U.S. Department of Housing and Urban Development

COMMUNITY PLANNING AND DEVELOPMENT

Special Attention of: Notice: CPD 96-05

All Secretary\'s Representatives

All State/Area Coordinators Issued: October 11, 1996

All CPD Division Directors Expires: October 11, 1997

All CDBG Entitlement Grantees

All HOME Coordinators Cross References: 24 CFR Parts 570 & 92

All HOME Participating Jurisdictions

Subject: Procurement of consulting services by Community Development

Block Grant (CDBG) recipients, HOME participating

jurisdictions, and subrecipients

PURPOSE

The purpose of this Notice is to provide information and guidance to

Community Development Block Grant (CDBG) program recipients, HOME

participating jurisdictions, and subrecipients (and for States that

have adopted the Federal regulations on procurement referred to

herein) on the procedures that should be followed to ensure proper

procurement of goods and services. The Notice places particular

emphasis on the procedures to be followed to ensure that professional

service providers or consulting services are properly procured.

BACKGROUND

An audit report issued by the Office of Inspector General (OIG) in

March 1994, found a variety of deficiencies in the procurement of

consulting services by CDBG recipients. Among the problems identified

in the procurement of such services were that (1) cost analyses were

not being performed, (2) competition was often not free and open, (3)

contract services were being paid for before the contract was signed

or after the contract had expired, (4) work required under contracts

often was not properly performed or delivered, and (5) maintenance of

a contract administration system was often lacking.

As a result of this audit, the OIG recommended that the Office of

Community Planning and Development issue a Notice to CDBG recipients

and subrecipients on the need for compliance with the applicable CDBG

procurement regulations with respect to the procurement of consulting

services. ^1^

DGBE: Distribution: W-3-1, Special (All CDBG Entitlement Grantees;

all HOME Participating Jurisdictions)

^1^ For existing guidance on distinguishing between the use of

procurement contracts and subrecipient agreements as a means of

carrying out eligible CDBG activities, recipients and subrecipients

should refer to HUD\'s Guidebook for Grantees on Subrecipient Oversight

\- Managing CDBG, which is part of HUD\'s Subrecipient Management

Training materials issued August 1993. For guidance in carrying out

eligible HOME activities, HOME participating jurisdictions should

refer to [24 CFR
92.504](http://www.hud.gov/offices/cpd/affordablehousing/lawsandregs/regs/home/subk/92504.cfm)
and
[92.505](http://www.hud.gov/offices/cpd/affordablehousing/lawsandregs/regs/home/subk/92505.cfm).

The use of contracted services, including consulting services for

professional assistance in program planning, development of community

development objectives, and other general professional guidance

relating to program execution, is eligible under the CDBG program at

[24 CFR
570.200](http://www.hud.gov/offices/cpd/communitydevelopment/rulesandregs/regulations/subc/570200.cfm)(d)
and authorized under the HOME program at 24 CFR

92.505 by reference to the applicable uniform administrative

requirements. For both programs, 24 CFR 85.36 is the authority for

local governments (and States that have chosen to follow the

regulations) to use when procuring consulting services under an

independent contractor relationship, as provided at 24 CFR

570.502(a)(12) for CDBG and 92.505(a) for HOME. 24 CFR part 84 is the

authority for non-governmental subrecipients, as stipulated at 24 CFR

[570.502](http://www.hud.gov/offices/cpd/communitydevelopment/rulesandregs/regulations/subj/570502.cfm)(b)
and 92.505(b), respectively. ^2^

Consulting services are an important resource available to CDBG
grantees/

HOME participating jurisdictions and their subrecipients to obtain

professional assistance to plan and implement CDBG/HOME activities.

However, the solicitation of these services should be prefaced by as

much planning and preparation as possible, including identifying the

use of consulting services in the recipient\'s consolidated plan,

thereby subjecting it to the citizen participation process. The

result will be procurement activities for which a more comprehensive

and thoughtful procurement agenda exists and for which adequate funds

are more likely to have been budgeted.

Following completion of the planning and budgeting process, recipients

and subrecipients may wish to issue a public notice of procurement

needs identifying general and specific activities under which

consulting services may be required. The issuance of the notice sets

in motion a process of early notification to potential providers of

consulting services. By requesting qualifications of potential

providers to carry out work in the areas specified, the notice can

lead to the receipt of information that can be used to start a

database of potential consultant providers.

While consulting services procured under the CDBG/HOME programs are

governed by the procurement requirements noted above, these

regulations permit recipients and their subrecipients to use their own

procurement procedures (reflecting appropriate State and local laws

and ordinances), as long as those procedures meet the standards

identified in these regulations.

SECTION 1. COMPETITION AND STANDARDS OF CONDUCT

The procurement of consulting services places the utmost importance on

a process that is fair and unbiased in every respect. A major

opportunity to achieve this objective is ensuring in all procurement

transactions the presence of full and open competition and the absence

of conflicts of interest.

^2^ In the text, where possible, applicable regulatory language is

included in italicized print. As Part 85 is more descriptive than

Part 84, it may be useful to nongovernmental entities seeking more

information on a given procurement subject matter.

2

A. Full and open competition

To help ensure that consulting services are procured in a manner

that is fully and openly competitive, the procurement of

consulting services shall be conducted in a manner that provides

full and open competition. 24 CFR 85.36(c)(1) identifies the

following among the situations considered to be restrictive of

competition:

\(I\) Placing unreasonable requirements on firms in order for them

to qualify to do business,

\(ii\) Requiring unnecessary experience and excessive bonding,

\(iii\) Noncompetitive pricing practices between firms or between

affiliated companies,

\(iv\) Noncompetitive awards to consultants that are on retainer

contracts,

\(v\) Organizational conflicts of interest,

\(vi\) Specifying only a \"brand name \" product instead of allowing

\"an equal product to be offered and describing the

performance of other relevant requirements of the

procurement, and

\(vii\) Any arbitrary action in the procurement process.\"

Section 84.43, which covers the subject, of competition for non-profit

organizations, provides, in part:

\"All procurement transactions shall be conducted in a manner to

provide, to the maximum extent practical, open and free

competition.\"

Guidance for implementation:

Central to the efforts of recipients and subrecipients to obtain

professional service providers to carry out eligible CDBG/HOME

activities is ensuring that the procurement process is as free

and open as possible. An adequate number of competing

professional service providers must be part of the competitive

process regardless of the method of procurement employed. The

key to obtaining an adequate number of competing providers is an

appropriate level of advertising. This can be best accomplished

by advertising for professional service providers in widely

circulated newspapers, trade journals and other sources including

the use of a bidders list, if available, to ensure coverage of

the marketplace.

Certain other considerations must be kept in mind to ensure the

procurement of professional service providers is based on full

and open competition. Unless stated in the solicitation

documentation that the contract to be awarded calls for multi-year

funding, contracts cannot be renewed or extended without

further competition. Professional services which are to be

provided for a longer period than originally procured must be

readvertised. Recipients and subrecipients must also ensure,

when procuring consulting services, that they do not use any firms

3

included on HUD\'s Debarment and Suspension List, as provided at

24 CFR 570.609 of the CDBG regulations, [24 CFR
92.357](http://www.hud.gov/offices/cpd/affordablehousing/lawsandregs/regs/home/subh/92357.cfm)
of the HOME

regulations, and at 85.35 and 84.44(d). (The General Services

Administration issues a monthly publication, \"The Lists of

Parties Excluded from Federal Procurement or Non-Procurement

Programs, \" that consolidates information from HUD and other

Federal agencies on firms that are debarred and suspended.

Information on subscription requirements may be obtained from

GSA\'s Office of Acquisition Policy, (202) 501-4873.)

B. Conflicts of interest/standards of conduct

24 CFR 85.36(b)(3) states, in part:

\"Grantees and subgrantees will maintain a written code of

standards of conduct governing the performance of their employees

engaged in the award and administration of contracts. No

employee, officer or agent of the grantee or subgrantee shall

participate in selection, or in the award or administration of a

contract supported by Federal funds if a conflict of interest,

real or apparent, would be involved. Such a conflict would arise

when: (I) the employee, officer or agent,- (ii) any member of his

immediate family; (iii) his or her partner,- or (iv) an

organization which employs, or is about to employ, any of the

above, has a financial or other interest in the firm selected for

award.\"

The regulations covering nonprofit entities at 24 CFR 84.42

state:

\"The recipient shall maintain written standards of conduct

governing the performance of its employees engaged in the award

and administration of contracts. No employee, officer, or agent

shall participate in the selection, award, or administration of a

contract supported by Federal funds if a real or apparent

conflict of interest would be involved.

Guidance for implementation:

Nothing is perhaps more detrimental to a successful procurement

operation than to have the relationship between the

recipient/subrecipient and the contractor questioned by real or

apparent conflicts of interest. Conflicts may be personal,

financial, or organizational. The professional services provider

should be viewed as, and be in fact, an unencumbered provider of

assistance in program planning, community development strategies

and sources of other general and detailed guidance to the

community. The integrity of the community development process

and of those charged with carrying it out should not be

sacrificed for something less than the highest standards of

conduct. Nothing is more important than to ensure that the

professional service provider is an independent party above any

suspicion of having a real or apparent conflict of interest.

The concern about avoiding any appearance of a conflict of

interest extends to those cases where one is to conduct business

with organizations whose board members may have relationships

with personnel of the recipient or subrecipient that may cause a

real or apparent conflict of interest. It goes without saying

that it will be most

4

important that those responsible for ensuring the integrity of

the process exercise the utmost in good judgment when faced with

such situations. Often, the only solutions to such situations is

for the personnel of the recipient or subrecipient to abstain

from any decision-making that would directly, and perhaps

indirectly, impact on the final selection of the professional

service provider.

(NOTE: The conflicts of interest discussed here pertain to

conflicts under the procurement regulations in Parts 84 and 85.

The CDBG and HOME conflict of interest regulations at 24 CFR

570.611 and 92.356, respectively, pertain to all nonprocurement

cases not covered by Parts 84 and 85.)

SECTION II. METHODS OF PROCUREMENT

Recipients and subrecipients may use different methods of procurement

to obtain consultant services.

A. Requests for proposals

24 CFR 85.36(d)(3), Procurement by competitive proposals,

provides that \"the technique of competitive proposals is normally

conducted with more than one source submitting an offer, and

either a fixed-price or cost-reimbursement type contract is

awarded. It is generally used when conditions are not

appropriate for the use of sealed bids. If this method is used,

the following requirements apply:

\(I\) Requests for proposals will be publicized and identify all

evaluation factors and their relative importance. Any

response to publicized requests for proposals shall be

honored to the maximum extent practical;

\(ii\) Proposals will be solicited from an adequate number of

qualified sources,

\(iii\) Grantees and subgrantees will have a method for conducting

technical evaluations of the proposals received and for selecting

awardees;

\(iv\) Awards will be made to the responsible firm whose proposal

is most advantageous to the program, with price and other

factors considered.\"

24 CFR 84.44 provides that nonprofit recipients \"shall establish

written procurement procedures. These procedures shall provide

for at a minimum, \"that the following criteria apply:

\(1\) \"Recipients avoid purchasing unnecessary items.

\(2\) Where appropriate, an analysis is made of lease and purchase

alternatives to determine which would be the most economical

and practical procurement for the Federal Government.

\(3\) Solicitations for goods and services provide for all of the

following:

5

\(i\) A clear and accurate description of the technical

requirements for the material, product or service to be

procured. In competitive procurements, such a

description shall not contain features which unduly

restrict competition.

\(ii\) Requirements which the bidder/offeror must fulfill and

all other factors to be used in evaluating bids or

proposals.

(iii)A description, whenever practical, of technical requirements

in terms of functions to be performed or performance

required, including the range of acceptable

characteristics or minimum acceptable standards.

\(iv\) The specific features of \"brand name or equal\"

descriptions that bidders are required to meet when

such items are included in the solicitation.

\(v\) The acceptance, to the extent practicable and

economically feasible, of products and services

dimensioned in the metric system of measurement.

\(vi\) Preference, to the extent practicable and economically

feasible, for products and services that conserve

natural resources and protect the environment and are

energy efficient.

Guidance for implementation:

The competitive proposals method of procurement is the preferred

method to use when procuring consulting services. Under this

method, a request for proposals (RFP) is prepared containing a

statement of work that details the procurement requirements

needed by the recipient or subrecipient. The request for

proposals must clearly and accurately state selection criteria

against which all responding proposals will be evaluated.

If an adequate number of professional service providers respond

to the RFP, a qualified panel will review the proposals against

factors for award identified in the RFP. This requirement that

each proposal must first be evaluated against the selection

criteria noted in the RFP is a distinctive characteristic of this

method of procurement, where no public disclosure of the contents

of offerors\' proposals is made on the final date of receipt, as

is done with sealed bids.

In its evaluation, the panel should use a competitive range

procedure to establish a ranking order of successful proposals

which may lead to a determination of whether oral discussions

(negotiations) should be held with service providers that fall

within the competitive range, or if the contract should be

awarded to the top offeror in the range. If discussions are

held, \"best and final offers\" are requested and re-scored with

the best of the best selected as the winner of the competition,

subject to negotiation of a fair and reasonable price.

3 The competitive range will include those consultant firms who,

after a scoring of their proposals, appear to have the greatest

potential to satisfy the terms and conditions of the RFP. Usually

these consultants will be invited to an oral discussion and asked to

submit, subsequent to such discussion, a \"best and final offer.\"

6

After proposals are reviewed by the panel against the evaluation

criteria (a combination of cost and price factors) in the RFP,

written results of the reviews must be maintained as part of the

documentation of the procurement process. If requested, the

recipient or subrecipient should debrief or notify unsuccessful

offerors of the winner and the conclusion of the procurement

process.

B. Small purchases

24 CFR 85.36(d)(1) provides for procurement by small purchase

procedures. \"Small purchase procedures are those relatively

simple and informal procurement methods for securing services,

supplies or other property that do not cost more than \$100,000 in

the aggregate. If small purchase procurements are used, price or

rate quotations will be obtained from an adequate number of

qualified sources.\"

Unlike 24 CFR 85.36(d)(1), the regulations at 24 CFR 84 do not

specifically identify small purchase procedures as an eligible

method of procurement. However, such eligibility is implicit in

the language at 24 CFR 84.44(e)(2), which provides that when

\"\[T\]he procurement is expected to exceed \$100,000 or the small

purchase threshold fixed at 41 U.S.C. 403(11) whichever is

greater\...,\" recipients shall, on request, make available for the

Federal awarding agency, certain pre-award review and procurement

documents.

Guidance for implementation:

Consultant services may be procured using small purchase

procedures when the procurement will not cost more than the

simplified acquisition threshold of \$100,000 in the aggregate.

As noted in the above 24 CFR 85.36(d)(1) citation, it is

necessary to obtain price or rate quotations from an adequate

number (i.e., three to five) of qualified sources. To obtain

rate and price quotations vendors can be phoned and their names,

addresses and price or rate quotations should be recorded. The

vendors whose solicited information is the most responsive to the

item being procured should be issued a purchase order.

Catalogues or price lists may also be used. It is important that

the relatively smaller dollar amounts associated with small

purchases and the informal nature of this procurement method do

not create a climate in which the emphasis on full and open

competition is diminished.

> By virtue of the higher dollar threshold for small purchases
>
> (compared to a previous threshold of \$25,000) established under
>
> Parts 85 and 84, it is expected that most recipients and
>
> subrecipients will substantially increase the level of procurement of
> consulting services using small purchase procedures. In this regard,
> procuring parties should be advised that if small purchases with the
> higher dollar threshold become complex, it may be advantageous to use
> a written solicitation and to request written responses from potential
> providers of consultants\' services.

C. Sealed bids

> 24 CFR 85.36(d)(2) provides for \"Procurement by sealed bids (formal
> advertising). Bids are publicly solicited and a firm-fixed-price
> contract (lump sum or unit price) is awarded to the responsible bidder
> whose bid, conforming with all the material

7

terms and conditions of the invitation for bids, is the lowest in

price. The sealed bid method is the preferred method for

procuring construction \" services.

24 CFR 84.44 does not include a provision that specifically

addresses the use of sealed bids. It does, however, make

frequent use of the terms \"bid\" and \"bidder\" in discussing

competition, procurement procedures and contract provisions.

Guidance for implementation:

Because of the nature of the services provided by most

consultants, the sealed bid method of procurement is not the

preferred method to use in procuring such services.

Where the occasion arises for its use, this method of procurement

must involve use of a public solicitation (e.g., issuance of an

invitation for bid (IFB)) with specifications to be responded to

that are not overly restrictive. Award is to be made to the most

responsive and responsible bidder whose bid conforms in all the

material terms and conditions to the IFB and is the lowest in

price. ~4~ Selection of a consultant can be principally made on

the basis of a firm, fixed price (lump sum or unit price).

D. Use of non-competitive procedures

In accordance with 24 CFR 85.36(d)(4), \'Procurement by

noncompetitive proposals is procurement through solicitation of a

proposal from only one source, or after solicitation of a number

of sources, competition is determined inadequate. Procurement by

noncompetitive proposals may be used only when the award of a

contract is infeasible under small purchase procedures, sealed

bids or competitive proposals and one of the following

circumstances applies:

\(A\) The item is available only from a single source;

\(B\) The public exigency or emergency for the requirement will

not permit a delay resulting from competitive solicitation;

The awarding agency authorizes noncompetitive proposals; or

\(D\) After solicitation of a number of sources, competition is

determined inadequate.

Cost analysis, i.e., verifying the proposed cost data, the

projections of the data, and the evaluation of the specific

elements of costs and profits, is required.\"

~4~ 24 CFR Part 84 procurement regulations refer to the term

lowest bid in a discussion that allows a grantor agency or authority

to request pre-award reviews and procurement documents where other

than the \"apparent lowest bidder\" will be the beneficiary of the

procurement. Therefore, where the apparent low bidder is not awarded

the contract, the procuring entity should document its application of

cost reasonableness, as provided in [OMB Circular
A-122](http://www.whitehouse.gov/OMB/circulars/a122/a122.html), in the

procurement of consulting services.

8

24 CFR 84.44 does not include a provision that specifically

addresses the use of noncompetitive procedures. However, it does

provide at 84.46, Records, that \"procurement records and files

for purchases in excess of the small purchase threshold shall

include, at a minimum:

\(b\) Justification for lack of competition when competitive bids

or offers are not obtained.\"

Guidance for implementation:

It is important that ample support and justification exist for

the use of the noncompetitive method of procurement. Events that

require efficiency in the procuring of services (e.g., an

untimely event occurs that may be judged a crisis) may lead to

initiating a one and only contractor selection process and

awarding the contract to that firm. However, such a situation

could be handled by simply shortening the procurement period

rather than eliminating it. Another example is when a contract

runs out that does not contain a provision calling for work for

more than one year. The contract is renewed to the same

contractor without competition on the belief that the renewal is

justified because of the experience accumulated by the contractor

in the subject area of work or because of the perception that a

new procurement initiative would be no more than an exercise with

the current contractor being selected anyway. If there is no

provision for extending the contract, a provision that would have

been made known to all parties in the solicitation document, the

preponderance of odds seemingly favoring one contractor is not an

adequate basis on which to justify the exclusion of potential

providers of consulting service from the right to compete. (Note:

with respect to item C above, awarding agency means HUD, the

grantee, HOME participating jurisdiction or subgrantee.)

Additional information on conducting a cost analysis is provided

in Section V.

E. Architectural & engineering services

24 CFR 85.36(d)(3)(v) provides that \"grantees and subgrantees may

use competitive proposal procedures for qualifications-based

procurement of architectural/engineering (A/E) professional

services whereby competitors\' qualifications are evaluated and

the most qualified competitor is selected, subject to negotiation

of fair and reasonable compensation. The method, where price is

not used as a selection factor, can only be used in procurement

of A/E professional services. It cannot be used to purchase

other types of services though A/E firms are a potential source

to perform the proposed effort.\" 24 CFR 84.44 does not include a

provision that specifically addresses the procurement of A/E services.

Guidance for implementation:

As noted above, recipients and subrecipients have the choice of

issuing a Request For Proposal (RFP) or soliciting qualification-based

statements. When the choice is to issue a RFP, the guidance discussed

under Section II(A) should be followed. In addition to the guidance,
maps

and site locations and starting and ending dates should also be made

available to A/E service providers if this kind of information is
critical

to the development of proposals. Of course, where A/E services will be

used for construction projects, it is advisable to schedule pre-bid

construction

9

discuss the project, wage rates, responsibilities, on-site

monitoring procedures and other pertinent subjects.

Where the grantee or subgrantee decides to request A/E qualifications,

the qualification statements received should be reviewed and ranked

by a qualified panel or board. The most qualified A/E service

providers can be asked to submit requests for proposals or the

most qualified can be selected and negotiation with the selectee

can began immediately.

Under qualifications-based procurement of A/E consultant

services, four points are to be remembered: (1) qualifications-based

procurement may p& be used in procuring A/E professional

services; (2) price is not an initial selection factor; (3)

geographic preference may be used as a selection factor if

adequate competition (i.e., 2 or more offerors who are responsive

and responsible) exists within an area; and (4) state laws

governing the procurement of architectural and engineering

services may vary, so recipients should be careful to understand

the laws in their respective states.

F. Employee/employer relationship (24 CFR 570.200(d)(1))

Consultant services provided under an employee/employer

relationship are not governed by the procurement requirements of

Part 85 or Part 84.

Rather, under the CDBG program, obtaining consultant services

under this procedure is authorized at 24 CFR 570.200(d)(1).

(Until such time as the HOME regulations are revised to address

consultant services under an employee/ employer relationship,

HOME participating jurisdictions should follow the procedure

established for the CDBG program.) Recipients and subrecipients

must follow their own formal personnel policies and procedures in

obtaining consultant services under this provision of the

regulations. When using this procedure, the consultant (1) would

have a description of his or her duties (position description),

\(2\) would be supervised by the recipient or subrecipient, and (3)

would be subject to the normal periodic interaction that takes

place between an employee and his or her supervisor. Standard

personnel policy for selecting individuals to fill positions

include the development of a position, writing of the duties of

the position, advertising the position, reviewing and rating of

applications, and selection for the position. Where CDBG or HOME

funding is being used to pay the salary of the person occupying

the position in whole or in part, for purposes of determining the

length of stay in a position before it is readvertised, the

standard that shall apply is a maximum of three years from the

date the contract is signed. (Note: This 3-year standard is used

by HUD irrespective of the recipient or subrecipient using

personnel agreements or contracts.)

No person providing consultant services in an employer-employee

type of relationship can receive more than a reasonable rate of

compensation paid with CDBG or HOME funds for personal services,

and in no event can the amount of compensation in an

employee/employer relationship exceed the maximum daily rate of

compensation for Level IV of the Executive Schedule (ES) as

established by Federal law.

10

SECTION III. CONTRACT CLAUSES AND BIDDERS LIST

A. Contract Clauses

Refer to 24 CFR 85.36(I) or 84.48, as applicable, for those

clauses to be included in the contract type associated with the

above methods of procurement.

B. Use of bidders list

24 CFR 85.36(c)(4) states that \"grantees and subgrantees will

ensure that all prequalified lists of persons, firms, or products

which are used in acquiring goods and services are current and

include enough qualified sources to ensure maximum open and free

competition. Also, grantees and subgrantees will not preclude

potential bidders from qualifying during the solicitation

period.\" Further, 24 CFR 85.36(e)(2)(I) requires that qualified

small and minority businesses and women\'s business enterprises

are to be placed on solicitation lists.

24 CFR 84 does not specifically address the use of a bidders

list. However, 24 CFR 84.43 states that \"all procurement

transactions shall be conducted in a manner to provide, to the

maximum extent practical, open and free competition.\" Further,

24 CFR 84.44(b)(2) provides that organizations covered by these

regulations shall \"make information on forthcoming opportunities

available and arrange time frames for purchases and contracts to

encourage and facilitate participation by small businesses,

minority-owned firms, and women\'s business enterprises.

Guidance for implementation:

The procurement of professional services must be accomplished

under procedures that provide for full and open competition as

has been stated throughout this Notice. The bidders\' list can

assist in the realization of that objective if used properly.

Not meant to be read literally, the term bidders list is intended

to refer to any properly developed database, classification or

categorizing of potential professional service providers whose

services may be solicited under any method of procurement. As

with any special listing, a bidders list also affords recipients

and subrecipients the opportunity to obtain information on the

capabilities and the resources of providers. Such information

can be critical for a purchasing operation to provide to

operating departments timely and up-to-date information on

vendors available to provide consulting services. These lists

must be open and inclusive, and routinely updated and managed.

For example, names should be purged from the list when found to

be on the HUD debarment list or when no proposals or bids are

received for a long time from list members to whom RFP\'s or IFB\'s

have been mailed. Keep in mind that lists are not simply to be

rotated; such usage has been judged by courts to be inconsistent

with the full and open competition concept. The one exception to

this, however, is in the case of small purchases where the

practice of rotating names on the list is considered acceptable.

11

SECTION IV. CONTRACTING WITH SMALL AND MINORITY FIRMS, WOMEN\'S

BUSINESS ENTERPRISES AND LABOR SURPLUS AREAS FIRMS; COMPLIANCE WITH

SECTION 3

A. Contracting with small and minority, women\'s business enterprises

and labor surplus area firms

24 CFR 85.36(e) addresses contracting with small and minority

firms, women\'s business enterprise and labor surplus area firms

and provides that \"the grantee and subgrantee will take all

necessary affirmative steps to ensure that minority firms,

women\'s business enterprises, and labor surplus area firms are

used when possible. Affirmative steps shall include:

\(I\) Placing qualified small and minority businesses and women\'s

business enterprises on solicitation lists;

\(ii\) Assuring that small and minority businesses, and women\'s

business enterprises are solicited whenever they are

potential sources;

\(iii\) Dividing total requirements, when economically feasible,

into smaller tasks or quantities to permit maximum participation

by small and minority business, and women\'s business enterprises;

\(iv\) Establishing delivery schedules, where the requirement

permits, which encourage participation by small and minority

business, and women\'s business enterprises;

\(v\) Using the services and assistance of the Small Business

Administration, and the Minority Business Development Agency

of the Department of Commerce; and

\(v\) Requiring the prime contractor, if subcontracts are to be

let, to take the affirmative steps listed above in (I)

through (v).

As identified in paragraph B of Section III above, 24 CFR

84.44(b) requires that positive efforts shall be made by

recipients to utilize small businesses, minority-owned firms, and

women\'s business enterprises, whenever possible. Recipients of

Federal awards shall take the steps identified at 24 CFR

84.44(b)(1) - (5), which are identified below, to further this

goal.

\(1\) \"Ensure that small businesses, minority-owned firms, and

women\'s business enterprises are used to the fullest extent

practicable.

\(2\) Make information on forthcoming opportunities available and

arrange time frames for purchases and contracts to encourage

and facilitate participation by small businesses, minority-owned

firms, and women\'s business enterprises.

\(3\) Consider in the contract process whether firms competing for

larger contracts intend to subcontract with small

businesses, minority-owned firms, and women\'s business

enterprises.

12

\(4\) Encourage contracting with consortiums of small businesses,

minority-owned firms and women\'s business enterprises when a

contract is too large for one of these firms to handle

individually.

\(5\) Use the services and assistance, as appropriate, of such

organizations as the Small Business Administration and the

Department of Commerce\'s Minority Business Development

Agency in the solicitation and utilization of small

businesses, minority-owned firms and women\'s business

enterprises.

Guidance for implementation:

Recipients and subrecipients should initiate actions to increase

the opportunities for small, minority- and women-owned businesses

to participate in the procurement process. Placing such

businesses on lists, dividing total requirements, organizing

procurement schedules, making information available encouraging

small business consortiums and using the services of the

Department of Commerce are among the identified actions or steps

that are available. Some measure of aggressiveness or initiative

must be put forth either directly or indirectly by recipients and

subrecipients, or it is unlikely opportunities will open up for

greater participation by the subject businesses. However, if

none of the suggested steps are incorporated into the procurement

activities of units of general local government or nonprofit

organizations, it can be fairly concluded that any leveling of

the playing field for opportunities for these firms will be quite

limited.

A close look at the list of steps that can be taken shows them to

be divided into those that can be directly controlled by the

recipient or subrecipient, with others being done by prime or

general contractors.

For example, in the RFP process, recipients and subrecipients can

develop a points system in which extra points can be awarded to

firms whose proposals include the use of minority- and women-owned

businesses and labor surplus area firms as subcontractors.

Additionally, databases can be developed that include such firms

so that when a prime contractor indicates difficulty in locating

minority- or women owned firms, a list can be provided to him or

her by the recipient or subrecipient from its database.

Each recipient/subrecipient is responsible for ensuring that

general contractors are aware of their responsibility to use

small, minority-owned and women-owned businesses. Similarly,

those contractors are responsible for ensuring that their

subcontractors are aware of the responsibility for compliance

with this requirement and of the strategies that may be used to

comply. In the previous section, it was noted that the use of

the bidders list, for example, should be inclusive. In that

regard, the list should be open to new firms at all times and can

be helpful in the development of information on small, minority

and women-owned businesses by the areas of specialty of these

professional services providers.

13

B. Section 3 Requirement of the Housing and Urban Development Act of

1968, as amended

In accordance with the requirements under Section 3 of the

Housing and Urban Development Act of 1968, as amended, recipients

shall ensure that employment and other economic opportunities

generated by the use of CDBG/HOME funds shall, to the greatest

extent feasible, be directed to low- and very-low income persons,

particularly those who are recipients of government assistance

for housing, and to business concerns which provide economic

opportunities to low- and very-low income persons. Section 3

covered assistance includes the expenditure of CDBG/HOME funds

for work arising in connection with housing rehabilitation,

housing construction, or other public construction projects.

Section 3 requirements are applicable to all procurement actions

in excess of the small purchase threshold established at 24 CFR

85.36(d)(1), regardless of whether the procurement is governed by

24 CFR 85.36. All Section 3 covered contracts and subcontracts

(contracts and subcontracts awarded for work generated by the

expenditure of Section 3 covered assistance, or for work arising

in connection with a Section 3 covered project) in which the

amount of assistance to the recipient exceeds \$200,000 and the

contract or subcontract exceeds \$100,000 shall include the

Section 3 clause.

SECTION V. CONTRACT COST AND PRICE

In addition to the requirements for competitive procurement and

maintenance of a written code of standards of conduct, those who

procure consultant services must be prepared (1) to conduct a cost or

price analysis and (2) to ensure that the contract price and profit

are reasonable.

A. Contract cost and price

1\. Cost and price analysis

24 CFR 85.36(f)(1) provides that \"grantees and subgrantees

must perform a cost or price analysis in connection with

every procurement action including contract modifications.

The method and degree of analysis is dependent on the facts

surrounding the particular procurement situation, but as a

starting point, grantees must make independent estimates

before receiving bids or proposals. A cost analysis must be

performed when the offeror is required to submit the

elements of estimated cost, e.g., under professional,

consulting, and architectural engineering services

contracts. A cost analysis will be necessary when adequate

price competition is lacking, and for sole source

procurements, including contract modifications or change

orders, unless price reasonableness can be established on

the basis of a catalog or market price of a commercial

product sold in substantial quantities to the general public

or based on prices set by law or regulation. A price

analysis will be used in all other instances to determine

the reasonableness of the proposed contract price.\"

14

24 CFR 84.45 states that \"some form of cost or price

analysis shall be made and documented in the procurement

files in connection with every procurement action. Price

analysis may be accomplished in various ways, including the

comparison of price quotations submitted, market prices and

similar indicia, together with discounts. Cost analysis is

the review and evaluation of each element of cost to

determine reasonableness, allocability and allowability.

Guidance for implementation:

As provided in the regulations identified above, recipients

and subrecipients must perform their own cost or price

analysis for every procurement action for consulting

services, including contract modifications or change orders.

The method and degree of analysis depends on the facts

related to each procurement, but as a starting point, the

recipient/subrecipient must make independent estimates

before receiving bids or proposals.

a\. Price analysis is the process of examining and

evaluating a proposed price without examining its

separate cost elements and proposed profit. As price

analysis is associated with the sealed bid method of

procurement, which is not the preferred approach to

procuring professional services, the need to conduct a

price analysis for such services will be limited.

However, where the need arises to conduct a price

analysis for consulting services, approaches that can

be used to determine if a proposed price is fair and

reasonable include:

I. A comparison of the proposed prices received in

response to the solicitation;

ii\. A review of historical/previous prices proposed

against current prices proposed for the same or

similar items;

iii\. A comparison with published prices or market prices;

iv\. A comparison with internal, independent estimates;

v\. A comparison of detailed price information to

assess the overall price (which may involve use of

cost principles as general guidance in determining

price reasonableness).

b\. Cost analysis differs from price analysis in that it is

the review and evaluation of the separate elements of

cost and proposed profit, and the reasonableness of

those estimated costs of performance. Cost analysis is

necessary when cost or pricing data are required, as

> well as when adequate price competition is lacking (e.g., use of
> non-competitive procedures), for sole source procurements, or when
> price analysis alone is insufficient to ensure the proposed price is
> reasonable. Cost analysis is also required for contract modifications
> or change orders, unless price reasonableness can be established on
> the basis of a catalog or market price of a commercial product sold in
> substantial quantities to the general public or based on prices set by
> law or regulation. Approaches to cost analysis and ensuring that
> proposed costs represent accurate projections include:

15

I. Verification that costs submitted by the offeror

comply with applicable cost principles, including

that direct and indirect costs are allowable and

allocable, as well as reasonable;

ii\. A comparison of the offeror\'s proposed costs with

internal, independent estimates;

iii\. A comparison of historical/previous actual costs

from the offeror, or previous cost estimates from

the offeror or from other offerors, with the

current/proposed costs for the same or similar

items;

iv\. A comparison of proposed cost items with published

catalogue prices, market costs, etc.

In addition to evaluating such factual data on costs,

cost analysis should also consider the judgmental

factors used by the offeror to arrive at the estimated

costs that were submitted, i.e., what judgmental

factors and methods (mathematical or other) were used

in projecting the data submitted in the proposal. This

part of the cost analysis should ensure that the

factual data presented reasonably reflects the need(s)

identified in the solicitation.

In carrying our their responsibilities in the

performance of price and cost analysis, recipients and

subrecipients are to follow the provisions of OMB

[Circulars
A-87](http://www.whitehouse.gov/OMB/circulars/a087/a087-all.html) and
A-122, as applicable.

2\. Contract price and profit

In accordance with 24 CFR Section 85.36(f)(2),

recipients and subrecipients will negotiate profit as a

separate element of the price for each contract in

which there is no price competition and in all cases

where cost analysis is performed. To establish a fair

and reasonable profit, consideration will be given to

the complexity of the work to be performed, the risk

borne by the contractor, the contractor\'s investment,

the amount of subcontracting, the quality of its record

of past performance, and industry profit rates in the

surrounding geographical area for similar work. Costs

or prices based on estimated costs for contracts under

grants will be allowable only to the extent that costs

incurred or cost estimates included in negotiated

prices are consistent with Federal cost principles (see

24 CFR 85.22). Grantees may reference their own cost

principles that comply with the applicable Federal cost

principles. The cost plus a percentage of cost and

percentage of construction cost methods of contracting

shall not be used.

24 CFR 84.44 states that the type of procuring

instruments used (e.g., fixed price contracts, cost

reimbursable contracts, purchase orders, and incentive

contracts) shall be determined by the recipient but

shall be appropriate for the particular procurement and

for promoting the best interest of the program or

project involved. Similar to Part 85, Part 84

provides, the \"cost-plus-a-percentage-of-cost\" or

\"percentage of construction cost\" methods of

contracting shall not be used.

Guidance for implementation:

In accordance with the above requirements, recipients

and subrecipients will negotiate profit as a separate

element of the price for each consultant contract in

which there is no price competition, and in all cases

where a cost analysis is performed. To establish a

fair and reasonable profit, it may be useful to

establish a general range of profit for the work being

done, with consideration given to the complexity of the

work to be performed, the risk borne by the consultant,

the consultant\'s investment, the amount of

subcontracting, the quality of its record of past

performance, and industry profit rates in the

surrounding geographical area for similar work. If

profit is shown as a percentage of cost relative to the

work to be done, the recipient should review such

amount and make adjustments, as needed, based on the

factors identified above in this paragraph.

SECTION VI. CONTRACT ADMINISTRATION

The procurement of contract services must provide for an overall

system of contract administration to ensure proper post-award

administration of each procurement action.

24 CFR 85.36(b)(2) states that grantees and subgrantees \"will maintain

a contract administration system which ensures that contractors

perform in accordance with the terms, conditions, and specifications

of their contracts or purchase orders.

Similarly, for nonprofit organizations, 24 CFR 84.47 requires that \"a

system for contract administration shall be maintained to ensure

contractor conformance with the terms, conditions and specifications

of the contract and to ensure adequate and timely follow up of all

purchases. Recipients shall evaluate contractor performance and

document, as appropriate, whether contractors have met the terms,

conditions and specifications of the contract.\"

Guidance for implementation:

Based on the above requirements for recipients and their subrecipients

to maintain a system for contract administration, such a system should

ensure the following:

1 . That the method of procurement is documented and that such

records are maintained for five (5) years after the final

payment is made and the activity is listed on a recipient\'s

annual performance report to HUD, and all pending matters

are closed;

2\. That all activities are carried out and all costs are

incurred in compliance with requirements of 24 CFR Parts

570, 92 and 58;

3\. Before payment is made, that services performed are adequate

and consistent with the contract scope of services;

17

4\. That performance is monitored periodically and the results

of the reviews are included in the procurement record.

Monitoring should include periodic reviews of tasks against

deliverables, as well as a review of progress reports

submitted by the consultant against the tasks and

deliverables. It should also include a determination that

the management systems contractually agreed to are still in

place and functioning properly;

5\. That contract modifications are justified and do not serve

as a means to artificially increase the price of the award.

Recipients and subrecipients with questions concerning the content of

this Notice should contact the Community Planning and Development

Division in the appropriate HUD field office. HUD field offices with

questions related to the CDBG program should contact the Entitlement

Communities Division or the Financial Management Division in the

Office of Block Grant Assistance, while questions from HUD field

offices related to the HOME program should be directed to the Office

of Affordable Housing Programs.

18