oversight

The Texas Department of Housing and Community Affairs Did Not Fully Follow Requirements or Best Practices in the Acquisition of Its Disaster Recovery-Funded Program Management Firm

Published by the Department of Housing and Urban Development, Office of Inspector General on 2010-07-20.

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

                                                                      Issue Date
                                                                               July 20, 2010
                                                                      Audit Report Number
                                                                               2010-FW-1005




TO:               Scott G. Davis, Director, Disaster Recovery and Special Issues Division, DGBD

                  //signed//
FROM:             Gerald R. Kirkland
                  Regional Inspector General for Audit, Fort Worth Region, 6AGA

SUBJECT: The Texas Department of Housing and Community Affairs Did Not Fully
           Follow Requirements or Best Practices in the Acquisition of Its Disaster
           Recovery-Funded Program Management Firm


                                               HIGHLIGHTS

    What We Audited and Why

                    We audited the U. S. Department of Housing and Urban Development (HUD)
                    Community Development Block Grant (CDBG), Supplemental II Disaster Recovery
                    program, funds, administered by the Texas Department of Housing and Community
                    Affairs (TDHCA). Specifically, we wanted to determine whether TDHCA followed
                    Federal and State of Texas (State) regulations in procuring the program
                    management firm to administer the Housing Assistance and Sabine Pass
                    Restoration Programs. This is the third audit of the State of Texas Disaster
                    Recovery funds conducted as part of the Office of Inspector General’s (OIG)
                    commitment to HUD to implement oversight of the Disaster Recovery funds to
                    prevent fraud, waste, and abuse.


    What We Found

                    TDHCA did not follow requirements or best practices in the acquisition of its
                    Disaster Recovery-funded program management firm (Firm). 1 Specifically, it

1
     ACS State & Local Solutions, Inc. (ACS)
           accepted and approved the only proposal received when the proposal’s cost
           exceeded the request for proposals’ specification by $3.68 million. TDHCA
           made material changes to the contract that increased the maximum cost by $1.99
           million, budgeted $210,000 in prohibited costs, and contracted to pay the Firm
           using multiple payment types including $2.23 million for a cost plus a percentage
           of cost type, which is prohibited by Federal regulations. In addition, TDHCA’s
           contract with the Firm lacked sufficient detail tying construction management
           services and oversight to the payment and budget section costs for the proper
           identification and allocation of $14.33 million in costs. As a result, TDHCA
           cannot ensure it received the best value to the State, and its contract included
           ineligible and unsupported costs of almost $18.76 million.

What We Recommend


           We recommend that HUD’s Disaster Recovery Assistance and Special Issues
           Division Director require TDHCA to (1) adopt sound agency business procedures
           for Disaster Recovery-funded procurements in accordance with State policy, (2)
           train its staff to ensure that they follow its policies, (3) reimburse its Disaster
           Recovery account for $2.44 million in ineligible costs, (4) provide support for or
           reimburse $16.32 million in unsupported costs, and (5) modify its contract
           language.

           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 TDHCA our draft report on June 11, 2010, and requested comments
           by June 28, 2010. TDHCA requested an extension until July 7, 2010, to provide
           comments, which we granted. We held an exit conference on June 21, 2010.
           TDHCA provided its response to the draft report on July 7, 2010. TDHCA
           generally agreed with the audit report. The complete text of the auditee’s
           response, along with our evaluation of that response, can be found in appendix B
           of this report.




                                            2
                            TABLE OF CONTENTS

Background and Objective                                                            4

Results of Audit
      Finding:   TDHCA Did Not Fully Follow Requirements or Best Practices in the   5
                 Acquisition of Its Disaster Recovery-Funded Program Management
                 Firm

Scope and Methodology                                                               16

Internal Controls                                                                   17

Follow-up on Prior Audits                                                           18

Appendixes
   A. Schedule of Questioned Costs                                                  19
   B. Auditee Comments and OIG’s Evaluation                                         20
   C. Criteria                                                                      25




                                            3
                      BACKGROUND AND OBJECTIVE

Congress authorized two supplemental funding appropriations to assist the Gulf Coast States in
recovering from the destruction of Hurricanes Katrina, Rita, and Wilma. Public Law 109-148
authorized $11.5 billion (Supplemental I), and Public Law 109-234 (Supplemental II) authorized
$5.2 billion in Disaster Recovery program funding. Of the $16.7 billion, the State of Texas
(State) received $503 million through the U. S. Department of Housing and Urban Development
(HUD) Community Development Block Grant (CDBG) program to address areas most impacted
by Hurricanes Rita and Katrina.

The Governor of Texas selected the Texas Department of Housing and Community Affairs
(TDHCA) as the lead agency to administer the Disaster Recovery funds. TDHCA was
established in 1991 as the State’s primary agency to provide essential public service and housing
needs for extremely low to moderate income individuals and families in Texas. TDHCA in
conjunction with the State’s Council of Governments distributed the Supplemental I funds for
housing. The Supplemental II funds were distributed for housing using a procured program
management firm (Firm).

In May 2007, TDHCA solicited through a competitive request for proposals (request) for a firm
to administer the Housing Assistance Program (HAP) and the Sabine Pass Restoration Program
(SPRP). The request and subsequent contract were an extremely large and complex procurement
for TDHCA; normally State CDBG funds are not used directly to procure contracts. Further, the
firm was to be responsible for the distribution of more than $222 million in Supplemental II
housing aid to homeowners affected by the hurricanes. The bidder’s conference held by
TDHCA attracted 34 representatives from 17 entities. Four entities, including ACS State and
Local Solutions, Inc. (ACS), Shaw Environmental, Inc. (Shaw), and Reznick, Mississippi, L.L.C.
(Reznick), combined to submit one proposal with ACS designated as “the Firm” in July 2007. In
August 2007, TDHCA's board approved the Firm’s proposal, which included three of the four
proposed entities, and after several months of negotiations, TDHCA contracted with the Firm in
December 2007. As of March 2010, TDHCA reported that the Firm had constructed or
rehabilitated 1,129 homes with Supplemental II Disaster Recovery funds.

Our objective was to determine whether the TDHCA followed Federal and State of Texas
regulations in the acquisition of the program management firm to administer the Housing
Assistance and Sabine Pass Restoration Programs.




                                                4
                                      RESULTS OF AUDIT

Finding: TDHCA Did Not Fully Follow Requirements or Best
         Practices in the Acquisition of Its Disaster Recovery-Funded
         Program Management Firm
TDHCA did not always follow Federal or State requirements and best practices in the evaluation
of the single proposal and subsequent contract award with the Firm. Specifically, it accepted and
approved the only proposal received when the proposed cost exceeded the request for proposals’
(request) specifications by $3.68 million. In addition, it made material changes to the request’s
specifications during contract negotiations by increasing the maximum cost by $1.99 million,
budgeting $210,000 in prohibited costs, and allowing multiple payment types. Further, TDHCA
did not detect a $2.23 million cost plus a percentage of cost payment type that is not allowed
under Federal requirements. 2 TDHCA’s contract with the Firm lacked sufficient detail
describing and tying the construction management and oversight services to the payment and
budget sections to allow for the proper identification and allocation of $14.33 million in costs.
As a result, TDHCA cannot ensure it received the best value to the State, and its contract
included ineligible and unsupported costs of $18.76 million. The lack of contract details also
placed TDHCA at risk of paying unidentified, unallowable, or possible duplicate construction
management and oversight costs.


    TDHCA Needed Sound
    Business Procedures


                  HUD allowed States to follow their own procurement policies.3 The State of Texas
                  follows the Texas Government Code, the Texas Administrative Code, the State’s
                  Procurement Manual, and the State’s Contract Management Guide for
                  procurements. TDHCA indicated it followed State policy; however, the Contract
                  Management Guide stated that “each agency is independently responsible for
                  developing sound business procedures in accordance with applicable federal and
                  state laws, regulations, policies and procedures.”4

                  TDHCA had general procurement standards,5 but it did not provide independent
                  agency procurement business procedures. The lack of agency procedures had a
                  negative impact, as there appeared to be confusion as to which procurement
                  procedures to follow. In interviews, TDHCA stated that Federal procurement



2
     Appendix C, 24 CFR (Code of Federal Regulations) 570.489(g)
3
     Appendix C, 24 CFR 570.489(d) and (g)
4
     Appendix C, State of Texas Contract Management Guide, Version 1.6, Introduction, Purpose
5
     Appendix C, Texas Administrative Code, title 10, chapter 5, rule 5.10, Procurement Standards

                                                        5
                   regulations6 did not apply, but in e-mails generated at the time of the procurement,
                   its staff indicated that Federal procurement regulations7 applied. However, it
                   included different Federal procurement requirements in the contract.8

     TDHCA Properly Prepared and
     Advertised the Request


                   TDHCA properly coordinated with the Texas Building and Procurement
                   (Commission) to prepare the request. The Commission delegated procurement
                   authority to TDHCA, and TDHCA sent the request for review to the State’s
                   Contract Advisory Team. In addition, TDHCA properly advertised the request on
                   the State’s Web site, held a “Bidder’s Conference” to answer offerors’ questions,
                   and properly followed bid-opening procedures.

     The Proposal Did Not Comply
     with the Request’s
     Specifications

                   TDHCA did not follow State procurement requirements9 as it accepted the one
                   proposal received even though the total cost of the Firm’s individual operating
                   budgets exceeded the budget summary and the maximum administrative fees
                   available in the request. TDHCA used the competitive request for proposal method
                   of procurement10 to solicit a firm to administer the Housing Assistance and Sabine
                   Pass Restoration Programs as a turnkey solution for homeowners affected by
                   Hurricanes Rita and Katrina. The request stated that the selected firm was to receive
                   a maximum of $32.24 million11 for administrative, planning, and project delivery
                   costs. Although 17 bidders attended the pre-bidders conference, TDHCA received 1
                   proposal from the Firm to provide the required services. TDHCA did not check the
                   mathematical accuracy of the budget summary amount by comparing it to the sum
                   of the 11 individual operating budgets. Thus, it did not notice that the individual
                   budgets totaled to more than the budget summary, as follows:

                                         Compare Firm’s proposal amounts
                                11 individual      Project budget      Difference
                                   budgets           summary
                                 $35,933,105        $32,190,453        $3,742,652




6
      Appendix C, 24 CFR 85.36(a), Administrative Requirements for Grants and Cooperative Agreements to State,
      Local, and Federally Recognized Indian Tribal Governments
7
      Appendix C, 24 CFR 85.36 Procurement, (f) Contract cost and price
8
      The Firm’s contract references the Federal Acquisition Regulation at 48 CFR Part 31 for allowability of costs.
9
      Appendix C, Texas Government Code, sections 2262.051 and 052 and 2155.074(a) and (b)
10
      Appendix C, Request for Proposals, section 2.0, and Texas Government Code, chapter 2156, subchapter C
11
      Appendix C, Request for Proposals, section 4.4

                                                           6
                  In addition, the individual budgets’ total exceeded the maximum administrative fee
                  available in the request12 by a material amount.

                                 Compare individual budgets’ total to request
                               Firm’s 11       TDHCA’s request         Difference
                           individual budgets     maximum
                              $35,933,105        $32,243,834           $3,689,271


                  TDHCA contended that the request was only a guide, a nonbinding and nonlimiting
                  solicitation for services when factors other than price were evaluated and when
                  negotiations were contemplated. Therefore, the subsidiary budgets submitted by the
                  Firm were not a firm offer. However, as the request contained an award all or none
                  requirement 13 and the State’s policies required TDCHA to determine whether the
                  response complied with specifications, which included the maximum administrative
                  fee, 14 TDHCA should have considered rejecting the proposal. Since it did not detect
                  and address this error, it cannot ensure it received the best value for the services
                  solicited.

     Proposal Evaluations Were Not
     Independently Performed

                  TDHCA performed an evaluation of the Firm’s proposal even though it only
                  received the one response. However, rather than having each team evaluation
                  member separately review the proposal as required by State policy, 15 TDHCA’s
                  staff members assigned to scoring the proposal used the same application review
                  sheet to score and review it. According to State policy, evaluation members are
                  responsible for an independent and impartial evaluation of the submittals to maintain
                  integrity in the evaluation process.16 TDHCA staff members explained that had they
                  received more than one proposal, a formal evaluation and scoring process would
                  have taken place, but since there was only one proposal, the evaluation team only
                  focused on meeting the request’s requirements. TDHCA further asserted that
                  protocol would be followed in the future.




12
      Appendix C, Texas Contract Management Guide, chapter 5, Evaluation and Award, Responsive Proposals and
      the Texas Administrative Code, Title 34, Part I, Chapter 20, Subchapter C, Rule 20.36 (a)(7).
13
      Appendix C, Request for Proposals, section 4.0
14
      Appendix C, Texas Contract Management Guide, chapter 5, Evaluation and Award, Evaluation Teams,
      Responsive Proposals, and Proposal Evaluation
15
      Appendix C, Texas Contract Management Guide, chapter 5, Evaluation and Award, Evaluation Teams
16
      Appendix C, Texas Contract Management Guide, chapter 5, Evaluation and Award, Evaluation Teams,
      Proposal Evaluation, and appendix 6, Evaluation Team Briefing Instructions

                                                       7
     Single Responses Requirements
     Were Not Followed

                   According to the State’s policy, since TDHCA only received one response, it was
                   required to review the solicitation for any unduly restrictive requirements and
                   contact some potential respondents to determine why they did not submit a
                   response. Further, it should have considered the reasons that other responses were
                   not received and determined whether it was in the best interest of the State to
                   make the award, to readvertise with revised specifications, or to determine
                   whether a proprietary or single source justification was required. 17 TDHCA’s
                   procurement policies indicated that this was a noncompetitive proposal, as its
                   policies defined a noncompetitive proposal as one in which “after solicitation of a
                   number of sources, competition is determined inadequate.” 18

                   TDHCA staff asserted in interviews that this policy was followed but could not
                   document it. Instead, TDHCA provided a sole source justification memorandum,
                   dated October 26, 2009, which was more than 2 years after it approved the
                   proposal on August 28, 2007. According to TDHCA staff, this memorandum was
                   generated for the State’s independent auditors to explain the procurement and to
                   apparently comply with the State’s policy on proprietary purchases. Compliance
                   with the State’s policy did not occur. A memorandum should only be used for
                   purchases under $100,000; a formal letter to the State’s Comptroller of Public
                   Accounts was required for purchases greater than $100,000. 19

     Material Changes Were Made
     to the Request’s Specifications
     during Contract Negotiations


                   TDHCA made material changes to the request’s specifications during contract
                   negotiations by increasing the maximum cost for administration by $1.99 million,
                   budgeting $210,000 in prohibited proposal preparation costs, and allowing multiple
                   payment types. State policies allow the offeror to make changes during contract
                   negotiations; 20 however, the State cannot make material changes to the advertised
                   request specifications.21 These State policies ensure that contract objectives are not
                   inadvertently changed during negotiations and ensure that adequate competition
                   occurs, resulting in the best value to the State.




17
       Appendix C, Texas Contract Management Guide, chapter 5, Evaluation and Award, Single Responses
18
       Appendix C, Texas Administrative Code, title 10, chapter 5, rule 5.10(c)(4), Procurement Standards
19
       Appendix C, Texas Procurement Manual, section 2.21, Proprietary Purchases
20
       Appendix C, Texas Government Code, section 2156.124(b)
21
       Appendix C, Texas Administrative Code, Title 34, Part I, Ch 20, Subchapter C, Rule 20.31(b)(4)

                                                          8
                 The Contractor’s Amount Exceeded the Request’s Specifications

                 TDHCA did not follow the State’s best practices for contract management as the
                 contract exceeded by more than $1.99 million the maximum administrative fee it
                 set in the request, as detailed below. 22

                         Administrative fee category          Request        Contract         Difference
                                                             maximums         amounts
                      Planning/project delivery costs       $22,237,127     $23,655,848         $1,418,721

                      Program administrative costs           10,006,707      10,582,827            576,120

                      Totals                                $32,243,834     $34,238,675         $1,994,841


                 State policy allows negotiation; however, material changes to the request’s
                 specifications cannot be made. TDHCA’s $1.99 million increase in
                 administrative fees was a material change to the request’s specifications. TDHCA
                 did not provide justification or support for the increase in the administrative fees.
                 It admitted that formal documentation to support cost reasonableness was not
                 available; however, it asserted that the cost increase was well within the discretion
                 and latitude outlined in the State’s action plan and did not conflict with Federal or
                 State procurement requirements. Additionally, TDHCA did not make other
                 potential contractors aware of the increase in administrative fees, which could
                 have influenced their decision to submit a proposal. Therefore, it did not know
                 whether it received the best value to the State for the award.

                 The Contract Budget Included Costs Prohibited in the Request

                 TDHCA’s contract with the Firm included $210,000 in the budget for “Pre Award
                 Costs.” 23 A review of the contract’s budgets and a few invoices showed that the
                 Firm billed proposal preparation costs as “Pre Award Costs,” which were
                 described as “RFP [request for proposals] Response and Prep.” However,
                 TDHCA’s request specifically stated, “the offeror shall bear all costs related to
                 the preparation and submittal of their proposals.” 24 As a result, the $210,000 was
                 an ineligible cost. TDHCA stated that this was an error as it never intended to
                 pay bid preparation costs. TDHCA staff agreed that if these costs were incurred
                 before acceptance of the Firm’s proposal, they were ineligible and steps would be
                 taken to recover the funds.




22
     Appendix C, Request for Proposals, section 4.4
23
     Contract between TDHCA and the Firm, exhibit 4.1, Requirements for Payment and Reimbursement of
     Program Administrative, Planning and Project Delivery and Pass-Through Funds, attachment 1 and section 2
24
     Appendix C, Request for Proposals, section 3.8

                                                        9
                  The Contract Included Multiple Payment Types

                  TDHCA’s request stated that the Firm would receive a cost reimbursement
                  contract. 25 The contract with the Firm included a budget that indicated it would
                  be reimbursed for costs plus profit. The contract also stated the Firm would be
                  paid a per transaction rate (the “Per Home Rate”) for construction management
                  and oversight services on each home constructed or rehabilitated. The budget in
                  the contract also contained a “Construction Mgmt Fee,” which was calculated as a
                  cost plus a percentage of cost. 26

                  According to State policy, TDHCA’s contract with the Firm contained three State
                  contract payment types, 27 one of which was a cost plus a percentage of cost
                  method that was not allowed by Federal regulations. 28 Further, two payment
                  types, cost plus a percentage of cost and cost plus a fixed fee, appeared to be an
                  improper combination because the State’s policy allowed for a cost plus a
                  percentage of cost “or” cost plus a fixed fee. 29 The change from a cost
                  reimbursement type to multiple payment types was a material change and should
                  not have occurred. TDHCA indicated it was working with the Firm to define
                  construction categories, identify specific activities for each category, and provide
                  documents to support each activity.

     The Contract Included an
     Ineligible Payment Type


                  TDHCA’s contract with the Firm included a budget category for a “Construction
                  Mgmt Fee,” which totaled $2.23 million.30 A review of the contract’s budget
                  showed that it calculated this fee by multiplying a “7.5% Supplier Subcontractor
                  Markup” against project delivery costs. 31 Although State policy allowed cost plus
                  type payment methods, HUD’s State CDBG program regulations did not allow a
                  cost plus a percentage of cost method of contracting. Further, TDHCA’s
                  procurement policy stated that in the case of any conflict between the Office of
                  Management and Budget (OMB) Circulars or Federal laws and State laws
                  involving Federal funds, the OMB Circular or Federal law would prevail. 32 As
                  both the Firm and its subcontractor agreed to follow HUD’s requirements, 33 the
                  $2.23 million in “Construction Mgmt Fee” costs were ineligible. TDHCA stated
                  it was taking steps to amend the contract to remove the cost plus a percentage of
                  cost payment type.

25
      Appendix C, Request for Proposals, section 1.5.2
26
      Contract between TDHCA and the Firm, exhibit 4.1, attachment 1, Subcontractor Cost Budget
27
      Appendix C, Texas Contract Management Guide, chapter 3, Preparing the Solicitation, Payment Types
28
      Appendix C, 24 CFR 570.489(g)
29
      Appendix C, Texas Contract Management Guide, chapter 3, Preparing the Solicitation, Payment Types
30
      Contract between TDHCA and the Firm, exhibit 4.1, section 2, and attachment 1
31
      Contract between TDHCA and the Firm, exhibit 4.1, attachment 1
32
      Appendix C, Texas Administrative Code, title 10, chapter 5, rule 5.10(b), Procurement Standards
33
      Contract between TDHCA and the Firm and subcontractors, section 6.3, Certifications

                                                       10
     The Contract Included
     Budgeted Costs That Did Not
     Tie to Deliverables

                   TDHCA’s contract with the Firm lacked sufficient detail describing and tying the
                   amounts in the payment and reimbursement section to the scope of services
                   section. The scope of services section of the contract described construction
                   administration, contract management of subcontractors, construction
                   management, and construction oversight. However these terms were not clearly
                   tied to the payment section, which included these terms in more than one budget
                   cost category. TDHCA also did not approve a final budget 34 that separately
                   allocated all costs by program, Housing Assistance or Sabine Pass Restoration
                   Program. As a result, it cannot support $4.28 million 35 in budgeted costs.

                   The contract’s payment and reimbursement section defined costs, included a
                   budget detailing the maximum reimbursable amounts, and outlined
                   reimbursement procedures. Costs included program administration costs,
                   planning costs, project delivery costs, supplier profit, and direct costs that would
                   be paid through “Pass-Through Funds.” 36 The contract budget summary
                   contained three categories under project delivery costs, all of which involved
                   construction management, as detailed in the following table.

                              Budget summary description           Amount
                              “PMO Total-Shaw” 37                  $1,422,128
                              “Construction Mgmt”                   2,856,620
                              “Construction Mgmt Fee”               2,231,365
                              Total                                $6,510,113

                   The detailed budget provided little additional language other than to briefly
                   explain the various categories. The contract’s scope of service’s section included
                   the services to be provided by the Firm and its subcontractors. Comparing the
                   language in the contract’s payment section to the scope of services showed that
                   the terms used did not tie and were used interchangeably for the various budget
                   categories and services. For example, the scope of services section detailed
                   construction management of subcontractors, construction management of
                   rehabilitation, and construction oversight for new homes, but the budget summary
                   had three categories, all of which contained construction management without
                   detailing for what service the budgeted cost was paying. Further, salary
34
      Contract between TDHCA and the Firm exhibit 4.1, section 3
35
      The actual amount of unsupported project delivery costs is $6.51million; however, $2.23 million was previously
      questioned in the finding as ineligible ($6.51-$2.23=$4.28 million).
36
      Contract between TDHCA and the Firm, exhibit 4.1, “Pass-Through Funds: Direct costs incurred in the
      performance of home rehabilitation and reconstruction activities…”
37
      Contract between TDHCA and the Firm, exhibit 4.1, section 2, and attachment 1, Subcontractor Cost Budget

                                                         11
                   information provided with the detailed budget was not sufficient to tie positions to
                   the scope of services section. In addition, as discussed further below, the “Per
                   Home Rate” was also for construction management and oversight. As the scope
                   of services included deliverables, all of which generally fell under construction
                   management and oversight, TDHCA lacked clear terminology that tied services to
                   the costs.


     The Contract Included a Poorly
     Defined, Unbudgeted, and
     Unsupported “Per Home Rate”


                   TDHCA included a “Per Home Rate” in the payment section of the contract. The
                   “Per Home Rate” was for construction management and oversight services related
                   to home rehabilitation and new construction, as follows:

                        •    Homes for rehabilitation (general contractor comprehensive service
                             construction management) - $5,044/home;
                        •    New “Stick-Built” home construction (construction oversight) -
                             $1,510/home; and
                        •    New manufactured home construction (construction oversight) -
                             $800/Home 38

                   According to the Firm, the “Per Home Rate” was estimated to cost $10.05
                   million.39 However, TDHCA’s contract did not clearly specify in the contract
                   language where the “Per Home Rate” would be allocated or whether a maximum
                   existed for this rate. Further, the “Per Home Rate” was not included in the
                   budget, and the contract also did not clearly specify whether the “Per Home Rate”
                   costs would be project delivery costs, paid through the administrative fee, or paid
                   with “Pass-Through Funds” as a direct cost. The contract stated that the rate
                   would be paid according to section 2B, 40 which did not exist. However, section
                   3B of the contract stated that all costs paid would “be on a reimbursement basis”
                   and “Pass-Through Funds” draws shall be sufficiently detailed and paid according
                   to milestones with percentage payments being made based on the amount of
                   milestone work completed. 41

                   TDHCA's lack of a clear definition of the “Per Home Rate” impacted its ability to
                   oversee this contract item. Various TDHCA staff members provided conflicting

38
       Contract between TDHCA and the Firm, exhibit 4.1, section 2
39
       Contract between TDHCA and the Firm, exhibit 4.1, attachment 1, Unit Pricing Budget, showed a $5,044 rate
       applied to 739 homes to be rehabilitated ($5,044 x739 = $3,727,516) and rate of $1,510 applied to 4,186 new
       homes ($1,510 x 4,186 = $6,320,860). Thus, the estimated “Per Home Rate” totaled $10,048,376 ($3,3727,516
       +$6,320,860=$10,048,376).
40
       Contract between TDHCA and the Firm, exhibit 4.1, section 2
41
       Contract between TDHCA and the Firm, exhibit 4.1, section 3

                                                         12
                  definitions and explanations of the “Per Home Rate.” In one explanation, the
                  “Per Home Rate” was described as a part of the budgeted line item “Construction
                  Mgmt Fee.” In another, it was detailed as hard costs directly charged through
                  “Pass-Through Funds” for home inspections. In an e-mail generated at the time
                  of the procurement, it appeared that the “Per Home Rate” was to replace the
                  budgeted “Construction Mgmt” and the “Construction Mgmt Fee,” but that did
                  not occur.

                  A few invoices were reviewed in an attempt to determine what costs and services
                  TDHCA paid for with the “Per Home Rate.” The review showed the “Per Home
                  Rate” (1) involved inspections, (2) was paid in full even though homes had not
                  been completed, and (3) was paid with “Pass-Through Funds,” indicating a direct
                  cost. TDHCA cannot support that the rate was solely a direct cost, as it had no
                  cost detail. Additionally, costs associated with home inspections like the
                  inspector’s salaries, vehicle expenses, and other miscellaneous costs were
                  invoiced and paid from “Construction Mgmt,” which indicated that the rate may
                  not have been supported as a direct inspection cost.

                  Since TDHCA did not specify where the ‘Per Home Rate’ would be paid from
                  and it allowed the rate to be charged to “Pass-Through Funds,” it effectively
                  increased the total cost of the contract from $34.24 million to almost $44.29
                  million.42 Decreasing the amount of “Pass-Through Funds” reduced the amount
                  available to rehabilitate and construct homes. The lack of sufficient contract
                  detail tying the budget cost items to specific deliverables in the scope of services
                  placed TDHCA at risk of paying unidentified, unallowable, or possibly duplicate
                  construction management and oversight costs, making the entire estimated $10.05
                  million “Per Home Rate” unsupported. In addition, the invoice review showed
                  TDHCA did not ensure that the Firm billed the “Per Home Rate” according to
                  contract terms, which resulted in its paying the full fee for more than 600 homes
                  when only 4 had been completed. Further, as TDHCA did not set a maximum
                  amount for the “Per Home Rate” in the contract, the Firm had no incentive to
                  minimize costs.

                  TDHCA agreed that the contract did not clearly detail the activities involved in
                  construction management, inspections, and construction fees. It stated it had
                  undertaken a preliminary review of costs and there was no indication of
                  comingling of fees. As a review of the costs was outside the scope of this audit,
                  testing was not performed to confirm this statement; however, the contract needs
                  modification to ensure that proper identification of costs and billing occurs.




42
     The original contract price of $34,238,676 will increase by the $10,048,376 estimated cost for the “Per Home
     Rate” ($34,238,676 + $10,048,376 = $44,287,052).

                                                        13
Conclusion


             TDHCA did not always follow Federal and State requirements and best practice
             procedures in the evaluation of the single proposal and subsequent award of the
             contract to the Firm. Consequently, it accepted a proposal that materially did not
             meet specifications, made material changes to the request’s specifications during
             contract negotiations, included prohibited costs and ineligible payment types, and
             did not include language in the contract adequately tying the budgeted costs to
             service deliverables. As a result, TDHCA cannot support budgeted costs and it
             included ineligible costs, as follows.

                                   Cost category            Unsupported    Ineligible       Totals
                         Contract exceeded specifications   $ 1,994,841                   $1,994,841
                         Proposal preparation costs                       $     210,000     210,000
                         “Construction Mgmt Fee”                              2,231,365    2,231,365

                         “PMO Total-Shaw”                    1,422,128                     1,422,128
                         “Construction Mgmt”                  2,856,620                     2,856,620
                         “Per Home Rate”                     10,048,376                    10,048,376
                         Totals                             $16,321,965   $2,441,365      $18,763,330


Recommendations



             We recommend that HUD’s Disaster Recovery Assistance and Special Issues
             Division require TDHCA to

             1A. Adopt sound agency business procedures for Disaster Recovery-funded
                 procurements in accordance with State policy.

             1B. Train staff to adequately follow State and Federal procurement requirements
                 in the evaluation and acceptance of proposals and contract negotiations and
                 contract formation. Further, if staff fail to follow requirements, TDHCA
                 should have procedures in place to address noncompliance.

             1C. Reimburse the HUD funded Disaster Recovery program $210,000 for any
                 ineligible proposal preparation costs.

             1D. Provide support for the $1,994,841 material increase to the administrative
                 fees or repay its HUD funded Disaster Recovery program.




                                                14
1E. Modify its contract to correct the $2,231,365 cost plus a percentage of cost
    “Construction Mgmt Fee.” Any payments made to the Firm under this
    payment type must be repaid to its HUD funded Disaster Recovery program.

1F. Modify the contract language to include sufficient detail to allow for the
    proper tying of budgeted costs to the scope of services and approve a final
    budget that properly identifies and allocates all costs to support $14,327,124
    in questioned costs: $10,048,376 in estimated “Per Home Rate” costs,
    $2,856,620 for budgeted “Construction Mgmt,” and $1,422,128 for “PMO-
    Shaw Labor” costs.




                                15
                            SCOPE AND METHODOLOGY

We conducted our audit at the Texas Department of Housing and Community Affairs’ office in
Austin, TX, and the HUD Office of the Inspector General (OIG) office in San Antonio, TX. We
performed our audit work between November 2009 and May 2010. To accomplish our
objective, we

       •   Reviewed Federal and State procurement policy, regulations, and practices.
       •   Reviewed HUD and State Disaster Recovery grant agreements and the State’s HUD-
           approved action plan.
       •   Reviewed TDHCA’s request for proposals, the Firm’s proposal, the contract between
           TDHCA and the Firm, the two subcontracts, and other procurement information
           concerning this procurement maintained by TDHCA.
       •   Reviewed HUD’s monitoring reports, the Texas State Office of Audit reports, and
           documentation regarding the Disaster Recovery funds.
       •   Interviewed HUD Office of Community Planning and Development management and
           staff.
       •   Interviewed TDHCA Disaster Recovery Division executives, managers, and staff.
       •   Interviewed the Texas State Comptroller of Public Accounts 43 manager and staff.
       •   Obtained and reviewed some voucher payments for reasonableness, eligibility, and
           evidential support.

To accomplish our objective related to procurement, we compared TDHCA’s procurement
information to the Comptroller of Public Accounts’ files to verify the data’s completeness and
accuracy. We used the HUD State CDBG program regulations and the State’s Government
Code, Procurement Manual, and Contract Management Guide to verify all requirements were
implemented and documented as required. TDHCA’s evaluation documentation was reviewed
for adequate evaluation team composition, team independence, and the responsiveness of the
Firm’s proposal. TDHCA’s contract with the Firm was evaluated against its threshold criteria in
the request. We obtained from TDHCA the Firm’s payment requests and draws from January
2008 through November 2009. A few of the payment requests and draws were matched to the
contract’s described services to validate whether budgeted costs were tied to the scope of
services.

We conducted the audit in accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain sufficient, appropriate
evidence to provide a reasonable basis for our findings and conclusions based on our audit
objective. We believe that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objective.




43
     The Comptroller of Public Accounts, Contract Advisory Team Review and Delegation (CATRAD), procedures
     require major contracts over $1 million to be reviewed by the CATRAD.

                                                    16
                              INTERNAL CONTROLS

Internal control is a process adopted by those charged with governance and management,
designed to provide reasonable assurance about the achievement of the organization’s mission,
goals, and objectives with regards to

   •   Effectiveness and efficiency of operations,
   •   Reliability of financial reporting, and
   •   Compliance with applicable laws and regulations.

Internal controls comprise the plans, policies, methods, and procedures used to meet the
organization’s mission, goals and objectives. Internal controls include the processes and
procedures for planning, organizing, directing, and controlling program operations as well as the
systems for measuring, reporting, and monitoring program performance.



 Relevant Internal Controls
               We determined that the following internal controls were relevant to our audit
               objective:

               •   Policies and procedures established and/or followed by TDHCA regarding
                   procurement, including the request, the proposal evaluation, and the contract
                   award.

               We assessed the relevant controls identified above.

               A deficiency in internal control exists when the design or operation of the control
               does not allow management or employees, in the normal course of performing their
               assigned functions, the reasonable opportunity to prevent, detect, or correct (1)
               impairments to effectiveness and efficiency of operations, (2) misstatements in
               financial or performance information, or (3) violations of laws and regulations on a
               timely basis.

 Significant Deficiencies


               Based on our review, we believe that the following item is a significant deficiency:

               •   TDHCA did not follow requirements or best practices in the acquisition of its
                   Disaster Recovery-funded contract with the Firm (see finding).




                                                17
                       FOLLOW-UP ON PRIOR AUDITS


  The Texas Department of
  Housing and Community
  Affair’s Disaster Recovery
  Action Plan Needs
  Improvement, 2009-FW-1016

We issued an audit report on the CDBG Supplemental I and II Disaster Recovery program funds
in September 2009 with the following recommendation: HUD should request that TDHCA
modify its action plan to either provide homeowner’s insurance for a reasonable period to all
newly reconstructed or repaired homes for a period equitable to the amount of funds invested and
the life of the asset, or request the homeowner to obtain homeowner’s insurance as a prerequisite
to obtaining assistance for a period equitable to the amount of funds invested and the life of the
asset, or prohibit the homeowner from being able to receive future Disaster Recovery assistance
if an insurance policy is not maintained on a newly reconstructed or repaired home, which will
result in $60.2 million in funds to be put to better use. HUD agreed to request that TDHCA
modify it procedures. The recommendation is in an open status.




                                               18
                                              APPENDIXES

Appendix A

                        SCHEDULE OF QUESTIONED COSTS

                         Recommendation                  Ineligible 1/      Unsupported 2/
                                number
                                 1C                       $ 210,000
                                 1D                                            $ 1,994,841
                                 1E                        2,231,365
                                 1F                                              14,327,124

                               Totals                     $2,441,365           $16,321,965




1/   Ineligible costs are costs charged to a HUD-financed or HUD-insured program or activity that the auditor
     believes are not allowable by law; contract; or Federal, State, or local policies or regulations.

2/   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 the 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.




                                                          19
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION

Ref to OIG Evaluation   Auditee Comments




                         20
Ref to OIG Evaluation   Auditee Comments




Comment 1




Comment 2




Comment 3




                         21
Ref to OIG Evaluation   Auditee Comments




                         22
Ref to OIG Evaluation   Auditee Comments




Comment 4




                         23
                         OIG Evaluation of Auditee Comments

Comment 1   We are in agreement with TDHCA either altering its current standard operating
            procedures or issuing standard operating procedures to reflect the process for
            procurements that involve limited bidders.

Comment 2   We agree that TDHCA should include additional procurement training as part of
            its new or revised internal standard operating procedures and that it should remain
            committed to the training.

Comment 3   TDHCA agreed to recapture $210,000 in disallowed proposal preparation costs
            from the contractor and use the recovered funds on other eligible program costs.
            Because TDHCA made the ineligible payment, it is TDHCA’s responsibility to
            repay the funds irrespective of whether it recaptures the funds from the contractor.

Comment 4   We agree that TDHCA should amend the contract and Exhibit 4.1 to include a
            new budget. TDHCA stated it expects that the contract amendments will address
            the $1,994,841 contract price increase over the request for proposal and address
            other finding issues related to adding clarity to cost classifications and payment
            types. TDHCA will need to provide adequate support/justifications to HUD to
            address each of the issues in recommendations 1D, 1E, and 1F.




                                             24
Appendix C
                                        CRITERIA

Code of Federal Regulations

    24 CFR 570.489(d), Fiscal controls and accounting procedures. (1) A state shall have
    fiscal and administrative requirements for expending and accounting for all funds received
    under this subpart. These requirements must be available for Federal inspection and must:
    (i) Be sufficiently specific to ensure that funds received under this subpart are used in
    compliance with all applicable statutory and regulatory provisions: (ii) Ensure that funds
    received under this subpart are only spent for reasonable and necessary costs of operating
    programs under this subpart; and (iii) Ensure that funds received under this subpart are not
    used for general expenses required to carry out other responsibilities of state and local
    governments. (2) A state may satisfy this requirement by: (i) Using fiscal and
    administrative requirements applicable to the use of its own funds; (ii) Adopting new
    fiscal and administrative requirements; or (iii) Applying the provisions in 24 CFR part
    85 ``Uniform Administrative Requirements for Grants and Cooperative Agreements to
    State and Local Governments.'' (emphasis added)

    24 CFR 570.489(g), Procurement. When procuring property or services to be paid for in
    whole or in part with CDBG funds, the state shall follow its procurement policies and
    procedures. The state shall establish requirements for procurement policies and procedures
    for units of general local government, based on full and open competition. Methods of
    procurement (e.g., small purchase, sealed bids/formal advertising, competitive proposals,
    and noncompetitive proposals) and their applicability shall be specified by the state. Cost
    plus a percentage of cost and percentage of construction costs methods of contracting shall
    not be used.

    24 CFR 85.36(a), Procurement. States. When procuring property and services under a
    grant, a State will follow the same policies and procedures it uses for procurements from its
    non-Federal funds. The State will ensure that every purchase order or other contract
    includes any clauses required by Federal statutes and executive orders and their
    implementing regulations. Other grantees and subgrantees will follow paragraphs (b)
    through (i) in this section

    24 CFR 85.36(f), Contract and price (1) Grantees and subgrantees must perform a cost or
    price analysis in connection with every procurement action including contract
    modifications. The method and degree of analysis is dependent on the facts surrounding the
    particular procurement situation, but as a starting point, grantees must make independent
    estimates before receiving bids or proposals. A cost analysis must be performed when the
    offeror is required to submit the elements of his estimated cost, e.g., under professional,
    consulting, and architectural engineering services contracts. A cost analysis will be
    necessary when adequate price competition is lacking, and for sole source procurements,
    including contract modifications or change orders, unless price reasonableness can be
    established on the basis of a catalog or market price of a commercial product sold in

                                               25
   substantial quantities to the general public or based on prices set by law or regulation. A
   price analysis will be used in all other instances to determine the reasonableness of the
   proposed contract price. (2) Grantees and subgrantees will negotiate profit as a separate
   element of the price for each contract in which there is no price competition and in all cases
   where cost analysis is performed. To establish a fair and reasonable profit, consideration
   will be given to the complexity of the work to be performed, the risk borne by the
   contractor, the contractor's investment, the amount of subcontracting, the quality of its
   record of past performance, and industry profit rates in the surrounding geographical area
   for similar work. (3) Costs or prices based on estimated costs for contracts under grants will
   be allowable only to the extent that costs incurred or cost estimates included in negotiated
   prices are consistent with Federal cost principles (see Sec. 85.22). Grantees may reference
   their own cost principles that comply with the applicable Federal cost principles. (4) The
   cost plus a percentage of cost and percentage of construction cost methods of contracting
   shall not be used.

Texas Government Code

   Section 2155.074 (a) For a purchase of goods and services under this chapter, each state
   agency, including the commission, shall purchase goods and services that provide the best
   value for the state. (b) In determining the best value for the state, the purchase price and
   whether the goods or services meet specifications are the most important considerations.
   However, the commission or other state agency may, subject to Subsection (c) and Section
   2155.075, consider other relevant factors...

   Section 2156.124, Discussion and Revision of Proposals. (a) As provided in a request for
   proposals and under rules adopted by the commission, the commission or other state agency
   may discuss acceptable or potentially acceptable proposals with offerors to assess an
   offeror’s ability to meet the solicitation requirements. When the commission is managing
   the request for proposals process, it shall invite a requisitioning agency to participate in
   discussions conducted under this section. (b) After receiving a proposal but before making
   an award, the commission or other state agency may permit the offeror to revise the
   proposal to obtain the best final offer. (c) The commission or other state agency may not
   disclose information derived from proposals submitted from competing offerors in
   conducting discussions under this section. (d) The commission or other state agency shall
   provide each offeror an equal opportunity to discuss and revise proposals.

   Section 2262.051 (a) In consultation with the attorney general, the Department of
   Information Resources, the comptroller, and the state auditor, the commission shall develop
   or periodically update a contract management guide for use by state agencies…(g) The
   guide must establish procedures under which a state agency is required to solicit
   explanations from qualified potential respondents who did not respond to a competitive
   solicitation for a contract on which fewer than two qualified bids were received by the
   agency.

   Section 2262.052 (a) Each state agency shall comply with the contract management guide.



                                              26
Texas Administrative Code, Title 10, Part 1, Chapter 5, Subchapter A, General Provisions

    Rule 5.10 (a)-(c)(4) Procurement Standards (a) Procurement procedures must meet
    minimum guidelines, according to Office of Management and Budget (OMB) Circulars A-
    87, A-102, A-110, A-122 (as applicable), the Uniform Grant Management Common Rule,
    Texas Government Code, Chapter 783, and 10 CFR Part 600 (Financial Assistance Rule).
    (b) All subrecipients including non-profits must comply with all of the referenced statutes
    and regulations listed in subsection (a) of this section. In case of any conflict between the
    OMB Circulars or federal laws and state laws involving federal funds, the federal law
    or OMB Circulars will prevail. (c) Additional Department requirements are: (1) Small
    purchase procedures: (A) This procedure may be used only on those services, supplies, or
    equipment costing in the aggregate of $25,000 or less. For Emergency Shelter Grant
    Program (ESGP), the threshold is $500 and more per unit; (B) Subrecipient must establish a
    clear, accurate description of the specifications for the technical requirements of the
    material, equipment, or services to be procured; and (C) Subrecipient must obtain a written
    price or documented rate quotation from an adequate number of qualified sources. An
    adequate number is, at a minimum, three different sources. (2) Sealed bids: (A)
    Subrecipient must formally advertise, for a minimum of three (3) days, in newspapers or
    through notices posted in public buildings throughout the service area. Advertising beyond
    the subrecipient's service area is allowable and recommended by the Department. The
    advertisement should include, at a minimum, a response time of fourteen (14) days prior to
    the closing date of the bid request. Cities and counties must comply with the statutorily
    imposed publication requirements in addition to those requirements stated herein; and (B)
    When advertising for material or labor services, subrecipient shall indicate a period for
    which the materials or services are sought (e.g. for a one-year contract with an option to
    renew for an additional four (4) years). This advertised time period shall determine the
    length of time which may elapse before re-advertising for material or labor services, except
    that advertising for labor services must occur at least every five (5) years. (3) Competitive
    proposals: (A) The Request for Proposal (RFP) must be publicized. The preferred method
    of advertising is the local service area newspapers. This advertisement should, at a
    minimum, allow fourteen (14) days before the RFP is due. The due date must be stated in
    the advertisement; and (B) The time period for services shall be one year, plus four (4)
    additional years at a maximum. (4) Non-competitive proposals: (A) The service, supply,
    or equipment is available only from a single source; (B) A public emergency exists
    preventing the time required for competitive solicitation; and (C) After solicitation of a
    number of sources, competition is determined inadequate. (emphasis added)

Texas Administrative Code, Title 34, Part 1, Chapter 20, Subchapter C

    Rule 20.31(b)(4) (a) The commission purchases supplies, materials, services, and
    equipment for the State of Texas. (b) Whenever possible, purchases are based on
    competitive bids. Negotiation of contracts is permitted for: (1) emergency purchases when
    there is insufficient time to solicit bids; (2) proprietary purchases or purchases of items for
    which there is only one source of supply; (3) purchases by means of competitive sealed
    proposals; and (4) proposed purchases in circumstances where competitive
    specifications have been advertised but the commission has received only one

                                                27
    acceptable bid, or no acceptable bids; provided, however, such negotiation may not
    result in a material change to the advertised specifications. (emphasis added)

    Rule 20.36(a)(1-7) (a) Bid evaluation. (1) The commission may accept or reject any bid or
    any part of a bid or waive minor technicalities in a bid, if doing so would be in the state's
    best interest. (2) A bid price may not be altered or amended after bids are opened except to
    correct mathematical errors in extension. (3) No increase in price will be considered after a
    bid is opened. A bidder may reduce its price provided it is the lowest and best bidder and is
    otherwise entitled to the award. (4) Bid prices are considered firm for acceptance for 30
    days from the bid opening date for open market purchases and 60 days for term contracts,
    unless otherwise specified in the invitation for bids. (5) A bid containing a self-evident
    error may be withdrawn by the bidder prior to an award. (6) Bid prices which are subject to
    unlimited escalation will not be considered. A bidder may offer a predetermined limit of
    escalation in his bid and the bid will be evaluated on the basis of the full amount of the
    escalation. (7) A bid containing a material failure to comply with the advertised
    specifications shall be rejected. (emphasis added)

State of Texas Contract Management Guide, Version 1.6

Section - Introduction

    Purpose “…Each agency is independently responsible for developing sound business
    procedures in accordance with applicable federal and state laws, regulations, policies and
    procedures.”

Chapter 3 – Preparing the Solicitation

   Payment Types. The method of payment has a direct impact on how the statement of work
   is written and how the contract is managed. As with specification types, there are also many
   payment types. The payments should be consistent with the type of product or service
   delivered. Payments should be structured to fairly compensate the contractor and encourage
   timely and complete performance of work. As a general rule, payment should be
   approximately equal to the value of the completed work.

                                         COMMON TYPES OF PAYMENT
   Payment Type      Commonly used for:                                 Payment based on:
   Cost              Client services contracts, usually associated with Reimbursement of allowable costs in
   Reimbursement     state and federal grants                           accordance with the approved budget.
                     Example: Contracts for services in remote areas
   Cost Plus         Materials contracts wherein the materials are      Contractor’s cost plus a percentage of
   Incentives        unknown at the time of contract award.             cost or cost plus a fixed fee. This type
                     Example: Construction Contract                     of payment is usually discouraged as
                                                                        there is no incentive for the contractor
                                                                        to minimize the cost to the State.
   Fee for Service   Contract wherein a fee can be established for a    A specific fee for a unit of service.
                     unit of service.                                   Payments are made for each unit of
                     Example: Providing flu shots to patients. Unit of service completed.
                     service is one flu shot


                                                    28
Chapter 5 - Evaluation and Award

    Evaluation Teams. Each proposal must be evaluated individually against the requirements
    of the RFP. Each RFP response is considered independently of all other RFP responses.

    Single Responses. To determine why an agency receives only one (1) response to a
    competitive solicitation, the following actions should be taken:
     • Re-review the solicitation for any unduly restrictive requirements.
     • Contact some potential respondents to determine why they did not submit a response.

    If it is determined that there were unduly restrictive requirements in the specification, it may
    be necessary to re-advertise the solicitation. Otherwise, the agency should consider the
    reasons that other responses were not received and determine if it is in the best interest of
    the state to make an award, to re-advertise with revised specifications, or to determine if a
    proprietary or single source justification is required.

   Responsive Proposals. After all proposals are opened and recorded, the Purchasing
   Department determines if the proposals submitted are responsive… In addition, the
   Purchasing Department will review the proposals to ensure that minimum qualifications are
   met.

   Proposal Evaluation. Once the proposals have been reviewed and deemed responsive, the
   evaluation team may begin the evaluation process. The recommended method for evaluation
   is to have all team members in the same room evaluating the proposals at the same
   time…The team leader must be present during these discussions to ensure that no team
   member tries to influence the decision of other team members. Under no circumstances
   should any team member attempt to pressure other members to change evaluation scores.

   Negotiations. State agencies may negotiate terms and conditions in some solicitations and
   not in others… A bidding process cannot be competitive unless each respondent is bidding
   on like items. If the negotiation changes or modifies the specification or any other term or
   condition, each respondent is not afforded the same opportunity to bid upon the like
   items…Competitive proposal and qualification processes generally contemplate and allow a
   certain amount of negotiation. The best practice is to read the requirements of the applicable
   procurement procedure to verify that negotiation is permissible. Even in competitive
   proposal or qualification processes, care should be taken to avoid inadvertently changing the
   stated contracting objectives. If the contracting objectives are changed through the
   negotiation process, each potential contractor is not placed on an equal level to propose an
   offer. Similarly, care should be taken when determining negotiation strategy whether to
   include, as a part of that strategy, giving the vendors a cost or price that must be met to
   obtain further consideration. Suggesting a cost or price could deprive the competitive
   process from generating the cost or price that is the best value to the state. Also, be mindful
   that the above prohibitions still apply, i.e., disclosing competing respondents’ costs or prices
   is not allowed, even if done without tying the cost or price to the specific vendor; and
   respondent cannot be told its price standing relative to other respondents. Negotiation

                                                29
   strategy should be tailored to suit the particular facts and circumstances of the specific
   competition.

Appendix 6 – Evaluation Team Briefing Instructions
   Member Responsibilities.

   •   Sign Non-Disclosure Forms. This form states that you will not divulge any information
       concerning this submittal/evaluation to anyone who is not part of the team.
   •   Evaluate submittals independently and impartially.
   •   If a respondent/contractor contacts you, refer them to the purchaser
   •   If a team member has questions on the submittal, submit in writing to the purchaser. The
       purchaser will contact the respondent, obtain an explanation and prepare a written
       response. All members will be provided a copy of the response.
   •   Please safeguard the submittal when not evaluating.
   •   Purchasing Department will score pricing and tabulate total scores.
   •   Questions between team members are allowed, but team members should respond only
       with technical information. Do not give individual opinions about respondents and/or the
       content of their responses.

State of Texas Procurement Manual

   Section 1. Purpose. The State of Texas Procurement Manual serves as the guide for
   purchasing in the State of Texas. It contains standard procedures for implementing the
   requirements of Texas statutes and delegated purchasing authority. The manual is a
   necessary resource to ensure the application of consistent and sound business practices in
   state purchasing and demonstrates CPA’s [Comptroller of Public Accounts] ongoing
   commitment to increasing communication among agencies involved in state procurement.

   State of Texas employees involved in the procurement of goods and services have a
   responsibility to uphold Texas procurement laws and to serve the best interests of the state.
   This responsibility requires a thorough knowledge of the Tex. Gov’t Code, Title 10, Subtitle
   D and Texas Administrative Code (TAC), Title 34, Part 1 as well as the procedures in the
   Procurement Manual.

   Section 1. Statutory Purchasing Authority. To support state operations and shorten the
   procurement cycle for purchasers, state law grants purchasing authority to CPA, the Council
   of Competitive Governments (CCG), and the Department of Information Resources (DIR) to
   establish contracts for commonly used goods/services for state agency and local government
   use. Statewide contracts include Go DIRect contracts for IT/IS goods and services and CPA
   Term and TXMAS contracts for other goods/services.

   For items not on an existing statewide contract, Government Code Chapters 2155-2161 and
   CPA 34 TAC Ch 20 provide additional detail on CPA purchasing oversight and contract
   responsibilities as well as the purchasing authority delegated to state agencies.



                                                30
   Section 2.10 Request For Proposal (RFP). In accordance with Texas Government Code,
   Title 10, Subtitle D, Section 2156.121 the CPA is authorized to determine whether to
   delegate sole oversight of the use of the Competitive Sealed Proposal or Request for Proposal
   (RFP) method of procurement to a state agency or to retain oversight of such procurement.
   A Request For Proposal (RFP) is a written request for proposals concerning goods or services
   the state intends to acquire by means of the competitive sealed proposal procedure. This
   procedure is similar to the open market procurement process; however, instead of sealed
   competitive bids, a negotiation phase is included and a best and final offer is permitted.
   Specific guidelines concerning documentation, procedures, and handling requirements for
   using the competitive sealed proposal procedures are addressed in the Texas Comptroller of
   Public Accounts (CPA) Contract Management Guide. Texas Government Code, Title 10,
   Subtitle D, Sections 2156.121 - 2156.125, 2157.121 - 2157.125, and the CPA Contract
   Management Guide should be reviewed before submitting the RFP to the CPA's Procurement
   Operations and Customer Service Division.

   Section 2.21 Proprietary Purchases. A proprietary product or service has a distinctive
   characteristic that is not shared by competing products or services. When the specification
   limits consideration to one manufacturer, one product or one service provider, you must
   include a written Proprietary Purchase Justification, signed by the Agency head or
   designee, in the procurement file. A formal letter should be submitted to the Comptroller of
   Public Accounts for services $100,000 or greater. (emphasis added)


Request for Proposals – RFP # 332-RFP7-7005

   Part I. Statement of Objective and General Requirements.

   1.5 Scope of Project Management Firm Constraints

   1.5.2 The successful PM [project management firm] will receive a cost reimbursement
   contract and may expend funds in accordance with the administrative expense categories
   defined in Section 4.4-Administrative Fee and the terms specified in Section 2.7-Federal
   Contract Terms and Conditions. The Department [TDHCA] will establish reasonable
   drawdown thresholds for administrative expenses that are commensurate with the progress of
   the project and the associated administrative duties. The PM will ensure that expenditure of
   funds submitted to the Department is for eligible program costs. If the persons to benefit
   from the Programs are not receiving the service or benefit, the PM is liable to repay to the
   Department any associated disallowed costs.

   1.5.3 All CDBG rules and regulations must be followed as they apply to the Program.

   Part II. Contract Terms and Conditions

   2.0 Type of Contract. This RFP for Management Services is solicited under Texas Code,
   Chapter 2156, Subchapter C.

   Part III. Preparation and Submission of Offers
                                              31
3.8 Proposal Costs. Offerors shall bear all costs related to the preparation and submittal of
their proposal.

Part VI. Evaluation of Offers and Award

4.0 Award all or None Basis
TDHCA intends to make one award to the offeror whose proposal is determine to offer the
best value to the government. The Government intends to award one contract as the result of
this RFP. TDHCA reserves the right not to award any contract as a result of this RFP if it
determines that none of the submitted proposals would adequately satisfy the requirements of
the Plan. TDHCA also reserves the right to reopen the procurement to seek additional offers
or to amend the RFP at any time prior to award if it is determine by TDHCA to be in the best
interests of the Government.

4.4 Administrative Fee
Up to 10 percent of the $210,371,273 available under the HAP [Housing Assistance
Program] and $12,000,000 available under the SPRP [Sabine Pass Restoration Program] may
be used for administrative expenses related to planning and/or project delivery costs under
this RFP. Therefore, up to $21,037,127 is allowable for HAP planning and/or project
delivery costs and $1,200,000 is allowable for SPRP planning and/or project delivery costs.
Project delivery costs are costs that can be attributed directly to housing activities. Examples
of project delivery costs include procurement of services or goods, contract preparation
related to subcontracted activities, compliance reviews, such as environmental review records
directly related to housing activities, reviewing applications submitted for assistance,
preparing reports and record keeping specifically for housing activities. Planning costs are
associated with activities conducted for the common good of the affected region and for the
overall benefit of the public and not linked to a specific project or activity. An inclusive list
of planning costs can be found at 24 CFR 570.205(a)(6).

Separately, if all milestones identified under Section 4.3.1 are met, a maximum of
$9,466,707 is allowable for eligible HAP program administrative costs and a maximum of
$540,000 is available for eligible SPRP program administrative costs. These program
administrative costs are separate from the $210,371,273 available under HAP and
$12,000,000 available under the SPRP. Therefore, the total funds available for HAP is
$219,837,980, and the total funds available for SPRP is $12,540,000. Specifically, program
administrative costs are defined as those services that are being completed on behalf of
TDHCA primarily that are not specifically linked to housing activities. An inclusive list of
program administrative costs can be found at 24 CFR 570.206(a)(I).

As part of its proposal, the offeror will prepare a project budget tied into project deliverables
and a proposed timeline which shall reflect milestones identified under Section 4.3.1 and
shall contain sufficient cost detail to support its proposed Administrative Fee and to permit
TDHCA to determine if the proposed fee is fair and reasonable. The offeror must also
outline voluntary Administrative Fee penalties for not meeting milestones identified under
Section 4.3.1.

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