oversight

The State of New Jersey Did Not Disburse Disaster Funds to Its Contractor in Accordance With HUD, Federal, and Other Applicable Requirements

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)

   The State of New Jersey, Trenton, NJ
        Community Development Block Grant Disaster
         Recovery-Funded Superstorm Sandy Housing
                 Incentive Program Contract




Office of Audit, Region 3      Audit Report Number: 2016-PH-1009
Philadelphia, PA                               September 30, 2016
To:            Stan A. Gimont, Acting Deputy Assistant Secretary for Grant Programs, DGB
               //signed//
From:          David E. Kasperowicz, Regional Inspector General for Audit, Philadelphia
               Region, 3AGA
Subject:       The State of New Jersey Did Not Disburse Disaster Funds to Its Contractor in
               Accordance With HUD, Federal, and Other Applicable Requirements




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 Superstorm Sandy Housing Incentive
Program contract.
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
215-430-6734.
                    Audit Report Number: 2016-PH-1009
                    Date: September 30, 2016

                    The State of New Jersey Did Not Disburse Disaster Funds to Its Contractor in
                    Accordance With HUD, Federal, and Other Applicable Requirements




Highlights

What We Audited and Why
We audited the State of New Jersey’s Community Development Block Grant Disaster Recovery-
funded Superstorm Sandy Housing Incentive Program contract. We conducted the audit because
the contract involved a significant amount of funds ($67.7 million), was critical to the
implementation of three of the State’s disaster programs, and was terminated less than 1 year into
the 3-year contract term. Our objective was to determine whether the State disbursed disaster
funds to its contractor in accordance with U.S. Department of Housing and Urban Development
(HUD), Federal, and other applicable requirements for costs that were eligible, supported,
reasonable, and necessary.

What We Found
The State did not disburse disaster funds to its contractor in accordance with HUD, Federal, and
other applicable requirements. Specifically, it did not ensure that (1) disbursements met a
national objective, (2) expenses were incurred after the contract was executed, (3) other direct
costs were fully supported and the prices paid were fair and reasonable, (4) labor costs were fully
supported, (5) travel costs were fully supported, and (6) disbursements were for costs that were
reasonable and necessary. Further, the State did not show that it properly managed equipment
purchased with disaster funds. These conditions occurred because the State did not have
adequate controls in place to administer its contract and monitor contract performance and was
not fully aware of Federal procurement and cost principle requirements. As a result, HUD did
not have assurance that the $43.1 million disbursed under the contract was for costs that were
eligible, supported, reasonable, and necessary.

What We Recommend
We recommend that HUD require the State to provide documentation to show that the $43.1
million disbursed under the contract was for costs that met a national objective and were
supported, reasonable, and necessary or direct the State to repay HUD from non-Federal funds.
Further, HUD should require the State to repay HUD from non-Federal funds for the $128,990 in
charges incurred before the contract effective date. HUD should also require the State to
implement controls to ensure that it adequately administers current and future contracts related to
disaster funds, adequately monitors contract performance, and takes appropriate action when
contractors fail to meet performance goals stated in the contract.
Table of Contents
Background and Objective......................................................................................3

Results of Audit ........................................................................................................6
         Finding: The State Did Not Disburse Disaster Funds to Its Contractor in
         Accordance With HUD, Federal, and Other Applicable Requirements ...................6

Scope and Methodology .........................................................................................14

Internal Controls ....................................................................................................16

Followup on Prior Audits ......................................................................................17

Appendixes ..............................................................................................................19
         A. Schedule of Questioned Costs .......................................................................19

         B. Auditee Comments and OIG’s Evaluation.....................................................20

         C. Timeline of Key Dates ..................................................................................47




                                                            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. To date, HUD has
awarded the State of New Jersey approximately $4.2 billion, including $1.8 billion from this
initial allocation of funds. On April 29, 2013, HUD approved the State’s initial 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. On
July 29, 2014, HUD approved the State’s second grant agreement, which obligated an additional
$500 million. On June 1, 2015, HUD approved the State’s third grant agreement, which
obligated an additional $1.4 billion. 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 Block Grant Disaster Recovery grant. The State decided
to retain a contractor that would administer its Superstorm Sandy Housing Incentive Program,
which affected three disaster assistance programs that were allocated $850 million in the State’s
initial action plan. The contractor would be responsible for establishing intake centers in the


1
    Public Law 113-2, dated January 29, 2013
2
    78 FR 14330 (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 (March 5, 2013)



                                                      3
State’s nine most impacted counties; developing a management information system; and
performing intake, application processing, eligibility determinations, loan closings, and more for
the (1) Reconstruction, Rehabilitation, Elevation, and Mitigation Program; (2) Homeowner
Resettlement Program; and (3) Small Rental Program.

The State issued a request for quotation on April 17, 2013. It received bids from two contractors
as shown in the table below. 5

                                            Hammerman
                Expense category                                            Contractor B
                                           and Gainer, Inc.
                       Labor                  $42,517,117                   $175,627,124
                  Other direct costs           23,662,652                    15,046,336
                       Travel                   1,560,220                     3,751,332
                      Total bid               $67,739,989                   $194,424,792

On May 8, 2013, the State awarded the 3-year contract to Hammerman and Gainer, Inc. (HGI),
totaling $67.7 million. After negotiations between the State and HGI, the contract was
terminated by mutual agreement on December 6, 2013. Work on the contract ended on
January 20, 2014, and a settlement was reached on May 7, 2015. The State made its final
settlement payment on June 12, 2015. In total, the State paid HGI more than $43.5 million for
less than 9 months 6 of work performed under the 3-year contract, including $43.1 in Block Grant
disaster funds. 7 As the State indicated in a June 2015 letter to HUD, the amount paid to HGI was
less than the $57.5 million invoiced by HGI and less than the $45.3 million that the State
determined was accurate and supported, without consideration of performance adjustments. The
table below shows the total amounts proposed and invoiced by HGI, the total amount the State
determined to be accurate and supported before performance adjustments, and the total amount
the State disbursed to HGI.

                           Total amount              Total           Total amount the
                                                                                              Total disaster
                          proposed for the          amount           State determined
     Expense type                                                                                funds
                          3-year contract         invoiced by       to be accurate and
                                                                                               disbursed
                               period                 HGI                supported
         Labor              $42,517,117           $47,052,452           $35,066,168            $32,817,752
    Other direct costs       23,662,652            9,686,457             9,566,671              9,566,671
         Travel               1,560,220             734,142               696,509                696,509
          Total              $67,739,989          $57,473,051           $45,329,348            $43,080,932




5
     The information shown is from the contractors’ best and final offers.
6
     HGI performed work under the contract between May 2013 and January 2014.
7
     Although the State disbursed more than $43.5 million to HGI, $454,517 was for Federal Emergency
     Management Agency funds under the Hazard Mitigation Grant Program.



                                                        4
Regulations at 24 CFR (Code of Federal Regulations) 85.36(b)(11) indicated that grantees and
subgrantees alone are responsible, in accordance with good administrative practice and sound
business judgment, for the settlement of all contractual and administrative issues arising out of
procurements. These issues include, but are not limited to source evaluation, protests, disputes,
and claims. The regulations further stated that Federal agencies will not substitute their
judgment for that of the grantee or subgrantee unless the matter is primarily a Federal concern.
However, the State was still required to comply with HUD, Federal, and other applicable
requirements.

Our objective was to determine whether the State disbursed disaster funds to its contractor in
accordance with HUD, Federal, and other applicable requirements for costs that were eligible,
supported, reasonable, and necessary.




                                                 5
Results of Audit

Finding: The State Did Not Disburse Disaster Funds to Its
Contractor in Accordance With HUD, Federal, and Other
Applicable Requirements
The State did not disburse disaster funds to its contractor in accordance with HUD, Federal, and
other applicable requirements. Specifically, the State did not ensure that (1) disbursements met a
national objective, (2) expenses were incurred after the contract was executed, (3) other direct
costs were fully supported and the prices paid were fair and reasonable, (4) labor costs were fully
supported, (5) travel costs were fully supported, and (6) disbursements were for costs that were
reasonable and necessary. Further, the State did not show that it properly managed equipment
purchased with disaster funds. These conditions occurred because the State did not have
adequate controls in place to administer its contract and monitor contract performance and was
not fully aware of Federal procurement and cost principle requirements. As a result, HUD did
not have assurance that the $43.1 million disbursed under the contract was for costs that were
eligible, supported, reasonable, and necessary.

The State Did Not Ensure That Disbursements Met a National Objective
The State did not maintain sufficient documentation to show that the costs it allocated among its
activities met national objectives. Program regulations at 24 CFR 570.483 provide the criteria
for determining compliance with the national objective requirements. 8 The State provided
general information showing how the $43.1 million it disbursed was allocated among activities
(the programs supported by the contract) and between two national objectives. It indicated that
the allocation between activities was sometimes based on how contractor case managers’ time
was spent when providing services for the State’s programs. In other cases, the State said that
the allocation among activities was made using a flat distribution percentage because time could
not be easily split among the programs. However, the State did not always provide
documentation to show how it allocated costs among the activities. Further, it did not provide
documentation to show how it allocated disbursements between the two national objectives
selected and that the $43.1 million it disbursed achieved those national objectives. The State
needed to demonstrate that the funds were used for eligible program delivery costs that met the
selected national objectives. See the table below for a breakdown of the $43.1 million in
allocations by national objective.




8
    Every activity, except for program administration and planning, must meet one of the following three national
    objectives: (1) benefit low- and moderate-income persons, (2) aid in preventing or eliminating slums or blight, or
    (3) address certain urgent needs in a community because conditions pose an immediate threat to the health and
    welfare of the community.



                                                           6
                                          Amount allocated to the selected
                                                  national objective                   Total
               Activity                   Benefit to low- and                      allocated to
                                          moderate-income        Urgent need       each activity
                                               persons
   Reconstruction, Rehabilitation,
                                              $16,644,361           $8,561,558     $25,205,919
  Elevation, and Mitigation Program
  Homeowner Resettlement Program               7,102,118            6,694,060       13,796,178
        Small Rental Program                   4,078,835                0            4,078,835
                Totals                        $27,825,314          $15,255,618     $43,080,932

This occurred because the State did not establish controls to ensure that it collected and
maintained documentation to support its cost allocation among activities and national objectives,
and to demonstrate that it had achieved the selected national objectives. As a result, HUD did
not have assurance that the $43.1 million the State disbursed under the contract was supported by
documentation to show that it met a national objective.

The State Did Not Ensure That Expenses Paid Were Incurred After the Contract Was
Executed
The State did not ensure that disbursements for labor, travel, and other direct costs were for
expenses incurred after the contract was executed. Specifically, for the invoice reviewed, the
State paid for $109,260 in labor charges, $9,190 in travel charges, and $10,540 in other direct
costs that were incurred between May 2 and May 8, 2013. On May 2, 2013, the State notified
both contractors that bid that it intended to award the contract to HGI. However, the contract
was not official at that time. It was awarded on May 8, 2013, and executed on May 9, 2013.
Further, the first task order listed the performance period as starting on May 9, 2013. The State
paid these expenses because it believed that expenses incurred before the contract was signed
and before the performance period established by the first task order were eligible to be paid. As
a result, it paid $128,990 for ineligible costs incurred before May 9, 2013.

The State Did Not Ensure That Other Direct Costs Were Fully Supported and Were for a
Fair and Reasonable Price
The State did not show that disbursements for other direct costs were fully supported and the
prices paid were fair and reasonable. The contract required the contractor to obtain authorization
from the State’s contract manager before making purchases and submit documentation
authorizing purchases with invoices. It also required the contractor to follow the regulations at
24 CFR 85.36 for other direct costs, which included procurement standards detailing the methods
of procurement to be followed, the requirement for transactions to be conducted in a manner
providing full and open competition, and the requirement for a cost estimate and cost analysis.
Further, requirements at 2 CFR Part 225, appendix A, paragraph C(1)(j) required that costs be
adequately documented. The State could not show that $2.4 million disbursed for other direct
costs for the invoice reviewed met these requirements. For example, the State did not provide
   •   Purchase authorizations from the State’s contract manager,



                                                 7
   •   Documentation showing the procurement method used for each purchase and compliance
       with the specific procurement standards in 24 CFR 85.36,
   •   Receipts totaling $258 for plants, and
   •   An executed lease and support for a security deposit and lease payment.

See the table below for details.

                                        Amount missing                       Compliance with
                                                        Authorization
                          Amount         receipts or an                        procurement
    Description                                              not
                         disbursed       executed lease                      requirements not
                                                         documented
                                           agreement                           documented
     Computer
                          $783,419                                X                   X
     equipment
  Furniture and
                          743,429                                 X                   X
      fixtures
      Software            575,000                                 X                   X
 Security deposits
    and rent for          225,342           $35,000               X                   X
   leased space
 Temporary office
                           35,927                                 X                   X
       space
     Legal fees            16,345                                 X                   X
  Office supplies           9,048               258               X                   X
       Totals            $2,388,510         $35,258

The leases contained several issues. For example,
   •   One of the leases was not fully executed. It was not dated and was missing signatures
       from the landlord and the contractor.
   •   The square footage on one of the leases significantly exceeded the square footage listed
       on the related task order. The lease was for 20,874 square feet, while the task order
       showed 15,000 feet. This was important because the rent was based on the square
       footage.
   •   The annual price per square foot for two of the leases exceeded the price per square foot
       listed in the contractor’s proposal. In one case, the annual price per square foot was
       $1.50 higher than the amount proposed. In the other case, the annual price per square
       foot was $2 higher than the amount proposed.

The conditions described above occurred because the State did not ensure that the documentation
submitted with the invoice demonstrated compliance with applicable requirements. As a result,
HUD had no assurance that $2.4 million in disbursements for other direct costs was supported
and was for prices that were fair and reasonable.


                                                 8
The State Did Not Ensure That Labor Costs Were Fully Supported
The State did not show that labor costs it considered to be accurate and supported 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. Further, Federal cost principle requirements at 2 CFR Part 225, appendix B, paragraph
(8)(h)(4), 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 its 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. For the invoice reviewed, the State did not always
provide documentation to meet these requirements. For example,
    •    For 20 employees, the State did not provide any time records to support $70,097.
    •    For 177 employees, the timesheets provided to support $398,969 were not signed by the
         employees. Further, the timesheets for 45 of these employees were not weekly as
         required by the contract.
    •    For 16 employees, the timesheets provided did not fully support the hours considered
         accurate and supported by the State. While the State’s invoice reconciliation included
         more than 2,200 hours for the 16 employees, the timesheets provided did not support
         $49,620 paid for more than 500 hours.
    •    While some of the timesheets provided allocated employee time between tasks, none of
         them divided time among the three programs (activities) to which the State allocated
         contract disbursements.

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, 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 conditions described above occurred because the State did not fully understand the Federal
cost principle requirements and did not adequately review the timesheets submitted with the
invoice to ensure that they complied with all the applicable requirements. As a result, HUD had
no assurance regarding how much time the contractor’s employees spent working on the
programs, and the $516,560 9 that the State disbursed to the contractor for labor costs was
unsupported.




9
    Some timesheets contained more than one deficiency.



                                                          9
The State Did Not Ensure That Travel Costs Were Fully Supported
The State did not show that travel costs it considered to be accurate and supported were fully
supported. The contract required it to follow the General Services Administration’s (GSA)
Federal travel regulations. However, for the invoice reviewed, the State disbursed

   •   $9,430 for expenses that were not related to travel. This amount included $8,990 for
       printing at FedEx-Kinko’s and $440 in cleaning and office supplies.
   •   $547 for fuel expenses when a rental car was not documented.
   •   $480 for upgraded business class train tickets, which were not allowed under the GSA
       Federal travel regulations.
   •   $335 for hotel and per diem charges for an employee who had traveled home for the
       weekends.
   •   $330 for mileage reimbursements that did not have MapQuest printouts as required by
       the State’s invoice processing manual.
   •   $146 for an expense exceeding $75 that did not have a receipt as required by GSA
       Federal travel regulations.

This occurred because the State did not adequately review the supporting documentation
submitted with the invoice to ensure that the travel costs complied with all applicable
requirements. As a result, $11,268 that the State disbursed to the contractor for travel costs was
unsupported.

The State Did Not Show That It Properly Managed Equipment Purchased With Disaster
Funds
The State did not show that it managed equipment purchased with disaster funds in accordance
with requirements. Regulations at 24 CFR 85.32(b) required the State to use, manage, and
dispose of equipment acquired under a grant in accordance with State laws and procedures. The
State provided its policy for property management and disposition of property purchased with
disaster funds. While its policy only addressed property management requirements for
subrecipients, the State indicated that it generally followed these requirements. However, the
inventories provided by the State did not always contain information required by its policy and
did not always reconcile to previous equipment records. For example, the April 2016
information technology asset inventory did not always contain sufficient descriptions for and
information about the use of items, and contained fewer items than a January 2014 inventory that
showed information at the time the contract was terminated. The State also indicated that it was
in the process of updating its inventory records for some of the information technology and
furniture items due to the recent consolidation of its housing recovery centers.

This occurred because the State did not have adequate controls in place to ensure that it followed
its policy for managing equipment. Without a complete and up-to-date inventory, HUD did not
have assurance that assets purchased with disaster funds were managed in accordance with
applicable requirements.



                                                 10
The State Did Not Ensure That Payments Made Under the Contract Were for Costs That
Were Reasonable and Necessary
The State did not show that payments made under the contract were for costs that were
reasonable and necessary. Regulations at 2 CFR Part 225, appendix A, paragraph C, discussed
factors affecting the allowability of costs, including the need for costs to be reasonable and
necessary. The documentation provided by the State did not show that it had considered whether
costs were reasonable and necessary when compared to the contractor’s proposal, the State’s task
orders, and the contractor’s performance.

The State did not prepare an independent cost estimate and cost analysis before receiving bids or
proposals and awarding the contract. The regulations at 24 CFR 85.36(f) 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
show 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. The need for an independent cost estimate and analysis was illustrated by the large
variance in the bids received from two contractors. The bid from the second contractor totaled
more than $194 million, while the bid for HGI totaled $67.7 million. Although the State
expressed concern about the large variance between the bids, it determined that HGI’s bid was
the most advantageous to the State, price and other factors considered. The State should have
performed a detailed cost estimate and analysis to ensure that the contract amount was fair and
reasonable.

The State also did not perform an analysis of the reasonableness and necessity of charges before
disbursing funds. The State performed a detailed reconciliation to determine the amount of
invoiced charges it considered to be accurate and supported; however, it did not perform an
analysis of the reasonableness and necessity of the charges. See the table below for details on
the total amounts proposed and invoiced by HGI, along with the total amount the State
determined to be accurate and supported before performance adjustments.

                                Total amount              Total       Total amount the
                               proposed for the          amount       State determined
            Expense type
                               3-year contract         invoiced by   to be accurate and
                                    period                 HGI            supported
               Labor             $42,517,117           $47,052,452       $35,066,168
          Other direct costs      23,662,652            9,686,457         9,566,671
               Travel              1,560,220             734,142           696,509
                Total            $67,739,989           $57,473,051      $45,329,348




                                                  11
While the State’s integrity monitor stated that the reasonableness of the labor hours charged by
the contractor would be the subject of a monitoring report, the State said that the review was not
completed because the contract was terminated and the State reached a settlement with the
contractor. The need for an analysis of the reasonableness and necessity of the charges,
including the labor costs, was illustrated by the difference between the contractor’s proposal and
the amount it invoiced. While the contract ended after less than 9 months of work, the contractor
invoiced for approximately $4.5 million more than it had proposed for labor expenses for the full
3-year contract period. The amount invoiced and paid also exceeded the maximum amount
authorized in the first two task orders by $18.3 million.

The need for an analysis of the reasonableness and necessity of the amounts paid was further
illustrated by the performance issues identified by the State and the effect the contractor’s
performance had on the State’s programs. The State incorporated performance requirements and
penalties into the contract as required by the Federal Register notice. 10 It later identified several
issues with the contractor’s performance and the documentation submitted with invoices. For
example, the contractor failed to deliver a fully operational management information system as
required, which affected eligibility determinations. These issues resulted in delays of assistance
to recipients and may have resulted in unnecessary labor costs for idle contractors. After the
contract was terminated by mutual agreement and the State had completed its detailed
reconciliation, it notified HGI that $45.3 million of the $57.5 million invoiced was accurate and
supported, but that performance adjustments would need to be made due to the quality of work
and costs associated with replacing HGI’s system and reviewing the eligibility determinations.
The State subsequently reached a settlement with HGI that brought the total disaster funds paid
to $43.1 million.

The conditions described above occurred because the State did not have adequate controls in
place to administer its contract and monitor contract performance. Further, it was not fully
aware of applicable Federal procurement and cost principle requirements. As a result, HUD did
not have assurance that the $43.1 million disbursed under the contract was for costs that were
reasonable and necessary.

Conclusion
The State did not disburse disaster funds to its contractor in accordance with HUD, Federal, and
other applicable requirements because it did not have adequate controls in place to administer its
contract and monitor contract performance and was not fully aware of Federal procurement and
cost principle requirements. As a result, HUD and the State had no assurance that the $43.1
million disbursed under the contract was for costs that were eligible, supported, reasonable, and
necessary. Further, performance issues with the contractor affected the State’s implementation
of three disaster programs, which resulted in delays of assistance to recipients and may have
resulted in unnecessary labor costs for idle contractors.




10
     78 FR 14344 (March 5, 2013)



                                                   12
Recommendations
We recommend that HUD’s Deputy Assistant Secretary for Grant Programs direct the State to

          1A.      Provide documentation to show that the $40,046,144 11 disbursed under the
                   contract was for costs that met a national objective or 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 1B, 1C, 1D, 1E, and 1F).

          1B.      Repay HUD from non-Federal funds for the $128,990 in charges incurred before
                   the contract effective date.

          1C.      Provide documentation to show that $2,377,970 12 disbursed for other direct costs
                   was supported and was for prices that were fair and reasonable or repay HUD
                   from non-Federal funds any amount that it cannot support (excluding any amount
                   repaid as a result of recommendation 1B).

          1D.      Provide documentation to support $516,560 disbursed for wages and salaries
                   charged to its programs by its contractor’s employees or repay HUD from non-
                   Federal funds any amount that it cannot support.

          1E.      Provide documentation to support $11,268 disbursed for travel or repay HUD
                   from non-Federal funds any amount that it cannot support.

          1F.      Provide documentation showing that the amount it paid under the contract was
                   reasonable and necessary or repay HUD from non-Federal funds any amount that
                   it cannot support.

          1G.      Provide documentation to show that it has complete and up-to-date inventory and
                   equipment records for all items purchased under the contract in accordance with
                   its property management and disposition policy.

          1H.      Implement policies and procedures to ensure that it adequately administers current
                   and future contracts related to disaster funds and disburses funds for costs that are
                   eligible, supported, reasonable, and necessary.

          1I.      Implement policies and procedures to ensure that it monitors contract
                   performance related to disaster funds and takes appropriate action when
                   contractors fail to meet performance goals contained in the contract terms.


11
     To avoid double-counting, we reduced the amount shown as unsupported for recommendation 1A by the
     amounts discussed in recommendations 1B, 1C, 1D, and 1E. The $40,046,144 is the full $43,080,932 paid less
     the amounts cited in recommendations 1B ($128,990), 1C ($2,377,970), 1D ($516,560), and 1E ($11,268).
12
     To avoid double-counting, we reduced the amount shown as unsupported for recommendation 1C by the amount
     of other direct costs also covered by recommendation 1B. The $2,377,970 is the full $2,388,510 discussed in the
     finding less the amount also counted in recommendation 1B ($10,540).



                                                          13
Scope and Methodology
We conducted the audit from September 2015 through April 2016 at the State’s offices located at
101 South Broad Street, Trenton, NJ, and our office located in Philadelphia, PA. The audit
covered the period March 2013 through June 2015.

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 and amendments;
   •   Funding agreements between HUD and the State;
   •   Correspondence between HUD and the State;
   •   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, termination agreement, and settlement agreement with HGI, Inc.;
   •   The State’s reconciliation spreadsheets, showing the invoiced amounts it determined to
       be accurate and supported, as well as amounts it took exception with;
   •   Contractor invoices and supporting documentation;
   •   Reports from the contractor’s automated timekeeping systems;
   •   Integrity monitoring reports prepared by the State’s contractor; and
   •   HUD management review reports.

We conducted interviews with responsible employees of the State and HUD staff located in 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 an invoice for 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.

The State disbursed $43.1 million in disaster funds to its contractor related to 33 invoices,
including negotiated payments made while the contract was winding down and a final settlement
payment. While its payments were not always directly tied to invoices, the State performed an
overall invoice reconciliation to document which labor, travel, and other direct costs it
determined to be accurate and supported for each of the 33 invoices. Of the two invoices that
represented at least 5 percent of the costs in each of the three categories, we selected the invoice
with the largest total accurate and supported amount in the State’s reconciliation spreadsheet.
Although this approach did not allow us to make a projection to the entire population of invoices
or to the full $43.1 million paid, it was sufficient to meet our objective and allowed us to review


                                                  14
costs from all three categories. According to the invoice reconciliation data, the State
determined that $4.5 million related to this invoice was accurate and supported.

                                                          Total amount the State
                      Total amount the State
     Expense                                          determined to be accurate and
                         determined to be                                                  Percent
     category                                           supported for the selected
                      accurate and supported
                                                                  invoice
      Labor                  $35,066,168                        $1,986,090                   5.7
 Other direct costs           9,566,671                          2,388,510                  25.0
      Travel                   696,509                             95,955                   13.8
       Total                 $45,329,348                       $4,470,555                    9.9

We reviewed the invoice and related documentation to determine whether the amount considered
accurate and supported by the State was for costs that were eligible, supported, reasonable, and
necessary.

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.




                                                 15
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 Federal,
    HUD, and other applicable requirements.




                                                  16
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: 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. For
recommendation 1C, HUD agreed to review the adequacy of the documentation provided by the
State for wages and salaries charged to the program by the contractors’ employees and consider
the range of remedies for noncompliance found in 24 CFR 570.496 by September 30, 2015. For
recommendation 1D, HUD agreed to advise the State to revise its policies and procedures to
reflect the procurement requirements for subrecipients and include a reference to 24 CFR
570.489(n), which applies to the Federal cost principles at 2 CFR Part 225, and provide a copy of
the updated policies and procedures by October 10, 2015. HUD did not meet its target dates for
completing its actions related to recommendations 1C and 1D. We will track HUD’s resolution
of these recommendations through the management decision process prescribed in HUD
Handbook 2000.06, REV-4.

The State of New Jersey, Trenton, NJ, Community Development Block Grant Disaster
Recovery-Funded Sandy Integrated Recovery Operations and Management System, Audit
Report 2015-PH-1003, Issued June 4, 2015
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 $36,992,675 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 to
better use; 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 to the program by the contractors’ employees and if not, direct the State to
repay HUD from non-Federal funds any amount that it cannot support; and 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. For recommendation 1D, HUD
agreed to review the adequacy of the documentation provided by the State and consider the range
of remedies for noncompliance found in 24 CFR 570.496 by April 30, 2016. HUD did not meet
its target date for this recommendation. We will track HUD’s resolution of this recommendation


                                                 17
through the management decision process prescribed in HUD Handbook 2000.06, REV-4. For
recommendations 1A, 1B, 1C, and 1E, we are working through the management decision process
with HUD as prescribed in HUD Handbook 2000.06, REV-4.




                                            18
Appendixes

Appendix A


                                  Schedule of Questioned Costs
                          Recommendation
                                           Ineligible 1/ Unsupported 2/
                              number
                                   1A                                    $40,046,144 13
                                   1B                 $128,990
                                   1C                                     2,377,970 14
                                   1D                                       516,560
                                   1E                                        11,268

                                 Totals               $128,990           $42,951,942



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.




13
     To avoid double-counting, we reduced the amount shown as unsupported for recommendation 1A by the
     amounts discussed in recommendations 1B, 1C, 1D, and 1E. The $40,046,144 is the full $43,080,932 paid less
     the amounts cited in recommendations 1B ($128,990), 1C (2,377,970), 1D ($516,560), and 1E ($11,268).
14
     To avoid double-counting, we reduced the amount shown as unsupported for recommendation 1C by the amount
     of other direct costs also covered by recommendation 1B. The $2,377,970 is the full $2,388,510 discussed in the
     finding less the amount also counted in recommendation 1B ($10,540).



                                                          19
Appendix B
             Auditee Comments and OIG’s Evaluation



Ref to OIG    Auditee Comments
Evaluation




Comment 1




Comment 2


Comment 3




                               20
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 4


Comment 5




                               21
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




                               22
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




                               23
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




                               24
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




                               25
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




                               26
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 2




                               27
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 3




                               28
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 3




Comment 4


Comment 6




Comment 4




                               29
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 4




Comment 7




Comment 5



Comment 5




Comment 8




                               30
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 8




Comment 9




                               31
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 10




                               32
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 10




Comment 11




                               33
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 12




Comment 12



Comment 13




Comment 14




                               34
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 14




Comment 15




                               35
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 16




                               36
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 17




Comment 18




Comment 19




                               37
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 20




                               38
                         OIG Evaluation of Auditee Comments


Comment 1   The State contended that many of the issues noted in the report are duplicative of
            the issues it identified and corrected during the life of the contract. We disagree.
            Because the State had identified several issues, we conducted our documentation
            review on amounts the State determined to be accurate and supported. Therefore,
            the issues and dollar amounts addressed in recommendations 1B, 1C, 1D, and 1E
            are not duplicative.

Comment 2   The State contended that its methodology for allocating costs to programs and
            national objectives was reviewed and approved by HUD and that the
            methodology used by HGI resulted in roughly the same distribution among
            national objectives. However, it provided no documentation to show that HUD
            approved its methodology, nor did it provide us documentation to support the cost
            allocation used by HGI among activities and national objectives and to show that
            it had achieved the selected national objectives. The State is responsible for
            maintaining documentation to show that it used funds for eligible program
            delivery costs that met the selected national objectives.

Comment 3   The State contended that the audit report is legally and factually inaccurate to the
            extent that it suggests that precontract costs are ineligible and cited regulations at
            48 CFR 31.205-32 as its basis. However, 48 CFR applies to Federal executive
            agencies. As a grantee of disaster funds, 48 CFR does not apply to the State.
            Regardless, we did not question the precontract costs on their face value. We
            compared the costs to the executed contract and to the first task order. In this
            case, the labor, travel, and other direct costs were incurred between May 2 and
            May 8, 2013. However, the contract was not awarded until May 8, 2013, and not
            executed until May 9, 2013. Also, the first task order under the contract listed the
            performance period as starting on May 9, 2013. Although these expenses may be
            eligible under the program, they were not eligible in this instance because the
            contractor incurred them before the contract was executed and before it was
            authorized to do so under the first task order.

Comment 4   The State contended that we incorrectly asserted that it was required to follow
            Federal rather than its own procurement rules. It also contended that it was not
            required to conduct a prebid cost estimate or postbid cost analysis because Federal
            law required it to follow its own procurement practices. We disagree. As a
            condition of making any grant under the Disaster Relief Act, the HUD Secretary
            was required to certify in advance that grantees had in place proficient financial
            controls and procurement processes. To establish a basis for the Secretary to
            make the certifications required by the Disaster Relief Act, HUD required the
            State to either (1) certify that it had adopted the specific procurement processes
            identified in 24 CFR 85.36 and indicate the sections of its standards that
            incorporated the specific procurement standards identified in 24 CFR 85.36 or (2)



                                               39
            certify that it had a procurement process that was equivalent to the procurement
            standards at 24 CFR 85.36 and provide a crosswalk indicating which sections of
            its standards aligned with each procurement provision of 24 CFR 85.36. As
            discussed in the report, the State chose to certify that its policies and procedures
            were equivalent to the procurement standards at 24 CFR 85.36. Therefore, while
            Federal law allowed the State to use its procurement process, this was contingent
            upon the State’s process being equivalent to each of the specific procurement
            provisions of 24 CFR 85.36. These provisions included requiring a prebid cost
            estimate and postbid cost analysis.

Comment 5   The State contended that we raised the cost estimate and cost analysis concerns in
            two previous audit reports and that final resolution of the issue is pending with
            HUD. It also questioned the basis for our finding, asserted that we planned to
            question the total dollar value of every State contract, and requested that we
            remove the finding until the issue is resolved. We did raise these issues in two
            previous audit reports, and we are working through the management decision
            process with HUD to resolve them. (See the Followup on Prior Audits section of
            this report.) However, 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. Since OIG is 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 analyses. We are not required to hold audit reports until issues from
            other audit reports are resolved. Instead, we include a section in the report
            addressing our followup on prior audits. Further, we note that the finding and
            recommendations in this report are not based solely on the lack of an independent
            cost estimate and cost analysis.

Comment 6   The State contended that we improperly sought to substitute our judgment for its
            judgment in resolving the contract dispute with HGI because Federal law and
            HUD handbook guidance provide that States are responsible to resolve all claims
            or disputes arising under a federally funded contract. We did not substitute our
            judgment for the State’s judgment. The State was still required to comply with
            HUD, Federal, and other applicable requirements. We conducted our
            documentation review on amounts the State determined to be accurate and
            supported. We compared the documentation against Federal program,
            procurement, travel, and cost principle requirements and the State’s contract
            documents. The State acknowledged our authority to classify costs as ineligible
            and unsupported when it included a clawback provision in the settlement
            agreement with HGI that required it to pay back any amounts disbursed under the
            contract to the extent that HUD, OIG, or any other Federal agency determines that
            any costs were ineligible or unallowable.




                                              40
Comment 7   The State contended that HUD confirmed that it was legally required to follow its
            procurement process in 2013 when it certified that the State had a proficient
            procurement process in place. We acknowledge that HUD certified that the State
            had a proficient procurement process. Specifically, HUD staff completed a
            certification checklist in which it certified that the State’s process was equivalent
            to each of the specific procurement provisions of 24 CFR 85.36. However, as
            noted in a recent internal audit report (2016-PH-0005, dated September 29, 2016),
            HUD did not always adequately evaluate the supporting documentation submitted
            by State grantees and did not always provide accurate and supported certifications
            of State disaster grantee procurement processes. Regardless of whether HUD’s
            certification was accurate and supported, the State was required to ensure that its
            certification was accurate and supported and that its procurement process was
            equivalent to each of the specific procurement provisions in 24 CFR 85.36, as it
            indicated in the required crosswalk that it attached to its certification.

Comment 8   The State contended that it undertook exhaustive efforts to review the accuracy,
            reasonableness, and necessity of all disbursements made under the contract as part
            of its contract management efforts and claimed that the report failed to recognize
            or include these exhaustive efforts. For example, the State claimed that it
            regularly met with HGI to discuss problems, cost overruns, and proposed
            solutions. The State also claimed that while the report highlights the fact that
            HGI billed the State more than $57 million in just 9 months, we failed to
            understand that the State did not pay $57 million and instead discounted HGI’s
            billings and paid only $43.5 million, which is $14 million less than the amount
            HGI invoiced. Pages 4, 11, 12, 14, and 15 of the report acknowledge that the
            State performed an invoice reconciliation and considered only $45.3 million as
            accurate and supported. We commend the State for adjusting HGI’s billings for
            amounts that it did not believe were accurate and supported. However, these
            adjustments were related to the supporting documentation submitted by HGI and
            did not show that the State also considered the amounts paid against all applicable
            Federal requirements, the contract, and the contractor’s performance. Further, our
            review of the amount the State considered accurate and supported for the selected
            invoice identified several issues. For example, the State did not always ensure
            that (1) other direct costs were fully supported and the prices paid were fair and
            reasonable, (2) labor costs were fully supported, and (3) travel costs were fully
            supported.

Comment 9   The State contended that we implied that it failed to account for performance
            adjustments on page 12 of the report. It further claimed that the settlement took
            into consideration all of the issues joined in the litigation, which included
            performance adjustments and the applicability and amount of liquidated damages,
            and contended that its identification of HGI’s performance deficiencies allowed it
            to negotiate a settlement that was advantageous to the State and HUD. On page
            12 of the report, we explained that the State incorporated performance
            requirements and penalties into the contract as required, identified performance



                                              41
                   issues during the contract term, and notified HGI that performance adjustments
                   would need to be made. We also acknowledged that the State later reached a
                   settlement agreement with HGI that brought the total disaster funds paid to $43.1
                   million. We did not claim that the State failed to account for performance
                   adjustments. On page 5 of its comments, the State listed more than $20.5 million
                   in performance adjustments, including $11 million to replace the management
                   information system, $9.5 million in liquidated damages because the system did
                   not meet contract specifications, a percentage reduction in the amounts payable
                   under several sections of the contract scope of work to reflect what the
                   Department of Community Affairs determined to be poor quality of work, and
                   costs associated with the State’s re-review of HGI’s eligibility and ineligibility
                   determinations. The State also provided us with a June 2015 letter it sent to HUD
                   listing the $20.5 million in performance adjustments identified and an August
                   2013 presentation showing earlier performance adjustment calculations that it
                   presented to HGI. However, it did not provide documentation showing that the
                   performance adjustment calculations were factored into the settlement. Further,
                   regardless of how the settlement was reached and whether it considered the
                   performance adjustment calculations, the State still needed to demonstrate that the
                   amount it disbursed was reasonable and necessary to comply with Federal cost
                   principle requirements. If the State had deducted the $20.5 million in
                   performance adjustments that it had calculated to date 15 from the $45.3 million it
                   had considered accurate and supported, only $24.8 million 16 would have been
                   considered payable. Because the amount it disbursed under the contract was
                   $18.3 million 17 more than this, we believe the State should have provided more
                   justification to show that the $43.1 million it paid was reasonable and necessary.

Comment 10 The State contended that we did not evaluate its resolution of the contract claims
           according to the proper standard and should have considered the business
           judgment standard. To support this contention, it cited case law, regulations at 24
           CFR 85.36(b)(11), HUD Handbook 7460.8, and a Block Grant guidebook. The
           State claimed that we disregarded the business judgment standard and instead
           evaluated the settlement amounts paid and all issues joined in the litigation based
           on strict auditing and accounting principles, while substituting our own judgement
           for that of the State. The case law the State cited discusses corporate law rather
           than rules surrounding Federal funds. Federal regulations at 24 CFR 85.36(b)(11)
           state that grantees and subgrantees alone are responsible, in accordance with good
           administrative practice and sound business judgment, for the settlement of all
           contractual and administrative issues arising out of procurements and that Federal
           agencies will not substitute their judgment for that of the grantee or subgrantee


15
     The $20.5 million calculated by the State included only the amount needed to replace HGI’s system and
     liquidated damages. It did not consider the other types of performance adjustments it had identified.
16
     $45.3 million (amount the State considered accurate and supported) - $20.5 million (performance adjustments
     calculated by the State) = $24.8 million
17
     $43.1 million (total disaster funds disbursed for the contract) - $24.8 million = $18.3 million



                                                          42
              unless the matter is primarily a Federal concern. However, the State was still
              required to comply with HUD, Federal, and other applicable requirements. While
              the HUD handbook the State cited states that public housing agencies should
              apply prudent business judgment when determining fair compensation for a
              terminated contract as opposed to strict accounting principles, the State is not a
              public housing agency. Lastly, the Block Grant guidebook the State cited states
              that the Federal guidelines for contracting are designed to help ensure that
              contracts are structured in a way that is consistent with good administrative
              practices and sound business practices. To be consistent with good administrative
              practices and sound business judgment, the State should have ensured that disaster
              funds it disbursed to HGI were for costs that were eligible, supported, reasonable,
              and necessary.

Comment 11 The State contended that we disregarded the business judgment standard and
           instead evaluated the settlement amounts paid and all issues joined in the
           litigation based on strict auditing and accounting principles, while substituting our
           own judgement for that of the State. We disagree. We did not apply strict
           accounting principles to evaluate the settlement amounts. For example, because
           payments were not always directly tied to invoices, we conducted our
           documentation review on amounts the State determined to be accurate and
           supported. We compared the documentation against Federal program,
           procurement, travel, and cost principle requirements and the State’s contract
           documents. Further, the State acknowledged our authority to classify costs as
           ineligible and unsupported when it included a clawback provision in the
           settlement agreement with HGI that required it to pay back any amounts disbursed
           under the contract to the extent that HUD, OIG, or any other Federal agency
           determines that any costs were ineligible or unallowable.

Comment 12 The State agreed that the contract required HGI to follow Federal procurement
           regulations at 24 CFR 85.36 for other direct costs. It noted that while HGI was
           performing under a very constrained timeline, appropriate steps were taken to
           ensure that other direct costs purchased under the contract were reasonably priced.
           Specifically, the State claimed that HGI purchased used furniture and fixtures
           from a company that was going out of business and purchased information
           technology equipment at catalogue prices. However, the documentation it
           provided during the audit did not show that it purchased used furniture and
           fixtures from a company that was going out of business or that it purchased
           information technology equipment at catalogue prices. Further, the State could
           not support its claim that appropriate steps were taken to ensure that the prices
           paid were reasonable because its documentation did not show the procurement
           process used for each purchase. Therefore, it could not show that the transactions
           were conducted in a manner providing full and open competition and that its
           contractor prepared cost estimates and cost analyses when required. Regardless
           of the time constraints it was under, the State should have ensured that its
           contractor followed the requirements of 24 CFR 85.36 when making purchases



                                               43
               and that the contractor provided adequate documentation to show that the prices
               paid were fair and reasonable before disbursing funds to the contractor.

Comment 13 The State contended that the task orders issued by the State and signed by the
           contract manager authorized cost limits for other direct costs and served as
           purchase authorizations for the State contract manager. However, the contract
           required HGI to obtain authorization from the State’s contract manager before
           making purchases and to submit documentation authorizing purchases with
           invoices. The first task order was not signed by the State’s contract manager until
           May 30, 2016. However, before the task order was signed, HGI had spent $1.2
           million for furniture and fixtures, temporary office space, computer equipment,
           software, office supplies, and legal services. It had also signed leases for the
           housing recovery centers. Therefore, the first task order could not have served as
           an authorization for these purchases. Further, besides listing locations for the
           leases, the first task order did not list the specific other direct costs for the State’s
           contract manager to review before authorizing the purchase as required by the
           contract. The State should have ensured that HGI provided adequate
           documentation to show compliance with applicable requirements before
           disbursing funds to the contractor.

Comment 14 The State contended that although the report accurately summarized instances in
           which HGI’s leased square footage and per square foot rates exceeded task order
           amounts, the report failed to provide the full context on this issue. The State
           noted that HGI’s negotiations resulted in overall savings to the State, as opposed
           to cost overruns, because there were several instances in which the leased square
           footage and per square foot rates were significantly lower than the amounts
           authorized. However, because HGI was required to follow Federal procurement
           requirements for each purchase, we considered each lease individually. If HGI
           was able to negotiate a lower price per square foot for one location than it had
           listed in its proposal, we would have expected it to do so because it was
           conducting the procurement in a manner providing full and open competition.
           However, if after following applicable procurement requirements to ensure full
           and open competition, HGI was not able to obtain a space within the square
           footage and rates authorized by the State, it should have obtained approval from
           the State for the higher amount before executing the lease.
Comment 15 The State said it had located 13 of the 20 missing timesheets and would locate the
           remaining 7 timesheets. We disagree that the State located 13 of the 20 missing
           timesheets. During the course of the audit, we requested that the State provide all
           of the time records related to the invoice selected for review. While the
           documentation was not organized, we conducted a thorough review to compare
           each timesheet to the State’s reconciliation spreadsheet. We provided the State
           with a list of the labor charges for which we did not have a corresponding
           timesheet. Although the State expressed having significant difficulty in locating
           them, it provided several timesheets for our consideration. We accepted several



                                                 44
              of the timesheets provided and removed them from the results in the draft report.
              However, we did not accept the 13 timesheets in question because the names on
              the timesheets did not match the names listed in the State’s invoice reconciliation
              for the 13 labor charges. In some instances, we found that the timesheet provided
              was for a name that was listed separately on the invoice reconciliation with
              charges for the selected invoice, so the names clearly identified separate
              employees. In other instances, we did not accept the timesheets because the
              names were significantly different from the names listed on the reconciliation
              spreadsheet. For example, the State submitted timesheets with the name
              “Precious” for “Leroy,” “Clover” for “Simone,” “Larry” for “Anne,” and
              “Anthony” for “Monica.” The State’s difficulty in locating supporting
              documentation for labor charges that it previously determined were accurate and
              supported shows that it did not adequately review the timesheets with the invoice
              to ensure that they complied with all applicable requirements before disbursing
              funds for the labor charges.

Comment 16 The State contended that timesheets from a fully automated timekeeping system
           do not require wet signatures. It also claimed that we ignored timesheets that
           were submitted through a fully automated timekeeping system and timesheets that
           were reviewed and authorized by the employees’ supervisors. It also cited newly
           enacted Uniform Administrative Requirements, Cost Principles, and Audit
           Requirements for Federal Awards. We agree that timesheets from a fully
           automated timekeeping system would not require wet signatures. However, the
           Federal cost principle requirements that apply to these funds required an
           employee signature, and the timesheets in question did not have wet or digital
           signatures from the employees.

Comment 17 The State contended that we failed to provide legal or contractual support for our
           finding regarding the requirement for weekly timesheets. The State further
           contended that Federal cost principle requirements required only monthly
           personnel activity reports and that the timesheets in question showing daily
           charges provided more detail than contemplated by Federal cost principle
           requirements and the contract. We agree that Federal cost principle requirements
           required the timesheets to be prepared at least monthly. However, section VIII of
           the “Method of Operation, Management, and Other Related Service for
           Superstorm Sandy Housing Incentive Program” required HGI to submit copies of
           weekly timesheets for employees assigned to do the work referenced in the
           invoice. In line with this requirement, the State provided weekly timesheets for
           224 individuals related to the invoice selected. While the timesheets in question
           provide a daily accounting of time for the 45 individuals, they covered more than
           1 month and were not signed by the employees. Because the timesheets were not
           signed by the employees at least monthly, they do not meet Federal cost principle
           requirements.




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Comment 18 The State contended that it methodically reviewed and reconciled HGI’s invoices
           and supporting documentation, performed an individual-by-individual review of
           each employee’s time records to ensure that the labor titles and labor rates were
           appropriate, and did not pay any invoiced labor charges that were not supported
           by an approved timesheet. The State provided an invoice reconciliation
           spreadsheet related to its review. However, for the invoice that we reviewed, the
           documentation the State provided did not always match the amount it considered
           accurate and supported. For example, there were not always time records for
           employees named on the reconciliation spreadsheet, the hours on the timesheets
           did not always match the invoice reconciliation, and the timesheets were not
           always signed. As a result, we recommended that HUD direct the State to provide
           documentation to support $516,560 disbursed for wages and salaries or repay
           HUD from non-Federal funds for any amount that it cannot support.

Comment 19 The State said it would provide adequate support to HUD to fully justify the
           $11,268 in travel costs allegedly missing support. It also noted that while it
           would recategorize the $9,430 in office expenses incurred by an HGI employee
           while traveling, these costs were clearly eligible expenses under the contract that
           were fully supported and should not be questioned. We commend the State for its
           plan to provide adequate documentation to HUD to fully justify the $11,268 in
           travel costs identified in the report. However, we disagree that the $9,430 should
           not be questioned. If the State recategorizes the office expenses as other direct
           costs, it will need to provide required purchase authorizations and documentation
           showing that the prices paid for the services and products were fair and
           reasonable.

Comment 20 The State contended that it maintains a comprehensive cataloguing system to
           properly manage and track all of the furniture and information technology assets
           purchased under the contract in compliance with State and Federal requirements.
           The State further stated that it had provided us printouts and databases, which
           detailed the status of assets. However, as stated in the audit report, the inventories
           provided by the State did not always contain information required by its policy
           and did not always reconcile to previous equipment records. As part of the audit
           resolution process, HUD will need to assess any documentation the State provides
           to determine whether it has complete and up-to-date inventory and equipment
           records, including records of disposition of any assets.




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Appendix C
                                   Timeline of Key Dates

4/17/2013    The State issued the request for quotation.
4/29/2013    HGI submitted a bid for $68.8 million.
             Contractor B submitted a bid for $196.2 million.
4/30/2013    The State requested best and final offers from HGI and Contractor B by noon on
             May 2, 2013.
5/1/2013     HGI submitted its best and final offer of $67.7 million.
5/2/2013     Contractor B submitted its best and final offer of $194.4 million.
             The State evaluation committee conducted its evaluation of the best and final
             offers provided by HGI and Contractor B and recommended that the State select
             HGI.
             The State sent HGI and Contractor B letters notifying them of its intent to award
             the contract to HGI and requesting that any comments or protest be made by
             May 7, 2013.
5/8/2013     The State awarded the contract to HGI.
             The State debriefed Contractor B.
5/9/2013     The State executed the contract.
6/10/2013    Date of the first invoice submitted by HGI
8/5/2013     The State indicated that it met with HGI to discuss its performance and required it
             to develop a corrective action plan by August 12, 2013. The State subsequently
             created a corrective action plan, which is not dated or signed.
12/6/2013    The State and HGI reached a mutual agreement to terminate the contract. The
             agreement included a transition period and required the State to make interim
             payments totaling $10.5 million.
12/11/2013   The State made a $9 million interim payment to HGI.
12/18/2013   The State made a $1 million interim payment to HGI.
12/19/2013   The State made a $500,000 interim payment to HGI.
1/20/2014    Last day HGI worked under the contract
5/7/2015     The State reached a settlement agreement and release date with HGI.
6/12/2015    The State made a final payment of $7.6 million to HGI.




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