oversight

HUD Needs To Obtain Complete Documentation To Close Ginnie Mae Contracts

Published by the Department of Housing and Urban Development, Office of Inspector General on 2011-07-15.

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

                                                               Issue Date
                                                               July 15, 2011
                                                               
                                                               Audit Report Number
                                                               2011-HA-0003




TO:        Jemine Bryon, Chief Procurement Officer, Office of the Chief Procurement
             Officer, N
           Theodore W. Tozer, President, Government National Mortgage Association, T

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


SUBJECT: HUD Needs To Obtain Complete Documentation To Close Ginnie Mae
           Contracts


                                  HIGHLIGHTS

 What We Audited and Why

            We audited the Office of the Chief Procurement Officer’s (procurement office)
            procedures for closing out completed and expired Government National Mortgage
            Association (Ginnie Mae) contracts in compliance with applicable regulations.
            This audit was part of our audit plan for fiscal year 2010. Our objective was to
            determine whether the procurement office performed timely closeouts on
            completed and expired Ginnie Mae contracts.

 What We Found


            The procurement office did not obtain documentation from Ginnie Mae to close
            out completed and expired Ginnie Mae contracts in a timely manner. The
            procurement office did not follow the Federal Acquisition Regulation (FAR) and
            U.S. Department of Housing and Urban Development (HUD) guidelines for
            contract closeout procedures. In addition, Ginnie Mae did not follow HUD’s
            guidelines for contract closeout. The procurement office did not have access to
           Ginnie Mae’s financial systems or data and Ginnie Mae did not always retain
           documentation needed to close aged contracts.

What We Recommend


           We recommend that HUD’s Chief Procurement Officer (1) ensure that her staff
           follows the closeout procedures and the FAR time standards for closing out contracts
           and (2) clearly define the type and frequency of financial data Ginnie Mae needs to
           provide to the procurement office to close out contracts.

           We recommend that the President of Ginnie Mae require his staff to (1) follow the
           procurement office’s policies and procedures for closing out contracts, (2) retain
           complete contract files until contracts are formally closed, and (3) routinely
           provide the required financial data to HUD’s procurement office.

           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.


Auditees’ Response
           We provided the discussion draft report to the procurement office and Ginnie Mae
           for comment on April 21, 2011. We held an exit conference with the
           procurement office on April 29, 2011, and with Ginnie Mae on May 11, 2011, to
           discuss the discussion draft report. Based on comments and additional
           information received at the exit conferences, we revised the draft report. The
           final draft report was provided to the procurement office and Ginnie Mae on
           June 14, 2011. The Chief Procurement Officer provided written comments on
           June 24, 2011, and the President of Ginnie Mae provided written comments on
           July 7, 2011, both generally concurred with our recommendations.

           The complete text of the auditees' responses, along with our evaluation of those
           responses, can be found in appendix A of this report.




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                           TABLE OF CONTENTS

Background and Objective                                                            4

Results of Audit
      Finding 1: The Procurement Office Did Not Close Out Ginnie Mae Contracts in   6
      a Timely Manner

Scope and Methodology                                                               12

Internal Controls                                                                   14

Appendix
   A. Auditees Comments and OIG’s Evaluation                                        15




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                             BACKGROUND AND OBJECTIVE

The Office of the Chief Procurement Officer (procurement office) is responsible for awarding
and administering contract actions for the U.S. Department of Housing and Urban Development
(HUD). In addition to awarding contracts, the procurement office administers a large portfolio
of existing contracts that have been completed or have expired and are ready for closeout.
Contract closeout refers to the administrative actions taken to retire completed contracts
(contracts in which all work has been finished, all deliverables have been received and accepted
or otherwise disposed of, and all financial matters have been settled). The program office
initiates the closeout process.

In September 2006, the headquarters procurement office implemented an aggressive closeout
initiative to remedy the serious backlog of aged contract actions throughout HUD that were
complete but not closed out in the procurement and accounting systems. This initiative was
implemented to reduce the backlog of contract actions and liquidate millions of dollars
remaining on HUD’s books. The procurement office planned to accomplish this goal by hiring a
contractor and developing a closeout function within the headquarters procurement office to
close approximately 9,500 contract actions that were in the procurement systems. Currently the
closeout contractors are responsible for closing contracts that were completed or expired before
2006 which included more than 300 Government National Mortgage Association (Ginnie Mae)
contract actions.1 During our previous review of the procurement office’s closeout procedures
for completed and expired contracts (Audit Report 2010-HA-0003, dated September 30, 2010),
the Ginnie Mae contract actions were excluded from our review because the procurement office
could not locate the Ginnie Mae contract files that we requested.

Ginnie Mae is a government-owned corporation within HUD that provides guarantees on
federally insured mortgage-backed securities. At the time of our review, Ginnie Mae had a staff
of approximately 70 employees and used various contractors to support its business processes.
During fiscal year 2010, Ginnie Mae had 95 ongoing contract actions that were valued at
approximately $234 million. Unlike other HUD program offices Ginnie Mae did not receive
appropriated funds to pay for contract services; contract services were paid for from revenues
(fees and interest) generated from mortgage-backed-securities. In addition, Ginnie Mae must get
approval from the Office of Management and Budget each year to fund its contracts. In fiscal
year 2011, the contract authorization limit was $64 million. Another unique aspect of Ginnie
Mae’s operations is that it has its own accounting system that is separate from HUD’s accounting
system.

Before 1998, Ginnie Mae was solely responsible for its own procurement actions. Since that
time, HUD’s procurement office has been delegated the authority for awarding and
administering contracts for Ginnie Mae. However, Ginnie Mae’s Procurement Management
Division (Ginnie Mae procurement) (1) developed and implemented internal policies and
procedures to plan and oversee Ginnie Mae contracts, (2) prepared all of Ginnie Mae’s requests

1
    Contract actions include base contracts and task orders.



                                                               4
for contract services, (3) provided oversight of the government technical representative
functions, and (4) supported Ginnie Mae’s Office of Finance in analyzing financial aspects of the
contracts.

The audit objective was to determine whether the procurement office performed timely closeouts
on completed and expired Ginnie Mae contracts.




                                               5
                                       RESULTS OF AUDIT

Finding 1: The Procurement Office Did Not Close Out Ginnie Mae
Contracts in a Timely Manner
The procurement office neither requested nor received adequate documentation from Ginnie Mae
to close completed and expired contracts. The procurement office did not follow the Federal
Acquisition Regulation (FAR) and HUD guidance. Ginnie Mae did not follow HUD guidance
for contract closeout. Additionally, the procurement office did not have access to Ginnie Mae’s
financial system and records and Ginnie Mae did not retain the documentation needed to close
out the backlog. As a result, Ginnie Mae’s contract actions were not closed out in a timely
manner and there was a backlog of more than 300 Ginnie Mae contract actions that should have
been closed; hence, approximately $500 million remained in HUD’s procurement system as
being obligated.



    Documentation Not Provided
    To Close Contracts

                 The procurement office has overall responsibility for closing out all contracts but
                 must coordinate this process with the program office and the contractor.2
                 Although the procurement office has had responsibility for administering the
                 Ginnie Mae contracts since the late 1990’s, that office had not routinely received
                 or requested documentation from Ginnie Mae to close contracts that had been
                 completed or expired as early as 1996.

                 When a contract expires and all work has been completed the contract should be
                 closed within the time standards established in subpart 4.804 of the FAR (48 CFR
                 [Code of Federal Regulations], chapter 1). The standard practice in HUD to close
                 a contract was to have the government technical representative3 create a request
                 for contract services4 alerting the contracting officer that the contract is complete
                 and available to be closed. The procurement office should then contact the
                 contractor to obtain the contractor’s release of claims.5


2
  This process is applicable to all HUD program offices and contractors for closing out contracts.
3
  A program office employee appointed to a specific contract to support procurement office staff in technical and
programmatic matters related to the contract. Chief responsibilities include maintaining a complete working file for
each contract, monitoring and evaluating contractor performance, and inspecting products and services.
4
  The request for contract services includes form HUD 720 (Request for Contract Services), form HUD 718 (used if
deobligation of funds is needed), the contractor’s final performance evaluation, final payment, payment registers,
certification of deliverables, copies of reports, and other supporting documentation for the expired contract.
5
  This is a final release discharging the government, and its officers, agents, and employees from all liabilities,
obligations, and claims under the contract.



                                                         6
         However, neither the procurement office nor Ginnie Mae followed these closeout
         procedures. Ginnie Mae’s technical representatives did not notify or send the
         requests for contract services to the procurement office when contracts were
         completed. In addition, the procurement office did not request from Ginnie Mae,
         the documents it needed to close the contracts. Everyone’s focus was on
         awarding, not closing, contracts.

         As a consequence of not requesting or receiving documents, the procurement
         office did not follow the FAR to close out contracts in a timely manner.
         Specifically, the procurement office did not follow subpart 4.804-1 which
         specifies the time standards and subpart 4.804-5 which describes the
         administrative closeout procedures that must be used to close out contracts. Until
         late 2010, minimal emphasis was placed on closing out Ginnie Mae contracts
         because records were not available and the procurement office generally
         considered the closeout process to be a low priority.

Ginnie Mae’s Role in the
Contract Closeout Process

         Chapter 12-16 of the HUD procurement handbook (2210.3 REV-9) clearly states
         that the government technical representative shall provide the contracting officer
         all documentation related to the performance of the contract. Our interviews with
         Ginnie Mae representatives disclosed that they were unaware of their
         responsibility to provide the closeout documentation to the procurement office.
         Ginnie Mae stated that they were told to wait for the procurement office to request
         the closeout documentation. However, we found no documented evidence to
         show that the procurement office told Ginnie Mae not to provide them with
         closeout documentation. Ginnie Mae acknowledged that they used the HUD
         procurement handbook for guidance and received annual training on the
         government technical representative’s roles and responsibilities. Chapter 12-16 of
         the handbook specifically states

                Closeout begins with the GTR’s [government technical representative]
                submission of the final performance evaluation to the Contracting Officer.

         Hence, Ginnie Mae’s practice of waiting for the procurement office to request
         closing documents is contrary to the handbook requirements.

         One key aspect of closing contracts is to have an accurate accounting of the funds
         (i.e., the payment registers as well as the final payment). However, when we
         inquired about the financial information for Ginnie Mae contracts we found that
         the procurement office did not have financial reports or access to Ginnie Mae’s
         financial systems or data. This is an atypical arrangement, given that the other
         HUD program offices have a shared accrual and budgetary accounting system to



                                          7
                      which the procurement office has access and from which it can obtain financial
                      data when needed. Ginnie Mae, on the other hand, uses a different system based
                      on generally accepted accounting principles, to track and report its financial
                      information. If contracts are to be routinely closed upon their completion, the
                      procurement office needs the financial documentation as well as the request for
                      contract services documents to close out contracts on a regular basis.

                      Another aspect to closing contracts, according to chapter 12-16.C. of the HUD
                      procurement handbook, is for the contracting officer to determine that “all
                      contract requirements have been met and that the final payment amount is proper.
                      The contracting officer must approve requests for final payments before they are
                      processed.” However, because of Ginnie Mae’s independent financial accounting
                      system, the procurement office cannot access the contract expenditure information
                      it needs to close out the contracts. Therefore, the procurement office must rely
                      solely upon Ginnie Mae to provide all financial information including the final
                      payment information on all contract actions.

      Strategy for Closing Out
      Backlog

                      In September 2006, the headquarters procurement office implemented an
                      aggressive closeout initiative to remedy the serious backlog of aged contract
                      actions throughout HUD that were complete but not closed out in the procurement
                      and accounting systems. In its attempts to reduce the backlog of aged contract
                      actions, the procurement office failed to close more than 300 completed and
                      expired Ginnie Mae contract actions6 that dated back as far as 1996. According to
                      the procurement office, these contract actions were valued at more than $166
                      million.

                      The procurement office used contractors to conduct this closeout initiative. When
                      the contractors began reviewing the backlog of Ginnie Mae’s aged contract
                      actions in September 2010 they realized that they did not have the necessary
                      financial data for closeout. At that time the procurement office contacted Ginnie
                      Mae to obtain financial data for the aged contract actions.

                      In response to the requests for aged contract files, Ginnie Mae advised the
                      procurement office that, “… per documentation retention policy, Ginnie Mae has
                      not retained complete records for events that occurred greater than six years and
                      nine months ago. Thus, for most of the contracts in question, we do not have
                      documentation evidencing expended amounts, or confirmation of services
                      rendered.”


6 These contract actions included task orders on 36 contracts.




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           In turn, the Chief Procurement Officer accepted Ginnie Mae’s response and
           issued a memorandum dated March 9, 2011, that stated:

                  OCPO [the procurement office] has made a business decision to
                  administratively close these contract actions unilaterally. . . . These
                  contract actions will be closed using a streamlined procedure that consists
                  of HUD Procurement System/Small Purchase System (HPS/SPS)
                  generated modification and no formal notification to the contractor.
                  Accordingly, this memorandum will serve as representation of a
                  modification to be placed in all contract files that fall under the expedited
                  closeout process.

           The Chief Procurement Officer’s memorandum will be used for all Ginnie Mae
           contract actions that expired before 2006. Hence, the closeout initiative
           contractor can close all Ginnie Mae contracts that were in the backlog without
           obtaining additional records or documentation.

           We agree with the premise used to reduce the backlog of aged Ginnie Mae
           contract actions (actions with expiration dates before 2006); however, we believe
           that Ginnie Mae should have retained the government technical representatives’
           working files and provided those files to the procurement office so that contracts
           could have been officially closed.


Future Closeout
Procedures


           During our audit, the procurement office implemented an ambitious plan to close
           the current as well as the aged Ginnie Mae contract actions by December 31,
           2011. As part of the plan, Ginnie Mae procurement sent all of its files for
           contracts that had expired after 2005 to the procurement office. Those files
           purportedly included the financial data and requests for contract services for 32
           contracts that Ginnie Mae valued at $518.6 million. However, because the
           procurement office had not determined, at the end of the audit, whether the
           requests for contract services corresponded to the applicable contract files or
           whether the files were sufficient to close the contracts, we were unable to verify
           the completeness of those files.

           We recognize that progress had been made in closing aged Ginnie Mae contracts
           since our audit began, but it was evident from discussions with the procurement
           office and Ginnie Mae that there continued to be a disconnect regarding who
           should “take the lead” in closing out future contracts. Even though the guidance,
           as written, is ambiguous in sections, the procedures are clearly applicable to HUD
           program offices. However, given Ginnie Mae’s unique structure and relationship



                                            9
             to HUD, we believe additional procedures are needed to ensure that the necessary
             financial documentation such as the “Contract Activity Report” is regularly
             provided to the procurement office and that all government technical
             representative working files are retained until the contracting officer formally
             closes the contract.

             Without sufficient documentation, such as the contractor’s evaluation, final
             payment, payment registers and certification of deliverables, Ginnie Mae’s
             contracts were not closed out in a timely manner and resulted in the backlog of
             completed and expired contract actions. This situation resulted in approximately
             340 Ginnie Mae contract actions that had expired but had not been closed.


                            Ginnie Mae contract actions that should
                                        be closed out
                                              Contract Actions
                           Expiration
                              Date      Number          Amount
                           1995-2006      303         $166,349,501
                           2006-2009        39        $341,642,792
                          Total            342        $507,992,293
                         Source: HUD’s procurement system, November 2010

             It is important that contracts are closed out in a timely manner to ensure that the
             terms of the contract have been met before the contractor receives the final
             payment and the contractor releases the government from being obligated to pay
             additional claims on the contract.

             HUD’s procurement system interfaces with the Federal Procurement Data
             System-Next Generation that is used by Congress, Federal agencies and the
             public. As such, it is important for HUD to accurately report the status of its
             procurement activities. As a result of Ginnie Mae’s completed and expired
             contracts remaining in HUD’s procurement system, HUD’s procurements were
             overstated by more than $500 million.

Conclusion

             If the Ginnie Mae contracts are to be closed in a timely manner, the procurement
             office must coordinate closely with Ginnie Mae throughout the contract period.
             Specific procedures must be established for obtaining financial data from Ginnie
             Mae because (1) Ginnie Mae’s financial system uses a different accounting basis
             than other HUD program offices and (2) the procurement office does not have
             access to Ginnie Mae’s financial systems or records.




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Recommendations


        We recommend that HUD’s Chief Procurement Officer

        1A. Ensure that her staff follows the closeout procedures and the FAR time
            standards for closing out contracts.

        1B. Clearly identify the type and frequency of financial data Ginnie Mae needs to
            provide to close out contracts.

        We recommend that the President of Ginnie Mae

        1C. Require his staff to follow HUD’s policies and procedures for closing out
            contracts, specifically the request for contract services and the final payment
            documents.

        1D. Ensure that employees retain complete contract files until the contracts are
            formally closed by the contracting officer.

        1E. Implement procedures to routinely provide to the procurement office the
            necessary financial data to close out contracts in a timely manner.




                                        11
                                SCOPE AND METHODOLOGY

We performed our audit from October 2010 through March 2011 in Washington, DC at HUD
headquarters and Ginnie Mae offices. Our audit generally covered the period January 1, 2004,
through March 31, 2010.

To accomplish our objective we:
    Reviewed applicable laws, the FAR, HUD procurement handbook (2210.3 REV-9), HUD
       Acquisition Instructions and Ginnie Mae policies and procedures.
    Examined 18 Ginnie Mae contract files.
    Reviewed contract history reports from HUD’s procurement system.
    Conducted interviews with procurement office staff members to determine their roles and
       responsibilities regarding the Ginnie Mae contracts and the closeout process.
    Conducted interviews with Ginnie Mae’s Office of Finance and Ginnie Mae procurement
       to determine their roles and responsibilities regarding Ginnie Mae contracts and the
       closeout process.
To achieve our objective, we relied in part on computer-processed data from HUD’s
procurement system. Although we did not perform a detailed assessment of the reliability of the
data, we performed a minimal level of testing and found the data to be adequate for our purposes.

The procurement office provided us with two lists of contracts separated by status. The first list
was comprised of 40 contracts that had been completed or expired and the second list was
comprised of 18 contracts that had been closed. The contracts we selected were not
representative of the entire Ginnie Mae contract universe; therefore, we did not project our
results to the entire universe. Of the 40 expired Ginnie Mae contracts, we chose eight contracts
to review in detail. The contracts had two statuses (active/expired7 and active/in closeout8).
From the list of completed and expired contracts we selected the following:

          One active/in closeout contract,
          Two contracts with the highest obligated amounts and
          Five contracts with the longest contract periods.  
From the second list of closed contracts, we initially chose to review all 18 contracts. However,
due to delays in receiving the contract files from the procurement office and directions from our
management, we limited our review to 10 closed contracts. We reviewed the contract files,
individual contract history reports, invoices and other applicable documentation to determine
whether the completed and expired contracts should be closed and whether the closed contracts
were closed in a timely manner.



7
    Active/expired is when a contract’s last option period has passed.
8
    Active/in closeout is when a contract enters the closeout process.



                                                            12
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 finding and
conclusion based on our audit objective.




                                               13
                              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
                     Procedures that the procurement office had established with the program
                      offices to effectively and efficiently administer HUD’s contracts.
               We assessed the relevant controls identified above.


 Internal Control Deficiency


               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.

               Based on our review, we believe that the following item is an internal control
               deficiency
                     The procurement office did not have adequate controls in place to ensure
                      compliance with the FAR and HUD closeout procedures when a contract
                      was completed and expired.




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                                 APPENDIX

Appendix A

     CHIEF PROCUREMENT OFFICER’S COMMENTS AND
                  OIG EVALUATION

Ref to OIG Evaluation          Auditee Comments




Comment 1




                        OIG Evaluation of OCPO’s Comments




                                       15
            OIG Evaluation of the Chief Procurement Officer’s Comments

Comment 1   We agree with the Chief Procurement Officer’s proposed actions.




                                           16
    GINNIE MAE’S COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 1




                         17
Comment 2




            18
                      OIG Evaluation of Ginnie Mae’s Comments

Comment 1   We acknowledged the uniqueness of Ginnie Mae’s structure, funding and
            accounting systems in the background and results of audit sections of this report.
            We did not make any recommendations about changing the accounting
            methodology.


Comment 2   Although Ginnie Mae did not respond to our specific recommendations, these
            proposed actions should enhance Ginnie Mae’s working relationship with the
            procurement office and should result in a more timely contract closeout process.
            However, the final decision regarding the proposed corrective actions on the
            OIG’s recommendations will be determined during the audit resolution process. 




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