oversight

HA, Kansas City, MO

Published by the Department of Housing and Urban Development, Office of Inspector General on 1998-03-10.

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

                            Audit Report
                            District Inspector General for Audit
                            Great Plains District
                            Report: 98-KC-204-1001                    Issued: March 10, 1998



TO: Kevin E. Marchman, Assistant Secretary for Public and Indian Housing, P
    Andrew L. Boeddeker, Director, Office of Public Housing, 7APH

FROM: Jose R. Aguirre, District Inspector General for Audit, 7AGA

SUBJECT: Housing Authority of Kansas City
         Job Order Contracting Program
         Kansas City, Missouri


We have completed our audit of the Job Order Contracting (JOC) program at the Housing
Authority of Kansas City, Missouri (HAKC). Our report details one finding regarding overall
problems with the JOC program as implemented at the HAKC. We also performed a limited
review of the HAKC’s implementation of provisions required by Section 9 of Public Law 104-
120, the “Housing Opportunity Program Extension Act of 1996;” and subsequent HUD
notices that detail further instructions to housing authorities regarding the Act. Our report
details the HAKC’s insufficient implementation of provisions required by HUD Notice PIH
97-27. We have provided the HAKC with a copy of this report.

Within 60 days, please give us, for each recommendation in this report, a status report on:
(1) corrective action taken; (2) proposed corrective action and the date to be completed; or
(3) why action is considered unnecessary. Also, please furnish us copies of any
correspondence and/or directives issued because of the audit.

Should you have any questions, please contact me or Kim Randall of my staff at
(913) 551-5870.
                                                                      98-KC-204-1001




Executive Summary
In June 1996, we met with the Housing Authority of Kansas City, Missouri
(HAKC) to begin an audit of several areas of operation. The HAKC staff and its
Receiver expressed concerns regarding its Job Order Contracting (JOC) program
and one general contractor. Based on this information, we focused our audit on the
JOC program and this general contractor.

Our primary objectives were to: evaluate the HAKC’s overall JOC system;
evaluate the consultant’s performance under its contract with the HAKC; and to
determine whether a general contractor complied with its JOC contract. We also
completed a limited review of the HAKC’s compliance with Section 9 of Public
Law 104-120, the “Housing Opportunity Program Extension Act of 1996.”

Initiating its JOC program in December 1994, the HAKC began renovating units in
April 1995 using the JOC system. Our audit covered nearly $1 million of over
$4 million paid to this particular general contractor. This report contains one major
finding relative to the JOC program and a finding on the HAKC’s incomplete
compliance with Section 9 of Public Law 104-120.

We concluded the JOC program was developed with internal control weaknesses,
implemented with management deficiencies, and abused by a contractor. In
addition, the JOC consultant, The Gordian Group (Gordian), did not fulfill all its
responsibilities under its contract. As a result, the HAKC was not adequately
prepared to administer its JOC program.

We inspected JOC work totaling $976,000 and determined the contractor, F.H.
Paschen Venture, Inc. (Paschen), overcharged the HAKC $227,000 for work not
performed, substitution of quality, and overstatement of materials and labor.
Further, we estimate if other work assigned to Paschen (not inspected during our
review) follows the same pattern, Paschen overcharged the HAKC an additional
$387,000.

The JOC program can be a useful system for accelerating the process of
completion of rehabilitation work at Public Housing Authorities (PHAs).
However, the JOC program (as implemented at HAKC) contained internal control
weaknesses that contributed to abuses. Because the JOC program is used by other
PHAs, we recommend the Assistant Secretary for Public and Indian Housing
(PIH) require Gordian to amend its training program and instructional material to
require that PHA inspectors use contractors’ detailed proposals when conducting
JOC work inspections; and ensure PHAs develop detailed Scopes of Work and
independent estimates adequate for comparison to contractors’ detailed proposals.



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We also recommend the Assistant Secretary require Gordian, in consultation with
a PHA, to ensure the PHA has sufficient, well-qualified staff to administer the JOC
program in order to continue with implementation of the program.

In addition to problems with the HAKC’s consultant and contractor, deficiencies in
the HAKC’s administration of the JOC program can be attributed largely to
staffing problems, including inadequate staff resources and training. Accordingly,
we recommend the Director of the Office of Public Housing require the HAKC, in
consultation with Gordian, to determine the number of staff and necessary
qualifications required to adequately administer the JOC program; and require the
HAKC to staff the JOC department with the required number of well-qualified
staff. We also recommend the Director require the HAKC to evaluate causes for
frequent staff turnover and take steps to address those causes . In addition, we
recommend the Director take administrative sanctions against Paschen.

Further, we concluded the HAKC has not fully met the provisions of Section 9 of
Public Law 104-120. Neither the HAKC screening procedures nor its lease
agreement contain all provisions required by Section 9 of the Act regarding tenant
alcohol abuse and off premises drug-related criminal activity. Because the HAKC
has not fully complied with Section 9 provisions, the HAKC may not be able to
deny tenancy to applicants or evict current tenants for violations of these
provisions. Therefore, we recommend the Director of the Office of Public Housing
require the HAKC to amend its screening procedures and lease agreement to
include the appropriate language regarding alcohol abuse and
drug-related criminal activity on or off the premises. In response to our draft
report, the HAKC provided an amended lease agreement which properly addressed
the issue of drug-related criminal activity on or off the premises. However, it did
not specifically address alcohol abuse. As a result, we modified our
recommendation to address only the alcohol abuse provisions.

We discussed the report issues with the HAKC and the Director of the Office of
Public Housing. We requested comments on our draft report from the Assistant
Secretary for PIH, the Director of the Office of Public Housing, and the HAKC.

We received written comments from the Director of the Office of Public Housing
that addressed all recommendations. The Director generally concurred with our
finding. However, the Director suggested some modifications to our
recommendations. We considered these comments in preparation of this final
report.

We also received written comments from the HAKC. In general, the HAKC
agreed with our report except for staffing issues in Finding 1 and noncompliance
issues in Finding 2 regarding Section 9 of Public Law 104-120.The comments
from the HAKC were considered in completing this report and are included in
Appendix 2.



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Table of Contents
Management Memorandum ..................................................................i

Executive Summary.............................................................................ii

Table of Contents ...............................................................................iv

Introduction.........................................................................................1

Findings and Recommendations

         1. The JOC Program Was Developed With Internal Control
            Weaknesses, Implemented With Management Deficiencies,
            And Abused By A Contractor...............................................4

         2. The HAKC Did Not Fully Comply With The “Housing
            Opportunity Program Extension Act of 1996”.....................21

Internal Controls................................................................................25

Appendices

         1. Schedule of Ineligible/Potentially Ineligible Costs ..............26

         2. Auditee Comments .............................................................27

         3. Distribution ........................................................................33




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Abbreviations:

HAKC       Housing Authority of Kansas City, Missouri
HUD        Department of Housing and Urban Development
JOC        Job Order Contracting
PHA        Public Housing Authority
PIH        Office of Public and Indian Housing
UPB        Unit Price Book




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Introduction
In June 1996, we met with the HAKC to begin an audit of several areas of its
operations. During initial meetings, the HAKC and its Receiver expressed concerns
regarding the JOC program and one of its general contractors. Based on this
information, we focused our audit on the JOC program and the general contractor.


A. Background

The HAKC was established by the State of Missouri in 1939 to provide safe and
sanitary housing for the poor. The HAKC provides housing for low-income
persons through two programs. First, it develops, owns and manages multi-family
public housing developments as well as single-family houses. The HAKC is directly
responsible for managing and maintaining these housing units. Second, the HAKC
makes housing assistance payments, known as Section 8 payments, for low-income
persons who rent housing from private property owners. For
Section 8 housing, the HAKC inspects dwellings to ensure they meet applicable
standards, but does not actively manage or maintain the properties.

Missouri law provides that a Board of Commissioners appointed by the Mayor will
administer day-to-day operations of the Authority. However, a Federal Court
placed the HAKC in Receivership in July 1993. In September 1994, the court
appointed TAG Associates of Kansas City, Inc. (TAG) as Receiver. When TAG
began managing the HAKC, approximately 40 percent of the housing units were
vacant due to poor physical condition. TAG committed to the Court to
aggressively renovate many of these units, and elected to use a construction
procurement method known as JOC.

JOC is a contracting technique designed to reduce procurement lead times. The
Department of Defense invented JOC in 1981 for use by the North Atlantic Treaty
Organization. Since then, Defense has used JOC for installation maintenance,
minor repair, and construction projects.

JOC is a competitively bid, indefinite quantity, fixed price, multi-task contract. The
owner awards a base contract with pre-established tasks and prices, specifications
and general contract conditions. Contractors bid a coefficient (bid factor) on the
Unit Price Book (UPB), the pricing basis for the JOC work. The UPB consists of
over 60,000 construction tasks and each task unit price is based on localized direct
costs for material, equipment and labor. For each construction project, the
contractor submits a cost proposal based on selection of individual tasks from the
UPB, and applies its bid factor to UPB prices to arrive at a proposed price to



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complete the project. The owner and the contractor negotiate a Scope of Work
and total price to complete the project, then the owner issues a work order
notifying the contractor to proceed.

On December 19, 1994, the HAKC contracted with a JOC consultant, The
Gordian Group (Gordian), to set up a JOC system at the HAKC. By mid-March
1995, the HAKC had contracted with two general contractors, F.H. Paschen
Venture, Inc. (Paschen) and Brown and Root Services, Inc., to provide renovation
work using the JOC process. From April 1995 through February 1997, JOC
contractors renovated units and completed various maintenance and repair projects
with contracts totaling $10 million.

Although our report addresses only the HAKC JOC program, we understand
similar JOC programs are used by at least nine other PHAs throughout the
country.


B. Objectives, Scope And Methodology

Based on concerns expressed by the HAKC and its Receiver, we conducted our
audit with two primary objectives:

       •      Evaluate the overall JOC system at the HAKC
       •      Determine whether Paschen complied with its JOC contract

To accomplish these objectives, we reviewed the HAKC’s performance under the
JOC system and Gordian’s performance under its consultant contract. Further, we
reviewed Paschen’s performance by analyzing HAKC and Paschen project files and
inspecting renovated properties related to 20 work orders valued at $976,000.

As of August 15, 1996, the HAKC had paid Paschen $2.7 million for completed
JOC rehabilitation work, including both construction-type renovations and
abatement of hazardous materials. Of the $2.7 million, $1.8 million related to
renovations and the remaining $900,000 related to abatement. Our review
concentrated entirely on renovations; therefore, our universe consisted of
$1.8 million in renovation work orders. We inspected approximately one-half
($976,000) of these construction renovations.

Although there were other work orders completed as of our universe date, the
HAKC had not paid Paschen for these and still had the opportunity to review the
rehabilitations and reduce the amount to be paid to Paschen, if necessary.
The HAKC also had other work orders in progress, but these rehabilitation efforts
were in various stages of completion and not selected for review. As of
September 23, 1997, the HAKC had paid Paschen over $4 million for JOC
rehabilitations; and an additional $600,000 remains unpaid and in dispute.



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For JOC program background purposes, we reviewed studies of JOC completed
by the Corps of Engineers and the U.S. Army Audit Agency. We also reviewed
various HAKC internal and external reports related to its JOC system.

In addition, we performed a limited review of the HAKC compliance with
Section 9 of Public Law 104-120, the “Housing Opportunity Program Extension
Act of 1996.” Specifically, we reviewed the HAKC’s screening procedures and
lease documentation to determine whether occupancy provisions of the Act were
met.

We discussed our review with the U.S. Department of Housing and Urban
Development (HUD) program staff and HAKC management. We performed audit
work from June 1996 through December 1997, and conducted the audit in
accordance with generally accepted governmental auditing standards.




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Findings and
Recommendations
Finding 1

The JOC Program Was Developed With Internal
Control Weaknesses, Implemented With
Management Deficiencies, And Abused By A
Contractor

The JOC program developed by Gordian for the HAKC contained inherent internal
control weaknesses. Further, Gordian did not fulfill all its responsibilities under the
contract. As a result, the HAKC was not adequately prepared to administer a new
concept of rehabilitating property in an accelerated manner. Additionally, the
HAKC’s administration of the JOC program was deficient. Inherent problems in
the JOC program, coupled with the HAKC’s management deficiencies, led to the
construction contractor, Paschen, abusing the program and overcharging the
HAKC.

We inspected contract work totaling $976,000. Paschen overcharged the HAKC
$227,000 for work not performed, for substitution of quality, and overstatement of
materials and labor. If other work assigned to Paschen (not inspected during this
review) follows the same pattern, Paschen overcharged the HAKC an additional
$387,000.


A. Gordian’s Role in the JOC Program


   1. Internal Control Weaknesses in the JOC Program

Gordian received a HAKC contract to develop a JOC system that would accelerate
rehabilitation of dwellings. In setting up the system, Gordian stressed:

       •   The Scope of Work was the governing document.
       •   The Work Order was based on a lump sum price.



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       •   The HAKC should review the contractor’s proposal on a “bottom line”
           basis.

Additionally, the HAKC and the contractor were to create Scopes of Work based
on joint inspections of dwellings needing rehabilitation. However, Scopes of Work
were generalized lists of needed repairs. Once the Scope of Work was finalized,
the HAKC was to prepare an independent estimate of repair costs and the
contractor was to prepare its detailed proposal. The contractor’s detailed proposal
included each repair task and the related costs, and formed the basis for
establishing the price the HAKC would pay the contractor for its work.

Based on Gordian’s training, the HAKC provided its inspectors only the
generalized Scope of Work rather than the detailed proposal for inspecting work.
The contractor’s detailed proposal was the only document that contained specific
work tasks, quantities and quality of materials. As a result, inspectors could not,
and in fact did not, disclose when Paschen: did not complete the work; inflated
quantities; or substituted materials.


   2. Gordian’s Training was Insufficient and Untimely, and
      Periodic Progress Reports Needed Improvement

Gordian’s contract required Gordian to conduct as many training courses as
necessary to ensure the HAKC was fully prepared to execute the JOC system. We
concluded Gordian’s training was insufficient and untimely because:

       •   The initial training was in March 1995; consisted of a three-day session;
           and at the time, the HAKC had only two full-time and two part-time
           JOC employees.
       •   The HAKC had continuous turnover in critical JOC positions.
           However, the next formal training was conducted in December 1996,
           after Paschen had completed most of its work.

Gordian’s contract also called for periodic program reviews and written progress
reports. In addition, Gordian was to provide on-site assistance for a minimum of
four days a month and was paid $5000 a month for the assistance. We concluded
the HAKC did not get the level of support specified in the contract because:

       •   On site assistance, according to HAKC staff, consisted of 1 to 3 days a
           month.
       •   Telephone support was difficult to obtain.
       •   Gordian’s first written program review (May 1995) informed the
           HAKC the JOC department was understaffed. The next written
           program review was not until March 1996 and the review found “...no



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           glaring deficiencies or concerns....” The report also contained
           suggestions for obtaining good independent cost estimates.
       •   At the request of the HAKC Executive Director, Gordian performed a
           June 1996 program review and in its written report Gordian included
           the following disclosures:
               • Under-staffing problems since the inception
               • Ill-qualified HAKC staff
               • HAKC staff allowed Paschen to write Scopes of Work
               • Paschen had submitted proposals that appeared to be exact
                   duplicates for different job sites
               • JOC and other HAKC staff needed additional training on JOC
               • JOC staff did not properly inspect contractor proposals to
                   identify bogus items
               • The HAKC had never been in control of the JOC contracts

Because Gordian did not disclose these problems to upper HAKC management
timely, we concluded Gordian’s previous periodic program reviews and on-site
assistance were deficient. We further concluded that the absence of more written
reports to upper HAKC management contributed to the delays in taking corrective
action.


HAKC Comments

In response to our draft report, the HAKC agreed with both audit issues regarding
Gordian’s role in the JOC program. The HAKC also provided additional
comments, with which we agree, as follows:

       •   The HAKC retained Gordian to help assure the JOC program operated
           efficiently and effectively. The HAKC was under the impression this
           was occurring. When the Receivership team expressed concerns,
           information regarding weaknesses in internal controls was not
           forthcoming from Gordian. As a result, the HAKC experienced overall
           management problems with the JOC program.

       •   The HAKC assumed its contract with Gordian would result in timely,
           fully comprehensive reports and training of its staff. The HAKC also
           believed it could rely on Gordian to alert the Receivership team to
           problems with JOC program administration and contractor
           performance. Based on findings by OIG and the HAKC Office of
           Internal Audit, the HAKC was unable to sufficiently rely on support by
           Gordian.




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B. HAKC Management of the JOC Program was Deficient


The HAKC inadequately administered its $10 million JOC program. As a result,
the HAKC did not cease doing work with Paschen until a substantial amount of
rehabilitation work had been performed. Specifically, the HAKC did not:

       •   Prepare adequate Scopes of Work.
       •   Prepare adequate independent cost estimates.
       •   Adequately review contractor cost proposals.
       •   Adequately staff its JOC program.


   1. Inadequate Scopes of Work

The HAKC prepared vague Scopes of Work that in some instances consisted of a
few general lines of instructions to renovate an entire scattered site unit. These
vague Scopes of Work led to differing interpretations and expectations among the
HAKC, Paschen, and subcontractors. Further, HAKC staff advised that one
HAKC program manager allowed Paschen to write the Scopes of Work that
should have been written in conjunction with HAKC staff. This imprudent practice
relegated to Paschen the HAKC’s control over the work to be performed.


   2. Inadequate Independent Cost Estimates

The HAKC’s independent cost estimates were inadequate for evaluating Paschen’s
proposals. We identified estimates with duplicate renovation tasks and overstated
quantities or measurements. For example, one estimate included 1600 square feet
of carpet. Our on-site inspection revealed only 850 square feet was necessary,
overstating the HAKC’s cost estimate by $900. Another estimate for a five-unit
townhouse row contained excessive quantities that overstated the HAKC’s
estimate by $11,459. The deficient independent cost estimates negated the
HAKC’s ability to effectively evaluate Paschen’s proposal price.


   3. Inadequate Review of Contractor Cost Proposals

The HAKC did not adequately review, and therefore did not detect, inappropriate
cost proposals; therefore allowing Paschen to abuse the JOC program. Our sample
of 20 Paschen proposals disclosed numerous examples of improper tasks, duplicate
tasks, variations of the same task, and obviously overstated quantities and
measurements. As a result, HAKC payments to Paschen were inappropriate.



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    4. Inadequate Staffing

The HAKC did not adequately staff its JOC program. The JOC department was
understaffed and the staff did not have all qualifications necessary to properly
manage its JOC program.

To meet the demand for livable units, the HAKC decided to implement the JOC
program. The HAKC hired Gordian to develop, implement and assist in executing
a JOC system.1 Gordian began system development in January 1995 and
renovations started in April. In May, Gordian notified the HAKC the JOC
department was understaffed. Gordian recommended a minimum of six employees
as JOC renovations were getting underway. Gordian warned “anything short of
that staffing will produce a less than satisfactory results. The JOC system will only
be as effective as the people managing it.” Gordian recommended:

         •    1 Program Manager
         •    2 Project Managers
         •    2 Inspectors
         •    1 Clerk

As JOC renovations dramatically increased in volume during August 1995,
Gordian recommended no less than eight persons administer the program:

         •    1 Program Manager
         •    3 Project Managers
         •    1 Cost Estimator
         •    3 Inspectors

The HAKC did not staff its JOC department as recommended, but began with only
four employees (two full-time and two part-time). In March 1995, the HAKC
determined it needed more assistance from Gordian. The HAKC contracted with
Gordian to provide a Program Manager from March through June 1995. During
May of this period, the HAKC promoted one of its inspectors to Program
Manager to learn the position duties before Gordian’s contract ended in June.
Even though Gordian recommended against the promotion because it believed the
new Program Manager was not qualified, the HAKC promoted the inspector.



1
  The HAKC contracted with Gordian in December 1994 to develop and implement a JOC system. For this
service, the HAKC agreed to pay Gordian $135,000. The HAKC also agreed to pay Gordian $5,000 per
month for 24 months ($120,000) for technical support. During the contract, the HAKC issued change orders
for additional Gordian services, bringing the total paid to Gordian from December 1994 through April 1997
to nearly $300,000.




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During this same period, the Director of Construction and Development assigned a
newly-hired Vacancy Reduction Manager to oversee the JOC program as well as
other vacancy reduction duties. The HAKC also filled the vacant inspector position
in June 1995. The JOC department remained at a level of three full-time and two
part-time employees until July 1995. In July, the HAKC added another JOC
inspector by transferring a Maintenance employee to the JOC department.

During August 1995, as renovations intensified, the HAKC replaced the recently
promoted Program Manager by promoting another JOC inspector to that position,
and hired a Cost Estimator. At this point, the HAKC had issued 46 work orders
(totaling $7.2 million) with only four JOC-dedicated staff members, even though
Gordian had recommended eight individuals at that volume of renovations. The
JOC program was so understaffed, the Program Manager was forced to fill the role
of five JOC positions until the HAKC hired the Cost Estimator in August. For
several months, the Program Manager acted as:

       •   JOC Program Manager (overall program administration)
       •   3 Project Managers (monitor individual work orders)
       •   Cost Estimator (prepares independent cost proposal for comparison
           purposes)

The HAKC eventually added another inspector and a clerk in September, bringing
JOC-dedicated employees to six. At this point, the HAKC reached its maximum
JOC staff, but was still only three-fourths of the recommended level. The JOC
department remained at six members until March 1996, when most of the planned
renovations were complete.

In addition, not all JOC employees were fully qualified. For example, one Program
Manager did not understand the contractors’ bid factors or how the factors related
to the Unit Price Book (UPB), two very important elements of a JOC system. In
addition, JOC inspectors did not have adequate knowledge to inspect all aspects of
renovation work. Two inspectors had significant experience in electrical work, but
lacked sufficient knowledge in other areas of construction. Another inspector had
no specialized field of expertise. All three told us they received no formal training
to conduct inspections.

After JOC renovations were essentially complete in June 1996, Gordian evaluated
the HAKC’s JOC program and concluded it had operated understaffed and with
ill-qualified employees since inception. A second consultant reported to the HAKC
in August 1996 that “…due to understaffing and poor staff quality there has been
mismanagement of the operation.”

The HAKC also conducted an internal review of its JOC program in August 1996
and Gordian provided another evaluation of the program in September.




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These reviews identified problems related to staffing and a lack of operational
procedures. The HAKC subsequently attempted to remedy staffing problems by
replacing the Director and Deputy Director of Construction and Development,
replacing the Cost Estimator, adding two Project Managers, and promoting a
Contracting Officer to the Program Manager position. In addition to staffing
changes, in August 1997 the HAKC required Gordian to provide a daily operations
manual addressing JOC operational procedures. To remedy contractor problems,
the HAKC canceled Paschen’s contract in October 1996 and hired Team Ace.

These changes, although positive, were short-lived because several recently hired
JOC department staff no longer work for the HAKC or transferred out of the JOC
department. The Director of Construction and Development left the HAKC in July
1997 and the Deputy left in September 1997. One Project Manager worked only
two months before leaving in August 1997. Because the JOC program is
somewhat labor-intensive, the JOC program will not function properly with
minimal staff and high staff turnover.

                                       ***

Additionally, the HAKC did not: establish complete technical specifications before
JOC renovations began; ensure verbal change orders were prohibited; enforce
contract requirements; or prohibit work orders too complex to manage properly.

In summary, lack of properly trained, adequate staffing contributed to management
deficiencies in the JOC program and ultimately led to inefficient use of renovation
funds.


HAKC Comments

In its response to our draft report, the HAKC agreed with the three audit issues
regarding inadequate Scopes of Work, independent cost estimates, and reviews of
contractor cost proposals. However, the HAKC disagreed with the audit issue
regarding inadequate staffing, stating::

       •   The HAKC has acknowledged the past management problems with the
           JOC program and taken corrective measures to improve its JOC
           operations. For example, the HAKC has restructured the Construction
           and Development Department, hired an experienced, well-trained cost
           estimator, increased performance requirements for its staff, revamped
           its use of the JOC program, and hired a new JOC contractor.

       •   The HAKC believes staffing issues were not raised and the staffing
           pattern for the Construction and Development Department was
           approved in its entirety. The HAKC does not know why Gordian or



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           any others involved recommended a JOC staffing plan other than that
           approved by the Construction and Development Department. It was
           understood that the staffing plan approved for the Construction and
           Development Department included the staffing and administrative
           components required to effectively administer the JOC program.


OIG Evaluation of HAKC Comments

We agree with the HAKC’s efforts to improve its JOC operations. However, we
disagree with the HAKC’s response to the staffing issue.

Gordian notified the HAKC in May1995 that the JOC program was understaffed,
however, the HAKC did not meet the recommended minimum of six JOC
employees before beginning the program. In addition, the HAKC did not heed
Gordian’s concerns regarding promoting the inspector to Program Manager, nor
did the HAKC ever reach Gordian’s ultimate recommended levels of staff.
Although the HAKC believes a staffing plan was approved, the number of staff
used by the HAKC to administer the JOC program remained significantly below
Gordian’s recommended levels.

The HAKC needs to evaluate the causes of frequent turnover. Such turnover could
indicate inadequate recruiting and promotion practices. As such, we maintain that
insufficient staff and turnover led to various problems with the HAKC’s JOC
program.


C. Contractor Abuse of the JOC Program

On March 13, 1995, the HAKC entered into a Professional Services Agreement
with Paschen to serve as a JOC contractor for a year with two option periods.
Section 3, Services; Price, of the contract states that, pursuant to the terms of the
contract, Paschen was to furnish all labor, materials, tools, equipment, and
services, and perform and complete all work required for the contract as defined
on the Bid Form, in strict accordance with the Invitation for Bid package
incorporated by reference and made a part of the contract. Section 4, Contract
Documents, incorporated several forms/documents into the contract, including
JOC Supplemental General Conditions.



Section 1, Supplemental Definitions, of the JOC Supplemental General Conditions
definitions follow:




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“COMPLETION (FINAL COMPLETION), as used herein means that an
individual Purchase Order issued under the Contract is fully executed and
completed in accordance with the scope of work, plans and specifications.”

“PLANS, as used herein include scopes of work, task descriptions in Unit Price
Book, drawings, specifications and other pertinent information.”

“PURCHASE ORDER, as used herein refers to the obligation document under a
Job Order Contract.” “Each purchase order will include a detailed scope of
work, a firm fixed price proposal from the Contractor, a time duration for the
completion of the work and any special conditions that might apply to that
specific Purchase Order, such as Liquidated damages.”

Section 2, Job Order Contracting - Overview, of the JOC Supplemental General
Conditions describes the Job Order Contracting process as the following:

As Job Order Contract requirements are identified, the contractor will be issued a
request for purchase order proposal and will be required to develop an estimate
for the work required. The contractor will submit its proposal to HAKC. This
proposal will be compared with an independent HAKC estimate. If the
contractor’s proposal is found reasonable, a purchase order may be issued at the
agreed upon price. The price is achieved by selecting various prepriced
construction tasks from the Unit Price book and multiplying those pre-established
prices by the appropriate quantities and then by the contractor’s adjustment
factor. The sum of all included tasks will establish a firm fixed price for the
purchase order.

Section 26, General Requirements, Paragraph E. of the JOC Supplemental
General Conditions states, in part, that in response to the HAKC’s Request for
Proposal (RFP), the Contractor shall prepare a detailed proposal based on the
RFP. This proposal shall contain detailed costs, schedules, lists of proposed
subcontractors and any other supporting documents requested in the RFP. The
contractor shall be held responsible for performing all work as stated in the RFP.
It is the contractor’s responsibility to include the necessary items in his cost
proposal.

Section 29, Ordering Procedures, Paragraph D.(1) of the JOC Supplemental
General Conditions states, in part, that the contractor’s proposal shall include
support documentation to indicate that the work units proposed are reasonable
for the tasks to be performed.

Paragraph D.(4) of the same supplement states, in part, that each purchase order
shall state the agreed upon requirements and fixed price of performance; the
schedule for the work, the item number, description, quantity, unit price and




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extended price; applicable adjustment factors; and totaled to include the firm-
fixed price for the order.

Paragraph D.(6) of the same supplement states, in part, that by submitting a
signed proposal to the HAKC, the contractor is agreeing to accomplish the work
outlined in the RFP for that particular purchase order. It is the contractor’s
responsibility to include the necessary scope items in the proposal prior to
delivering it to the HAKC.

Section 31, Measurements to be Verified, of the JOC Supplemental General
Conditions states, in part, that before doing any work, the contractor shall verify
all measurements at the site of a specific purchase order, and shall be responsible
for the correctness of same.

Section 42, Request for Payments, of the JOC Supplemental General Conditions
states, in part, the contractor must certify when requesting full or partial payment
that the amounts requested are only for performance in accordance with the
specifications, terms and conditions of the subject purchase order.

We reviewed $976,000 (20 work orders2) of the $1.8 million in construction-
related work orders completed by Paschen and paid by the HAKC as of
August 15, 1996. Paschen did not complete proposed renovations valued at
$227,000 (average of 23 percent). We could not verify Paschen’s completion of
another $250,000 (26 percent). If the same degree of noncompliance exists in the
remaining $1.7 million of Paschen’s renovations, Paschen billed the HAKC an
additional $387,000 for renovations it did not complete.

Although the JOC program had internal control deficiencies and was inadequately
managed by the HAKC, we concluded Paschen: violated its contract with the
HAKC; abused the program; and was paid and/or billed the HAKC approximately
$614,000 more than justifiable.

We believe these estimates to be low because of our conservative methodology.
We inspected renovated units and compared each line item of the Paschen proposal
to actual work completed on each unit:


2
  To select our sample, we identified all Paschen work orders that were completed and paid, including two
that the HAKC had not yet paid the retainage, as of August 15, 1996. From this group of work orders
(totaling $2.7 million), we identified our universe of $1.8 million in work orders related only to
construction renovations. We did not include work orders related to abatement of hazardous materials in our
universe for review. From our universe of $1.8 million in construction work orders, we reviewed 20 work
orders valued at $976,000. Although not statistically derived, the value of work orders reviewed
represented about
50 percent of completed and paid construction renovation work as of the universe date. We analyzed HAKC
and Paschen documentation, interviewed HAKC personnel, the JOC consultant personnel, and
subcontractors; and conducted on-site inspections of completed work.




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         •     If we could verify Paschen completed the line item and the quantity
               and/or measurement was correct, we gave Paschen full credit for
               completing the line item and included additional allowances when more
               than proposed was installed.
         •     If the item was completed, but the quantity or measurement was
               incorrect, we gave Paschen credit for the amount actually completed.
         •     If the item was not completed, we gave no credit to Paschen and
               considered the line item incomplete.
         •     If Paschen made substitutions, we adjusted the completed amount by
               using the UPB price relative to the substitution.
         •     If we could not determine whether Paschen completed the line item,
               such as plumbing sealed behind walls, we noted it as such.


The chart below presents our overall inspection results:

   WORK          WORK
   ORDER         ORDER                          ADDITIONAL         NOT            SUBSTI-       COULD NOT
  NUMBER        AMOUNT        COMPLETED        ALLOWANCES       COMPLETED         TUTIONS       DETERMINE
01-0001.01      $ 3,331.62     $  3,027.85      $          -     $   303.77       $       -      $        -
01-0003.01        29,950.48        13,466.80         1,039.68         8,636.90         216.84       6,590.29
01-0003.02        30,250.48        15,249.73         2,061.82         5,767.22         765.07       6,406.65
01-0004.01        29,000.60        13,548.05          709.41          7,925.25         614.25       6,203.64
01-0004.03        14,716.04         5,728.51                -         4,858.71         600.00       3,528.82
01-0004.04       113,659.24        78,929.62          532.53         13,416.43              -      20,780.66
01-0004.05         3,000.00         1,193.58           10.39           470.78               -       1,325.25
01-0012.02       144,509.19        43,510.86         9,298.29        27,446.23      10,749.73      53,504.08
01-0012.11        44,116.18        15,052.72          899.85         14,333.45       4,817.73       9,012.43
01-0014.01       174,952.22       104,609.27                -        40,707.20              -      29,635.75
01-0014.03        42,657.56        19,320.00                -        11,077.93       1,850.00      10,409.63
01-0014.04        13,785.91        12,414.32          127.20          1,214.13              -          30.26
01-0023.01        92,096.40        34,143.85         4,536.98        23,313.74       5,587.44      24,514.39
01-0023.21        43,523.29        14,621.79          736.72         18,950.85         452.35       8,761.58
01-0023.23        43,321.74        15,772.12          809.79         16,003.09         813.94       9,922.82
01-0028.01         5,973.26         4,181.17         1,081.30          702.48               -           8.30
01-0028.02        30,915.23        11,355.56          131.98          9,887.69         903.25       8,636.75
01-0029.01 &
01-0029.04        81,239.59        29,817.63         3,459.13        15,666.25       2,187.66      30,108.92
01-0029.07        35,000.00         5,699.75           892.62         6,127.63       1,398.12      20,881.88
TOTALS          $975,999.03   $   441,643.18   $    26,327.69   $   226,809.73    $ 30,956.38   $ 250,262.10




Per the Paschen contract, for each assigned JOC project, Paschen was to prepare a
detailed cost proposal, including all items necessary to complete the Scope of
Work. In addition, Gordian’s training sessions stressed that contractors were to
“…prepare realistic/defendable price proposals…” and include “appropriate” UPB
items. Our analyses and inspections found:


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•   Renovation tasks not completed
•   Inflated quantities
•   Identical proposals for different housing units
•   Inappropriate tasks for work proposed
•   Improper substitutions for proposed products




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   1. Renovation Tasks Not Completed

Paschen did not complete renovation tasks identified in its accepted proposals. For
example, masonry work at one unit ($3,073) was not completed. Bricks were
literally crumbling away from the house. Paschen’s subcontractor told us brick
work was not included in its Scope of Work.




Figure 1: 6733 Bellefontaine-Bricks are crumbling away from house around
entry.




Figure 2: 6733 Bellefontaine-Bricks are crumbling away from house around
windows.



   2. Inflated Quantities



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Paschen included inflated quantities in its detailed proposals. For example,
Paschen’s proposal to replace a gymnasium roof showed a need for 2,238 square
feet of soffit and fascia siding. Our on-site inspection revealed only 960 square feet
was needed, less than half of Paschen’s proposed amount.

Paschen proposed installation of 900 square feet of carpet and padding; however,
our inspection showed Paschen installed only 630 square feet, an overstatement of
$1,041. In four other proposals, Paschen consistently overstated light fixtures
needed. Paschen proposed twelve light fixtures in each unit for a total of 48
fixtures at a cost of $3,834. Our inspection indicated only 25 lights were replaced
at a cost of $1,997, an overstatement of $1,837.


   3. Identical Proposals for Different Housing Units

Two proposals had nearly identical renovation tasks, measurements, quantities,
and total prices for different scattered-site units. Paschen divided each proposal
into 13 UPB sections (i.e. concrete, mechanical, electrical). Nine of thirteen
sections were identical. The remaining sections were nearly identical with only a
$202 price difference. Two ranch-style houses differed in configuration and size;
therefore, renovation tasks should have differed substantially.


   4. Inappropriate Tasks for the Proposed Work

Paschen’s proposals included inappropriate renovation tasks. Paschen proposed
masonry repairs valued at $3,073; however, no brick or stone exists on the unit. At
this same address, Paschen proposed two sets of stairs costing $797; however, the
single-story unit (no basement) required no stairs.




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Figure 3: 8406 East 111th Street-House has no masonry or stairs in front.




Figure 4: 8406 East 111th Street-House has no masonry or stairs in back.



   5. Improper Substitutions for Proposed Products

Paschen substituted lower grade materials for those listed in its proposals. For
example, Paschen consistently proposed solid core interior doors, but often
installed hollow core doors. Paschen’s proposed price for each solid core door was
$102; hollow core doors actually installed were only $51 (based on the UPB).

                                      ***

Based on the foregoing, we concluded Paschen: violated numerous provisions of
its contract with the HAKC, and billed and/or was paid $614,000 more than
entitled.


HAKC Comments

In its response to our draft report, the HAKC agreed with all issues regarding
contractor abuse of the JOC program. Additional HAKC comments, with which
we agree, include:




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       •   The HAKC believed there was evidence of contractor abuse in its JOC
           program. The Receivership team therefore initiated a review through
           the HAKC’s Office of Internal Audit, and based on its preliminary
           internal findings notified OIG and the State Attorney of its concerns,
           requesting assistance to conduct a comprehensive review of the JOC
           program.


       •   The HAKC intends to pursue all available remedies to assure
           appropriate contractor compensation is made to the HAKC for
           deficient work. The HAKC will cooperate fully in any appropriate
           enforcement actions as they pertain to the conduct of the contractor.


Recommendations


Assistant Secretary for PIH

The JOC program can be a useful system for accelerating time periods a PHA
needs for completing rehabilitation work. However, the JOC program (as
implemented at the HAKC) contained internal control weaknesses that contributed
to abuses. Because other PHAs use the JOC program, we recommend the
Assistant Secretary for PIH require Gordian:

1A.    As a condition for acceptance as a JOC consultant, to amend its training
       program and instructional material to require PHA inspectors to inspect
       work performed using the contractor’s detailed proposal (which contains
       the specific tasks, quantities, and quality of materials for each work order).

1B.    Ensure PHAs develop detailed Scopes of Work and detailed independent
       estimates to compare with the contractor’s proposal as to tasks required,
       quantities/measurements, and quality of materials.

1C.    To consult with PHAs and ensure PHAs have sufficient, well-qualified staff
       to administer the JOC program.


Director of the Office of Public Housing

Specific deficiencies in the HAKC management of the JOC program can largely be
attributed to problems with staff resources and training. Accordingly, we
recommend the Director of the Office of Public Housing:




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1D.   Require the HAKC, in consultation with Gordian, to determine the number
      of staff and necessary qualifications required to adequately administer the
      JOC program.

1E.   Require the HAKC to staff the JOC department with well-qualified
      individuals as determined by recommendation 1D.

1F.   Require the HAKC to evaluate the causes for frequent turnover of staff and
      to take steps to address those causes.

1G.   Take administrative sanctions against Paschen.




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Finding 2

The HAKC Did Not Fully Comply With The
“Housing Opportunity Program Extension Act Of
1996”

The HAKC has not fully met provisions of Section 9 of Public Law 104-120, of
the “Housing Opportunity Program Extension Act of 1996.” Neither the HAKC
screening procedures nor its lease agreement contain all provisions required by
Section 9 of the Act regarding tenant alcohol abuse and off premises drug-related
criminal activity.


Screening and Eviction Procedures

Specifically, the Act requires PHAs to establish standards for occupancy in public
housing units to include provisions that:

       •   Prohibit occupancy in any public housing unit by any person the PHA
           determines is illegally using a controlled substance; or the PHA
           determines it has reasonable cause to believe that such person’s illegal
           use (or pattern of illegal use) of a controlled substance or abuse (or
           pattern of abuse) of alcohol, may interfere with the health, safety, or
           right to peaceful enjoyment of the premises by other residents of the
           project.

       •   Allow the PHA to terminate tenancy in any public housing unit of any
           person the PHA determines is illegally using a controlled substance or
           whose illegal use of a controlled substance, or whose abuse of alcohol,
           is determined by the PHA to interfere with the health, safety, or right to
           peaceful enjoyment of the premises by other residents of the project.


Lease Provisions

The Act requires PHAs to use leases stating that any criminal activity that
threatens the health, safety, or right to peaceful enjoyment of the premises by other
tenants or any drug-related criminal activity on or off such premises, engaged in by
a public housing tenant, any member of the tenant’s household, or any guest or
other person under the tenant’s control, will be cause for termination of tenancy.




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Because the HAKC has not amended its screening procedures and lease agreement
to reflect occupancy provisions of the Act, it may not be able to deny tenancy to
applicants or evict current tenants for violations of these provisions.


HAKC Comments

The HAKC disagreed with our finding and stated it’s belief that it is in compliance
with the Act. The HAKC provided a lease amendment adopted subsequent to our
review; and provided additional comments, including the following:


Screening and Eviction Procedures

•   The HAKC screening procedures were amended in 1995 prior to the passage
    of the “Housing Opportunity Extension Act of 1996.” These screening
    procedures:

       •   State the HAKC may deny admission to any applicant with a history of
           involvement in criminal activity on the part of any applicant or family
           member which would adversely affect the health, safety and welfare of
           others.
       •   State the HAKC will not admit a current user of illegal drugs.
       •   Permit the HAKC to deny housing to any applicant based on a record
           of serious disturbances of neighbors, or any pattern of disruptive or
           dangerous behavior, which endangers the health, safety, welfare or
           peaceful enjoyment by others.


Lease Provisions

•   The HAKC’s current lease provides for the eviction of families or family
    members who are a threat to the well-being of residents, but it does not include
    specific reference to alcohol abuse. However, the lease permits the HAKC to
    terminate the tenancy of a resident due to any activity that interferes with the
    health, safety or peaceful enjoyment of the premises by other residents.
•   The HAKC acknowledges the language included in the draft report relative to
    alcohol abuse is not included in its screening procedures or its lease, but
    believes it is not required for compliance with the Act.



OIG Evaluation of HAKC Comments



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                                                                    98-KC-204-1001


Based on our review of the recently implemented lease amendment, we agree the
HAKC has now complied with the Act in regard to drug-related criminal activity
on or off the premises. However, the HAKC acknowledged it has not included
specific provisions regarding alcohol abuse in either its screening procedures or its
lease. We recognize the Act itself does not specifically state PHAs are required to
include references to alcohol abuse in screening procedures and leases; however,
HUD Notices subsequent to the Act required PHAs to include specific provisions
regarding alcohol abuse in leases.

HUD issued the initial Notice (PIH 96-14) to PHAs on April 1, 1996, and
followed up with a more detailed Notice PIH 96-16. On May 13, 1997, HUD
issued Notice PIH 97-27, currently in effect, describing the screening, lease, and
eviction provisions PHAs must adopt as a result of the Act.

Notice (PIH 97-27) states:

       •   PHAs must establish standards (i.e. policies and procedures) that
           prohibit admission to public housing of any person the PHA determines
           is illegally using a controlled substance; or the PHA determines there is
           reasonable cause to believe the person’s pattern of illegal use of a
           controlled substance may interfere with the health, safety, or right to
           peaceful enjoyment of the premises by other residents.

       •   PHAs must establish policies and procedures that prohibit admittance
           to any person to public housing in cases where the PHA determines
           there is reasonable cause to believe the person’s abuse (or pattern of
           abuse) of alcohol may interfere with the health, safety, or right to
           peaceful enjoyment of the premises by other residents.

       •   PHAs must establish policies and procedures for tenancy termination of
           any person the PHA determines is illegally using a controlled substance.

       •   PHAs may terminate the tenancy of any person if the PHA determines
           the person’s abuse of alcohol interferes with the health, safety, or right
           to peaceful enjoyment of the premises by other residents.

       •   PHAs must amend public housing lease forms to provide that alcohol
           abuse determined to interfere with the health, safety, or right to
           peaceful enjoyment of the premises by other residents is grounds for
           tenancy termination.

       We concluded the HAKC’s screening procedures need to include specific
       references to alcohol abuse, as required by HUD in Notice PIH 97-27. In
       addition, we disagree that the HAKC lease permits the HAKC to terminate
       the tenancy of a resident due to any activity that interferes with the health,



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                                                                  98-KC-204-1001


       safety or peaceful enjoyment of the premises by other residents. The lease
       actually states the HAKC may terminate the tenancy of a resident due to
       any criminal activity that interferes with the health, safety or peaceful
       enjoyment of the premises by other residents. Accordingly, the lease
       agreement and the HAKC screening procedures should include appropriate
       language regarding alcohol abuse.



Recommendation


We recommend the Director of the Office of Public Housing:

2A.    Require the HAKC to amend its screening procedures and lease agreement
       to include the appropriate language regarding alcohol abuse, as specifically
       required by Notice PIH 97-27.




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                                                                     98-KC-204-1001



Internal Controls
In planning and performing our audit, we considered internal controls used by the
HAKC to administer its JOC program. Internal control is the process effected by
an entity’s management and other personnel designed to provide reasonable
assurance regarding achievement of objectives in the following categories:

       •   Effectiveness and efficiency of operations.
       •   Reliability of financial reporting.
       •   Compliance with applicable laws and regulations.

In these three categories of objectives, organizations will establish their own
specific control objectives and control procedures aimed at achieving these broad
objectives. If organizations are to meet these control objectives, five components
of internal controls - control environment, risk assessment, control activities,
information and communications, and monitoring - must be present. Control
objectives in each category are inextricably linked with the five supporting
components.

We determined program execution to be the primary internal control category
relevant to our audit objectives. For assessment of program execution, we
obtained an understanding of the design of relevant policies and procedures and
whether they were placed in operation.

Our assessment disclosed significant control weaknesses. A significant weakness
exists if an entity’s controls do not give reasonable assurance that the entity’s goals
and objectives are met; resource use is consistent with laws, regulations and
policies; resources are safeguarded against waste, loss and misuse; and that reliable
data are obtained, maintained, and fairly disclosed in reports. Based on our audit,
we concluded significant weaknesses exist in execution of the HAKC JOC
program and are detailed in Finding 1of this report.




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                                                                   98-KC-204-1001



Appendices
Appendix 1

Schedule of Ineligible/Potentially Ineligible Costs

 Finding                          Description                          Amount

     1         Ineligible Costs for work not performed,                 $227,000
               substitution of quality, and overstatement
               of materials and labor.

     1         Potentially Ineligible Costs for work not                $387,000
               performed, substitution of quality, and
               overstatement of materials and labor (if
               the pattern continued in work assigned to
               Paschen but not inspected during our
               review).


Ineligible costs are those questioned because of an alleged violation of a provision
of law, regulation, contract, grant, cooperative agreement, or other agreement or
document governing the expenditure of funds.




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             98-KC-204-1001


Appendix 2
Auditee
Comments




                        34
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           28
98-KC-204-1001




           29
98-KC-204-1001




           30
98-KC-204-1001




           31
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            1
                                                               98-KC-204-1001


Appendix 3

Distribution

Assistant Secretary for Public and Indian Housing, P
Director, Office of Public Housing, 7APH
President, TAG Associates of Kansas City, Inc.
Secretary’s Representative, 7AS
Office of the Comptroller, 6AF
Director, Administrative Service Center, 8AA
Director, Field Accounting Division, 4AFA
Assistant to the Deputy Secretary for Field Management, SDF (Rm. 7106)
Audit Liaison Officer, PF (4) (Rm. 5156)
Acquisitions Librarian, Library, AS (Rm. 8141)
Chief Financial Officer, F (2) (Rm. 10164)
Deputy Chief Financial Officer for Finance, FF (2) (Rm. 10164)
Comptroller’s Office, PF (Rm. P8202)
Director, Administration and Maintenance Division, PHMM (Rm. 4214)
Director, Office of Troubled Agency Recovery, PB (Rm. 4148)
Inspector General, G (Rm. 8256)
AIG, Office of Audit, GA (Rm. 8286)
Deputy AIG, Office of Audit, GA (Rm. 8286)
Director, Program Research and Planning Division, GAP (Rm. 8180)
Director, Financial Audits Division, GAF(Rm. 8286)
Central Records, GF (4) (Rm. 8266)
Semi-Annual Report Coordinator, GF (Rm. 8254)
Associate General Counsel, Office of Assisted Housing and Community
   Development, CD (Rm. 8162)
Counsel to the IG, GC (Rm. 8260)
Deputy Secretary, SD (Rm. 10100)
Assistant Secretary for Congressional and Intergovernmental Relations, J
   (Rm. 10120)
Deputy Assistant Secretary for Public Affairs, W (Rm. 10220)
Chief of Staff, S (Rm. 10000)
Counselor to the Secretary, S (Rm. 10234)
Senior Advisor to the Secretary for Communication Policy, S (Rm. 10222)
General Counsel, C (Rm. 10214)
Public Affairs Officer, G (Rm. 8256)
Assistant to the Secretary for Labor Relations (Rm. 7118)




                                                                           2
                                                            98-KC-204-1001


Director, Housing and Community Development Issue Area
Attention: Judy England-Joseph
U. S. GAO; 441 G Street, NW - Room 2474; Washington, D. C. 20548

The Honorable John Glenn
Ranking Member, Committee on Governmental Affairs
United States Senate; Washington, D. C. 20515-4305

The Honorable Fred Thompson
Chairman, Committee on Governmental Affairs
United States Senate; Washington, D. C. 20515-4305

Mr. Pete Sessions
Government Reform and Oversight Committee
Congress of the United States; House of Representatives
Washington, D. C. 20510-6520

Ms. Cindy Sprunger
Subcommittee on General Oversight and Investigations
Room 212; O’Neill House Office Building; Washington, D. C. 20515

Honorable Dan Burton
Chairman; Committee on Government Reform and Oversight
House of Representatives; Washington, D. C. 20515-6143




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