oversight

The State of New Jersey Did Not Comply With Federal Procurement and Cost Principle Requirements in Implementing Its Disaster Management System

Published by the Department of Housing and Urban Development, Office of Inspector General on 2015-06-04.

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

   The State of New Jersey, Trenton, NJ
        Community Development Block Grant Disaster
         Recovery-Funded Sandy Integrated Recovery
            Operations and Management System




Office of Audit, Region 3      Audit Report Number: 2015-PH-1003
Philadelphia, PA                                     June 4, 2015
To:            Marion M. McFadden, Deputy Assistant Secretary for Grant Programs, DG
               //signed//
From:          David E. Kasperowicz, Regional Inspector General for Audit, Philadelphia
               Region, 3AGA
Subject:       The State of New Jersey Did Not Comply With Federal Procurement and Cost
               Principle Requirements in Implementing Its Disaster Management System




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 State of New Jersey’s Community
Development Block Grant Disaster Recovery-funded Sandy Integrated Recovery Operations and
Management System.
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 8M, 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
215-430-6730.
                    Audit Report Number: 2015-PH-1003
                    Date: June 4, 2015

                    The State of New Jersey Did Not Comply With Federal Procurement and
                    Cost Principle Requirements in Implementing Its Disaster Management
                    System



Highlights

What We Audited and Why
We audited the State of New Jersey’s Community Development Block Grant Disaster Recovery-
funded Sandy Integrated Recovery Operations and Management System. We conducted the
audit based on the significant amount of funds associated with the system and the importance of
the system to the successful implementation of the State’s Disaster Recovery grant. Our
objective was to determine whether the State procured services and products for its system in
accordance with Federal procurement and cost principle requirements.

What We Found
The State did not procure services and products for its system in accordance with Federal
procurement and cost principle requirements. Specifically, it did not prepare an independent cost
estimate and analysis before awarding the system contract to the only responsive bidder.
Further, it did not ensure that option years were awarded competitively and included provisions
in its request for quotation that restricted competition. It also did not ensure that software was
purchased competitively and that the winning contractor had adequate documentation to support
labor costs charged by its employees. These issues show that the State’s process was not
equivalent to Federal procurement standards; therefore, its certification to the U.S. Department
of Housing and Urban Development (HUD) was inaccurate. These conditions occurred because
the State was not fully aware of the applicable requirements. As a result, it did not demonstrate
that the overall contract price of $38.5 million and option years totaling another $21.7 million
were fair and reasonable and that the $1.5 million it disbursed was adequately supported.
The State began taking corrective actions during the audit and began providing some
documentation to resolve these deficiencies. HUD needs to assess the documentation to
determine the appropriateness of all contract costs.

What We Recommend
We recommend that HUD determine whether corrective actions and documentation the State
provided are adequate to show that the $38.5 million contract price for the initial 2-year period
was fair and reasonable and that $1.5 million disbursed for software and labor costs was
allowable and supported or direct the State to repay HUD from non-Federal funds. Further,
HUD should determine whether the documentation provided is adequate to show that the
contract price for the three additional option years was fair and reasonable or direct the State to
rebid for the additional option years, thereby putting $9.1 million to better use.
Table of Contents
Background and Objective......................................................................................3

Results of Audit ........................................................................................................5
         Finding: The State Did Not Comply With Federal Procurement and Cost Principle
         Requirements in Implementing Its Disaster Management System .............................. 5

Scope and Methodology .........................................................................................13

Internal Controls ....................................................................................................15

Followup on Prior Audits ......................................................................................16

Appendixes ..............................................................................................................17
         A. Schedule of Questioned Costs and Funds To Be Put to Better Use ...................... 17

         B. Auditee Comments and OIG’s Evaluation ............................................................. 18




                                                            2
Background and Objective
On October 29, 2012, Hurricane Sandy made landfall near Atlantic City, NJ. The storm caused
unprecedented damage to New Jersey’s housing, business, infrastructure, health, social service,
and environmental sectors. On October 30, 2012, President Obama declared all 21 New Jersey
counties major disaster areas. The U.S. Department of Housing and Urban Development (HUD)
identified the following nine counties as New Jersey’s most impacted areas: Atlantic, Bergen,
Cape May, Essex, Hudson, Middlesex, Monmouth, Ocean, and Union.

Through the Disaster Relief Appropriations Act of 2013, 1 Congress made available $16 billion in
Community Development Block Grant funds for necessary expenses related to disaster relief,
long-term recovery, restoration of infrastructure and housing, and economic revitalization. In
accordance with the Robert T. Stafford Disaster Relief and Emergency Assistance Act of 1974,
these disaster relief funds were to be used in the most impacted and distressed areas affected by
Hurricane Sandy and other declared major disaster events that occurred during calendar years
2011, 2012, and 2013.

On March 5, 2013, HUD issued a Federal Register notice, 2 which advised the public of the initial
allocation of $5.4 billion in Block Grant funds appropriated by the Disaster Relief
Appropriations Act for the purpose of assisting recovery in the most impacted and distressed
areas declared a major disaster due to Hurricane Sandy. 3 The notice 4 allowed preaward costs to
be reimbursable as long as the costs were incurred after the date of the storm. HUD awarded the
State of New Jersey $1.8 billion from this initial allocation of funds. On April 29, 2013, HUD
approved the State’s action plan. The action plan identified the purpose of the State’s allocation,
including criteria for eligibility, and how its uses addressed long-term recovery needs. On May
13, 2013, HUD approved a grant agreement that obligated more than $1 billion in funding from
the $1.8 billion allocation. The Disaster Relief Act required the State to spend obligated funds
within 2 years of the date of obligation.

The governor of New Jersey designated the State’s Department of Community Affairs as the
responsible entity for administrating its Disaster Recovery grant. The State decided to retain a
contractor that would deliver a fully functional information technology solution, which would
allow it to quickly deploy its Block Grant Disaster Recovery program to assist State residents
impacted by Hurricane Sandy. The purpose of the system was to collect and manage reports and
data to make payments under the Disaster Recovery program, file reports with the Federal




1
  Public Law 113-2, dated January 29, 2013
2
  78 FR 14330, dated March 5, 2013
3
  Areas impacted by Hurricane Sandy included New York City, New York State, New Jersey, Connecticut, Rhode
Island, and Maryland.
4
  78 FR 14342, dated March 5, 2013



                                                      3
Government, and provide the source data to State transparency sites. The system was also
supposed to support the staff that operates, manages, and monitors the program, including
program managers, fiscal staff, auditors, and accountants. On May 24, 2013, the State entered
into a $38.5 million contract with CGI Federal, Inc., to develop and manage the Sandy Integrated
Recovery Operations and Management System. As of February 2015, the State had disbursed
$25.7 million for the system.

The Federal Register notice 5 required the State to either adopt the specific procurement standards
identified in 24 CFR (Code of Federal Regulations) 85.36 or have a procurement process and
standards that were equivalent to the procurement standards at 24 CFR 85.36. 6 The State
acknowledged in its procurement policy for Block Grant Disaster Recovery grants that it was
required as a grantee to follow the requirements of 24 CFR 85.36 and that its procurement
process and standards were equivalent to the procurement standards at 24 CFR 85.36.
Accordingly, the State certified to HUD that its policies and procedures were equivalent to the
procurement standards at 24 CFR 85.36.

Our objective was to determine whether the State procured services and products for its system
in accordance with applicable Federal procurement and cost principle requirements. 7




5
  78 FR 14336, dated March 5, 2013
6
  In audit report 2013-FW-0001, dated March 28, 2013, we recommended that HUD include the procurement
standards at 24 CFR 85.36 in its future Disaster Recovery grant terms and provide procurement training and
technical assistance to ensure that future Disaster Recovery grantees are aware of and follow Federal procurement
standards. HUD agreed to specifically reference these standards in future grant agreements, include this topic in
future conferences and webinars, and post information on specific topics on the Block Grant Disaster Recovery Web
site.
7
  In audit report 2014-PH-1008, dated August 29, 2014, we reported on the State’s procurement of services and
products for its tourism marketing program. We discuss the recommendations in the Followup on Prior Audits
section of this report.




                                                        4
Results of Audit

Finding: The State Did Not Comply With Federal Procurement and
Cost Principle Requirements in Implementing Its Disaster
Management System
The State did not procure services and products for its system in accordance with Federal
procurement standards or comply with all Federal cost principle requirements for supporting
salary and wage compensation. Specifically, it did not prepare an independent cost estimate and
analysis before awarding the system contract to the only responsive bidder. It also did not ensure
that option years were awarded competitively and included provisions in its request for quotation
that restricted competition. Further, it did not ensure that software was purchased competitively
and that the winning contractor had adequate documentation to support labor costs charged by its
employees. These issues show that the State’s process was not equivalent to Federal
procurement standards; therefore, its certification was inaccurate. These conditions occurred
because the State was not fully aware of Federal procurement and cost principle requirements. It
(1) mistakenly believed that it was not required to complete an independent cost estimate and
analysis before awarding the system contract, (2) was not fully aware of Federal procurement
standards, (3) mistakenly believed that the contractor was not required to obtain price quotes for
software purchases, and (4) was unaware of the Federal cost principle requirements for
supporting time charges. As a result, the State did not demonstrate that the initial contract price
of $38.5 million and option years totaling another $21.7 million were fair and reasonable and
that the $1.5 million it disbursed under the contract was adequately supported.

The State Did Not Prepare an Independent Cost Estimate and Analysis Before Awarding
the System Contract
Contrary to regulations at 24 CFR 85.36(f), the State did not prepare an independent cost
estimate and cost analysis before receiving bids or proposals and awarding the system contract.
The regulations required the State to make independent estimates before receiving bids or
proposals. They also required the State to perform a cost analysis. An independent cost estimate
serves as a yardstick for evaluating the reasonableness of the contractor’s proposed costs or
prices. An independent cost analysis consists of evaluating the separate elements (labor,
materials, etc.) that make up a contractor’s total cost proposal to determine whether they are
allowable, directly related to the requirement, and reasonable. Although the State did not adopt
the Federal procurement standards, it certified that its policies and procedures were equivalent to
the Federal standards. Therefore, it needed to demonstrate that it had developed a yardstick for
evaluating the reasonableness of the contractors’ proposed costs or prices and evaluated the
separate elements that made up the contractors’ total costs.

To satisfy the requirement for a cost estimate before receiving bids, the State initially estimated a
need for 45 to 50 full-time employees and $1.5 to $2 million per month based on the State of
Louisiana’s experience in the aftermath of Hurricanes Katrina and Rita in 2005. The State did



                                                  5
not provide detail comparing its information technology needs to those of Louisiana, showing
how much Louisiana paid for its system, or discussing how technology and costs had changed
since 2005. This estimate of basic information did not satisfy the requirement of performing an
independent cost estimate.

To satisfy the requirement for a cost analysis before awarding a contract, the State indicated that
it compared labor category rates from CGI Federal’s proposal to the rates for equivalent labor
categories from a random sampling of five other contractors. 8 The State’s cost analysis did not
satisfy the requirement to perform a cost analysis because it did not determine whether the
pricing of all of the separate elements that made up the total costs in the contractor’s proposal
were fair and reasonable.

The need for an independent cost estimate and analysis was illustrated by the lack of competition
and by a prior audit, 9 which showed a large variance in similar system costs. The State received
bids from only two contractors as shown below.

                                                                           Total bid for
                                                Total bid for the
                                                                            the 3-year
                Contractor                       initial 2-year                                   Date received
                                                                           maintenance
                                                     period
                                                                              period
           CGI Federal, Inc.                       $38,812,267             $21,771,075              05/14/2013
    International Technologies, Inc.                $6,695,520                 n/a 10               05/07/2013

The State established an evaluation committee to perform a technical review and price
comparison of the bids it received, based on the bidder’s personnel, experience, and ability to
complete the scope of work. 11 The committee deemed the lower bid as nonresponsive due to its
lack of required forms and a detailed proposal. Therefore, it evaluated only the higher bid.
While the State solicited a best and final offer from CGI Federal before awarding the contract, it
should have performed a detailed cost estimate and analysis to ensure that the contract amount
was fair and reasonable.
This condition occurred because the State mistakenly believed that it was not required to




8
  The contractors were listed on the U.S. General Services Administration’s (GSA) Web site, known as “eBuy.”
9
  In audit report 2013-FW-0001, dated March 28, 2013, we discuss three States that used Disaster Recovery grant
funds to create an information system at great expense. The costs varied widely, ranging from one State’s budget of
$1.2 million to another State’s expenditures of more than $295 million.
10
   International Technologies’ bid did not include a quote for the 3-year maintenance period.
11
   Regulations at 24 CFR 85.36(d)(3)(iii) required the State to have a method for conducting technical evaluations of
the proposals it received and selecting awardees. The State established an evaluation committee consisting of six
members: five voting members and one nonvoting member. The committee was responsible for performing a
technical review and price comparison of the quotes received. The request for quotation indicated that the
evaluation criteria would include the following factors: strategy to meet the request for quote requirements, strategy
to perform services required by the scope of work, experience, and ability to successfully complete the project
according to the proposed schedule.



                                                          6
complete an independent cost estimate and analysis. Because it did not perform an adequate
independent cost estimate and cost analysis, HUD and the State had no assurance that the
contract amount was fair and reasonable.

The State Had Begun To Take Action To Resolve Deficiencies Regarding the Cost Estimate
After we notified the State of this problem, it provided us an independent cost estimate report
related to its contract award. The report, dated May 16, 2014, was prepared by ICF
International, a technology, policy, and management consulting firm. 12 The report provided
estimates for the total cost of the initial 2-year contract and for the 3 additional option years for
system maintenance. The estimates from the report are presented in the schedule below, along
with a comparison to the pricing from CGI Federal’s best and final offer. 13


                                                 CGI’s best and           Independent cost
                 Period                                                                                Difference
                                                  final offer                 estimate

       Initial 2-year period                       $38,512,267                $38,696,356              ($184,089)
Optional 3-year maintenance period                 $21,674,307                $12,612,527              $9,061,780
               Total                               $60,186,574                $51,308,883              $8,877,691

The report estimated a total cost of $51.3 million. CGI Federal’s best and final offer for the
initial 2-year period was $184,089 less than the estimate. However, CGI Federal’s best and final
offer for the 3 option years was $9.1 million more than estimated. The State should have used
information such as this to evaluate the bids before awarding a contract. We have provided the
documentation to HUD. It needs to assess the appropriateness of the documentation.

The State Did Not Ensure That Option Years Were Awarded Competitively
Contrary to regulations at 24 CFR 85.36(c), the State did not ensure that option years were
awarded competitively. The regulations required that all procurement transactions be conducted
in a manner providing full and open competition. The State’s request stated that the term of the
contract was required to be for a period of 2 years and could be extended for all or part of three
1-year periods by mutual written consent. The request did not initially require potential bidders
to price out their projected costs for the option years. However, the State later added an
addendum to the request, stating that bidders shall provide a cost component for the 3 option




12
   The State executed a contract modification in February 2014, raising the cost for the initial 2-year period to $45.2
million. The modification was related to additional responsibilities given to CGI Federal after the State terminated
its contract with another contractor for the administration of several of its disaster programs. While the modification
took place before the State obtained the May 16, 2014, cost estimate report, the report did not address the
modification because it was intended to estimate costs before the State received bids or proposals.
13
   CGI Federal’s best and final offer included pricing for the initial 2-year period totaling more than $38.5 million,
which was $300,000 less than CGI Federal’s initial offer. The best and final offer also included pricing for the 3-
year maintenance period totaling more than $21.6 million, which was $96,768 less than the initial offer.



                                                           7
years. While CGI Federal provided pricing for the option years in its proposal, the State’s
evaluation committee did not consider the pricing as part of its technical review and price
comparison process. As a result, HUD had no assurance that the option years were awarded
competitively. This deficiency was illustrated by the independent cost estimate obtained by the
State during our audit, which provided an estimate for the option years that was $9.1 million less
than CGI Federal’s best and final offer of $21.7 million. Because the option years were included
in the contract language, the State could exercise them without additional competition when the
initial 2-year period expired on May 24, 2015.

The State Included Provisions That Restricted Competition
Contrary to regulations at 24 CFR 85.36(c), the State included provisions in its request for
quotation that restricted competition. The regulations required that all procurement transactions
be conducted in a manner providing full and open competition. Some of the situations
considered to be restrictive of competition included but were not limited to (1) placing
unreasonable qualification requirements on firms and (2) requiring unnecessary experience and
excessive bonding. The State’s request required that each bidder document experience in
implementing disaster recovery projects exceeding $500 million and describe in detail at least
three contract engagements of a 2-year duration or greater for which it was responsible as the
primary information technology shared services provider. In addition, (1) one of the three
engagements should have been undertaken within the past 3 years; (2) one of the clients should
have been a State or local government with an annual information technology budget of at least
$10 million (including a Block Grant Disaster Recovery or State disaster recovery effort); and
(3) all three engagements needed to be production systems or environments, not initiatives in
development. While Federal procurement standards did not prohibit requirements for
experience, the level of detail in the State’s requirements for experience may not have been
necessary to retain a qualified contractor.

The State also required potential contractors to complete a rate schedule that had predetermined
labor categories matching those of CGI Federal and had predetermined labor hours, which
restricted competition. Of the 26 predetermined labor categories included in the State’s
schedule, 22 of them matched the exact wording of labor category titles from CGI Federal’s
authorized pricelist on the U.S. General Services Administration’s (GSA) Web site. Instructions
for completing the schedule directed bidders to select the labor categories that most closely
matched their proposed group of employees for the contract. Further, bidders were asked to use
predetermined labor hours to estimate their labor costs. These requirements restricted
competition because otherwise qualified contractors may not have had employees who fit within
the predetermined labor categories and may have been discouraged from bidding. While asking
bidders to use predetermined labor categories and hours was not prohibited under Federal
procurement standards, the practice may not have resulted in the most advantageous bids or
proposals for the contract.

This condition occurred because the State mistakenly believed that all of the provisions were
necessary to retain a qualified contractor. Also, the State believed that providing predetermined
labor hours would establish a ceiling of hours for the life of the contract and promote more
aggressive price competition for the labor rates. As a result of the restrictive provisions, HUD



                                                 8
had no assurance that the procurement transaction was conducted in a manner providing full and
open competition. Without full and open competition, HUD and the State had no assurance that
the contract amount was fair and reasonable. The effect of the restrictive provisions may be
illustrated by the fact that the State received only one responsive bid despite soliciting 3,599
contractors. 14

The State Did Not Ensure That Software Purchases Were Procured Competitively
The State could not demonstrate that software totaling $1.1 million was acquired competitively.
The State’s contract with CGI Federal required the contractor to provide copies of at least three
quotes when submitting invoices for payment of direct costs. CGI Federal’s proposal indicated
the price and vendors that it planned to use for the software purchases. However, the State did
not modify the contract language to waive the three-quote requirement when submitting invoices
for payment. If the State did not intend for CGI Federal to follow the contract requirement, it
should have formalized the change and issued a contract modification because regulations at 24
CFR 85.36(b)(9) required the State to maintain records sufficient to detail the significant history
of the procurement. Regulations at 24 CFR 85.36(c) required the State to conduct all
procurement transactions in a manner providing full and open competition. Also, regulations at
24 CFR 85.36(d) required the State to obtain bids from an adequate number of sources,
regardless of the procurement method, unless the noncompetitive proposal method was selected.
The State could not provide adequate documentation to show that it met the intent of these
standards. This condition occurred because the State was not fully aware of procurement
standards. As a result, HUD had no assurance that the software was acquired competitively and
that the associated disbursements totaling $1.1 million were supported.

The State Had Begun To Take Action To Resolve Deficiencies Regarding Procurement of
Software
After we notified the State of this problem, it began providing additional documentation that it
believed demonstrated that prices it paid for software were fair and reasonable. HUD needs to
assess whether the documentation the State provided during the audit and any additional
documentation it provides after the audit are sufficient to demonstrate that the prices the
contractor paid for marketing services and products were fair and reasonable.

The State Did Not Ensure That Contract Labor Costs Were Fully Supported
When submitting invoices for payment, the contract required the contractor to provide copies of
weekly timesheets for employees assigned to do the work referenced in the invoice. The State
did not have timesheets to support $1.5 million in labor costs charged by the contractor’s
employees. Instead, it provided billing worksheets that identified the employee, the number of
hours worked by date and activity, the hourly rate, and the total amount due.




14
  Regulations at 24 CFR 85.36(d)(3)(i) required the State to publicize requests for proposals. Also, 24 CFR
85.36(d)(3)(ii) required the State to solicit proposals from an adequate number of qualified sources. The State met
these requirements by using GSA’s Web site, known as “eBuy,” to issue a request for quotation to 3,599 contractors.



                                                         9
In addition to not meeting the terms of the contract, these billing worksheets did not meet
Federal cost principle requirements for supporting salary and wage compensation for personnel
services because they did not account for all of the activities for which the employee was
compensated and they were not signed by the employees. Federal cost principle requirements at
2 CFR Part 225, appendix B(8)(h), required the State, in instances in which employees worked
on multiple activities or cost objectives, to have personnel activity reports or equivalent
documentation to support the distribution of their salaries or wages. This documentation was
required to reflect an after-the-fact distribution of the actual activity of each employee, account
for the total activity for which each employee was compensated, be prepared at least monthly
and coincide with one or more pay periods, and be signed by the employee. The State did not
provide documentation to meet these requirements.

The State should have had weekly timesheets or equivalent personnel activity reports in its
possession when it paid invoices as required by the terms of the contract. Also, regulations at 24
CFR 570.490(a)(1) required the State to establish and maintain such records as may be necessary
to facilitate review and audit by HUD of its administration of Block Grant funds under 24 CFR
570.493.

The problem noted occurred because the State was unaware of the Federal cost principle
requirements and believed that documents it accepted to support contractor employee time
charges were subject to its discretion rather than the contract requirements. As a result, HUD
had no assurance regarding how much time the contractor’s employees spent working on the
program, and the $1.5 million that the State disbursed to the contractor for labor costs was
unsupported.

The State Had Begun To Take Action To Resolve Deficiencies Regarding Labor Costs
After we notified the State of this problem, it contacted the contractor and provided us reports
from the automated timekeeping systems of CGI Federal and its subcontractors. The
timekeeping reports satisfied the requirements of the contract and Federal cost principles for
some but not all of the employees who charged time to the contract. After reviewing this
additional documentation provided by the State, we determined that the State had not provided
adequate timesheets to support $467,659 disbursed for wages and salaries charged under the
contract by the contractor’s employees. These timesheets were not signed by the employee as
required by 2 CFR Part 225.

The State Did Not Ensure the Accuracy of Its Certification to HUD
The State did not ensure that its procurement policies and procedures were fully equivalent to
Federal procurement standards. The HUD Federal Register notice 15 required the State to either
adopt the specific procurement standards identified in 24 CFR 85.36 or have a procurement
process and standards that were equivalent to the procurement standards at 24 CFR 85.36. The
State acknowledged in its procurement policy for Block Grant Disaster Recovery grants that it




15
     78 FR 14336, dated March 5, 2013



                                                 10
was required as a grantee to follow the requirements of 24 CFR 85.36 and that its procurement
processes and standards were equivalent to the procurement standards at 24 CFR 85.36.
Accordingly, the State certified to HUD that its policies and procedures were equivalent to the
procurement standards at 24 CFR 85.36. While the State accurately portrayed its policies and
procedures on the certification, the issues identified above show that the State’s process was not
equivalent to Federal procurement standards; therefore, its certification was inaccurate.

Conclusion
The State did not procure services and products for its disaster management system in
accordance with Federal procurement and cost principle requirements. This condition occurred
because the State was not fully aware of applicable requirements. As a result, HUD had no
assurance that the $38.5 million initial contract amount was fair and reasonable, the option years
totaling another $21.7 million were awarded competitively, provisions in the request for
quotation did not restrict competition, software purchases were acquired competitively, and labor
costs were supported.

Although the State had begun taking corrective action to resolve some of the deficiencies, HUD
needs to assess whether the State’s corrective action and related documentation are adequate to
ensure that all disbursements were reasonable and supported. Further, because the State’s
process was not equivalent to Federal procurement standards, HUD should direct the State to
update its procurement processes to ensure that they are fully aligned with applicable
requirements.

Recommendations
We recommend that HUD’s Deputy Assistant Secretary for Grant Programs

        1A.      Determine whether the documentation the State provided is adequate to show that
                 the $36,992,675 16 contract price for the initial 2-year period was fair and
                 reasonable and if not, direct the State to repay HUD from non-Federal funds any
                 amount that it cannot support (excluding any amount repaid as a result of
                 recommendations 1C and 1D).

        1B.      Determine whether the documentation the State provided is adequate to show that
                 the price for the 3 additional option years is fair and reasonable and if not, direct
                 the State to rebid for the additional option years, thereby putting $9,061,780 17 to
                 better use.




16
   To avoid double-counting, we reduced the contract price shown for recommendation 1A by the amounts discussed
in recommendations 1C and 1D. The $36,992,675 is the full $38,512,267 contract price for the initial 2-year period
less the amounts cited in recommendations 1C ($1,051,933) and 1D ($467,659).
17
   The $9,061,780 is the difference between CGI Federal’s best and final offer for the 3 additional option years
($21,674,307) and the cost estimate obtained by the State after awarding the contract ($12,612,527). If HUD directs
the State to rebid for the additional option years, it could reduce the price by as much as $9,061,780.



                                                         11
1C.   Determine whether the documentation the State provided is adequate to show that
      the $1,051,933 disbursed for software was a fair and reasonable price and if not,
      direct the State to repay HUD from non-Federal funds any amount that it cannot
      support.

1D.   Determine whether the documentation the State provided is adequate to support
      the $467,659 disbursed for wages and salaries charged to the program by
      contractors’ employees and if not, direct the State to repay HUD from non-
      Federal funds any amount that it cannot support.

1E.   Direct the State to update its procurement processes and standards to ensure that
      they are fully aligned with applicable Federal procurement and cost principle
      requirements.




                                       12
Scope and Methodology
We conducted the audit from November 2013 through October 2014 at the State’s offices located
at 101 South Broad Street and 33 West State Street, Trenton, NJ, and our office located in
Philadelphia, PA. The audit covered the period January through November 2013.

To accomplish our objective, we reviewed

   •   Relevant background information;
   •   Applicable regulations, HUD notices, and the State’s policies and procedures;
   •   The Disaster Relief Appropriations Act, Public Law 113-2;
   •   The State’s Block Grant Disaster Recovery action plan as approved by HUD on April 29,
       2013;
   •   The funding agreement between HUD and the State, dated May 13, 2013;
   •   The State’s request for quotation;
   •   Bids, proposals, and other supporting documentation submitted by contractors;
   •   The State’s bid evaluation documentation;
   •   The State’s contract with CGI Federal;
   •   Contractor invoices and supporting documentation;
   •   Weekly progress reports prepared by the contractor;
   •   Reports from the contractor’s automated timekeeping systems;
   •   A contractor-prepared independent cost estimate report related to the State’s contract
       award;
   •   Contractor analyses conducted by the Federal Recovery Accountability and Transparency
       Board; and
   •   A HUD management review, dated June 10, 2014.

We conducted interviews with responsible employees of the State and HUD staff located in
Philadelphia, PA, and Fort Worth, TX.

To achieve our audit objective, we relied in part on the State’s computer-processed data. We
used the data to select a sample of disbursements to review. Although we did not perform a
detailed assessment of the reliability of the data, we performed a minimal level of testing and
found the data to be adequate for our purpose.

As of November 2013, the beginning of the audit, the State had made eight disbursements to the
contractor totaling $3.2 million. That amount included costs for labor and project materials, such
as software licensing. We selected for review the five disbursements with the highest dollar
amounts. The value of the five disbursements was $2.6 million (about 81 percent of the total
disbursed), including $1.5 million for labor costs and $1.1 million for project materials. We
reviewed the disbursements to determine whether they were eligible and supported by adequate



                                                 13
documentation. During the period December 2013 to February 2015, the State made additional
disbursements to the contractor, bringing the total amount disbursed to $25.7 million.

As of January 2014, there were 350 completed funds requests in the system. We selected and
reviewed the first 25 completed funds requests to determine whether they went through all levels
of review and approval.

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




                                                14
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:

•   Validity and reliability of data – Policies and procedures that management has implemented
    to reasonably ensure that valid and reliable data are obtained, maintained, and fairly
    disclosed.
•   Compliance with laws and regulations – Policies and procedures that management has
    implemented to reasonably ensure that the use of resources is consistent with laws and
    regulations.
We assessed the relevant controls identified above.
A deficiency in internal control exists when the design or operation of a control does not allow
management or employees, in the normal course of performing their assigned functions, the
reasonable opportunity to prevent, detect, or correct (1) impairments to effectiveness or
efficiency of operations, (2) misstatements in financial or performance information, or (3)
violations of laws and regulations on a timely basis.
Significant Deficiency
Based on our review, we believe that the following item is a significant deficiency:

•   The State did not establish and implement procedures to ensure that it complied with all
    applicable procurement and cost principle requirements.




                                                  15
Followup on Prior Audits
The State of New Jersey, Trenton, NJ, Community Development Block Grant Disaster
Recovery-Funded Tourism Marketing Program; Audit Report 2014-PH-1008; Issued
August 29, 2014
The following recommendations were still open at the time of this report: 1A. Determine
whether the documentation the State provided is adequate to show that the overall contract price
was fair and reasonable and if not, direct the State to repay HUD from non-Federal funds for any
amount that it cannot support; 1B. Determine whether the documentation the State provided is
adequate to show that the $19,499,020 disbursed for marketing costs was fair and reasonable and
if not, direct the State to repay HUD from non-Federal funds for any amount that it cannot
support; 1C. Determine whether the documentation the State provided is adequate to support
$3,487,461 disbursed for wages and salaries charged to the program by the contractors’
employees and if not, direct the State to repay HUD from non-Federal funds for any amount that
it cannot support; and 1D. Direct the State to update its procurement processes and standards to
ensure that they are fully aligned with applicable Federal procurement and cost principle
requirements. We are working through the management decision process with HUD as
prescribed in HUD Handbook 2000.06, REV-4. 18




18
     This process will determine what corrective actions HUD will require of the State.



                                                            16
Appendixes

Appendix A


                Schedule of Questioned Costs and Funds To Be Put to Better Use
                     Recommendation                      Funds to be put
                                        Unsupported 1/
                          number                         to better use 2/
                                1A               $36,992,675 19
                                1B                                        $9,061,780
                                1C                 $1,051,933
                                1D                  $467,659
                              Total               $38,512,267             $9,061,780


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.
2/      Recommendation that funds be put to better use are estimates of amounts that could be
        used more efficiently if an Office of Inspector General (OIG) recommendation is
        implemented. These amounts include reductions in outlays, deobligation of funds,
        withdrawal of interest, costs not incurred by implementing recommended improvements,
        avoidance of unnecessary expenditures noted in preaward reviews, and any other savings
        that are specifically identified. In this instance, implementation of our recommendation
        to direct the State to rebid for the additional option years if the documentation is not
        adequate to show that the price is fair and reasonable could reduce the price by as much
        as $9.1 million. This is the difference between the contractor’s best and final offer and
        the cost estimate obtained by the State after awarding the contract.




19
  To avoid double-counting, we reduced the amount shown as unsupported for recommendation 1A by the amounts
discussed in recommendations 1C and 1D. The $36,992,675 is the full $38,512,267 contract price for the initial 2-
year period less the amounts cited in recommendations 1C ($1,051,933) and 1D ($467,659).




                                                        17
Appendix B
             Auditee Comments and OIG’s Evaluation



Ref to OIG
              Auditee Comments
Evaluation




Comment 1


Comment 2


Comment 2



Comment 3




Comment 2




                               18
Ref to OIG   Auditee Comments
Evaluation




Comment 4


Comment 5


Comment 6




Comment 7


Comment 8




                            19
Ref to OIG   Auditee Comments
Evaluation




                            20
Ref to OIG   Auditee Comments
Evaluation




Comment 1




                            21
Ref to OIG   Auditee Comments
Evaluation




                            22
Ref to OIG   Auditee Comments
Evaluation




Comment 9




                            23
Ref to OIG   Auditee Comments
Evaluation




                            24
Ref to OIG   Auditee Comments
Evaluation




Comment 1



Comment 1




Comment 4




                            25
Ref to OIG   Auditee Comments
Evaluation




Comment 10


Comment 3

Comment 10




Comment 11




Comment 12




                            26
Ref to OIG   Auditee Comments
Evaluation




Comment 3




Comment 13




Comment 14




                            27
Ref to OIG   Auditee Comments
Evaluation




Comment 14


Comment 3


Comment 10




Comment 10


Comment 14




                            28
Ref to OIG   Auditee Comments
Evaluation




Comment 3




Comments
10 and 14

Comment 3


Comment 15




Comment 14




Comment 14
and 15

Comment 3




                            29
Ref to OIG   Auditee Comments
Evaluation




Comment 3




Comment 5


Comment 16


Comment 17




Comment 5




                            30
Ref to OIG   Auditee Comments
Evaluation




Comment 5




Comment 16




Comment 18




                            31
Ref to OIG   Auditee Comments
Evaluation




Comment 17



Comment 5



Comment 19


Comment 16


Comment 20




                            32
Ref to OIG   Auditee Comments
Evaluation




Comment 19




Comment 10


Comment 21




                            33
Ref to OIG   Auditee Comments
Evaluation




Comments
16 and 19




Comment 22




                            34
Ref to OIG   Auditee Comments
Evaluation




Comment 23




                            35
Ref to OIG   Auditee Comments
Evaluation




Comment 23




Comment 6




                            36
Ref to OIG   Auditee Comments
Evaluation




Comment 23




                            37
Ref to OIG   Auditee Comments
Evaluation




Comments 6
and 24




Comments 6
and 25


Comments 6
and 26




                            38
Ref to OIG   Auditee Comments
Evaluation




Comment 27




Comment 28




Comment 29




                            39
Ref to OIG   Auditee Comments
Evaluation




                            40
Ref to OIG   Auditee Comments
Evaluation




Comment 28


Comment 28




                            41
Ref to OIG   Auditee Comments
Evaluation




                            42
Ref to OIG   Auditee Comments
Evaluation




Comment 28




                            43
Ref to OIG   Auditee Comments
Evaluation




Comment 28




Comment 28




                            44
Ref to OIG   Auditee Comments
Evaluation




Comment 30




                            45
Ref to OIG    Auditee Comments
Evaluation




Comment 31




Comments 6,
24, 25, 26,
and 30




Comment 32




                             46
Ref to OIG   Auditee Comments
Evaluation




                            47
Ref to OIG   Auditee Comments
Evaluation




                            48
Ref to OIG   Auditee Comments
Evaluation




                            49
Ref to OIG   Auditee Comments
Evaluation




Comment 8




                            50
Ref to OIG   Auditee Comments
Evaluation




Comment 8



Comment 33


Comment 33



Comment 34




                            51
Ref to OIG   Auditee Comments
Evaluation




Comment 35


Comment 36




Comment 37




                            52
Ref to OIG   Auditee Comments
Evaluation




                            53
Ref to OIG   Auditee Comments
Evaluation




Comment 38




                            54
Ref to OIG   Auditee Comments
Evaluation




Comment 39




Comment 40




                            55
Ref to OIG   Auditee Comments
Evaluation




Comment 37




                            56
                         OIG Evaluation of Auditee Comments


Comment 1   The State contended that its disaster management system was implemented in
            compliance with applicable laws and regulations and that statements to the
            contrary in the audit report were factually and legally incorrect. We found,
            however, that the State did not comply with Federal procurement and cost
            principle requirements. The State did not prepare an independent cost estimate
            and analysis before awarding the system contract to the only responsive bidder. It
            did not ensure that option years were awarded competitively and included
            provisions in its request for quotation that restricted competition. Also, the State
            did not ensure that software was purchased competitively and that the winning
            contractor had adequate documentation to support labor costs charged by its
            employees. We conducted the audit in accordance with generally accepted
            government auditing standards. Those standards require that we plan and perform
            the audit to obtain sufficient, appropriate evidence to provide a reasonable basis
            for our findings and conclusions based on our audit objective. We believe that the
            evidence obtained provides a reasonable basis for our findings and conclusions
            based on our audit objective.

Comment 2   The State contended that it provided an accurate certification to HUD and that any
            claim by OIG to the contrary was unsupported and misleading. However, we
            found that the State did not ensure that its procurement policies and procedures
            were fully equivalent to Federal procurement standards. While the State
            accurately portrayed its policies and procedures on the certification, the issues
            identified in the report show that the State’s process was not equivalent to Federal
            procurement standards. For example, the State’s policy did not require it to
            prepare an independent cost estimate and analysis before awarding the system
            contract to the only responsive bidder.

Comment 3   The State contended that HUD performed its own independent review of the
            State’s procedures and agreed that the State’s procurement procedures were
            equivalent to the Federal procedures and that the State had in place proficient
            financial controls and procurement processes. The State also contended that HUD
            continued to maintain the position that the State’s procurement procedures were
            sufficient. However, HUD relied on the State’s certification that its policies and
            procedures were equivalent to the Federal procurement standards at 24 CFR
            85.36. The State was responsible for the accuracy of its certification.

            Further, OIG’s mission is independent and objective reporting to the HUD
            Secretary and Congress to bring about positive change in the integrity, efficiency,
            and effectiveness of HUD operations. As an autonomous provider of oversight, it
            is not unusual for program elements within HUD and our office to have differing
            views. That is why Congress placed inspectors general in an objective role to
            assess the facts and come to conclusions based on such disinterested analysis.



                                              57
Comment 4   The State contended that it was not required to conduct a prebid cost estimate or
            postbid cost analysis for its disaster management system because Federal law
            required it to follow its own procurement practices. However, it also contended
            that its efforts to estimate and evaluate costs were sufficient to meet State
            requirements and the intent of the Federal standards. For this disaster recovery
            effort, unlike previous disaster recovery efforts, HUD required the State to either
            adopt the specific procurement requirements identified in 24 CFR 85.36 or have a
            procurement process and standards that were equivalent to the procurement
            standards at 24 CFR 85.36. As stated in the audit report, although the State did
            not adopt the Federal procurement standards, it certified that its policies and
            procedures were equivalent to the Federal standards. Therefore, it needed to
            demonstrate that it had developed a yardstick for evaluating the reasonableness of
            the contractors’ proposed costs or prices and evaluated the separate elements that
            made up the contractors’ total costs. However, its actions did not achieve the
            same procurement goals or meet the overall intent of 24 CFR 85.36(f).

            For example, to satisfy the requirement for a cost estimate before receiving bids,
            the State provided an email, which estimated a need for 45 to 50 full-time
            employees and $1.5 to $2 million per month based on the State of Louisiana’s
            experience. This was not equivalent because it did not estimate all of the separate
            elements (labor, materials, etc.) to determine whether they were allowable,
            directly related to the requirements, and reasonable. To satisfy the requirement
            for a cost analysis before awarding a contract, the State indicated that it compared
            labor categories from CGI Federal’s proposal to the rates for equivalent labor
            categories from a random sampling of five other contractors. This was not
            equivalent because it did not determine whether the pricing of all of the separate
            elements that made up the total costs in the contractor’s proposal were fair and
            reasonable.

            As stated in the report, the need for an independent cost estimate and analysis was
            illustrated by the lack of competition and by a prior audit, which showed a large
            variance in similar system costs.

Comment 5   The State contended that the option years had not been awarded because it had not
            yet extended the system contract. The State also contended that it had no
            contractual obligation to CGI Federal for the option years. Further, the State
            noted that it had not overpaid for the option years because they had not yet been
            awarded. We agree that the State had not yet extended the system contract with
            CGI Federal at the time of our review. However, as noted in the report, because
            the option years were included in the contract language, the State could exercise
            them without additional competition when the initial 2-year period expired on
            May 24, 2015. An independent cost estimate obtained by the State during our
            audit estimated the cost of the 3 option years to be $9.1 million less than CGI
            Federal’s best and final offer of $21.7 million. If HUD follows our



                                              58
            recommendation and, if necessary, directs the State to rebid for the additional
            option years, it could reduce the price for the option years by as much as $9.1
            million.

Comment 6   The State contended that it appropriately included labor hours and categories in
            the request for quotation and that this method is routinely employed by a number
            of Federal agencies, including HUD. We acknowledge that this method is
            employed by some Federal agencies. However, the examples provided by the
            State at the exit conference were not relevant to the system contract. Further,
            while asking bidders to use predetermined labor categories and hours was not
            prohibited under Federal procurement standards, the practice may not have
            resulted in the most advantageous bids or proposals for the contract, and when
            considered with all other provisions, it may have restricted competition. The
            State’s request was for an information technology solution, not for standard
            information technology support services. However, the State did not allow
            bidders to be creative and innovative in their approaches to the solution. For
            example, bidders could not propose different combinations of labor categories and
            hours based on their experience and the expertise of their staff. Instead, the only
            aspects of the contract cost that the bidders could control and the State could
            analyze were the labor rates and other indirect costs.

Comment 7   The State contended that it would have been irresponsible and likely harmful to
            the State’s disaster recovery efforts to consider a vendor without any experience
            in implementing a similar system. We agree. However, the State was not able to
            show that the level of detail in the requirements for experience was necessary to
            retain a qualified contractor. The State could have used the degree of experience
            as a weighting factor when evaluating bids instead of preventing contractors that
            lacked certain specific experience from bidding. Further, our finding that the
            State included provisions that restricted competition was based on the
            combination of several provisions pertaining to the request, not one specific
            provision. The specific experience requirements may have discouraged qualified
            contractors from bidding. The effect of this may be illustrated by the fact that the
            State received only one responsive bid despite soliciting 3,599 contractors.

Comment 8   The State contended that no prospective vendors had protested the request for
            quotation criteria or the award. However, the lack of protests from prospective
            vendors does not mean that the level of detail in the State’s requirements for
            experience was necessary to retain a qualified contractor. Further, the State
            provided no documentation to support its contention.

Comment 9   The State contended that its consultants, CDM Smith and ICF International,
            contacted government officials from a number of States and cities that had
            previously received Disaster Recovery funds. Further, the State contended that
            after determining that its needs were similar to those of Louisiana, it formed a
            working group with CDM Smith, ICF International, and disaster recovery



                                              59
              specialists from Louisiana. The State indicated that the working group discussed
              the project’s scope of work, estimated costs, and staffing requirements. However,
              while the State had several opportunities throughout the audit and after the exit
              conference to provide documentation related to the working group and its
              discussions with other government officials, it did not provide any documentation
              regarding discussions concerning the project’s scope of work, estimated costs, and
              staffing requirements.

Comment 10 The State contended that it was not required to follow the specific procurement
           standards at 24 CFR 85.36(b-i) because 24 CFR 85.36(a) required the States to
           follow their own procurement policy. The State further contended that it was
           bound to follow its own procurement policy in instances in which its processes
           diverged from the procurement standards at 24 CFR 85.36(b-i). We disagree. For
           this disaster recovery effort, unlike previous disaster recovery efforts, HUD
           required the State to either adopt the specific procurement requirements identified
           in 24 CFR 85.36 or have a procurement process and standards that were
           equivalent to the procurement standards at 24 CFR 85.36. The reason for this
           requirement was our recommendation to HUD in audit report 2013-FW-0001,
           dated March 28, 2013, on HUD’s State Community Development Block Grant
           Hurricane Disaster Recovery program for hurricanes that hit the Gulf Coast States
           from August 2005 through September 2008. Based on our prior audits and a
           review of the program’s data, we identified several lessons to be learned,
           including in the area of procurement. To improve the effectiveness and efficiency
           of the program, we recommended that HUD include the procurement standards at
           24 CFR 85.36 in its future disaster recovery grant terms and provide procurement
           training and technical assistance to ensure that future disaster recovery grantees
           are aware of and follow Federal procurement requirements. HUD agreed with our
           recommendation.

              For this disaster, the Federal Register notice required the State to either adopt the
              specific procurement standards identified in 24 CFR 85.36 or have a procurement
              process and standards that were equivalent to the procurement standards at 24
              CFR 85.36. Therefore, the State was allowed to follow its own procurement
              policies if they were equivalent to the specific procurement standards at 24 CFR
              85.36(b-i). The State acknowledged in its procurement policy for Block Grant
              Disaster Recovery grants that it was required as a grantee to adhere to the
              requirements at 24 CFR 85.36. Accordingly, it certified to HUD that its policies
              and procedures were equivalent to the specific procurement standards at 24 CFR
              85.36(b-i).

Comment 11 The State contended that 24 CFR 570.489(g) provides that States are required to
           use their own procedures. However, this regulation is related to the regular Block
           Grant program. For this disaster, the Federal Register notice required the State to
           either adopt the specific procurement standards identified in 24 CFR 85.36 or
           have a procurement process and standards that were equivalent to the



                                                60
              procurement standards at 24 CFR 85.36. The Federal Register notice
              supplemented existing guidance and allowed the State to follow its own
              procurement policy if its process was equivalent to the specific procurement
              standards at 24 CFR 85.36(b-i).

Comment 12 The State contended that a HUD handbook noted that States were not bound by
           24 CFR 85.36(b-i) unless they chose to adopt all or parts of these requirements.
           This handbook is related to HUD monitoring of its community planning and
           develop programs, which include its regular Block Grant program. However, for
           this disaster, the Federal Register notice required the State to either adopt the
           specific procurement standards identified in 24 CFR 85.36 or have a procurement
           process and standards that were equivalent to the procurement standards at 24
           CFR 85.36.

Comment 13 The State contended that several sections of the report started by explaining what
           the regulations required the State to do, despite acknowledging that the State did
           not adopt the procurement procedures of 24 CFR 85.36(b-i). While sections of
           the audit report began by explaining what the specific procurement standards of
           24 CFR 85.36(b-i) required, we maintain that the State’s process was not
           equivalent to these procurement standards. The last detailed section of the finding
           discussed the State’s certification and explained that the issues identified in the
           report show that the State’s process was not equivalent to the specific
           procurement standards at 24 CFR 85.36(b-i).

Comment 14 The State contended that its own procurement procedures were not identical to
           standards at 24 CFR 85.36(b-i) but achieved the same procurement goals and
           were equivalent because the procedures met the overall intent of those
           regulations. We disagree. As explained in the report, the State did not have
           procedures that were equivalent to an independent cost estimate and analysis. As
           a result, the State was unable to demonstrate that the initial contract price of $38.5
           million and option years totaling another $21.7 million were fair and reasonable.
           The State’s own procurement procedures did not achieve the same procurement
           goals or meet the overall intent of 24 CFR 85.36.

              The State contended that it made clear in the documentation it provided with its
              certification to HUD that although it considered its policies equivalent to those in
              the Federal regulations, they were not identical. Further, the State contended that
              it explained in detail where its policies diverged from the rules in 24 CFR 85.36
              and how its procurement rules contained procedures and controls that met the
              intent and were, therefore, equivalent to the Federal procurement standards.
              While the documentation provided by the State sometimes explained how its
              procedures and controls met the intent of the standards, there were many cases in
              which it provided only a vague reference to State rules without explaining what
              its policies required or how the procedures were equivalent. For example, there
              are 16 instances in which the State cited section 17:12 of the New Jersey



                                                61
               Administrative Code without detailing which subsection it was referring to or
               how the relevant procedure met the intent of the specific Federal standards.
               Further, our review of the documentation the State provided with its submission
               did not identify any instances in which it clearly explained how its policies
               differed from the Federal procurement standards at 24 CFR 85.36(b-i).

               For 24 CFR 85.36(f), the State contended that it explained in several paragraphs
               why its procedures met the intent of the Federal standards and were, therefore,
               equivalent. As noted in the report, 24 CFR 85.36(f)(1) required an independent
               cost estimate before receiving bids and a cost analysis before awarding the
               contract. However, in the documentation supporting the State’s certification of
               equivalency, the State indicated only that cost analysis was a component part of
               GSA’s Disaster Recovery Purchase Program and that the State’s adoption of this
               program as a part of its procurement process complied with the requirements of
               24 CFR Part 85.36(f)(1). The State also included three citations: New Jersey
               Administrative Code 17:12, et seq.; New Jersey Statutes Annotated 52:34-1, et
               seq.; and GSA’s Disaster Recovery Purchase Program. However, the State did
               not identify to HUD which portions of these citations were relevant to the
               requirements for an independent cost estimate and cost analysis. For example,
               when we obtained a copy of Section 17:12 of the State’s Administrative Code
               from its Web site, the document was 32 pages long. Further, the State did not
               explain how the procedures cited were equivalent to or differed from the Federal
               rules. For 24 CFR 85.36(f)(2-4), the State included short explanations of how it
               would meet the requirements but did not indicate which sections of its policies
               and procedures were equivalent.

Comment 15 The State contended that we suggested that it acted deceptively or disingenuously
           in making its certification to HUD. We disagree. The report did not suggest that
           the State acted deceptively or disingenuously when making its certification to
           HUD. Rather, the report states that while the State accurately portrayed its
           policies and procedures on the certification, the issues identified during the audit
           show that the State’s process was not equivalent to Federal procurement
           standards; therefore, its certification was not accurate.

Comment 16 The State contended that if and when the State awards the option years, it will
           ensure that the price is reasonable and will secure an updated independent cost
           estimate to review the proposed option year costs. We agree with the State that
           further steps should be taken to ensure the reasonableness of the price for the 3
           additional option years. Thus, our report recommended that HUD determine
           whether the documentation the State provided is adequate to show that the price
           for the 3 additional option years is fair and reasonable and if not, direct the State
           to rebid for the additional option years, thereby putting $9,061,780 to better use.

Comment 17 The State contended that comparing the total price estimate in the independent
           cost estimate to CGI Federal’s total option year bid estimate was not an apples-to-



                                                62
               apples comparison due to the widely differing assumptions that each estimate
               makes regarding the level of staffing required during the option years. We agree
               that the independent cost estimate and CGI Federal had widely differing
               assumptions regarding the amount of staffing required during the option years.
               This difference demonstrates the need for HUD to determine whether the
               documentation the State provided is adequate to show that the price for the 3
               additional option years is fair and reasonable. Further, the widely differing
               assumptions regarding the amount of staffing underscore the importance of
               performing an independent cost estimate before soliciting bids.

Comment 18 The State contended that the request for quotation did not require CGI Federal to
           provide price proposals for the option years. However, in an addendum to the
           request for quotation, the State explicitly stated that bidders shall provide a cost
           component for the 3 additional option years in their proposals, which could be
           exercised by the State.

Comment 19 The State contended that because the contract provides that option year rates must
           be equal to or less than the rates for the initial contract term, it will get a fair and
           reasonable price for the option years. However, as noted in the report, the State
           did not perform an independent cost estimate and analysis before awarding the
           contract. An independent cost estimate serves as a yardstick for evaluating the
           reasonableness of the contractor’s proposed costs or prices. An independent cost
           analysis consists of evaluating the separate elements (labor, materials, etc.) that
           make up a contractor’s total cost proposal to determine whether they are
           allowable, directly related to the requirement, and reasonable. The State did not
           perform an independent cost estimate and cost analysis and, therefore, did not
           evaluate all of the separate elements that made up the contractor’s total cost
           proposal. Additionally, the State’s evaluation committee report did not show that
           the State considered the pricing for the option years as a part of its technical
           review and price comparison process. As a result, HUD and the State had no
           assurance that the contract amount, including the option years, was fair and
           reasonable.

Comment 20 The State contended that we appeared to fully endorse the independent cost
           estimate that it obtained during our audit as a reasonable estimate of cost. We did
           not endorse the independent cost estimate. We referenced the independent cost
           estimate to show that the option years may not be reasonably priced. However,
           the report recommended that HUD determine whether the documentation the
           State provided is adequate to show that the price for the 3 additional option years
           is fair and reasonable.

Comment 21 The State contended that Federal Acquisition Regulation indicates that option
           years may be exercised without rebidding when certain requirements are met,
           including that the options were evaluated as part of the original competition.
           While these requirements do not apply to the State, it should be noted that the



                                                 63
              State’s evaluation committee report did not show that it considered the pricing for
              the option years as a part of its technical review and price comparison process.
              Further, as noted in the report, the State did not perform an independent cost
              estimate and analysis before awarding the contract. As a result, HUD and the
              State had no assurance that the contract amount, including the option years, was
              fair and reasonable.

Comment 22 The State contended that its request for quotation provided that task orders for
           services would be used and that for each task order issued, the contractor would
           be required to submit a plan that included the proposed labor categories and hours
           needed to complete the particular task order. However, during our audit, when we
           asked the State to provide task orders related to disbursements for labor costs, a
           State official informed us that the system contract was not operated by task order
           and did not provide any related task orders. Further, the request for quotation did
           not discuss the use of task orders for quantities of specific services. Rather, it
           used the phrase “task order” to refer to a series of tasks that the contractor must
           have completed within a certain number of days after the contract was signed.
           While the State provided signed acceptance sheets documenting that the each task
           had been completed, these sheets listed only the title of the task completed rather
           than a quantity of services provided. For example, the tasks included “Gap
           Solution,” “Cloud Computing,” “Meet with DCA [Department of Community
           Affairs] and ARMS [Automated Records Management System Committee],”
           “Provide training plan,” and “Provide standardized reports and ad hoc reporting
           capabilities.” Further, while the request for quotation included a rate schedule
           with predetermined hours, which CGI Federal used for its proposal, the State did
           not provide any plans submitted by CGI Federal showing proposed labor
           categories and hours needed to complete a particular task order. Instead, the
           hours shown on the rate schedule were intended to cover the full 2-year period.

Comment 23 The State contended that its request for quotation provided that task orders for
           services would be used. However, during our audit, when we asked the State to
           provide task orders related to disbursements for labor costs, a State official
           informed us that the system contract was not operated by task order and did not
           provide any related task orders.

Comment 24 The State contended that HUD recently used a pricing worksheet with labor
           categories and estimated labor hours in a solicitation for services associated with a
           broadcast operation center. However, according to the statement of work
           included in the solicitation, the services to be provided were more clearly defined.
           For example, while the system contract required the development of a complex,
           fully functional turnkey information technology solution, the HUD solicitation
           required technical staff and professional services to operate, maintain, and update
           an already fully functional broadcast operations center. The titles of the labor
           categories were more exclusive and clear cut, such as a camera operator, video
           editor, script writer, narrator, makeup artist, and court reporter. Based on the



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              statement of work and the labor categories included in HUD’s solicitation, this
              example is not relevant to the system contract.

Comment 25 The State contended that the U.S. Department of Homeland Security recently
           used pricing templates with labor categories and estimated labor hours when
           soliciting to design a major system. However, according to the solicitation and
           other publicly available information, this solicitation was used for the award of
           multiple contracts and included provisions for competitive awarding of individual
           task orders. Further, the solicitation was for a variety of services, including
           support services and testing of information technology products. Based on the
           information reviewed, this example is not relevant to the system contract.

Comment 26 The State contended that the U.S. Department of the Interior recently used a
           pricing worksheet with labor categories and estimated labor hours in a solicitation
           related to services to design and build an information technology infrastructure
           system. However, the statement of work provided by the State, along with other
           publicly available information, indicated that the solicitation was for support
           services, such as a help desk call center, not for designing and building an
           information technology infrastructure system. Based on the information
           reviewed, this example is not relevant to the system contract.

Comment 27 The State contended that it appropriately and reasonably relied upon historical
           data from Louisiana and other States to develop estimates necessary for labor
           categories and labor hours. However, the State did not supply documentation to
           support this claim, nor did it perform an independent cost estimate before
           soliciting bids. Also, a change made by the State during the open comment period
           illustrated that the State was not confident that its initial estimate of labor hours
           was sufficient. When a contractor requested that the State supplement the rate
           schedule with 38,000 additional labor hours to accommodate three different labor
           categories, the State fulfilled the contractor’s request. The State did not provide
           documentation to justify this change, which increased the total hours in the rate
           schedule by more than 17 percent, or approximately 9 full-time contractor
           employees for 2 years. Thus, it is clear that the State did not have a sufficient
           measure for estimating costs for the system before soliciting bids. As a result,
           HUD and the State had no assurance that the contract price, including option
           years, was fair and reasonable.

Comment 28 The State contended that the experience specifications listed in the request for
           quotation were necessary to meet the State’s legitimate needs and did not unduly
           restrict competition. However, the detailed experience requirements included that
           each bidder have all of the following:

                      •   Experience with Block Grant Disaster Recovery program and financial
                          requirements;




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                      •   Experience in implementing disaster recovery projects exceeding $500
                          million; and
                      •   Experience with at least three contract engagements of a 2-year
                          duration or greater for which it was responsible as the primary
                          information technology shared services provider, including one
                          engagement that was undertaken within the past 3 years and one
                          engagement in which the client was a State or local government with
                          an annual information technology budget of at least $10 million.

              The State was not able to show that the level of detail in its requirements for
              experience was necessary to retain a qualified contractor. For example, while it
              may have been reasonable to require experience with projects of a certain size and
              some level of disaster recovery experience, the State could not demonstrate that
              experience in implementing disaster recovery projects exceeding $500 million
              was necessary.

              Further, while the State contended that at least 19 contractors would have met its
              requirement for experience in implementing disaster recovery projects exceeding
              $500 million, it did not establish whether these contractors met its other
              requirements. When one prospective vendor asked whether it would qualify if it
              had significant past experience but did not have the Block Grant Disaster
              Recovery experience, the State restated its requirement for specific Block Grant
              Disaster Recovery experience. This action demonstrated that the specific
              experience requirements may have discouraged qualified contractors from
              bidding. The effect of this may be further illustrated by the fact that the State
              received only one responsive bid despite soliciting 3,599 contractors.

Comment 29 The State pointed out that we did not include the correct language from the
           regulations at 24 CFR 85.36(c) and failed to explain how the State required
           “excessive bonding.” We have updated the report and changed “excessive”
           experience to “unnecessary” experience. We did not find that the State required
           excessive bonding.

Comment 30 The State contended that Federal agencies use labor categories in solicitations
           when procuring technical services for task order contracts similar to its system
           contract. However, during our audit, when we asked the State to provide task
           orders related to disbursements for the system, a State official informed us that the
           system contract was not operated by task order. Further, while we agree that the
           use of labor categories in the request for quotation was not explicitly prohibited,
           our finding that the State included provisions that restricted competition was
           based on the combination of several provisions pertaining to the request, not one
           specific provision.

Comment 31 The State contended that its working group reviewed the labor categories from the
           vendor used for Louisiana’s “Road Home” program and began with a list of 42



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              labor categories common to the information technology industry. The contractor
              used by Louisiana was CGI Federal. CGI Federal was the only firm to submit a
              responsive bid, and the State awarded the system contract to CGI Federal.

Comment 32 The State contended that many vendors use common terms to describe labor
           categories. While we acknowledge this fact, our finding that the State included
           provisions that restricted competition was based on the combination of several
           provisions pertaining to the request, not one specific provision.

Comment 33 The State contended that CGI Federal purchased software at competitive,
           reasonable, and fair prices because the costs were in line with GSA Schedule rates
           and because CGI Federal negotiated additional discounts. However, as noted in
           the report, the State’s contract with CGI Federal required the contractor to provide
           copies of at least three quotes when submitting invoices for payment for direct
           costs, such as software. CGI Federal did not include at least three quotes when
           submitting invoices for the software. Without the required quotes, CGI Federal
           failed to follow contract requirements, and HUD had no assurance that the
           software was acquired competitively.

Comment 34 The State contended that CGI Federal included the software prices in its proposal
           to the State and that the prices were reasonable because they were obtained from
           the GSA Schedule and used the services of two GSA Schedule vendors.
           However, the State chose not to enforce the terms of its own contract by allowing
           CGI Federal to purchase software based on the proposal without providing copies
           of at least three quotes when submitting invoices for payment.

Comment 35 The State contended that CGI Federal was not required to include three price
           quotations when submitting invoices because the process it used already assured
           the State that the software expenditures were fair and reasonable. We disagree.
           The contract between the State and CGI Federal stated that the contractor must
           submit three price quotations when submitting invoices for direct costs. If the
           State did not intend for CGI Federal to follow the contract requirement, it should
           have formalized the change and issued a contract modification because
           regulations at 24 CFR 85.36(b)(9) required the State to maintain records sufficient
           to detail the significant history of the procurement.

Comment 36 The State contended that it took additional steps to ensure that software prices
           were reasonable by recently obtaining one additional quote from an information
           technology vendor for the same software purchased by CGI Federal and
           comparing the prices. We agree with the State that further steps need to be taken
           to ensure the reasonableness of the software prices. However, the quote was
           obtained after the software was purchased and did not document what the price
           would have been at the time of the purchase. Our report recommended that HUD
           determine whether the documentation the State provided is adequate to show that
           the more than $1 million disbursed for software was fair and reasonable.



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Comment 37 The State contended that it possessed sufficient documentation to support labor
           costs consistent with the terms of the contract. We disagree. As stated in the
           audit report, the contract required the bidder to have weekly timesheets when
           submitting invoices for payment. The State, however, did not have the required
           timesheets at the time of the audit. Instead, it initially provided billing worksheets
           that identified the employee, the number of hours worked by date and activity, the
           hourly rate, and the total amount due. These billing worksheets did not meet the
           terms of the contract. After we notified the State of this problem, it contacted the
           contractor and provided us reports from the automated timekeeping systems of
           CGI Federal and its subcontractors. The timekeeping reports satisfied the
           requirements of the contract and Federal cost principle requirements for some but
           not all of the employees who charged time to the contract. The timesheets
           provided from CGI Federal’s timekeeping system contained digital signatures.
           Some of the subcontractor timesheets contained “wet” signatures. However,
           timesheets supporting $467,659 in disbursements for subcontractor labor costs
           were not signed by employees with a digital or “wet” signature and, therefore, did
           not meet the Federal cost principle requirements.

Comment 38 The State contended that CGI Federal’s method of timekeeping satisfied Federal
           cost principle requirements. As noted in the report, the State did not initially have
           timesheets to support $1.5 million in labor costs charged by the contractor’s
           employees. Instead, the State provided billing worksheets that identified the
           employee, the number of hours worked by date and activity, the hourly rate, and
           the total amount due. After we notified the State of this problem, it contacted the
           contractor and provided us reports from the automated timekeeping systems of
           CGI Federal and its subcontractors. The timekeeping reports satisfied the
           requirements of the contract and Federal cost principles for some of the
           employees who charged time to the contract. This documentation included the
           timekeeping reports provided for CGI Federal, which contained digital signatures.

Comment 39 The State contended that nothing in the State or Federal rules required CGI
           Federal’s fully automated timekeeping statements to contain “wet” signatures.
           We agree. As stated in the audit report, after we notified the State of problems
           with the billing worksheets provided, it contacted the contractor and provided us
           reports from the automated timekeeping systems of CGI Federal and its
           subcontractors. The timekeeping reports satisfied the requirements of the contract
           and Federal cost principles for some of the employees who charged time to the
           contract. This documentation included the timekeeping reports provided for CGI
           Federal, which contained digital signatures.

Comment 40 The State contended that any subcontractor timesheets that were initially drafted
           outside CGI Federal’s timekeeping system were electronically recorded and
           reviewed for accuracy by CGI Federal and the State before payment. However,
           we found that not all of these timesheets were signed by the employees (digitally



                                                68
or with a “wet” signature) as required by 2 CFR Part 225. Our report
recommended that HUD determine whether the documentation the State provided
is adequate to support the $467,659 disbursed for subcontractor wages and
salaries.




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