oversight

HUD Did Not Adquately Monitor Its Performance-Based Contract Adminstrator, New York State Housing Trust Fund Corporation

Published by the Department of Housing and Urban Development, Office of Inspector General on 2008-10-16.

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

                                                                Issue Date
                                                                     October 16, 2008
                                                                Audit Report Number
                                                                      2009-NY-0001




TO:        Janet Golrick, Acting Deputy Assistant Secretary, Multifamily Housing, HT



FROM:      Edgar Moore, Regional Inspector General for Audit, 2AGA

SUBJECT: HUD Did Not Adequately Monitor Its Performance-Based Contract
         Administrator, New York State Housing Trust Fund Corporation


                                   HIGHLIGHTS

 What We Audited and Why

            We audited the U.S. Department of Housing and Urban Development’s (HUD)
            monitoring of its annual contributions contract with its performance-based
            contract administrator, the New York State Housing Trust Fund Corporation
            (contractor). The audit was initiated in accordance with the Office of Inspector
            General’s (OIG) audit plan that includes performing internal audits to evaluate
            HUD’s execution of its fiscal responsibilities. Our audit objective was to
            determine whether HUD appropriately monitored the contractor with respect to
            contract performance.

 What We Found


            HUD did not effectively assess the performance and contractual compliance of
            the contractor and its subcontractor. Specifically, HUD did not fulfill its
            monitoring responsibilities regarding appeals of fee determinations, monthly
            invoice reviews, and the annual compliance review. In addition, HUD
            headquarters and hub management failed to keep open lines of communication to
            provide clear and concise guidance. We attribute these conditions to a lack of
            written policies and procedures for (1) addressing the complexities of contractor
           oversight by two hubs, (2) ensuring that consistent performance criteria were used
           by the hubs, and (3) handling disagreements regarding interpretations of program
           directives. Consequently, more than $2.08 million in reduced administrative fees
           that were reversed were unsupported, and the contractor’s substandard
           performance was not adequately addressed.

What We Recommend


           We recommend that the Deputy Assistant Secretary for Multifamily Housing
           require the Director of Housing Assistance Contract Administration Oversight to
           establish policies and procedures defining the roles and responsibilities of hub
           staff. We also recommend that HUD provide training to hub staff in monitoring
           the contractor’s performance. In addition, we recommend that HUD examine the
           appeals and ensure that the appropriate supporting documentation exists for the
           more than $2.08 million in fees reimbursed to the contractor. We also
           recommend that the Deputy Assistant Secretary for Multifamily Housing require
           the HUD New York and Buffalo multifamily hubs to develop policies and
           procedures for monitoring the Section 8 contract administration initiative and
           reviewing challenges to HUD’s fee determination, the monthly invoice review,
           and the annual compliance review.

           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 discussed the results of our review during the audit, provided a copy of the
           draft report to auditee officials, and requested their comments on August 25,
           2008. We held an exit conference on September 23, 2008, and the auditee
           provided its written comments on September 25, 2008, at which time it generally
           agreed with our findings. Appendix B of this report contains HUD’s comments,
           along with our evaluation of the comments.




                                            2
                           TABLE OF CONTENTS

Background and Objectives                                        4

Results of Audit
      Finding 1: HUD Did Not Adequately Monitor the Contractor   6

Scope and Methodology                                            18

Internal Controls                                                19

Appendixes
   A. Schedule of Questioned Costs                               21
   B. Auditee Comments and OIG’s Evaluation                      22




                                          3
                      BACKGROUND AND OBJECTIVES

In May 2000, the U.S. Department of Housing and Urban Development (HUD) selected the New
York State Housing Trust Fund Corporation (contractor) as New York State’s contract
administrator for the Section 8 project-based program. As of April 1, 2008, the contractor’s
portfolio consisted of 999 contracts covering 91,969 units. The contractor engaged a private-
sector partner to perform the day-to-day responsibilities of contract administration. After a
competitive procurement process, CGI-AMS Inc., (CGI) was selected as the private-sector
partner beginning December 1, 2005.

The contractor provides program oversight and input on policy development, performs a quality
assurance function, and fulfills the reporting requirements to HUD. CGI performs the following
duties: (1) conducts management and occupancy reviews; (2) adjusts contract rents; (3)
processes housing assistance payments contract renewals, terminations, and/or opt-outs; (4) pays
monthly housing assistance payment vouchers submitted by project owners; (5) responds to
project health and safety issues; and (6) follows up on results of physical inspections of Section 8
projects.

The responsibilities of HUD’s Office of Housing Assistance Contract Administration Oversight
in headquarters include administering the outsourcing of project-based Section 8 contract
administration and subsidy contracts under multifamily rental subsidy programs. HUD’s
Monitoring and Oversight Division coordinates activities related to the evaluation of contractor
performance, provides technical assistance to contractors, prescribes any remedial actions needed
to improve contractor performance, and coordinates efforts between the contractors and the
multifamily field office staff.

The primary responsibility for monitoring and oversight of contractors rests with HUD’s
multifamily hubs and the program centers. The hub and operations directors should have limited
direct contact with the contractor. Although hub directors have the ultimate responsibility in the
field, the supervisory project manager oversees the day-to-day interaction with the contractor.
The oversight monitor is responsible for ensuring the overall contractual compliance on the part
of the contractor and initiating corrective compliance actions. The oversight monitor
responsibilities include enforcing contract compliance, drafting policies and procedures that
impact contractor oversight, oversees the work of the supervisory project manager and the
project manager, conducts invoice analyses, and acts as team leader for compliance reviews.
The monitoring of New York State’s contract is more complex because there are two hubs, New
York City and Buffalo, overseeing the operations of the contractor.

The contract for administration services for the Section 8 project-based program consists of 16
standards or tasks for which the contractor is responsible. The contractor is required to maintain
an acceptable level of quality for each of the tasks (standards) it performs under the annual
contributions contract with HUD. The four components used to measure task performance are
quality, timeliness, quantity, and data entry. The annual contributions contract and HUD’s
Monitoring and Evaluation Policies and Procedures require the contractor to (1) submit 95
percent of the required management and occupancy reports to HUD within 30 calendar days after


                                                 4
its scheduled completion review for standard 1–management and occupancy reviews; (b)
correctly process 100 percent of rent adjustments within 30 days or by the housing assistance
payments contract anniversary date for annual adjustment factor rent adjustments related to
standard 3–rental adjustments; and (c) correctly execute 90 percent of renewal housing assistance
payment contracts 60 calendar days before contract expiration for standard 14–contract renewals.
These standards are measured each month.

The administrative fee is the monthly fee HUD pays the contractor for each unit covered under
the housing assistance payments contract on the first day of the month. The administrative fee is
the total of the basic fee plus the incentive fee. The basic fee is paid to the contractor for a
covered unit under the contract. The contractor may be assessed a disincentive for performance
that fails to meet the acceptable quality level on any of the 16 standards or tasks. HUD may
reduce the basic fee earned if it determines that the contractor’s performance of standard tasks
was below the minimum acceptable quality level. Likewise, an incentive fee may be earned for
performance that exceeds the acceptable quality level on certain standards.

The objective of our audit was to determine whether HUD appropriately monitored the
contractor with respect to contract performance.




                                                5
                                RESULTS OF AUDIT

Finding 1: HUD Did Not Adequately Monitor the Contractor
HUD did not effectively assess the performance and contractual compliance of the contractor
and its subcontractor, CGI. Specifically, HUD did not fulfill its monitoring responsibilities
regarding (1) appeals of fee determinations, (2) monthly invoice reviews, (3) the annual
compliance review, and (4) keeping lines of communication open to provide clear and concise
guidance. We attribute these conditions to a lack of written policies and procedures for (1)
addressing the complexities of contractor oversight by two hubs, (2) ensuring that consistent
performance criteria were used by the hubs, and (3) handling disagreements regarding
interpretations of program directives. Consequently, more than $2.08 million in reduced
administrative fees that were reversed was unsupported, and the contractor’s substandard
performance was not adequately addressed.



              1. HUD’s Reversal of $2.08 Million in Appealed Administrative Fees Was
                 Unsupported



                                    Reversed administrative fees

                                                                            $2,088,908
                                                                               86%




                     $336,988
                       14%




              HUD reversed more than $2.08 million in disincentives and reductions in
              incentive fees without adequate support. The contractor and subcontractor
              appealed 91 HUD fee determinations from invoices submitted during the period
              December 2005 through October 2006. The fee challenges were equivalent to
              more than $2.4 million in reduced fee determinations that HUD made during that
              period. However, we did not find adequate documentation to support the reversal
              of $2.08 million in administrative fees. Specifically, the contractor did not
              provide adequate support justifying the appeals and HUD did not provide


                                               6
           adequate documentation to support reversing the findings. In addition, the
           reversed amounts were unsupported because

                  The contractor and subcontractor did not clearly identify how HUD’s fee
                  determinations were errant,

                  The oversight monitor failed to include hub management and program
                  managers who were involved in the original assessment in the decision
                  process, and

                  HUD failed to resolve inconsistent implementation of program directives.

           We attribute the fact that the reversed amounts were unsupported to the lack of
           written policies and procedures to address the various types of fee challenges the
           hubs processed.

Contractor Appeals Did Not
Provide Support That HUD’s
Fee Determinations Were
Errant

           The contractor and subcontractor did not clearly identify how HUD’s fee
           determinations were errant. HUD’s Guidebook for Section 8 Contract
           Administration provides that the contractor must clearly state what determination
           was errant and the nature of the error. Also, the contractor must provide
           supporting documentation to substantiate the claim. The contractor did not
           generally disagree with the facts surrounding the deficiencies but, rather, that the
           issues did not rise to a level of a finding. The oversight monitor stated that the
           decisions to overturn the fee determinations were based solely on the narratives of
           the contractor and subcontractor; however, the documentation provided to us did
           not support why the findings should have been reversed. The narratives provided
           the same information that was available during the invoice reviews, and the hub
           management teams agreed to these findings. For example, the Buffalo hub
           director disagreed with the oversight monitor’s comments on the appeal that
           future errors could result in a loss of fee. According to the director, a penalty
           should have been assessed since the oversight monitor acknowledged that the
           items were errors. This condition occurred in 13 of the 27 appealed items that
           were reversed.




                                            7
The Oversight Monitor Did Not
Include Buffalo Hub
Management in Its Fee
Challenge Decisions

            Although the Buffalo hub cited findings related to contractor invoices submitted,
            the oversight monitor did not include hub management or project managers in
            deciding the fee challenges and was the sole decision maker on some of the fee
            challenges reviewed. The oversight monitor overturned all 42 cases in which the
            contractor or subcontractor challenged the fee determination for the April through
            October 2006 invoices submitted. However, the oversight monitor did not
            provide Buffalo hub management staff with the fee challenges for review, nor did
            she consult with the Buffalo hub on HUD’s decision to overturn the findings.
            According to Buffalo hub management, this action was contrary to the procedures
            in place. However, we were unable to verify this statement because there were no
            written local procedures. The issue was further complicated by the fact that at the
            time of these fee challenges, the two hubs were in disagreement over the
            resolution of the fee challenges for the December 2005 through March 2006
            invoices.


HUD Failed to Resolve
Inconsistent Implementation of
Program Directives

            Monitoring of the contractor was complicated because this contractor had
            responsibilities related to both the New York City and Buffalo hubs.
            Nevertheless, HUD failed to resolve the inconsistent implementation of program
            directives at the two hubs. The disagreements between the two hubs over
            procedures to monitor the contractor’s performance were evident in the
            contractor’s appeal of the December 2005 to March 2006 invoices. The Buffalo
            hub took exception to the New York hub’s allowing for Real Estate Management
            System entries that were incomplete or incorrect and preliminary approval letters
            that were missing information or contained incorrect information. Thus, it took
            more than five months and the intervention of the Deputy Assistant Secretary for
            Multifamily Housing to resolve the fee challenge. Originally, the oversight
            monitor planned to reverse 41 of 49 fee challenges. However, the hub directors
            compromised, and 27 of the appealed fee challenges were reversed. Buffalo hub
            management still believes that the original findings should have been upheld.

            For 17 of the 49 fee challenges, the findings were overturned because the
            contractor updated the Real Estate Management System entries or the contractor-
            amended documents that were submitted to HUD for review before the
            submission of the invoice. The amounts were reversed due to a policy change
            that occurred during the fee challenge. The policy was changed during a



                                             8
             conference call between the oversight monitor and the contractor; however,
             Buffalo hub management was not included on the conference call or in the
             decision. According to Buffalo hub management, it is contrary to the annual
             contributions contract to allow a contractor to make corrections to submitted work
             products and not be penalized. Buffalo hub management stated that the majority
             of HUD’s reviews of the contractor’s work would be completed before the
             submission of the invoice. Nevertheless, the Annual Contribution Contract allows
             the contractor reasonable opportunity to cure mistakes. However, the two hubs
             disagree with the interpretation of this section of the contract. In many cases,
             corrections were made by the contractor as a result of HUD’s communicating the
             error to the contractor. Accordingly, the Buffalo hub director questioned the
             oversight monitor’s authority to change the policy and New York hub
             management’s acceptance of the change without concurrence with the Buffalo
             hub.

             The Director of HUD’s Office of Housing Assistance Contract Oversight, in
             response to a previous appeal from the contractor, provided that the contractor is
             responsible for detecting all deficiencies and taking appropriate corrective action
             before the package is submitted to HUD. In this instance, HUD provided that the
             processing clock starts once a properly prepared package from the owner is
             received. The clock stops when the package is properly processed by the
             contractor and submitted to HUD and all data entry is properly completed.
             Illegible, poorly documented, and poorly processed requests are not to be
             submitted to HUD for approval.

             HUD headquarters failed to address the disagreements between the two hubs.
             The hubs requested intervention regarding the appeal; however, HUD
             headquarters only provided general policy directions. According to HUD
             headquarters, the issues between the two hubs should be settled by the two hubs
             rather than headquarters for various reasons, one of which is that the contractor’s
             second level of appeal requires headquarters processing. Thus, headquarters
             needs to maintain an arms-length involvement. Even after the appeal was
             conducted, HUD headquarters did not address the policy disagreements between
             the two hubs.


HUD Lacked Written Policies
and Procedures for the Various
Types of Fee Challenges

             HUD did not have specific written policies and procedures for the various types
             of fee challenges made by the contractor and subcontractor. The HUD
             Guidebook for Section 8 Contract Administration provides that at the end of each
             contract year, the contractor may appeal a HUD fee determination that it feels was
             in error. In addition, the guidebook provides that HUD will review the
             contractor’s appeal and notify the contractor in writing of its findings. However



                                              9
contrary to this policy, informal policies and procedures allowed for appeals at
any time throughout the year by the contractor or subcontractor and allowed for
HUD not to notify the contractor in writing of its findings.

One type of fee challenge was a preappeal. According to the oversight monitor,
for a preappeal fee challenge, the contractor cannot request a second-level appeal.
However, the contractor can file a formal appeal if not satisfied with HUD’s
findings. The oversight monitor was unsure whether preappeals were standard
procedure within the contract administration initiative, and the Buffalo hub
director had never heard of a preappeal fee challenge as part of the initiative.
Nevertheless, the subcontractor preappealed the reductions to its administrative
fees for the May through October 2006 invoices by submitting fee challenges to
the oversight monitor via e-mails throughout the contract year, and the oversight
monitor reimbursed the contractor without notifying the contractor in writing of
its decisions.

Accordingly, HUD headquarters needs to provide guidance and written policies
regarding the requirements to address the hubs discrepancies on interpretations of
the contract and procedures. Specifically, the following discrepancies need to be
addressed by headquarters

       The determination of whether acknowledged errors should result in a loss
       of fees,

       The contractor’s ability to cure errors based on the circumstances of the
       case and prior failure or pattern of failure, and

       Challenges to fee determination procedures including preappeals.

2. HUD’s Ability to Monitor the Contractor through Its Monthly Invoice
   Review Process Was Questionable

The outcome of the contractor and subcontractor fee challenges raised questions
regarding HUD’s ability to monitor the contractor through its monthly invoice
review process. The contractor challenged six transactions in which HUD did not
assess a finding. Although the project managers cited the contractor for a finding
on these six transactions, the oversight monitor reversed the project managers’
decision after consulting with the contractor. However, during the appeal, the hub
directors decided that four of the six transactions were in fact findings. This
situation raised concerns as to how the oversight monitor handled the project
managers’ findings when processing the monthly invoices. Consequently, the
contractor’s performance could not be adequately assessed when the hubs could
not concur on what constituted substandard performance.




                                10
The Contractor Was Not
Assessed the Proper
Administrative Fee

           The contractor was not assessed the proper amount of disincentives and
           reductions in the incentive fees based upon the project managers’ monthly invoice
           review findings. HUD had experienced significant issues with the contractor’s
           performance since the end of 2005 when CGI became its subcontractor. The
           project managers had findings with more than 23 percent of the transactions on
           the monthly invoices for performance standards relating to rental adjustments and
           contract renewals with the new subcontractor. However, HUD’s concerns did not
           result in a significant loss of fees to the contractor. The oversight monitor did not
           assess reduced administrative fees on approximately 70 percent of the project
           managers’ findings. If HUD does not properly issue disincentives or make
           reductions in incentive fees, the contractor will not be inclined to improve
           substandard performance. There were project managers’ findings that should
           have resulted in additional loss of administrative fees. The review of the monthly
           invoices revealed that project manager-cited findings were similar to past findings
           and to those that were upheld in previous appeals that resulted in a loss of
           administrative fees. However, the oversight monitor did not assess a loss of
           administrative fee after consulting with the contractor. The chart below, detailing
           the total number of findings compared to the number of transactions according to
           the project manager and the oversight monitor, shows that approximately 70
           percent of the project manager’s findings were reversed and not considered as
           findings by the oversight monitor.


                                                                       Project
                           Monthly         Project     Oversight     manager’s
        Performance         invoice      manager’s     monitor’s      findings      Percentage
          standard       transactions     findings     findings       reversed       reversed
        3–rental              967            213           58            155           73%
        adjustments
        14–contract          474             129           48            81             63%
        renewals
               Totals       1,441            342           106           236           69%

    The Actual Administrative Fee
    to Be Paid Was Undeterminable

           The actual amount of administrative fees to be paid could not be determined due
           to a lack of adequate documentation. The oversight monitor failed to fully
           document the resolution of the findings and the reasons that project managers’
           findings were overturned. The documentation lacked evidence of how the
           oversight monitor communicated with the project managers to resolve the


                                            11
           findings. Likewise, the oversight monitor did not always provide or discuss with
           Buffalo hub management the outcome of the project manager’s findings. HUD’s
           Monitoring and Evaluation Policies and Procedures Guidebook requires that the
           oversight monitor’s review and the hub director’s final approval be documented
           in HUD’s files; however, they were not. In addition, it was difficult to determine
           the actual administrative fee to be paid because the project managers did not fully
           develop their findings by indicating the criteria that were violated (e.g., the annual
           contributions contract or other regulations).

HUD Did Not Address
Inconsistent Reviews

           Further, HUD did not ensure a consistent approach to measure contractor
           performance in the monthly invoice review process. For example, during the
           Buffalo hub’s review of performance standard 1–management and occupancy
           reviews, it documented in all of its monthly reports that a full review could not be
           completed because only the summary and corrective action sheet were submitted.
           However, the New York hub evaluated each of the summary and corrective action
           sheets and determined whether they were adequate. The oversight monitor, who
           reviewed both hubs’ reports each month, had not implemented policies and
           procedures to ensure that the offices examined each performance standard in the
           same manner.

           3. The Compliance Review Process Indicated Similar Performance
              Measurement Problems

           The 2007 annual compliance review for year 6 indicated similar problems with
           HUD’s measurement of contractor performance. HUD failed to ensure that a
           consistent approach was used to conduct the reviews. Moreover, HUD failed to
           address the concerns of hub management before releasing the report. Lastly, hub
           management was not included in the decisions to assess disincentives or loss of
           incentive fees. Thus, the lack of consistency of the hubs did not allow for an
           effective review of the contractor’s performance.


HUD Failed to Ensure That the
Compliance Review Procedures
Were Consistently Applied


           The two hubs had different expectations regarding the procedures when
           performing the 2007 annual compliance review for year 6. Therefore, HUD’s
           inconsistent approach to performing the compliance reviews undermined its
           ability to accurately assess the contractor’s performance. The hubs differed as to
           what transactions should be reviewed and when it was necessary to request



                                            12
           additional information from the contractor. The Buffalo hub requested from the
           oversight monitor and the acting New York hub director information that the
           contractor did not provide. For example, the Buffalo hub requested four vouchers
           and the supporting documentation for the vouchers it had previously received.
           The acting director denied the request because the additional information would
           have affected the timely completion of the compliance review and should have
           been obtained at the entrance conference. According to Buffalo hub management,
           this was the first time a deadline for requesting additional information was
           imposed; therefore, until the review was performed, there was no way to
           determine what documents were missing.

           In addition, there were questions raised about which transactions could be
           reviewed during the compliance review. According to the New York hub, only
           transactions that were included in the sample provided to the contractor could be
           examined, and that sample should only include transactions in which the
           contractor invoiced during the review period. However, the Buffalo hub believed
           that all transactions that occurred during the period could be reviewed, regardless
           of whether they were in the sample or invoiced.

Concerns of the Hub Director
Were Not Addressed


           The concerns of the Buffalo hub director were not addressed before the release of
           the annual compliance review report. In a June 7, 2007, e-mail to the oversight
           monitor, the Buffalo hub director expressed concerns regarding the compliance
           review, in that some findings identified by the Buffalo hub were removed from
           the report and some findings were changed to concerns by the oversight monitor.
           The Buffalo hub director strongly advised the oversight monitor to issue the
           compliance report as it was written and not remove any items as requested by the
           contractor. However, the compliance report that was issued changed three of the
           findings that the Buffalo hub identified to concerns and removed four of the
           original findings from the report. On June 22, 2007, the acting New York hub
           director responded to the Buffalo hub director via e-mail stating that in the past,
           HUD had afforded the contractor the opportunity to submit documentation, which
           may have been overlooked by HUD staff. Since the contractor submitted
           documentation, some of the findings were changed to concerns.

           The New York Regional Office’s quality management review report provided that
           draft reports are internal HUD documents and should not be provided to the
           contractor for negotiation or remediation. Also, the quality management review
           recommended that the process and timeframes for the next compliance review
           follow existing procedures referenced in the guidebook for the program.




                                            13
Hub Management Was Not
Included in Loss of Fees
Determination


           Buffalo hub management was not included in the decision-making process to
           assess the loss of administrative fees based on the compliance review findings.
           The Buffalo hub was not consulted on the fee determination, although 39 of the
           44 findings in the compliance review report were in the Buffalo portfolio.
           Further, there was no loss of fees assessed by the New York hub against the
           contractor for any of the 44 findings. According to the oversight monitor,
           disincentives or loss of incentive fees would depend on the nature of the finding,
           the contractor’s response, and HUD’s acceptance of the response. Further, the
           oversight monitor stated that the contractor’s responses were adequate to support
           not assessing a loss of administrative fee. However, Buffalo hub management
           noted many findings, which were eventually resolved by the contractor’s
           admitting to the errors, and could not understand why the New York hub did not
           assess a loss of fees.

           HUD headquarters needs to provide guidance and document the requirements to
           address the hubs discrepancies on interpretations of the contract and policies.
           Specifically, the following discrepancies regarding the annual compliance review
           need to be addressed by headquarters

                  Time limits to request information from the contractor,

                  The transactions that can be reviewed,

                  The procedures for handling hub director’s concerns, and

                  The determination of whether both hub management teams should be
                  included in the decision-making process to assess the loss of
                  administrative fees based on the compliance review findings.

           4. Failure to Keep Open Lines of Communication to Provide Guidance
              Affected HUD’s Measurement of Contractor Performance

           HUD could not ensure consistency in measuring the quality of the contractor’s
           performance because of a lack of communication. Monthly meetings were held
           between the New York hub, the contractor, and the subcontractor, but these
           meetings did not include the Buffalo hub. In addition, the hubs did not have
           conference calls to discuss changes in policies and procedures. Thus, the
           processes by which the two hubs reviewed monthly invoices and conducted
           annual compliance reviews were accomplished by informal procedures. As a
           result, conflicting directives were issued to the contractor from both hubs. These


                                           14
             directives were based on each hub’s interpretation of the informal procedures.
             Consequently, without a consistent message, the hubs could not expect the
             contractor’s performance to improve.


The Hubs Did Not Address the
Substandard Performance


             The hubs did not address issues relating to the change in subcontractors due to its
             problems with monitoring the contractor’s performance. The majority of the
             project managers’ findings and the policy issue changes were attributed to the
             new subcontractor and its substandard performance. The hubs spent a majority of
             their resources on bringing the subcontractor up to the level of competence,
             reviewing appeals to the fee determinations, and working with the subcontractor
             to resolve the findings so that the subcontractor would not suffer a loss of fees.
             However, the hubs should have informed the contractor in a timely manner of the
             subcontractor’s substandard performance and enforced the contract provisions for
             noncompliance. Since the hubs did not address the issue properly (through the
             contractor), HUD has no assurance that future changes in subcontractors will not
             result in the same type of substandard performance.


Conclusion

             HUD did not effectively assess the performance and contractual compliance of
             the contractor and its subcontractor. Specifically, HUD did not fulfill its
             monitoring responsibilities regarding appeals of HUD’s fee determinations,
             monthly invoice reviews, and the annual compliance review. We attribute these
             conditions to a lack of written policies and procedures for (1) addressing the
             complexities of contractor oversight by two hubs; (2) ensuring that consistent
             performance criteria were used by the hubs; and (3) handling disagreements
             regarding interpretation of program directives. Consequently, more than $2.08
             million in reduced administrative fees that were reversed was unsupported. In
             addition, the contractor’s substandard performance was not adequately addressed.
             Accordingly, HUD headquarters needs to provide guidance and document the
             requirements to address the hubs discrepancies on interpretations of the contract
             and policies.

Recommendations

             We recommend that the Deputy Assistant Secretary for Multifamily Housing require
             the Director of Housing Assistance Contract Administration Oversight to




                                             15
1A. Establish policies and procedures defining the roles and responsibilities of the
    HUD New York and Buffalo multifamily hubs’ Section 8 contract
    administration initiative staff.

1B. Provide training in monitoring the contractor’s performance to the HUD
    oversight monitor, and the New York, and Buffalo multifamily hub staff. The
    training should include appeals of fee determinations, monthly invoice
    reviews, and annual compliance reviews. In addition, the training should
    include a review of past invoices and address outstanding concerns of both
    offices.

1C. Review the procedures that the hubs developed with regard to challenges of
    fee determinations to ensure that they comply with requirements.

1D. Examine the appeals from December 2005 through October 2006 and ensure
    that appropriate supporting documentation exists for the $2,088,908 in fees
    reimbursed to the contractor and assess the disincentives and/or reductions to
    incentive fees as appropriate.

1E. Provide personnel with the institutional knowledge to assist the hubs with
    appeals and contract compliance issues.

We also recommend that the Deputy Assistant Secretary for Multifamily Housing
require the HUD New York and Buffalo multifamily hubs to

1F. Develop policies and procedures for the internal monitoring of the Section 8
    contract administration initiative that address collaboration between the two
    hubs in obtaining concurrences, handling disagreements, revising directives,
    and obtaining assistance from the Office of Housing Assistance Contract
    Administration Oversight.

1G. Develop policies and procedures for reviewing contractor’s challenges to fee
    determinations. The procedures should address the format of the written
    findings to the contractor, when the contractor may appeal, the format of the
    appeal, and the recommended timeframes for resolving the appeal.

1H. Develop and implement procedures to ensure that reversals of disincentives are
    based on supporting documentation, which clearly substantiates the claim that
    the hub’s assessment was errant.

1I.   Appoint objective personnel from both hubs with institutional knowledge to an
      appeals committee to ensure the consistent interpretation of applicable
      program rules.

1J.   Develop policies and procedures for implementing the monthly invoice review
      that include the process for conducting the reviews, providing the hubs with all



                                  16
     necessary supporting documentation for the monthly invoices, how each
     incentive-based performance standard will be reviewed, and how consistency
     will be maintained between the hubs.

1K. Implement and/or develop policies and procedures that require project
    managers to clearly develop their findings by including criteria regarding the
    contract violations. In addition, the files should include evidence that the
    contract administration oversight monitor obtained concurrence from the
    project managers of both hubs when applicable and/or the operations directors
    on the outcome.

1L. Develop and implement policies and procedures for the annual compliance
    review that include a consistent approach to conducting the review, addressing
    hub management concerns, and including both hub management teams on fee
    determinations.

1M. Develop and implement procedures to address nonperformance of the
    contractor. These procedures should include timely correspondence with the
    contractor, required actions to resolve poor performance, and administrative
    actions for nonperformance.




                                17
                         SCOPE AND METHODOLOGY

Our review focused on whether HUD appropriately monitored its performance-based contractor
with respect to its contract performance. To accomplish our objectives, we reviewed applicable
federal regulations, HUD handbooks, and other HUD requirements. In addition, we interviewed
HUD officials at the New York and Buffalo hub offices.

We reviewed the contractor and subcontractor appeals of the hubs’ fee determinations to
determine whether adequate policies and procedures were implemented. Also, we reviewed the
communication at the hub and headquarters level to determine its affect on the monitoring of the
contractor. In addition, we selected invoices from the months between December 2005 and
September 2007 to review the hubs’ monitoring policies and whether the hubs provided
consistent monitoring of contractor and subcontractor performance. Our focus was on standard
1–management and occupancy reviews, standard 3–rental adjustments, and standard 14–contract
renewals, since these were the standards by which the project managers assessed the majority of
their findings. Lastly, we reviewed the 2007 compliance review for year 6 to determine the
impact of the informal policies and procedures on the monitoring of the contractor’s
performance.

The review covered the period between October 1, 2005, and September 30, 2007, and was
extended as necessary. We performed our audit work from October 2007 through May 2008 at
the New York and Buffalo hub offices.

The review was conducted in accordance with generally accepted government auditing
standards.




                                               18
                             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:

                      Program operations – Policies and procedures that management has
                      implemented to reasonably ensure that a program meets its objectives.

                      Validity and reliability of data – Policies and procedures that management
                      has implemented to reasonably ensure that valid and reliable data are
                      obtained, maintained, and fairly disclosed in reports.

                      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.




                                               19
Significant Weaknesses


           Based on our review, we believe the following items are significant weaknesses:

                  HUD did not have adequate controls over its program operations when it did
                  not implement adequate procedures for addressing appeals to its fee
                  determinations; thus, HUD could not ensure that only incorrectly assessed
                  fees were reversed upon appeal (see finding).

                  HUD did not have adequate controls over compliance with laws and
                  regulations, as it did not ensure that the contractor was in compliance with
                  the annual contributions contract; thus, HUD could not adequately address
                  substandard performance (see finding).

                  HUD did not have an adequate system to ensure that resources were properly
                  safeguarded when the contractor did not maintain an acceptable level of
                  quality for each of the tasks it performed; thus, HUD could not provide
                  assurance that the fees paid were earned (see finding).




                                            20
                                   APPENDIXES

Appendix A

                SCHEDULE OF QUESTIONED COSTS

                         Recommendation           Unsupported
                                number                     1/
                                        1D         $2,088,908



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.




                                             21
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 1




                         22
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 1




Comment 2




                         23
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 3



Comment 4




Comment 5




Comment 6



Comment 6



Comment 7




                         24
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 7



Comment 8




Comment 9



Comment 10



Comment 11




Comment 12




                         25
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 13



Comment 14



Comment 14


Comment 15




Comment 12




Comment 14




                         26
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 16



Comment 17




Comment 18




Comment 19




Comment 18




                         27
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 20




                         28
                         OIG Evaluation of Auditee Comments

Comment 1   HUD officials generally concurred with the report conclusions, specifically
            regarding the lack of communication between the New York and Buffalo hubs,
            which has resulted in inconsistent program criteria and directives. In response to
            our recommendations, HUD plans to implement an alternative oversight structure
            and a realignment of staff workload. We have not examined the plan for
            sufficiency and it will be reviewed in conjunction with HUD’s response to all of
            the audit recommendations as part of the audit resolution process.

Comment 2   HUD officials note that various functions and related roles and responsibilities of
            the oversight monitor, project managers and hub directors are not accurately
            represented in the report from a program monitoring or organizational structure
            perspective, which has lead to flawed conclusions. In addition, HUD officials
            contend that there are statements in the report that require additional clarification
            to provide a clearer understanding of program monitoring requirements and the
            appropriate role of the staff involved. The functions, roles, and responsibilities of
            the staff at the two hubs as reported were obtained during interviews with Section
            8 contract administration initiative staff at each hub. As such, we maintain that
            written policies and procedures defining the roles and responsibilities of the HUD
            New York and Buffalo multifamily hubs’ Section 8 contract administration
            initiative staff needs to be established. Clarification on specific report statements
            are addressed individually in comments 3 through 11 below.

Comment 3   HUD officials state that there is an incorrect statement, which should be deleted
            or clarified regarding the monitoring and oversight division developing a
            monitoring and evaluation plan, and coordination of field activities to execute the
            plan. During the exit conference, we explained to HUD officials that the
            information detailed in our report was obtained from the Housing Assistance
            Contract Administration Oversight’s website. HUD officials contend that the
            information is inaccurate and will be removed from the site. Thus, we have
            removed the sentence in question from the report background section.

Comment 4   HUD officials contend that the description of the oversight monitor’s
            responsibility is incomplete and omits critical activity regarding the oversight
            monitor’s role. The purpose of the monitor’s responsibilities as described in the
            report background section was to provide only a general idea of some of the
            oversight monitor’s responsibilities; however, in response to the officials’
            contention, we have added additional responsibilities of the oversight monitor.

Comment 5   HUD officials state that the basis used in the finding regarding HUD’s inability to
            effectively monitor the program should be refined. The officials contend that the
            inability of the hubs to resolve differences in interpretations of existing guidance
            and the materiality of performance in question is the crux of the issue rather than
            the availability of written guidance. However, we maintain that the root cause for
            the conditions was a lack of local written policies and procedures for (1)



                                             29
              addressing the complexities of contractor oversight by two hubs, (2) ensuring that
              consistent performance criteria were used by the hubs, and (3) handling
              disagreements regarding interpretations of program directives. In regards to the
              term materiality of performance, we caution HUD officials on measuring
              contractor performance on such a basis, unless materiality is clearly defined in
              either the annual contributions contract or some other HUD guidance.

Comment 6     HUD officials contend that the failure of the oversight monitor to include hub
              management is not a procedural failure, is the appropriate process and is within
              the monitor’s responsibility of serving as the arbiter of the appeal. However,
              since our audit disclosed control weaknesses within these procedures, our
              recommendation to appoint objective personnel, with institutional knowledge,
              from both hubs to an appeals committee would increase controls ensuring the
              consistent interpretation of applicable program rules, thereby reducing
              disagreements.

Comment 7     HUD officials contend that the statement pertaining to headquarters failing to
              address disagreements between the two Hubs is inaccurate. We acknowledge that
              in the past HUD has attempted to provide direction, guidance and arbitrate the
              disagreements between the two hubs. However, for this particular appeal and the
              underlying issues, headquarters failed to provide adequate direction. As a result,
              the issues have continued to affect the hubs’ monitoring of the contractor’s
              performance.

Comment 8     HUD officials contend that all fee appeals are treated the same, and that the
              procedures allowed for appeals on an annual basis. However, this resulted in
              ineffective and inefficient monitoring of the program and it became more prudent
              to allow submission of appeals in real time, thus ensuring that relevant
              documentation, staff actions and contractor performance could be addressed
              immediately. While we agree that all fee appeals should be treated the same, our
              audit disclosed that they were in fact not treated the same. Further, the
              submission of appeals in real time is contrary to available HUD guidance, which
              provides that at the end of each contract year, the contractor may appeal a HUD
              fee determination that it feels was in error; thus, if this is no longer required then
              the procedures should be updated.

Comment 9     HUD officials note that the term preapproval fee challenge is unfamiliar and that
              a description of the process would assist in their response to the issue. This term
              was provided to us by the oversight monitor and the context of its use is self-
              explanatory in the report.

Comment 10 HUD officials contend that the oversight monitor’s function is to review the
           information submitted by the Buffalo hub, the contractor, and systemic data. The
           oversight monitor can request additional data if information is needed, however it
           is the oversight monitor who determines contractor performance and calculates
           the appropriate administrative fee. Nevertheless, local procedures and good



                                                30
              internal controls should make it imperative for the oversight monitor to discuss
              with asset management staff the reasons why the contractor does not believe the
              project manager’s findings should result in a loss of administrative fees on the
              monthly invoice; this would also reduce the redundancy of findings.

Comment 11 HUD officials concur that they did not ensure a consistent approach to measure
           contractor performance in the monthly invoice review process. However,
           determining which hub was conducting the correct review is not the issue, but
           rather, that the oversight monitor did not provide program guidance on how each
           incentive based performance standard would be reviewed.

Comment 12 HUD officials suggest that recommendations 1A and 1F be deleted from the
           report since the planned centralization of functions within the New York hub will
           address the discrepancy issue between the two hubs. HUD’s planned actions
           appear responsive to our recommendations. As such, the recommendations will
           remain in the report and be considered for closure during the audit resolution
           process in conjunction with HUD’s response to all of the audit recommendations.

Comment 13 HUD officials suggest that recommendation 1B be deleted from the report since
           invoice reviews, appeals of fee determinations, etc., are a function of the oversight
           monitor and therefore does not require training of hub staff. Further, HUD will
           provide the oversight monitor training as needed. We disagree with removing the
           recommendation; because there are two hubs involved, hub staff should be
           considered essential in monitoring the contractor’s performance including appeals
           of fee determinations, monthly invoice reviews, and annual compliance reviews.
           Thus, training should be provided to the oversight monitor and hub staff to
           address the outstanding concerns of the two hubs.

Comment 14 HUD’s actions are responsive to our recommendations.

Comment 15 HUD officials suggest that recommendation 1E be deleted from the report since
           contract compliance, invoice reviews, appeals of fee determinations, etc., are a
           function of the oversight monitor. We disagree with removing the
           recommendation since it ensures that proper internal controls are maintained.
           Disagreements between the oversight monitor and the staff of the two hubs
           regarding interpretations of program directives should be uniformly addressed by
           HUD headquarters, thereby ensuring a consistent interpretation of the regulations.

Comment 16 HUD officials suggest we delete recommendation 1H and include it as part of
           recommendation 1G. The recommendations will not be combined since each
           recommendation addresses a separate condition.

Comment 17 HUD officials suggest that recommendation 1I be deleted from the report since
           invoice reviews, appeals of fee determinations, etc., are a function of the oversight
           monitor and therefore should not be addressed by a committee. Our audit
           disclosed control weaknesses in these procedures; consequently, we disagree with



                                              31
              removing the recommendation. The appointment of objective personnel from
              both hubs with institutional knowledge to an appeals committee will ensure the
              consistent interpretation of applicable program rules.

Comment 18 HUD officials suggest that recommendations 1J and 1L be deleted from the report
           since the information is available in the annual contributions contract, the PBCA
           monitoring and oversight guidebook and numerous handbooks. However, since
           the criteria cited does not address the local policies and procedures pertaining to
           the day- to-day monitoring of the contractor’s performance, we disagree with
           removing the recommendations.

Comment 19 HUD officials suggest that recommendation 1K be deleted from the report since
           the requirements for annual compliance review findings are established and
           defined in the annual compliance review directions. Our review disclosed that the
           project managers were not citing the criteria pertaining to the contract violations
           during either their monthly invoice or annual compliance reviews. In addition,
           the oversight monitor did not provide evidence that she corresponded with the
           project managers and/or operations directors to determine why the findings were
           overruled. Accordingly, since procedures are already established for the annual
           compliance review, we have revised the recommendation to state implement
           and/or develop the policies and procedures in question.

Comment 20 HUD officials suggest that recommendation 1M be deleted from the report since
           the procedures for addressing nonperformance are imbedded in the annual
           contributions contract and the monthly and annual review of the PBCA. Further,
           officials contend that there is no role or responsibility of the Office of General
           Counsel in monitoring performance and would only be relevant if default under
           the contract is under review. Our audit disclosed that the oversight monitor did
           not take the appropriate steps to address the nonperformance of the contractor
           when a new subcontractor was hired, thus the recommendation stands; however,
           we will remove the Office of General Counsel from the recommendation since
           they are only involved during contract default.




                                              32