oversight

HUD's Approval of the City of High Point's Use of a 15 Percent Margin for Procurement Bids

Published by the Department of Housing and Urban Development, Office of Inspector General on 2015-08-25.

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

                                                U.S. DEPARTMENT OF
                                HOUSING AND URBAN DEVELOPMENT
                                         OFFICE OF INSPECTOR GENERAL



                        
 
                                                    August 25, 2015
                                                                                               MEMORANDUM NO:
                                                                                               2015-AT-0801



Memorandum
TO:           Renee Ryles, Director of Office of Field Management, Office of the Deputy
              Assistant Secretary for Operations, DOF

              //signed//
FROM:         Nikita N. Irons, Regional Inspector General for Audit, 4AGA

SUBJECT:      HUD’s Approval of the City of High Point’s Use of a 15 Percent Margin for
              Procurement Bids


                                            INTRODUCTION

We reviewed the U.S. Department of Housing and Urban Development’s (HUD) Greensboro,
NC, Office of Community Planning and Development’s approval of the City of High Point’s use
of a 15 percent cost estimate margin. The review was performed based on indicators identified
in an audit of the City’s lead-based paint hazard control grant. The Office of Healthy Homes and
Lead Hazard Control requested that we conduct a review of the City’s 2008 and 2011 lead-based
paint hazard control grants after its May 2013 review of the City’s 2008 and 2011 grants. We
found that the City used a 15 percent cost estimate margin to exclude bidders outside the margin
from the selection process. The objective of this review was to determine whether HUD
knowingly allowed the City to use the 15 percent margin.

This memorandum contains one recommendation for corrective action. 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 this review.




                                                 Office of Audit Region 4
                                  75 Spring Street SW., Room 330, Atlanta, GA 30303
                                       Phone (404) 331-3369, Fax (404)730-2382
                           Visit the Office of Inspector General Web site at www.hudoig.gov.
                                METHODOLOGY AND SCOPE

To accomplish our objective, we

      Reviewed applicable criteria, including 24 CFR (Code of Federal Regulations) 85.36,
       Federal procurement regulations, and North Carolina General Statute, NC GS 143,
       Article 8, Public Contracts;
      Interviewed HUD officials and City personnel;
      Reviewed the City’s procurement records; and
      Reviewed 14 lead-based paint hazard control project files for compliance with
       procurement and eligibility requirements.

We performed our evaluation of this issue during the High Point audit, which covered the period
September 2014 through March 2015, at the City’s office in High Point, NC; HUD’s
Greensboro, NC, Office of Community Planning and Development; and our Greensboro and
Atlanta regional offices. Our review generally covered the period December 1, 2008, through
August 31, 2014. This was a limited scope review, and we did not review HUD’s internal and
information systems controls and procedures. Therefore, the review was not performed in
accordance with generally accepted government auditing standards. To meet our objective, it
was not necessary to fully comply with the standards, nor did our approach negatively affect our
review results.

The Office of Field Management did not provide us formal comments.

                                           BACKGROUND

The City’s Lead-Based Paint Hazard Control Grant
The City’s Community Development and Housing Department administers the Lead Safe High
Point program. The program is federally funded by HUD. The purpose of the program is to
identify and control lead-based paint hazards in eligible privately owned rental or owner-
occupied housing. HUD awarded the City lead-based paint hazard control grants of $5.5 million
for grant years 2008 and 2011. As of March 17, 2015, the City had used its entire 2008 grant of
more than $2.9 million and more than $755,000 of its more than $2.4 million 2011 grant. Our
audit found that the City did not select the lowest bidder for 5 of the 14 project bids, representing
$824,734 (91 percent) of the $902,997 spent for contracts.

The HUD Office of Healthy Homes and Lead Hazard Control is responsible for overseeing lead-
based paint hazard control grants. The field office for the HUD Greensboro, NC, Office of
Community Planning and Development is responsible for overseeing community planning and
development grants. It has provided the City guidance and technical support for all of its
community planning and development grants since 1975.




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2013 HUD Monitoring Review
The HUD Office of Healthy Homes and Lead Hazard Control conducted a review of the City in
May 2013 and found that the City did not consistently follow procurement policy and
regulations1 as required by 24 CFR 85.36. The Office of Healthy Homes and Lead Hazard
Control recommended that the City provide documentation showing that it followed required
procurement procedures for all projects. Based on the review, the Office of Healthy Homes and
Lead Hazard Control had placed the City on a zero threshold for approval of projects under the
2011 grant but had not reviewed later spending for eligibility.

                                                               RESULTS OF REVIEW

The Director of Community Planning and Development, Greensboro, NC, approved the City to
use a 15 percent margin to disallow offers outside the margin. The City would determine the
cost estimate amount and then determine the 15 percent margin above and below this amount. It
would open the bids after it determined the range. For any bids outside the 15 percent range, the
City would consider the contractor to be nonresponsive. This practice is a clear violation of 24
CFR 85.36(d)(2)(ii).2 HUD’s Director of Community Planning and Development stated that the
15 percent margin was common practice in the State of North Carolina; therefore, he did not take
issue3 with the City’s using the 15 percent margin.

The Director stated that he reviewed how the grantees handled procurements in North Carolina
and researched the North Carolina Housing Finance Agency’s4 procurement policy. He
determined that the North Carolina Housing Finance Agency allowed its subgrantees to use a 15
percent margin above and below cost estimates. The North Carolina Housing Finance Agency
had allowed this practice as a part of its model procurement policies, and since it was in the
model policy, the Director believed it was acceptable. Therefore, he allowed the City to use the
15 percent margin but could not recall when he approved it to do so.

The State of North Carolina does not have a law in place to support the use of the 15 percent
margin. We spoke with the State of North Carolina purchasing officer, and she stated that she
was not aware of this common practice and that the North Carolina General Statute, NC GS 143,
Article 8, Public Contracts, is the State regulation that the City should follow. The statute states
that the contract must be awarded to the lowest responsible, responsive bidder, taking into
consideration quality, performance, and the time specified in the bids for the performance of the
contract. Since HUD allowed the City to use the 15 percent margin, other grantees in North
Carolina may also have been using improper procurement techniques and not using the lowest
bidders.


                                                            
1
   The review stated that the City used a 15 percent cost estimate margin.   
2
   Regulations at 24 CFR 85.36(d)(2)(ii) state that the lowest bidder must be selected for sealed bids.
3
   In follow-up interviews, neither the City nor HUD could say whether the City requested the use because of the
time that had elapsed, but both stated that it was a common practice.
4
  The North Carolina Housing Finance Agency is an organization that receives community planning and
development funding in North Carolina. It is a self-supporting public agency that provides financing through the
sale of tax-exempt bonds and management of Federal tax credit programs, the Federal HOME Investment
Partnerships Program, the State Housing Trust Fund, and other programs.



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Conclusion
HUD’s Greensboro, NC, Office of Community Planning and Development allowed the City to
use the 15 percent cost estimate margin, although it violated 24 CFR 85.36. This practice
allowed the City to misspend $824,734 of $902,997 (91 percent) for inadequate contracts for 5 of
the 14 (35.7 percent) projects for which the City did not select the lowest bidder for its lead-
based paint hazard control grants.

                                   RECOMMENDATION

We recommend that the Director of the Office of Field Management, Office of the Deputy
Assistant Secretary for Operations, require the Director of the Greensboro, NC, Office of
Community Planning and Development to

       1A.    Issue a notice to inform all North Carolina grantees that they must use the lowest
              bidder in a sealed bid process unless they are able to provide sufficient support in
              compliance with 24 CFR 85.36 to remove the bidder from the procurement
              process.




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