oversight

The Richmond Redevelopment and Housing Authority, Richmond, VA, Did Not Comply With HUD Requirements When Procuring Services

Published by the Department of Housing and Urban Development, Office of Inspector General on 2015-09-30.

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

      Richmond Redevelopment and
     Housing Authority, Richmond, VA
                            Public Housing Program




Office of Audit, Region 3                Audit Report Number: 2015-PH-1008
Philadelphia, PA                                         September 30, 2015
To:            Catherine D. Lamberg, Director, Office of Public Housing, Richmond Field
               Office, 3FPH
               //signed//
From:          David E. Kasperowicz, Regional Inspector General for Audit, Philadelphia
               Region, 3AGA
Subject:       The Richmond Redevelopment and Housing Authority, Richmond, VA, Did Not
               Comply With HUD Requirements When Procuring Services


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 Richmond Redevelopment and Housing
Authority.
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-1008
                    Date: September 30, 2015

                    The Richmond Redevelopment and Housing Authority, Richmond, VA, Did
                    Not Comply With HUD Requirements When Procuring Services




Highlights

What We Audited and Why
We audited the Richmond Redevelopment and Housing Authority’s public housing program
based on a request from the Office of Public Housing in the U.S. Department of Housing and
Urban Development’s (HUD) Richmond, VA, field office. The request was made after media
inquiries noted possible fraud, waste, or abuse at the Authority. Our audit objective was to
determine whether the Authority complied with HUD procurement requirements.

What We Found
Under the leadership of its former chief executive officers, the Authority did not procure services
associated with its public housing program in accordance with HUD procurement requirements.
Specifically, it did not prepare an independent cost estimate and cost analysis before awarding
contracts, did not maintain documentation to demonstrate that services were procured
competitively, and did not ensure that option years were awarded competitively. The issues
identified occurred because the Authority was not fully aware of HUD procurement requirements
and mistakenly believed that it was properly procuring services. Because the Authority did not
comply with HUD procurement requirements, HUD and the Authority had no assurance that
more than $6.5 million in public housing operating funds paid under the contracts was fair and
reasonable.

What We Recommend
We recommend that HUD direct the Authority to (1) provide documentation to support that
payments for services totaling more than $6.5 million were fair and reasonable or reimburse its
program from non-Federal funds for any amount that it cannot support, (2) not exercise
remaining option years for the contracts identified, and (3) implement controls in its procurement
process to ensure that HUD requirements are followed. We also recommend that HUD provide
technical assistance to the Authority to ensure that responsible personnel receive necessary
procurement training.
Table of Contents
Background and Objective......................................................................................3

Results of Audit ........................................................................................................4
         Finding: The Authority Did Not Comply With HUD Procurement Requirements
         When Procuring Services ................................................................................................. 4

Scope and Methodology ...........................................................................................8

Internal Controls ....................................................................................................10

Appendixes ..............................................................................................................11
         A. Schedule of Questioned Costs .................................................................................. 11

         B. Auditee Comments and OIG’s Evaluation ............................................................. 12




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Background and Objective
The Richmond Redevelopment and Housing Authority was established in 1940. The Authority’s
mission is to be the catalyst for quality affordable housing and community revitalization for the city
of Richmond, VA. The Authority is governed by a board of commissioners consisting of nine
members appointed by the city council. The board appoints a chief executive officer to manage the
day-to-day operations of the Authority. In January 2015, the board announced the resignation of its
chief executive officer and selection of a new interim chief executive officer. The Authority is
located at 901 Chamberlayne Parkway in Richmond, VA.

The Authority is the largest public housing agency in Virginia, serving nearly 10,000 residents.
It manages more than 4,000 units under its public housing program. In fiscal year 2014, the
Authority received $18.9 million in public housing operating subsidies and $6.6 million in public
housing capital funds. The U.S. Department of Housing and Urban Development (HUD)
provides operating funds annually to public housing agencies for the operation and management
of public housing. It provides capital funds annually to public housing agencies for the
development, financing, and modernization of public housing developments and for management
improvements.

Our audit objective was to determine whether the Authority complied with HUD procurement
requirements.




                                                   3
Results of Audit

Finding: The Authority Did Not Comply With HUD Procurement
Requirements When Procuring Services
Under the leadership of its former chief executive officers, 1 the Authority did not procure
services associated with its public housing program in accordance with HUD procurement
requirements. Specifically, it did not prepare an independent cost estimate and cost analysis
before awarding contracts, did not maintain documentation to demonstrate that services were
procured competitively, and did not ensure that option years were awarded competitively. The
issues identified occurred because the Authority was not fully aware of HUD procurement
requirements and mistakenly believed that it was properly procuring services. Because the
Authority did not comply with HUD requirements, HUD and the Authority had no assurance that
more than $6.5 million in public housing operating funds paid under 58 contracts was fair and
reasonable.

The Authority Did Not Prepare Independent Cost Estimates and Analyses Before
Awarding Contracts
Contrary to regulations at 24 CFR (Code of Federal Regulations) 85.36(f), the Authority did not
prepare an independent cost estimate and cost analysis before receiving bids or proposals and
awarding five contracts with payments totaling more than $7 million, including $2.9 million in
public housing operating funds. 2 The regulations required the Authority to make independent
estimates before receiving bids or proposals. They also required the Authority to perform a cost
analysis. HUD Handbook 7460.8, REV-2, explains that an independent cost estimate serves as a
yardstick for evaluating the reasonableness of the contractor’s proposed costs or prices. While
the level of detail would depend upon the dollar value of the proposed contract and the nature of
goods or services to be acquired, the independent cost estimate must be prepared before the
solicitation of offers. 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. Because the Authority did not
perform independent cost estimates and analyses as required, HUD and the Authority had no
assurance that the $2.9 million paid under the contracts was fair and reasonable.




1
  The audit covered the period July 2010 to December 2013. This period included the tenures of three different chief
executive officers, with the third serving from April 2012 through January 2015. In January 2015, the Authority
announced the resignation of its chief executive officer and selection of the current interim chief executive officer.
2
  For some of the contracts cited, the Authority made additional payments using non-Federal funds, such as those
from the Authority’s central office cost center.



                                                          4
The Authority Did Not Maintain Documentation To Demonstrate That Services Were
Procured Competitively
The Authority could not demonstrate that services under 53 contracts with payments totaling
more than $4 million, including $3.6 million in public housing operating funds, 3 were procured
competitively. Regulations at 24 CFR 85.36(b)(9) required the Authority to maintain records
sufficient to detail the significant history of the procurement. Regulations at 24 CFR 85.36(c)
required the Authority to conduct all procurement transactions in a manner providing full and
open competition.

The Authority issued two requests for proposal for a variety of services, including grounds and
property maintenance, painting, repair, renovation, elevator maintenance, power line distribution,
roof replacement, demolition, fire sprinkler inspection, fire extinguisher inspection, and other
construction- and maintenance-related services. The Authority then awarded contracts to the 53
bidders that it deemed to be responsive, for a total of 53 contracts. The Authority did not provide
documentation showing how it evaluated the proposals received.

For some services, such as property rehabilitation and renovation, the request for proposal
indicated that the Authority would contact three vendors, request quotes for a given task, and
select the vendor with the lowest complete quote. For other services, such as vacancy reduction,
the request for proposal did not require contact with a minimum number of vendors or explain
how vendors would be selected for the task. The Authority indicated that after awarding the 53
contracts, it operated them based on purchase orders, which would contain bid quotes, detailed
cost analyses, and information identifying the vendors selected to perform each task. However,
for the 10 purchase orders reviewed related to 2 contracts, the files did not contain this
information.

While HUD Handbook 7460.8, REV-2, allows indefinite delivery contracts, the Authority would
have been required to award the contracts competitively, and this type of contract generally does
not allow the use of purchase orders. Further, while HUD Handbook 7460.8, REV-2, allows
indefinite quantity contracts, which are run by purchase orders, the Authority would have needed
to meet various requirements such as specifying a minimum quantity of supplies or services.
The Authority did not meet the requirements for either the indefinite delivery or quantity type of
contract.

Without documentation demonstrating that the Authority adequately evaluated the proposals and
showing how it selected vendors for individual work orders, HUD had no assurance that the
services were procured competitively and that the $3.6 million paid under the contracts was fair
and reasonable.

The Authority Did Not Ensure That Option Years Were Awarded Competitively
Contrary to regulations at 24 CFR 85.36(c), the Authority did not ensure that option years were




3
    See footnote 2.



                                                 5
awarded competitively. The regulations required that all procurement transactions be conducted
in a manner providing full and open competition. Further, HUD Handbook 7460.8, REV-2,
details that options must be priced out in the terms of the contract 4 and evaluated as part of the
overall contract award, and indicates that the option to extend is the unilateral right of the
housing authority. For 55 contracts, the contract terms stated that the parties could agree to
renew the contract for additional years, subject to any escalation provisions as negotiated and
agreed to in writing. The Authority did not ensure that its contracts gave it the unilateral right to
exercise the option years. Also, the Authority did not require the option years to be priced out as
part of the bids and considered when awarding the contract. Allowing negotiation at the end of
the initial contract period can prevent full and open competition because it does not require
option year prices to be evaluated during the competitive procurement process. As a result,
HUD had no assurance that the amount paid under the contract option years was fair and
reasonable. 5

The Authority Was Not Fully Aware of Procurement Requirements
The issues identified occurred because the Authority was not fully aware of HUD procurement
requirements and mistakenly believed that it was properly procuring services. The Authority’s
written policies and procedures were generally in line with applicable requirements. For
example, the Authority’s policy required it to ensure full and open competition consistent with
the requirements at 24 CFR 85.36, its annual contributions contract with HUD, and the Virginia
Public Procurement Act. Further the Authority’s policy required it to obtain an independent cost
estimate for all procurement actions. However, Authority staff did not understand how various
procurement requirements applied to the contracts in question and could not demonstrate how its
practices followed applicable requirements and the Authority’s policy.

The Authority Is Under New Leadership
During the audit, the Authority announced the resignation of its chief executive officer and
selection of an interim chief executive officer. The Authority also made several changes to key
staff positions. As a result of our audit, the Authority stated that it would continue to work with
HUD to address the issues identified and improve its procurement process.

Conclusion
Under the leadership of its former chief executive officers, the Authority’s procurement process
did not ensure that services were procured in compliance with HUD requirements. Because the
Authority did not comply with HUD requirements, HUD and the Authority had no assurance that
more than $6.5 million in public housing operating funds paid under 58 contracts was fair and
reasonable. Further, because we identified issues in all 58 of the contracts reviewed, 6 the
Authority needs to strengthen controls in its procurement process and train responsible personnel
to ensure compliance with HUD procurement requirements.



4
  According to HUD Handbook 7460.8, REV-2, an unpriced option is considered a new procurement, and therefore,
may not be used. In some cases, options can be treated as a change order.
5
  Each of the 55 contracts discussed in this section are part of the 58 contracts previously discussed in the finding.
6
  Some contracts had more than one deficiency.



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Recommendations
We recommend that the Director of HUD’s Richmond Office of Public Housing

      1A.    Direct the Authority to provide documentation to support that payments for
             services totaling $6,565,897 were fair and reasonable or reimburse its program
             from non-Federal funds for any amount that it cannot support.

      1B.    Direct the Authority not to exercise remaining option years for 55 contracts to
             ensure that future services are procured competitively.

      1C.    Direct the Authority to develop and implement controls in its procurement
             process to ensure that HUD requirements are followed.

      1D.    Provide technical assistance to the Authority to ensure that responsible personnel
             receive necessary procurement training.




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Scope and Methodology
We conducted the audit from December 2013 through September 2014 at the Authority in
Richmond, VA, and our office in Richmond, VA. The audit covered the period July 2010 to
December 2013.

To accomplish our objective, we reviewed

   •   Relevant background information;
   •   Applicable regulations, HUD handbooks, and the Authority’s policies and procedures;
   •   Reports from the Authority’s automated software; and
   •   Procurement files provided by the Authority.

We conducted interviews with responsible employees of the Authority and HUD staff located in
Richmond, VA.

To achieve our objective, we relied in part on the Authority’s computer-processed data. We used
the data to select a sample of contracts and purchase orders 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 purposes.

We initially selected five contracts for review based on the Authority’s master contract listing
and a purchase order listing that covered the period October 2011 through December 2013. We
selected the only nonexpired contract listed for legal services, the only contract listed for security
services, the only contract listed for financial benchmarking assessment services, the pest control
contract with the vendor that received the most funds on the purchase order listing, and a
temporary employment services contract with a vendor that had three contracts included on the
contract listing.

Because the contract listing did not include the value of contracts and the Authority had
indicated that its procurement system was driven by purchase orders, we selected an additional
sample of purchase orders and contracts for vendors that had received a significant amount of
money during our audit period. We summarized the purchase order listing by vendor and
identified two vendors for review based on the amount of funds received and the number of
purchase orders. We then selected five purchase orders for each of the two vendors based on the
dollar amount and type of service provided. After our review of the 10 purchase orders and the 2
related contract files disclosed issues, we reviewed 51 additional contracts that resulted from the
same requests for proposal, for a total of 53 additional contracts.

Using financial reports provided by the Authority, we determined that it had disbursed more than
$11.4 million for the 58 contracts reviewed, including more than $6.5 million in public housing




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operating funds. The remaining payments were made using non-Federal funds, such as those
from the Authority’s central office cost center.

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.




                                                9
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 Authority did not establish and implement controls to ensure that it complied with HUD
    procurement requirements.




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Appendixes

Appendix A


                             Schedule of Questioned Costs
                           Recommendation
                                             Unsupported 1/
                               number
                                   1A              $6,565,897


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.




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Appendix B
             Auditee Comments and OIG’s Evaluation



Ref to OIG    Auditee Comments
Evaluation




Comment 1




                               12
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 1


Comment 2


Comment 3


Comment 4




                               13
                         OIG Evaluation of Auditee Comments


Comment 1   The Authority stated that it had compiled documentation to verify that the
            payments for services totaling more than $6.5 million were fair and reasonable
            and that it will provide the documentation to HUD. As part of the audit resolution
            process, HUD will need to determine whether the documentation supports the
            expenditures totaling more than $6.5 million or direct the Authority to reimburse
            its program from non-Federal funds for any amount that it cannot support.

Comment 2   The Authority stated that it had declined to renew the 55 contracts discussed in
            the report. Additionally, the Authority stated that it had trained its procurement
            staff to ensure that contract renewal provisions are part of the competitive
            procurement process and had implemented internal procedures to ensure that
            future contracts incorporate the required contract renewal provisions. These
            actions meet the intent of our recommendation. However, as part of the audit
            resolution process, HUD will need to evaluate and verify these actions.

Comment 3   The Authority stated that it had instituted internal procedures to ensure that
            independent cost estimates and cost analyses are retained in sufficient detail in the
            procurement files. These actions meet the intent of our recommendation,
            however, to fully comply with the recommendation, as part of the audit resolution
            process, the Authority will need to demonstrate to HUD that it has developed and
            implemented controls in its procurement process to ensure that it complies with
            all HUD requirements.

Comment 4   The Authority stated that it was working with HUD on a technical assistance
            program to ensure that responsible personnel receive the necessary procurement
            training and certifications. The Authority also stated that an internal audit and
            training program on procurement procedures were ongoing. We are encouraged
            by the Authority’s focus on improving its operations and preventing future
            occurrences of the deficiencies identified by the audit.




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