to the development of nonluxury housing. All housing
developed with HOME funds must serve low- and very low-income families.

Our audit objective was to determine whether the City complied with all applicable federal
procurement requirements with respect to its HOME homeowner rehabilitation program.




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                               RESULTS OF AUDIT


Finding 1: The City Did Not Procure Homeowner Rehabilitation
Services in Accordance with All Federal Requirements
             The City did not advertise for homeowner rehabilitation contractors as required.
             Also, it did not take necessary affirmative steps to ensure that minority firms,
             women’s business enterprises, and labor surplus area firms were used when
             possible. This condition occurred because the City lacked adequate procedures to
             ensure compliance with all federal procurement requirements. As a result, it
             could not ensure that it procured $790,364 in homeowner rehabilitation services
             via full and open competition. It also could not ensure that minority firms,
             women’s business enterprises, and labor surplus area firms were used when
             possible.



 Rehabilitation Services Not
 Procured as Required


             As part of its HOME program, the City administers a homeowner rehabilitation
             program. The program allows the City to enter into deferred, forgivable loans
             amortized for up to 10 years for elderly and disabled owner-occupants with
             incomes at or below 50 percent of the area median income. The City procures
             contractors to rehabilitate the housing units, which must have at least three severe
             conditions to qualify. The maximum loan per unit is $35,000 except for
             residences that meet prescribed special conditions.

             The City uses the competitive proposal method of procurement for its homeowner
             rehabilitation activities. Procurement regulations (24 CFR 85.36(d)(3)(i)) require
             that construction type contracts be advertised when the competitive proposal
             method is used.

             The City is also required (24 CFR 85.36(e)) to take all necessary affirmative steps
             to ensure that minority firms, women’s business enterprises, and labor surplus
             area firms are used when possible. Affirmative steps include (1) placing qualified
             small and minority businesses and women’s business enterprises on solicitation
             lists and (2) ensuring that small and minority businesses and women’s business
             enterprises are solicited whenever they are potential sources.

             The City’s procurement policy stated that purchases and contracts would follow
             federal law. However, the City’s policy did not mirror the federal procurement
             requirements, including those cited above. As a result, the City’s staff did not
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          have adequate written procurement procedures to ensure compliance with all
          applicable federal requirements.

          The City planned to use $777,085, or about 30 percent of its 2006 and 2007
          HOME allocation, for its homeowner rehabilitation program. It carried out a total
          of 20 homeowner rehabilitation activities during this period. The original contract
          amounts of the activities totaled $731,337, and as of September 4, 2008, including
          all change orders, the City had expended $790,364 from its HOME allocation (see
          appendix B).

          We reviewed 13 of the 20 homeowner rehabilitation activities and found that none
          were advertised as required. As a result, the City could not support that the
          homeowner rehabilitation activities carried out were subject to full and open
          competition. In addition, it did not document its efforts to solicit participation of
          minority and women-owned businesses or labor surplus area firms in its
          homeowner rehabilitation program. Thus, the City did not ensure that minority
          firms, women’s business enterprises, and labor surplus area firms were used when
          possible as required. Both cited conditions occurred because the City lacked
          adequate internal controls to ensure compliance with all applicable federal
          procurement requirements.


Recommendations



          We recommend that the Director of Community Planning and Development,
          HUD North Carolina State Office, require the City to

          1A.     Provide adequate documentation to support that the $790,364 in HOME
                  funds for homeowner rehabilitation activities for fiscal years 2006 and
                  2007 were awarded to the most responsible firm with a proposal that was
                  most advantageous to the program, considering price and other factors.

          1B.     Develop and implement procedures to ensure that future services for
                  homeowner rehabilitation are procured in accordance with requirements as
                  they relate to both advertising and adequately documenting all necessary
                  affirmative steps to ensure that minority firms, women’s business
                  enterprises, and labor surplus area firms are used when possible.




                                            6
                         SCOPE AND METHODOLOGY

The audit objective was to determine whether the City complied with all federal procurement
procedures with respect to its HOME homeowner rehabilitation program services. To
accomplish our objective, we

       Obtained and reviewed relevant HUD regulations and City guidelines,

       Interviewed HUD and City officials, and

       Reviewed HOME project/activity files.


To achieve our audit objective, we planned to review all of the City’s fiscal year 2006 and 2007
homeowner rehabilitation projects. After reviewing 13 of 20 fiscal year 2006 and 2007 project
files, we cut off the review due to the consistency in procurement deficiencies noted. The
finding contains $790,364 in unsupported costs. We calculated the amount by totaling the
HOME funds expended for the City’s fiscal year 2006 and 2007 homeowner rehabilitation
activities.

The audit generally covered the period July 1, 2003, through June 30, 2007, but we extended the
audit period when necessary to accomplish our objectives. We conducted our field work from
May through July 2008 at the City’s offices in Durham, North Carolina.

We performed our review in accordance with generally accepted government auditing standards.




                                                7
                             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 City did not follow applicable procurement procedures when procuring
            homeowner rehabilitation services (finding 1).




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                                   APPENDIXES

Appendix A

                SCHEDULE OF QUESTIONED COSTS




                            Recommendation        Unsupported
                                   number                  1/

                                   1A             $790,364


                                  Total           $790,364


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

HOME HOMEOWNER REHABILITATION ACTIVITIES FOR
          FISCAL YEARS 2006 AND 2007


     Contract            Original contract    Total amount       HOME funds
     number              amount               paid(*)            expended
     7677                      $27,735             $30,509            $30,509
     76378                     $41,225             $41,225            $45,410
     76279                     $38,845             $45,870            $45,870
     76376                     $44,295             $56,400            $56,400
     76835                     $46,653             $46,653            $58,928
     76834                     $35,395             $38,935            $38,935
     76859                     $21,780             $23,958            $23,958
     76897                     $34,857             $34,857            $39,662
     76939                     $34,700             $38,170            $38,170
     76898                     $24,830             $27,313            $27,313
     76942                     $17,765             $19,465            $19,465
     76981                     $37,155             $40,871            $40,871
     323                       $37,625             $41,388            $41,388
     724                       $32,335             $36,918            $36,918
     1603                      $52,665             $59,099            $52,655
     1577                      $42,116             $53,608            $53,608
     3047                      $40,673             $42,295            $42,295
     3573                      $38,511             $41,470            $38,511
     3591                      $40,679             $36,000            $18,000
     3572                      $41,498             $41,498            $41,498

      Total                    $731,337            $796,502           $790,364
    (*) – City funds are used for the rehabilitation costs, and HOME funds are used
    to reimburse the City for those costs. Total amounts paid often exceed original contract
    amounts due to change orders.




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Appendix C

         AUDITEE COMMENTS AND OIG’S EVALUATION



Ref to OIG Evaluation   Auditee Comments




Comment1




Comment 2




                                11
12
                     OIG Evaluation of Auditee Comments

Comment 1   The regulations require that requests for proposals be publicized when using the
            competitive proposal method of procurement. This requirement, if followed,
            helps ensure full and open competition.

Comment 2   Although the City believes minority contractors are well represented on its
            bidders list, the requirement is much more encompassing. The regulations require
            that grantees and subgrantees take all necessary affirmative steps to assure that
            minority firms, women's business enterprises, and labor surplus area firms are
            used when possible.




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