oversight

HUD Needs to Improve Controls Over Its Administration of Completed and Expired Contracts

Published by the Department of Housing and Urban Development, Office of Inspector General on 2010-09-30.

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

                                                                Issue Date
                                                                September 30, 2010
                                                                Audit Report Number
                                                                2010-HA-0003




TO:        Jemine Bryon, Chief Procurement Officer, Office of the Chief Procurement
             Officer, N

             //s//
FROM:      Saundra G. Elion, Director, Headquarters Audit Division, GAH

SUBJECT: HUD Needs To Improve Controls Over Its Administration of Completed and
           Expired Contracts



                                   HIGHLIGHTS

 What We Audited and Why

             We audited the Office of the Chief Procurement Officer’s (procurement office)
             procedures for administering completed and expired contracts in compliance with
             applicable regulations. This audit was part of our 2010 audit plan. Our objective
             was to determine whether the procurement office performed contract closeout
             procedures on completed and expired contracts in a timely manner. We expanded
             our objective to determine whether the contract files were complete and properly
             maintained.

 What We Found


             The procurement office did not close contracts in a timely manner. Specifically,
             the procurement office did not close out more than 1,800 contract actions for
             which the performance period had expired or the work had been completed more
             than 6 months before our review. Of these actions, 35 contracts had outstanding
             balances totaling $15.2 million that should have been deobligated. Also, the
           procurement office did not maintain accountability over contract files. As a
           result, the procurement office could not locate 15 of the 94 files in our sample,
           and 11 files were incomplete because required documents were missing.


What We Recommend


           We recommend that the procurement office deobligate the $15.2 million in
           outstanding balances remaining on the contracts included in our review, increase
           the priority for closing expired and completed contracts and appropriately
           deobligate outstanding balances to avoid future backlogs, and establish adequate
           administrative controls to properly maintain and safeguard contract files.

           For each recommendation without a management decision, please respond and
           provide status reports in accordance with HUD Handbook 2000.06, REV-3.
           Please furnish us copies of any correspondence or directives issued because of the
           audit.

Auditee’s Response
          We provided the discussion draft to the procurement office for comment on
          August 5, 2010. We provided a revised discussion draft, based on the exit
          conference, to the procurement office of September 3, 2010. We received written
          comments from the Chief Procurement Officer on September 10, 2010, that
          generally agreed with our findings and recommendations. 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 Objectives                                                            4

Results of Audit
      Finding 1: The Procurement Office Did Not Close Out Contracts in a Timely      5
                 Manner
      Finding 2: The Headquarters Procurement Office Did Not Properly Maintain Its   9
                 Contract Files

Scope and Methodology                                                                11

Internal Controls                                                                    13

Appendixes
   A. Schedule of Funds To Be Put to Better Use                                      15
   B. Auditee Comments and OIG’s Evaluation                                          16




                                            3
                          BACKGROUND AND OBJECTIVES

The Office of the Chief of Procurement Officer (procurement office) is responsible for awarding
and administering contracts and purchase orders for program offices to meet the U.S.
Department of Housing and Urban Development’s (HUD) operational needs and achieve its
program mission. In addition to awarding contracts, the procurement office administers a large
portfolio of contracts that have expired (the performance period has ended) or have been
completed (products or services have been delivered). Procurement activities are performed at
the headquarters procurement office as well as at the three field contracting offices located in
Philadelphia, PA, Atlanta, GA, and Denver, CO.

Contract closeout refers to the administrative actions taken to retire completed contracts (contract
for which all work has been finished, all deliverables have been received and accepted or
otherwise disposed of, and all financial matters have been settled). The program office initiates
the closeout process, but the procurement office has overall responsibility for closing out all
contracts.

In September 2006, the headquarters procurement office implemented an aggressive closeout
initiative to remedy the serious backlog of contracts, purchase orders, and interagency
agreements that were complete but not closed out in the procurement and accounting systems.
This initiative was implemented to reduce the backlog and liquidate millions of dollars
remaining on HUD’s books. The procurement office planned to accomplish this initiative by
hiring a contractor and developing a closeout function within the headquarters procurement
office to close approximately 9,500 actions that were in the HUD Procurement System and Small
Purchase System (procurement systems). The priorities of the closeout initiative were to close
(1) expired actions with outstanding balances that could be reprogrammed, (2) expired actions
identified by the Chief Information Officer, (3) expired actions that need to be deobligated 1 per
the Chief Financial Officer’s open obligation review process, and (4) expired actions with no
dollars remaining.

To date, the procurement office has hired three different contractors to accomplish this ongoing
initiative but has not developed a closeout function at headquarters. As of January 2010, HUD
reported that more than $40 million had been deobligated and 11,330 actions closed 2.

Our objective was to determine whether the procurement office performed contract closeout
procedures on expired and completed contracts in a timely manner. We expanded our objective
to determine whether the contract files were complete and properly maintained.



1
  Deobligate: to remove remaining funds from a completed, terminated, or cancelled contract or project that had
been previously set aside for the contract or project.
2
  The procurement office could not identify the specific contract actions that make up the 9,500 cited in the contract
closeout initiative; therefore, we could not determine which of the 11,330 actions related to the 9,500 contract
actions.



                                                          4
                                                   RESULTS OF AUDIT

Finding 1: The Procurement Office Did Not Close Out Contracts in a
Timely Manner
The procurement office did not close out expired and completed contracts in a timely manner.
Specifically, more than 1,800 contract actions had not been closed although some had expired or
been completed for more than 15 years. This condition occurred because the procurement office
(1) made closing out contracts a low priority and (2) experienced staff turnover, which
contributed to a lack of continuity in managing and administering the contracts. As a result,
outstanding balances of $15.2 million remaining on these contracts could have been deobligated
and potentially reprogrammed to further HUD’s mission.


 More Than 1,800 Expired
 and/or Completed Contract
 Actions Had Not Been Closed

              In December 2009, HUD’s procurement system showed that more than 1,800
              contract actions had either expired or been completed but had not been entered
              into the closeout process. Contract actions with expiration dates as early as 1991
              were still open in the procurement system.

                                             800
                                                               709
                                             700
                       Number of contracts




                                             600     564
                                                                           498
                                             500

                                             400

                                             300

                                             200

                                             100                                       47

                                               0
                                                     1-5       6 - 10     11 - 15    16 - 20
                                                           Number of years expired
                      Source: The procurement office. December 17, 2009

              For years, the procurement office had placed a low priority on the contract
              closeout process as evidenced by the backlog that precipitated the 2006 closeout



                                                           5
                     initiative. Putting a low priority on closing contracts contributed to outstanding
                     balances accumulating and remaining on contracts that have no expected future
                     activity.

                     According to procurement officials, “management’s focus is on awarding and
                     administering contracts,” and the large volume of new contracts leaves few
                     resources with which to focus on and perform contract closeout. Delays in
                     completing the closeout process were further compounded by a shortage of staff.
                     The most recent management review completed by the procurement office in
                     2008 also reported that “HUD’s acquisition function has suffered significantly
                     from workforce losses in recent years” and that the procurement office has
                     experienced high levels of turnover on a continuous basis. The high staff turnover
                     contributes to a lack of continuity in contract administration.

                     Even with the low priority assigned to the contract closeouts and workforce
                     shortages in the procurement office, HUD has a process (the review of open
                     obligations) in place to identify which funds should be deobligated or retained.
                     This process is conducted on an annual basis for the express purpose of reducing
                     the amount of the outstanding balances reported in HUD’s accounting system.

                     HUD’s Office of the Chief Financial Officer oversees the annual open obligations
                     review so that HUD can certify to the Office of Management and Budget the total
                     amount of funds remaining as obligations at the end of the year. To determine the
                     total amount to certify, the Chief Financial Officer requires the program offices to
                     review their obligated 3 balances recorded in the accounting system. The program
                     offices research the funds and associated projects and determine whether the
                     outstanding balances should be deobligated or retained. Balances remaining on
                     expired contract actions that are marked for deobligation during this review
                     process should be sent to the procurement office for deobligation.

                     We identified that 35 of the 380 contracts we verified had expired between June
                     2004 and March 2009 and had $15.2 million in outstanding balances remaining
                     on them but had not been entered into the closeout process. As shown below, the
                     majority of the outstanding balances were for the Office of Housing, and the
                     Office of Administration and Office of the Chief Financial Officer comprised the
                     remainder.




3
    Obligate: when funds are set aside for a specific contract or project.



                                                              6
                                           $14,000,000   $12.7 M
                                           $12,000,000
                                           $10,000,000




                     Oustanding balances
                                            $8,000,000
                                                                                         HSNG
                                            $6,000,000
                                                                                         ADMN
                                            $4,000,000
                                                                    $1.4 M               CFO
                                            $2,000,000                          $1.1 M
                                                    $0
                                                         HSNG
                                                                   ADMN
                                                                                CFO
                                                              Program offices

                   Source: The Office of Chief Financial Officer, as of March 12, 2010
                   HSNG = Office of Housing
                   ADMIN = Office of Administration
                   CFO = Office of the Chief Financial Officer


        Of the 35 contracts comprising the chart above, one contract with a $1.2 million
        outstanding balance had been marked for deobligation during the 2009 open
        obligations review process. However, as of March 12, 2010 (more than 1 year
        later), this balance was still recorded as an obligation in the accounting system.
        Although it is clearly the responsibility of the procurement office to deobligate the
        funds after receiving notification from the program office, we were unable to
        learn from the procurement office why this amount had not been deobligated.

        After our review and initial inquiries about this contract, the procurement office
        initiated action to not only deobligate the $1.2 million, but also deobligate $7
        million in outstanding balances on 19 other contracts as well as to begin closeout
        procedures on those contracts. Additionally, the procurement office was
        researching the 15 contracts that had remaining balances totaling nearly $7
        million to determine whether the funds could be immediately deobligated and
        either reprogrammed or returned to the U.S. Treasury.

Expired Funds Were Not
Cancelled and Returned to
Treasury

        Section 1501 (d) of the Supplemental Appropriation Act of 1955 (Title 31, United
        States Code, Section 1107) provides that the nature of an appropriation or fund
        determines its period of obligational availability (i.e., one-year, multiple-year, no-
        year). Expired funds that are five years old are cancelled on September 30 of year
        five and are no longer available to be used by the agency. Of the remaining 34



                                                          7
                 expired contracts identified above, the funds ($56,157) on one contract expired on
                 September 30, 2009, and should have been returned to the U.S. Treasury.
                 However, those funds were marked “retain” during the 2009 open obligations
                 review, and as of March 12, 2010, those funds remained in HUD’s accounting
                 system. We were unable to determine from the procurement and accounting
                 offices why those funds had not been deobligated or cancelled and returned to
                 Treasury after September 30, 2009. Funds remaining on the other 33 contracts
                 are expected to expire between 2010 and 2014, at which time HUD will be unable
                 to reprogram these funds, and the funds will have to be returned to Treasury.
                 However, if the funds are deobligated before they expire HUD can reprogram
                 them for similar program activities.

    Conclusion


                 Contract closeout was given a much lower priority than awarding new contracts.
                 By not closing out contract actions in a timely manner, HUD may miss the
                 opportunity to use the $15.2 million.

                 Subsequent to and during our audit, the procurement office deobligated $8.2 of the
                 $15.2 million in outstanding balances from the 35 expired contracts. Although the
                 procurement office has taken action to deobligate these outstanding balances,
                 progress needs to be evaluated over a longer period of time to ensure that funds are
                 deobligated before they expire so that HUD can reprogram them for similar program
                 activities.



    Recommendation


                 We recommend that the Chief Procurement Officer

                 1A      Complete the deobligation of the $15.2 million in outstanding balances
                         remaining on expired contracts as of March 2010. 4

                 1B      Increase the priority for closing expired and completed contracts and
                         appropriately deobligate funds in a timely manner to avoid future
                         backlogs. The Chief Procurement Officer should also consider adding
                         contract closeout as a performance measure in the contracting officers’
                         annual evaluation.


4
 The procurement office has already begun to take action on our recommendation to deobligate funds remaining on
expired and completed contracts. Subsequent to and during our audit, the procurement office deobligated $8.2
million of the $15.2 million in outstanding balances.



                                                       8
Finding 2: The Headquarters Procurement Office Did Not Properly
Maintain Its Contract Files
The headquarters procurement office did not maintain accountability over contract files.
Specifically, the procurement office could not locate 15 of the 94 files in our review and 11 of
the available contract files were incomplete. This condition occurred because the procurement
office did not establish adequate administrative controls to properly maintain and safeguard
contract files. As a result, HUD had no assurance that contract files were complete or available
to effectively monitor and support contract activity.



Contract Files Were Missing or
Incomplete

               The procurement office did not maintain accountability over contract files as
               required by Title 48 of the U.S. Code of Federal Regulations, the Federal
               Acquisition Regulation (FAR). According to FAR 4.802(c)(1)(2), contract files
               must be maintained at organizational levels that ensure effective documentation of
               contract actions and provide ready accessibility to principal users.

               Of the 94 closed contracts included in our review, 15 contract files were missing
               and 11 did not contain adequate documentation. The procurement office staff
               assigned to search and retrieve the 15 missing contract files indicated that they
               could not locate the files because the contracts were old.

               Eleven contract files were not being adequately maintained to ensure the files
               contained reliable and complete documentation. Documents that were missing or
               incomplete from the files included key documents such as contractor’s release,
               final invoice, or the contract completion statement that should be evaluated before
               the contract is closed; the contract award document was not signed by all parties,
               and critical pages were missing from one contract. The critical pages that were
               missing were the supplies or services and price/costs; and the description,
               specifications, and/or work statements that are required sections as outlined in
               FAR 15.204.1. These sections contain information describing HUD’s needs, the
               deliverables and cost for the contract.


Controls Over Contract Files
Were Inadequate

               The procurement office did not have a policy or procedures in place requiring
               contract files to be maintained or stored in a systematic manner. Instead, staff
               members were allowed to maintain records at their discretion.



                                                9
             Staff members opted for storing contracts in either their immediate areas or in one
             of the six Lektrievers (large storage/filing system) located in three areas of the
             building. Some contract files were put into unlabeled boxes and stacked on the
             floor or just placed on the floor (not in boxes) in the basement.

             Because the files were missing or incomplete, HUD had no assurance that
             contracts were complete or contained adequate information to effectively monitor
             and support contract activity.

Conclusion


             Since the procurement office did not have adequate controls over its contract files
             as required by the Federal Acquisition Regulation, documents could easily be
             misplaced, lost, or destroyed. Because the files were missing, HUD had no
             assurance that contracts were complete or contained adequate information to
             effectively monitor and support contract activity.

Recommendation


             We recommend that the procurement office

             2A.    Establish a policy and appropriate procedures to ensure the proper
                    maintenance, tracking and safeguarding of contract files.




                                             10
                              SCOPE AND METHODOLOGY

We performed audit work at HUD headquarters, Washington, DC, between October 2009 and June
2010. Our audit generally covered the period January 1, 1990, through March 31, 2009, but was
expanded when necessary to include other periods.

To accomplish our objectives, we

     •   Reviewed applicable laws, the Federal Acquisition Regulation, HUD acquisition
         regulations, HUD handbooks 2210.3 REV-9 and 1830.2 Rev5.
     •   Examined contract files awarded between January 1, 1990, through March 31, 2009.
     •   Examined contract history reports and data from the procurement and accounting systems.
     •   Examined reports from HUD’s accounting system to determine contracts with outstanding
         balances.
     •   Conducted interviews with HUD employees from the Office of the Chief Procurement
         Officer and the Office of the Chief Financial Officer to determine roles and responsibilities
         related to contracts.

To achieve our objectives, we relied in part on computer-processed data in the procurement office’s
database. Although we did not perform a detailed assessment of the reliability of the data, we
performed a minimal level of testing, and we found the data to be adequate for our purposes.

The procurement office provided a universe of 16,383 procurement actions that included
interagency agreements and purchase orders for the period January 1, 1990, through March 31,
2009. We reduced the universe to 9,013 to reflect only contracts. We then separated the universe
into the three categories (active/expired5, active/in closeout6, and inactive/closed7) that the
procurement office used to describe contracts that had either expired or had been completed.

We initially selected a statistical sample of 69 contracts to determine whether the procurement
office performed contract closeouts in a timely manner. We computed the sample size using
attribute methodology and a random number generator to select the contracts. The sampling criteria
used a confidence level of 85 percent, an estimated error rate of 3 percent, and precision range of 16
to 26 percent.

We expanded our sample when we determined that 4 of the 69 contracts had outstanding
balances totaling $1 million although the report from the Office of the Chief Financial Officer
showed that all of the contract balances were zero. Because we had indicators that more
contracts had outstanding balances remaining on them, we selected all contracts that had
outstanding balances greater than $1,000. This process resulted in the selection of an additional

5
  Active/expired: when a contract’s last option period has passed.
6
  Active/in closeout: when a contract enters the close-out process
7
  Inactive/Closed: when a contract has been administratively closed, after the contracting officer receives completion
documents.



                                                         11
311 non-representative contracts. We verified the outstanding balances reported in HUD’s
accounting system for each contract in our sample. In addition to the 69 statistically selected
contracts we included 25 of the 311 non-representative contracts (for a total of 94) for detailed
testing of the contract closeout procedures. [See Finding 2] We did not project our results to the
universe of expired and completed contracts.

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
objectives. We believe that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objectives.




                                                12
                              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 regard 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
               objectives:

               •      Effectiveness and efficiency of operations – Policies and procedures that
                      management has implemented to reasonably ensure that a program meets its
                      objectives.

               •      Compliance with applicable laws and regulations – Policies and procedures
                      that management has in place to ensure that resource use is consistent with
                      laws and regulations.

               We assessed the relevant controls identified above.

               A deficiency in internal control exists when the design or operation of a 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 or efficiency of operations, (2) misstatements in
               financial or performance information, or (3) violations of laws and regulations on
               a timely basis.




                                                13
Significant Deficiencies
             Based on our review, we believe that the following items are significant
             deficiencies:

             •     The procurement office did not have adequate controls in place to ensure
                   that outstanding balances were properly deobligated when contracts
                   expired or were completed (finding 1).

             •     The procurement office did not have adequate controls in place to ensure
                    that contract files were properly stored and maintained (finding 2).




                                             14
                                  APPENDIXES

Appendix A

     SCHEDULE OF FUNDS TO BE PUT TO BETTER USE

                           Recommendation       Funds to be put
                                  number        to better use 1/
                                         1A       $15.2 million



1/   Recommendations that funds be put to better use are estimates of amounts that could be
     used more efficiently if an Office of Inspector General (OIG) recommendation is
     implemented. These amounts include reductions in outlays, deobligation of funds,
     withdrawal of interest, costs not incurred by implementing recommended improvements,
     avoidance of unnecessary expenditures noted in pre-award reviews, and any other savings
     that are specifically identified.




                                           15
Appendix B

                   AUDITEE COMMENTS


Reference to OIG      Auditee Comments
Evaluation




Comment 1




                             16
Comment 2




            17
                     OIG Evaluation of Auditee Comments
Comment 1   We combined recommendations 1A and 1B to reflect the entire $15.2 million in
            outstanding balances that was identified during the audit. Additionally, we
            revised recommendation 1A to acknowledge that the Office of the Chief
            Procurement Officer is not responsible for reprogramming the deobligated funds.

Comment 2   Recommendation 1C referred to in the auditee’s response was renumbered to 1B
            in the final audit report.




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