oversight

The Housing Authority of the City of New Haven, CT, Did Not Support Cost Reasonableness for More Than $1.4 Million or Properly Obligate $60,000 of Its Capital Fund Stimulus Recovery Act Grant

Published by the Department of Housing and Urban Development, Office of Inspector General on 2010-12-17.

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

                 AUDIT REPORT




The Housing Authority of the City of New Haven, CT, Did Not
Support Cost Reasonableness for More Than $1.4 Million of Its
         Capital Fund Stimulus Recovery Act Grant

            Audit Report Number 2011-BO-1003

           Date of the Report December 17, 2010
                    Office of Audit, Region 1
                        New England
                                                                           Issue Date
                                                                              December 17, 2010
                                                                           Audit Report Number
                                                                                  2011-BO-1003




TO:         Donna Ayala, Director, Office of Public Housing, Boston Hub, 1APH
                       Digitally signed by Kristen Ekmalian
                       DN: cn=Kristen Ekmalian, o=HUD,
                       ou=OIG,
                       email=KEkmalian@hudoig.gov, c=US
                       Date: 2010.12.17 09:56:22 -05'00'


FROM:       John Dvorak, Regional Inspector General for Audit, Boston Region, 1AGA


SUBJECT: The Housing Authority of the City of New Haven, CT, Did Not Support Cost
         Reasonableness for More Than $1.4 Million or Properly Obligate $60,000 of Its
         Capital Fund Stimulus Recovery Act Grant


                                                              HIGHLIGHTS

 What We Audited and Why

             We selected the Housing Authority of the City of New Haven (Authority), a
             Moving to Work agency, because it obligated a majority of its $6 million in
             Public Housing Capital Fund Stimulus (formula) Recovery Act Funded grant
             (grant) received under the American Recovery and Reinvestment Act of 2009
             (Recovery Act) just before the required obligation deadline. Our objectives were
             to determine whether the Authority (1) obligated its Recovery Act formula funds
             for eligible projects/activities, (2) properly supported obligations and
             expenditures, (3) had adequate controls over obligations and expenditures, and (4)
             procured contracts in accordance with Recovery Act requirements and U.S.
             Department of Housing and Urban Development (HUD) rules and regulations.




                                                                  2
What We Found

         Overall, the Authority obligated its Recovery Act formula funds for eligible
         activities, supported its obligations, and had adequate controls over the obligation
         and expenditure process. However, it did not always procure contracts in
         accordance with Recovery Act and Federal requirements that involved more than
         $1.4 million of its $6 million in Recovery Act funds.

         Specifically, the Authority could not show cost reasonableness for more than $1.4
         million in vacancy reduction contracts primarily because it did not complete an
         independent cost estimate before solicitation and failed to complete a formal cost or
         price analysis of the bids. In addition, the Authority did not obtain competitive bids
         for the renovations. This condition occurred because the Authority did not follow
         HUD’s and its own procurement policies and procedures regarding the Recovery
         Act funds. As a result, Recovery Act funds may not have been used efficiently, and
         the maximum number of vacant housing units may not have been returned to
         service.

         The Authority also did not properly obligate and execute its Recovery Act physical
         needs assessment contract. The contract was not properly obligated because it
         included a $60,000 contingency for additional work that may have required
         expenditure; thus, the Authority was not obligated to spend Recovery Act funds.
         The contract was not properly executed because the Authority used the contingency
         for a study that was not included in the contract scope of work and, thus, was not an
         eligible contract cost. This condition occurred because the Authority did not ensure
         that costs identified for funding with the $60,000 represented an eligible cost under
         the contract. If this situation is not corrected, $60,000 may be spent for ineligible
         activities, and funds may be recaptured in accordance with the Recovery Act.


What We Recommend


         We recommend that the Director of HUD’s Boston Office of Public Housing
         require the Authority to support the cost reasonableness or repay any amounts it
         cannot support from the more than $1.4 million in Recovery Act capital funds
         spent for vacancy reduction contracts. We also recommend that the Authority
         improve its procurement controls to include obtaining appropriate procurement
         training and fully implementing procurement requirements regarding cost
         estimates, cost analysis, and competitive bids. We recommend that HUD require
         the Authority to pay for the Section 8 conversion study, assigned under task order
         one, from non-Recovery Act funds. Lastly, we recommend that the Director of
         HUD’s Boston Office of Public Housing ensure that the $60,000 is expended
         according to the contract; however, if eligible costs cannot be identified, the
         $60,000 should be recaptured in accordance with the Recovery Act. For each



                                           3
           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 Authority the report on December 3, 2010, and held an exit
           conference with the Authority on December 9, 2010. The complete text of the
           auditee’s response, along with our evaluation of that response, can be found in
           appendix B of this report. We did not include in the report the attachments
           provided with the Authority’s response due to the volume of documents provided,
           however, it is available upon request. The Authority did not agree with finding 1
           and the recommendations and did not comment on finding 2 in its response.




                                            4
                           TABLE OF CONTENTS

Background and Objectives                                                          6

Results of Audit

      Finding 1: Cost Reasonableness for More Than $1.4 Million in Contracts Was   7
      Not Supported

      Finding 2: The Authority Did Not Properly Obligate $60,000                   9


Scope and Methodology                                                              11

Internal Controls                                                                  12

Appendixes
   A. Schedule of Questioned Costs                                                 14
   B. Auditee Comments and OIG’s Evaluation                                        15




                                            5
                         BACKGROUND AND OBJECTIVES

The Housing Authority of the City of New Haven, CT, (Authority) was incorporated under the
laws of the State of Connecticut. The Authority operates under a five-member board of
commissioners, appointed by the mayor, and an executive director to provide safe and decent
housing to low- and moderate-income families and elderly individuals.

In 2001, the Authority was awarded Moving to Work (MTW) status as part of the Federal MTW
Demonstration program. As an MTW grantee, the Authority is required to submit MTW annual
plans to the U.S. Department of Housing and Urban Development (HUD) that articulate its
policies, objectives, and strategies for administering its Federal housing programs. HUD
approved a waiver requested by the Authority in 2006 to use an alternative procurement process
through which it would use a request for qualifications process to obtain a prequalified list of
construction contractors to work on various jobs at the Authority. When the Authority was ready
to perform work on a project, it was required to solicit bids from the prequalified contractors.
During our audit period, the Authority owned and managed 2,422 units under its MTW
agreement.

President Obama signed the American Recovery and Reinvestment Act of 2009 (Recovery Act)
on February 17, 2009. This legislation included a $4 billion appropriation of capital funds with
$3 billion distributed as formula grants and $1 billion distributed through a competitive grant
process. On March 18, 2009, HUD awarded the Authority a $6 million formula grant. 1

The Recovery Act imposed additional reporting requirements and more stringent obligation and
expenditure requirements on the grant recipients beyond those applicable to the ongoing Public
Housing Capital Fund program grants. Recovery Act funds were to be used to address deferred
maintenance needs, including but not limited to (1) repair of vacant units, (2) work items related
to code compliance including abatement of lead-based paint, and (3) rehabilitation and
modernization activities that have been delayed or not undertaken because of insufficient funds.

The Authority allocated its noncompetitive Recovery Act funds primarily to repair building
facades and roofs, prepare units for vacancy, and upgrade kitchens and bathrooms and for
environmental testing and physical needs assessments.

Our objectives were to determine whether the Authority (1) obligated its noncompetitive
Recovery Act funds for eligible projects/activities, (2) properly supported obligations and
expenditures, (3) had adequate controls over obligations and expenditures, and (4) procured
contracts in accordance with Recovery Act requirements and HUD rules and regulations.




1
  HUD also awarded the Authority $22.2 million in Recovery Act competitive capital grants; however, we limited
this review to formula grant funds.


                                                       6
                                 RESULTS OF AUDIT

Finding 1: Cost Reasonableness for More Than $1.4 Million in
           Contracts Was Not Supported
The Authority could not show cost reasonableness for more than $1.4 million in vacancy reduction
contracts primarily because it did not complete an independent cost estimate before solicitation and
failed to complete a formal cost or price analysis of the bids. In addition, it did not obtain
competitive bids for the renovations. This condition occurred because the Authority did not follow
HUD’s and its own procurement policies and procedures. As a result, these Recovery Act funds
may not have been used efficiently, and the maximum number of vacant housing units may not have
been returned to service.


    The Authority Awarded $1.4
    Million in Contracts

                The Authority awarded more than $1.4 million in Recovery Act funds to four
                contractors to renovate 87 vacant housing units. The work included repairs and lead
                and asbestos remediation. A sample of renovated units reviewed showed the work
                to be of satisfactory quality.


    The Authority Did Not Follow
    Requirements

                The Authority did not follow HUD’s and its own procurement policies and
                procedures, which require a detailed estimate of the contract costs before
                soliciting bids and a cost/price analysis when competition is lacking. 2
                Completing cost estimates and performing a cost analysis were required to
                evaluate the reasonableness of proposed contract prices. In spite of these
                requirements, the Authority did not complete either the cost estimates or the
                analysis and, therefore, could not show that the renovation costs totaling more
                than $1.4 million were reasonable for the 87 units renovated.


    Bids Were Not Always
    Competitive and Comparable

                Competitive bids are required for procurements3 and may be used in some

2
 24 CFR (Code of Federal Regulations) 85.36(f)
3
 Competitive bids are required by 24 CFR 85.36(c)(1); HUD Handbook 7460.8, REV-2, paragraph 5.3A; and
HUD’s waiver allowing alternative procurement procedures.


                                                     7
                    circumstances to establish price reasonableness. 4 However, the Authority obtained
                    competitive and comparable bids for only 10 percent of the renovated units.5 The
                    bids were not competitive because the Authority requested only 1 bid for 59 of the
                    87 renovated units. A majority of other bids were not comparable because
                    contractors based their bids on substantially different scopes of work. For example,
                    one bidder failed to include thousands of dollars for asbestos abatement in his bids.
                    The lack of competitive and comparable bids made it difficult to determine whether
                    the contract costs were reasonable and increased the risk that the Authority may
                    have overpaid for some renovations.


    Conclusion



                    Although work was completed on 87 vacant housing units, without independent
                    cost estimates, cost analyses, and competitive bidding, we could not verify that
                    the costs paid totaling more than $1.4 million to renovate the units were
                    reasonable. Thus, Recovery Act funds may not have been used efficiently, and
                    the maximum number of vacant housing units may not have been returned to
                    service.


    Recommendations

                    We recommend that the Director of HUD’s Boston Office of Public Housing
                    require the Authority to

                    1A. Support the cost reasonableness or repay any amounts it cannot support
                        from the $1,438,948 in Recovery Act capital funds spent for vacancy
                        reduction contracts.

                    1B. Improve its procurement controls to include obtaining appropriate
                        procurement training and fully implementing procurement requirements
                        regarding cost estimates, cost analysis, and competitive bids.




4
    HUD Handbook 7460.8, paragraph 10.3B
5
    The Authority obtained 1 bid for 59 units plus 19 non-comparable bids = 78 units / 87 total units = 90%.



                                                            8
                                 RESULTS OF AUDIT

Finding 2: The Authority Did Not Properly Obligate $60,000
The Authority did not properly obligate and execute its Recovery Act physical needs assessment
contract. The contract was not properly obligated because it included a $60,000 contingency for
additional work that may have required expenditure; thus, the Authority was not obligated to spend
Recovery Act funds. The contract was not properly executed because the Authority used the
contingency for a study that was not included in the contract scope of work and, thus, was not an
eligible contract cost. This condition occurred because the Authority did not ensure that costs
identified for funding with the $60,000 represented an eligible cost under the contract. If this
situation is not corrected, $60,000 may be spent for ineligible activities, and funds may be
recaptured in accordance with the Recovery Act.



    A Task Order Was Not
    Properly Obligated and Outside
    the Contract Scope

                The Authority entered into a physical needs assessment contract (contract) on
                May 8, 2009. The contract included a fixed price for specific projects/units plus
                $60,000 for additional unspecified (contingency) services to be assigned by task
                order. The Authority added the contingency based on its experience that after
                completing an assessment, various questions arise that may require further
                investigation and work. The Authority then issued a $60,000 task order on
                August 25, 2010, for the contractor to complete a study to assist the Authority in
                converting its public housing developments to Section 8 developments.

                However the contract stipulated that additional services were not to be used for
                studies but were to be used for specific physical condition assessments as
                determined during site visits.6 Therefore, the Section 8 study was outside the
                scope of the contract and was not an eligible contract cost.

______________________
6
  The PHA will be required to provide a physical need assessment (PNA), as specified by HUD, using funds from
this Recovery Act grant or other Capital Funds. (Note: PHAs are not required to complete the PNA before
commencing Modernization work using the Recovery grant funds).” Per Recovery Act Capital Fund Formula Grant
Frequently Asked Questions #3, As of July 24, 2009, PHYSICAL NEEDS ASSESSMENT: If a PHA completes a
PNA of its public housing portfolio it may obligate and expend Recovery Act Capital Funds on that PNA provided
that it does so within the statutory timeframes.




                                                      9
A $60,000 Contingency Is at
Risk of Recapture

             The Recovery Act requires HUD to recapture all funds not obligated by March
             17, 2010. HUD defines an obligation as a legally binding agreement that will
             require an expenditure of funds. Since the contract allowed the Authority the
             option of not exercising this contingency and not incurring the $60,000 in costs,
             an obligation may not have occurred and may require recapture.

             Although the contract did not require an expenditure of funds, HUD determined
             that the Authority could use the $60,000 in funds for task orders that were within
             the scope of the contract. The contractor started work on this task order during
             our audit; however, the Authority had not made any payments related to the task
             order.

Conclusion


             The $60,000 study assigned under the physical needs assessment contract was
             outside the Recovery Act contract’s scope of work; therefore, non-Recovery Act
             funds must be used to pay the contractor. The Authority may use Recovery Act
             funds if it identifies work that is within the contract’s scope of work. However, if
             the Authority cannot assign another task order in accordance with the contract, the
             $60,000 must be recaptured in accordance with the Recovery Act.


Recommendations



             We recommend that the Director of HUD’s Boston Office of Public Housing require
             the Authority to

             2A. Pay for the Section 8 conversion study, assigned under task number one, from
                 non-Recovery Act funds.

             2B. Ensure that the $60,000 is expended according to the contract; however, if
                 eligible costs cannot be identified, the $60,000 should be recaptured in
                 accordance with the Recovery Act.




                                              10
                                   SCOPE AND METHODOLOGY

We conducted the audit from July to November 2010. Our fieldwork was conducted at the
Authority’s offices located at 360 Orange Street, New Haven, CT, and our office in Hartford,
CT. Our audit covered the period March 18, 2009, through June 30, 2010, and was expanded as
necessary to meet our audit objectives. To accomplish our audit objectives, we limited our tests
to Recovery Act activities and

    •   Reviewed the Recovery Act and applicable HUD rules, regulations, and guidance

    •   Reviewed management controls over obligations, expenditures, and procurement

    •   Reviewed 100 percent of Recovery Act formula-funded projects 6 totaling more than $6
        million for 13 activities to determine whether funds were obligated for eligible projects.

    •   Reviewed 93 percent of Recovery Act formula-funded projects to determine whether
        funds were obligated in a timely manner, adequately supported, and properly procured. 7

    •   Reviewed 38 percent of expenditures 8 to ensure that they were supported with an invoice,
        agreed with the contract, and matched HUD’s reimbursement records.

    •   Interviewed the Authority’s contractors, HUD staff, and Authority officials.

    •   Performed limited visits to planned and completed vacancy reduction worksites.


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.




7
  Reviewed all obligations over $100,000, which resulted in 12 Recovery Act contracts totaling more than $5.3
million of the $6.04 million in Recovery Act funds tested.
8
  Reviewed a sample of 16 expenditures totaling $1.08 million of the $2.83 million expended as of June 30, 2010.


                                                        11
                              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:

               •      Controls over staff experience, training, and workload.
               •      Controls over selecting and approving eligible projects.
               •      Controls over the timely obligation of Recovery Act funds.
               •      Controls over the obligation and expenditure of funds to ensure that they are
                      eligible, supported, necessary, and reasonable.
               •      Controls over the procurement of contracts.

               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.




                                                 12
Significant Deficiencies


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

             •      The Authority had inadequate procurement controls for its Recovery Act
                    formula-funded vacancy reduction contracts.

             •      The Authority did not ensure that all obligations were eligible in accordance
                    with contract terms.




                                              13
                                   APPENDIXES

Appendix A

                 SCHEDULE OF QUESTIONED COSTS

                    Recommendation          Ineligible 1/     Unsupported 2/
                        number
                           1A.                                  $1,438,948
                           2B.                $60,000




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

2/   Unsupported costs are those costs charged to a HUD-financed or HUD-insured program
     or activity when we cannot determine eligibility at the time of the audit. Unsupported
     costs require a decision by HUD program officials. This decision, in addition to
     obtaining supporting documentation, might involve a legal interpretation or clarification
     of departmental policies and procedures.




                                             14
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 1




                         15
Ref to OIG Evaluation   Auditee Comments




Comment 2


Comment 3




Comment 4




                         16
 Ref to OIG Evaluation   Auditee Comments




Comment 2



Comment 1


Comment 5

Comment 2

Comment 6




                          17
OIG Evaluation of Auditee Comments

Comment 1    The finding did not state that the units should have been be bid on a per unit or
            work item basis. Although the authority put together a detailed scope of work,
            there was no cost estimate associated with each unit based on the detailed scope
            of work. Furthermore, the Authority did not use a sealed bid/competitive process,
            but instead requested bids from contractors for specific units.

Comment 2   The Authority is correct that regulations do not specify the specific form of a cost
            estimate to be prepared. However, we do not agree the budget document
            provided by the Authority during the audit was a cost estimate. Furthermore, the
            estimates provided were conflicting and budgetary amounts.

Comment 3   In response to the finding outlines and draft report, the Authority provided OIG
            detailed cost estimates by unit and work item for several units in the same
            developments that were rehabbed previously, yet it did not develop detailed cost
            estimates for the Recovery Act units. Further, the detailed cost estimates
            provided for these other units did not include more than $170,000 in abatement
            costs, which was a material cost in the Recovery Act units. Therefore, the cost
            estimates provided in the Auditees response could not be used to establish the cost
            reasaonbleness of the Recovery Act units.

            The Authority stated in its response that it used these worksheets to determine
            reasonableness of costs, yet discussions with the project manager who received
            and evaluated the bids showed that he did not have cost estimates nor did he use
            any to evaluate the bids prior to awarding the contracts.

            Furthermore, the Authority did not use a sealed bid procurement method and did
            not obtain bids for the same units from more than one qualified contractor for the
            majority of units. Therefore, the procurement method used was considered a sole
            source procurement, thus, requiring the Authority to perform cost analyses of the
            bids to determine reasonableness of costs. However, the Authority did not
            develop cost analyses prior to awarding the contracts. For two contractors, the
            Authority was not provided nor did it request a cost breakout of the bids for each
            unit.

            The Authority did not support that the costs paid were reasonable, therefore, no
            changes were made to the finding.

Comment 4   The detailed cost estimates provided by the Authority in response to our finding
            outlines and draft report for similar units rehabbed, showed that the Authority
            prepared a cost estimate for each unit and showed the quantity and standard unit
            prices per work item that the Authority expected to pay. For example, it showed
            $275 to replace a toilet, $35 to replace a toilet seat, $8 per square foot to patch
            holes in sheetrock, $15 per foot to repair/remount baseboard hearers, etc. The
            cost estimates also showed that the quantity and type of work items completed in



                                             18
            each unit was different and thus, the total cost estimated to repair each unit was
            different. Therefore, the Authority should have completed similar cost estimates
            for the ARRA funded units given the difference in repairs for each unit.

            Our review of the cost estimates provided by the Authority for similar units
            showed it may have overpaid for work items for its ARRA funded units.
            Specifically the Authority’s estimate showed it would cost $275 to replace a
            toilet, yet it paid $356 and $375 per toilet to one contractor and $600 per toilet to
            another contractor. In another example, the Authority’s estimate showed $85 to
            replace a range hood, yet paid one contractor $122.50 per range hood and paid
            $240 to another contractor. In another example, the Authority paid $13.50 per
            light bulb to one contractor, totaling more then $4,000.

            Therefore, it is not clear that the costs paid for the Recovery Act rehabbed units
            were reasonable. Further, without competitive bids, it would have been prudent
            for the Authority to negotiate prices down to its cost estimate for those work
            items. However, we found little to no price negotiations.

Comment 5   The Authority's methodology to use prior costs to support cost reasonableness is
            lacking in several respects. First, by using historical costs, if the Authority
            overpaid for goods and services in the past, it will continue to overpay for goods
            and services in the future. In, addition this methodology does not account for
            economic changes and opportunities to obtain more favorable prices. For
            example during economic down-turns, the primary reason for the Recovery Act,
            more contractors are available to bid on projects and contractors will bid lower to
            ensure a steady stream of work.

            Furthermore, the Authority’s methodology does not address the federal
            requirements to obtain formal competitive bids for projects that exceed $100,000.
            Nor does it address the requirement to complete a formal cost analysis for sole
            source contracts and procurements when competition is lacking; both of which
            pertain to this procurement.

Comment 6   The Authority's statement that "In this instance the Authority used its cost
            estimate to determine the reasonableness of the proposed bid costs” is factually
            incorrect. Discussions with the Project Manager who received and evaluated the
            bids showed that he did not have cost estimates nor did he use any to evaluate the
            bids prior to awarding the contracts.




                                              19