oversight

HUD's Performance-Based Contract Administration Contract Was Not Cost Effective

Published by the Department of Housing and Urban Development, Office of Inspector General on 2009-12-12.

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

                                                                  Issue Date
                                                                        November 12, 2009
                                                                  Audit Report Number
                                                                           2010-LA-0001




TO:         Carol J. Galante, Deputy Assistant Secretary for Multifamily Housing, HT



FROM:       Joan S. Hobbs, Regional Inspector General for Audit, Region IX, 9DGA

SUBJECT: HUD‟s Performance-Based Contract Administration Contract Was Not Cost
         Effective

                                    HIGHLIGHTS

 What We Audited and Why

      We audited the U.S. Department of Housing and Urban Development‟s (HUD) annual
      contributions contract (contract) for performance-based Section 8 contract administrators
      (PBCA). We audited this contract because our prior audit of HUD payments to the
      PBCAs for certain performance standards indicated that HUD was not getting the best
      value for the dollars spent on the PBCA‟s services. Our audit objective was to determine
      whether the performance-based contract administration contract was cost effective.

 What We Found


      HUD did not always ensure accountability for results and include appropriate, cost-
      effective controls over its contracts. Consequently, HUD did not obtain the best value for
      the $291 million spent in 2008 on contract administration services. In particular, HUD
      spent $107 million of this amount on incentive fees. While we could not quantify how
      much of this amount was excessive, HUD continued to pay incentives for tasks that were
      included in the PBCAs‟ basic fees. In addition, at least $7.6 million may be wasted each
      year because HUD continues to extend the existing contracts beyond the original contract
      term of five years.
What We Recommend


     We recommend that the Deputy Assistant Secretary for Multifamily Housing perform a
     detailed analysis to determine the most cost-effective method of performing the contract
     administration tasks. After selecting the best method, we recommend that the Deputy
     Assistant Secretary for Multifamily Housing ensure accountability for results and include
     appropriate, cost-effective controls in its contracts.

     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 our discussion draft report to HUD on September 21, 2009, and it provided
     its written response on October 26, 2009. HUD officials generally agreed with our audit
     report but disagreed with portions of 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 Objective                                                            4

Results of Audit

      Finding 1: HUD Did Not Always Ensure Accountability for Results and Include
                 Appropriate, Cost-Effective Controls in Its Contracts              6

Scope and Methodology                                                               21

Internal Controls                                                                   23

Follow-up on Prior Audits                                                           24

Appendices
   A. Schedule of Funds to Be Put to Better Use                                     27
   B. Auditee Comments and OIG‟s Evaluation                                         29
   C. Criteria                                                                      35




                                            3
                      BACKGROUND AND OBJECTIVES

Performance-Based Section 8 Contract Administration

The U.S. Department of Housing and Urban Development (HUD) is authorized to enter into an
annual contributions contract (contract) with public housing authorities. The contract provides
contract administration services for units receiving project-based rental assistance under Section
8 of the United States Housing Act of 1937.

In May 1999, HUD issued a request for proposals for contract administration services for
project-based Section 8 housing assistance payments contracts for each state. During the first
year, HUD awarded contracts to only 37 performance-based contract administrators (PBCA) due
to a lack of qualified applicants. HUD then issued a request for qualifications to ensure that
applicants met the definition of a public housing authority, followed by a request for proposals,
and awarded an additional seven contracts between 2001 and 2003. In 2003, HUD issued an
invitation for submission of applications (invitation) rather than a request for proposals. HUD
awarded the remaining nine contracts between 2003 and 2005 under this solicitation.

Under the request for proposals, the applicant was required to submit both a technical and cost
proposal for evaluation. Once a PBCA was chosen, its cost proposal was reviewed to determine
the contract rate of payment, sometimes resulting in a decrease in the rate. Under the invitation,
the applicant was only required to submit a technical proposal and a proposed rate. No cost
proposal was required.

Although not technically required to comply with the Federal Acquisition Regulation, HUD
stated that it would use a best value trade-off source selection process for evaluating offers
similar to the one defined in Federal Acquisition Regulation 15.101-1. This process is, in
essence, a negotiated acquisition method that seeks to select the best technically qualified
applicant and then negotiate the best price for the services to be acquired.

HUD entered into performance-based contracts because of a government-wide emphasis for
service contracts to be performance based. Performance-based service contracting is based on
the development of a performance work statement, which defines the work in measurable,
mission-related terms with established performance standards and review methods to ensure
quality. A performance-based contract allows for the assessment of disincentives for contractors
that are not performing as required and incentives for value-added activities that are not part of
the basic contract requirements.

Performance-Based Annual Contributions Contract Requirements

The contract includes 10 core tasks for which the PBCA is responsible:

   1.   Conduct management and occupancy reviews.
   2.   Adjust contract rents.
   3.   Process housing assistance payments contract terminations or expirations.
   4.   Pay monthly vouchers submitted by Section 8 owners.
   5.   Respond to health and safety issues.
                                               4
   6.   Submit Section 8 budgets, requisitions, revisions, and year-end statements.
   7.   Submit audits of the PBCA‟s financial condition.
   8.   Renew housing assistance payments contracts.
   9.   Report on PBCA operating plans and progress.
 10.    Follow up on results of physical inspections of Section 8 projects.

Within the 10 core tasks, there are 16 incentive-based performance standards (performance
standards). HUD measures the PBCA‟s performance for each standard against the acceptable
quality level for that standard to determine the administrator‟s earned administrative fee. It also
determines whether disincentive deductions or incentive fees apply.

Compliance with Annual Contributions Contract, HUD Regulations, and Directives

HUD requires the PBCAs to comply with Title 24 of the Code of Federal Regulations, including
any revisions or additions to the regulations. HUD issues additional program requirements as
HUD “directives,” including HUD notices, handbooks, and forms. It requires the PBCAs to use
program receipts in compliance with the U.S. Housing Act of 1937 and all HUD regulations and
other requirements. However, according to the contract, “if required by HUD, program receipts
in excess of current needs shall be promptly remitted to HUD or invested in accordance with
HUD requirements.”

Current Contract Administration Activity and Cost

During 2008, there were 53 PBCAs with contracts costing approximately $291 million. They
perform administration for 15,571 housing assistance payments contracts valued at more than
$6.8 billion. The annual contributions contracts were written for an initial three-year period with
two one-year renewal options. On average, in 2008, each of the 15,571 project-based housing
assistance payments contracts cost HUD $18,706 to administer.

Our audit objective was to determine whether the performance-based contract administration
contract was cost effective.




                                                 5
                                      RESULTS OF AUDIT

Finding 1: HUD Did Not Always Ensure Accountability for Results and
           Include Appropriate, Cost-Effective Controls in Its Contracts
HUD did not always ensure accountability for results and include appropriate, cost-effective
controls when it outsourced the Section 8 contracts with PBCAs. Specifically, HUD did not (1)
adequately control costs, (2) protect resources from potential waste, (3) ensure compliance with
laws and regulations, and (4) emphasize quality in performance standards. It also did not (5)
require collection of information for decision making, (6) adequately develop the intended result,
and (7) ensure that resources were used consistent with its mission. This issue occurred because
HUD did not properly consider management accountability requirements when it developed,
awarded, and continued to renew 53 annual contributions contracts. Therefore, HUD did not
obtain the best value for the $291 million spent in 2008 on contract administration services. In
particular, HUD spent $107 million of this amount on incentive fees. While we could not
quantify how much of this amount was excessive, HUD continued to pay incentives for tasks that
were included in the PBCAs‟ basic fees. In addition, at least $7.6 million, may be wasted each
year because HUD continues to extend the existing contract beyond the original contract term of
five years.



    HUD Did Not Adequately
    Control Costs
        Office of Management and Budget (OMB) Circular A-1231 states that federal employees
        must ensure that government resources are used efficiently and effectively to achieve the
        intended program results. OMB Circular A-123 also states that management
        accountability includes the expectation that federal managers are responsible for
        controlling the costs of federal programs.

        HUD‟s objectives for the Section 8 PBCA initiative included getting the best value for
        dollars spent on contract administration using performance-based service contracting.
        However, HUD did not achieve this objective because it did not adequately control costs
        when it allowed the PBCAs to earn incentive fees for baseline tasks. It also allowed the
        PBCAs to earn profits in excess of 10 percent of contract price and did not provide for
        sharing in cost savings when a PBCA rebid its subcontract. Finally, it did not require and
        review certified cost proposals for all potential PBCAs and did not negotiate with the
        PBCAs to obtain the lowest price.

        Incentive fee - Performance-based service contracting is based on the development of a
        performance work statement. The work statement defines the work in measurable,

1
 We used OMB Circular A-123, dated June 21, 1995, because it was the version applicable at the time of contract
development and award. The circular, dated December 21, 2004, strengthened the process for conducting
management assessments of the effectiveness of internal controls over financial reporting based on widely
recognized internal control standards. The changes have no effect on audit conclusions.
                                                        6
        mission-related terms with established performance standards and review methods to
        ensure quality. Incentives should be used when they will induce better quality
        performance and may be either positive (incentive fee), negative (disincentive deduction),
        or a combination of both. They should be applied selectively to motivate contractor
        efforts that might not otherwise be emphasized and to discourage inefficiency. In a pre-
        proposal conference held in 1999, HUD stated that it would limit the basic fee to 2
        percent of the fair market rent.2 The annual contributions contracts between HUD and
        the PBCAs provided an incentive fee of 1 percent to the PBCA. This fee was included
        because HUD felt that the tasks were important enough for it to pay extra to obtain
        services at a level greater than that established as the acceptable quality level.

        The contracts provided for incentive fee payments of almost $107 million in 20083 for
        completing work in a timely manner. This amount was almost 37 percent of the total
        contract fee for all 53 contracts. However, the incentives were actually for baseline tasks.
        This practice rewarded contract administrators for meeting contract requirements and
        complying with quantity and timeliness requirements rather than for inducing better
        quality performance. For fifteen of the sixteen contract requirements there was no
        requirement that the work performed be accurate, and disincentives could only be applied
        if the number of on-time submissions fell below the acceptable quality level. Incentive
        fees were paid for performance that exceeded the acceptable quality level for specific
        tasks as defined in the contract.

        Incentive fees were paid to the PBCAs on 4 of the 16 contract performance standards for:

                  Performing management and occupancy reviews,
                  Documenting Section 8 owner compliance,
                  Providing resident data to HUD, and
                  Renewing expiring Section 8 contracts.

        PBCAs were highly motivated to meet the contract requirement of these performance
        standards because the incentive fee was always more than the basic fee, as shown in the
        graph below.




2
  The basic fee is calculated based on the number of units under contract per month, multiplied by 2 percent of the
fair market rent of a two-bedroom unit in the service area.
3
  The total basic and incentives fees earned for all of the PBCAs were obtained from HUD‟s Line of Credit Control
System, also referred to as LOCCS, for government fiscal year 2008.
                                                         7
                   Basic & incentive fee by task
                       ($3 million total fee
                    basic fee 2%, incentive 1%)
    $600,000
    $500,000
    $400,000
    $300,000
    $200,000
    $100,000
          $-
               1. Management & 2. Document               5. Provide     15. Renewals of
                   occupancy   Section 8 owner        resident data to expiring Section 8
                                 compliance                 HUD            contracts

                                Basic Fee       Incentive Fee




In January of 2005, HUD informed the contract administrators that it was going to revise
the incentive fee and described how the new basic and incentive fee tasks would be
weighted. However, HUD did not follow through with its decision.

In early 2007, an independent assessment report stated that the contract contained
incentives that were actually baseline tasks. It stated that HUD was rewarding contract
administrators for meeting contract requirements and complying with expected outcomes.
The assessment also stated that the incentive fee should move to a results-oriented
outcome as opposed to a process-based program and should not exceed 15 percent of the
total contract. In a later presentation to the PBCAs, HUD agreed and stated that when it
revises the contract, the incentive fee would be limited to 15 percent of the total amount
available. HUD also stated that the incentive fee would be paid for value-added activities
rather than for meeting contract requirements. HUD paid more than $90.9 million in
incentive fees in 2008 in excess of the 15 percent considered reasonable by the
independent assessment report. HUD had not revised the contract.

Profits - In the 1999 pre-proposal conference, HUD stated that it would not allow a
straight 3 percent rate because it would result in many of the PBCAs receiving a large
profit. In a 1999 memorandum requesting final proposals, HUD further stated, “in
general, profit margins exceeding 10 percent are generally considered to be unacceptable
and contracts of this type usually see rates below that amount.” However, HUD did not
follow its own guidance and approved basic fees for one PBCA that included profit in
excess of 21 percent. This action resulted in excessive profits of almost $1.8 million in
basic fees in 2008 for that PBCA (see appendix A). We estimate that the total excessive


                                            8
        profit received by this PBCA since the award of the contract was $5 million.4 HUD
        could not tell us why the excessive profit was allowed.

        Rebidding the contracts - HUD did not include a mechanism to rebid the contracts after a
        set period to make the most of the benefits of competition, lower cost subcontractors, or
        experience gained by the PBCAs. The initial contract was for a total of five years, yet
        more than eight years after the first contract was awarded, the contracts continue to be
        extended. As the result of a state requirement, one of the PBCAs rebid its subcontractor
        services at a lower cost, resulting in increased profit for the PBCA. As a result, in 2008,
        this PBCA received approximately $5.8 million in additional unrestricted profit with no
        savings to HUD5 (see appendix A).

        According to the minutes from an August 25, 2004, contract administrators‟ conference
        call, HUD received approval from its Office of General Counsel to extend the contracts
        for an additional 10 years. One of the primary reasons for extending the contracts was to
        provide for better economies of scale created by the experience gained over the period
        under contract. In return, HUD wanted the PBCAs to examine their fees to determine
        their level and whether they needed to stay at that level.

        HUD requested information from the PBCAs on the costs necessary to accomplish the
        provisions of the contract. However, a new contract was never fully developed;
        therefore, HUD continues to extend the original contracts. As a result, it does not receive
        the cost/benefits of lower cost subcontractors or the lower cost due to experience gained
        by the PBCAs. The cost to administer the contracts is $18,706 per contract. In addition,
        profits for some of the largest PBCAs ranged from 39 to 67 percent of the total expenses,
        with one PBCA receiving profits of 198 percent of its total expenses.6 This amount
        includes the incentive fees paid.

        Cost proposals not required for all contract awards - The original request for proposals
        required applicants to provide a cost proposal that certified that the costs proposed were
        accurate and allowable. HUD also wanted to ensure that it was paying a fair and
        reasonable price for the work performed. In 2003, HUD published an invitation for
        submission of applications (invitation). The invitation did not require a cost proposal.
        As a result, nine contract awards were based solely on the technical submission.
        According to a HUD official, the decision not to require a cost proposal “...was made for
        two reasons: (1) based on the previous RFP [request for proposals] process, the majority
        of the PBCAs bid the full 2 percent and a majority of those PBCAs were selected and (2)
        both the Offices of Procurement and Multifamily Housing did not have adequate staff
        resources to review the cost proposals.”


4
  We computed the excessive profit using 2004 through 2008 LOCCS basic fee data and the profit percentage from
the cost proposal submitted by the PBCA.
5
  We computed the cost savings from rebidding the subcontract using the PBCA‟s 2008 audited financial statements,
2008 official budget request, and its original cost proposal (budgeted information was used when the financial
statements were not of sufficient detail to provide the needed information). The cost proposal provided us with the
costs of the original subcontractor for that activity level. We compared this amount with the revenues and expenses
in the 2008 audited financial statements and official budget and calculated the difference.
6
  Profits were determined using the PBCA‟s most current financial statements and official budgetary data.
                                                        9
     In addition, since a cost proposal was not required for nine of the PBCAs, they were not
     required to certify that their proposed costs were accurate, complete, and current. They
     were also not required to certify that all costs and indirect rates included were allowable.
     Therefore, HUD did not have reasonable assurance that the rates for the fixed price
     service contracts were accurate and excluded unallowable costs.

     Further, HUD did not have adequate procedures and metrics to evaluate the cost
     proposals it received. Although HUD had detailed procedures for evaluating the
     technical proposals, the procedures for evaluating the cost proposals were inadequate.
     HUD stated that it would review “the supporting pricing information for sufficiency to
     determine if the offeror has an adequate understanding of the contract requirements.”
     However, HUD did not develop benchmarks, such as the number of projects
     recommended per employee. This process would have allowed it to determine whether
     the costs appeared reasonable and adequate to meet all of the contract responsibilities.

     Negotiation of price - HUD used a best value trade-off source selection process for
     evaluating offers similar to the one defined in Federal Acquisition Regulation 15.101-1.
     HUD determined that the technical approach, not cost, was the most important factor.
     Although the contract was not subject to the Federal Acquisition Regulation, HUD
     should have negotiated with the PBCAs to obtain the lowest price.

     HUD placed a 2 percent limit on the basic fee. Contracts were awarded to 30 of the 53
     PBCAs with the maximum 2 percent fee, 27 of which were awarded during the first two
     years of the program. Of the 27 contract awards, 17 had no competition.


HUD Did Not Protect Resources
from Waste

     OMB Circular A-123 states that resources must be used in such a way as to protect them
     from waste, fraud, and mismanagement. However, HUD did not protect the funds used
     under the PBCA initiative from waste when it did not

            Restrict the use of excess revenues,
            Ensure that the administrative fee distribution to the tasks was commensurate with
            associated workload,
            Require the PBCAs to adopt a risk-based approach to monitoring reviews on low-
            risk projects,
            Include a mechanism in the contract to change contract elements and associated
            fees to allow for changes in program requirements, and
            Have an equitable method for paying the PBCAs.

     The use of excess unrestricted revenues - The annual contributions contract states, “the
     [PBCA] may use or distribute any such earned administrative fee income, including basic
     fees and incentive fees, for any purpose.” Because the incentive fee was significantly
     higher than the amount necessary to complete the administrative tasks, many PBCAs had
     profits in excess of the amount originally determined to be acceptable to HUD. These

                                              10
        profits were not restricted by the contract and were in addition to the profit that was
        included in the cost proposals.

        We estimate that since the inception of the contract, almost $558 million in incentive fees
        has been paid to the PBCAs.7 Our review of 8 of the 53 PBCAs‟ most recent financial
        statements disclosed that there was at least $44.4 million in unrestricted funds on the
        PBCAs‟ books.8 In addition, although Congress appropriated these funds for contract
        administration services, since the excessive funds were unrestricted, they could be used
        for any purpose.

        We observed many examples in which PBCA organizations used these excess revenues
        to fund other activities within the organization or returned them to the parent
        organization‟s general fund. One state earmarked the proceeds of this contract to fund
        community planning and development projects and improve handicapped accessibility in
        single-family and multifamily dwellings. Another state used the funds to purchase
        apartments and “leisure time condominiums.” In addition, excess revenues were used to
        repay millions of dollars for violations cited in Office of Inspector General (OIG) audit
        findings in which HUD-restricted funds were misused. In this case, the unrestricted
        excess revenues from the PBCA were transferred to the parent organization, a housing
        agency, to resolve prior violations and close audit recommendations. Sometimes, the
        revenue from contract administration activities was not separately identified in the
        financial statements but was commingled so that excess revenues were not apparent.

        The contracts produced significantly more profits than those included in the cost
        proposals. In turn, these profits provided funding for other activities that were not part of
        the contract‟s stated purpose.

        Administrative fee distribution not commensurate with associated workload - The
        administrative fee distribution to the performance standards in the contract was not
        commensurate with the associated workload for each of the performance standards. As a
        result, the related disincentives were not commensurate with the cost of meeting the
        performance standard.

        We asked the HUD official responsible for this program to explain the basis for the
        original fee distribution. She stated that “the breakdown of base and administrative fees
        was based on both anticipated workload and departmental priorities at the time the
        contract was developed by the drafters…”

        In 2004, HUD realized that the basic fee percentages distributed to each performance
        standard in the contract were not equitable. The responsible HUD official provided us
        with a revised draft contract that was developed in 2005 but had not been completed.
        HUD instead hired an independent assessor to review the PBCA activities and the
        contract.



7
  The total incentive fees earned for all PBCAs were obtained from LOCCS for government fiscal years 2000
through 2008.
8
  Unrestricted funds were determined using the PBCAs‟ most current financial statements.
                                                      11
        The independent assessment report received by HUD in February of 2007 discussed the
        distribution of the basic fee to the performance standards in depth. The contractor
        performing the assessment surveyed each of the PBCAs to determine whether the
        performance standards‟ distribution percentages were commensurate with the costs
        necessary to meet the performance standards. Several of the PBCAs provided HUD with
        distribution percentages based on their actual workload.

        The independent assessment report stated that
               Four of the performance standards were the most time consuming and critical
               activities,
               Nine were administrative in nature,
               One was federally mandated, and
               Two were no longer required.

        We compared the original contract performance standard distribution with the 2005
        revised draft contract and the independent assessment. We determined that HUD‟s
        revised draft distribution percentages were similar to the independent contractor‟s
        assessment, while the current contract percentages were not, as shown below.

                                                                           Contract Assessment
                 Performance standard                    Type             percentage percentage
           1.   Management and occupancy           Mission critical
                reviews                                                          8%            15%
           2.   Document Section 8 owner           Administrative
                civil rights compliance                                          5%             5%
           3.   Rental adjustments                 Mission critical              5%            10%
           4.   Owner opt-out and Section          Administrative
                8 contract terminations                                          5%              5%
           5.   Provide resident data to           Administrative
                HUD                                                              5%              5%
           6.   Review, verify, and                Mission critical
                authorize monthly vouchers                                     15%             16%
           7.   Notice of corrective actions       Administrative               3%              5%
           8.   Income discrepancies               Not required9                3%              0%
           9.   Life-threatening health and        Administrative
                safety                                                           7%              5%
          10.   Non-life-threatening health        Administrative
                and safety                                                       5%              5%
          11.   Budgets                            Not required9                 8%              0%
          12.   Year-end statement                 Administrative                8%              3%
          13.   PBCA audit report                  Federally
                                                   mandated                      3%              3%

9
  OIG Audit Report Number 2007 SE 0001, HUD Did Not Ensure That Payments to Contract Administrators Were
for Work Performed or That Interest Was Earned on Advances and Recovered, dated June 7, 2007 (see follow-up on
prior audits).

                                                     12
                                                                           Contract Assessment
               Performance standard                      Type             percentage percentage
          14. Renewal of expiring Section          Mission critical
              8 contracts                                                      12%             15%
          15. General reporting                    Administrative               5%              5%
          16. Monitoring physical                  Administrative
              inspection results                                                 3%              3%

        Risk-based approach - It is not cost effective to perform monitoring reviews every year
        on low-risk projects. We consider low-risk projects as those that have high physical and
        financial assessment scores, good internal controls, no changes in ownership or
        management, and low employee turnover. HUD did not obtain the best value for dollars
        spent when it did not require the PBCAs to use a risk-based approach in performing
        monitoring reviews.

        Before the contract award, HUD was the contract administrator and was required to
        monitor the Section 8 housing assistance payments contracts. The schedule of
        management and occupancy reviews was based on yearly risk assessments of the
        projects, considering experience and physical and financial assessments. However, HUD
        decided that the PBCAs should perform a 100 percent review of the projects because it
        was the “right” way to do it. A 100 percent review of projects does not result in the best
        value for dollars spent on contract administration services.

        Contract changes - HUD did not include a mechanism in the contract to change contract
        elements and associated fees to allow for changes in program requirements.10 Although
        the contract allowed for changes in the contract terms, there was nothing in the contract
        allowing for a change in contract price as a result of changes in terms. Consequently,
        when three tasks were no longer required, HUD could not reduce the contract price.
        When other tasks needed to be performed, HUD had no way of amending the contract or
        the administrative fee. This HUD decision resulted in more than $35 million being paid
        in fiscal year 2008 for activities that were no longer required or performed.

        In addition, the United States Government Accountability Office (GAO) issued a report
        on HUD‟s “Challenges in Measuring and Reducing Improper Rent Subsidies.”11 The
        report stated that HUD‟s guidance for collecting data on the types and frequency of errors
        property owners made in determining subsidies was not widely followed. GAO
        determined that this deficiency occurred because the data collection effort was not
        mandatory and duplicated some of the PBCAs‟ existing procedures. According to a
        GAO representative, the report did not include a recommendation to revise the contract
        since HUD stated that it was already rewriting it (see Follow-up on Prior Audits section).



10
   OIG Audit Report Number 2007 SE 0001, HUD Did Not Ensure That Payments to Contract Administrators Were
for Work Performed or That Interest Was Earned on Advances and Recovered, dated June 7, 2007 (see follow-up on
prior audits).
11
   GAO-05-224 Report on HUD Rental Assistance, Progress and Challenges in Measuring and Reducing Improper
Rent Subsidies, dated February 2005 (see Follow-up on Prior Audits section).

                                                     13
     Method of payment - HUD did not develop an equitable method of paying the PBCAs. It
     paid the contractors on a per unit basis; however, the contractor was responsible for the
     housing assistance payments contracts, not individual units. HUD needs to determine a
     method of payment that considers both the number of housing assistance payments
     contracts and the number of assisted units so that payment is equitable across all of the
     PBCAs.

HUD Did Not Ensure
Compliance with Laws and
Regulations


     HUD did not define what activities in the contract could not be contracted out. As a
     result, some of the PBCAs allowed their subcontractors to sign the housing assistance
     payments contracts with the owners. This practice made enforceability of the housing
     assistance payments contracts questionable since the PBCA‟s subcontractor is technically
     not an agent of HUD. Consequently, HUD should clarify which activities cannot be
     performed by subcontractors to ensure that these tasks are performed directly by the
     PBCA or HUD.

HUD Did Not Emphasize
Quality in Performance
Standards

     The acceptable quality level was the required performance level for each of the 16
     performance standards. The basic fee as well as the acceptable quality level for 15 of the
     16 contract performance standards was based on timeliness and/or quantity with no
     consideration of quality. For example, the acceptable quality level for performance
     standard 1, management and occupancy reviews, was for the contract administrator to
     submit 95 percent of required reports and data to HUD within 30 days after scheduled
     completion of the management and occupancy review. The incentive fee would be
     earned if 100 percent of the required reports were submitted on time. Since the incentive
     fees are also based on timeliness and/or quantity, the PBCAs were motivated to perform
     the work in a timely manner without regard to the quality of the work performed.
     Additionally, since HUD can return the submissions but cannot assess disincentives for
     incomplete or inaccurate reporting, the risk of incomplete and/or inaccurate reporting
     increases.

HUD Did Not Require
Collection of Information for
Decision Making


     HUD stated that the outsourcing of contract administration would save the government in
     excess of $600 million per year. However, the contract did not include a measurement of
     results, such as voucher errors (number of errors and amount of error), abatements due to
     physical inspections, or income errors. Further, HUD did not perform studies to

                                             14
      determine whether outcomes were sufficient in relation to the cost of providing the
      service, more than $291 million in 2008.

      We asked the Director of Housing Assistance Contract Administration Oversight if there
      were any tangible benefits due to the PBCA contract activities. The director provided us
      with the Web site for the Rental Housing Integrity Improvement Project Newsletters from
      2003 through 2008. The newsletters indicated that the PBCAs‟ use of the Enterprise
      Income Verification system (system) ensured the accuracy of tenant income. However,
      when we reviewed the newsletters, we determined that the system was not available for
      the project-based Section 8 program until the latter part of fiscal year 2006. Further, it
      was the owners‟ responsibility to certify that the tenants‟ income was accurate. It was the
      PBCAs‟ responsibility to examine tenant documentation when they performed the
      management and occupancy review. However, since the PBCAs do not have a
      contractual requirement to track income errors, HUD could not show what tangible
      benefits were provided.

 HUD Did Not Adequately
 Develop the Intended Result


      OMB Circular A-123, states that federal employees must ensure that government
      resources are used efficiently and effectively to achieve intended program results. Not
      only were the incentive fees excessive, they should have been used to promote HUD‟s
      goals such as self-sufficiency and housing preservation rather than to promote work
      already included in the basic fee.

      HUD had several clear objectives for subsidized housing including the promotion of
      economic self-sufficiency and independence for elderly and disabled populations. HUD
      had good specific goals for improving physical quality through the Real Estate
      Assessment Center but did not have good specific goals for improving the economic self-
      sufficiency of families receiving project-based assistance.

HUD Did Not Ensure That
Resources Were Used
Consistent with Its Mission

      Management controls include organization, policies, and procedures used to reasonably
      ensure that resources are used consistent with the agency mission. As stated above, HUD
      did not restrict funds, and as a result, excess funds were spent on non-mission-related
      activities such as repaying OIG audit findings. At the same time, HUD did not
      adequately monitor the PBCAs. We performed a concurrent audit of HUD‟s monitoring
      of the PBCAs, which was issued September 1, 2009. This review indicated that HUD
      field offices were not able to perform all of the required reviews of PBCA activities due
      to a lack of available resources.

      In addition, HUD‟s 2009 budget request asserts that the “PBCAs for project-based
      Section 8 contract administration „are a vital tool‟ in the Department‟s efforts to
                                              15
        transform and improve program administration and monitoring.” In particular, HUD
        stated that it used PBCAs to

            (1) Reduce payment errors. HUD stated that in conjunction with its Rental Housing
                Integrity Improvement Project (RHIIP), PBCAs have helped make HUD a leader
                among federal agencies in reducing improper payments.

            (2) Improve the physical condition of units.

            (3) Ensure timely payment of rents to property owners. HUD stated that PBCAs help
                to ensure the timely payment of housing assistance to property owners.

        However, in relation to the above activities, we determined the following:

            (1) HUD could not tell whether PBCAs were reducing payment errors because the
                contract did not contain a mechanism to quantify payment errors. Further,
                PBCAs were not required to participate in RHIIP.

            (2) The PBCAs assumed a follow-up role, but HUD‟s Real Estate Assessment Center
                was the primary organization that helped improve the physical condition of units.

            (3) According to a GAO report, PBCA numbers may not be accurate because the
                funds are disbursed to the PBCA, rather than directly to the owner. Also, HUD‟s
                data systems do not track the date owners receive payment under these contracts.
                PBCAs‟ timeliness was based on the date the funds were disbursed to the PBCAs.
                It generally takes PBCAs anywhere from one to five days to pay owners.12

HUD Needs to Determine the
Most Cost-Effective Method of
Obtaining Contract
Administration Services

        While using PBCAs may have a positive impact on the overall program, it was not the
        most cost-effective method of delivering the contract administration services. In
        addition, HUD did not have adequate resources to monitor the PBCAs, and its field
        offices were not able to perform all of the required reviews of PBCA activities.

        OMB Circular A-123 states that federal employees must ensure that government
        resources are used efficiently and effectively to achieve intended program results.
        Resources must be used consistent with agency mission and with minimal potential for
        waste and mismanagement.

        Consequently, instead of continuing to renew the same contracts, HUD needs to look at
        all available options to ensure that it is using the most cost effective method of

12
  GAO-06-57, dated November 2005, Report to Congressional Requesters, Project-Based Rental Assistance, HUD
Should Streamline Its Processes to Ensure Timely Housing Assistance Payments.
                                                    16
           performing the contract administration tasks and that it complies with management
           accountability requirements. Depending on the method determined to be most cost
           effective, HUD needs to build certain management controls into the process for obtaining
           these services. Three possible options for consideration in determining the most cost-
           effective method and some courses of action HUD should consider are

               Option 1 - HUD as contract administrator. HUD could increase its staffing levels and
               bring all of the contract administration functions back in house. This option
               eliminates layers of management and profit that are inherent in the other methods of
               obtaining these services. Currently, for most of the larger PBCAs, HUD monitors the
               PBCAs that monitor their subcontractors that monitor their lower tier subcontractors.
               There is also profit built into each layer.

               Further, HUD established its Financial Management Center to handle some aspects of
               vouchers and housing assistance payments and its Real Estate Assessment Center to
               handle physical assessments. These centers could handle at least three of the tasks
               being performed by PBCAs.

               In 2007, HUD employees submitted an issue paper, “Contracting Out at HUD.”13
               The paper asked OMB to (1) require that HUD subject current contracts, including
               the PBCA contracts, to a review in accordance with OMB Circular A-76 or (2)
               require a small pilot program of no more than 100 full-time-equivalent HUD
               employees to compare both the cost and quality of the services as provided by HUD
               employees versus PBCAs. At the employees‟ request, this paper was provided to a
               congressional appropriations subcommittee on February 9, 2009. At the time of this
               report, we are unaware of any decisions made on this issue paper.
               If HUD selects the option 1 method of contract administration, it needs to ensure that
               there are adequate resources. It will need sufficient staff and travel funds to
               adequately perform the contract administration activities.

               Option 2 - HUD as contract administrator, contract out some administration activities.
               As stated above, the outsourcing of contract administration resulted in multiple layers
               of management and profit. To reduce the management layers and increase control,
               HUD could be the contract administrator and contract out some activities that could
               be performed by other entities. This change would allow for outsourcing of
               administration activities that could be performed by commercial for-profit entities,
               current PBCAs, other nonprofits, and HUD employees, which would increase
               competition and decrease overall costs.

               If HUD decides that this option is the most cost-effective method for contract
               administration, it needs to

                           Adequately control costs by awarding the contract to the lowest priced
                           qualified applicant. In addition, if there is no competition for any specific
                           geographic locality, it should obtain a cost proposal from the sole
                           applicant and negotiate the rate.

13
     American Federation of Government Employees, HUD Council 222, Issue Paper, Contracting Out at HUD.
                                                      17
           Include a clause in the new contract stating that any savings generated by
           the contract administrator as a result of rebidding/renegotiating its
           subcontracts should be shared with HUD.
           Protect resources from waste by rebidding the contract periodically to
           ensure that HUD continues to receive the best price for the work
           performed.
           Follow the Federal Acquisition Regulation in the solicitation process.
           Include quality performance standards in the annual contributions
           contract.
           Ensure that HUD promotes its goals and focuses on quality and/or other
           results-oriented outcomes if an incentive fee is made part of the new
           contract.
           Require collection of information for decision making in the annual
           contributions contract.
           Adequately develop the intended result.

Option 3 - PBCAs as contract administrator. Continue outsourcing contract
administration using a revised annual contributions contract. HUD employees should
also be allowed to submit a bid as a PBCA under this option.

If HUD determines that this option is the best course of action, it needs to

           Adequately control costs.
              o Consider using a budget-based system, paying the contractor only
                   what is needed to accomplish the tasks plus a reasonable profit.
              o Require the applicants to submit cost proposals, including
                   subcontract proposals, and negotiate the rates based on consistent
                   requirements.
              o Rebid the contracts periodically to ensure that HUD continues to
                   receive the best price for the work performed.
              o Include a clause in the new contract stating that any savings
                   generated by the contract administrator as a result of
                   rebidding/renegotiating its subcontracts should be shared with
                   HUD.
           Protect resources from waste.
              o Restrict the use of administrative fees earned in excess of expenses
                   to low- and moderate-income housing activities.
              o Ensure that the administration fee distribution to performance
                   standards is commensurate with associated workload.
              o Use a risk-based approach so that HUD receives the best value for
                   dollars spent.
              o Include a method in the new contract for adjusting administrative
                   fees when HUD modifications change or eliminate work for which
                   contract administrators are specifically paid.
              o Use an equitable method of payment that considers the number of
                   projects and units.


                                     18
                   Ensure compliance with laws and regulations.
                       o Follow grant requirements and regulations.
                       o Clarify which activities cannot be performed by subcontractors to
                          ensure that these tasks are performed directly by the PBCA or
                          HUD.
                   Include quality performance standards in the contract.
                   Include an incentive fee that promotes HUD goals and focuses on quality
                   and/or other results-oriented outcomes.
                   Require collection of information for decision making in the contract.
                   Adequately develop the intended result.
                   Ensure that resources are used consistent with HUD‟s mission.

     We realize that the above options may not work in all circumstances. Therefore, a
     combination of the three options could be considered, depending on items such as the
     geographic area serviced and market conditions. If these options are combined, the
     courses of action listed above should be similarly combined.

Conclusion


     We estimate that HUD will annually pay more than $90.9 million in incentive fees in
     excess of the 15 percent level recommended in a 2007 independent assessment report.
     Another $7.6 million could be put to better use annually if HUD were to eliminate
     excessive profits for one PBCA and rebid contracts to take advantage of lower
     subcontractor costs. HUD knew in 2004 that the contracts cost more than necessary but
     did not finalize a revised contract. Further, these amounts do not reflect additional
     unreasonable and unnecessary costs incurred because of

             Lack of adequate competition,
             Inadequate review of cost proposals,
             Multiple layers of profit and monitoring,
             Costs spent on 100 percent management and occupancy reviews when a risk-
             based approach to these reviews would be more cost effective, and
             Costs incurred by HUD to monitor the PBCAs.

Recommendations


     We recommend that the Deputy Assistant Secretary for Multifamily Housing

        1A. Perform a detailed analysis to determine the most cost-effective option for
            performing the contract administration tasks and initiate that method.

        1B. Ensure accountability for results and include appropriate, cost-effective controls
            so that at least $7.6 million in funds is put to better use or eliminated.



                                             19
                         SCOPE AND METHODOLOGY

Our audit testing included the preliminary analysis and drafting of the requests for proposals
from 1997 through 1999. Also, we tested the awarding of contracts from 2000 through 2005 and
contract performance from 2000 through 2008. We conducted our work from July 2008 through
March of 2009.

To accomplish our audit objectives, we examined HUD records and interviewed officials from
HUD‟s Office of Housing Assistance Contract Administration Oversight in Washington, DC; a
HUD contracting official from Denver, Colorado; and individuals who worked on the contract to
perform an independent assessment of the annual contributions contract. We obtained
information from HUD officials, various HUD OIG audit assignments, a HUD independent
consultant, GAO and OMB reports, the Internet, and staff of all 53 PBCAs.

The methodologies used included

       Compiling information to determine the history of the contract administration program.
       Reviewing PBCA technical and cost proposal files.
       Reviewing and compiling financial information obtained from the PBCAs.
       Reviewing and compiling information from the independent assessment.
       Reviewing and compiling information from files archived by the HUD contracting officer
       who worked on the request for proposals and contract award.
       Reviewing and compiling information from GAO and OMB reports.
       Obtaining and summarizing basic and incentive administrative fees paid to contract
       administrators for fiscal years 2000 through 2008 from HUD‟s Line of Credit Control
       System (LOCCS). Costs have steadily increased since 2000. Therefore, we used 2008
       dollars for future projections of costs to be conservative. The actual amount will exceed
       these amounts based on the rate of increase from 2006 to 2008.
       Calculating the excessive profits for one of the PBCAs from its cost proposal and 2008
       revenues from LOCCS.
       Calculating savings due to rebidding the subcontract based on the PBCA cost proposal,
       2008 financial statements, and official budgetary information.
       Calculating fees paid for tasks no longer required using 19 percent of the basic fees
       earned for 2008.
       Calculating unrestricted profits currently reported in 8 of 53 PBCA financial statements.

We relied on computer-processed data contained in LOCCS to estimate our finding‟s impact.
We relied on the HUD financial audit and quality management reviews of grant closeout
procedures, which reconcile LOCCS cash drawdown balances to grants. However, we did not
perform a detailed assessment of the reliability fo the data. We found the data to be reliable for
our purposes since the data are used primarily for the purposes of estimating our finding‟s
impact. We included only those transactions that were paid to the PBCAs.

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
                                                20
objective. We believe that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objective.




                                               21
                              INTERNAL CONTROLS

Internal control is an integral component of an organization‟s management that provides
reasonable assurance that the following objectives are achieved:

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

Internal controls relate to management‟s plans, methods, and procedures used to meet its
mission, goals, and objectives. They 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 control was relevant to our audit objective:

              Policies and procedures in place to ensure that the performance-based contract
              administration contract was cost effective.

       We assessed the relevant control identified above.

       A significant weakness exists if internal controls do not provide reasonable assurance that
       the process for planning, organizing, directing, and controlling program operations will meet
       the organization‟s objectives.

 Significant Weaknesses


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

       HUD did not have adequate policies and procedures to ensure

              Compliance with management accountability requirements contained in OMB
              Circular A-123.

              That outsourcing of contract administration included accountability for results and
              appropriate cost-effective controls.




                                                22
                    FOLLOW-UP ON PRIOR AUDITS

OIG Audit Reports


    Audit Report Number 2007 SE 0001, HUD Did Not Ensure That Payments to Contract
    Administrators Were for Work Performed or That Interest Was Earned on Advances and
    Recovered

    We issued audit report number 2007-SE-0001 on June 7, 2007. We reported that 3 of the
    16 performance standards were no longer required or performed. However, HUD
    continued to pay PBCAs for these services. HUD paid PBCAs $27.2 million during
    fiscal year 2006 for the eliminated work. In addition, HUD did not include a mechanism
    in the contract to change contract elements and associated fees to allow for changes in
    program requirements. Although the contract allowed for changes in the contract terms,
    there was nothing in the contract allowing for a change in contract price as a result of
    changes in terms. Consequently, when three tasks were no longer required, HUD could
    not reduce the contract price. When other tasks needed to be performed, HUD had no
    way of amending the contract or the administrative fee. This HUD decision resulted in
    more than $35 million for fiscal year 2008 for activities that were no longer required or
    performed. The report contains two recommendations that are still open as follows:

        1A.    Revise the annual contributions contract when entering or renewing contracts
               so that it properly reflects the work required.

        1B.    Include in the revised annual contributions contract a method for adjusting
               administrative fees when HUD modifications change or eliminate work for
               which contract administrators are specifically paid. This revision would result
               in about $27.2 million in annual savings from discontinuing payments for
               services that are no longer required.

    On October 31, 2007, HUD and OIG entered into an agreed-upon management decision
    with a final action target date of October 31, 2008. The management decision for these
    recommendations stipulated that HUD would revise its performance-based annual
    contributions contract when entering or renewing contracts. The revised contract would
    properly reflect the work required and would include a method for adjusting the contract
    in the future if or when requirements changed.

    On September 19, 2008, we followed up with the Acting Deputy Assistant Secretary for
    Multifamily Housing to determine whether HUD was still on target to meet the October
    31, 2008, deadline. The Acting Deputy stated, “…based on limited staff and travel
    resources, a working group has not yet been established to revise the contract. We are
    anticipating forming a working group in the late first quarter of FY [fiscal year] 2009.”




                                            23
    We followed up again on January 15, 2009. The Acting Deputy Assistant Secretary for
    Multifamily Housing stated, “…the Office that handles the PBCA program also handles
    the funding of the project-based Section 8 program. Over the last 24 months that Office‟s
    priority has been dealing with inadequate funding and poor management of that
    program.”

    Memorandum Report Number 2009-SE-0801, dated December 8, 2008, HUD‟s Recent
    Performance-Based Contract Administration Activity Was Inconsistent with Agreed-
    Upon Management Decisions between HUD and HUD OIG on Audit Report 2007-SE-
    0001, dated June 7, 2007

    HUD‟s Office of Multifamily Housing decided not to renew the annual contributions
    contract for the PBCA for the Southern California geographic service area, which expired
    in July of 2009. On October 1, 2008, HUD issued an invitation for submission of
    applications to award a new annual contributions contract. However, HUD used the
    outdated invitation, which still included the tasks that were no longer required.

    On December 8, 2008, we issued a memorandum recommending that HUD immediately
    rescind the invitation until it revises its contract. The revised contract should include
    only tasks that are required and a mechanism to adjust workload and commensurate fees
    as program needs change. It should also include a provision for making adjustments to
    the contracts in the future if or when requirements further change.

    HUD has made initial changes to the contract for the Southern California geographic
    region to rearrange the fee percentages to reflect current program practices and related
    contract administration activities. In addition, HUD changed the contract to provide for a
    one-year term to ensure that HUD will be able to adjust the contract for future changes in
    contract requirements as contracts expire. Further, HUD will enter into this new contract
    with the newly selected contract administrator for the Southern California geographic
    region.

GAO Audit Reports


    GAO-05-224 Report on HUD Rental Assistance, Progress and Challenges in Measuring
    and Reducing Improper Rent Subsidies, dated February 2005

    In February of 2005, GAO issued a report on HUD‟s “Challenges in Measuring and
    Reducing Improper Rent Subsidies.” The report stated that HUD‟s guidance for
    collecting data on the types and frequency of errors property owners made in determining
    subsidies was not widely followed. This deficiency occurred because the data collection
    effort was not mandatory and duplicated some PBCAs‟ existing procedures. Although
    HUD‟s monitoring guidance called for PBCAs to collect information on improper rent
    subsidies at each property, compliance with this guidance was limited. The report went
    on to say that implementing oversight measures could be challenging for HUD. Prior
    GAO reviews showed that HUD had not always provided adequate oversight of
    contractors.

                                            24
HUD concurred with the findings, stating, “HUD is rewriting its PBCA contract
requirements and will address GAO‟s issue that more consistent reporting of monitoring
results is needed as a basis for measuring, analyzing, and resolving compliance and
performance problems.” According to a GAO representative, the report did not include a
recommendation to revise the contract since HUD stated that it was already rewriting it.




                                       25
                                     APPENDICES

Appendix A

      SCHEDULE OF FUNDS TO BE PUT TO BETTER USE

              Recommendation                                   Funds to be put to
                  number                  Description            better use 1/
                      1B            Profits                           $1,780,306
                      1B            Rebidding the contract             5,820,449

                      Total                                           $7,600,755

  1/ Recommendations that funds be put to better use are estimates of amounts that could be
     used more efficiently if an 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. The amounts
     above represent our estimate of savings that could be achieved by eliminating excessive
     profits on one contract and instituting a mechanism to rebid the contracts after a set period
     to benefit from reduced subcontractor costs. These amounts reflect only one year of
     savings although the savings would incur indefinitely if HUD implements our
     recommendations.

             Profits - We computed the excessive profit using 2008 basic fee data and the
             profit percentage from the cost proposal submitted by the PBCA that exceeded the
             10 percent that HUD determined to be appropriate. (Basic fee divided by one
             plus proposed profit percentage multiplied by the excessive profit percentage =
             $19,004,018/121.37 *11.37 = $1,780,306)

             Rebidding the contract - We computed the cost savings for rebidding the
             subcontract using the PBCA‟s fiscal year 2008 basic fee earned, 2008 official
             budget request, and its original cost proposal. The cost proposal provided us with
             the costs of the original subcontractor for that activity level. We compared this
             amount with the 2008 projected revenues and expenditures from the official
             budget, adjusted to 2008 actual fees earned, and calculated the difference.




                                               26
       Proposed                       Total        Proposed          Total 2008           Estimated
      subcontract                   proposed      subcontract         basic fee             2008
         costs                      basic fee     percentage           earned         subcontract costs^
           a                           b             c=a/b               d                 e=d*c
     $ 11,038,870               $ 14,382,440         76.8%          $ 22,405,367        $ 17,196,660



       Budgeted                     Budgeted    Budgeted 2008         Budgeted         Cost savings for
         2008                         2008       subcontract         subcontract        rebidding the
    subcontract costs               basic fee    percentage            costs^           subcontract^
            f                          g             h=f/g             i=d*h                j=e-i
      $ 9,170,000               $ 18,060,250         50.8%          $ 11,376,211         $ 5,820,449


^Differences are due to rounding.

These amounts do not include any additional savings HUD could achieve by restructuring the
contracts and limiting the incentive fee to 15 percent as recommended in a 2007 independent
contractor‟s assessment report. As noted in the finding, the assessment report stated that the
contract contained incentives that were actually baseline tasks. This practice rewarded contract
administrators for meeting contract requirements and complying with expected outcomes. HUD
paid $107 million in incentive fees, which was more than $90.9 million in excess of the
recommended 15 percent. However, we could not estimate the amount of savings that would
accrue since restructuring the contracts could also affect the level of the basic fees. Any
increases in the basic fee portion of the contract would offset the reduced incentive fee portion.




                                                27
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 1



Comment 2




Comment 3




                         28
Comment 4




Comment 5




Comment 6



Comment 7




            29
Comment 8



Comment 9




Comment 10


Comment 11




             30
Comment 12




Comment 12




             31
32
                         OIG Evaluation of Auditee Comments

Comment 1   Although the initial intent of the contract was not focused on cost effectiveness, at
            this time, cost effectiveness is important to prevent waste.

Comment 2   While we commend HUD for acknowledging changes are needed, HUD first
            discussed the fact that the contract needed to be revised in August of 2004. In
            February of 2005, the United States General Accountability Office (GAO) issued
            a report on HUD‟s “Challenges in Measuring and Reducing Improper Rent
            Subsidies.” The report stated “HUD is rewriting its PBCA contract requirements
            and will address GAO‟s issue that more consistent reporting of monitoring results
            is needed as a basis for measuring, analyzing, and resolving compliance and
            performance problems.”

            More than a year later, HUD hired an independent contractor for an assessment of
            the program and the existing contract at a cost of about $360,000. The assessment
            report stated that it would take approximately six to eight months to revise and
            finalize a new contract. While HUD received the assessment report February 9,
            2007, it still has not drafted a revised contract.

            On June 7, 2007, OIG issued an audit report that identified three tasks the PBCAs
            were no longer required to perform but for which they were paid. HUD stated
            that it had already begun the process of revising the annual contributions contract.

            On September 19, 2008, we followed up with the Acting Deputy Assistant
            Secretary for Multifamily Housing to determine whether HUD was still on target
            to meet the October 31, 2008, final action target date for revision of the annual
            contributions contract. The Acting Deputy stated, “…based on limited staff and
            travel resources, a working group has not yet been established to revise the
            contract. We are anticipating forming a working group in the late first quarter of
            FY [fiscal year] 2009.”

            We followed up again on January 15, 2009. The Acting Deputy Assistant
            Secretary for Multifamily Housing stated, “…the Office that handles the PBCA
            program also handles the funding of the project-based Section 8 program and over
            the last 24 months that Office‟s priority has been dealing with inadequate funding
            and poor management for that program.”

            The original contract developed and awarded in the early 2000s was initially a
            three year contract with two renewal years. However, HUD did not begin to
            develop a new contract until early in 2009 and the contract is now not scheduled
            to be implemented until January of 2011. While HUD has significantly delayed
            developing and implementing a new contract the department has unnecessarily
            paid hundreds of millions of dollars in basic and incentive fees that will hopefully
            not be paid once the contract is revised.




                                             33
Comment 3       We clarified the sections of the report to better explain how quantity and
                timeliness of the performance standards relates to incentive fees and disincentive
                deductions.

Comment 4       Qualitative components are included in the narrative section of Exhibit A to the
                contract. However, with the exception of task 3, the IBPS Performance
                Requirements Summary table, in which the calculations for disincentives are
                explained, does not include qualitative components. The defined acceptable
                quality level for each of the tasks, with the exception of task 3, is based on
                quantity or timeliness, not quality.

Comment 5       We are encouraged by HUD‟s agreement to consider mirroring the physical
                inspection protocol implemented by REAC. However, since REAC plays a
                significant role in the review of physical and financial reviews, we are hesitant to
                agree that the annual management reviews are the reason for the improvement in
                the physical condition of the portfolio and increased financial performance. If the
                physical condition of the portfolio can increase with performing fewer inspections
                on low risk properties, it makes sense that it would work with management
                reviews as well.

Comment 6       We agree that the Department should look at the potential for mirroring the
                physical inspection protocol which would require fewer management and
                occupancy reviews if certain scores are achieved.

Comment 7       We received a formal legal opinion on what inherently governmental activities are
                contained in the contract from HUD‟s Office of General Counsel on March 31,
                2009. The opinion stated that since executing the housing assistance payment
                contract is inherently governmental it must be performed by HUD or the PHA,
                not the subcontractor. Further, if HUD executed the housing assistance payment
                contract it could contract out all of the contract administrator functions that are
                not inherently governmental. If the PBCAs continue to act as the contract
                administrators and sign the housing assistance payment contracts they are
                ultimately responsible for overall contract administration.

Comment 8       OIG disagrees. As discussed in comment 4, the defined acceptable quality level
                for each of the tasks, with the exception of task 3, is based on quantity or
                timeliness, not quality. In addition, our September 1, 2009 audit reported that
                HUD did not adequately monitor the PBCAs‟ performance with respect to the
                Section 8 Performance-Based Contract Administration initiative. Consequently,
                HUD lacked assurance that Section 8 rental subsidies were correctly calculated
                and paid; project-based Section 8 housing assistance payments contracts were
                administered consistently; and that it received quality work.14

Comment 9       According to performance based contracting best practices the contract should
                include goals for performance and then develop performance objectives to obtain

14
  OIG Report 2009 SE 0003, HUD‟s Monitoring of the Performanced-Based Contract Administrators was
inadequate, dated September 1, 2009.
                                                   34
              those goals. The current goals in the contract emphasize the quantity and
              timeliness of PBCA submissions rather than encouraging quality performance.
              However, one of the goals of the PBCA is to earn one hundred percent of the
              basic and incentive fees. Consequently, HUD‟s determination of common goals
              and objectives across the entire PBCA Program would greatly benefit the program
              and every affected HUD field office.

Comment 10 While HUD does not have current budgetary authority, the contracts will not
           expire until January of 2011. Therefore, HUD should determine what is the most
           cost effective and efficient method of performing these services and determine if
           funds could be reappropriated accordingly.

              There are current initiatives within the Federal government to bring work
              previously contracted out back in house. For example in September of 2008 the
              Internal Revenue Service canceled a multimillion contract and brought 700 jobs
              back in house. The Department of Homeland Security recently made the decision
              to bring 3,200 jobs back in house. The Department of Defense comptroller
              recently stated that outsourced contractor jobs have ended up being more
              expensive than government workers.

              When HUD decided to contract out the administrative of project-based contracts
              it had little or no choice due to mandatory downsizing within the Federal
              Government during the Clinton Administration. Further, HUD was just in the
              process of creating its Real Estate Assessment Center and the Financial
              Management Center. HUD needs to re-examine its current environment to
              determine the most efficient and cost effective method of providing the contract
              administration services.

Comment 11 Option 2 would not require a statutory change because the tasks that cannot be
           contracted out would be performed by HUD as discussed in Comment 7 above.
           Most of the work being performed under the current contract for the largest
           PBCAs is not performed by the PHA but rather by the commercial subcontractor.
           In addition, the contract currently being developed could be used for Option 2.
           HUD would only need to do a minor modification to bring the inherently
           governmental activities back in house. Additional FTEs could be attained with
           cost savings on the contracts and HUD has until 2011 to negotiate the change.

Comment 12 As stated in our report, since Option 3 has multiple layers of management and
           profit it may not result in the most cost effective and efficient contract. As
           recommended, HUD should perform a detailed analysis to determine what option
           is the most cost effective rather than selecting an option it wishes to perform
           without any analysis of the cost. This will ensure that the method selected is the
           most cost effective.




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Appendix C

                                      CRITERIA
  A. OMB Circular A-123, attachment I. Introduction. The proper stewardship of Federal
     resources is a fundamental responsibility of agency managers and staff. Federal
     employees must ensure that government resources are used efficiently and effectively to
     achieve intended program results. Resources must be used consistent with agency
     mission, in compliance with law and regulation, and with minimal potential for waste,
     fraud, and mismanagement.

  B. Federal Acquisition Regulation 15.000. This part prescribes policies and procedures
     governing competitive and noncompetitive negotiated acquisitions. A contract awarded
     using other than sealed bidding procedures is a negotiated contract.

  C. Federal Acquisition Regulation 15.101. Best value continuum. An agency can obtain
     best value in negotiated acquisitions by using any one or a combination of source
     selection approaches. In different types of acquisitions, the relative importance of cost
     or price may vary. For example, in acquisitions where the requirement is clearly
     definable and the risk of unsuccessful contract performance is minimal, cost or price
     may play a dominant role in source selection. The less definitive the requirement, the
     more development work required, or the greater the performance risk, the more technical
     or past performance considerations may play a dominant role in source selection.

  D. Federal Acquisition Regulation 15.101-1. Tradeoff process. (a) A tradeoff process is
     appropriate when it may be in the best interest of the Government to consider award to
     other than the lowest priced offeror or other than the highest technically rated offeror.
     (b) When using a tradeoff process, the following apply: (1) All evaluation factors and
     significant subfactors that will affect contract award and their relative importance shall
     be clearly stated in the solicitation; and (2) The solicitation shall state whether all
     evaluation factors other than cost or price, when combined, are significantly more
     important than, approximately equal to, or significantly less important than cost or price.
     (c) This process permits tradeoffs among cost or price and non-cost factors and allows
     the Government to accept other than the lowest priced proposal.




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