U.S. Department of Housing and Urban Development District Office of the Inspector General Richard B. Russell Federal Building 75 Spring Street, SW, Room 700 Atlanta, GA 30303-3388 (404) 331-3369 August 21, 1996 Audit Related Memorandum No. 96-AT-241-1824 MEMORANDUM FOR: John Perry, Director, Office of Community Planning and Development, 4AD FROM: Nancy H. Cooper Acting District Inspector General for Audit, Southeast/Caribbean, 4AGA SUBJECT: Limited Review of Gwinnett County HUD Program Operations Lawrenceville, Georgia We completed a limited review of Gwinnett County's operation of the Communit y Development Block Grant (CDBG ) and Home Investment Partnerships Act (HOME) Programs. Our review focused on the County's procurement of the contract administrator. We reviewe d records maintained at HUD, Gwinnett County and the contract administrator. We als o interviewed the staffs at the respective locations. We performed the review during June 199 5 through April 1996. We noted indications of deficiencies that warrant additional attenti on by HUD and County staff. We did not develop the administrative deficiencies as we no rmally would to meet reporting standards for generally accepted government auditing standards. Our review was not an audit of County activities and our observations are related to our limited review. SUMMARY The County needs to improve its contracting procedures for obtaining a professional consultant to administer its HUD funded and related programs. We found that: - The County did not (a) clearl y describe whether its HUD program administrator's contract was a fixed price or cost r eimbursable agreement, (b) adequately analyze the reasonableness of the contractor's proposed rate for overhead/profit, (c ) adequately solicit proposals, and (d) document its price analysis. - The County paid for additional rehabilitation inspection and work-write-u p services ($51,416) which the contract administrator should have performed. - The County paid its contract administr ator $159,459 for personnel costs that were not supported by proper time and attendance records. Details of our findings and recommendations are discussed in Attachment 1. We discussed the results of the review with Gwi nnett County officials during the review and at an exit conference held on June 5, 1996. The County's written response is included as Attachment 3. Within 60 days, please give us, for each recomme ndation in Attachment 1, a status report on: (1) the corrective actions taken; (2) th e proposed corrective actions and the date to be completed; or (3) why actions are considered unnecessary. Also, please furnish us copies of an y correspondence or directives issued as a result of this review. We provided a copy of this memorandum to the auditee. If you have any questions, ple ase contact James D. McKay, Assistant District Inspector General for Audit or Narcell Stamps, Senior Auditor, at (404) 331-3369. Abbreviations CDBG - Community Development Block Grant ESGP - Emergency Shelter Grant Program HOME - Home Investment Partnerships Act RFP - Request for Proposal WFN - W. Frank Newton, Inc. Attachments: 1- Findings and Recommendations 2- Schedule of Ineligible and Unsupported Amounts 3- Auditee Comments 4- Distribution 3 Background Since 1986 the County has used the same consultant, W. Frank Newton Inc., (WFN) t o administer its CDBG and related HUD programs. The latest contract, which started June 16 , 1993, was still in effect during the time of our on site revie w. WFN's administrative contract was for three consecutive one year periods. The last renewal expired June 15, 1996. The contract provided for the administration of the f ollowing HUD programs with funding levels as indicated: Funding Level for Program Years Programs 1993 1994 1995 CDBG $2,120,710 $2,300,000 $2,633,000 HOME 50,220 73,301 77,492 ESGP 25,000 62,000 83,000 Total $2,195,930 $2,435,301 $2,793,492 The County used the competitive negotiation method to solicit and ob tain proposals for a contract administrator. The County asked the bidders to provide a separate price for each of the three one year periods to be covered by the contract. The County received only two proposals and awarded the contract to WFN. WFN agreed to administer the programs for the following amounts: Total Year Compensation 1993 $ 223,176 1994 232,871 1995 240,916 We found no amendments to the contract amounts. The County, in addition to the contract price, provided WFN w ith an office for his staff and other related support using HUD funds. The other support costs included items such as offic e equipment, telephones, copiers, office supplies, and reimbursement for travel. 4 ATTACHMENT 1 FINDINGS AND RECOMMENDATIONS Finding 1 - Procurement Practices Need Improvement Gwinnett County should improve its procurement practices for contracting with a consultant to administer its HUD funded programs. We noted that the County did not (a) clearly describ e whether its contracts with WFN were fixed price or cost reimb ursable agreements, (b) adequately analyze the reasonableness of WFN's proposed contract rate for overhead/profit, (c) adequately solicit proposals, and (d) conduct a proper price analysis. These issues may have resulted i n excessive and unreasonable contractor overhead/profit and unduly restricted competition. We reviewed the County's 1993 contract award to WFN for compliance with HUD requirements and evaluated the contract's compensation provision for reasonableness. The contract, whic h started June 16, 1993, was for three one year periods. Contract Compensation Provisions Not Clear The County's contracts with WFN did not clearly state whether WFN would be compensate d based on a fixed price or a cost reimbursable type agreement. Some of the contract languag e indicated the contract was a cost reimbursable contract. For example, paragraph II.C. o f Attachment B of the contract dated June 16, 1994 provides that the consultant will prepar e compensation reimbursement requests which detail consultant individual and tota l salary/personnel expenses, plus a standard factor of .5 of salaries for all consultan t administration/overhead burden expenses. This language implies that the consultant is to b e compensated on a cost reimbursable basis. Other language, however, implied that the contract is a fixed price contract. For example, paragraph I of Attachment B states the total cost of this contract is $232,871. The County provided a legal opinion, dated January 11, 1996, whic h stated, "In our opinion, both the 1994 and 1995 contracts are hybrid cost-reimbursabl e agreements with fixed price, not to exceed ceilings". Our legal counsel reviewed a sample WFN contract, noted the ambiguous wording concerning compensation, and suggested that we rely on the County's intent regarding the compensatio n method. The County provided an additional legal opinion (from the same attorney) dated June 5, 1996, which states in part, " ... the County all along intended for these contracts to be treated as fixed price contracts not cost reimbursable contracts". We believe the County needs to clarify future contracts in order to pr event misinterpretation. The contract method of com pensation is important because it determines the level of documentation required to support progress payments. Cost reimbursable contracts require a higher level o f 5 documentation for costs. For instance, cost reimbursabl e contracts require compliance with rules that govern direct (e.g., personnel) and indirect (administrative/overhead) costs. High Overhead/Profit Rate Not Evaluated The County's contract with WFN allowed the firm a 50 percent markup ($263,418) fo r overhead/profit. The contract did not designate how much of the 50 percent rate was fo r overhead and how much was for profit. The County revised the contract, effective September 16, 1995, to provide for compensation using fixed hourly rates as opposed to personnel cost s times the 50 percent overhead/profit factor. The maximum contract price remained the same . Thus, the maximum price under the revised contract still includes the 50 percent mark-up. In our opinion, the 50 percen t rate was not reasonable, because the County made separate direct payments for a major portion of WFN's o verhead costs. For instance, the County paid for office space, equipment, supplies etc., to provide and equip the offices utilized by WFN's staff . Considering these separate payments, the 50 percent rate for overhead/profit seems excessive. We believe the County should have negotiated a reduction in the 50 percent rate givin g consideration to the County's separate CDBG expenditures to support WFN's office operations. Insufficient Bid Advertisements Federal procurement regulations specify that proposals must be solicited from an adequat e number of qualified sources. The County's requirements specify that advertisements for bid s shall be published for two consecutive weeks in the official organ of Gwinnett County. The files indicated the County advertised in the Atlanta Journal on April 11 and 18, 1993 and mailed notices to 13 potential firms. Only two bidders responded to the advertisements. In our opinion, the County did not run the bid advertisements long enough and did not giv e prospective bidders enough time to respond with responsible bid proposals. The County ran the advertisement for two days (April 11 and 18), in the legal section of the Atlanta newspaper. The advertisement gave prospective contractors until 2:50 p.m., April 29, 1993 to respond. This time frame allowed only 11 days from the second advertisement date for bid prep aration (18 days from the first advertisement). The County's multi-million dollar array of HUD programs involved a mixture of comple x activities. Therefore, prospective contractors were required to submit a lengthy proposal package to demonstrate the experience, expertise, and past performance needed to take on the job. The short response time, in our opinion, did not allow prospective bidders sufficient time to prepare and submit such a proposal. 6 Price Analysis Not Documented Federal procurement requirements specify a price analysis will be used in determining th e reasonableness of the proposed contract price (24 CFR 85.36(f)(1)). The County did not formally document a price analysis they claim was performed and used as the basis for analyzing reasonableness of the proposed contract. County personnel stated they used the history of prior contracts with an estimated inflation factor in evaluating th e reasonableness of the two bids. They acknowledged the analysis was not formally documented and promised to provide this documentation for future contracts. Auditee Comments Contract Compensation Provision Not Clear At the exit confere nce, County officials said they intended the contract to be a fixed fee, lump sum agreement. They said the Request for Proposal (RFP) requested lump su m amounts for each annual period on the pricing page and that the 1993-1995 Contrac t Budget reflected the lump sum amounts. Excessive Profit and Overhead Rate/Unsupported Billing Rates County officials said they did not evaluate the 50 percent rate because the WFN contracts were fixed fee agreements a nd they do not negotiate fixed price offers if the lowest offer is from a responsible firm. Bid Advertisements The County contends it complied with local purchasing guidelines and state procedures in the handling of the bid advertisements. County officials said they published the ad in its legal organ once a week for two weeks (the legal organ publishes legal advertisements on Fridays only each week). The County also posted the advertisements in its Purchasing Department, mailed RFP's to 13 potential firms, and posted the ad on its Bid Hotline . They said no firm indicated a problem with the timeframe allowed for the bids. Price Analysis Not Documented County officials said they performed a price analysis. 7 OIG Evaluation Contract Compensation Provision Not Clear The County did not dispute the finding issue that the contract co mpensation provision was not clear. Excessive Profit and Overhead Rate/Unsupported Billing Rates The RFP did not contain sp ecific language requesting prospective contractors to provide a "lump sum" contract price. Furthermore, the co mpetitive procurement process does not preclude, but allows for, negotiation of fair and reasonable compensation. We believe the circumstances raised a compelling question about the reasonableness of the overall procurement transaction. Specifically, WFN submitted a contract proposa l showing proposed maximum contract prices calculated using personnel costs times a 50 percent overhead/profit factor. In a ddition, the County used CDBG funds to provide and equip the offices WFN and his staff used to administer the contr act. Given this extra level of support, we believe the County, despite WFN's low bid, should have attempted t o negotiate a reduction in the 50 percent overhead/profit rate. Bid Advertisements We recognize that there is n o specified minimum time frame to allow bidders to respond to advertisements and/or RFPs. The time frames in this case seemed too short considering the nature of the procurement and the details required to be included in a responsive bid proposal. Price Analysis Not Documented The County provided a document which they claim is a price analysis. However, th e document showed only a comparison of the two proposals. It did not provide a n independent estimate based on prior and expected costs. 8 Recommendations We recommend that you: 1A. Determine the eligibility of the 50 percent profit and overhead rate. 1B. Require reimbursement to HUD pro grams for any portion of the costs your office determines not to be a reasonable program charge. We also recommend you instruct the County to improve its controls to: 1C. Ensure that the lan guage in future HUD program administrative contracts clearly describes whether the contracts are cost reimbursable or fixed price agreements. 1D. Consider and evaluate the reasonableness of overhead/profit rates. 1E. Advertise for a longer period of time and provide a longer period for response. 1F. Perform and document a proper price analysis. 9 Finding 2 - Dual Payments for the Same Rehabilitation Services, $51,416 The County contracted with an inspector to perform services which WFN was required t o perform. Thus, the County paid a n unnecessary $51,416 for rehabilitation inspection and work- write-up services. T he inspector was also an employee of WFN who performed inspections for another non-HUD program. The additional contract reduced funds available for other eligible program purposes and created a possible conflict of interest situation. Separate Inspection Contract The County contracted with a separate inspector to perform work write-up and constructio n inspections. The County paid the inspector $51,416 for the period January 1, 1993 throug h January 31, 1996. The inspection services RFP stated the functions to be performed will be equivalent to thos e ordinarily performed by a Housing Rehabilitation Advisor. Included in these duties will be the inspection of rehabilitation properties (initial inspection and construction-in-progres s inspections), on site receipt of signatur es from homeowners on various documents, and advisory assistance to the homeowner and contractor in performing the housing rehabilitation work. WFN's Responsibilities The wording in the County's RFP, WFN's proposal, and WFN's contract indicates that WFN was to perform all housing rehabilitation inspections and work write-ups. The following excerpt s from the cited documents illustrate WFN's responsibilities: County's Request for Proposal (RFP) The RFP required pro posed contractors to submit bids that would provide for the: "Continued administration of existing CDBG, Rental Rehab, HOME, ESG , HOPWA, LIHEAP, WAP, and Oil Overcharge programs including complet e program management such as project implementation, monitoring, an d reporting...." (Section III, Scope of Services). The RFP did not indicate the County would need or elect to award separate contracts to assist in providing project service delivery, such as rehabilitation inspection services. WFN's Proposal WFN's proposal included a separate amount for the administration of the County's CDBG and HOME housing rehabilitation programs. WFN's proposa l included a detailed explanation of the firm's distinction between the price proposed for 10 general administration and the price proposed for rehabilitation project delivery services (project administration). Specifically, WFN's proposal provided: "These activities are separate from the CDBG Program Administration activities since it is for the delivery of eligible housing/housing rehabilitation Projec t Service Delivery activities. (Section 18.II) "WFN has designed and implemented the only computerized work write-u p Housing Rehabilitation Program in the State of Georgia, and possibly th e Southeast, which contains all Work Write-up information, Cost Estimator, an d Program/Client Database information, which includes over 100 fields o f information. Attachment 5 - Sample Housing Rehabilitation Work Write-up , exemplifies the type of computerized Work Write-up which WFN personnel are able to prepare for eligible Gwinnett County clients. Without such a system , Gwinnett County would need at least one-two additional clerical positions t o handle all the housing rehabilitation Work Write-ups and related documentation." (Section 15 H) WFN's Contract with the County The contract provided that WFN would: Conduct all necessary rehabilitation advisor activities including, (a) applicatio n taking and screening, and (b) structure qualification, economic feasibility, an d types of improvements necessary to meet minimum standards and genera l property improvements. (Section 6.18) We believe the above documents indicate that WFN was obligated to provide all rehabilitation inspections and work write-ups. As mentioned in the firm's proposal, WFN had developed a computerized system to document inspection results and to generate work write-up and cos t estimates. The firm's marketing of the system in the RFP indicates WFN would run the system as part of WFN's contract price. We also interviewed representatives of the only other company that bid against WFN for th e County's administrative contract. The representatives stated that they also interpreted the RFP to require rehabilitation inspec tion and work write-ups and that their proposed price included an amount for all services. Possible Conflict of Interest Federal procurement standards provide that no employee, officer or agent of the grantee o r subgrantee shall participate in selection, or in the a ward or administration of a contract supported by Federal funds if a conflict of interest, real or apparent, would be involved. Such a conflic t would arise when, "the employee, officer or agent, any member of his immediate family, his or her partner, or an organization which employs, or is about to employ, any of the above, has a 11 financial or other interest in the firm selected for the award." (24 CFR 85.36(b)(3)) 12 The inspector was also an employee 1 of WFN. WFN employed the individual to perfor m inspections and work write-ups for another non-HUD program (Georgia Power Weatherization Program). For CDBG and HOME inspections, WFN notified the individual of neede d inspections and reviewed and approved requests for payment prior to forwarding them to th e County for final approval and p ayment. In our opinion, this dual affiliation created a conflict of interest which increased the potential for fraud and abuse. County officials stated that they had a contract with the inspector before he was first employed by WFN and that they were aware of the inspector's working relationship with WFN. Th e officials said the County continued contracting with the individual because they had difficulty locating qualified 2 inspectors willing to participate in the program. The officials stated that the inspector was the only bidder who responded to their RFP who met their qualifications. Auditee Comments County officials stated that WFN's proposal did not include a price for rehabilitation inspections and work write-ups and that WFN knew from prior experience that the County contracte d separately for those services. They also contend that the inspections noted in WFN's contrac t represents oversight control over the rehabilitation work an d provided a quality control assurance of the work performed by the inspector. They also did not believe there was a conflict of interest. They contend there is no conflict of interest with WFN hiring the inspector for the sole purpose of conducting Georgia Power energy audits. OIG Evaluation The County's comments address WFN's oversight role, a responsibility we agree the firm wa s contracted to perform. However, the County's position does not acknowledge and is no t consistent with wording in the RFP, WFN's contract proposal, WFN's contract and information provided by the opposing bidder which shows the firm offered and contracted to provid e rehabilitation program implementation services. 1 WFN classified this and other workers as contract cons ultants. However, the Department of Labor did a review and determined the individual was an employee. WFN has appealed that decision, which was unresolved when we completed our site work. 2 The inspector must be certified by Southern Building Code Congress International, Inc. 13 The explanation also indicates WFN had information about the scope of services being less than that cited in the RFP which the opposing bidder did not have. If this was the case, the County should have advised the opposing bidder to also omit the services from its bid and revise th e contract to clearly exclude the work. We disagree that the situation does not involve a conflict of interest. WFN, an agent for th e County, was prohibited from participating in the administration of contracts supported by Federal funds if a conflict of interest, real or apparent, would be involved. The conflict exists because WFN administered the contract (as signed properties for inspection and reviewed and authorized payment requests) with the inspector who was also a WFN employee. Recommendations We recommend that you: 2A. Disallow $51,416 paid to the ins pector and additional payments of this type since the dates of our review, and require reimbursement to the HUD programs. 2B. Instruct the County to est ablish controls to prevent similar unnecessary payments in the future. 2C. Instruct the County to refrain from entering into future contracts with WF N employees as long as WFN is the County's HUD program contract administrator. 14 Finding 3 - Inadequate Support for Personnel Costs Charged to HUD Programs Gwinnett County paid WFN $159,459 for personnel costs that were not supported by proper time and attendance records. Paragraph 5 of the 1993 and 1994 con tracts specified that WFN would be paid an amount based upon staff days worked, up to the maximum amount of the contract. We reviewed WFN's time records. According to a WFN representative, the firm develope d supporting time records by applying predetermined percentages to the hours in each bi-monthly pay period. The billings reflected evidence of that methodology. For instance, the billing s generally showed the same salary amounts to HUD pro grams over consecutive pay periods. The payroll costs for individuals who devote time to multiple activities normally vary from pay period to pay period because the level of effort between programs generally va ry from day to day. WFN did not have appropriate time records to support the predetermined percentages. Between January 1993 and September 15, 1995 the County paid WFN $159,459 for personnel who devoted time to HUD and non-HUD activities. The amount included $64,689 for WFN's president and $94,770 for another individual. Since WFN did not have proper time records to support the predetermined percentages, WFN could not demonstrate that the salary cost s ($159,459) were reasonable. During the on site review, County officials a lso stated they intended and thought WFN billed for personnel costs based on the actual time workers spent performing duties for HUD programs. Auditee Comments During the exit conference, County officials stated they i ntended for the contracts to be fixed fee, lump sum agreements. They contend the RFP requested lump sum amounts for each annua l period on the pricing page and that the 1993 through 1995 budgets reflected the lump su m amounts. They also contend that WFN was not required to maintain time distribution records to support billings for personnel costs because the contract was a fixed price contract. OIG Evaluation The RFP did not contain specific language requesting prospective contractors to provide a "lump sum" contract price. Also, the position is not consistent with the contract wording nor with WFN's billing method . WFN's billings to the County included copies of time and attendance records for each worke r shown on the billing. 15 Recommendations We recommend that you: 3A. Determine the eligibility of the $159,459 spent for personnel w ho worked on HUD and non-HUD activities. 3B. Require reimbursement to HUD programs for any portion of the $159,459 your office determines not to be a reasonable program charge. 3C. Instruct the County to ensure that the administrator maintains proper time an d attendance records to support future personnel charges to HUD programs. 16 ATTACHMENT 2 SCHEDULE OF INELIGIBLE AND UNSUPPORTED AMOUNTS Recommendation Ineligible Costs 3 Unsupported Costs 4 1A $263,418 2A $51,416 3A 159,459 Total $51,416 $422,877 3 Costs not allowable by law, contract, HUD or local agency policies or regulations. 4 Unsupported amounts do not o bviously violate law, contract, policy or regulation but warrant being contested for various reasons such as the lack of satisfactory documentation to support eligibility and HUD approval. 17 ATTACHMENT 3 18 19 20 21 22 23 ATTACHMENT 4 Distribution Secretary's Representative, 4AS Director, Community Planning and Development, 4AD Field Comptroller, 4AF Director, Accounting Division, 4AFF Assistant to the Deputy Secretary for Field Management, SDF (Room 7106) Chief Financial Officer, F (Room 10166) (2) Director, Office of Internal Control and Audit Resolution, FOI (Room 10176) (2) Associate Director, US GAO, 820 1st St. NE Union Plaza, Bldg. 2, Suite 150, Washington, DC 20002 Gwinnett County Department of Financial Services, Accounting and Systems Administration Division 24
Gwinnett County, Lawrenceville, GA
Published by the Department of Housing and Urban Development, Office of Inspector General on 1996-08-21.
Below is a raw (and likely hideous) rendition of the original report. (PDF)