Issue Date
February 9, 2011
Audit Report Number
2011-KC-1001
TO: Ray E. Willis, Director, Region V, Office of Community Planning and
Development, 5AD
//signed//
FROM: Ronald J. Hosking, Regional Inspector General for Audit, 7AGA
SUBJECT: The City of East St. Louis, IL Did Not Properly Manage Housing Rehabilitation
Contracts Funded by the Community Development Block Grant Program
HIGHLIGHTS
What We Audited and Why
We audited the City of East St. Louis’ (City) Community Development Block
Grant (Block Grant) program because it is the 10th largest recipient in the State of
Illinois and is the largest Illinois recipient of Block Grant funds outside the
Chicago area.
The objective of our review was to determine whether the City properly managed
Block Grant-funded housing rehabilitation contracts.
What We Found
The City awarded more than $1 million in Block Grant funds for 124 of the 147
rehabilitation contracts reviewed without adequately ensuring that it complied
with requirements and that the work was completed in an acceptable manner.
Specifically, it did not ensure that contractors completed all of the contracted
work as required and at a reasonable cost. Additionally, the City created scopes
of work for the rehabilitation contracts that were not detailed and specific in
nature. Finally, it did not comply with Federal procurement requirements and its
own policies and procedures when it managed the rehabilitation contracts.
What We Recommend
We recommend that the U.S. Department of Housing and Urban Development
(HUD) withhold $400,000 in 2010 Block Grant funding for the City’s housing
rehabilitation programs until it improves its controls and require the City to
collect more than $127,000 paid to contractors for rehabilitation work not
performed or improperly performed. Additionally, we recommend that HUD
require the City to develop and implement adequate internal controls to ensure
that all work is completed according to the scope of work, update its inspection
software, and provide training to ensure future compliance.
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 draft audit report to the City on January 14, 2011 and requested
its comments by January 28, 2011. The City provided its written comments on
January 28, 2011. It generally disagreed with our findings.
The complete text of the auditee’s response, along with our evaluation of that
response, can be found in appendix B of this report.
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TABLE OF CONTENTS
Background and Objective 4
Results of Audit
Finding 1: The City Improperly Expended Block Grant Program Funding for 5
Housing Rehabilitation Projects
Finding 2: The City Did Not Always Prepare Specific and Detailed Scopes of 10
Work Before Contracting for Block Grant-Funded Rehabilitation
Work
Finding 3: The City Did not Follow Federal Procurement Regulations and Its 13
Own Policy While Managing Rehabilitation Contracts
Scope and Methodology 17
Internal Controls 18
Appendixes
A. Schedule of Funds To Be Put to Better Use 19
B. Auditee Comments and OIG’s Evaluation 20
C. Schedule of Deficiencies 23
D. Criteria
28
3
BACKGROUND AND OBJECTIVE
Title I of the Housing and Community Development Act of 1974 established the Community
Development Block Grant (Block Grant) program, a flexible program that provides communities
with resources to address a wide range of unique community development needs. According to
24 CFR (Code of Federal Regulations) 570.202(a)(1), one permitted use of Block Grant funds is
to finance the rehabilitation of privately owned buildings and improvements for residential
purposes.
The City of East St. Louis (City) participates in the Block Grant program as an entitlement
community. These grants are allocated to larger cities and urban counties to develop viable
communities by providing decent housing, a suitable living environment, and opportunities to
expand economic opportunities, principally for low- and moderate-income persons. The U.S.
Department of Housing and Urban Development (HUD) determines the amount of each
entitlement grant by a statutory dual formula which measures community needs in relationship to
those of other metropolitan areas. The City received almost $3.7 million for fiscal years 2007
and 2008 combined. It used these funds for several purposes including housing rehabilitation,
code enforcement, and public services.
The City’s Block Grant program is administered by its Community Development Department.
Additionally, the City is subject to the Financially Distressed City Law and is accordingly under
the control of the State-established East St. Louis Financial Advisory Authority, which provides
oversight and assistance. The City had a home repair program, senior modification program, and
emergency home repair program with maximum grant amounts of $15,000, $9,999, and $9,999,
respectively, in 2008. Through these housing rehabilitation programs, the City addressed the
national objective of addressing substandard housing concerns and ensuring decent housing and
a suitable living environment for low- to moderate-income homeowners. The City does not
conduct the rehabilitation activities with its own labor but solicits bids from contractors to
participate in the home rehabilitation programs.
This is our third audit report on the City’s Block Grant program. Our first report disclosed that
the City did not properly allocate $917,669 and $58,205 in salary and building expenses,
respectively, or properly document its process for securing a $49,924 consulting services
contract (report number 2010-KC-1003, dated March 26, 2010). Our second report disclosed
that the City improperly awarded more than $1.2 million in Block Grant program funds to
recipients of rehabilitation work without adequately verifying their eligibility (report number
2010-KC-1008, dated September 28, 2010).
Our objective was to determine whether the City properly managed Block Grant-funded housing
rehabilitation contracts.
4
RESULTS OF AUDIT
Finding 1: The City Improperly Expended Block Grant Program
Funding for Housing Rehabilitation Projects
The City expended Block Grant funds for 116 housing rehabilitation projects that were not
completed, were improperly completed, or were completed at an unreasonable cost. This
condition occurred because the City had inadequate controls over the contracting process. As a
result, homeowners did not get the repairs they were entitled to, their lives could be at risk from
substandard work, and HUD had no assurance that more than $1 million in Block Grant funds
was well spent.
Of 132 projects we physically inspected, the City expended Block Grant funds for 116 housing
rehabilitation projects that were not completed, were improperly completed, or were completed
at an unreasonable cost. It granted these contracts in East Louis, IL, via sealed bids. The
assisted homes were selected for improvement through the home repair, senior modification, and
emergency home repair programs. Appendix C contains a schedule of the deficiencies identified in
each of the 116 projects.
Incomplete Rehabilitation
Work
The City paid contractors for rehabilitation work that was not completed in 30
assisted houses. The contractors did not complete invoiced work items including
guttering, electrical, plumbing, and window work. For example, for project #1843,
part of the contract required the contractor to install new vinyl siding over the entire
structure. The contractor did not install the vinyl siding. For project #1692, part of
the contract required the contractor to rewire the entire house. The contractor did
not rewire the house, and the homeowner had to hire an electrician to do the
rewiring. In both cases, the City paid the contractor the full contract amounts of
$9,909 and $6,500 respectively.
5
Vinyl siding was not installed around the entire house in project #1843.
Substandard Rehabilitation
Work
The City paid contractors for rehabilitation work that was not completed in a
workmanlike manner in 99 projects. The poorly completed work included
substandard electrical, roof, and plumbing work. For example, for project
#1714, part of the contract required the contractor to replace the toilet with a
handicapped toilet and a grab bar. The replacement toilet did not comply with
handicapped height requirements, and there was no grab bar. For project #1832,
the contract required the contractor to replace the front and rear covered
porches. On the front porch, the contractor improperly installed the columns. In
addition, some porch ceiling boards were deteriorated and needed to be replaced.
Instead, the contractor cut strips of oriented strand board and screwed them to the
surface of the ceiling. The contractor used plywood sheets to build both porches’
floors instead of using parallel boards with small gaps between them for
drainage. The column blocks on the right side of the rear porch sat on the soil
and were starting to settle, causing it to start leaning.
A nonhandicapped toilet and no grab bar were installed in project #1714.
6
Strips of oriented strand board were screwed to the front porch ceiling
of project #1832.
For project #1832, the contractor straddled boards from one side of the pier formwork
to the other and rested the columns on the boards instead of on the front porch’s
concrete piers.
Overpriced Rehabilitation
Work
The City expended Block Grant funds for repairs that were completed at an
unreasonable cost on 84 projects. In these homes, the City paid the contractor
more than our estimated cost of completion for the completed work items. The
30 projects with incomplete rehabilitation work and the 99 projects with
substandard rehabilitation work are not mutually exclusive and add up to a total
of 104 projects. Of the 104 projects with incomplete and substandard
rehabilitation work, the City paid the contractors more than the value of the work
completed on 72 of the projects. On 12 additional projects, the contractors
provided the contracted work but at an unreasonable price. For example, for
project #1605, the contractor was required to tear off the existing roofing, replace
7
deteriorated roof sheathing, and install new shingle roofing at a cost of $7,630.
We estimated that the contract should have cost no more than $5,883; therefore,
the City overpaid $1,747.
Regulations at 2 CFR 225, Appendix A, (c)(2), state that a cost is reasonable if, in
its nature and amount, it does not exceed that which would be incurred by a prudent
person under the circumstances prevailing at the time the decision was made to incur
the cost. It also adds that when determining reasonableness, consideration must be
given to the market prices of comparable goods and services as well as if the
individuals concerned acted with prudence in the circumstances considering their
responsibilities to the governmental unit, its employees, the public at large, and the
Federal Government.
Inadequate Controls Over the
Contracting Process
The City had inadequate controls over the contracting process.
Inadequate Supervision
The City did not adequately supervise its inspector. It had no quality control
policies and procedures to ensure that the inspector properly conducted project
inspections. The inspector stated that he did not always verify all of the work
performed on any particular project. He also stated that he performed final
inspections on projects without taking the scope of work to the sites but worked
from his memory of the scope of work for certain projects.
Inadequate Monitoring
The City did not properly monitor the performance of its contractors. The
inspector stated that he did not closely track the work performed by the
contractors. He added that the contractors were supposed to wait for him before
they closed up walls or covered roofs and that often the contractors had completed
a lot of the work before he inspected the projects. The inspector noted that at
times, contractors billed for the original scope of work when they had made
changes. Finally, the City did not verify that the contractors employed licensed
workmen to complete the rehabilitation work.
Repairs Not Received and Lack
of Assurance That Funds Were
Well Spent
Homeowners did not receive the repairs they were entitled to, and their lives
could be at risk from substandard work. For example, in project #1621, the
contractor improperly completed repairs on the electrical system by running two
wires into one breaker. This error caused a current of 220 volts to run through
parts of the house rather than the standard 110 volts, and there was a loss of
power in other parts of the house.
8
The City spent more than $1 million in Block Grant funds on 116 projects that
were not completed, completed in a substandard manner, or completed at a high
cost. We estimated that the City overpaid the contractors $127,780 for projects
that had work items that were either not completed or were completed in a
substandard manner. In addition, for projects that had all work items completed
according to contract, the City paid $22,294 more than the completed work was
worth.
Conclusion
The City had inadequate controls and did not properly spend more than $1 million
of its Block Grant Funds. It needs to collect funds paid to contractors for work
not performed or work performed improperly. Additionally, we recommend that
HUD require the City to develop and implement a quality control plan to ensure
that all work is completed according to the scope of work.
Recommendations
We recommend that the Director of the HUD Chicago Office of Community
Planning and Development require the City to
1A. Pursue collection of $127,780 paid to contractors for projects in which
rehabilitation work was not performed or was performed improperly.
1B. Require detailed inspection reports with pictures of completed repairs to
ensure that all work items are properly completed according to the approved
scopes of work before the contractors are paid.
1C. Develop and implement a postrepair quality control process to ensure that
work is completed according to the scope.
9
Finding 2: The City Did Not Always Prepare Specific and Detailed
Scopes of Work Before Contracting for Block Grant-Funded
Rehabilitation Work
The City did not always prepare specific and detailed scopes of work before contracting for
Block Grant-funded rehabilitation work. This condition occurred because City staff had
inadequate contract management training and outdated inspection software. As a result, the City
could not adequately solicit comparable bids or measure contractor performance.
The City did not always prepare specific and detailed scopes of work before contracting for
Block Grant-funded rehabilitation work.
Lack of Specific and Detailed
Scopes of Work
Lack of Specific Scopes of Work
The City did not always prepare scopes of work that specifically listed the work to
be performed before contracting for Block Grant-funded rehabilitation work.
Some of the scopes of work reviewed did not contain enough information to
enable a contractor to know exactly what work was required. For example, for
project #1621, part of the contract required the contractor to install a new circuit
complete with hookup at panel and receptacles “as specified” and the size “as
specified.” However, no specifications were listed.
Lack of Detailed Scopes of Work
The City did not always prepare scopes of work that listed the quantity of
materials required or dimensions of areas in need of work before contracting for
Block Grant-funded rehabilitation work. For example, for project #1409, part of
the contract required the contractor to install new gutters, install underlayment
and tile, and repair drywall in the bathroom. The scope of work did not specify
the length of gutters to be installed or the area of the bathroom that required new
underlayment and tile as well as the area requiring drywall repair.
As described above, the scopes of work did not provide enough information to
determine all of the requirements for the rehabilitation work. In addition, the City
did not conduct walk-throughs of the projects with the contractors to clear up any
issues before accepting bids. Regulations at 24CFR 85.36(d)(2) state that a
complete, adequate, and realistic specification or purchase description must be
available, prior to the City advertising for bids.
10
Inadequate Training and
Outdated Inspection Software
City staff had inadequate contract management training and outdated inspection
software.
Inadequate Training
City staff had not had contract management training in more than 3 years.
They last attended training relating to contracting in 2007 and had not received
training relating to managing a rehabilitation program since then. In addition, the
last construction training received by City staff was unrelated to work writeups.
After the audit started, the City registered its staff for construction management
training scheduled to cover areas such as inspections, work writeups, plans, and
specifications.
The inspector did not provide dimensions of areas to be worked on to the
contractors to avoid excessive change orders. He stated that if he wrongly
measured the dimensions of the areas requiring repairs and put a lesser area in the
scope of work, the contractors would request change orders to complete the work.
We concluded that the inspector did not realize that to obtain comparable bids, he
was required to provide the dimensions of the areas needing repairs to potential
bidders.
Outdated Inspection Software
The inspection software version used by the inspector to produce the scopes of
work was outdated and used 2001 information. The software package is menu
driven and creates scopes of work once the user enters the type of work to be
performed, the unit cost, and the dimensions of the areas requiring repairs. The
software version installed on the inspector’s computer did not generate specific
details about the work items. We attempted to contact the software’s maker to
determine whether there was a newer version, but we were unable to do so, and its
Web site had not been updated in more than 2 years.
Inability To Compare Bids and
Measure Performance
As a result of the lack of detailed and specific scopes of work, the City could not
adequately solicit comparable bids or measure contractor performance. Bids
solicited from nonspecific and nondetailed scopes of work cannot be compared
because each contractor creates bids based on its own interpretation of the scope
of work, which creates wide variances in bid amounts. Additionally, scopes of
work that are not detailed and specific create a hurdle for the City in measuring
the performance of the contractor.
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Conclusion
The City’s staff had inadequate training and tools and, therefore, did not create
detailed and specific scopes of work. Therefore, it could not compare bids or
adequately measure contractor performance. The City needs to provide training
to its staff, update its inspections software to ensure that it is more detailed, and
seek technical assistance from HUD.
Recommendations
We recommend that the Director of the HUD Chicago Office of Community
Planning and Development
2A. Require the City to provide contract management training to staff members.
2B. Require the City to update its inspection software to ensure that it is more
detailed or use a different software package that will provide more detailed
scopes of work.
2C. Provide technical assistance to the City in the area of contract management.
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Finding 3: The City Did Not Always Follow Federal Procurement
Regulations and Its Own Policy While Managing
Rehabilitation Contracts
The City did not always follow Federal procurement regulations and its own policy while
managing 52 of 147 rehabilitation contracts. This condition occurred because the City’s internal
controls were inadequate and its staff was unaware of all of the requirements. As a result, the
City could not document that $475,747 spent on these contracts was reasonable or necessary.
The City did not always follow Federal procurement regulations and its own policy while
managing 52 of 147 rehabilitation contracts. Appendix C contains a schedule of the deficiencies
identified in each of the 52 projects with deficiencies.
Lack of Cost Estimates for
Executed Contracts
Lack of Cost Estimates for Executed Contracts
The City did not prepare cost estimates for the executed contracts or change
orders for 33 of the projects reviewed. Regulations at 24 CFR 85.36(f)(1) require
the City to perform a cost or price analysis in connection with every procurement
action including contract modifications. Additionally, the regulations state that
grantees must make independent estimates before receiving bids or proposals.
For example, for project #1691, the City processed a change order to repair water
damage in a bathroom walls and floor. It did not perform and document a cost
estimate for this change.
Lack of Justification for Selecting Contractors
The City did not document the justification for selecting contractors for
rehabilitation contracts for 11 of the projects reviewed. Regulations at 24 CFR
85.36(b)(9) state that grantees and subgrantees will maintain records sufficient to
detail the significant history of a procurement. These records will include but are
not necessarily limited to the following: rationale for the method of procurement,
selection of contract type, contractor selection or rejection, and the basis for the
contract price. For project #1590, the City paid off the initial contractor that
started the rehabilitation work but did not complete it. It then awarded the
contract to another contractor to complete the work but did not document how it
selected the bid submitted by the second contractor as it was not listed on the bid
review sheet. In addition, the City did not always select the lowest bidder.
Lack of Appraisals When Work Equaled or Exceeded $10,000
The City granted 10 rehabilitation contracts that equaled or exceeded $10,000
without obtaining appraisals for the properties. The City’s policy requires
appraisals for all rehabilitation projects that equal or exceed $10,000.
13
Missing Rationale for Exceeding Grant Limits on Executed Contracts
The City did not document the rationale for exceeding grant limits on the
executed contracts for 11 of the projects reviewed. The City’s policy sets
maximum levels of funding for each of the three home rehabilitation programs.
For project #1604, the City spent $15,400 to repair the home when the maximum
for the emergency repair program was $9,999. The City did not document why it
paid $5,401 more than the program limit or why it split the rehabilitation of the
house into two separate contracts with different contractors.
Undocumented Change Orders
The City did not document approved change orders for the executed contracts for
15 of the projects reviewed. For project #1754, the City substituted the approved
fascia, gutter, and soffit work for living room ceiling repair and insulation work
without obtaining an approved change order or performing a cost estimate.
However, the contractor billed for and was paid the original contract sum.
Missing Lien Waivers for Executed Contracts
The City did not obtain lien waivers for eight of the projects reviewed before
paying the contractors. The City’s rehabilitation procedures require the receipt of
lien waivers from contractors before issuing payment.
Inadequate Internal Control
and Staff Unaware of
Requirements
The City’s internal controls were inadequate, and its staff was unaware of all
requirements.
Inadequate Internal Controls
The City did not have adequate internal controls in place to ensure compliance
with Federal procurement regulations and its own procurement policy. For
example, the City’s change order process was lengthy, and staff circumvented it
to ensure that the homeowners were not harmed by delays. The City’s change
order process required more levels of approval when the Community
Development Department transitioned to City control in 2005. In addition, the
inspector stated that he contacted contractors to obtain cost estimates for change
orders, but this communication was not documented in the files. Internal controls
must create an environment that ensures that the requirements are followed.
Staff Unaware of Requirements
City staff was not aware that it was violating the requirements when managing the
rehabilitation program. For example, some of the staff members were not aware
that appraisals were required for projects that cost $10,000 or more. Additionally,
staff was not aware of the requirements for handling projects that had substituted
work items but the same invoiced amount. Specifically, the staff was not aware
of the requirements for determining whether the substituted items were
14
comparable in cost. Finally, staff was not aware of the maximum dollar limit for
change orders. Staff members must be aware of all of the requirements of their
positions to ensure that limited grant funds are spent appropriately and in
compliance with the requirements.
No Assurance That Costs Were
Reasonable or Necessary
The City could not document that $475,747 spent on these 52 contracts was
reasonable or necessary. The City must ensure that it follows Federal
procurement regulations as well as its own procurement procedures and policies
to ensure that all costs incurred are reasonable and necessary in meeting its goals
of providing decent and affordable housing opportunities.
Based on finding 1, 2, and 3, as well as the findings in audit report 2010- KC-
1008, the City failed to properly process 146 of the 147 Block Grant home
rehabilitation program projects reviewed. Regulations at 24 CFR 570.910 list
actions that HUD can take to prevent a continuation of a performance deficiency,
mitigate the adverse effects of a deficiency, and prevent recurrence of a
deficiency. One such action is to condition the use of funds from a succeeding
fiscal year’s allocation upon appropriate corrective action by the recipient. The
City planned to spend $400,000 in 2010 Block Grant funding on its housing
rehabilitation programs.
Conclusion
The City did not comply with Federal procurement requirements as well as its
own procurement policy because it had inadequate controls in place and its staff
was not aware of the requirements. Therefore, it had no assurance that the
contracts awarded were reasonable or necessary. HUD needs to withhold a
portion of the City’s 2010 funding until it improves its controls. Additionally, the
City needs to provide training to its staff and develop and implement adequate
internal controls to ensure compliance with Federal procurement regulations and
its own procurement policy.
Recommendations
We recommend that the Director of the HUD Chicago Office of Community
Planning and Development
3A. Withhold $400,000 in 2010 Block Grant funding for the City’s housing
rehabilitation programs until it improves its controls.
15
3B. Require the City to develop and implement adequate internal controls to
ensure compliance with Federal procurement regulations and its own
procurement policy.
3C. Require the City to provide staff with training on Federal procurement
regulations and local procurement policies.
16
SCOPE AND METHODOLOGY
To accomplish our objectives, we reviewed applicable laws and regulations, interviewed City
staff, and reviewed City policies and procedures.
We used reports obtained from HUD’s Integrated Disbursement and Information System as
background information for our review. The reports from this information system revealed that
there were 364 homeowner repair projects with at least one drawdown during the 5-year period
covering March 2005 through February 2010. The total funded amount for these projects was
more than $3.3 million. Specifically, we used the reports to select all homeowners that received
at least $5,000 in housing rehabilitation assistance from March 2008 through February 2010. We
also selected any homeowners receiving housing rehabilitation assistance from March 2005
through February 2010 who either received assistance more than once during the 5-year period
or whose name or address matched employees, elected officials, or contractors of the City. This
process led to a sample of 147 projects. However, we did not rely on these data for our
conclusion. All conclusions were based on additional reviews performed during the audit.
We reviewed the projects’ files identified through our sample selection process to determine
whether the City complied with Federal procurement laws and regulations as well as its own
procedures. We also conducted physical inspections at 132 of the 147 projects in our sample.
We should note that one of the projects reviewed involved 2 different contractors. For the
houses inspected, we estimated the cost of the repairs performed. We prepared our cost
estimates using R.S. Means Residential Repair and Remodeling Costs, Contractor’s Pricing
Guide for 2009, as well as Chicago area retail store flyers and Internet-based vendors’ pricing.
When a work item was not performed, did not meet code, or was of substandard quality and
needed to be redone to have value, we estimated the cost of that work item as zero. When we
were unable to verify that a work item had been completed, we gave the contractor credit for that
item in our estimate. If the quantities were unknown, we used the contractor’s price if it seemed
reasonable. The inspections and cost estimates were performed by OIG’s appraiser who is a
registered architect.
Our audit period generally covered March 2008 through February 2010 and we expanded it as
explained in the sample selection above. We performed our audit work onsite at the City’s
municipal building located at 301 River Park Drive, East St. Louis, IL, and in various assisted
houses from April to November 2010.
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 objective.
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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 to ensure that Block Grant-funded housing rehabilitation contracts
are completed based on the approved scopes of work.
Controls to ensure that Block Grant-funded housing rehabilitation contracts
are processed according to the applicable rules 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:
The City did not have adequate controls in place to properly manage Block
Grant-funded housing rehabilitation contracts.
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APPENDIXES
Appendix A
SCHEDULE OF QUESTIONED COSTS
AND FUNDS TO BE PUT TO BETTER USE
Recommendation Ineligible 1/ Funds to be put
number to better use 4/
1A $127,780
3A $400,000
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/ Recommendations that funds be put to better use are estimates of amounts that could be
used more efficiently if an Office of Inspector General (OIG) recommendation is
implemented. These amounts include reductions in outlays, deobligation of funds,
withdrawal of interest, costs not incurred by implementing recommended improvements,
avoidance of unnecessary expenditures noted in preaward reviews, and any other savings
that are specifically identified.
In findings 1 and 3 of this report, we concluded that the City awarded more than $1 million in
Block Grant funds for 124 rehabilitation contracts without adequately ensuring that it complied
with requirements and that the work was completed in a professional manner. Because these
same projects have already been questioned in our report 2010-KC-1008, issued September 28,
2010, which questioned more than $1.2 million in Block Grant funds, we did not include these
costs in the schedule of questioned costs in this report.
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Appendix B
AUDITEE COMMENTS AND OIG’S EVALUATION
Ref to OIG Evaluation Auditee Comments
Comment 1
Comment 2
20
Ref to OIG Evaluation Auditee Comments
Comment 3
21
OIG Evaluation of Auditee Comments
Comment 1 While the City might have noted inconsistencies with specific work write-ups and
controls over the contracting process, it did not provide the OIG with documents
to show that these were rectified. The City stated that it will be requiring
inspection photos for rehabilitation projects before and after completion of the
work. This should help in verifying that the work is completed according to the
approved scope of work.
Comment 2 The City was aware of the problems with its inspection software and therefore
could not have obtained the best work write-ups during the audit period. The City
stated that it is seeking alternative software packages. We expect it to implement
a new inspection system before initiating any new rehabilitation projects.
Comment 3 The City could not prove that these contract changes would have caused the
monetary values of the contracts to remain unaffected since it did not follow all
the procurement requirements in 24CFR85.36. In addition, the City did not
provide documentation to the OIG during the audit to support the fact that it was
requiring cost analyses for all change orders. The City stated that it is developing
a new form to document the approval of contract changes that do not affect the
original contract amount and providing its staff with contract management
training. These actions should help address some of our recommendations.
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Appendix C
SCHEDULE OF DEFICIENCIES
Failure to document a cost estimate
Work items not properly performed
difference between contract price
Work items not performed
When cost not reasonable,
Contract granted without
Grant amount exceeded
Lowest bid not selected
Missing change order
Missing lien waivers
Cost not reasonable
and OIG estimate
Lack of appraisal
competition
IDIS*
# # Amount paid
1 1409 $4,938 x x $284 x x x
2 1433 $4,850 x x $4,043
3 1458 $4,650 x
4 1499 $4,050 x
5 1502 $4,463 x x $961
6 1521 $4,700 x x x
7 1535 $5,200 x $357 x x
8 1540 $4,500 x x x $2,605 x
9 1546 $8,550 x x $1,640 x x
10 1550 $5,985 x x $3,573 x
11 1556 $9,800 x x
12 1569 $5,257 x x $986
13 1572 $9,000 x
14 1573 $13,750 x x
15 1574 $14,650 x
16 1575 $8,950 x x $1,154
17 1576 $7,500 x x x $279 x x
18 1577 $10,000 x x $648 x x
19 1579 $7,315 x x $2,168
20 1581 $9,000 x
21 1586 $10,000 x $752 x x
22 1587 $8,600 x x $37
23 1588 $6,033 x x $1,173 x
24 1589 $9,950 x x $695
23
Failure to document a cost estimate
Work items not properly performed
difference between contract price
Work items not performed
When cost not reasonable,
Contract granted without
Grant amount exceeded
Lowest bid not selected
Missing change order
Missing lien waivers
Cost not reasonable
and OIG estimate
Lack of appraisal
competition
IDIS*
# # Amount paid
25 1590 $15,390 x x x x
26 1591 $8,900 x $2,224
27 1592 $9,925 x x x $878 x x
28 1593 $5,000 x
29 1596 $9,325 x x $1,592
30 1597 $9,400 x x x $533
31 1598 $4,950 x x x $1,181 x x
32 1604 $15,400 x x $2,489 x x x
33 1605 $7,630 x $1,747 x
34 1606 $8,800 x
35 1607 $8,752 x x $1,732
36 1609 $7,070 x $925
37 1610 $8,650 x
38 1618 $7,200 x x $2,054
39 1619 $6,000 x
40 1621 $5,525 x x $962 x
41 1665 $9,300 x x $2,080
42 1666 $7,100 x x x $198
43 1668 $7,100 x x $2,756
44 1669 $9,425 x x $1,612
45 1670 $9,400 x x x $3,014
46 1671 $5,000 x x $3,456
47 1672 $8,055 x x
48 1673 $5,600 x
49 1674 $9,950 x
50 1675 $9,600 x x $4,553
51 1680 $9,000 x $3,623
52 1681 $7,300 x x x $2,457
53 1683 $7,700 x x $2,271
24
Failure to document a cost estimate
Work items not properly performed
difference between contract price
Work items not performed
When cost not reasonable,
Contract granted without
Grant amount exceeded
Lowest bid not selected
Missing change order
Missing lien waivers
Cost not reasonable
and OIG estimate
Lack of appraisal
competition
IDIS*
# # Amount paid
54 1685 $9,700 x x x $1,943 x x
55 1686 $6,800 x $5,951
56 1687 $9,895 x x $816
57 1688 $9,900 x x $900 x
58 1689 $13,162 x x
59 1690 $9,200 x
60 1691 $9,975 x x $1,820 x x
61 1692 $6,500 x x x $2,260
62 1693 $9,150 x
63 1694 $9,400 x x x
64 1695 $9,999 x $65
65 1697 $9,500 x x $106
66 1698 $6,820 x x x $1,390
67 1699 $7,250 x x $2,343
68 1701 $9,500 x x x $1,073 x x
69 1702 $8,100 x
70 1709 $9,800 x x $2,003 x
71 1711 $9,500 x x $1,917
72 1713 $9,995 x x x $596
73 1714 $8,650 x x $494
74 1715 $9,220 x x x $2,283
75 1717 $8,150 x
76 1719 $7,800 x x $2,909
77 1720 $10,000 x x
78 1721 $9,950 x x x $3,158 x x
79 1722 $10,400 x x x $2,438 x
80 1724 $8,840 x x $54
81 1726 $9,980 x x $1,518 x
82 1727 $7,950 x x $885
25
Failure to document a cost estimate
Work items not properly performed
difference between contract price
Work items not performed
When cost not reasonable,
Contract granted without
Grant amount exceeded
Lowest bid not selected
Missing change order
Missing lien waivers
Cost not reasonable
and OIG estimate
Lack of appraisal
competition
IDIS*
# # Amount paid
83 1728 $10,000 x x x x
84 1731 $8,500 x
85 1732 $4,895 x x $249 x
86 1739 $1,900 x x $1,633
87 1740 $14,710 x
88 1741 $15,610 x x x
89 1742 $13,135 x x x $2,908 x
90 1743 $9,200 x x
91 1744 $12,740 x x x $3,241 x
92 1745 $9,500 x x $1,975 x x
93 1746 $9,400 x x $2,570
94 1747 $8,900 x
95 1749 $9,250 x x $3,835 x
96 1750 $12,300 x $2,006 x x
97 1751 $12,994 x $1,274
98 1752 $6,900 x x
99 1753 $6,800 x
100 1754 $9,700 x x $586 x x
101 1757 $7,725 x x $3,135
102 1758 $8,800 x
103 1769 $9,875 x x
104 1770 $2,379 x $984
105 1776 $9,300 x x $508
106 1777 $8,800 x x $1,316
107 1778 $7,600 x
108 1783 $7,635 x x
109 1805 $8,900 x
110 1811 $8,850 x x x $1,828
111 1816 $13,600 x x $666
26
Failure to document a cost estimate
Work items not properly performed
difference between contract price
Work items not performed
When cost not reasonable,
Contract granted without
Grant amount exceeded
Lowest bid not selected
Missing change order
Missing lien waivers
Cost not reasonable
and OIG estimate
Lack of appraisal
competition
IDIS*
# # Amount paid
112 1823 $10,025 x x $602 x
113 1824 $9,850 x x
114 1827 $6,715 x
115 1830 $10,000 x x x
116 1832 $9,350 x x $5,453
117 1833 $8,720 x x $1,887 x
118 1834 $9,975 x x $3,205 x x
119 1836 $7,520 x x x $2,805 x x
120 1837 $8,500 x x $309
121 1838 $9,100 x x $2,044 x
122 1839 $10,000 x $2,386 x x x x x
123 1842 $9,400 x x $2,056
124 1843 $9,909 x x x
$1,078,185 30 99 84 $150,074 33 6 5 10 11 15 8
* IDIS = Integrated Disbursement and Information System
27
Appendix D
CRITERIA
Code of Federal Regulations
Regulations at 24 CFR 85.36(b)(2) state that grantees and subgrantees will maintain a contract
administration system which ensures that contractors perform in accordance with the terms,
conditions, and specifications of their contracts or purchase orders.
Regulations at 24 CFR 85.36(b)(9) state that grantees and subgrantees will maintain records
sufficient to detail the significant history of a procurement. These records will include, but are
not necessarily limited to the following: rationale for the method of procurement, selection of
contract type, contractor selection or rejection, and the basis for the contract price.
Regulations at 24 CFR 85.36(c)(3)(i) state that grantees will have written selection procedures
for procurement transactions. These procedures will ensure that all solicitations incorporate a
clear and accurate description of the technical requirements for the material, product, or service
to be procured.
Regulations at 24 CFR 85.36(d)(2), Procurement by sealed bids (formal advertising), state that bids
are publicly solicited and a firm-fixed-price contract (lump sum or unit price) is awarded to the
responsible bidder whose bid, conforming with all the material terms and conditions of the invitation
for bids, is the lowest in price. The sealed bid method is the preferred method for procuring
construction, if the conditions in §85.36(d)(2)(i) apply.
In order for sealed bidding to be feasible, the following conditions should be present:
1. A complete, adequate, and realistic specification or purchase description is available;
2. Two or more responsible bidders are willing and able to compete effectively and for the
business; and
3. The procurement lends itself to a firm fixed price contract and the selection of the successful
bidder can be made principally on the basis of price.”
Regulations at 24 CFR 85.36(f)(1) state that grantees and subgrantees must perform a cost or
price analysis in connection with every procurement action including contract modifications.
The method and degree of analysis is dependent on the facts surrounding the particular
procurement situation, but as a starting point, grantees must make independent estimates before
receiving bids or proposals. A cost analysis must be performed when the offerer is required to
submit the elements of his estimated cost, e.g., under professional consulting, and architectural
engineering services contracts. A cost analysis will be necessary when adequate price
competition is lacking, and for sole source procurements, including contract modifications or
change orders, unless price reasonableness can be established on the basis of a catalog or market
price on a commercial product sold in substantial quantities to the general public or based on
prices set by law or regulation. A price analysis will be used in all other instances to determine
the reasonableness of the proposed contract price.
28
Regulations at 24 CFR 570.202(a)(1) state that Block Grant funds may be used to finance the
rehabilitation of privately owned buildings and improvements for residential purposes.
Regulations at 24 CFR 570.910(b)(8) state that in the case of an entitlement recipient, [HUD
can] condition the use of funds from a succeeding fiscal year’s allocation upon appropriate
corrective action by the recipient pursuant to section 570.304(d). The failure of the recipient to
undertake the actions specified in the condition may result in a reduction, pursuant to section
570.911, of the entitlement recipient’s annual grant by up to the amount conditionally granted.
Regulations at 2 CFR 225(c)(2), state that a cost is reasonable if, in its nature and amount, it does
not exceed that which would be incurred by a prudent person under the circumstances prevailing at
the time the decision was made to incur the cost. The question of reasonableness is particularly
important when governmental units or components are predominately federally-funded. In
determining reasonableness of a given cost, consideration shall be given to:
a. Whether the cost is of a type generally recognized as ordinary and necessary for the
operation of the governmental unit or the performance of the Federal award.
b. The restraints or requirements imposed by such factors as: sound business practices; arms
length bargaining; Federal, State and other laws and regulations; and, terms and conditions
of the Federal award.
c. Market prices for comparable goods or services.
d. Whether the individuals concerned acted with prudence in the circumstances considering
their responsibilities to the governmental unit, its employees, the public at large, and the
Federal Government.
e. Significant deviations from the established practices of the governmental unit which may
unjustifiably increase the Federal award's cost.
29
City Criteria
COST ESTIMATE AT OR BELOW GRANT LIMIT
If the estimate is within a reasonable range of the grant maximum (which is defined as a
maximum of $15,000.00 – Home Repair/Lottery, $9,999 – Senior Repair and Emergency Repair,
and $25,000 – HOME Rehab/Lead Reduction) for rehabilitation repairs the work write-up is sent
for bids to licensed contractors.
COST ESTIMATE ABOVE GRANT LIMIT
If the bid estimate is in excess of the grant maximum $15,000.00 – Home Repair/Lottery, $9,999
– Senior Repair and Emergency Repair, and $25,000 – HOME Rehab/Lead Reduction for
rehabilitation work, the following actions can be taken:
1. The homeowner is contacted to determine if they have any resources to fund the
contracts cost over the grant maximum.
2. A. If the applicant does not have the resources, the inspector can delete some
line items from the work write-up to bring the cost estimate down if
feasible. If it is found not to be feasible, it must be denied and the
applicant must be notified in writing as the home cannot be rehabilitated
within the grant limit guidelines.
B. When using HOME funds, the reason for denial is that the home must be
brought up completely to code under the City’s adopted International
Code Council within the program’s financial guidelines, and the
anticipated rehabilitation costs exceed these program limits.
C. The home may also be denied when the Inspector deems that the home is
structurally unsound and cannot be rehabilitated.
3. After the bid period has expired, the lowest responsible bidder (from the
Community Development Department approved Contractor List) is awarded the
contract. Generally the lowest bid is within 20% of the Community Development
Department cost estimate.
APPRAISALS
Property appraisals to determine the before-rehab value and the after-rehab value may be required
for Community Development rehabilitation programs based on the following:
1. A property appraisal is required for ALL rehabilitation projects funded through HOME
programs. A real estate office/appraisal agent is contracted to conduct both appraisals
(before and after rehab).
30
2. If CDBG [Block Grant] funds are used to complete the home repair work, a property
appraisal is required if the contract value is $10,000 or greater. A real estate office/appraisal
agent is contracted to conduct both appraisals (before and after rehab).
CONTRACT COMPLETION
1. A contract is then written and signed by the Contractor and Community Development
Department for the amount of the award with all relevant Community Development
regulations incorporated.
2. A written Notice to Proceed is issued and the Contractor proceeds with the rehabilitation
work for the project at this time.
3. The Community Development Inspector makes site progress inspections to monitor the
project. The Inspector is to prepare written inspection reports and photograph the work-
in-progress for Community Development Department files.
4. The Inspector also advises contractors if any deficiencies occur or if any corrections
have to be made during the job’s progress and he ensures that proper action is taken. If
corrections are required that were not included in of the original scope of work, a
Change Order is required. (Change orders must be submitted in writing by the Housing
Inspector to the Community Development Director, City Manager, Budget Director,
Finance Director and Financial Advisory Authority for approval.)
PAYMENTS
1. One payment is made to the Contractor upon completion of the entire project. The payment
process includes the approval of the Community Development Housing Inspector and
Program Manager as well as the Property Owner.
2. For any jobs containing lead hazard reductions, a clearance must be achieved by a licensed
lead risk assessor before any payment is made to the contractor. Upon the completion of the
rehabilitation, the Housing Inspector conducts a final inspection. If all work meets the work
write-up job specifications and contract requirements, the contractor’s payout request is
initiated.
3. Contractor must submit executed Lien Waiver and Invoice before Final payout is made.
31
The City of East St. Louis, IL Did Not Properly Manage Housing Rehabilitation Contracts Funded by the Community Development Block Grant Program
Published by the Department of Housing and Urban Development, Office of Inspector General on 2011-02-09.
Below is a raw (and likely hideous) rendition of the original report. (PDF)