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
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)