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 64 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; 65 • 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 66 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. 67 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. 69
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)