oversight

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)

                                                                  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.




                                            2
                              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.




                                            11
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.




                                               12
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.




                                               17
                              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.



                                                 18
                                       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.




                                               19
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.




                                             22
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