3. Observations – management of contracts and compliance with policies
Two fundamental principles govern contracting in the federal government: open competition and ‘value for money’. Contracting rules and regulations are, therefore, designed to support a cost-effective and transparent procurement process.
As part of the audit, we examined contract files to determine the extent to which departmental contracting practices in the three regions under review complied with Government Contracts Regulations, TB policies, and PWGSC and Department of Justice policies and rules. We also examined the extent to which contracts were appropriately managed, from the selection of suppliers to the monitoring of activity.
To conduct our examination, we chose a random statistical sample of contracts from the 660 service contracts that were (1) over $2,000, (2) not awarded by PWGSC, and (3) not expert witness or Crown counsel contracts. We selected a sample of 65 service contracts from the period April 1, 2007 to March 31, 2009 for the three regions. The sample was weighted according to both the amount of contracting activity initiated in each region and contracting method (competitive and non-competitive). One contract from the random sample was found to have been awarded and completely processed by CMMD at headquarters and was therefore excluded from the sample. As a result, we examined 64 randomly selected files.
To assess whether the Department is procuring services in compliance with policies and is managing contracts appropriately, the audit criteria were grouped into categories that reflected the contracting process, namely, requirements definition, procurement strategies, solicitation activities, contract award process, contract payment, and evaluation of contract performance. A discussion of specific findings and recommendations related to these categories follows this introduction.
Overall we observed a lack of compliance with selected requirements for service contracts in these regions.
We conclude with 95 percent confidence that service contracts we reviewed in the amount of $2,000 or more in the three regions audited were not compliant with the above-noted categories 19 times out of 20 (+ or – 5.6%).
3.1 Requirements Definition
Work requirements were not consistently defined and documented in contracts prior to the start of the contracting process.
Contract work descriptions or specifications should be defined in terms of clear outputs, performance requirements, cost estimates for the required work, and the appropriate level of approval obtained before bids are solicited and contracts awarded. Appropriate approval is required through expenditure initiation authorizations under FAA Section 32.
Contracts are expected to be initiated when a Project Authority completes and submits a Contract Initiation Document or similar request to Regional Contracting. The purpose of the requisition form is to detail the work to be performed. In 48 of the 64 contract files reviewed (75%), we found no Contract Initiation Document on the file or any similar request to regional contracting outlining the work required prior to the work commencing. In reviewing contracts that were not call-ups against standing offers (47 out of the sample of 64 contracts), we identified that in 33 of the 47 files (70%) a Statement of Work was not provided to the vendor prior to work being completed.
As an example of the importance of defining and approving requirements at the appropriate time, in one contract file in the sample, the vendor provided a price list to CMMD prior to the work commencing. The region stated that it was unable to provide a contract with the corresponding Statement of Work and Terms and Conditions to the vendor, because CMMD at headquarters had not released the contract in a timely manner. Work began as scheduled without the contract being released. As a result of the delay, the vendor invoiced the Department at current rates that were higher than the rates in their price list, since the contract had not been finalized.
While expenditure initiation authorizations under FAA Section 32 were completed in 61 of the 64 files (95%) in the sample, in 24 files (37.5%) this authorization was provided after the work commenced.
It is the audit team’s opinion that work requirements have not always been defined appropriately prior to contracting processes being initiated.
Recommendation and Management Response
10. It is recommended that the Director General, Administration Directorate, introduce measures that will ensure that work requirements are defined and documented prior to the start of the contracting process. (Medium risk)
Agreed. The Director General, Administration Directorate, will develop policy instruments outlining how to adequately define and document work requirements. In addition, training will be provided in this area and communiqués will be issued. This element will also be incorporated into the Compliance and Monitoring Program, in that a sampling of contract files will validate the definition of work requirements. Target Date February 2012.
3.2.1 Procurement Strategies
Significant portions of regional contracting activity involve after-the-fact contracting, contract splitting, and sole-source contracting.
The regions need to promote and apply appropriate contracting strategies that are consistent with departmental policies and procedures, including contract justifications consistent with Government Contracts Regulations. Variance from departmental requirements for contracting should either be identified and corrected or monitored and reported.
We found no formal procurement mechanisms for significant portions of the contracting process. Some regions considered the commitment of funds ahead of time as sufficient to pay invoices from vendors. Other regions created contracts in IFMS in order to be able to pay vendors after invoices were received. In 39 of the 64 files (61%) reviewed, work was invoiced before the contract was awarded or entered into IFMS.
From a comparison of dates and other descriptive data in IFMS for the total 660 service contracts over $2,000 that were awarded by the three regions between April 1, 2007 and March 31, 2009, we found that 195 (29.5%) of these contracts were created in IFMS more than 14 days after projects started or afterthe projects ended.
TB Contracting Policy mandates that contracts must not be split in order to circumvent dollar limit thresholds imposed under contract approval authorities.
The audit team suspected that 28 of the 64 service contracts in our sample may have involved contract splitting. As a result, we reviewed 81 additional service contract files that we suspected of being split from the original 28 files in the sample. We found that:
- of the 28 files suspected of contract splitting, 25 (i.e. 25 of the 64 contracts or 39%) demonstrated evidence of contract-splitting. (We found contracts from the same sector with the same vendor where the requirements bore the same or similar resemblance to other contracts.);
- of the 81 additional contract files examined, 72 showed evidence of contract splitting.
Of the total 660 contracts over $2,000 that were awarded by the three regions during fiscal years 2007-08 and 2008-09, 97 (14.7%) showed evidence of contract splitting. Of these 97 contracts (25 from the random sample and 72 from the additional sample), the audit team found evidence of contract splitting in:
- 46 purchase orders awarded in the BCRO related to accommodation services (i.e. warehousing, repairs and maintenance of furnishings, and local moving services); (Interviews indicated that these were after-the-fact contracts related to a project directed by headquarters and PWGSC and that the region received invoices for payment without a contract. Regional Corporate Services personnel indicated that these invoices ought to have been sent to headquarters to determine the proper approach for dealing with these vendors.)
- 18 printing purchase orders awarded in the PRO in Edmonton.
The situation in the PRO is of particular concern as the purchase orders for printing did not relate to an actual contract. The departmental delegation limit for awarding printing contracts without competition is $10,000. In one case, it was observed that several purchase orders were created for a single invoice over $10,000, in order to remain under this contract limit.
Use of Sole-Source Contracts
TB Contracting Policy requires contracts to be awarded on a competitive basis (unless TB exceptions can be demonstrated to apply). The Policy also requires the contracting authority, when awarding a sole-source contract, to record the decision together with the justification for the decision.
From our sample of 64 randomly selected files, 47 contract files were not call-ups against a Standing Offer. In only two of these 47 files (4%) was work awarded through a competitive process. Of the remaining 45 sole-source contracts, we found:
- Nine related to printing (eight from the PRO (Edmonton) and one from the QRO). None of these contracts had sole-source justifications on file.
- Nine related to accommodations in the BCRO. None of these contracts had sole-source justifications on file. (As above, interviews indicated that these were after-the-fact contracts related to a project directed by headquarters and PWGSC and that the region received invoices for payment without a contract. Regional Corporate Services personnel indicated that these invoices ought to have been sent to headquarters to determine the proper approach for dealing with these vendors.)
- Eleven related to court reporters and transcripts. Of these, six contracts did not have sole-source justifications on file. (There are a limited number of these vendors in each region. While the regions often don’t choose the specific vendor to provide services for a specific case, they can predict the minimum amount of business they would require from these vendors based on previous years’ activity.)
- Eight related to training, of which four (from the QRO and PRO) did not have sole-source justifications on file.
- Eight related to a variety of different commodities.
It is the audit team’s opinion that appropriate procurement strategies have not always been selected.
Recommendation and Management Response
11. It is recommended that the Director General, Administration Directorate, introduce measures to enforce compliance with the issues noted above. (High risk)
Agreed. The Director General, Administration Directorate, will create policy instruments, develop a Compliance and Monitoring Program, and provide training to address compliance issues. The Policy framework for the Compliance and Monitoring Program will contain express provisions on reporting of non-compliance and to enforce compliance with contracting rules on Contract Splitting, Sole Source Contracts and After-the-Fact Contracts . The Compliance and Monitoring Program will consist of an initial review before the contract is awarded for contracts over a predetermined value or for sensitive files, in addition to a post-contract award compliance review based on a target percentage of contracts within predetermined value ranges – for example, up to five percent of contracts valued between $1,000 and $10,000 will be subject to annual review. There will be ad hoc targeted reviews based on commodities as determined by the Director of Contracting and Materiel Management. Target Date February 2012.
Contracting compliance will be added to the performance agreements of all Direct Reports. Completed.
Multi-year procurement vehicles will be developed to meet recurring requirements such as printing, court reporting, transcription and process servers. Target Date February 2012.
3.3 Solicitation Activities
Contracting files in the three regions audited lacked documented support that solicitation activities and decisions had been conducted in a transparent manner.
TB Contracting Policy states that “
Government contracting shall be conducted in a manner that will stand the test of public scrutiny in matters of prudence and probity, facilitate access, encourage competition, and reflect fairness in the spending of public funds.” Complete documentation provides management with a record that contract rules and regulations were followed and ensures that departmental contracting activities are conducted in a transparent, fair, and rigorous manner.
Our examination of contracts awarded as non-competitive included an assessment of completeness and clarity as to why the winning vendor was qualified while other potential vendors were not. The file examination also sought to determine the extent to which the rationale for not having pursued a competitive process was documented.
From our sample of 64 service contracts, we reviewed 30 contract files that were coded as non-competitive contracts. The remaining number of contracts were call-ups against standing offers (17 files) and competitively coded contracts (17 files). In 24 of the 30 contract files (80%), we found no information recorded on how the Department found the vendor (e.g. from previous use, the Yellow Pages, Google search). In 25 of the 30 files (83%) we found no vendor information, such as a company profile or curriculum vitae of the person performing the work. In addition, there was no information indicating how the vendor was qualified to perform the services required.
As noted earlier, the TB Contracting Policy requires the contracting authority, when awarding a sole-source contract, to record the decision together with the justification for the decision. Sole-source justifications, however, were not found in 20 of the 30 files (66%).
Many of the service contract files examined were simply purchase orders that were created after the work was completed for the purposes of being able to process the corresponding invoice in IFMS. For sole-source contracts, documentation on file is required to demonstrate how the Department found the vendor, why the vendor was qualified to provide the service, and why the Department has decided not to pursue a competitive process for the service requirement.
It is the audit team’s opinion that solicitation activities in the three regions under review have not been appropriately recorded and do not demonstrate transparency.
Recommendation and Management Response
12. It is recommended that the Director General, Administration Directorate, establish measures to enforce that contracting files demonstrate that solicitation activities and decisions have been conducted in a transparent manner. (Medium risk)
Agreed. The Director General, Administration Directorate, will create policy instruments, develop a Compliance and Monitoring Program, and provide training to ensure that contracting files demonstrate that solicitation activities and decisions have been conducted in a transparent manner.The Compliance and Monitoring Program Framework will contain express provisions on enforcement consequences. Target Date February 2012.
3.4 Contract Award Process
The regions audited are not capturing and retaining key Standing Offer documentation for service contracts.
Standing offers include rules for their application, as well as maximum limitations, terms, and conditions. Specific sections of Standing Offer documentation need to be retained with the contract file in order to validate whether call-up rules have been properly applied and services acquired fall within the scope of the Standing Offer.
From our sample of 64 files (which included 17 call-ups), we found that key Standing Offer information, upon which the call-ups were based, was not retained. Of the 17 files sampled, none of the files contained Standing Offer information or documentation. As a result, the audit team was unable to assess the extent to which the Department had properly awarded the call-ups. While audit interviewees indicated that some standing offers were in excess of 100 pages in length and could not be placed in the files, electronic retention of the pertinent sections would have provided sufficient documentation to determine compliance. We noted that CMMD ’s proactive disclosure monitoring process had challenged one of the 17 sampled files. CMMD had concluded that the call-up did not fall within the scope of the Standing Offer and that an ineligible vendor was used.
It is the audit team’s opinion that retention of key Standing Offer information is essential to support and validate appropriate and timely application of contracting terms and conditions.
Improvements are required in documenting and recording contract award activities and decisions in IFMS and regional contracting files.
From our sample of 64 randomly selected contract files, the audit team examined the 17 files that were coded in IFMS and regional files as competitive contracts. We found that 15 of these contracts were actually awarded on a sole-source basis. Only two of the 17 files showed evidence of a competitive process.
In one of these two files, significant information about the solicitation and awarding of the contract was absent from the file. No information was maintained in the file about the unsuccessful bidders, including the unsuccessful bids themselves; the unsuccessful bidders’ information, including contact information and recommended bidders list; the detailed evaluation of the unsuccessful bids; or an indication as to when the bids were received.
The second of the two files contained more complete documentation. There was an email in the file indicating that the higher-priced bid from this file was selected because the bidder had more expertise. However, there was no documentation (e.g. contract proposal, team members’ curriculum vitae) on file to support this assertion.
In our view, the Department is at risk of contracts appearing to have been improperly awarded where:
- contracts awarded on a sole-source basis are inaccurately recorded as being competitively awarded in IFMS and regional contracting files;
- contract files lack evidence that all bids received are evaluated;
- the rationale for selecting the successful bid does not respect the evaluation criteria.
Furthermore, before contracts are awarded, all persons who may require access to departmental facilities must have a security clearance, and this must be documented in the contract file. We examined our statistical sample of service contract files to verify whether file documentation supported the need for vendor access to departmental facilities and whether contractors had the corresponding security clearance. Of the 64 files in the sample, 23 had a possibility of the vendor requiring access to the Department’s facilities to undertake or complete work. In nine of the 23 files (39%), the contract files did not demonstrate whether the vendor required on-site access. More importantly, 13 files of the 64 indicated that it was likely that the vendor’s personnel would require access to departmental facilities or classified information. Yet, in 10 of 13 files (77%), there was no security clearance or similar information recorded on the file. Security requirements for each contract need to be documented and properly addressed to ensure that appropriate vendors are selected and the security interests of the Department protected.
It is the audit team’s opinion that improvements are required to regional contract award documentation.
Recommendation and Management Response
13. It is recommended that the Director General, Administration Directorate, ensure that procedures are developed for capturing and retaining key Standing Offer documentation. (Medium risk)
Agreed. All documentation leading up to a contracting decision, including the use of a particular Standing Offer and a copy of the Standing Offer call-up will be retained on the contracting file. Procedures and supporting training will support these requirements. All information about Standing Offers initiated by the Department will be available in the CCMD. However, as PWGSC Standing Offer information is available electronically on the PWGSC Web site, a copy is not required on the procurement file. CMMD has confirmed with PWGSC that archived standing offers will be available upon request to Client departments. The standing offers can be large documents, up to 300 pages, and it is not in accordance with Justice sustainable development practices to print and store large Standing Offer documents on every file. Target Date February 2012.
Recommendation and Management Response
14. It is recommended that the Director General, Administration Directorate, enforce that contract award activities, decisions, and security clearances are appropriately documented and that contract award activities, including selection process, process type, and contract type, are recorded appropriately in IFMS. (Medium risk)
Agreed. The Director General, Administration Directorate, will create policy instruments, develop a Compliance and Monitoring Program, and provide training to address these issues. A file documentation check list will be created to ensure that contract award activities, decisions and security clearances are appropriately documented and that contract award activities, including selection process, process type, and contract type are recorded appropriately in IFMS. Target Date February 2012.
3.5 Contract Payment
Service contract payments are generally made in compliance with contract requirements.
Service contracts need to be administered in accordance with delegated contracting and financial authorities, and agreed in terms of time, cost, and performance. The audit team found proper FAA Section 34 approval in 58 of 62 files (93%) where work was invoiced against the contract during the audit period. In the remaining files (7%) we found that some were missing invoices and some were missing proper FAA Section 34 approval. In some cases where the Section 34 approval was in place, improper rates had been charged for the contracted service and the approval should not have been granted. The audit team noted that in only one of the audited files identified with an improper Section 34 approval was there evidence that Regional Corporate Services had detected the error when undertaking account verification. In our judgment, these types of errors can be overcome through increased diligence. This matter has been reviewed with management of the three regions visited.
3.6 Evaluation of Contract Performance
Contractor performance is not being formally evaluated.
The TB Contracting Policy, section 12.3.1 states that “
Procurement files shall be established and structured to facilitate management oversight with a complete audit trail that contains contracting details related to relevant communications and decisions including the identification of involved officials and contracting approval authorities.”
Contractor (or vendor) performance should be evaluated at the completion of each contract. For consulting and professional service contracts, Section 16.11.8 of the Contracting Policy states that “
On completion of the contract, the contracting authority should evaluate the work performed by the consultant or professional.”
Section 8.1 of the departmental Guide on Contracting states that “Managers should document contractor assessment results in the contract file.”
As a result of our file examination, the audit team found that none of the contracted vendors was formally evaluated. It is our opinion that the departmental procurement practices should include documenting the evaluation of vendor performance.
Recommendation and Management Response
15. It is recommended that the Director General, Administration Directorate, inform departmental personnel of the need to evaluate contractor performance. (Low risk)
Agreed. A process for the evaluation of contractor performance will be developed and a post contract summary will be required for service contracts. The Department will develop a process to assess contractor performance and report poor vendor performance to PWGSC. Target Date March 2012.
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