oversight

The Dayton Metropolitan Housing Authority, Dayton, OH, Did Not Always Follow HUD's and Its Own Requirements for the Procurement of Capital Grant-Funded Contract

Published by the Department of Housing and Urban Development, Office of Inspector General on 2016-09-30.

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

           Dayton Metropolitan Housing
                   Authority
               Public Housing Capital Fund Program




Office of Audit, Region 5         Audit Report Number: 2016-CH-1012
Chicago, IL                                       September 30, 2016
To:            Kevin J. Laviano, Director of Public and Indian Housing Hub, 5DPH

               //signed//
From:          Kelly Anderson, Regional Inspector General for Audit, 5AGA

Subject:       The Dayton Metropolitan Housing Authority, Dayton, OH, Did Not Always
               Follow HUD’s and Its Own Requirements for the Procurement of Capital Grant-
               Funded Contracts


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 Dayton Metropolitan Housing Authority’s
Public Housing Capital Fund program.
HUD Handbook 2000.06, REV-4, sets specific timeframes for management decisions on
recommended corrective actions. For each recommendation without a management decision,
please respond and provide status reports in accordance with the HUD Handbook. Please furnish
us copies of any correspondence or directives issued because of the audit.
The Inspector General Act, Title 5 United States Code, section 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
312-353-7832.
                          Audit Report Number: 2016-CH-1012
                          Date: September 30, 2016

                          The Dayton Metropolitan Housing Authority, Dayton, OH, Did Not Always
                          Follow HUD’s and Its Own Requirements for the Procurement of Capital
                          Grant-Funded Contracts


Highlights

What We Audited and Why
We audited the Dayton Metropolitan Housing Authority’s Public Housing Capital Fund program.
We selected the Authority’s program for audit based on our analysis of risk factors related to
public housing agencies in Region 5’s1 jurisdiction. The audit was part of the activities in our fiscal
year 2016 annual audit plan. Our objective was to determine whether the Authority complied
with the U.S. Department of Housing and Urban Development’s (HUD) and its own
procurement requirements.

What We Found
The Authority did not always comply with HUD’s and its own procurement requirements.
Specifically, it did not (1) prepare adequate independent cost estimates for two contracts, (2)
maintain documentation to justify the reason for the significant price difference between the
independent cost estimate and the contract price for four contracts, and (3) analyze the cost of the
additional items included in the scope of work for three contracts. As a result, HUD and the
Authority lacked assurance that (1) nearly $406,000 in capital funds expenses was reasonable
and (2) nearly $95,000 in capital funds would be used appropriately.

What We Recommend
We recommend that the Director of HUD’s Cleveland Office of Public housing require the
Authority to support that the (1) costs paid for two contracts that did not have adequate cost
estimates were reasonable or reimburse its Public Housing Capital Fund program, (2) cost paid
in excess of the independent cost estimate for one contract was reasonable or reimburse its
program, (3) cost paid in excess of the independent cost estimate for one contract was reasonable
or deobligate the program funds, (4) costs paid for contract modifications for two contracts were
reasonable or reimburse its program, and (5) cost paid for contract modifications for one contract
was reasonable or deobligate the program funds. We also recommend that HUD requires the
Authority to (1) reimburse the U. S. Treasury from its capital fund account for the costs charged
to the incorrect budget line item in HUD’s system and (2) implement adequate procedures and
controls to address the findings cited in this audit report.


1
    Region 5 includes the States of Illinois, Indiana, Michigan, Minnesota, Ohio and Wisconsin.
Table of Contents
Background and Objective......................................................................................3

Results of Audit ........................................................................................................4
         Finding: The Authority Did Not Always Comply With HUD’s and Its Own
                  Procurement Requirements............................................................................. 4

Scope and Methodology ...........................................................................................9

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

Appendixes ..............................................................................................................11
         A. Schedule of Questioned Costs and Funds To Be Put To Better Use .................... 11

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

         C. Federal and Authority Requirements ..................................................................... 40




                                                            2
Background and Objective
The Dayton Metropolitan Housing Authority was created in 1934 by the State of Ohio to provide
decent, safe, and sanitary housing to low-income households. The Authority’s mission is to
develop housing solutions for individuals, seniors, and families. It is governed by a seven-
member board of commissioners appointed by elected officials. The board’s responsibilities
include performing duties and functions as required by the Authority’s bylaws or its rules and
regulations. The Chief Executive Officer has supervision over the administration of the
Authority and management of the Authority’s housing projects.
The U.S. Department of Housing and Urban Development (HUD) established the public housing
program to provide decent and safe rental housing for eligible low-income families, the elderly,
and persons with disabilities. HUD provides funds to local housing agencies that manage
housing for low-income residents at rents they can afford. The Public Housing Capital Fund
program provides financial assistance to public housing agencies and resident management
corporations to make improvements to existing public housing. It also provides financial
assistance to develop public housing, including mixed-finance developments that contain public
housing units. HUD authorized the Authority the following Capital Fund program grants for
fiscal years 2013, 2014, and 2015.

                                                    Capital Fund
                              Fiscal year             program
                               2013                 $5,634,710
                                2014                5,359,701
                                2015                5,068,970
                                Total               16,063,381


Our objective was to determine whether the Authority complied with HUD’s and its own
procurement requirements.




                                                3
Results of Audit

Finding: The Authority Did Not Always Comply With HUD’s and
Its Own Procurement Requirements
The Authority did not always comply with HUD’s and its own requirements. Specifically, it did
not (1) prepare adequate independent cost estimates for two contracts, (2) maintain
documentation to justify the reason for the significant price difference between the independent
cost estimate and contract price for four contracts, and (3) estimate the cost of additional items
included in the scope of work for three contracts. These weaknesses occurred because the
Authority lacked a sufficient understanding of HUD’s and its own procurement requirements.
As a result, HUD and the Authority lacked assurance that (1) nearly $406,0002 in program capital
funds expenditures was reasonable and (2) nearly $95,0003 in program capital funds would be
used appropriately.
The Authority Did Not Prepare Adequate Independent Cost Estimates
From July 1, 2013, through June 30, 2015, the Authority entered into 15 contracts with 12
contractors, totaling more than $1.9 million in capital funds. We reviewed 5 of the 15 contracts
totaling more than $1.5 million to determine whether the Authority complied with HUD’s and its
own procurement requirements.
The Authority did not prepare adequate independent cost estimates for two of the five contracts.
For contract number 1697, the Authority developed a scope of work for the replacement of
boilers. It estimated that the services would cost $83,000. The Authority’s request for
quotations included the scope of work and 13 alternatives to the scope of work. It received
quotes from three contractors. The lowest quote for the scope of work was $126,000, and the
lowest quote for alternate number 13 was $97,290. The Authority accepted the lowest quote of
$97,290 for alternate number 13, and on July 25, 2013, it entered into a contract with the
winning contractor. The Authority’s independent cost estimate included the cost for the scope of
work; however, it did not include the cost for each of the alternates, in particular alternate
number 13, to support that the contract price was reasonable.4 The Authority believed that an
independent cost estimate for the alternatives to the scope of work was not required because it
had performed a price analysis by comparing the three quotes received. However, since this was
a small purchase, the analysis should have also included a comparison to other pricing
information, especially since the independent estimate did not include the costs or related
information regarding the alternates.5
For contract number 1707, the Authority developed a scope of work for door replacement
services and six alternatives to the scope of work. The Authority estimated that the work would

2
  181,290 in recommendation 1A + $44,452 in recommendation 1B + $179,949 in recommendation 1D = $405,691.
3
  $34,928 in recommendation 1C +$59,620 in recommendation 1E = $94,548
4
  24 CFR 85.36(f)(1)
5
  HUD Procurement handbook 7460 REV-2



                                                     4
cost $120,750. However, the Authority executed a contract with the winning contractor for
$84,000, which was more than 30 percent less than the estimate. The Authority’s independent
cost estimate contained only the estimated total cost. It did not identify the cost elements such as
the quantity of the materials to assess price or cost reasonableness. Without this information, we
could not determine whether the independent estimate supported the work items detailed in the
scope of work. According to the Authority, it was not required to break down the total cost into
separate categories, such as labor and material, because HUD’s procurement handbook states
that for commercially available products, such as doors, less detail was acceptable. HUD’s
regulations at 24 CFR 85.36(f)(1) state that a cost analysis must be performed when the bidders
are required to submit the elements of the estimated cost. The Authority’s invitation to bid
required the bidders to submit the elements of the estimated cost. Therefore, without an
independent cost estimate that identifies the quantity and cost of materials, labor, or any other
pertinent information the Authority has no baseline to determine reasonableness of the contract’s
costs.

The Authority’s Procurement Records Did Not Justify Price Differences
Contrary to HUD’s requirements,6 the Authority did not justify the significant difference
between the independent cost estimate and the price obtained for the four contracts procured
through sealed bids. The variance between the Authority’s independent cost estimate and
contractors’ price exceeded 10 percent for each contract. The following table shows the
independent cost estimate for the scope of work, contract price, and the percentage that the
contract price exceeded or fell short of the independent cost estimate.

                               Independent
                 Contract      cost estimate    Contract price  Difference
                   1698                 201,660         246,112    22.04%
                   1702                 194,195         229,123    17.99%
                   1707                 120,750          84,000   -30.43%
                   1724               1,219,409         888,481   -27.14%


According to the Authority, its interpretation of HUD’s procurement handbook7 was that for
sealed bids, it did not need to justify the significant difference between the independent cost
estimate and the price awarded as long as there was adequate competition. However, HUD
requires the Authority to examine significant variances between the independent cost estimate
and lowest competitive bid received and document the reason for a significant variance. Without
a comparison for the difference, there was no assurance that the price it paid for each of the four
contracts was reasonable.
The Authority Did Not Analyze the Cost of Additional Items
For three of the Authority’s contracts (contract numbers 1697, 1702, and 1724), it included
additional items that were not part of the original scope of work; however, it did not analyze the
cost of the items as required by 24 CFR 85.36(f)(1) and its own procurement policy.

6
    24 CFR 85.36(f)(1) and HUD’s Quick Guide to Cost and Price Analysis
7
    Paragraph 10-3(e) of HUD’s procurement handbook



                                                        5
Specifically, for contract 1697, the Authority added seven backflow preventers and seven
expansion tanks totaling $1,500 to the scope of work through a change order, dated September
24, 2013, and a pump for $445, for which it did not amend the contract. Therefore, on December
9, 2013, it issued a purchase order for $1,945 ($1,500 + $445). However, it did not analyze the
cost of the additional items to ensure that the total price paid was reasonable. According to the
Authority, it determined that the costs were reasonable based on information that the contractor
initially submitted with its bid and on industry norms. However, since the Authority did not
prepare an adequate independent estimate for the original scope of work, reasonableness could
not be determined. Further, the Authority mistakenly charged the $1,945 in HUD’s Line of
Credit Control System8 to budget line item 1430 for fees and costs, also referred to as soft costs,
when the items purchased should have been charged to line item 1460 for dwelling structures,
also referred to as hard costs.
For contract 1702, the Authority added three items totaling $8,000 to the scope of work through
a change order, dated October 14, 2013. Although the Authority used the allowance for bad soil
that was part of its initial contract to pay for the items, it did not analyze the cost for each of
these additional items to ensure that the price was reasonable. According to the Authority, since
it used the allowance to pay for the work completed, it believed that it complied with HUD’s and
its own procurement requirements. As a result of our audit, the Authority’s architect developed a
memorandum that provided a side by side comparison of the change order costs compared to RS
Means9 costs. However, no documentation to support the RS Means costs was provided.
For contract 1724, the Authority added 16 work items totaling $231,569 to the scope of work
through eight change orders, dated from December 18, 2014, through November 16, 2015. For
these additions, it did not analyze the related costs as required. The Authority’s procurement file
contained a cost certification for each change order in which its architect certified that the
proposed costs were acceptable based on reference manual estimates. The Authority stated that
its architect documented the basis for the estimated cost for each item to show that the costs were
reasonable. However, neither the Authority’s contract file contained documentation of the
architect’s cost estimates as required10 nor did the Authority provide us with the estimates. As a
result of our audit, the architect developed a memorandum that does a side by side comparison of
the change order costs compared to RS Means costs. However, no documentation to support the
RS Means costs was provided.




8
  The System is HUD’s primary grant disbursement system for handling disbursements for the majority of HUD
programs. Grant disbursements are facilitated via the Internet through the System.
9
  RS Means is a division of Reed Business Information that provides cost information to the construction industry so
contractors in the industry can provide accurate estimates and projections for their project costs.
10
   Paragraph 3-3(a) of HUD’s procurement handbook



                                                         6
Conclusion
The weaknesses described above occurred because the Authority lacked a sufficient
understanding of HUD’s and its own procurement requirements. As a result, HUD and the
Authority lacked assurance that (1) nearly $406,000 in program capital funds was reasonable and
(2) nearly $95,000 in program capital funds would be used appropriately.
Recommendations
We recommend that the Director of HUD’s Cleveland Office of Public Housing require the
Authority to
        1A.      Support the reasonableness of $181,290 ($97,290 + $84,000) paid for the two
                 contracts (contract numbers 1697 and 1707) that did not have adequate cost
                 estimates or reimburse its Capital Fund program from non-Federal funds.
        1B.      Support the reasonableness of $44,452 ($246,112 - $201,660) paid in excess of
                 the independent cost estimate for contract number 1698 or reimburse its Capital
                 Fund Financing program from non-Federal funds.11
        1C.      Support that $34,928 ($229,123 - $194,195) paid in excess of the independent
                 cost estimate for contract number 1702 was reasonable or deobligate the funds.12
        1D.      Support that contract modifications totaling $179,949 for two contracts (contract
                 numbers 1702 and 1724) were reasonable.13 The amount that cannot be shown to
                 be reasonable should be reimbursed to its Capital Fund program from non-Federal
                 funds.
        1E.      Support that the contract modification totaling $59,620 for contract number 1724
                 was reasonable. The amount that cannot be shown to be reasonable should be
                 deobligated under its Capital Fund program.
        1F.      Reimburse the U. S. Treasury from its capital fund account $1,945 charged to the
                 incorrect budget line item in HUD’s system.
        1G.      Implement adequate procedures and controls to ensure that the proper
                 documentation is maintained and contracts are procured and administered in
                 accordance with HUD’s and the Authority’s procurement requirements. Such
11
   We did not include contract number 1697 because it was included in recommendation 1A and contract number
1702 because it was included in recommendation 1C. Further, we did not question any funds for contract numbers
1707 and 1724 because the independent estimates exceeded the lowest bids. However, the Authority was also
required to include a justification or explanation in its procurement records for a significant difference when the
independent estimates exceeded the lowest bids.
12
   The Authority used private funding under the Capital Fund Finance program to pay the contractor for contract
number 1702 and pledged (obligated) future capital funds to pay for the work. Therefore in this instance, we
recommend that the Authority support or deobligate the funds.
13
   $$8,000 from contract number 1702 + $171,949 from contract number 1724. The amount questioned for contract
number 1724 was $231,569. However, because the Authority had not yet used $59,620 of the funds as of June
2016, the total amount questioned for this contract was limited to $171,949. The unused amount was included in
recommendation 1E. Further, we did not include the $1,500 change order that was added to contract number 1697
because it was included in recommendation 1F.



                                                         7
procedures and controls should include but not be limited to providing training to
its contract officer(s) on HUD’s and the Authority’s procurement requirements.




                                 8
Scope and Methodology
We performed our audit work from January through July 2016 at the Authority’s office located
at 400 Wayne Avenue, Dayton, OH, and HUD’s Chicago, IL regional office. The audit covered
the period July 2013 through June 2015 and was expanded as necessary.
To accomplish our objective, we reviewed
      Applicable laws; Federal regulations at 2 CFR Parts 200, and 225; HUD’s regulations at
       24 CFR 85, 905, and 990; Office of Public and Indian Housing notices; HUD Handbook
       7460.8, REV-2; HUD’s Quick Guide to Cost and Price Analysis for HUD Grantees and
       Funding Recipients; and HUD’s Guidebook 7510.
      The Authority’s accounting records, annual audited financial statements for fiscal years
       2014 and 2015, bank statements; contract and procurement files, policies and procedures,
       board meeting minutes for July 2013 through November 2014, and annual contributions
       contract, and data in HUD’s Line of Credit Control System.

      HUD’s files for the Authority.

In addition, we interviewed the Authority’s employees and HUD’s staff.
During our review period of July 1, 2013, through June 30, 2015, the Authority entered into 15
contracts with 12 contractors totaling more than $1.9 million in capital fund disbursements. We
reviewed the highest 5 (5 different contractors) of the 15 contracts totaling more than $1.5
million of the more than $1.9 million (80 percent) in disbursements to determine whether the
Authority procured the goods or services in accordance with HUD’s and the Authority’s
requirements.

We relied in part on the data from HUD’s Line of Credit Control System. Although we did not
perform a detailed assessment of the reliability of the data, we performed minimal levels of
testing and found the data to be adequately reliable for our purposes.

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:

   Effectiveness and efficiency of operations – Policies and procedures that management has
    implemented to reasonably ensure that a program meets its objectives.
   Reliability of financial reporting – Policies and procedures that management has
    implemented to reasonably ensure that valid and reliable data are obtained, maintained, and
    fairly disclosed in reports.
   Compliance with applicable laws and regulations – Policies and procedures that management
    has implemented to reasonably ensure that resource use 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 lacked a sufficient understanding of HUD’s and its own procurement
    requirements (finding).




                                                  10
Appendixes

Appendix A
           Schedule of Questioned Costs and Funds To Be Put To Better Use


       Recommendation                                               Funds to be put
                               Ineligible 1/     Unsupported 2/
           number                                                   to better use 3/
               1A                                      $181,290
               1B                                         44,452
               1C                                                            $34,928
               1D                                        179,949
               1E                                                             59,620
                1F                     $1,945

              Totals                    1,945           405,691               94,548


1/   Ineligible costs are costs charged to a HUD-financed or HUD-insured program or activity
     that the auditor believes are not allowable by law; contract; or Federal, State, or local
     policies or regulations.
2/   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.
3/   Recommendations 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
     will deobligate unreasonable amounts of capital funds and make them available for
     eligible uses.




                                                11
Appendix B
             Auditee Comments and OIG’s Evaluation


Ref to OIG
Evaluation
              Auditee Comments




Comment 1




                               12
             Auditee Comments and OIG’s Evaluation



Ref to OIG
              Auditee Comments
Evaluation




Comment 1




Comment 2




Comment 3




                               13
             Auditee Comments and OIG’s Evaluation



Ref to OIG
              Auditee Comments
Evaluation




Comment 4




                               14
             Auditee Comments and OIG’s Evaluation



Ref to OIG
              Auditee Comments
Evaluation




                               15
             Auditee Comments and OIG’s Evaluation



Ref to OIG
              Auditee Comments
Evaluation




Comment 4


Comment 5


Comment 4




                               16
             Auditee Comments and OIG’s Evaluation



Ref to OIG
              Auditee Comments
Evaluation




Comment 4




Comment 4




Comment 6




                               17
             Auditee Comments and OIG’s Evaluation



Ref to OIG
              Auditee Comments
Evaluation




                               18
             Auditee Comments and OIG’s Evaluation



Ref to OIG
              Auditee Comments
Evaluation




Comment 7




Comment 8


Comment 6

Comment 4

Comments 6
and 7




Comment 4




                               19
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comments 5
and 8

Comment 2




Comment 9




Comment 10
Comments 3
and 11

Comment 9
Comment 12
Comment 10




                               20
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 10

Comment 7




                               21
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 10




Comment 9




                               22
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 9




Comments 3
and 11


Comment 5


Comment 8




                               23
              Auditee Comments and OIG’s Evaluation




Ref to OIG     Auditee Comments
Evaluation




Comments 3,
10, 11, and
12




Comment 10




Comments 9
and 12




                                24
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 10




Comment 10



Comment 13




Comment 10




                               25
              Auditee Comments and OIG’s Evaluation




Ref to OIG     Auditee Comments
Evaluation




Comment 10




Comments 9,
10, and 12




Comment 10
and 12




                                26
              Auditee Comments and OIG’s Evaluation




Ref to OIG     Auditee Comments
Evaluation




Comment 10


Comment 12

Comment 9


Comment 12




Comments 3,
11, and 12

Comment 9

Comments
12 and 10




                                27
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 14




                               28
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 14




                               29
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 15

Comment 16




                               30
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 17




                               31
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 17


Comment 14


Comment 14




Comment 17




Comment 14




                               32
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 18




Comment 19




                               33
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 20




                               34
                         OIG Evaluation of Auditee Comments


Comment 1   The Authority contends that the scope of the audit was more expansive than a
            review of the Authority’s procurement practices. Generally Accepted
            Government Auditing Standards requires us to obtain a sufficient understanding
            of an entity’s control environment. The survey objective was to determine
            whether the Authority administered its program in accordance with HUD's and its
            own requirements. During the survey phase, we performed limited testing of
            various aspects of the Authority’s public housing program to identify area(s) of
            high risk to focus on during the audit. In this case, our limited testing identified
            that the Authority’s procurement transactions yielded a high risk. Therefore
            during the audit phase, we focused our review on the Authority’s procurement
            practices and performed more detailed testing to support our conclusions.
Comment 2   The Authority contends that the audit report failed to identify relevant
            procurement policies of the Authority. It also contends that it fully followed
            HUD’s and its own procurement policy. Appendix C of the audit report, cites
            applicable excerpts from HUD’s and the Authority’s procurement requirements.
            The report acknowledged that the Authority prepared independent costs estimates;
            however, the estimates were not adequate. The report also stated that the
            Authority did not justify the reasonableness of the prices paid by failing to
            conduct cost analyses in accordance with Federal requirements and lacked
            adequate documentation to properly support its procurements.
Comment 3   The Authority contends that it did not use competitive proposals as a method of
            solicitation of bids for contract number 1697. We removed the statement
            regarding the Authority’s use of competitive proposals for contract 1697 from the
            report and modified the report accordingly.
Comment 4   The Authority states that the report’s contention that its written cost estimates for
            contract 1697 and 1707 did not have enough detail was predicated on
            misinterpretations and misapplications of HUD’s procurement requirements. We
            disagree. HUD Handbook 7460.8 REV-2, states that an estimate must be
            prepared prior to obtaining offers. The degree of analysis will depend on the size
            and complexity of the purchase. As mentioned in the audit report, the Authority’s
            independent estimates only stated the total cost of the scopes of work. It did not
            provide any other details such as quantity of materials, labor, etc. For contract
            1697, the Authority accepted alternate number 13; however, the estimate did not
            contain any information regarding alternates. Therefore, it did not have an
            independent estimate for the services performed.

Comment 5   The Authority contends that it determined price reasonableness by comparing the
            three proposed prices received. Paragraph 5.5(A)2 of HUD Handbook 7460.8
            REV-2, states that before making an award, the contracting officer must
            determine that the proposed price was fair and reasonable. For most small



                                              35
              purchases, a price analysis would be sufficient to make that determination. In
              addition, for small purchases above the micro purchase threshold, generally, a
              price analysis would consist of a comparison of quotations to each other and to
              other sources of pricing information (e.g., past prices paid, catalog prices, etc.).
              Further, an analysis was needed because there was a greater than 10 percent
              difference between the Authority’s independent estimate and the lowest winning
              bid. Specifically, for contract number 1697, the lowest bid for the initial cost of
              scope of work exceeded the Authority’s cost estimate by more than 50 percent.

Comment 6     The Authority contends that the draft report seems to erroneously use these terms
              interchangeably. We clarified the audit report to better differentiate between cost
              estimates and cost analyses.

Comment 7     The Authority contends that the requirement to prepare an individual cost analysis
              did not apply to construction contracts that were procured using sealed bids. We
              disagree. The report stated that the Authority did not justify or explain the
              significant difference between the independent cost estimate and the price
              obtained. Paragraph 10-3(e) HUD’s Handbook 7460.8, REV-2, and HUD’s
              Quick Guide to Cost and Price Analysis for HUD Grantees and Funding
              Recipients states that for sealed bids method of procurement, a cost analysis must
              be performed (1) when there was not sufficient competition, (2) if after soliciting
              competitive sealed bids, only one bid is received, or (3) bids received differs
              substantially from the independent estimate of the contract price.

Comment 8     The Authority contends that for contract 1707, it obtained a sufficient number of
              bids to demonstrate that the contract was awarded competitively and after a
              comparison of the bids it was apparent that the costs were reasonable. As stated
              in the audit report, the lowest bid for the contract was 30 percent less than the
              estimate. Therefore, the Authority should have performed a cost analysis as
              required by HUD.

Comment 9     The Authority contends that the draft report arbitrarily concludes that a 10 percent
              difference between the cost estimate and contract award equates to a significant
              price variance and therefore, triggers an additional requirement that the Authority
              include a price variance notation in the procurement file. We disagree. The 10
              percent significant variance between the independent cost estimate and contract
              award had been determined by HUD. We acknowledge that HUD’s handbook
              does not define significant difference. However, the Authority should have
              consulted with HUD for clarification.

Comment 10 The Authority contends that the requirement to notate the file applied to
           competitive proposals only and therefore did not apply to any of the five (1697,
           1698, 1702, 1707, and 1724) contracts. However, the files contained a notation.
           The report stated that the Authority’s procurement files did not contain sufficient
           documentation to justify or explain the significant difference between the



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              independent cost estimate and the price obtained. Handbook 7460.8, REV-2,
              paragraph 10.3(e) states that documentation is required to demonstrate price
              reasonableness, including any cost analyses, whenever the price obtained varied
              significantly from the independent cost estimate, in which case the contracting
              officer should notate/explain the reasons for the difference, e.g., poor estimate,
              etc. For the Authority’s procurements, the independent cost estimate for four
              contracts using sealed bid procedures, significantly varied from the contract price.
              The Authority’s procurement files for the four contracts contained a notation
              regarding the difference between the independent cost estimates and the bids
              received. However, the notation did not explain or justify the significant
              difference between the independent cost estimate and the lowest bids received. In
              addition, see comment 3 regarding the removal of contract 1697; thus the number
              of contracts cited was reduced from five to four.

Comment 11 The Authority contends that paragraph 10-3(e) of HUD’s procurement handbook
           did not apply to contract 1707. Contract 1707 was purchased using the sealed
           bids method of procurement because the Authority’s independent cost estimate,
           assessed the cost would exceed $120,000.

Comment 12 The Authority contends that since all five contracts (1697, 1698, 1702, 1707, and
           (1724) had sufficient competition and a comparison of the proposed prices
           demonstrated price reasonableness. All five contracts had significant variances
           between the independent cost estimate and the lowest bid as detailed in the report.
           Therefore, the Authority should have performed a price or cost analysis in
           accordance with HUD Handbook 7460.8, REV-2 and HUD’s quick guide. In
           addition, see comment 3 regarding the removal of contract 1697; thus the number
           of contracts cited was reduced from five to four.

Comment 13 The Authority contends that the calculation of the price variance for contract
           number 1702 in the audit report was inaccurate because the auditor included an
           $8,000 bad soil allowance in the contract amount that was not included in the cost
           estimate. The Authority provided two cost estimates for contract number 1702,
           one dated July 11, 2013, in the amount of $185,047 that did not include the bad
           soil allowance of $8,000 and one dated July 12, 2013, in the amount of $194,195
           that did include the $8,000 bad soil allowance. We used the $194,195 to calculate
           the percentage. Therefore, the Authority’s independent cost estimate exceeded
           the contract price by nearly 18 percent (($229,123 - $194,195)/$194,195).
           Therefore, the Authority should have justified the price difference as required by
           HUD’s procurement handbook and quick guide.
Comment 14 The Authority contends that the report includes a determination that the Authority
           failed to estimate the cost of additional items for three contracts. We revised the
           wording in the report from estimate to analyze. For three of the Authority’s
           contracts (contract numbers 1697, 1702, and 1724), it included additional items
           that were not part of the original scope of work; however, it did not analyze the



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              cost of the items as required by 24 CFR 85.36(f)(1) and its own procurement
              policy, which was cited in the draft report.
Comment 15 The Authority contends that because contract number 1697 was purchased
           through the small purchase method of procurement, the requirement for a cost
           analysis do not apply. Regulations at 24 CFR 85.36(f)(1) state that grantees and
           subgrantees must perform a cost or price analysis in connection with every
           procurement action, including contract modifications.
Comment 16 The Authority states that it performed a cost analysis to ensure that the prices paid
           were reasonable for the contract modifications under contract 1697 by comparing
           the change order prices to the proposed costs in the contract. The Authority did
           not prepare an independent estimate for the awarded original scope of work;
           therefore, reasonableness of the awarded proposed contract modifications could
           not be determined.
Comment 17 The Authority states that its architect prepared cost certifications certifying that
           the costs of the contract modifications for contracts 1702 and 1724 were
           reasonable based on industry standards. Further, the Authority states that the
           architect provided detailed analyses comparing each element to the applicable RS
           Means. We acknowledge that the Authority’s architect prepared cost
           certifications, and as a result of our audit, analyses using RS Means. However,
           the Authority did not provide documentation to support the RS Means
           determinations.
Comment 18 The Authority states that its understanding was that it cannot change the line
           items in HUD’s system for the $1,995 charged to the wrong budget line item
           under contract number 1697. We revised recommendation 1F to state the
           following:

                 Reimburse the U. S. Treasury from its capital fund account $1,945 charged to
                  the incorrect budget line item in HUD’s system.
Comment 19 The Authority contends that it updated its policy in September 2015 and will use a
           more detailed cost/price analysis form for all of its contracts. We commend the
           Authority for updating its procurement policy. The Authority should work with
           HUD to ensure that its updated policy addresses the deficiencies cited in this
           report.
Comment 20 The Authority contends that the OIG should withdraw its finding and revise the
           draft report to state that the Authority generally followed HUD’s and its own
           procurement requirement. We disagree. As stated in the audit report, the
           Authority did not always comply with HUD’s and its own procurement policies.
           Specifically, it did not always (1) prepare adequate independent cost estimates,
           (2) maintain documentation to justify and explain the difference between the
           independent cost estimates and contract price, and (3) analyze or examine the cost




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of the additional items included in the scope of work. The only changes made to
the report are noted in these comments.




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Appendix C
                              HUD and Authority Requirements


Regulations at 24 CFR 85.36(f)(1) state that grantees and subgrantees must perform a cost or
price analysis in connection with every procurement action, including contract modifications.
The method and degree of analysis is dependent on the facts surrounding the particular
procurement situation, but as a starting point, grantees must make an independent cost estimate
before receiving bids or proposals. A cost analysis must be performed when the offeror is
required to submit the elements of his estimated cost. A cost analysis is necessary when
adequate price competition is lacking and for sole-source procurements, including contract
modifications or change orders, unless price reasonableness can be established on the basis of a
catalog or market price of a commercial product sold in substantial quantities to the general
public or based on prices set by law or regulations. A price analysis will be used in all other
instances to determine the reasonableness of the proposed contract price.
Paragraph 3-3(A) of HUD’s procurement handbook states that the public housing agency must
maintain records sufficient to detail the significant history of each procurement action.
Paragraph 10-3(E) states that documentation is required to demonstrate price reasonableness,
including any cost analysis, whenever the price obtained varies significantly from the
independent cost estimate, in which case the contracting officer should notate or explain the
reasons for the difference; for example, poor estimate, etc.
HUD’s Quick Guide to Cost and Price Analysis for HUD Grantees and Funding Recipients states
that for sealed bids method of procurement, normally, the competitive pricing forces of the
marketplace determine the reasonableness of the low price obtained through sealed bidding.
Nevertheless, the housing authority should always compare its own independent cost estimate to
the low competitive bid received. In the event they are significantly different, the housing
authority will need to examine each to verify that either its own estimate or the market price is
valid.
Paragraph 7-9 of HUD’s Office of Public and Indian Housing Capital Fund Guidebook states
that in HUD’s system Public Housing Authority’s may not draw down funds from one budget
line item for expenditures associated with another budget line item. If an Authority disburses
funds from the wrong budget line item, HUD’s Public and Indian Housing Field Office will
direct the Authority to immediately transfer those funds back to the U.S. Treasury, and the funds
will be credited back to the budget line item from which the funds were incorrectly withdrawn.
The Authority’s procurement policy states that for all purchases above the micro purchase
threshold, the Authority must prepare an independent cost estimate before solicitation. The level
of detail must be appropriate with the cost and complexity of the item to be purchased. For small
purchases, a comparison with other offers and an independent cost estimate will be sufficient to
determine price reasonableness. For sealed bids, the presence of adequate competition and an
independent cost estimate will be sufficient to establish price reasonableness. However, where
sufficient bids are not received, and when the bid received is substantially more than the


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independent cost estimate, and where the Authority cannot reasonably determine price
reasonableness, the Authority must conduct a cost analysis, consistent with Federal guidelines, to
ensure that the price paid is reasonable. For contract modifications, a cost analysis, consistent
with Federal guidelines, must be conducted for all contract modifications for projects that were
procured through sealed bids.




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