oversight

HUD Did Not Adequately Plan the Procurement of the Management and Marketing Contracts

Published by the Department of Housing and Urban Development, Office of Inspector General on 2010-11-09.

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

                                                                  Issue Date
                                                                   November 9, 2010
                                                                  Audit Report Number
                                                                  2011-HA-0001




TO:        Vicki Bott, Deputy Assistant Secretary for Single Family Housing, HU
           Jemine A. Bryon, Chief Procurement Officer, Office of the
              Chief Procurement Office, N
              //s//
FROM:      Saundra G. Elion, Director, Headquarters Audit Division, GAH


SUBJECT: HUD Did Not Adequately Plan the Procurement of the Management and
         Marketing Contracts


                                HIGHLIGHTS

 What We Audited and Why

            We performed an audit of the selection of management and marketing
            contractors for single-family properties owned by the U.S. Department of
            Housing and Urban Development (HUD). This audit was initiated based
            on a complaint to our hotline alleging possible mismanagement, political
            influence, and violations of law in the procurement strategy used to select
            firms for the third generation management and marketing (M&M III)
            contracts. Our objective was to determine whether the allegations of
            mismanagement, political influence, and possible violations of law were
            valid.

 What We Found


            We found the allegation of mismanagement credible; however, we did not
            find support to substantiate the allegations of political influence or
            violations of law. The Office of Single Family Asset Management (single
            family) and the Office of the Chief Procurement Officer (procurement
            office) did not have adequate controls to ensure that the M&M III contracts
                   were awarded in a timely and efficient manner. Specifically, key
                   stakeholders were not included in the initial planning for these contracts,
                   and acquisition plans were not developed in a timely manner. As a result,
                   the M&M III contracts were delayed for nearly a year, and bridge contracts
                   with an estimated cost of more than $275 million had to be awarded to the
                   existing M&M II contractors to avoid a lapse in the management and
                   marketing services.

    What We Recommend


                   We recommend that the Deputy Assistant Secretary for Single Family
                   Housing develop controls to award contracts in a timely manner, thus
                   avoiding unnecessary expenditures for extending contracts. We also
                   recommend that the Deputy Assistant Secretary (1) follow the procurement
                   office’s established acquisition planning requirements and procurement
                   acquisition lead time (PALT)1 guidance, (2) submit timely and complete
                   performance work statements on all future contracts, and (3) use in-house
                   resources when forming the integrated program team for all significant
                   acquisitions to avoid unnecessary expenditures such as those paid to a
                   contractor for writing performance work statements.

                   In addition, we recommend that HUD’s Chief Procurement Officer (1)
                   assign significant acquisitions to offices that have sufficient staff and
                   expertise to avoid unnecessary expenditures such as those paid to an
                   administrative support contractor, and (2) ensure that the PALT schedule is
                   followed and require written justification when significant delays are
                   encountered.

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

    Auditee’s Response


                   We provided the discussion draft to single family and the procurement
                   office for comment on July 13, 2010. We provided a revised draft to the
                   auditees on September 24, 2010, then the final revised draft on October 15,
                   2010. We received written comments from single family and the
                   procurement office on October 21, 2010, that generally agreed with our
                   findings and recommendations. The complete text of the auditees’
                   responses, along with our evaluation of those responses, can be found in
                   Appendix B of this report.

1
    A schedule of the standard number of days it takes to process actions through the acquisition process.
                                                        2
                      TABLE OF CONTENTS

Background and Objective                                                        4

Results of Audit
     Finding 1: HUD Did Not Adequately Plan the Procurement of Management and   6
     Marketing Services Under the M&M III Contracts

Scope and Methodology                                                           15

Internal Controls                                                               16

Appendix
  A. Comparison of Management Fees Paid                                         17
  B. Auditee Comments and OIG’s Evaluation                                      19




                                     3
                       BACKGROUND AND OBJECTIVE

Since 1999, the U.S. Department of Housing and Urban Development (HUD) has
outsourced the disposition of its single-family properties conveyed to it as a result of
defaults on Federal Housing Administration-insured loans. The first generation of
management and marketing contracts (known as M&M I) consisted of 16 contracts with a
value of $1.2 billion. These contracts were awarded to seven private firms to provide
management and marketing services throughout the United States, Puerto Rico, the
Virgin Islands, Guam, and the Northern Marianna Islands. In 2004, 24 second generation
(M&M II) contracts, with a value of $1.9 billion, were awarded to 12 private firms.

Each M&M I and II contractor provided administrative and program support and property
management, marketing, and sales in their assigned geographic areas. Their
responsibilities included ensuring that

     Lenders (Federal Housing Administration-approved mortgage loan holders or
      mortgage loan servicers) complied with all legal requirements for conveying good
      marketable titles to HUD;
     Properties were secure, safe, and maintained to preserve property values during
      the transition; and
     Properties were accurately valued and proceeds were properly accounted for and
      delivered to HUD in a timely manner.

By the end of the two contract periods, HUD had spent far in excess of the estimated
contract value to manage and market its single-family properties and was not satisfied
with the quality of the work of some contractors.

In an attempt to remedy the shortcomings of the M&M I and II contracts as well as to
increase HUD’s net return on single-family properties, increase management oversight
and control, address historical audit findings, and improve effectiveness and efficiency of
the disposition process, the Office of Single Family Asset Management (single family)
restructured its overall approach for obtaining management and marketing services.
Specifically, in 2007, single family awarded an 8(a) sole-source2 contract to Booth
Management Consulting, LLC (Booth), to assist with planning the third generation
management and marketing (M&M III) contracts. Booth recommended that the
management and marketing contracts be separated into four primary areas, and single
family agreed. The four areas are as follows:

         Oversight monitor – One contract, valued at $17.2 million, to be awarded to
         assist HUD in meeting its program objectives by monitoring and providing
         oversight of the M&M III contractors. HUD planned to award this contract in
         February 2009.

2
  A sole-source contract is a contract that is entered into after soliciting and negotiating with only one
source.

                                                       4
       Mortgagee compliance manager – One contract, valued at $50.3 million, to be
       awarded to certify that the lender protected and preserved HUD’s property against
       damages and completed the foreclosure action within the required timeframe.
       HUD planned to award this contract in May 2009.

       Field services manager – HUD planned to award 35 contracts to private firms at
       an estimated value of $1 billion. The primary purpose of these contracts is to
       provide property maintenance and preservation services in support of HUD’s
       property disposition program nationwide. HUD planned to award these contracts
       in late May 2009, 2 months before the majority of the M&M II contracts would
       expire.

       Asset manager – HUD planned to award 26 contracts to private firms at an
       estimated value of $987.6 million. The primary purpose of these contracts is to
       market and sell single-family properties within the contractor’s designated
       geographic area. HUD planned to award these contracts in September 2009.

The value of the 63 M&M III contracts is estimated to be $2.1 billion.

HUD’s Office of the Chief Procurement Officer (procurement office) has overall
responsibility for obtaining all contracted goods and services for HUD and works closely
with each program office in developing its procurement requirements. To ensure that
HUD meets its strategic objectives, the procurement office has established policies and
procedures for HUD program offices to follow. Some of those procedures include the
development of short- and long-range acquisition plans, establishing timelines for
completing and submitting contract requests, and providing the procurement office
adequate time to acquire goods and services in the most cost-effective manner. Contracts
are awarded and managed by four principal offices within HUD at HUD headquarters
and three field contracting operations offices in Philadelphia, PA, Atlanta, GA, and
Denver, CO. Additionally, there are specialty areas within the field contracting
operations offices. In 2007, the procurement office designated the Atlanta office as the
M&M Contracting Center of Excellence.
Our objective was to determine whether the allegations of mismanagement, political
influence, and possible violations of law were valid.




                                            5
                                 RESULTS OF AUDIT

Finding 1: HUD Did Not Adequately Plan the Procurement of
Management and Marketing Services Under the M&M III
Contracts
The Office of Single Family Asset Management (single family) and the Office of the
Chief Procurement Officer (procurement office) did not adequately plan the procurement
of management and marketing services under the M&M III contracts. Inadequate
planning occurred because single family mismanaged the process by using a contractor to
plan the strategy and create the performance work statements for the M&M III contracts
and the headquarters procurement office experienced staff shortages and continuous staff
turnover. As a result, the M&M III contracts were delayed for nearly a year, and bridge
contracts with an estimated cost of more than $275 million had to be awarded to the
existing M&M II contractors to avoid a lapse in management and marketing services.



    Key Stakeholders Were Not
    Involved in the Initial Planning
    Process

                Single family began planning the process to award the M&M III contracts
                in 2007, nearly 2 years before the expiration dates of the M&M II
                contracts. However, in its attempt to reengineer this 10-year-old
                management and marketing services contract process that had proven to be
                risky and costly to HUD, single family neglected to follow the established
                protocol for procuring significant acquisitions such as this one.

                In accordance with the Procurement Office Handbook 2210.3, the
                procurement office and single family established an integrated program
                team (IPT)3 for M&M III. The goal of the IPT is to ensure that all
                necessary expertise is made available and devoted to the successful
                accomplishment of the procurement. To that end members were appointed
                to the IPT; an acquisition strategy, including critical milestones and target
                dates, was developed; and an acquisition project plan was also developed.

                Noticeably absent from the IPT and the initial planning process (that
                happened before July 2007), were the Office of Housing’s Procurement
                Management Division and Office of Budget and Field Resources. These

3
  An IPT is a group of key stakeholders, made up of management, program, technical, and contracting
experts, assembled to accomplish critical and complex procurement actions.

                                                   6
                key stakeholders could have provided program and technical expertise
                necessary to execute a timely and successful acquisition. Specifically

                          The Office of Housing’s Procurement Management Division
                         conducts the market research for new procurements for the Office
                         of Housing and reviews the requests for contract services and the
                         performance work statements for all single-family contracts.

                          The Office of Housing’s Office of Budget and Field Resources
                         generally determines the funding source and certifies that the
                         appropriate funds are available in the Office of Housing’s budget
                         for all new procurements.

                In addition to the two single family offices described above, the M&M
                Contracting Center of Excellence4 (the center) was not actively involved in
                planning the M&M III acquisition. The former director of the center
                believed his role as an “advisor” to the IPT was less than that of a member
                and considered his contributions minor. However, the current director
                shared specific “lessons learned” based on the center’s experiences in
                administering the management and marketing contracts with the Director of
                Single Family Asset Management in November 2007. One lesson he
                shared was, “Acquisition Planning cannot be allowed to occur
                independently in a vacuum!” He emphasized that other offices, including
                single family, real estate-owned property divisions, the Office of General
                Counsel, and homeownership centers (offices that insure single-family
                mortgages and oversee the selling of HUD homes) must also participate in
                the process [if the procurement is to be successful].

                As best we could discern from the few planning records provided to us, the
                focus of the IPT changed and the target dates abandoned shortly after the
                current Director of Single Family Asset Management became part of the
                organization. For example, the market research and performance work
                statement tasks were no longer led by in-house (IPT) team members, and
                none of the target dates were adhered to. Instead of using the strategy set
                forth by the IPT, the Director of Single Family Asset Management elected
                to outsource much of the planning function to Booth. In 2007, single
                family awarded Booth a $1.6 million 8(a) sole-source contract to assist
                with planning the M&M III contracts. Planning consisted of providing best
                industry practices relating to the property management and disposition of
                HUD-owned single-family properties and providing guidance in
                restructuring the overall management and marketing contract structure.
                Each of these functions could have been handled by one of the key
                stakeholders described above or other members appointed to the IPT.
4
 The procurement office designated the Southern (Atlanta) Field Contracting Center as the M&M
Contracting Center of Excellence in 2007 because the Atlanta office was responsible for managing and
overseeing the M&M II contracts and, therefore, was knowledgeable of the requirements and practices of
providing management and marketing services and overseeing the contracts.
                                                   7
          Moreover, Booth was not familiar with HUD’s internal acquisition
          requirements for keeping the management and marketing service contracts
          on schedule. Booth’s lack of familiarity led to delays in the acquisition
          process.

The Contractor Developed
Statements for M&M III
Contract Proposals


         Under the 8(a) sole-source planning contract with Booth, single family also
         tasked Booth to develop performance work statements and statements of
         objectives (hereafter referred to as statements) for each of the four major
         areas of the M&M III contracts. The statements Booth prepared were
         poorly developed and written; therefore, single family deemed the
         statements to be unacceptable and had to use its own staff to revise and
         complete the statements.

         According to the technical monitor for the Booth contract and documents
         contained in the contract file, Booth merely copied verbatim language from
         the previous M&M II contract into the requested statements for the M&M
         III proposals without taking into consideration the restructured approach to
         unbundle the services. The poorly written statements were even more
         confusing given Booth’s acceptable work on the market study as well as the
         firm recommending the asset disposition strategy and structure for M&M
         III. The technical monitor also stated that:

                . . . it was thought that the next step in the process of developing the
                requirements would be a seamless process for BMC [Booth]. In
                practice it was anything but. Even though this structure was largely
                based on BMC’s recommendations to HUD, it became clear early in
                this task that BMC did not have a fundamental understanding of the
                requirements and a fundamental lack of understanding of the HUD’s
                management and marketing (M&M) under its existing M&M
                structure.

          This statement clearly shows that HUD recognized that Booth “did not
          have a fundamental understanding of the requirements.” HUD provided
          Booth’s staff with written feedback as well as a walk-through of the
          existing M&M II contract to explain where to make specific changes to the
          language in the statements. However, the changes that were inherent in the
          new M&M III contract disposition structure were not always incorporated
          into the statements. As a result of the fundamental misunderstanding and
          lack of clarity, Booth submitted multiple drafts (as many as 10 drafts for
          the compliance contract proposal alone). Single family ultimately asked
          Booth to discontinue work on this task and had its own staff spend
          additional time and resources revising and completing the statements. By
                                        8
                that time, Booth had exceeded its hours allocated to this task and requested
                an additional $299,399 for the work done. However, single family
                negotiated a settlement of $146,246 for the additional hours spent on this
                unsuccessful task. Ultimately, Booth was paid $352,508 for this task. We
                believe that the $352,508 paid to Booth was an unnecessary expenditure
                because single family spent additional time and resources revising and
                completing the statements.

    Acquisition Plans Were Not
    Submitted in a Timely Manner


        Single family’s acquisition plans for the procurement of the M&M III contract
        were not developed and provided to the procurement office in a timely manner.
        The PALT schedule as prescribed by the procurement office describes the
        standard number of days typically needed by the procurement office to complete
        the preaward portion of the acquisition process from beginning to end. Single
        family submitted three of the four M&M III contract solicitations after the
        established lead time specified in the PALT. The number of days late ranged
        from 37 to 127 days.5

        The contracting officer for the M&M III contracts stated, “…the requirement
        [performance work statement] was not timely and not properly defined by the
        program office.” The poorly written statements contributed to the delays in
        meeting established timelines because single family and procurement office
        personnel had to devote additional time and resources to revising and completing
        the statements submitted by the contractor. Consequently, single family failed to
        meet HUD’s established lead time requirements for submitting complete
        statements to the procurement office.

        Additional delays were attributed to single family’s need to reassess appropriate
        funding sources for the oversight monitor (oversight) and mortgagee compliance
        manager (compliance) contracts. This funding error was not found until January
        2010, more than 9 months after the original M&M III solicitations were
        announced and after the M&M II contracts had expired. As a result, the
        procurement office could not award the oversight and compliance contracts until
        single family had reviewed its available budget resources and determined whether
        appropriate funds were available. Single family identified an appropriate funding
        source, and the procurement office awarded both the oversight and compliance
        contracts nearly a month later, in January and February 2010 respectively. As
        shown in the chart below, the M&M III contracts were from 9 to 12 months late.




5
  The established lead time for the oversight, compliance, and asset manager contracts was 120 days before
the planned award date and 210 days for the field services manager contracts.
                                                    9
         Planned and actual award dates for the M&M III contracts




                                                              Source: The procurement office
         Oversight monitor (OM) - 11 months late
         Mortgagee compliance monitor (MCM) - 9 months late
         Field service manager (FSM) - 12 months late
         Asset manager (AM) - 9 months late

         The procurement office attributed the delays in awarding the contracts to
         many factors, including late requests for quotes, amendments to the
         proposal, legal sufficiency reviews, responding to extensive questions asked
         by perspective vendors, vendor protests, incorrect funding source, and late
         responses from single family and the Office of General Counsel.

         Had the IPT included key stakeholders such as personnel from Office of
         Housing’s Budget Office and the Procurement Management Division, and
         had the Director of Single Family Asset Management heeded the advice of
         the current Director of the M&M Contracting Center of Excellence to
         “timely collaborate during all phases of the process,” many of the problems,
         including the poorly written statements and the funding source, may have
         been avoided.


The Headquarters Procurement
Office Experienced Staff
Shortages and High Staff
Turnover

         Staff shortages and high staff turnover in the headquarters procurement
         office contributed to the mismanagement of the M&M III contracting
         process. Although the procurement office had requested an additional 12

                                            10
              positions over the past 4 years, that office had a continuous staff shortage of
              18 to 20 vacancies and a 50 to 60 percent staff turnover rate every 18
              months. Further, 95 percent of the staff who worked on the presolicitation
              phase of the M&M III contracts was no longer employed by the
              procurement office by the time we completed our audit.

              While the acquisition community throughout the Federal Government is
              experiencing shortages, HUD’s shortages and turnovers have persisted for
              years, thereby causing a lack of continuity in procurement actions. This
              conclusion is supported by the resource management study6 HUD conducted
              in 2004 that stated,

                    “The [procurement] Office faces a number of challenges that impact
                    efficiency, including a shortage of staff resources, high turnover…”

              However, despite the continuous staff shortages and high staff turnover at
              the headquarters procurement office, a former Deputy Chief Procurement
              Officer decided to award the M&M III contracts from the headquarters
              procurement office instead of the M&M Contracting Center of Excellence.
              The center had a larger, more experienced, stable office staff that had in-
              depth knowledge of the management and marketing services process, as
              well as HUD’s procurement procedures. We believe the M&M Contracting
              Center of Excellence had the capacity to process this procurement more
              efficiently than the headquarters procurement office.

              To mitigate the staff shortages and increased workload at the headquarters
              procurement office caused by the M&M III solicitations, single family
              funded a $325,300 8(a) sole-source contract to Design to Delivery, Inc.
              This contractor was to provide administrative support to the procurement
              office for processing the asset manager and field service manager
              solicitations under the M&M III contracts. However, Design to Delivery
              only worked on the contract for a portion of the base year because single
              family deemed Design to Delivery’s performance to be “unacceptable” and
              the delivered products to be “untimely and without an acceptable level of
              quality.”

              Conversely, Design to Delivery believed that the information its staff
              received from single family to complete its deliverables was unclear and
              incomplete and the difficulties it experienced working with the contracting
              officer for the M&M III contracts were the factors affecting its performance.

              We believe that the $325,300 paid to Design to Delivery was an unnecessary
              expenditure of funds that possibly could have been avoided if the M&M III
              contracts had been awarded by the M&M Contracting Center of Excellence.

6
 US Department of Housing and Urban Development; Resource Estimation and Allocation Process
(REAP), Study # 14, March 18, 2004
                                               11
          As stated above, we believe that because the center had a stable staff that
          had years of experience working with HUD’s management and marketing
          contractors the center may have had the capacity to award the M&M III
          contracts more timely. Furthermore, the center will administer the M&M III
          contracts after they are awarded.

HUD Awarded Sole-
Source Contracts To
Avert a Lapse in Services

           None of the M&M III contracts had been awarded by the end of the M&M
           II contract period. To avert a lapse in the management and marketing
           services, the procurement office first exercised the contract extension
           option then awarded sole-source contracts. The M&M II contracts allowed
           the procurement office to extend the services (under the M&M II contracts)
           for an additional 6 months beyond the initial contract period. These
           extensions were given with the expectation of having the M&M III
           contracts in place by January 2010.

           However, when it became obvious to the procurement office and single
           family that none of the M&M III contracts would be awarded in time (i.e.,
           before December 2009) to transition the properties from the M&M II
           contractors, they elected to award bridge contracts to the 19 existing M&M
           II contracts. Since, Federal procurement law precludes HUD from
           awarding bridge contracts unless the agency invokes one of the statutory
           exceptions to full and open competition, the Chief Procurement Officer,
           with the approval of the Secretary of HUD, invoked the public interest
           exception and notified Congress of HUD’s intent to award these sole-
           source bridge contracts in December 2009. To that end, HUD negotiated
           new (bridge) contracts with the existing contractors for the continuation of
           management and marketing services provided under the M&M II contracts.

           Unlike the extensions to the M&M II contracts, in which the costs
           remained essentially the same as for option year 4, the procurement office
           negotiated substantial increases in the prices of many of the 19 M&M II
           bridge contracts. The procurement office explained, and we
           acknowledged, that it was reasonable to increase the price of the bridge
           contracts to include the cost of inflation as well as changing conditions in
           the housing market. However, when we compared the individual line
           items, some of the contract prices appeared to be unreasonable given that
           the bridge (sole-source) contract was with the same private firm, for
           essentially the same services, to cover the same geographic area that they
           had under M&M II. For example, our review of the property management
           fees paid to each contractor during option year 4 showed that the
           procurement office negotiated fees that were as much as 77.8 percent

                                         12
             higher for the bridge contract than those same fees had been for M&M II.
             See appendix A for a comparison of the management fees.

             Based on the data obtained from single family and the procurement office,
             the 19 bridge contracts will cost HUD in excess of $275 million. The
             substantial increase in the cost of the management and marketing services
             under the bridge contract could have been avoided had HUD awarded the
             M&M III contracts in accordance with their initial timelines.


Conclusion

             The poor decisions made by single family and the procurement office in
             restructuring and planning the M&M III contracts resulted in significant
             delays in awarding contracts valued at $2.1 billion, the largest and most
             critical single procurement for HUD. To avoid a lapse in the management
             and marketing services that could have caused significant financial harm,
             HUD’s only option at that point was to award bridge contracts.
             Unfortunately, the average cost of the 19 sole-source contracts will cost
             substantially more than the average cost of the M&M II contracts. Also,
             the $352,508 paid to Booth to develop the statements of work and the
             $325,300 contract awarded to Design to Delivery to provide administrative
             support for the M&M III contract solicitations were the results of poor
             management decisions.

Recommendations

             We recommend that the Deputy Assistant Secretary for Single Family
             Housing

             1A. Develop controls to award contracts in a timely manner, thus avoiding
                 unnecessary expenditures such as the additional costs incurred for
                 extending the M&M II bridge contracts.

             1B. Follow the procurement office’s established acquisition planning
                 requirements and PALT guidance, and submit timely and complete
                 performance work statements on all future contracts.

             1C. Use in-house resources for significant acquisitions to ensure that the
                 necessary knowledge and experience are leveraged to the greatest
                 extent possible during the acquisition process, thus avoiding
                 unnecessary expenditures such as those paid to a contractor for
                 writing the statements of objectives and performance work statements.




                                          13
We recommend that HUD’s Chief Procurement Officer

1D. Assign significant acquisitions to the office that is sufficiently staffed
    with the necessary experience and technical expertise to ensure the
    timely award of contracts, thus avoiding unnecessary expenditures
    such as those paid to the administrative support contractor.
1E. Ensure that requirements in the PALT are followed and require
    written justification when there are significant delays in the
    acquisition process.




                              14
                     SCOPE AND METHODOLOGY

We performed an audit of the selection of management and marketing contractors for
single-family properties owned by HUD in response to a hotline complaint alleging
possible mismanagement, political connections, and violations of law in the selection of
firms for M&M III contracts.

       We performed audit work from October 2009 through July 2010 at HUD
       headquarters in Washington, DC, and at the Southern Field Contracting
       Operations Office in Atlanta, GA. Our audit generally covered the period August
       2004 through May 2010 but was expanded when necessary to include other
       periods.

To accomplish our objective, we

       Reviewed the Federal Acquisition Regulation and applicable HUD acquisition
       regulations and General Services Administration regulations.
       Conducted interviews with single family, procurement office, Office of Housing’s
       Procurement Management Division, Office of the General Counsel, and General
       Services Administration employees in Washington, DC, to determine their roles
       and responsibilities regarding the M&M III contracts.
       Conducted interviews with Southern Field Contracting Operations Office and
       General Services Administration employees in Atlanta, GA, and the Chicago
       Operations Branch to determine their roles and responsibilities regarding the
       M&M II, M&M II extension, and M&M III contracts.
       Conducted interviews with former HUD contractors to determine their roles and
       responsibilities regarding the M&M III acquisition process.
       Examined the M&M III contract solicitations and the prime contractor and
       subcontractor contracts.
       Examined the M&M II contracts and the M&M II bridge contracts to determine
       whether premium costs were paid.

We did not review computer processed data during the audit. We relied on the
information contained in the M&M II and M&M II bridge contracts, and the M&M III
solicitation files.

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




                                           15
                          INTERNAL CONTROLS

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

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

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



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

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

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

               We assessed the relevant controls identified above.

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

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

                  Single family and the procurement office did not have adequate
                  controls in place to ensure that the M&M III contracts were awarded in
                  a timely and efficient manner.
                                            16
                                                       APPENDIXES

Appendix A
                          COMPARISON OF MANAGEMENT FEES PAID
                                                                             Bridge contract
                                                          M&M II                 Mortgagee             Increase
                                              Geographic                                                        Percentage
                           Contractor                    option Year Management compliance               over
                                                 area                                        Fee total          of increase
                                                              4         fee       services             M&M II
                                                                                        1
                                                                                    fee
                    Hooks Van Holm             PA, DE       $   1,800 $     2,500 $      700 $   3,200 $    1,400     77.8%
                                              ND, SD, NE,
                    Best Assets Inc.                        $   2,059 $     3,549 $       99 $   3,648 $    1,589     77.2%
                                              MN, IA, WI
                    Southwest Alliance of
                                               South TX     $   1,678 $     2,848 $        - $   2,848 $    1,170     69.7%
                    Asset Managers D6, LLC
                    Hooks Van Holm              AL, MS      $   1,800 $     2,500 $      450 $   2,950 $    1,150     63.9%
                    Southwest Alliance of
                                              NM, North TX $    1,632 $     2,644 $        - $   2,644 $    1,012     62.0%
                    Asset Managers D5, LLC
                    Michaelson, Connor and    MT, WY, CO,
                                                          $     3,134 $     4,448 $      339 $   4,787 $    1,654     52.8%
                    Boul Inc.                     UT
                    Pyramid Real Estate
                                              KS, MO, OK    $   2,150 $     3,084 $      120 $   3,204 $    1,054     49.0%
                    Services, LLC
                                     2
                    Home Source                 MD, DC      $   2,787 $     4,074            $   4,074 $    1,287     46.2%
                    Michaelson, Connor and
                                                AZ, NV      $   3,088 $     4,080 $      388 $   4,468 $    1,379     44.7%
                    Boul Inc. 3
                    Pyramid Real Estate
                                                TN,KY       $   2,225 $     3,071 $      120 $   3,191 $     966      43.4%
                    Services, LLC
                    Harrington, Moran,
                                                 IL, IN     $   2,381 $     3,200 $        - $   3,200 $     819      34.4%
                    Barksdale Inc.
                    Harrington, Moran,
                                                VA, WV      $   2,179 $     2,800 $        - $   2,800 $     621      28.5%
                    Barksdale Inc.
                    National Home
                                                NY, NJ      $   2,985 $     3,550 $      180 $   3,730 $     745      25.0%
                    Management Solutions 4
                    National Home
                                                  OH        $   2,995 $     3,550 $      180 $   3,730 $     735      24.5%
                    Management Solutions 4
                    Atlantic Alliance             PR        $   3,207 $     3,884 $        - $   3,884 $     677      21.1%
                    Michaelson, Connor and
                                                  MI        $   3,154 $     3,154 $      495 $   3,649 $     495      15.7%
                    Boul Inc.3
                    Pemco, LTD5                   GA        $   3,451 $     3,796            $   3,796 $     345      10.0%
                    National Home
                    Management Solutions of       FL        $   3,751 $     4,000 $      121 $   4,121 $     370       9.9%
                    New York, LLC
                    Harrington, Moran,
                                                NC, SC      $   1,745 $     1,430 $      340 $   1,770 $      25       1.4%
                    Barksdale Inc.
                                 5
                    Pemco, LTD                    CA        $   4,270 $     4,208 $      110 $   4,318 $      48       1.1%
                    Cityside Management
                                              New England   $   2,700 $     2,585 $      115 $   2,700 $        -      0.0%
                    Corp.
                    Cityside Management
                                                LA, AR      $   2,200 $     2,003 $      197 $   2,200 $        -      0.0%
                    Corp.
                                     2
                    Home Source                 MD, D.C.    $   4,200        4074            $   4,074 $    (126)      -3.0%


1
 HUD negotiated the mortgagee compliance services separately under the bridge contract. These fees had been
combined with the management fees under the M&M II contract; therefore, for comparison we combined the
management and mortgagee compliance fees for the bridge contract to accurately reflect the costs.
2
 Same contract; however, the management fees were based on the number of properties under M&M II. The bridge
contract was based on a flat fee of $4,074.
3
    Same contract with different management fees for the different geographic areas.
4
    Same contract with different management fees for the different geographic areas.
5
    Same contract with different management fees for the different geographic areas.

                                                                 17
Appendix B

     AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation    Auditee Comments




                        18
Comment 1




Comment 2




Comment 3




            19
20
Comment 4




Comment 5




Comment 6




            21
Comment 7




Comment 8




Comment 9




            22
Comment 10




             23
                    OIG Evaluation of Auditee Comments

Comment 1   We concur with single family’s planned actions and willingness to make
            the necessary improvements in its existing policies and procedures.

Comment 2   We concur with single family’s planned action to ensure that future
            timelines reflect the magnitude of the acquisition, deviation from and
            adjustments to the timelines are documented.

Comment 3   We concur with single family that key stakeholders’ involvement in all
            planning phases is very important and its proposed action to ensure that
            in-house resources are used for future significant acquisitions. However,
            since the documentation provided to us did not show that representatives
            from the budget office or the procurement management division attended
            the initial IPT meetings, we did not revise the report or our conclusions.

            OIG acknowledges single family’s right to engage outside contractors
            and leverage private sector expertise as necessary. However, we strongly
            encourage single family to ensure that vendors have the requisite
            knowledge and skills to perform the necessary tasks to expedite future
            acquisitions.

Comment 4   We disagree with the procurement office’s assertion that statements
            relative to our conclusion about the exclusion of select stakeholders are
            speculative and have no basis in fact. The report clearly acknowledges
            that a number of factors contributed to the delays in awarding the M&M
            III contracts.

            Specifically, our report referenced the fact that there was indeed an
            absence of the key stakeholders after Booth was selected as the contractor
            to assist with the planning function of this acquisition. In particular, the
            absence of the Office of Housing’s Office of Budget and Field Resource
            contributed to the delays with the funding issues that were encountered.
            Further, due to the poor quality of work submitted by Booth, additional
            time and resources were consumed by the need to revise the statements of
            work. Had the program office divisions with the requisite knowledge and
            expertise been involved, many of the delays of this significant acquisition
            may indeed have been avoided.

Comment 5   We disagree with the procurement office’s assertion that staff shortages
            and turnover should not lead to a conclusion of mismanagement and that
            there is no basis for the reported “50 to 60 percent staff turnover rate
            every 18 months…It is simply inaccurate.”

            We reaffirm our position that staff shortages and high turnover in the
            procurement office contributed to the mismanagement of the M& M III
                                        24
            contracting process. These factors directly impacted the acquisition from
            pre-solicitation through final award of the M&M III contracts. Moreover,
            the contracting officer for M &M III informed us that

                 The loss of 95 percent of the procurement office staff caused a lack
                 of clarity and a lack of continuity in the actions taken prior to the
                 staff leaving. These actions included the status of the procurement,
                 pre-solicitation documents, acquisition plans, technical evaluation
                 plans, performance work statements, solicitation documents; etc.
                 Ultimately, the original decision makers were no longer a resource
                 to the department to execute their decisions.

            Regarding the turnover, the Acting Chief Procurement Officer during the
            pre-solicitation phase of this contract advised us that the procurement
            office had a 50 to 60 percent staff turnover rate every 18 months. We
            accepted the “50 to 60 percent” range of turnover because, as the Acting
            Chief Procurement Officer, he was responsible for managing the
            workload and staffing resources in the procurement office at the time of
            this acquisition. Since the procurement office did not provide
            documentation to refute the turnover rate, we did not revise the report.

Comment 6   We disagree that the audit report makes inferences or statements “that the
            then-Deputy Chief Procurement Officer intentionally made decisions that
            sabotaged the procurement.” While the decisions may have been made in
            good faith, the information we obtained during our review led us to
            conclude that the Atlanta office had the capacity to process the
            procurement more efficiently than the headquarters procurement office.
            Given that the M&M III was the largest and most critical single
            procurement for HUD and the headquarters procurement office was
            experiencing high turnover and staff shortages, we believe the managers
            of the procurement office should have assessed its available resources
            and either moved this significant acquisition from the headquarters office
            or detailed procurement staff from the field who were knowledgeable of
            the management and marketing services contracting process.

            Our conclusion about the viability of using the Atlanta office is supported
            by the current Chief Procurement Officer in the procurement office’s
            most recent Procurement Management Review dated September 17,
            2009. She states in that review that “the recent creation of the
            Management & Marketing (M&M) Center of Excellence in Atlanta, GA
            allows OCPO [the procurement office] to strategically centralize the
            administration and management of one of HUD’s largest acquisitions
            with a dedicated team of experienced support staff.” Additionally, the
            Atlanta office clearly had the experience as it was responsible for
            managing and overseeing the M&M II contracts and, therefore, was
            knowledgeable of the requirements and practices of providing
            management and marketing services and overseeing the contracts.
                                        25
Comment 7      We reaffirm our position that the decision to award this large and critical
               procurement from the headquarters procurement office contributed to the
               mismanagement of the acquisition and the contract with Design to
               Delivery, Inc. was evidence of that mismanagement. Because the
               headquarters procurement office was understaffed, single family funded
               the administrative support contract with Design to Delivery. Again, we
               believe that the managers of the procurement office could have avoided
               the cost of this administrative support contract had the M&M III
               acquisitions been assigned where resources were more readily available.

               Additionally, we maintain that the Atlanta office may have been in a
               better position to handle the increase in workload and the additional
               resources that this significant procurement required.


Comment 8      We reaffirm our position that the substantial increase in the cost of the
               management and marketing services under the bridge contract could have
               been avoided had HUD awarded the M&M III contracts in accordance
               with their initial timelines.

               While we acknowledge that the part of the unit price increases were due
               to normal market conditions, we cannot overlook the fact that $275
               million was spent on the bridge contracts, and this was in addition to the
               planned $2.1 billion cost of the M&M III contracts. We believe that had
               the M&M III contracts been awarded on time, this $275 million would
               not have been spent on bridge contracts, nor would it have been spent on
               M&M III (thus increasing the planned cost of the M&M III contracts to
               $2.4 billion). Single family would have been able to use the $275 million
               on other projects.

Comment 9      We concur with the procurement office’s proposed action to assign future
               procurements to an office that is best equipped to handle significant
               acquisitions.

Comment 10 The procurement office’s proposed action (to remind contracting officers
           to document “any significant delays, causes, and resolution…”) is only
           partially responsive to Recommendation 1E. While we agree that the
           contracting officers can and should document the delays, the cognizant
           program offices should also be required to prepare a justification, as
           specified in the Procurement Office Handbook 2210.3. Specifically,
           section 4-1 requires the head of the cognizant program office to “submit a
           written request for the extended lead-time to the Assistant Chief
           Procurement Officer responsible for the acquisition.” In addition, the
           current Chief Procurement Officer stated in the Procurement
           Management Review referenced above that “it is imperative that HUD
                                           26
improve internal controls over the acquisition function.” One of the
suggested ways for the procurement office to improve its internal controls
over the acquisition function was “to initiate stricter consequences for
program personnel who do not adhere to the procurement administrative
lead times”. The “stricter consequences” could be to require detailed
justification. Implementation of both the handbook and management
review recommendations could further improve the quality of HUD’s
acquisition process.

We are optimistic that reminding the contracting officers of the impact
delays have on the quality of the acquisition process and their
responsibility for full documentation should ensure an accurate record of
any significant delays, causes, and resolutions that occur on all
acquisitions.




                           27