oversight

The Housing Authority of the County of San Bernardino, CA, Did Not Adequately Complete All Procurements for Its Recovery Act Capital Fund Grants in Accordance With HUD Requirements

Published by the Department of Housing and Urban Development, Office of Inspector General on 2011-09-26.

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

                                                               Issue Date
                                                                     September 26, 2011
                                                               Audit Report Number
                                                                        2011-LA-1019




TO:         K.J. Brockington, Director, Los Angeles Office of Public Housing , 9DPH



FROM:       Tanya E. Schulze, Regional Inspector General for Audit, Region IX, 9DGA

SUBJECT: The Housing Authority of the County of San Bernardino, CA, Did Not
         Adequately Complete All Procurements for Its Recovery Act Capital Fund
         Grants in Accordance With HUD Requirements


                                   HIGHLIGHTS

 What We Audited and Why

             We audited the Housing Authority of the County of San Bernardino‟s American
             Recovery and Reinvestment Act of 2009 Public Housing Capital Fund formula
             and competitive grants. We performed the audit because Recovery Act reviews
             are part of the Office of Inspector General‟s (OIG) annual plan and the Los
             Angeles Office Public Housing‟s 2011 risk assessment rated the Authority as high
             risk based on data from the Authority‟s most recent Real Estate Assessment
             Center physical inspections and Financial Data Schedule submission.

             Our audit objective was to determine whether the Authority completed
             procurements for Recovery Act capital funds in accordance with 24 CFR (Code of
             Federal Regulations) Part 85 and U.S. Department of Housing and Urban
             Development (HUD) Recovery Act requirements.
What We Found

           The Authority did not complete all procurements for its Recovery Act capital
           funds in accordance with 24 CFR Part 85 and HUD Recovery Act requirements.
           Specifically, it procured one vendor through noncompetitive procurement without
           adequate justification, and the related contracts were missing 5 of 13 required
           provisions. In addition, we identified an expired assurance of completion for
           ongoing work, a lack of backup documentation for the independent cost estimates
           in two of the files reviewed, and a control weakness in the Authority‟s process for
           approving change orders. Therefore, the Authority may have spent more
           Recovery Act money toward its projects than it would have had it completed
           proper procurement procedures.


What We Recommend

           We recommend that the Director of HUD‟s Los Angeles Office of Public Housing
           require the Authority to (1) support the reasonableness of the $247,834 contracted
           through noncompetitive procurement or repay the Recovery Act funding
           expended thus far and ensure that no additional Recovery Act funding is
           disbursed under the contracts, (2) amend the ongoing noncompetitive
           procurement contracts to include the missing contract provisions, (3) implement a
           policy to ensure that its procurement and contracts manager reviews all contracts
           before they are executed, (4) implement controls to ensure that assurance of
           completion documents are obtained and valid for the duration of an ongoing
           contract, (5) implement controls to ensure that all contractor backup
           documentation is retained and accessible, and (6) implement controls to ensure
           that all documents requiring signature are approved by multiple parties as
           intended and that one person does not sign on multiple lines.

           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 Authority the discussion draft report on August 29, 2011, and
           held an exit conference with the Authority‟s officials on September 7, 2011. The
           Authority provided written comments on September 8, 2011, and 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.
           The auditee also included additional attachments with its response; however, we
           did not include these in the report and they are available upon request.



                                            2
                           TABLE OF CONTENTS

Background and Objective                                                          4

Results of Audit
      Finding: The Authority Did Not Complete All Procurements for Its Recovery   5
               Act Capital Funds in Accordance With 24 CFR Part 85 and HUD
               Recovery Act Requirements

Scope and Methodology                                                             11

Internal Controls                                                                 13

Appendixes

   A. Schedule of Questioned Costs                                                14
   B. Auditee Comments and OIG‟s Evaluation                                       15
   C. Criteria                                                                    24




                                           3
                          BACKGROUND AND OBJECTIVE

The Housing Authority of the County of San Bernardino was organized in 1941 and is the largest
provider of affordable housing in the County, owning or managing more than 10,000 housing
units and serving nearly 30,000 individuals and families throughout the County. As a public
agency, the Authority is tasked to address the local housing needs throughout the County;
therefore, the Authority works with various community partners and local government officials
to acquire, build, and manage more high quality housing. In March 2008, the Authority became
one of only 1 percent of housing authorities nationwide to be designated as a Moving to Work
demonstration site by the U.S. Department of Housing and Urban Development (HUD).

On February 17, 2009, the President enacted the American Recovery and Reinvestment Act of
2009. This legislation includes a $4 billion appropriation of capital funds for public housing
agencies to carry out capital and management activities, as authorized under Section 9 of the
United States Housing Act of 1937. The Recovery Act requires that $3 billion of these funds be
distributed as formula funds and the remaining $1 billion be distributed through a competitive
process.

Under both programs, housing agencies are required to obligate 100 percent of the grant within 1
year, expend at least 60 percent of the grant within 2 years, and expend 100 percent of the grant
within 3 years from the date that funds are made available. Failure to comply with the 1-, 2-, or
3-year obligation and expenditure requirements will result in the recapture of unobligated and
unexpended funds. The formula and competitive Recovery Act funds were made available to the
Authority on March 18 and September 24, 2009, respectively. The Authority was awarded
stimulus funds of more than $5 million under the formula grant and more than $3 million under
the Capital Fund Green Communities Option 2 Recovery competitive grant. As of July 31, 2011,
the Authority had expended 100 percent of its formula grant funds and 93 percent of its
competitive grant funds.

The Authority expended the funds among 25 vendors, in addition to paying administrative costs
and force account1 program labor. The funds enabled the Authority to complete exterior
improvements at four of its public housing sites, including but not limited to lead-based paint
abatement and selective demolition, window replacement, swamp cooler replacement, exterior
paint, and Americans With Disabilities Act upgrades. In addition, the Authority expended funds
for roofing and electrical preparations for solar panel installation, to be paid under a different
program, at its Maplewood Homes public housing site.

Our audit objective was to determine whether the Authority completed procurements for
Recovery Act capital funds in accordance with 24 CFR (Code of Federal Regulations) Part 85
and HUD Recovery Act requirements.




1
 Force account is defined in the Capital Fund program as labor employed directly by the public housing authority
either on a permanent or a temporary basis.


                                                        4
                               RESULTS OF AUDIT

Finding: The Authority Did Not Complete All Procurements for Its
         Recovery Act Capital Funds in Accordance With 24 CFR Part
         85 and HUD Recovery Act Requirements

The Authority did not complete all procurements for its Recovery Act capital funds in
accordance with HUD rules and regulations. Specifically, the Authority procured one vendor
through noncompetitive procurement without adequate justification, and the related contracts
were missing 5 of 13 required provisions. In addition, we identified an expired assurance of
completion for ongoing work, a lack of backup documentation for the independent cost estimates
in two of the files reviewed, and a control weakness in the Authority‟s process for approving
change orders. These conditions occurred because the Authority did not have adequate controls
over procurement and Authority staff misinterpreted HUD regulations. As a result, the Authority
may have spent more Recovery Act money toward its projects than necessary.



 Improper Procurement Method
 Used

              The Authority procured HelioPower, Inc., through noncompetitive procurement
              without adequate justification, which violated the requirements of full and open
              competition set forth at 24 CFR 85.36(c)(1) (see appendix C). Helio previously
              completed an application on behalf of the Authority for the local electrical supply
              company to partially fund solar panel installation at the Authority‟s Maplewood
              Homes public housing site under the Multifamily Affordable Solar Housing
              program. When Helio completed that application, it was acting as a subconsultant
              under the Heschong Mahone Group, Inc., contract. However, when the Authority
              was awarded funding through the Multifamily Affordable Solar Housing program,
              it contracted with Helio directly to complete the resulting work using Recovery
              Act funds.

              The Authority divided Helio‟s work into two contracts for $91,222 and $156,612
              in Recovery Act Public Housing Capital Fund competitive grant funding. These
              contracts were for solar roof stanchion installation and solar service entry
              electrical upgrades, respectively. Both contracts were executed on the same day
              but for different aspects of the same overall project. Because of the nature of the
              work involved in each contract, it was acceptable to separate the work into two
              contracts; however, the Authority should have procured the contracts using small
              purchase and sealed bid procedures, respectively. The Authority did not obtain an
              independent cost estimate for the work as required by 24 CFR 85.36(f)(1),




                                               5
publicly solicit bids as required by 24 CFR 85.36(d)(2), or obtain price or rate
quotations from an adequate number of qualified sources as required by 24
CFR 85.36(d)(1), each of which was also required by the Authority‟s own
procurement policies (see appendix C).

Further, the Authority did not proceed with the noncompetitive procurement in
accordance with HUD regulations or its own procurement policy. HUD
Handbook 7460.8 states, “Procurement by noncompetitive proposals shall be
conducted only if a written justification is made as to the necessity of using this
method in accordance with the procedures described in the PHA‟s [public housing
agency] procurement policy.” Moreover, the Authority‟s procurement policy and
24 CFR 85.36(d)(4)(i) provide for noncompetitive procurement only when the
award of the contract is infeasible using small purchase procedures, sealed bids,
or competitive proposals and if the item is only available from a single source, an
emergency exists, HUD authorizes the use of noncompetitive proposals, or
competition is determined inadequate after soliciting a number of sources.
However, none of these conditions was in effect at the time the Authority awarded
its Recovery Act contracts with Helio.

The Authority‟s procurement policy requires each procurement based on
noncompetitive proposal to be supported by a written justification for the
selection of that procurement method. The policy requires the justification to be
approved in writing by the contracting officer, be maintained in the procurement
file, and include the following information:

   1. Description of the requirement;
   2. History of prior purchases and their nature (competitive vs.
      noncompetitive);
   3. Specific exception above which applies;
   4. Statement as to the unique circumstances that require award by
      noncompetitive proposals;
   5. Description of the efforts made to find competitive sources (advertisement
      in trade journals or local publications, phone calls to local suppliers,
      issuance of a written solicitation, etc.);
   6. Statement as to efforts that will be taken in the future to promote
      competition for the requirement;
   7. Cost analysis in compliance with 24 CFR 85.36 and a declaration from the
      contracting officer stating that the cost is reasonable;
   8. Signature by the contracting officer‟s supervisor (or someone above the
      level of the contracting officer); and
   9. Price reasonableness. The reasonableness of the price for all
      procurements based on noncompetitive proposals must be determined by
      performing an analysis.

24 CFR 85.36(d)(4)(ii) also requires cost analysis, including verifying the
proposed cost data, projections of the data, and evaluation of the specific elements



                                  6
           of costs and profits. Further, 24 CFR 85.36(f)(2) requires grantees to negotiate
           profit as a separate element of the price of each contract in which
           there is no price competition. However, the justification the Authority presented
           to its board of commissioners lacked six of the nine key required elements
           identified above, including (1) the history of prior purchases and their nature, (2)
           the statement as to the unique circumstances that required award by
           noncompetitive proposal, (3) the description of the efforts made to find
           competitive sources, (4) the statement as to efforts that would be taken in the
           future to promote competition for the requirement, (5) a cost analysis in
           compliance with 24 CFR 85.36, and (6) a declaration from the contracting officer
           stating that the cost was reasonable as well as a price reasonableness analysis. In
           addition, the “scope of work detail” section in exhibit A of each of the Helio
           contracts did not indicate that the Authority had negotiated profit as a separate
           element of the price of each contract.

           The Authority‟s June 30, 2010, justification to its board of commissioners for
           using noncompetitive procurement misinterpreted an allowed exception in the
           Authority‟s procurement policy. Although its policy stated the exception as
           “HUD authorizes the use of noncompetitive proposals,” the justification presented
           to the board used the wording from 24 CFR 85.36(d)(4)(i)(C), which states the
           exception as “the awarding agency authorizes noncompetitive proposals.”
           Although both statements say the same thing since HUD is the awarding agency
           for the Authority‟s Recovery Act Capital Fund grants, the justification to the
           board inferred that the board was the awarding agency. Therefore, Authority staff
           misinterpreted 24 CFR 85.36 when completing the Helio procurement.

Contracts Missing Required
Provisions

           Each of the Helio contracts was missing 5 of the 13 provisions required under 24
           CFR 85.36(i) (see appendix C). Specifically, the contracts were missing the
           following provisions:

                  #4 – Compliance with the Copeland “Anti-Kickback” Act as
                  supplemented in U.S. Department of Labor regulations.
                  #8 – Notice of awarding agency requirements and regulations pertaining to
                  patent rights with respect to any discovery or invention which arises or is
                  developed in the course of or under such contract.
                  #9 – Awarding agency requirements and regulations pertaining to
                  copyrights and rights in data.
                  #11 – Retention of all required records for 3 years after grantees or
                  subgrantees make final payments and all other pending matters are closed.
                  #13 – Mandatory standards and policies relating to energy efficiency
                  which are contained in the State energy conservation plan issued in
                  compliance with the Energy Policy and Conservation Act.


                                             7
           The Authority executed the contracts without the review or approval of its
           procurement and contracts manager. According to the Authority‟s deputy
           executive director for its Office of Real Estate Development, the Authority
           completed the Helio contracts based on California Public Contract Code, and the
           contracts were geared to follow State requirements of the California Solar
           Initiative; however, as such, the contracts did not include all of the required
           Federal provisions. Authority staff relied on Helio to guide the process due to
           Helio‟s experience in the solar initiative arena, and the Authority‟s legal counsel
           reviewed contract negotiations along the way in lieu of the procurement and
           contracts manager‟s involvement. The Authority should implement a policy to
           ensure that the procurement and contracts manager reviews all contracts before
           they are executed to ensure compliance with all applicable laws and regulations.

Expired Assurance of
Completion


           The Authority‟s solar service entry upgrade contract with Helio was over the
           $100,000 small purchase threshold and was, therefore, subject to the bonding
           requirements set forth at 24 CFR 85.36(h) (see appendix C). In addition, section
           3.13.1 of the contract required the contractor to execute and provide the Authority
           with a payment bond in the amount of 100 percent of the total contract price.
           However, the Authority did not obtain a payment bond for this contract. In lieu of
           a payment bond, the Authority opted to obtain a 25 percent irrevocable letter of
           credit as allowed by 24 CFR 968.135(b).

           The 25 percent irrevocable letter of credit was initially due to expire on February
           28, 2011, but it was amended to expire on April 30, 2011. However, there were
           no further extensions, despite the contract‟s being only 40 percent complete with
           more than $71,000 remaining on the purchase order as of July 6, 2011. If the
           contractor had stopped working at that time, the Authority would not have had a
           current assurance of completion to protect itself.

           We brought the expired letter of credit to the Authority‟s attention on July 12,
           2011, and Authority staff confirmed that there were no additional amendments or
           extensions. By July 19, 2011, Authority staff had obtained another extension
           through August 31, 2011. Although the matter was corrected, the oversight
           represents a control weakness which the Authority needs to address to ensure that
           assurance of completion documents are obtained and valid for the duration of an
           ongoing contract.




                                             8
Other Issues


             In addition to the Helio contract, we reviewed the procurement and contracting
             for two vendors that the Authority procured through sealed bid procedures for its
             Recovery Act grants, including Queen City Glass and D. Webb, Inc. Services
             were properly procured, monitored, and completed for the two contracts reviewed
             for these two vendors. However, we did note items that the Authority could
             improve upon in future procurements.

                    For both of the sealed bid procurements reviewed, the Authority was
                    unable to provide backup documentation from its construction manager
                    for its independent cost estimate required by 24 CFR 85.36(f)(1) (see
                    appendix C); however, the procurement file did contain a summary sheet
                    for the independent cost estimate in both cases. Although services were
                    properly procured, in the future, the Authority needs to ensure that the
                    construction manager‟s backup documentation is retained and accessible
                    according to the access and retention contract provisions set forth in 24
                    CFR 85.36(i)(10) and (11).
                    Additionally, in the D. Webb, Inc., file, we identified a control weakness
                    that the Authority needs to address to ensure that all documents requiring
                    signature are approved by multiple parties as intended and that one person
                    does not sign on multiple lines. The Authority‟s deputy executive director
                    of its Office of Real Estate Development approved two change orders as
                    both the “supervisor” and the “executive director” when the executive
                    director was out of the office and unable to sign for herself.

Conclusion

             The Authority violated Federal procurement requirements and its own policies by
             entering into two contracts with Helio without undergoing proper procurement
             procedures because Authority staff misinterpreted HUD regulations and did not
             obtain approval from its procurement and contracts manager before executing the
             related contracts. In addition, there was a lack of backup documentation for the
             independent cost estimates in two of the files reviewed and a control weakness in
             the Authority‟s process for approving change orders because it did not have
             adequate controls over procurement. Consequently, the Authority limited
             competition and may have spent more Recovery Act money toward its projects
             than it would have had it completed proper procurement procedures. It contracted
             $247,834 in Recovery Act funds that may not have been obtained at a fair and
             equitable price, and it could not ensure that its contractors complied with all
             mandatory Federal requirements because the requirements were not included in
             the contracts.




                                             9
Recommendations

          We recommend the that Director of HUD‟s Los Angeles Office of Public Housing
          require the Authority to

          1A.     Support the reasonableness of the $247,834 contracted through
                  noncompetitive procurement or repay the Recovery Act funding expended
                  thus far and ensure that no additional Recovery Act funding is disbursed
                  under the contracts.

          1B.     Amend the ongoing noncompetitive procurement contracts to include the
                  missing contract provisions.

          1C.     Implement a policy to ensure that its procurement and contracts manager
                  reviews all contracts before execution.

          1D.     Implement controls to ensure that assurance of completion documents are
                  obtained and valid for the duration of an ongoing contract.

          1E.     Implement controls to ensure that all contractor backup documentation is
                  retained and accessible.

          1F.     Implement controls to ensure that all documents requiring signature are
                  approved by multiple parties as intended and that one person does not sign
                  on multiple lines.




                                          10
                         SCOPE AND METHODOLOGY

We performed our onsite work at the Authority‟s administrative office at 715 East Brier Drive,
San Bernardino, CA, between April and July 2011. Our audit generally covered the period
March 2009 to July 2011. We expanded our scope as necessary.

To accomplish our audit objective, we

       Obtained an understanding of the Recovery Act, the Authority‟s grant agreements with
       HUD, and the Authority‟s planned activities for its Recovery Act capital funds.
       Reviewed applicable HUD regulations, including but not limited to 24 CFR Part 85,
       Administrative Requirements for Grants and Cooperative Agreements to State, Local,
       and Federally Recognized Indian Tribal Governments; 24 CFR Part 905, The Public
       Housing Capital Fund Program; HUD Handbook 7460.8, The Procurement Handbook for
       Public Housing Agencies; applicable Office of Public and Indian Housing notices; and
       Public Law 111-5, American Recovery and Reinvestment Act of 2009.
       Reviewed the Authority‟s annual plans for 2009, 2010, and 2011; audited financial
       statements for 2009; chart of accounts; employee listing and organizational chart; and
       relevant internal policies and procedures.
       Interviewed appropriate HUD officials from the Office of Public Housing, Los Angeles
       field office.
       Reviewed 2010 and 2011 HUD monitoring reports.
       Interviewed the Authority‟s supervisors and staff.
       Reviewed the Authority‟s financial records and procurement files.
       Reviewed Authority data from HUD‟s Line of Credit Control System.
       Conducted site visits at the Authority‟s Maplewood Homes and Colton Public Housing
       sites to observe the progress of work and ensure that purchases were received.
       Selected a sample to test whether the Authority conducted its procurement activities in
       accordance with HUD rules and regulations.

We selected a nonstatistical sample of 2 of the 39 contracts (5 percent) awarded via sealed bid
and funded with Recovery Act capital funds. Of the two contracts, D. Webb, Inc., was funded
with the Authority‟s Capital Fund Recovery formula grant, while Queen City Glass was funded
with the Authority‟s Capital Fund Recovery competitive grant. We selected the D. Webb, Inc.,
contract because it was the single largest contract ($148,776) for the vendor, which received the
most Recovery Act Capital Fund awards from the Authority–seven contracts totaling $545,203.
We selected the Queen City Glass contract because it was the single largest contract ($2.194
million) the Authority awarded using Recovery Act capital funds.

In addition, we reviewed one of four vendors the Authority procured through methods other than
sealed bid and paid using Recovery Act funds (HelioPower, Inc.). The Authority contracted with
Helio for $247,834 in competitive funds, divided between two contracts. The remaining three
vendors that were not procured via sealed bid fell under the $2,000 micro purchase limit or the




                                                11
Authority‟s direct pay list, and we did not note any reason for additional review of those three
vendors.

The four contracts we reviewed (one each for D. Webb, Inc., and Queen City Glass plus two
contracts for Helio) comprise almost 31 percent of the total Capital Fund Recovery Act grant
funds the Authority received. We chose this approach since testing 100 percent of the population
was not feasible. Therefore, the sampling results apply only to the items tested and cannot be
projected to the universe or population.

To achieve our objective, we relied in part on spreadsheets maintained by the auditee. We
performed a moderate level of testing to assess the integrity of the data with respect to the
Authority‟s bid log and Recovery Act expense detail and found the data to be generally accurate
for our purposes.

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 finding and
conclusion based on our audit objective.




                                                12
                              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
               objective:

                      Policies, procedures, and controls to ensure that all procurements for the
                      Authority‟s Recovery Act capital funds are in accordance with HUD
                      requirements.

               We assessed the relevant controls identified above.

               A deficiency in internal controls 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 operation, (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 the following item is a significant deficiency:

                      The Authority did not implement sufficient policies, procedures, and
                      controls to ensure that all procurements for its Recovery Act capital funds
                      were in accordance with HUD requirements (see finding).




                                                13
                                      APPENDIXES

Appendix A

                   SCHEDULE OF QUESTIONED COSTS

                            Recommendation              Unsupported 1/
                                number
                                   1A                          $247,834
                                  Total                        $247,834


1/      Unsupported costs are those costs charged to a HUD-financed or HUD-insured program
or activity when we cannot determine eligibility at the time of the audit. Unsupported costs
require a decision by HUD program officials. This decision, in addition to obtaining supporting
documentation, might involve a legal interpretation or clarification of departmental policies and
procedures.




                                               14
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 1




                         15
Comment 2




Comment 3




            16
Comment 4




            17
Comment 5




Comment 5




            18
Comment 5




            19
Comment 5




            20
Comment 5




            21
                         OIG Evaluation of Auditee Comments

Comment 1   The OIG disagrees that HelioPower, Inc. was in fact procured through a
            competitive process. We reviewed Heschong Mahone Group‟s (HMG) response
            to the Authority‟s Request for Proposals (RFP) PC 452, and we acknowledged in
            the report that Helio was initially acting as a subconsultant under the HMG
            contract. However, while HMG‟s proposal included a “Program and Strategy
            Development Phase” (Phase 1) and a “Program Implementation/Support Phase”
            (Phase 2), Phase 2 was optional. The Authority previously confirmed during
            audit field work that the Strategic Energy Plan, prepared by HMG under Phase 1,
            did not include any specific reference to the Helio projects at the Maplewood
            Homes public housing site. HMG‟s proposal for Phase 2 detailed that Helio
            would “assist [the Authority] with the development of RFPs to support the
            implementation of the strategic plan” and “assist in selecting service providers
            and contractors.” The proposal did not indicate that Helio would do the
            implementation directly.

            Furthermore, HMG‟s proposed project budget did not include any labor hours or
            costs for Helio under the optional Phase 2. Although HUD Handbook 7460.8
            paragraph 10.8(B) does allow the PHA to order additional supplies or services
            through an option clause in the contract, paragraph 10.8(C)(1) clarifies the option
            “may only be exercised if the contract contained an options clause and if a price
            for the additional supplies or services was included.” In this case, the Authority
            has not provided support showing its contract with HMG included an options
            clause with prices for the additional Helio supplies and labor. HUD Handbook
            7460.8 paragraph 10.8(C)(1) states, “An unpriced option is considered a new
            procurement and, therefore, may not be used.”

            24 CFR 85.36(c)(1) states “All procurement transactions will be conducted in a
            manner providing full and open competition consistent with the standards of
            [section] 85.36.” It also clarifies that situations considered to be restrictive of
            competition include noncompetitive pricing and awards, and arbitrary actions in
            the procurement process. Since the two Helio contracts were not part of the
            original HMG proposal, they were not competitively awarded or priced, and
            therefore violated HUD‟s requirements.

Comment 2   The OIG disagrees that the selection of Helio met the requirements of the
            Authority‟s procurement policy and 24 CFR 85.36(d)(4)(i) as only being available
            from a single source. Step 2 of the Multifamily Solar Affordable Housing
            (MASH) program fact sheet instructs the applicant to “choose a reputable solar
            contractor by obtaining bids from at least three licensed contractors before
            making your selection.” This indicates the award of the grant money was not
            initially contingent on the use of Helio as the solar contractor, and the Authority
            should have obtained bids from at least three licensed solar contractors before
            selecting one to submit for its proposal to Southern California Edison. The




                                             22
            Authority has not provided any support showing it would not have been awarded
            funding if it had selected an alternate reputable solar contractor.

Comment 3   The OIG acknowledges the Authority‟s efforts to “minimize costs wherever
            possible.” However, costs may have been further reduced through the use of
            competitive procurement for the solar roof stanchion installation and solar service
            entry electrical upgrade projects.

Comment 4   The OIG acknowledges the Recovery Act federal funds were a very small portion
            of the total cost of the Authority‟s solar project; however, the amount of federal
            funds in question in comparison to the anticipated benefit does not justify
            deviating from the applicable federal requirements. Both Helio contracts were
            scheduled to be fully expended using Recovery Act Capital Fund competitive
            grant funding, and as such, federal provisions applied. Section VI(B)(3)(a)(2) of
            the procurement requirements in the Notice of Funding Availability (NOFA) for
            HUD‟s Recovery Act Capital Fund Recovery Competition (CFRC) Grants
            (Docket No. FR-5311-N-01) stated “Any requirements relating to the
            procurement of goods and services arising under state and local laws and
            regulations shall not apply to Capital Fund Stimulus (including CFRC) Grants.
            PHAs shall instead follow the Part 85 requirements.”

Comment 5   The OIG acknowledges the Authority‟s proactive approach to implementing our
            recommendations; however, the Authority did not provide the revised Helio
            contract or amended procurement procedures for our review. HUD will evaluate
            the Authority‟s amendments as part of audit resolution.




                                            23
Appendix C

                                        CRITERIA
The following sections of the Code of Federal Regulations and HUD handbook, as noted below,
apply to our audit objective.

Competition

       24 CFR 85.36(c)(1) states, “All procurement transactions will be conducted in a manner
       providing full and open competition consistent with the standards of [section] 85.36.”

Methods of Procurement

       24 CFR 85.36(d)(1) states, “Small purchase procedures are those relatively simple and
       informal procurement methods for securing services, supplies, or other property that do
       not cost more than the simplified acquisition threshold fixed at 41 U.S.C. [United States
       Code] 403(11) (currently set at $100,000). If small purchase procedures are used, price
       or rate quotations shall be obtained from an adequate number of qualified sources.”

       24 CFR 85.36(d)(2) states, “Procurement by sealed bids (formal advertising). 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 [section] 85.36(d)(2)(i) apply.”
       Section (d)(2)(i) goes on to state, “In order for sealed bidding to be feasible, the
       following conditions should be present:
           A. A complete, adequate, and realistic specification or purchase description is
               available;
           B. Two or more responsible bidders are willing and able to compete effectively and
               for the business; and
           C. 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.”

       HUD Handbook 7460.8 paragraph 8.5(A) states, “Procurement by noncompetitive
       proposals shall be conducted only if a written justification is made as to the necessity of
       using this method in accordance with the procedures described in the PHA‟s procurement
       policy.”

       24 CFR 85.36(d)(4) states, “Procurement by noncompetitive proposals is procurement
       through solicitation of a proposal from only one source, or after solicitation of a number
       of sources, competition is determined inadequate.”

       24 CFR 85.36(d)(4)(i) states, “Procurement by noncompetitive proposals may be used
       only when the award of a contract is infeasible under small purchase procedures, sealed



                                               24
       bids or competitive proposals and one of the following circumstances applies, [including]
           A. The item is available only from a single source;
           B. The public exigency or emergency for the requirement will not permit a delay
               resulting from competitive solicitation;
           C. The awarding agency authorizes noncompetitive proposals; or
           D. After solicitation of a number of sources, competition is determined inadequate.”

       24 CFR 85.36(d)(4)(ii) states, “Cost analysis, i.e., verifying the proposed cost data, the
       projections of the data, and the evaluation of the specific elements of costs and profits, is
       required.”

Contract Cost and Price

       24 CFR 85.36(f)(1) states, “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 offeror
       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 of 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.”

       24 CFR 85.36(f)(2) states, “Grantees and subgrantees will negotiate profit as a separate
       element of the price for each contract in which there is no price competition and in all
       cases where cost analysis is performed. To establish a fair and reasonable profit,
       consideration will be given to the complexity of the work to be performed, the risk borne
       by the contractor, the contractor‟s investment, the amount of subcontracting, the quality
       of its record of past performance, and industry profit rates in the surrounding
       geographical area for similar work.”

Bonding Requirements

       24 CFR 85.36(h) states, “For construction or facility improvement contracts or
       subcontracts exceeding the simplified acquisition threshold, the awarding agency may
       accept the bonding policy and requirements of the grantee or subgrantee provided the
       awarding agency has made a determination that the awarding agency‟s interest is
       adequately protected. If such a determination has not been made, the minimum
       requirements shall be as follows:
          1. A bid guarantee from each bidder equivalent to five percent of the bid price. The
               „bid guarantee‟ shall consist of a firm commitment such as a bid bond, certified




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              check, or other negotiable instrument accompanying a bid as assurance that the
              bidder will, upon acceptance of his bid, execute such contractual documents as
              may be required within the time specified.
          2. A performance bond on the part of the contractor for 100 percent of the contract
              price. A „performance bond‟ is one executed in connection with a contract to
              secure fulfillment of all the contractor's obligations under such contract.
          3. A payment bond on the part of the contractor for 100 percent of the contract price.
              A „payment bond‟ is one executed in connection with a contract to assure
              payment as required by law of all persons supplying labor and material in the
              execution of the work provided for in the contract.”

       24 CFR 968.135(b) states, “For [the Comprehensive Grant Program] and notwithstanding
       24 CFR 85.36(h), for each construction contract over $100,000, the contractor shall
       furnish a bid guarantee from each bidder equivalent to 5% of the bid price; and one of the
       following:
           1. A performance and payment bond for 100 percent of the contract price; or
           2. Separate performance and payment bonds, each for 50% or more of the contract
               price; or
           3. A 20% cash escrow; or
           4. A 25% irrevocable letter of credit.”

Contract Provisions

       24 CFR 85.36(i) states, “A grantee‟s and subgrantee‟s contracts must contain provisions
       in paragraph (i) of this section. Federal agencies are permitted to require changes,
       remedies, changed conditions, access and records retention, suspension of work, and
       other clauses approved by the Office of Federal Procurement Policy.
           1. Administrative, contractual, or legal remedies in instances where contractors
               violate or breach contract terms, and provide for such sanctions and penalties as
               may be appropriate. (Contracts more than the simplified acquisition threshold)
           2. Termination for cause and for convenience by the grantee or subgrantee including
               the manner by which it will be effected and the basis for settlement. (All
               contracts in excess of $10,000)
           3. Compliance with Executive Order 11246 of September 24, 1965, entitled „Equal
               Employment Opportunity,‟ as amended by Executive Order 11375 of October 13,
               1967, and as supplemented in Department of Labor regulations (41 CFR chapter
               60). (All construction contracts awarded in excess of $10,000 by grantees and
               their contractors or subgrantees)
           4. Compliance with the Copeland „Anti-Kickback‟ Act (18 U.S.C. 874) as
               supplemented in Department of Labor regulations (29 CFR part 3). (All contracts
               and subgrants for construction or repair)
           5. Compliance with the Davis-Bacon Act (40 U.S.C. 276a to 276a–7) as
               supplemented by Department of Labor regulations (29 CFR part 5).
               (Construction contracts in excess of $2000 awarded by grantees and subgrantees
               when required by Federal grant program legislation)




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           6. Compliance with Sections 103 and 107 of the Contract Work Hours and Safety
               Standards Act (40 U.S.C. 327–330) as supplemented by Department of Labor
               regulations (29 CFR part 5). (Construction contracts awarded by grantees and
               subgrantees in excess of $2000, and in excess of $2500 for other contracts which
               involve the employment of mechanics or laborers)
           7. Notice of awarding agency requirements and regulations pertaining to reporting.
           8. Notice of awarding agency requirements and regulations pertaining to patent
               rights with respect to any discovery or invention which arises or is developed in
               the course of or under such contract.
           9. Awarding agency requirements and regulations pertaining to copyrights and rights
               in data.
           10. Access by the grantee, the subgrantee, the Federal grantor agency, the
               Comptroller General of the United States, or any of their duly authorized
               representatives to any books, documents, papers, and records of the contractor
               which are directly pertinent to that specific contract for the purpose of making
               audit, examination, excerpts, and transcriptions.
           11. Retention of all required records for three years after grantees or subgrantees
               make final payments and all other pending matters are closed.
           12. Compliance with all applicable standards, orders, or requirements issued under
               section 306 of the Clean Air Act (42 U.S.C. 1857(h)), section 508 of the Clean
               Water Act (33 U.S.C. 1368), Executive Order 11738, and Environmental
               Protection Agency regulations (40 CFR part 15). (Contracts, subcontracts, and
               subgrants of amounts in excess of $100,000).
           13. Mandatory standards and policies relating to energy efficiency which are
               contained in the state energy conservation plan issued in compliance with the
               Energy Policy and Conservation Act (Pub. L. 94–163, 89 Stat. 871).”

Authority Internal Criteria:

The following sections of the Authority‟s internal procurement policy apply to our audit
objective.

Small Purchases

       Section 6.02(C) states, “This Policy establishes a separate Small Purchase threshold of up
       to $100,000 per purchase.” The corresponding “Authorized usage” reads, “A comparison
       with the ICE [Independent Cost Estimate] and other offers shall generally be sufficient
       determination of the reasonableness of price and no further analysis is required. If a
       reasonable number of quotes are not obtained to establish reasonableness through price
       competition, the Contracting Officer shall document price reasonableness through other
       means, such as prior purchases of this nature, catalog prices, the Contracting Officer‟s
       personal knowledge at the time of purchase, comparison to the ICE, or any other
       reasonable basis. At least 3 quotes shall be solicited orally, through fax, or by any other
       reasonable method. If less than 3 offers are made, the Contracting Officer must obtain
       documentation from those not submitting quotes stating why they elected not to
       respond.”



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Sealed Bids

      Section 6.02(D) states, “Sealed bidding is the preferred method for procuring
      construction, supply, and non-complex service contracts in excess of the $100,000
      [threshold]. Sealed bidding should be used whenever the following can be met:
            A compete, adequate, and realistic specification or purchase description is
             available;
            Two or more responsible bidders are willing and able to compete effectively for the
             business; and
            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.”

Noncompetitive Proposals

      Section 6.02(F) states, “Procurement by noncompetitive proposals (sole-source) shall be
      used only when the award of the contract is not feasible using small purchase procedures,
      sealed bids, cooperative purchasing, or competitive proposals, AND if one of the
      following applies:
            The item is available only from a single source, based on a good faith review of
              available sources;
            An emergency exists that seriously threatens the public health, welfare, or safety, or
              endangers property, or would otherwise cause serious injury, as may arise by
              reason of a flood, earthquake, epidemic, riot, equipment failure or similar event.
              In such cases, there must be an immediate and serious need for supplies, services,
              or construction such that the need cannot be met though any of the other
              procurement methods, and the emergency procurement shall be limited to those
              supplies, services, or construction necessary simply to meet the emergency;
            HUD authorizes the use of noncompetitive proposals; or
            After solicitation of a number of sources, competition is determined inadequate.”

      Section 6.02(F) also states, “Each procurement based on noncompetitive proposals shall
      be supported by a written justification for the selection of this method.” It goes on to
      state that the justification should be approved in writing by the contracting officer,
      maintained in the procurement file, and include the following information:
             Description of the requirement;
             History of prior purchases and their nature (competitive vs. noncompetitive);
             Specific exception above which applies;
             Statement as to the unique circumstances that require award by noncompetitive
              proposals;
             Description of the efforts made to find competitive sources (advertisement in trade
              journals or local publications, phone calls to local suppliers, issuance of a written
              solicitation, etc.);
             Statement as to efforts that will be taken in the future to promote competition for
              the requirement;




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Cost analysis in compliance with 24 CFR 85.36 and a declaration from the
 contracting officer stating that the cost is reasonable;
Signature by the contracting officer‟s supervisor (or someone above the level of the
 contracting officer); and
Price reasonableness. The reasonableness of the price for all procurements based
 on noncompetitive proposals must be determined by performing an analysis.




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