oversight

The Housing Authority of the City of Lowell, MA, Did Not Always Operate Its Public Housing and Recovery Act Capital Fund Programs in Compliance With HUD Regulations and Its Own Policies

Published by the Department of Housing and Urban Development, Office of Inspector General on 2013-09-04.

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

OFFICE OF AUDIT
Region 1
Boston, MA




               Lowell Housing Authority, Lowell, MA

     Public Housing and Recovery Act Capital Fund
                      Programs




2013-BO-1003                                 SEPTEMBER 04, 2013
                                         Issue Date: September 04, 2013

                                         Audit Report Number: 2013-BO-1003




TO:          Marilyn B. O’Sullivan,
             Director, Office of Public Housing, Boston Hub, 1APH

              //SIGNED//
FROM:        Edgar Moore
             Regional Inspector General for Audit, Boston Region, 1AGA

SUBJECT:     The Housing Authority of the City of Lowell, MA, Did Not Always Operate Its
             Public Housing and Recovery Act Capital Fund Programs in Compliance With
             HUD Regulations and Its Own Policies

    Attached is the U.S. Department of Housing and Urban Development (HUD), Office of
Inspector General’s (OIG) final results of our review of the Lowell Housing Authority, Lowell,
MA’s Public Housing and Recovery Act Capital Fund programs, including the force account
program.

    HUD Handbook 2000.06, REV-4, sets specific timeframes for management decisions on
recommended corrective actions. For each recommendation without a management decision,
please respond and provide status reports in accordance with the HUD Handbook. Please furnish
us copies of any correspondence or directives issued because of the audit.

    The Inspector General Act, Title 5 United States Code, section 8L, requires that OIG post its
publicly available reports on the OIG Web site. Accordingly, this report will be posted at
http://www.hudoig.gov.

   If you have any questions or comments about this report, please do not hesitate to call me at
(212) 264-4174.
                                 September 04, 2013
                                 f
                                 The Housing Authority of the City of Lowell, MA, Did
                                 Not Always Operate Its Public Housing and Recovery
                                 Act Capital Fund Programs in Compliance With HUD
                                 Regulations and Its Own Policies


Highlights
Audit Report 2013-BO-1003


  What We Audited and Why                              What We Found

We audited the Lowell Housing                         The Authority did not always operate its
Authority’s Public Housing and Recovery Act           force account modernization program in
Capital Fund programs, including its force account    compliance with HUD regulations. This
activities. We initiated this audit based on news     condition occurred because Authority
articles identifying concerns with the Authority’s    officials failed to establish adequate
use of force account labor. Our overall audit         management controls for the force
objective was to determine whether the Authority      account program to ensure that funds
(1) administered its force account modernization      were used in an economical and efficient
program in accordance with U.S. Department of         manner. As a result, more than $6.7
Housing and Urban Development (HUD) rules             million in Federal capital funds and $2.5
and regulations and (2) followed HUD                  million in Federal American Recovery
procurement regulations and its own procurement       and Reinvestment Act funds expended
policy.                                               for the force account program were
                                                      unsupported.
 What We Recommend
                                                      In addition, Authority officials did not
                                                      always follow proper procurement
We recommend that the Director of HUD’s               procedures. This condition occurred
Boston Office of Public Housing require Authority     because of ineffective management
officials to conduct an independent cost analysis     controls over the procurement process.
for each of the 14 force account activities for       As a result, officials could not assure
which the Authority failed to perform initial cost    HUD that their procurement process was
estimates and maintain construction records and       fair and equitable and that they obtained
modernization files to ensure that more than $6.7     the most favorable prices or best quality
million in capital funds and $2.5 million in          for items totaling more than $2.2 million,
Recovery Act funds charged to Federal programs        including $262,513 in American
were reasonable and supported. In addition, we        Recovery and Reinvestment Act funds
recommend that Authority officials conduct a          that were charged to Federal programs.
review to determine whether more than $2.2
million in procurement costs charged to the
Federal capital fund and Recovery Act programs
were reasonable and supported. Any costs
determined to be unreasonable or ineligible
should be reimbursed from non-Federal funds to
HUD or the U.S. Treasury in accordance with the
appropriate capital fund regulations.
                           TABLE OF CONTENTS

Background and Objective                                                     3

Results of Audit
       Finding 1: The Authority Did Not Operate Its In-House Force Account   4
                  Program In Compliance With HUD Regulations

       Finding 2: The Authority Did Not Always Follow Proper Procurement     12
                  Procedures

Scope and Methodology                                                        16

Internal Controls                                                            19

Appendixes
A.    Schedule of Questioned Costs                                           21
B.    Auditee Comments and OIG’s Evaluation                                  22
C.    Cost of Labor and Materials for Force Account – Capital Funds          32
D.    Cost of Labor and Materials for Force Account – Recovery Act Funds     33
E.    Unsupported Procurement Costs – Capital Funds                          34
F.    Unsupported Procurement Costs – Recovery Act Funds                     35




                                           2
                      BACKGROUND AND OBJECTIVE

The United States Housing Act of 1937 established the Federal framework for government-
owned affordable housing and was amended by the Quality Housing and Work Responsibility
Act of 1998. The Office of Capital Improvement is under the U.S. Department of Housing and
Urban Development’s (HUD) Deputy Assistant Secretary for Public Housing Investments. The
office administers the Public Housing Capital Fund program, which provides funds annually via
a formula to public housing agencies across the country. Public housing agencies may use
Capital Fund grants for development, financing, modernization, and management improvements.

The Lowell Housing Authority was founded in 1937 as part of President Franklin Delano
Roosevelt’s New Deal to provide safe, sanitary, and affordable housing for moderate- and low-
income persons. The Authority is a municipal corporation located in Lowell, MA, and was
established under chapter 121B of Massachusetts General Law.

The mission of the Authority is to provide decent, safe, and sanitary housing, thereby improving
the quality of life of low-income families, elderly, and disabled individuals. The Authority’s
portfolio consists of 1,698 units of Federal public housing and 198 units of State public housing.
The Authority also administers 1,246 Section 8 vouchers, 50 Department of Mental Health rental
subsidies, 50 Lowell Rental Assistance Fund Program subsidies, and 43 Massachusetts Rental
Voucher Program units.

The Authority was authorized $14.45 million in capital funds from 2008 through 2012, and $3.7
million in American Recovery and Reinvestment Act of 2009 (Recovery Act) funds. During the
period October 1, 2008, through September 30, 2012, Authority officials used capital funds and
Recovery Act funds for force account activities at 14 projects. Force account labor consisted of
unionized laborers, plumbers, carpenters, and masons. Some of the force account activities
included rehabilitation of units; kitchen and bathroom modernization, including handicap
conversions; replacement of siding and windows; and site work, such as landscaping. The total
costs were $10.6 million, with approximately 60 percent of those costs used for unit renovations
at North Common Village.

Authority officials’ decision to use the force account program was based on their judgment that
the scope of work was not complex or repetitive in nature. The overall benefit to the local
community in employing the local labor force was also taken into consideration as an important
factor when determining to use the force account program. All of the 14 force account activities
have been completed except for the ongoing unit renovations at North Common Village and the
bathroom and kitchen modernization at the George Flanagan Development.

Our overall audit objective was to determine whether the Authority (1) administered its force
account modernization program in accordance with HUD rules and regulations, and (2) followed
HUD procurement regulations and its own procurement policy.




                                                3
                              RESULTS OF AUDIT


Finding 1:        The Authority Did Not Operate Its In-House Force
                  Account Program In Compliance With HUD Regulations
The Lowell Housing Authority did not always operate its force account modernization program in
compliance with HUD regulations. Specifically, Authority officials did not (1) perform adequate
upfront planning, including preparing cost estimates and analyses; (2) maintain adequate
construction records and modernization files; and (3) provide sufficient leadership and oversight.
These problems occurred because Authority officials failed to establish adequate management
controls for the force account program to ensure that modernization funds were used in an
economical and efficient manner. As a result, work at the North Common Village development
was delayed, resulting in significant vacancy losses at the development; Authority officials were
unaware of the upfront costs of jobs; and it was difficult to assess the modernization work
performed. Also, there were deviations in the specifications of some construction work;
irregularities with purchase orders and invoices; unsupported costs; and weak controls over its
inventory of fixed assets, materials, and supplies. Therefore, we considered more than $6.7
million in capital funds and $2.5 million in Recovery Act funds expended for the force account
program to be unsupported.


 Inadequate Upfront Planning

               There was no evidence that Authority officials performed adequate upfront
               planning after deciding to use the force account program. Authority officials
               failed to (1) adequately perform cost estimate analyses for force account
               activities, and (2) properly plan renovation work to mitigate vacancy loss.
               Therefore, the Authority failed to operate its projects in such a manner as to
               promote efficiency and economy.

               Cost Estimate Analyses Not Adequately Performed

               There was a lack of documentation showing how the Authority substantiated the
               estimated cost, number of workers to be hired, estimated timeframe for
               completion of work, and total scope of work to be performed or the quantity of
               materials needed for force account activities. Although the quality of the work
               performed appeared good, it was impossible to determine whether it was more
               cost efficient to use force account labor or a general contractor because proper
               initial job cost estimates were not made. A cost analysis would benefit the
               Authority by establishing an upfront price and timeframe for completion of the
               work and should be used to establish performance standards for the progress of
               the work. The Authority’s procurement policy requires that a cost or price
               analysis shall be performed for all procurement actions.




                                               4
                 Of the 14 force account activities reviewed, only 1 had a cost analysis performed.
                 However, the analysis was incomplete and, therefore, not entirely useful in
                 determining whether using force account labor was more cost effective than
                 hiring a general contractor. An engineering firm hired by the Authority selected a
                 sample of 11 units to calculate the construction labor cost estimate to complete
                 kitchen and bath renovations at the George Flanagan development, comparing the
                 force account labor method to the general contractor method. This estimate
                 included salaries and benefits for force account workers only, but other important
                 components, such as costs of materials, project manager or superintendent
                 salaries, and workers compensation and unemployment insurance were not
                 factored into the estimate under the force account labor method. For example,
                 unemployment benefits were paid to force account workers whose employment
                 had been terminated during the past three years, but these benefits were not taken
                 into consideration when the Authority planned its payroll expenses. It is
                 important to include all potential costs in the estimated cost for a job before the
                 force account work starts because the Authority might find it is more economical
                 to use a general contractor in certain instances.

                 Improperly Planned Renovation Work Resulting in an Estimated Loss of
                 $272,598

                 Authority officials did not properly plan renovation work, which resulted in
                 vacancy losses. There were units at North Common Village that remained vacant
                 for extended periods during major renovations. A total of 116 units remained
                 vacant for 180 days or longer with only 11 units being off-line for less than 180
                 days. Authority officials stated that a 90-day cushion for renovation and
                 occupancy was not unreasonable because at one time the Authority gutted,
                 renovated, and had units ready for occupancy in 6 weeks. Based on current rents
                 and allowing for a 90-day cushion to complete renovations and have a unit ready
                 for occupancy, we estimated that the loss of revenue due to these vacancies was
                 $272,598 for fiscal years 2009 through 2012. 1 This amount represents funds that
                 could have been used for operational activities. This problem occurred because
                 units were taken offline before the force account staff was ready to begin working
                 on the units. Authority officials stated that too much control and decision making
                 was relegated to the lead carpenter, who took responsibility for providing
                 direction to laborers and masons and deciding which units to take offline and
                 schedule for renovations. HUD regulations dictate that a specific responsibility of
                 any public housing authority is to operate its projects in such a manner as to
                 promote efficiency and economy. 2




1
  The potential loss of revenue estimate is based on the number of days a unit was vacant, minus the 90-day cushion,
multiplied by the rent per day.
2
  Section 4 of the annual contributions contract.



                                                        5
    Inadequate Construction
    Records and Modernization
    Files

                The Authority had no formal modernization files and records available to show
                ongoing activities and what was accomplished with force account labor. For
                example, there were no reports showing the progress of the work, construction
                specifications, and weekly operational updates or meeting minutes. The work at
                North Common Village and the handicap conversions at Bishop Markham Village
                involved significant construction work and the replacement of most interior items.
                The work including comprehensive modernization work, electrical work, unit
                gutting, plumbing replacement, carpentry, flooring, and painting was performed
                by force account labor. We expected the same level of documentation for this
                type of work as would be maintained by a contractor if hired by the Authority.
                Therefore, Authority officials should have recorded which work items were
                performed in each unit and the scope or quantity of the work.

                HUD states that a housing authority may undertake modernization activities using
                force account labor where it is cost effective and appropriate to the scope and type
                of physical improvements.3 HUD further requires housing authorities to perform a
                cost or price analysis for each procurement. In addition, a housing authority
                should establish a system to enforce both specifications and timelines. A housing
                authority should also ensure that progress meetings are held on a regular basis to
                discuss work progress and any problems or deficiencies noted and prepare a
                written record of the items discussed at each meeting.4 HUD also states that a
                housing authority must maintain records that identify the source and application of
                funds in such a manner as to allow HUD to determine that all funds are and have
                been expended in accordance with each specific program regulation and
                requirement. 5

                Because the Authority did not develop a formal planning process, including
                determining the cost of using the force account program, and because the
                Authority had no formal modernization files and records available to show
                ongoing activities and what was accomplished with force account labor, we
                considered the total costs of more than $6.7 million (appendix C) in Federal
                capital funds and $2.5 million (appendix D) in Federal American Recovery and
                Reinvestment Act funds attributed to the 14 force account activities covering
                the period October 1, 2008, to September 30, 2012, to be unsupported.


3 HUD Handbook 7485.3G 10-2(A)
4 HUD Handbook 7460.8 REV 2, Sections 10-3, 11-3(D) and 11-2(B)
5
  Section 9(c) of the annual contributions contract




                                                   6
     Insufficient Leadership and
     Oversight

                  Authority officials did not provide adequate leadership and oversight of the
                  Authority’s force account activities. Specifically, some construction work was
                  not completed as designed, purchase orders were not adequately prepared, trash
                  removal costs were unsupported, prevailing wage rates were not followed, a
                  possible conflict of interest existed, and inventory was not properly maintained.
                  Therefore, Authority officials could not assure HUD that their force account
                  program was properly administered. Details are described below.

                  Unauthorized Deviation from Specifications

                  The lack of oversight and weak management resulted in deviation from
                  construction specifications. The failure of the Authority’s facilities coordinator
                  for special maintenance projects to follow the architect’s drawings and
                  specifications for a kitchen and bathroom handicap conversion at the Bishop
                  Markham project resulted in a unit not meeting the American Disabilities Act
                  requirements. The final construction varied from the original drawings because
                  the facilities coordinator changed certain installations in the bathroom area of one
                  unit without consulting the architect or his immediate supervisor. Authority
                  officials expressed concern regarding this matter because significant funding was
                  already expended to create the handicap units and additional costs between $6,000
                  and $10,000 will be required to bring the Bishop Markam unit into full
                  compliance with American Disabilities Act requirements. HUD stipulates that
                  “each grantee must provide, by contract or otherwise, adequate and competent
                  supervisory and inspection personnel to ensure work quality and progress during
                  modernization, whether work is performed by contract or force account labor and
                  with or without the services of an architect or engineer". 6

                  Inadequate Purchase Orders

                  Authority officials did not consistently follow established purchase order and
                  invoice procedures relating to expenditures charged to the force account Capital
                  Fund program. A total of 11 of 17 purchase orders reviewed had an invoice date
                  earlier than that of the purchase order. For 13 of the 17 vendor purchases, the
                  invoices and purchase orders lacked detail to substantiate what materials and
                  supplies were purchased or the number of hours charged. HUD regulations
                  require that a public housing authority maintain proper records of its small
                  purchases and that it is crucial that the purchase order clearly specify the
                  purchased items, services, and terms and conditions of the purchase.7

6
    24 CFR (Code of Federal Regulations) 968.140
7
    HUD Handbook 7460.8, paragraphs 5-2(A) and 5-9(B)



                                                        7
                  Unsupported Trash Removal Costs

                  Authority officials’ failure to maintain controls over the trash removal contractor
                  used for force account work resulted in $52,212 in unsupported overage costs.
                  The overage charges associated with the disposal of construction waste at North
                  Common Village consistently exceeded the base cost, and the majority of those
                  overage charges were unsupported. For example, an invoice, dated August 11,
                  2009, detailed a base cost of $1,095 for three trash containers and unexplained
                  overage charges of $1,344. The contractor began to consistently provide backup
                  invoices for the overages in July of 2010, but before that, $52,212 in overage
                  charges was unsupported.

                  Prevailing Wage Rates Not Followed

                  Authority officials did not enforce HUD labor standards for 10 companies
                  providing building products and supplies. We were informed that two of the
                  Authority’s subcontractors paid salaries below the prevailing wage rate.
                  Although Authority officials were not aware that this noncompliance had
                  occurred, they did not request payroll documentation to substantiate hourly wages
                  from the 10 companies. HUD requires public housing agencies to monitor
                  enforcement of labor standards for the payment of prevailing wage rates in all
                  contracts over $2,000 involving Federal funds. 8 Policies regarding prevailing
                  wage rates are also included in written contracts between public housing agencies
                  and contractors, but Authority officials failed to ensure that contracts were in
                  place for the 10 companies in question (See finding 2).

                  Possible Conflict of Interest

                  The son of the Authority’s facilities coordinator was hired by two of the
                  Authority’s subcontractors. Although the executive director took immediate
                  action when informed about this conflict-of-interest violation, Authority officials
                  failed to ensure that contractors were fully informed regarding conflict- of-
                  interest rules and regulations. Conflict-of-interest rules and regulations are
                  thoroughly addressed in contracts between public housing agencies and
                  contractors; however, as previously noted in our discussion of prevailing wage
                  rates, contracts were not in place.

                  Inadequate Inventory Controls

                  Authority officials did not maintain an adequate inventory system to allow proper
                  accountability for office equipment, appliances, materials, and supplies. There
8
    HUD Handbook 1344.1, Labor Standards Enforcement, section 8-8




                                                      8
                  were inconsistencies between the Authority’s practices and its written policies and
                  procedures, and also between the Authority’s practices and HUD requirements 9.
                  The Authority policy dictated that when physical counts were complete, a
                  reconciliation of variances between the inventory values and the trial balances
                  should be performed. The latest inventory count, performed on September 30,
                  2011, showed a variance of $53,270, and there was no evidence that a
                  reconciliation had been performed. We attempted to locate a sample of washers
                  and dryers, stoves, and refrigerators that should have been easily tracked to units.
                  However, an appliance inventory listing for appliances located in the units did not
                  exist and was, therefore, not included in any physical count. In addition, we
                  requested an inventory listing of the Authority’s computers, but an updated
                  inventory listing was not available. This deficiency showed that Authority officials
                  did not have procedures to keep an inventory for computers. Due to the inadequate
                  inventory records, the Authority had no assurance that important assets were
                  properly used or had not been misappropriated. We considered the $53,270 in
                  inventory variance to be unsupported.


    Conclusion

                 Authority officials did not always operate their force account modernization
                 program in compliance with HUD regulations. Specifically, a lack of adequate
                 planning delayed completion of force account activities and caused significant
                 vacancy losses at North Common Village; cost estimates and analyses were not
                 prepared before work was started, and the Authority’s force account activities were
                 not supported with construction records and modernization files, making it difficult
                 to assess the modernization work performed. In addition, poor leadership and
                 oversight led to deviations from construction specifications and contributed to
                 irregularities with purchase orders, invoices, trash removal services, labor standards,
                 conflict of interest issues, and inventory controls. We attribute these deficiencies to
                 Authority officials’ failure to establish adequate management controls for the force
                 account program to ensure that modernization funds were used in an economical and
                 efficient manner.

     Recommendations

                  We recommend that the Director of HUD’s Boston Office of Public Housing
                  require Authority officials to

                  1A.    Develop policies and procedures to adequately plan force account program
                         activities in accordance with HUD regulations, including substantiating
                         the cost effectiveness of using force account labor by performing cost
                         estimate analyses, which include salaries and applicable benefits of force



9
    24 CFR 84.34(3)

                                                   9
      account workers, project managers, and superintendents and the cost of
      materials and supplies.

1B.   Conduct an independent cost analysis for each of the 14 force account
      activities for which the Authority officials failed to perform cost estimates
      and maintain construction records and modernization files to ensure that
      $6,738,796 in capital funds charged to federal programs was reasonable
      and supported. For any amounts not reasonable and supported, HUD
      should require Authority officials to reimburse the program from non-
      Federal funds.

1C.   Conduct an independent cost analysis for each of the 14 force account
      activities for which the Authority officials failed to perform cost estimates
      and maintain construction records and modernization files to ensure that
      $2,527,524 in Recovery Act funds charged to federal programs was
      reasonable and supported. For any unreasonable amounts, HUD should
      require Authority officials to reimburse the program from non-Federal
      funds.

1D.   Establish and implement policies and procedures to properly schedule
      force account activities to prevent future losses in revenue, such as the
      $272,598 loss in revenue that occurred at North Common Village,
      attributed to unnecessary and extended vacancies.

1E.   Establish procedures to ensure that adequate records are maintained for
      modernization activities, including the detailed specifications of work
      performed at the developments.

1F.   Strengthen monitoring controls over construction projects to ensure the
      quality and progress of modernization work.

1G.   Develop controls to ensure that (1) purchase orders are prepared before
      expenditures are made, (2) purchase orders and invoices clearly specify
      service(s) needed, and (3) written contracts are properly executed for each
      procurement.

1H.   Provide documentation to support the $52,212 in overage charges
      associated with the disposal of construction waste at North Common
      Village. If adequate support cannot be provided these charges should be
      reimbursed from non-Federal funds.

1I.   Strengthen monitoring controls over the enforcement of labor standards to
      ensure that prevailing wage rates are paid in relation to all contracts over
      $2,000 involving Federal funds.




                               10
1J.   Ensure that contractors are fully informed regarding conflict-of-interest
      rules and regulations.

1K.   Reconcile the $53,270 variance from the September 30, 2011, inventory
      count and support the reconciliation. Any unsupported costs determined
      to be ineligible should be reimbursed from non-Federal funds.

1L.   Develop procedures to ensure that when the physical inventory of
      materials and supplies is complete, a reconciliation of variances between
      the inventory values and the trial balances is performed and perform
      periodic inventory counts for appliances located in units and for office
      computers.




                               11
Finding 2: The Authority Did Not Always Follow Proper Procurement
           Procedures
Contrary to regulations, Authority officials did not always follow proper procurement practices
and procedures. The types of deficiencies noted included that (1) procurements were awarded
without full and open competition, (2) independent cost estimates were not supported, (3)
requests for proposals were not prepared, (4) written contracts were not maintained, and (5)
change orders were not approved in a timely manner. These conditions occurred because
Authority officials did not implement effective management controls over the procurement
process. As a result, officials could not assure HUD that their procurement process was fair and
equitable and that they obtained the most favorable prices or best quality for items totaling more
than $1.9 million in capital funds, and $262,513 in Recovery Act funds that were charged to
Federal programs.


     Procurements Awarded
     Without Competition


                 Authority officials could not provide documentation to substantiate that the
                 Authority solicited price or rate quotations from an adequate number of sources
                 when procuring building products and supplies. For the period October 1, 2008,
                 through September 30, 2012, Authority officials paid more than $1.9 million in
                 capital funds (appendix E) and $262,513 in Recovery Act funds (appendix F) to
                 10 vendors for building products and supplies. However, they did not adequately
                 document that procurement procedures were followed allowing full and open
                 competition. Regulations require that Authority officials conduct all procurement
                 in a manner to provide full and open competition. 10 Also, Authority officials
                 must maintain records to show the history of procurement 11 and solicit price
                 quotations from an adequate number of qualified sources. 12 In addition, the
                 Authority’s procurement policy required soliciting price quotations to not only
                 achieve the most reasonable price, but also to provide increased fair access to the
                 economic opportunities created through its procurement process.

     Independent Cost Estimates
     Were Not Supported

                 Authority officials did not provide adequate documentation to support that
                 independent cost estimates were performed for five of the eight construction
                 contracts reviewed. These contracts included replacement of windows, roof

10
   24 CFR 85.36(c)(1)
11
   24 CFR 85.36(b)(9)
12
   24 CFR 85.36(d)(1)



                                                 12
                 replacement and repairs, installation of heating and hot water systems, and a
                 security gate upgrade. An independent cost estimate prepared before the receipt
                 of bids or proposals ensures that the costs are reasonable. HUD regulations
                 require that a cost or price analysis be performed in connection with every
                 procurement action before bids or proposals are received.13 In addition, the
                 Authority’s policy dictated that an independent cost estimate be prepared before
                 each solicitation.

     Requests for Proposals Were
     Not Prepared

                 Authority officials failed to prepare requests for proposals while procuring four
                 architect/engineering firms; thus, these firms were not procured in accordance
                 with HUD’s procurement procedures. As a result, we considered
                 $85,092 in capital funds and $13,800 in Recovery Act funds charged to federal
                 programs as unsupported for these four firms. HUD regulations dictate that when
                 a procurement is made by competitive proposal, the following requirements
                 apply: “(i) requests for proposals will be publicized and identify all evaluation
                 factors and their importance; (ii) proposals will be solicited from an adequate
                 number of qualified sources; and, (iii) a method must exist for conducting
                 technical evaluations of the proposals received and for selecting awardees.” 14

     Written Contracts Not
     Obtained

                 Authority officials failed to maintain written contracts or agreements with the 10
                 companies providing building products and supplies. Without a contract, it was
                 not possible to determine whether the contractor’s invoices were properly
                 submitted or whether the costs incurred by the Authority were reasonable. A
                 contract not only serves to support the agreed-upon cost, but also defines services
                 expected and describes the responsibilities of each party. Authority officials also
                 must maintain source documents and files that support the financial transactions
                 recorded in the books of account and provide an adequate audit trail. These
                 documents include such items as contracts, which were not maintained. 15

     Change Orders Not Approved
     in a Timely Manner

                 Authority officials had not established a change order policy, and change orders
                 were not approved in a timely manner for four construction projects. The change
                 orders for the four projects totaled $72,748. These projects included the

13
   24 CFR 85.36(f)
14
   24 CFR 85.36(d)(3)
15
   Public and Indian Housing Low-Rent Technical Accounting Guidebook 7510.1, section II(8)

                                                     13
                   replacement of an emergency generator, roof replacement and repairs, and
                   landscaping upgrades.

                   The replacement of an emergency generator at the Francis Gatehouse Mill
                   Development required one change in the amount of $6,456 to install wiring and
                   conduits, which was incorrectly marked on the original panel schedules. This
                   change order was not approved in a timely manner since it was approved by
                   Authority officials after the contract completion date.

                   The roof replacement at Bishop Markham Village required two change orders
                   totaling $35,492. Change order one in the amount of $7,949 was to install a
                   temporary rubber roof because the existing concrete sub roofing was causing
                   water damage and there was an approaching storm. Change order two was to
                   address the damaged concrete sub roofing at a cost of $27,543. These two change
                   orders were not approved in a timely manner since they were approved by
                   Authority officials after the contract completion date. In addition, roof repair
                   work at North Common Village required a change order in the amount of $1,800
                   to replace the existing vent pipe flashing for 18 plumbing vents, and this change
                   order also was not approved in a timely manner.

                   The unforeseen landscape upgrades at North Common Village required two
                   change orders and increased the contract price by $29,000. Change order one for
                   landscaping upgrades at North Common Village added 21 calendar days and was
                   approved by the contractor and architect on December 8, 2009, but was not
                   approved by Authority officials until January 13, 2010, which was after the
                   contract completion date of December 16, 2009, and more than 30 days after
                   December 8, 2009. Contrary to the General Conditions for Construction
                   Contracts, the Authority did not act on change order one within 30 days, and the
                   contractor went ahead with the work before approval from the contracting
                   officer 16. In addition, change order two increased the time by 132 days. The
                   adjusted completion date of the contract was January 6, 2010, and change order
                   two extended the completion date until May 18, 2010. However, change order
                   two was not approved by the contractor and the architect until June 4, 2010, and
                   was not approved by Authority officials until June 16, 2010; thus, all of the
                   approvals were well after the adjusted contract completion date of January 6,
                   2010. Accordingly, we considered $37,256 in capital funds and $35,492 in
                   Recovery Act funds paid for change orders to be unsupported costs.

     Conclusion

                   Authority officials did not always follow proper procurement procedures.
                   Specifically, Authority officials did not (1) award procurements with full and
                   open competition, (2) provide adequate documentation to support that
                   independent cost estimates were performed, (3) prepare requests for proposals,

16
     General Conditions for Construction Contracts, form HUD-5370, clause 29(h)

                                                        14
          (4) maintain written contracts, and (5) approve change orders in a timely manner.
          As a result, there was no assurance that the Authority’s procurement process was
          fair and equitable and that it obtained the most favorable prices or best quality for
          items totaling more than $1.9 million, including $262,513 in Recovery Act funds,
          which were charged to Federal programs. These violations occurred because
          Authority officials did not implement effective management controls over the
          Authority’s procurement process.

Recommendations

          We recommend that the Director of HUD’s Boston Office of Public Housing
          require Authority officials to

          2A. Develop and implement procedures to ensure that the Authority documents
              that independent cost estimates are performed, solicits price quotes or bids,
              publicizes requests for proposals, and maintains sufficient documentation
              supporting the basis for contract awards.

          2B. Develop and implement procedures to ensure that written contracts are
              properly executed.

          2C. Develop and implement a change order policy in compliance with Federal
              procurement requirements.

          2D. Conduct a review to determine whether the $1,959,594 in procurement costs
              charged to the Federal capital fund program was reasonable and supported.
              Any costs determined to be unreasonable or ineligible should be reimbursed
              from non-Federal funds to HUD or the U.S. Treasury in accordance with the
              appropriate capital fund regulations.

          2E. Conduct a review to determine whether the $262,513 in procurement costs
              charged to Federal Recovery Act program was reasonable and supported.
              Any costs determined to be unreasonable or ineligible should be reimbursed
              from non-Federal funds to HUD or the U.S. Treasury in accordance with the
              appropriate capital fund regulations.




                                           15
                         SCOPE AND METHODOLOGY

We performed our onsite audit work at the Authority’s main office located at 350 Moody Street,
Lowell, MA, from October 2012 to April 2013. Our audit generally covered the period October
1, 2009, to September 30, 2012, and was extended when necessary to meet our objective. We
relied in part on computer-processed data primarily for obtaining background information on the
Authority’s expenditure of capital funds. We performed a minimal level of testing and found the
data to be adequate for our purposes.

To accomplish our audit objective, we

   •   Reviewed applicable laws, regulations, HUD handbooks, HUD notices, and the Authority’s
       policies and procedures.

   •   Conducted discussions with Authority officials to gain an understanding of the Authority’s
       financial structure, procurement practices, Capital Fund program, and force account process.
   .
   •   Reviewed Real Estate Assessment Center inspection reports to identify physical
       deficiencies that may require an increased need for capital expenditures.

   •   Evaluated internal controls and reviewed computer controls to identify potential
       weaknesses related to our objective.

   •   Reviewed records of the Authority’s board minutes, independent public auditor’s reports,
       and written HUD monitoring reviews of the Authority’s Capital Fund program.

   •   Evaluated the Authority’s allocation plan to determine whether the allocation of costs
       between HUD and State programs was reasonable.

   •   Reviewed credit card charges for assurance that charges were reasonable, eligible, and
       adequately supported.

   •   Determined whether the Authority generally complied with its 5-year action plans and
       expended funds in accordance with its annual statements.

   •   Determined whether the Authority’s identification of modernization needs was consistent
       with significant facts and data pertaining to the physical and operational condition of the
       developments or management and operations of the Authority.

   •   Reviewed the Authority’s practices for handling inventory of nonexpendable equipment,
       materials, and supplies to determine whether the Authority managed and controlled its
       inventory effectively and efficiently.




                                                16
•   Ensured that the Authority obtained building permits and performed inspections as
    required by the Massachusetts Building Code and determined whether there was
    improper handling of asbestos and lead paint.

•   Evaluated the Authority’s procurement practices by selecting for review a sample of five
    procurements (totaling more than $1.7 million) based on high dollar amounts from a
    universe of 25 procurements (totaling more than $3 million) for the period October 1,
    2008 to September 30, 2012.

•   We selected a sample of 16 units for inspection to ensure the quality and consistency of
    the force account work. Using a random number generator, we selected 9 units to
    inspect from a universe of 132 units renovated at North Common Village and selected 4
    units to inspect from a universe of 24 units renovated at the George Flanagan
    development. We decided to select a nonstatistical sample of three of the total universe
    of six handicapped units renovated at Bishop Markham Village. The nonstatistical
    sample represented a sample of units selected without conscious bias.

•   We also selected a sample of 17 cost items (totaling $126,027) from a universe 433 cost
    items (totaling $643,664), representing 4 vendors that the Authority reported were not
    following proper procurement procedures. The selection was based on the largest cost
    items for four vendors providing materials, supplies, and services for force account
    activities for the period October 1, 2008, to September 30, 2012. We evaluated the cost
    items to determine whether charges were properly supported with purchase orders,
    invoices, and checks and whether the Authority executed contracts and solicited price
    quotes and bids.

•   In addition, we selected a sample of 33 cost items (totaling $189,440) from a universe of
    3,802 cost items (totaling $1,601,921) representing an additional 6 vendors that the
    Authority reported were not following proper procurement procedures. The selection
    was based on the largest cost items for six vendors providing materials, supplies, and
    services for force account activities for the period October 1, 2008, to September 30,
    2012. We evaluated the cost items to determine whether charges were properly
    supported with purchase orders, invoices, and checks and whether the Authority executed
    contracts and solicited price quotes and bids.

•   For review of salaries, we decided to concentrate on Recovery Act funds due to the
    attention the Recovery Act receives from HUD’s Office of Inspector General (OIG) and
    the 2008 program year funds because these were the oldest funds identified in the
    financial records covering the period October 1, 2008, to September 30, 2012. We
    identified the salaries charged to completed force account activities for Recovery Act and
    2008 program funds. Of the eight completed activities, we focused on the three activities
    with the largest salaries to determine whether the salaries were adequately supported. We
    selected a sample of 6 weekly payrolls, representing salaries totaling $58,187, from a
    universe of 161 weekly payrolls, representing salaries totaling $870,218. The sample
    selection was based on the largest two weekly payrolls for each of the three force account
    activities for the period October 1, 2008, to September 30, 2012.


                                            17
We conducted the audit in accordance with generally accepted government auditing
standards. Those standards require that we plan and perform the audit to obtain sufficient,
appropriate evidence to provide a reasonable basis for our findings and conclusions based on
our audit objectives. We believe that the evidence obtained provides a reasonable basis for
our findings and conclusions based on our audit objectives.




                                           18
                              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:

                  •   Program operations – Policies and procedures that management has
                      implemented to reasonably ensure that a program meets its objectives.

                  •   Compliance with laws and regulations – Policies and procedures that
                      management has implemented to reasonably ensure that the use of funds is
                      consistent with laws and regulations.

                  •   Safeguarding resources – Policies and procedures that management has
                      implemented to reasonably ensure that funds are safeguarded against
                      waste, loss, and misuse.


               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.




                                                 19
Significant Deficiencies

             Based on our review, we believe that the following items are significant deficiencies:

                 •   Authority officials did not have adequate controls over program
                     operations when they failed to develop a formal planning process,
                     including preparing upfront cost estimates for the Authority’s force
                     account activities, and did not maintain adequate construction or
                     modernization records and files regarding its force account activities. In
                     addition, Authority officials’ lack of oversight of force account labor
                     resulted in deviation from field specifications (see finding 1).

                 •   Authority officials did not have adequate controls over compliance with
                     laws and regulations when they failed to follow purchase order
                     procedures, prevailing wage rates, conflict-of-interest regulations, and
                     Federal procurement regulations (see findings 1 & 2).

                 •   Authority officials did not have adequate controls over safeguarding
                     resources because they charged unsupported costs to Federal programs,
                     awarded procurements without competition, and failed to maintain an
                     adequate inventory system to allow for proper accountability of office
                     equipment, appliances, materials, and supplies (see findings 1 & 2).




                                              20
                                    APPENDIXES

Appendix A

                 SCHEDULE OF QUESTIONED COSTS


             Recommendation           Unsupported
                 number                    1/
                     1B               $6,738,796

                     1C                $2,527,524

                     1H                   $52,212

                     1K                   $53,270

                     2D                $1,959,594

                     2E                 $262,513
                          Total      $11,593,909


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.




                                             21
APPENDIX B

                 AUDITEE COMMENTS AND OIG’S EVALUATION

Ref to OIG Evaluation                   Auditee Comments



                                       Lowell Housing Authority

                                     350 Moody Street, PO Box 60

                                 Lowell, Massachusetts 018353-0060



            August 7, 2013

            Mr. Edgar Moore
            Regional Inspector General for Audit
            U.S. Department of Housing and Urban Development
            Office of Inspector General
            New York-New Jersey Office
            26 Federal Plaza- Room 3430
            New York, NY 10278-0068

            Dear Mr. Moore:

                   Thank you for sending a copy of the Office of Inspector General for
            Audit’s draft audit report, and for meeting with us on July 31, 2013 to review
            its contents. We appreciate the time and effort that your staff has devoted to
            developing the draft report. We thank you for the opportunity to provide a
            written response.

                    To be clear, the Lowell Housing Authority concurs with a number of
            the items contained in the report. These include issues our agency identified
            through its own audit and oversight procedures prior to this audit
            engagement. While the Lowell Housing Authority acknowledges the two (2)
            audit findings, we will provide documentation and evidence both in this
            response and subsequently to our HUD field office that demonstrates we
            have acted on many of the audit issues. We have provided, as an
            attachment, two relatively brief responses, one for each of the two findings in
            the report. We believe this information will validate that the Board of
            Commissioners and Executive staff have exercised leadership and taken the
            necessary steps to address modernization and procurement issues.

                   This response is written from the perspective that a number of events
            occurred at the Lowell Housing Authority during the four-year audit period of
            2008 through 2012. We feel it is necessary to understand this context in
            assessing the items mentioned and the measures instituted by the LHA

                                          22
Ref to OIG Evaluation                   Auditee Comments



             prior to the audit report. In retrospect, more attention should have been
             focused on systems rather than relying on the knowledge and experience of
             individuals in leadership positions whose credentials would convey possession
             of the experience and judgment required while overseeing the activities in
             question, but who proceeded with too much informality and degree of freedom.
             It should be noted that former personnel believed they were acting in the best
             interest of the LHA and that no fraudulent use of funds has been alleged or
             found.

                   In the Report a number of recommendations are listed starting on page 9
             of the document. Some of the issues that underlay these recommendations
             have already been addressed in manners that will avoid their repletion. We
             anticipate that even though done on a post audit basis, the LHA will be able to
             confirm that choices made and the value obtained through the use of a force
             account approach did maximize overall value and were more cost effective than
             a formal bidding process that relied on third party general contractors with their
             mark-ups and overhead factors. Going forward, should we determine to use
             force account methods again to stretch our limited resources or to be
             responsive to a “lumpy” pipeline of work such as that created by relying on unit
             vacancies rather than relocation with all its added costs and complexities, we
             have moved towards an overall system that will allow us to connect the dots
             from the first decision to the last action. This would not be just to protect the
             agency from outside criticism, an important consideration at all times, but more
             so for our own benefit as frontline decision-makers.

                   These measures demonstrate our leadership and commitment to
             improving LHA procurement and modernization practices. We are confident
             that the LHA will adequately address and substantiate unsupported costs that
             the audit report notes. We look forward to working with HUD to ensure that the
             LHA operates at the highest level of efficiency and regulatory compliance with
             matters of procurement and modernization.



             Sincerely,

             // SIGNED //

             Dr. Gary K. Wallace

             Executive Director




                                            23
Ref to OIG Evaluation                      Auditee Comments



              Attachment 1

              Lowell Housing Authority Response to Audit Finding 1 – The Authority
              Did Not Always Operate Its in-house Force Account Program in
              Compliance with HUD Regulations.

              This finding consisted of three subparts:
              Inadequate Upfront Planning
              Inadequate Construction Records and Modernization Files
              Insufficient Leadership and Oversight

                    In 2008, the Lowell Housing Authority initiated a major renovation at
               the North Common Village Development, the oldest public housing
               development in the Commonwealth of Massachusetts using amounts from
               our Capital Fund Program (CFP) Grants with a total value of $6,676,931.

                     The scope of work included a complete renovation of the units in
               three story buildings within the development. The goal of this project was
               to remediate mold issues, improve ventilation, and modernize plumbing
               and electrical systems to improve the quality of life of our residents. Other
               major projects performed during the period of the Audit included
               replacement of all windows at North Common Village and Bishop Markham
               Village, exterior siding replacement at the George Flanagan Development
               and extensive site improvements and the creation of additional handicap
               accessible units at various developments. This work was funded by both
               Capital Fund Program Grants and the American Reinvestment and
               Recovery Act (ARRA) modernization Grant.

                      The key issue which seems to underlay the three major components
Comment 1      of this finding is the lack of suitable documentation to allow the Auditors to
               determine value of the choices made by the LHA when compared to other
               choices.

                     There is no question that in many locations including Section 9C of
               the current version of the Consolidated Annual Contribution Contract (form
               HUD 53012A) it is stated that an “HA shall maintain records that identify the
               source and application of funds in such a manner as to allow HUD to
               determine that all funds are and have been expended in accordance with
               each specific program regulation and requirement”. However, the
               recordkeeping requirements for different

                                                                                   Page 1




                                               24
Ref to OIG Evaluation                      Auditee Comments




               activities vary in terms of the nature of the activity and specific HUD guidance.

                     In the narrative for the sub-finding of inadequate construction and records
               and modernization files, the Finding cites HUD Handbook 7417.1, which is the
               Development Handbook. This Handbook, first published in 1980, has been
Comment 2      canceled by HUD and is not even carried as guidance or for reference in
               HUDCLIPS, which is the HUD maintained database for program reference
               materials including current regulations, Handbooks, Guidebooks, Administrative
               Notices and current OMB cleared forms. The Development handbook pertains to
               new construction or acquisition rehabilitation of units being brought into the
               program for the first time. The Development handbook does not nor was
               intended to cover modernization activities or extraordinary maintenance activities.
               Development is not modernization, and we would never use a force account
               approach for development.

                      We do not dispute that the force account program should have been
               initiated with fully formed documentation systems so that an exact scope could be
               documented for each unit or project assigned to the force account program.
               However, the assertion that all the activities funded out of modernization sources
Comment 3      required documents “similar to those for new construction” as well as full formal
               written specifications broken down into trade categories, while true of new
               construction or substantial rehab of units being acquired under 24 CFR 941,
               these requirements are not true of a force account program.

                      This is not to say that development of a scope of work, a cost estimate and
               full documentation of labor, labor payments and materials expended on each unit
               is not necessary and appropriate. The LHA should have been more complete in
               its recordkeeping in the time frame covered by the Audit, but force account is a
               method to allow an HA to serve as its own general contractor for “vanilla” or
Comment 4      standard physical renewal projects – standard in that no major structural
               modifications were required and existing items were replaced with new but
               essentially identical items. Maintenance staff members commonly replace unit
               elements such as kitchens and bathrooms in full or in part as part of their
               standard duties. They also, within their skill sets, do extensive renovations when
               merited including wall board replacement, flooring replacement, siding
               replacement and window replacement. Many large HAs have licensed
               maintenance staff that can perform electrical and plumbing work on an
               extraordinary maintenance basis without use of outside contractors. This work is
               often done without architectural specifications and drawings if the activity involves
               replacing existing design elements with new but essentially

                                                                                          Page 2




                                              25
Ref to OIG Evaluation                      Auditee Comments



              Identical elements. Force account is essentially extraordinary maintenance with
              staff levels supplemented by project specific additional staff.

                     Through the Force Account labor program, the LHA sought to achieve the
              dual goals of maximizing the ability to target dollars to materials and direct trades
              labor and to minimize resources lost to mark-ups such as fees and overhead.
              Inspections performed by architectural and engineering firms and the receipt of
              certificates of occupancy from the City of Lowell Division of Inspectional Services,
              verified that the work was of good quality and code compliant.

                    We recognize that from the top down more emphasis should have been
Comment 5     placed on the development of better formal internal controls to allow the Executive
              Office to evaluate that the intended goals of using force account were being met
              and to be able to justify the use of force account to 3rd parties such as HUD’s
              auditors and others, but the flow of renovated units at North Common Village and
              the other projects that were ongoing at the same time were providing proven
              results. The downside of being your own general contractor is that when errors are
              made, they must be absorbed internally. Nevertheless, the LHA is ready to follow
              the recommendations on page 9 of the Audit Report and to work closely with the
              local Field Office to substantiate and support the value of the work done through
              the use of Force Account.



              Lowell Housing Authority Response to Audit Finding 2 –
              The Authority Did Not Always Follow Proper Procurement Procedures

              This finding consisted of five subparts:

              Procurement Awarded Without Competition
              Independent Cost Estimates Were Not Supported
              Requests for Proposal Were Not Prepared
              Written Contracts Were Not Prepared
              Change Orders Not Approved in a Timely Manner

                    Our response to Finding #1 identifies that an expectation that all
              modernization should be subject to full development of specification and bid
              documents by 3rd parties is not always relevant to how modernization work is done
              by HAs nor required for the modernization program. This is instantiated by the
Comment 3     information in Chapter 10 of 7485.3G, the Capital Grant Program Guidebook in
              which Force Account is listed as an acceptable method for use of modernization
              funds. A requirement for full development of bid documents is not found in the
              Guidebook in

                                                                                         Page 3



                                               26
Ref to OIG Evaluation                     Auditee Comments




              terms of a requirement for the use of force account. This does not mean that
              upfront planning and ongoing determinations of the cost effectiveness of force
Comment 6     account rather than full invitation for Bid (IFB) was not pertinent and was
              certainly a weakness at the onset of the review period back in 2008 when the
              availability of ARRA resources required a very fast process for obligation and
              expenditures.

                       We add to the point that force account documentation did not have to
              rise to the level of IFB documentation with a second point that pertains to HUD’s
              small purchase threshold of $100,000 as described in 24 CFR 85.36(d). Small
Comment 7     purchases, as defined by HUD, do not require formal requests for proposals or
              invitation for bid. The Authority is also subject to the more stringent
              requirements of Massachusetts, specifically MGL 30B, where three verbal
              quotes for purchases up to $25,000 is a permitted practice. There are at least
              four items listed in Appendix C that fall below the $25,000 threshold just by the
              total shown, as well as two of the four A/E contracts referenced in Appendix E
              and F.

                      There are certainly individual activities that exceed the small purchase
              threshold listed in Appendix C. Small purchases do not require formal contracts.
              They can be documented using a purchase order format. We raise these points
              because we find that the report narrative does not seem to acknowledge that
Comment 8     there are streamlined and less burdensome procurement methods allowed
              under federal regulation than promoted in the Audit Report. In addition, the
              presentation of the dollar amounts listed in Appendix C does not provide a clear
              understanding that the events over the four year period covered by the Audit
              Report have in most cases been rolled up into the large sums shown. The
Comment 9     actual purchases are a series of smaller procurements, most under the $25,000
              level. This is certainly the case for the unit renovations at North Common
              Village, which is shown as a lump sum in Appendix C of over $6.7M. The
              procurement needs arose as units became vacant on an unpredictable and
              random basis over time.

                      Despite the above comments, the LHA did recognize starting in 2009 that
              improvements were needed in the overall procurement process, some of which
              were systems and some of which were having the correct staff skills and attitude
              in the correct locations within the pertinent line departments. HUD’s asset
              management systems and guidance promote decision making on purchases and
              expenditures to be as decentralized as possible. Decentralization creates
Comment 10    internal control challenges. Within this same year, internal control issues related
              to procurement and force account were identified by the Executive Director,
              Assistant Executive Director and the

                                                                                  Page 4



                                              27
Ref to OIG Evaluation                      Auditee Comments




               Chief Financial Officer. At that time, a comprehensive review was undertaken
               and followed by corrective action plans to provide better oversight, improve
               communication and establish formalized practices and procedures to ensure
               compliance.

                      Beginning in July, 2010, a Best Practice Audit was performed by the Chief
               Financial Officer and resulted in a proposal to completely overhaul then existing
Comment 10     procurement and modernization practices and procedures. As a result of this
               study and recommendation, the Executive Director and Assistant Executive
               Director adopted a key proposal and created a new position, Auditor and
               Compliance Officer, to test administrative systems for weaknesses, establish
               policy, internal controls and implement improvements.

                      Also in 2010, the Executive Director and Board of Commissioners
               established agency goals to train staff on State and Federal procurement laws.
               This included training and certification through the Massachusetts Office of the
Comment 10
               Inspector General, Massachusetts Operational Services Division and advanced
               HUD procurement and contracting training offered by industry experts. The
               Authority hosted a HUD procurement seminar that was attended by key LHA
               staff as well as other Public Housing Authorities from various states.

                      In early 2011, the Authority began its next level of refinement which
               included a reorganization of positions and responsibilities within the
               procurement and facilities departments that was triggered by the departures of
               departmental leaders in key areas that relied heavily on procurement policy and
               procedures, materials management and modernization administration. Key
               positions that were vacated included the Deputy Director of Facilities and
               Capital Planning, the Purchasing and Inventory Officer and the Executive
Comment 10
               Secretary of Facilities. Additionally, duties of other Facilities Departmental staff
               were redistributed to improve segregation of duties and internal controls.

                     At the conclusion of the data collection period for this Audit Report, the
               Authority hired a highly experienced, certified public procurement official with a
               law degree to assume the daily duties of Chief Procurement Officer. The
               Authority also created a new position of Assistant Director of Capital Planning
               and hired a professional who possesses a valid construction supervisor’s
Comment 10     license and holds a degree in construction management.

                     Our team of newly hired and credentialed professionals in combination
               with our organizational realignment of the procurement and construction
               management functions addresses the weaknesses that his Audit Report
               documented in our procurement and

                                                                                           Page 5



                                               28
Ref to OIG Evaluation                     Auditee Comments




               modernization departments. We are ready to implement additional improvements to
               existing policy and procedures to fulfill the recommendations offered in the Audit
               Report.

                      We believe that the actions described above demonstrate that our leadership is
Comment 10      responsive to our challenging and changing operating environment and our
                commitment to improving LHA procurement and modernization procedures. We are
                confident that the LHA will working in tandem with the local Field Office Staff address
                and substantiate the unsupported costs documented in this Audit Report.




                                                                                          Page 6




                                              29
                            Evaluation of Auditee Comments

Comment 1   Authority officials believe that their key issue is the lack of adequate
            documentation. However, while there was inadequate documentation, we also
            found inadequate planning, construction work that was not completed as designed,
            lost revenue due to extended vacancies, purchase orders dated after invoices,
            unsupported costs, and inadequate inventory records.

Comment 2   Based on the Authority’s concerns, we adjusted the report to reflect the criteria at
            handbook 7485.3G and 7460.8.

Comment 3   Authority officials interpret the finding as saying that all activities funded with
            modernization funds should be documented similar to those in new construction,
            which they believe is not true for the force account program. However, the
            renovations at North Common Village and the handicap conversions at Bishop
            Markham Village involved significant construction work including comprehensive
            modernization work, electrical work, unit gutting, plumbing replacement,
            carpentry, flooring, and painting. Regulations require the same level of
            documentation for this type of work as would be maintained by any contractor
            hired by the Authority. Our audit determined that the Authority lacked records
            that showed what was accomplished with force account labor.

Comment 4   Authority officials acknowledge that their recordkeeping for force account
            activities should have been better, but they believe that they conducted standard
            repair work that did not require detailed specifications. Nevertheless, as shown in
            comment 3 above, the work was extensive and required better documentation.

Comment 5   Authority officials acknowledge that they should have developed better internal
            controls and they are ready to begin working with the HUD field office and
            implement our recommendations.

Comment 6   Authority officials state that their lack of upfront planning and failure to determine
            the cost effectiveness of force account was a weakness back in 2008. Our audit
            showed that a lack of upfront planning and a failure to determine the cost
            effectiveness of force account were prevalent from 2008 through 2012.

Comment 7   Authority officials state that the Capital Grant Program guidebook (7485.3G) does
            not mention the development of bid documents for force account activity. They
            further state that HUD’s small purchase threshold ($100,000) under 24 CFR 85.36
            (d) does not require bidding and that in some cases the more stringent
            Massachusetts law (MGL 30B) applies to purchases under $25,000, requiring only
            verbal quotes; thus they cite 4 cases that were below $25,000. Although 24 CFR
            85.36 may not require bidding for force account labor, the regulations are
            applicable to the building products and supplies acquired for force account. The
            Authority paid three companies in excess of $100,000 for building products and
            supplies and another five companies in excess of $200,000. In fact, the Authority
            paid one of the five companies over $630,000 without solicitation of bids or price
                                              30
                   quotations. Authority officials could not show the basis for selecting this company
                   or any of the other building suppliers. HUD also requires that housing authorities
                   follow applicable State or local laws on procurement if stricter than Federal
                   standards. 17 Massachusetts requires that the award of procurements in the amount
                   of $25,000 or more shall conform to the competitive bidding procedures.
                   Regarding the amounts listed on the appendixes that are below $25,000,
                   Massachusetts requires quotes from three vendors, orally or in writing. A housing
                   authority is required to record the names and addresses of all persons contacted for
                   quotes, names of all persons that submitted quotes, and the date and amount of
                   each quote. 18 The Authority failed to comply with these requirements.

Comment 8          We acknowledge that the amounts reflected in Appendixes E and F include a series
                   of small procurements. However, as we explained in Comment 7 regarding
                   procurements under $25,000, Massachusetts requires quotes from three vendors,
                   orally or in writing. In addition, Massachusetts requires that a housing authority
                   record the following: (1) names and addresses of all persons contacted for quotes,
                   (2) names of all persons that submitted quotes, and (3) the date and amount of each
                   quote. 24 Code of Regulations (CFR) 85.36 on procurement states that, if small
                   procurements are used, price or rate quotations will be obtained from an adequate
                   number of qualified sources. In addition, we emphasize that the Authority’s
                   practice of purchasing building materials and supplies on an as needed basis did
                   not ensure that they were obtaining the most economical price. 24 CFR 85.36
                   states that to foster greater economy and efficiency, grantees and sub grantees are
                   encouraged to enter into State and local intergovernmental agreements for
                   procurement or use of common goods and services. Authority officials did not
                   provide OIG any evidence that they adhered to Massachusetts requirements or
                   HUD regulations.

Comment 9          Authority officials state that the total purchases in the report represent purchases,
                   most under the $25,000 level, incurred over a four year period. However, as noted
                   in comments 7 and 8, Authority officials failed to follow HUD regulations
                   regarding purchases under $25,000. Also, the Authority’s pattern of purchasing
                   building materials and supplies from many companies on an as needed basis is
                   generally not the most economical practice.

Comment 10 We acknowledge Authority officials efforts to address the weaknesses identified
           and appreciate their willingness to fulfill the recommendations of the audit report.




17
  This is found in HUD Handbook 7460.8 REV 2, Procurement Handbook for Public Housing Agencies, Chapter 1,
Section 1.3

18
     This is found in Chapter 30B of the Massachusetts General Laws, Uniform Procurement Act,



                                                         31
Appendix C

     COST OF LABOR AND MATERIALS FOR FORCE ACCOUNT
                     CAPITAL FUNDS


#     Development                     Description of work             Status          Total cost
1     North Common Village            Dwelling unit                   Ongoing                $6,593,421
                                      rehabilitation
2     Bishop Markham Village          Window replacement              Completed                 $200,575
      Development and North
      Common Village
      Development
3     George Flanagan                 Building siding                 Completed                   $91,368
      Development
4     George Flanagan                 Kitchens and baths              Ongoing                   $357,721
      Development
5     Bishop Markham Village          Kitchens and baths –            Completed                 $329,661
      Development                     handicap
6     North Common Village            Site – walks, drives,           Completed                   $83,510
                                      railing, landscaping
7  Francis Gatehouse                  Repoint brick                   Completed                   $52,968
8  Father Norton Manor                Exterior painting               Completed                   $51,985
9  George Flanagan                    Site – walks, drives,           Completed                   $43,285
   Development                        railing, landscaping
10 Bishop Markham Village             Site – walks, drives,           Completed                   $24,640
   Development                        railing, landscaping
11 Francis Gatehouse                  Kitchens and baths –            Completed                   $19,271
                                      handicap
12 Dewey Archambault                  Site – walks, drives,           Completed                   $15,694
   Towers                             railing, landscaping
13 Francis Gatehouse                  Site – walks, drives,           Completed                       $706
                                      railing, landscaping
      Less                                                                                ($1,126,009) 19
                                                                       Total cost            $6,738,796




19
  The $1,126,009 amount represents a portion of the unsupported costs reported in finding 2 because the Authority
failed to solicit price quotations and implement contracts with these nine vendors providing building products and
supplies. Therefore, to avoid double-counting, we have reduced the total cost amount of $7,864,805 by $1,126,009,
leaving $6,738,796 as questioned costs in finding 1 based on the Authority’s failure to operate its force account
program in compliance with HUD regulations.


                                                        32
Appendix D

      COST OF LABOR AND MATERIALS FOR FORCE ACCOUNT
                    RECOVERY ACT FUNDS


#  Development                    Description of work         Status          Total cost
1  Bishop Markham                 Window                      Completed                        $1,125,640
   Village Development            replacement
2 North Common                    Window                      Completed                          $381,795
   Village Development            replacement
3 George Flanagan                 Building siding             Completed                        $1,140,310
   Development
14 Father Morrissette             Painting                    Completed                         $93,00020
                                                                                             ($213,221)21
                                                               Total cost                     $2,527,524




20
  The above activities in this appendix overlap with the activities in Appendix C, except for activity 14. This
activity represents the painting work at Father Morrissette that was paid for exclusively with ARRA funds and
therefore, is not shown on appendix C. Thus, the 13 activities in Appendix C plus activity 14 in Appendix D total
the 14 force account activities as discussed in the finding.
 21
    The $213,221 amount represents a portion of the unsupported costs reported in finding 2 because Authority
 officials failed to solicit price quotations and implement contracts with these nine vendors providing building
 products and supplies. Therefore, to avoid double-counting, we have reduced the total cost amount of $2,740,745
 by $213,221, leaving $2,527,524 as questioned costs in finding 1 based on Authority official’s failure to operate
 its force account program in compliance with HUD regulations.




                                                         33
Appendix E

                   UNSUPPORTED PROCUREMENT COSTS
                           CAPITAL FUNDS


 Number                              Entity or project                                Unsupported
                                                                                         costs
                      Building products and supply vendors
      1       Frank McCartin, Inc.                                                               $630,796
      2       Diamond Vic’s Plumbing                                                             $223,314
      3       MacDonald Cabinet & Countertop                                                     $213,123
      4       Harvey Industries                                                                   $12,368
      5       Dracut Appliance Center                                                            $202,958
      6       West Tewksbury Contractors                                                         $174,532
      7       F.W. Webb                                                                          $162,286
      8       Marc L’Heureux                                                                     $153,933
      9       Burl Fence Company                                                                  $68,100
     10       Harmon’s Paint                                                                      $48,049
                                Subtotal 10 vendors                                            $1,889,459

                           Architectural design firms
     1        Weston and Sampson                                                                   $47,100
     2        Avid Engineers                                                                       $27,817
     3        Nagle Engineering Inc.                                                               $10,174
                    Subtotal three architectural design firms                                      $85,091

                          Construction change orders
     1        Landscape upgrades at North Common Village                                           $29,000
     2        Replacement of the emergency generator at the Francis                                 $6,456
              Gatehouse Mill Development
     3        North Common Village roof repair – phase 3                                            $1,800
                          Subtotal three change orders                                            $37,256
                                                                                                (52,212) 22
                                                                      Total cost               $1,959,594




22
   An amount of $52,212, representing overage charges for trash removal provided by West Tewksbury Contractors,
is reported separately in finding 1 (recommendation 1h) as unsupported costs. Therefore, to avoid double-counting,
we have reduced the total cost amount of $2,011,806 by $52,212, leaving the remaining $1,959,594 as unsupported
costs reported in finding 2.


                                                       34
Appendix F

             UNSUPPORTED PROCUREMENT COSTS
                   RECOVERY ACT FUNDS


Number                     Entity or project                      Unsupported
                                                                     costs
                 Building products and supply vendors
  1      Frank McCartin, Inc.                                              $3,631
  2      Harvey Industries                                               $200,751
  3      Marc L’Heureux                                                    $1,500
  4      Harmon’s Paint                                                    $7,339
                         Subtotal four vendors                           $213,221

                        Architectural design firms
         Jeffrey J. Cook Architects, Inc.                                 $13,800

                     Construction change orders
         Bishop Markham Village roof replacement                          $35,492

                                                     Total cost          $262,513




                                          35