**CHAPTER 5**

**MONITORING STRATEGIES AND PROCEDURES**

**CONTENTS**

INTRODUCTION 5-2

THE MONITORING PROCESS 5-4

> PREPARATION FOR THE MONITORING VISIT 5-7
>
> CONDUCTING THE MONITORING VISIT 5-8
>
> ADDITIONAL SOURCES OF EVALUATION INFORMATION 5-11
>
> SUMMARY 5-12

**APPENDIX**

-   Summary of Monitoring Objectives 5-15

-   HUD Monitoring Review of Grantee Oversight of Subrecipients 5-16

-   Checklist for On-Site Monitoring of a Subrecipient 5-21

-   Outline for a Subrecipient Monitoring Workbook 5-25

-   Example of a Grantee Monitoring Letter to a Subrecipient 5-33

-   Review of IPA Audit Reports 5-37

**CHAPTER 5**

**MONITORING STRATEGIES AND PROCEDURES**

*The Elmhurst Development Center project had been underway for more than
two years, ever since Hannibal Shoe moved its main plant to Mexico. Tom
Banks, the county\'s chief planner, had convinced 5 of the county\'s 12
towns to pool a fixed portion of their CDBG funds to form a non-profit
economic development consortium (EDC, Inc.) to buy the old shoe factory,
rehabilitate it, and operate a business incubator and training center.
The Center in turn hired Lena Wilson as Executive Director to staff and
run the program. Although EDC Inc. was a year behind schedule, the
rehabilitation was completed (with only a slight cost overrun) and the
incubator had attracted jobs for laboratory technicians.*

*A recent visit by HUD Field Office staff revealed serious monitoring
deficiencies. The Center did not have any information about the people
that were hired, so it could not demonstrate achievement of a National
Objective with respect to jobs created or training slots filled by low-
and moderate-income people. Further, it seemed to slip everyone\'s
attention that Ted Hammet, a former officer of Hannibal Shoe, was on the
Center\'s Board of Directors and also sat on the loan review committee
of the Landsdowne Bank. The bank had funded the rehabilitation work for
the Development Center. Questions arose about the potential conflicts of
interest. Finally, there were several rumors that, in order to finish
the rehab work as fast as possible, EDC, Inc. had brought in outside
subcontractors who had paid only two-thirds the prevailing wages to
their out-of-state workers. The Center, unfortunately, had no
documentation to disprove this assertion.*

####  

#### INTRODUCTION

**Requirements for Subrecipient Monitoring**

The case study above illustrates what can happen when a grantee gets
behind in monitoring subrecipient activities, especially when there are
many actors involved (local governments, non-profit sponsors, private
funding sources, staff and trainees), and when sponsored activities are
complicated (rehabilitation and economic development). No matter how
well run a project may appear, the question you always need to ask is,
"Who is minding the store?"

As a CDBG manager, you know that as far as monitoring is concerned, "the
buck stops here." This chapter discusses how, even with limited staff,
you can keep track of your subrecipients\' activities and help them
avoid problems and improve performance.

The CDBG regulations (24 CFR 570.501(b)) state that:

> "\[the grantee\] is responsible for ensuring that CDBG funds are used
> in accordance with all program requirements. The use of . . .
> subrecipients . . . does not relieve the recipient of this
> responsibility. The recipient is also responsible for determining the
> adequacy of performance under subrecipient agreements . . . and for
> taking appropriate action when performance problems arise..."

The language in Subpart J of 24 CFR Part 85 "Uniform Administrative
Requirements for Grants and Cooperative Agreements to State and Local
Governments," which applies to CDBG grants, is even more explicit about
your obligation to monitor subrecipients:

> "Grantees are responsible for managing the day-to-day operations of
> grant and subgrant supported activities. **Grantees must monitor . . .
> subgrant supported activities to assure compliance with applicable
> Federal requirements and that performance goals are being achieved.**
> Grantee monitoring must cover **each program, function, or
> activity**.**"** \[emphasis added\]

**Your Primary Legal**

**Obligation**

+-----------------------------------------------------------------------+
| ***"We look forward to monitoring visits because we know they\'re not |
| out to get us, and we usually wind up solving a problem."***          |
|                                                                       |
| ***-Subrecipient,\                                                    |
| Los Angeles, CA***                                                    |
+-----------------------------------------------------------------------+

These regulations make clear that your primary mission is to:

-   make sure your subrecipients [comply with all
    regulations]{.underline} governing their administrative, financial,
    and programmatic operations; and

-   make sure your subrecipients [achieve their performance
    objectives]{.underline} on schedule and within budget.

Both responsibilities are important. On the one hand, a subrecipient
that complies with applicable regulations yet fails to achieve its
service or project goals is still wasting the taxpayer\'s money. On the
other hand, a subrecipient that delivers a great many units of service,
yet in the process violates program regulations, puts itself, the
community, and you at risk of serious monitoring findings by HUD,
disallowance of costs, and termination of activities.

**Overall Monitoring Guidelines**

There is no magic to monitoring, but it helps if you **avoid** giving
the impression that you\'re trying to catch subrecipients making
mistakes and nail them with the blame. Whether you are right or wrong on
any given matter, if subrecipients feel this is your purpose, they are
likely to become uncooperative and resentful. Such perceptions only make
your work and the subrecipients\' work more difficult.

+-----------------------------------------------------------------------+
| ***The three most important strategies for effective monitoring       |
| are:***                                                               |
|                                                                       |
| -   ***on-site field visits***                                        |
|                                                                       |
| -   ***open communications***                                         |
|                                                                       |
| -   ***assisting subrecipients in creating good record-keeping        |
|     systems***                                                        |
+-----------------------------------------------------------------------+

Instead, establish a monitoring process that emphasizes ***positive
feedback*** to subrecipients about what they have done well, in addition
to pointing out areas for improvement. Approach the monitoring with the
assumption that your view is not always correct. This means building
into the process ***opportunities for dialogue*** with subrecipients to
develop a better appreciation of their perspectives and to identify and
resolve points of miscommunication or misunderstanding.

Encourage subrecipients to specify, within reason, the kinds of
technical support they need from you in order to make the improvements
you require.

**THE MONITORING PROCESS**

Monitoring should not be a "one-time event." To be an effective tool for
avoiding problems and improving performance, monitoring must involve an
[on-going]{.underline} **process of planning, implementation,
communication, and follow-up. Grantees should develop a local system for
monitoring that includes the following steps.**

**Developing a Monitoring Plan**

Develop a monitoring plan at the [beginning]{.underline} of your program
year so that you can ***match available resources with the needs and
capacity of your subrecipients***. Since you probably don\'t have enough
staff to monitor all your subrecipients as frequently and thoroughly as
you\'d like every year, decide which subrecipients are most likely to
have the most serious problems and make sure you devote extra attention
to them. Make sure your monitoring plan is appropriate to your
performance tracking capabilities and rotate the subrecipients selected
for in-depth monitoring.

This doesn\'t mean you can ignore subrecipients you think won\'t have
serious problems; it just means that if you have limited staff you may
have to perform more limited monitoring of these subrecipients.
Otherwise, you won\'t be able to help those subrecipients who will need
your assistance the most.

**Identifying Risky Subrecipients**

+-----------------------------------------------------------------------+
| **Some Common Risk Factors**                                          |
|                                                                       |
| ***The probability of monitoring findings and HUD involvement tend to |
| be related to the size of your program (expenditures, number of       |
| employees, number of subrecipients). Other program risk factors       |
| include using subrecipients for:***                                   |
|                                                                       |
| -   ***acquisition activities***                                      |
|                                                                       |
| -   ***housing***                                                     |
|                                                                       |
| ```{=html}                                                            |
| <!-- -->                                                              |
| ```                                                                   |
| -   ***economic development***                                        |
+-----------------------------------------------------------------------+

By carefully examining subrecipients\' past performance, you should be
able to perform a **risk assessment to identify which subrecipients
require comprehensive monitoring**. High-risk subrecipients might
include:

-   subrecipients new to the CDBG program;

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-   subrecipients that have experienced turnover in key staff positions
    or a change in goals or direction;

-   subrecipients with previous compliance or performance problems
    including failure to meet schedules, submit timely reports or clear
    monitoring or audit findings;

-   subrecipients carrying out high-risk activities (such as economic
    development); and

-   subrecipients undertaking multiple CDBG activities for the first
    time.

  -----------------------------------------------------------------------
  ***Monitoring problems are found even with the most experienced
  subrecipients.***

  -----------------------------------------------------------------------

By contrast, for an experienced subrecipient that has been successfully
carrying out multiple activities for you, you could plan **a more
narrowly focused monitoring**, that would examine:

-   those area(s) of the subrecipient\'s operation where the regulations
    have changed or been clarified;

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-   new activities the subrecipient is undertaking; or

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-   aspects of a subrecipient\'s operations that led to monitoring
    recommendations in the past.

Even for subrecipients with strong past performance, you should still
conduct a periodic comprehensive monitoring. Normally, effective and
efficient subrecipients can begin to neglect their CDBG responsibilities
if accountability has not been built into the funding cycle.

**Establishing Monitoring Schedules**

In addition to the questions of how often and how thoroughly to monitor,
your monitoring plan should specify when you expect to visit each
subrecipient. For example, if a subrecipient is undertaking a new
activity that requires procedures or a level of documentation it has
rarely experienced before, schedule a monitoring visit (or at least a
technical assistance visit) early enough in the program year to detect
and resolve problems while they are still small. Conversely, for

activities that require a long time to unfold, don\'t monitor too early
before there is anything of substance to monitor.

**Using Monitoring Checklists**

Your monitoring plan should specify the particular items or documents
you will examine in the course of your visit. **This list will vary
depending on the activity area.** For example, for rehabilitation
activities, you need to test for compliance with lead-based paint
regulations and required inspections.

+-----------------------------------------------------------------------+
| ***Primary Components of an Effective Monitoring***                   |
|                                                                       |
| ***Checklist or Workbook***                                           |
|                                                                       |
| -   ***Activity Summary (objectives, grant amount, dates, term)***    |
|                                                                       |
| -   ***Status of Project***                                           |
|                                                                       |
| -   ***Applicable Regulations***                                      |
|                                                                       |
| -   ***Documentation Requirements***                                  |
|                                                                       |
| -   ***Problems Encountered***                                        |
+-----------------------------------------------------------------------+

To ensure that you examine the correct items for the activity area in
question, as well as to promote thoroughness and consistency in your
monitoring, it is helpful to use standardized monitoring checklists or
workbooks for your on-site reviews. These guides can be as detailed as
necessary, identifying the applicable regulations or laws for each
activity area, the standards that need to be met, the types of
documentation required, or the accounting systems that will satisfy the
standards. The checklist should also specify the steps you will follow
in the site inspection or file review to measure compliance.

If you do not have a monitoring checklist or workbook for subrecipient
monitoring, you should develop one. The standardized forms and approach
facilitated by these checklists can dramatically increase the efficiency
and quality of your monitoring. Monitoring workbooks also allow you to
collect data in a form that summarizes and greatly facilitates writing
up the results of the review in a monitoring letter.

+-----------------------------------------------------------------------+
| ***[The HUD Community Planning and Development Monitoring             |
| Handbook]{.underline} (Handbook 6509.2) is currently being            |
| revised.***                                                           |
|                                                                       |
| ***When completed, it will be on the HUD Web site and available as a  |
| resource for helping you develop your own monitoring checklists.***   |
+-----------------------------------------------------------------------+

Included in the Appendix is a **sample checklist for on-site
monitoring** of a subrecipient, which is an amalgamation of review
documents used by four different entitlement grantees. It will give you
a head start in developing your own review procedures. You may wish to
review certain areas in greater depth or annually determine your
priority areas for review. The Appendix also provides an outline for a
subrecipient monitoring workbook, which lists the **general
administrative and financial management requirements** associated with
the CDBG program, **as well as specific requirements applicable to each
of the major CDBG activity areas.** You can use these two documents to
review the comprehensiveness of your own monitoring checklists, or as an
outline to prepare a monitoring workbook.

To assist you in developing your own process for management, monitoring
and oversight of subrecipients, the Appendix also includes a listing of
the areas HUD reviews when monitoring entitlement grantees for oversight
of subrecipients.

####  

####  PREPARATION FOR THE MONITORING VISIT

#### 

  -----------------------------------------------------------------------
  ***Many grantees use two or more monitors to examine fiscal and program
  performance, and to measure regulatory compliance**.*

  -----------------------------------------------------------------------

Before you begin your annual monitoring process, ensure that your
monitoring staff are adequately trained. Nothing can be as destructive
to good grantee-subrecipient relations than a monitor who is
ill-prepared, incorrectly interprets or misapplies regulations, or
exhibits a condescending or excessively bureaucratic manner.

Make sure that each of your monitoring staff is familiar with the
applicable program rules and correct monitoring protocol. Initially,
pair new monitoring staff with your most experienced staff so that
newcomers can learn firsthand how to prepare for, conduct, and follow-up
on a monitoring visit.

If more than one monitor will be involved in a monitoring visit, explain
the respective roles of each staff member as part of the planning for
the on-site visit. For example, grantees frequently assign one staff
person to review fiscal systems and records and another staff member to
look at program files and requirements. If you plan to perform a
comprehensive monitoring of a subrecipient that is conducting a range of
CDBG-funded activities, or for which you anticipate serious problems, a
"team" approach to the monitoring may be best. The specialization may
permit a more efficient and thorough process.

**In-House Review:**

**Desk Audits of Subrecipient Materials**

In preparation for the monitoring visit, have the assigned monitor(s)
review all the written data you already have in-house, such as:

-   the subrecipient\'s application for CDBG funding;

-   the written agreement with the subrecipient;

-   progress reports;

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-   drawdown requests;

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-   documentation of previous monitoring; and

-   copies of audits whether by an Independent Public Accountant (IPA)
    or another entity such as the HUD Office of Inspector General (OIG)
    or the General Accounting Office (GAO).

You can use the information from this "desk audit" to learn about
changes in a subrecipient\'s activities and to identify potential
problem areas to examine during the on-site visit.

**Pre-Monitoring Visits With Subrecipients**

As discussed at the end of the previous chapter, consider scheduling a
"pre-monitoring visit" to inform the subrecipient about your monitoring
procedures and the information you will be examining during the
subsequent visit. Your monitor can point out apparent weaknesses in the
subrecipient\'s operations and suggest how they can be corrected
***before the formal monitoring visit***. This will reduce the
likelihood of negative "findings" after the formal monitoring.

#### 

####  

#### CONDUCTING THE MONITORING VISIT

A "pre-monitoring visit" is one example of how you can reduce the
anxiety and defensiveness of subrecipients in connection with the
monitoring. Stress at the beginning of every visit that monitoring is
**not** intended to find something wrong with the subrecipient. Rather,
it is intended to provide an opportunity to **work together** to
recognize the subrecipient\'s accomplishments and to identify ways to
overcome problems and improve operations.

Avoid becoming **too informal** or casual in your approach. You may
discover serious problems in a subrecipient\'s operations and have to
mandate serious corrective action or even sanctions. You want
subrecipients to be clearly aware that any problems you find will be
taken seriously and have to be fixed.

**Five Steps in a Monitoring Visit**

There are five basic steps to any monitoring visit:

-   Notification Letter

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-   Entrance Conference

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-   Documentation, Data Acquisition and Analysis

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-   Exit Conference

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-   Follow-up Monitoring Letter

**A. The Notification Letter**

Begin the on-site monitoring process with a telephone call to explain
the purpose of the monitoring and to arrange mutually convenient dates
for your visits. Send a formal notification letter at least several
weeks before the scheduled visit to:

-   confirm the dates and the scope of the monitoring;

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-   provide a description of the information you want to review during
    your visit; and

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-   specify the expected duration of the monitoring, which of your staff
    will be involved, what office space you require, and what members of
    the subrecipient\'s staff you need to talk with.

**B. The Entrance Conference**

Hold an entrance conference on-site with the subrecipient\'s director
and appropriate financial and program staff immediately before you begin
the monitoring. Use the entrance conference to make sure that all
subrecipient staff have a clear understanding of the purpose, scope and
schedule of the monitoring from the very beginning. Both you and the
subrecipient must agree at the outset that it is **your responsibility
to monitor the subrecipient\'s activities** and determine whether its
use of CDBG funds is appropriate and meets CDBG regulations, even if the
subrecipient finds your monitoring inconvenient and unwelcome.

**C. Documentation and Data**

**Acquisition**

Keep a clear written record of the steps you followed and the
information you reviewed during the visit. Document any conversations
you have with subrecipient staff. The easiest way to do this is to
annotate a monitoring checklist or handbook with notes about particular
case numbers, statistics or financial figures, and the subrecipient\'s
written policies that you obtain from the file reviews, on-site
inspection of projects, or discussions with subrecipient
representatives.

You will find this documentation invaluable in analyzing information,
developing conclusions from the monitoring visit, and explaining the
basis for any findings that appear in your monitoring letter. Being able
to identify the sources of the information you used to arrive at your
conclusions is particularly important if the subrecipient disputes any
of your findings.

**D. The Exit Conference**

At the end of your visit, you or your monitoring team should meet again
with key representatives of the subrecipient organization to present the
tentative conclusions from your monitoring. This exit conference should
have four objectives:

-   to present preliminary results of the monitoring visit;

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-   to provide an opportunity for the subrecipient to correct any
    misconceptions or misunderstandings on your part;

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-   to secure additional information from subrecipient staff to clarify
    or support their position; and

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-   for any deficiency that the subrecipient agrees with, to provide an
    opportunity for subrecipient staff to report on steps they are
    already taking to correct the matter.

Maintain careful notes on the exit conference in order to document what
you told the subrecipient and whether the subrecipient agreed with your
tentative findings. At the end of the conference, there should be a
clear understanding of the areas of agreement and disagreement about
your monitoring results.

**E. The Monitoring**

> **Letter**

***Monitoring without formal feedback to the subrecipient is worse than
"half a loaf."*** If the subrecipient is doing a good job, it deserves
formal written recognition of its success. If the subrecipient is
experiencing problems or is failing to comply with regulations, you need
to describe these deficiencies formally and quickly in a letter that
also includes your recommendations or requirements for improvement.
Otherwise the subrecipient will conclude that its performance is
satisfactory or, worse still, that you condone its failure to comply.

Use the monitoring letters to create a permanent written record of what
you found during the monitoring review. Make your letter positive in
tone by recognizing areas where the subrecipient has done a good job or
shown significant improvement as well as pointing out areas where
corrective action or improvement is required.

+-----------------------------------------------------------------------+
| ***According to HUD rules***                                          |
|                                                                       |
| -   ***A "finding" is a violation of law or regulation that can       |
|     result in a sanction.***                                          |
|                                                                       |
| -   ***A "concern" is a matter that, if not properly addressed, can   |
|     become a finding and can result in a sanction.***                 |
+-----------------------------------------------------------------------+

Your monitoring letter should identify fully every finding and concern.
You should issue a **finding** for non-compliance with the rules and
regulations of the CDBG program. Be careful that the finding is:

-   correctly identified;

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-   based on applicable law, regulation, or program policy; and

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-   supported by the facts presented in the monitoring letter.

For each finding, specify ***corrective actions*** the subrecipient must
take.

Present as **concerns** in the monitoring letter instances where the
deficiency is not a finding, or where non-compliance may occur in the
future because of weaknesses in the subrecipient\'s operations. For each
concern, include ***specific recommendations*** for improvement.

Include ***deadlines*** in the monitoring letter for:

-   providing a **written response** to your monitoring letter that
    describes how the subrecipient will resolve any finding(s); and

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-   **correcting each deficiency** identified in your letter.

You do not have to require a written response for concerns noted in your
monitoring letter.

Mail the monitoring letter to the subrecipient ***within thirty days***
after the exit conference, especially if your letter details significant
problems in the subrecipient\'s operations. You cannot delay your
monitoring letter and then require the subrecipient to take "immediate
action" to correct its deficiencies. Do not ask the subrecipient to meet
a standard to which you, as the grantee, do not adhere.

You will be able to write your monitoring letter faster if you develop
standardized language for the opening paragraphs and for sections on
findings, corrective action, concerns and recommendations. \[**The
Appendix to this chapter provides a sample monitoring letter that
includes such "boilerplate" language.**\] Standardization also helps to
ensure more even-handed treatment of subrecipients for similar
performance characteristics or monitoring problems. However, take care
to ensure that the monitoring letter is not so "canned" that it ignores
the unique characteristics (both positive and negative) of the
particular subrecipient.

####  {#section-5 .unnumbered}

####  {#section-6 .unnumbered}

####  {#section-7 .unnumbered}

#### ADDITIONAL SOURCES OF EVALUATION INFORMATION {#additional-sources-of-evaluation-information .unnumbered}

According to OMB Circular A-133, ***any public agency or non-profit
organization that cumulatively expends \$300,000 or more in Federal
funds in a year must have an independent audit performed***, consistent
with the Single Audit Act of 1984. In most cases, these audits are
performed by an IPA.

**Subrecipient IPA Audits**

These audits can provide another source of information on
subrecipients\' finances and compliance with relevant fiscal
requirements of the CDBG program. They are especially helpful in
reviewing how subrecipients allocated expenses across multiple Federal
sources. Establish a system for tracking when your subrecipients\' audit
reports are due (see Chapter 6) and review these reports carefully for
indications about how well your subrecipients are performing. See the
Appendix to this chapter for more information on IPA audit reports.

**Subrecipient Reports**

***Subrecipients themselves*** may prepare quarterly or annual reports
on their operations. These are particularly helpful in providing an
appropriate context for your own monitoring by identifying areas you may
want to explore in greater detail.

**Local Agency Evaluations**

***Other local agencies*** that work with the subrecipient may conduct
their own evaluations. These evaluations may identify generic
characteristics of the subrecipient\'s operations that are relevant to
its CDBG activities as well. They can suggest aspects of the
subrecipient\'s operations that should receive special attention during
your monitoring, or serve as an "early warning" system (particularly for
subrecipients that have not been monitored recently). For example, such
reports might mention major staffing changes that could indicate
internal management difficulties.

**HUD Audits**

***HUD's Field Office staff or its OIG, or sometimes even GAO*** may
audit subrecipients. These audits can be important to you in a different
way if they conclude that there were serious deficiencies that you
didn\'t know about or weren\'t concerned about. Obviously, in such
instances you need to become directly involved in the process to help
sort out the facts. If the deficiencies are proven to exist, you should
take the lead in helping to solve these problems with the subrecipient.

**SUMMARY**

This chapter has described strategies and procedures that you can use to
fulfill your regulatory responsibility to monitor your subrecipients.
Effective monitoring depends on building a sense of partnership with
subrecipients and securing a mutual commitment to solve problems and
improve the delivery of services.

Monitoring can be time consuming. However, a consistent and thorough
monitoring process will produce significant payoffs over time in terms
of fewer subrecipient problems, improved performance, and greater
compliance with program regulations.

#### 

**NOTES:**

**CHAPTER 5: APPENDIX**

-   Summary of Monitoring Objectives 5-15

-   HUD Monitoring Review of Grantee Oversight of Subrecipients 5-16

-   Checklist for On-Site Monitoring of a Subrecipient 5-21

-   Outline for a Subrecipient Monitoring Workbook 5-25

-   Example of a Grantee Monitoring Letter to a Subrecipient 5-33

-   Review of IPA Audit Reports Letter 5-37

**SUMMARY OF MONITORING OBJECTIVES**

1.  To determine if a subrecipient is carrying out its community
    development program, and its individual activities, as described in
    the application for CDBG assistance and the Subrecipient Agreement.

2.  To determine if a subrecipient is carrying out its activities in a
    timely manner, in accordance with the schedule included in the
    Agreement.

3.  To determine if a subrecipient is charging costs to the project that
    are eligible under applicable laws and CDBG regulations, and
    reasonable in light of the services or products delivered.

4.  To determine if a subrecipient is conducting its activities with
    adequate control over program and financial performance, and in a
    way that minimizes opportunities for waste, mismanagement, fraud,
    and abuse.

5.  To assess if the subrecipient has a continuing capacity to carry out
    the approved project, as well as future grants for which it may
    apply.

6.  To identify potential problem areas and to assist the subrecipient
    in complying with applicable laws and regulations.

7.  To assist subrecipients in resolving compliance problems through
    discussion, negotiation, and the provision of technical assistance
    and training.

8.  To provide adequate follow-up measures to ensure that performance
    and compliance deficiencies are corrected by subrecipients, and not
    repeated.

9.  To comply with the Federal monitoring requirements of 24 CFR
    570.501(b) and with 24 CFR 84.51 and 85.40, as applicable.

10. To determine if any conflicts of interest exist in the operation of
    the CDBG program, per 24 CFR 570.611.

11. To ensure that required records are maintained to demonstrate
    compliance with applicable regulations.

**HUD MONITORING REVIEW OF GRANTEE OVERSIGHT OF SUBRECIPIENTS**

HUD Field Office staff from the Office of Community Planning and
Development monitor CDBG Entitlement Grantees to review the adequacy of
the grantee\'s management, monitoring, and oversight of its
subrecipients as required by 24 CFR Part 85 and 24 CFR 570.501−503. The
following outline provides a condensed list of the items covered in that
review. **THE OUTLINE BELOW DOES NOT NECESSARILY COVER ALL THE AREAS YOU
SHOULD ADDRESS IN YOUR SUBRECIPIENT MONITORING PROCESS, ONLY THE BASIC
AREAS THAT HUD TYPICALLY REVIEWS WHEN MONITORING ENTITLEMENT
COMMUNITIES.**

\[NOTE: Items preceded by asterisk (\*) are not related to statutory or
regulatory requirements, but are only included to assist HUD reviewers
in understanding a grantee\'s program, and/or to identify issues that if
not properly addressed could result in deficient performance. Negative
conclusions to items with an asterisk may result in a "concern" being
raised, but not a "finding."\]

**[AREAS OF REVIEW]{.underline}**

a.  **SUBRECIPIENT MANAGEMENT AND TRAINING SYSTEM**

> 1\. The grantee\'s management system for subrecipient oversight.
>
> ∗2. Efforts the grantee has made to assure its **subrecipients'
> understanding** of applicable CDBG program requirements through
> technical assistance, training, and distribution of source materials
> (regulations, OMB Circulars, HUD Policy Notebook, CPD Notices, [CDBG
> Guide to National Objectives and Eligible Activities for Entitlement
> Communities]{.underline}, etc.).
>
> 3\. The grantee's process to ensure that subrecipients maintain
> adequate records that comply with program requirements, including
> record retention.
>
> 4\. The grantee's process for handling audit reports required **OMB
> Circular A-133** and
>
> appropriate follow-up.
>
> 5\. The grantee's procedures for identifying subrecipients as **"high
> risk"** (e.g., agencies not familiar with CDBG regulations, with high
> staff turnover, or carrying out high-risk activities, etc.)
>
> 6\. The grantee process to review subrecipients for evidence of
> **conflicts of interest,** involving grantee and subrecipient, or
> subrecipient and its contractors.

**B. GRANTEE REVIEW OF SUBRECIPIENT\'S INTERNAL CONTROLS**

> 1\. The grantee's system to assure that:
>
> a\. The subrecipients\' **financial management systems** are in
> compliance with (as applicable): (a) **24 CFR 85.20(b)** \[financial
> reporting, accounting records, internal control, budget control,
> allowable costs, source documentation, and cash management\] or (b)
> **24 CFR 84.21−28** \[disclosure of financial results; sources and
> uses of funds; control of funds, property, and other assets;
> comparison of actual with budgeted outlays; cash management;
> procedures for determining reasonableness, allowability and
> allocability of costs; figures supported with source documentation;
> examination with audits by qualified individuals and resolution of
> audit results\].

b.  Time reporting/distribution records for subrecipient employees
    working on both

> CDBG and non-CDBG activities are kept appropriately.
>
> 2\. The grantee's process to ensure subrecipient compliance with
> **procurement and/or subcontracting requirements** of **24 CFR 85.36**
> \[governmental subrecipients\] or **24 CFR 84. 40−48**
> \[non-governmental subrecipients\].
>
> 3\. Property Management.
>
> a\. The procedures subrecipients use to **identify CDBG property and
> assets**, such as property records (**24 CFR 85.32 (d)(1)** and **24
> CFR 84.30-37**).
>
> b\. The procedures subrecipients use to ensure adequate safeguards for
> **preventing loss, damage or theft of subrecipient-held property** (24
> CFR 85.32 (d)(3)).

**C. SUBRECIPIENT AGREEMENTS (§570.503)**

1\. Review a Sampling of Agreements for:

> a\. Elements **required in §570.503 (b):**

-   Statement of Work

-   Records and reports

-   Program income

-   Uniform administrative requirements

-   Other program requirements

-   Suspension and termination

-   Reversion of assets

> b\. Adequacy of Statement of Work. Does it contain:
>
> 1\) A description of the types and amount of work or products **in
> sufficient detail to permit effective monitoring by grantee;**
>
> 2\) A schedule with a **deadline indicated for each major service or
> product** identified in the Statement of Work (**24 CFR
> 570.503(b)(1)**);
>
> 3\) A specified period for which the agreement is in effect;
>
> 4\) **Projected costs specified in sufficient detail** to provide a
> basis for comparing budgeted costs with actual costs of work (24 CFR
> 570.503(b)(1));
>
> c\. **Documentation required** for payment of expenses sufficient to
> ensure that (1) payments are made **only for eligible** expenses, (2)
> expenses are **reasonable** in relation to actual performance, and (3)
> funds requested are **not in excess of immediate needs;**
>
> d\. **Special documentation** (required by the Agreement) maintained
> by the subrecipient for tracking particular activities, for example,
> **project underwriting determinations** (for economic development),
> **household income or lead-based paint** (for rehabilitation
> activities); and
>
> e\. Where **program income** is retained by subrecipient, the
> provisions to ensure that it is **used in accordance with CDBG rules**
> (24 CFR 570.504(c)).
>
> 2\. Analysis of Grantee-Subrecipient Agreement.
>
> a\. Determine whether there is universal coverage for all
> subrecipients.
>
> ∗b. The procedures for amendments.
>
> c\. Adequacy of subrecipient agreements -- conclusion (i.e., are
> systemic changes necessary to comply with program requirements?).

**D. REPORTING**

> 1\. The process for submitting and receiving **progress and financial
> reports** required (24 CFR 570.503(b)(2)).

2\. **Frequency** of required reports.

> 3\. The mechanism used to obtain information necessary for the grantee
> to **input data in the Integrated Disbursement and Information System
> (IDIS)** and **prepare its CAPER**; i.e., Activity Summary and Direct
> Benefit Information.
>
> 4\. The adequacy of the reporting mechanism**content** of written
> reports **clearly specified**; information required sufficient to
> assess subrecipient performance against specifications in Statement of
> Work?
>
> 5\. Grantee **verification** of the data and beneficiaries reported by
> subrecipient.

**E. ON-SITE MONITORING BY THE GRANTEE**

> \*1. The process for selecting subrecipients and activities for
> **on-site review** (e.g., dollar amount, nature of activity, program
> experience).
>
> \*2. The **frequency** of grantee on-site monitoring.
>
> \*3. Review on-site monitoring conducted during preceding 12 months:

-   Names of subrecipients

-   Dates monitored

-   Number and type of findings

-   Date(s) of monitoring letters

-   Dates when findings were resolved

-   **Percentage of subrecipients monitored** to the total number of
    subrecipients

> \*4. Results of Monitoring.
>
> a\. Documentation for areas monitored, conclusions reached, and
> improvements or corrective actions necessary in the project file.
>
> b\. Adequacy of time for subrecipients' response.
>
> c\. Timeliness of grantee transmittal of monitoring results
> **communicated** to subrecipients.
>
> d\. **Corrective actions** and **dates** **for resolution** indicated.
>
> \*5. Grantee\'s **internal procedures** for ensuring **quality** of
> monitoring efforts, including **documentation and intended actions**,
> and follow-through on promised actions.

**F. PROGRAM INCOME MONITORING**

> 1\. The grantee process for:
>
> a\. Keeping track of subrecipient-generated **program income** and
> ensuring **accurate recording and reporting** of income.
>
> b\. Assuring retained program income is used appropriately

-   **before grant funds are requested**

-   **in accordance with the subrecipient agreement**

-   **in accordance with CDBG rules**

> 2\. Review that subrecipient-generated program income is adequately
> reflected in the CAPER.
>
> 3\. **Program income expected to be received** by all of its
> subrecipients is included in its most recent **Action Plan.**
>
> 4\. Review activities being carried out by subrecipients that
> **typically generate program income**, but for which the grantee has
> **no information** (e.g., rehabilitation loan programs, economic
> development revolving loan funds).

**G. ON-SITE REVIEW OF SELECTED SUBRECIPIENTS BY HUD**

> \[For a sample of subrecipients selected by HUD for on-site
> monitoring, the HUD monitor records the subrecipient\'s name, program
> or activity, records/data reviewed, and concerns/findings identified
> by grantee.\]
>
> 1\. Did grantee monitor this subrecipient on-site? If so, when?
>
> \*2. Are there **significant differences** between **actual and
> reported** performance?
>
> 3\. Do any costs appear **clearly unreasonable**? Do any costs warrant
> **further review**?
>
> \*4. Does there appear to be **adequate knowledge of CDBG rules** and
> other applicable regulations among subrecipient staff to support
> regulatory compliance? **Areas of weakness?**
>
> 5\. Did grantee\'s monitoring report **fail to find** something it
> should have? If so, what?

**H. SUMMARY**

Adequacy of monitoring, causes of problems, actions recommended, and
positive observations.

**CHECKLIST FOR ON-SITE MONITORING OF A SUBRECIPIENT**

**COMMUNITY DEVELOPMENT BLOCK GRANT PROGRAM**

Subrecipient
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

Project Name/Agreement No.
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

Project Director
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

In-house review and general oversight conducted on
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

On-site monitoring visit(s) conducted on
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

##### Monitoring letter sent on \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ {#monitoring-letter-sent-on-_____________________________ .unnumbered}

Follow-up monitoring visit conducted/letter sent
on:\_\_\_\_\_\_\_\_\_\_\_\_\_\_

**A. [National Objective and Eligibility]{.underline}**

1\. Which National Objective does this project meet (570.208)\*?

Benefit to Low- and Moderate-Income Persons

> \_\_\_\_Low/Mod Area Benefit
>
> \_\_\_\_Limited Clientele Benefit
>
> \_\_\_\_Low/Mod Housing Benefit
>
> \_\_\_\_Job Creation or Retention

Aid in the Prevention or Elimination of Slums or Blight

> \_\_\_\_on an Area Basis
>
> \_\_\_\_on an Spot Basis
>
> An Urgent Need
>
> \_\_\_\_Needs having a Particular Urgency
>
> 2\. Which eligibility category does the project meet? (570.201-6)?

**B. [Conformance to the Subrecipient Agreement]{.underline}**

> 1\. [Contract Scope of Services]{.underline} -- Is the full scope of
> services listed in the Agreement being undertaken? List any deviation.
>
> 2\. [Levels of Accomplishments]{.underline} -- Compare actual
> accomplishments at the point of monitoring with planned
> accomplishments. Is the project achieving the expected levels of
> performance (number of persons served, number of units rehabbed, etc.)
> and reaching the intended client group? Explain any problem the
> subrecipient may be experiencing. **Acknowledge major
> accomplishments.**

3\. [Time of Performance]{.underline} − Is the work being performed in a
timely manner (i.e., meeting the schedule as shown in the Agreement)?
Explain.

4\. [Budget]{.underline} − Compare actual expenditures versus planned
expenditures. Note any discrepancies

or possible deviations.

5\. [Requests for Payment]{.underline} − Are requests for payment being
submitted in a timely manner and are they consistent with the level of
work accomplished? Is program income properly accounted for and
recorded? Explain.

6\. [Progress Reports]{.underline} − Have progress reports been
submitted with payment requests (where required) on time and were they
complete and accurate?

7\. [Special Conditions]{.underline} − Does the project conform to any
special terms and conditions included in the Subrecipient Agreement?
Explain.

**C. [Record-Keeping Systems]{.underline} (570.506)**

Records should demonstrate that each activity undertaken meets the
criteria for National Objectives compliance. Such records should be
found in both the grantee's project file and the subrecipient file.

1.  [Filing System]{.underline} -- Are the subrecipient's files orderly,
    comprehensive, secured for confidentiality where necessary, and
    up-to-date? Note any areas of deficiency.

2.  [Documentation (activities, costs and beneficiaries]{.underline}) --
    Do the HCD project file and subrecipient records have the necessary
    documentation supporting the National Objective being met,
    eligibility, and program costs as they relate to 570.506? Do the
    project files support the data the subrecipient has provided for the
    CAPER?

3 [Record Retention]{.underline} − Is there a process for determining
which records need to be retained and for how long?

4\. [Site Visit]{.underline} (where applicable) − Is the information
revealed by a site visit consistent with the records maintained by the
subrecipient and with data previously provided to the grantee? Explain
any discrepancies.

a.  Is the project manager located on-site and running the day-to-day
    operations? Do the staff seem fully informed about program
    requirements and project expectations? Explain.

b.  Is the project accomplishing what it was designed to do? Explain any
    problems.

**D. [Financial Management Systems]{.underline} \[85.20 (local
governments) and 84.21−28 (non-profits)\]**

1.  [Systems for Internal Control]{.underline} -- Are systems in
    compliance with accounting policies and procedures for cash, real
    and personal property, equipment and other assets (85.20(b)(3) and
    84.20(b)(3))?

2.  [Components of a Financial Management System]{.underline} -- Review
    the chart of accounts, journals, ledgers, reconciliation, data
    processing, and reporting system. Note any discrepancies.

3.  [Accounting]{.underline} -- Compare the latest performance report,
    drawdown requests, bank records, payroll records,
    receipts/disbursements, etc. Note any discrepancies.

4.  [Eligible, Allocable, and Reasonable Costs]{.underline} -- See OMB
    Circulars A-87, A-122. Pay particular attention to the time
    distribution records where the subrecipient has employees who work
    on both CDBG and non-CDBG funded activities. Note any discrepancies.

5.  [Cash Management/Drawdown Procedures]{.underline} -- See Treasury
    Circular 1075, 85.20(b)(7), and 84.20. Has all cash been promptly
    drawn down and deposited? Are all drawdowns of Federal funds
    properly recorded? Note any discrepancies.

6.  [Management of Program Income]{.underline} -- If the subrecipient
    generates program income, refer to 570.504 and the Subrecipient
    Agreement about its use. Note any discrepancies.

7.  [IPA Audit Reports/Follow-up]{.underline} -- (OMB Circular A-133)
    Determine if the subrecipient has expended \$500,000 or more in
    Federal funds for the subject program year.

IPA Audit Required Yes\_\_\_\_ No\_\_\_ N/A\_\_\_\_

Date Conducted\_\_\_\_\_\_\_\_\_\_\_\_

Any findings related to CDBG activity? Status? Explain.

8.  [Maintenance of Source Documentation]{.underline} -- (85.20(b) and
    84.20(b)) Note any discrepancies in sample records, invoices,
    vouchers and time records traced through the system.

9.  [Budget Control]{.underline} -- Do actual expenditures match the
    line item budget? Refer to 85.20(b)(4) and 84.20. Note any
    discrepancies.

**E. [Insurance]{.underline}**

1.  Has the subrecipient submitted a current copy of its Certificate of
    Insurance?

2.  Is the City named as an additional insured?

**F. [Procurement]{.underline}**

1.  [Procurement Procedures]{.underline} -- Do the procedures the
    subrecipient uses for procurement of goods and services meet CDBG
    requirements? Review a sample number of procurements.

2.  [Conflict of Interest]{.underline} -- How does the subrecipient
    assure there was no conflict of interest, real or apparent? Review
    the process and comment.

**G. [Equipment and Real Property]{.underline}**

1.  Has the subrecipient acquired or improved any property it owns in
    whole or in part with CDBG funds in excess of \$25,000? If yes,
    review for compliance with 570.503(b)(7).

2.  Has the subrecipient purchased equipment with CDBG funds in excess
    of \$1,000? Does the subrecipient maintain the records required at
    84.34?

3.  Has a physical inventory taken place and the results reconciled with
    property records within the last two years?

4.  If the subrecipient disposed of equipment/property that was
    purchased with Federal funds within the last five years:

    a.  Were proceeds from the sale reported as program income?

    b.  Did the grantee approve expenditure of program income?

    c.  Was the program income returned to the grantee?

**H. [Non-Discrimination and Actions to Further Fair
Housing]{.underline}**

1.  [Equal Employment Opportunity]{.underline} -- Refer to 570.506, 601
    and 602. Note any deficiencies.

2.  [Section 3]{.underline} -- Opportunities for Training and Employment
    for Local Residents -- Refer to 570.506(g)(5) and 570.607(a)
    (affirmative action). Note any deficiencies.

3.  [Fair Housing Compliance]{.underline} -- Refer to 570.904 and
    570.601(b). Note any deficiencies.

4.  [Requirements for Disabled Persons]{.underline} -- Refer to 8.6.
    Note any concerns.

5.  [Women and Minority Business Enterprises]{.underline} -- Refer to
    570.506(g), 85.36(e), and 84.44, affirmative steps documentation.
    Note any concerns.

**I. [Conclusion and Follow-up]{.underline}**

1.  Is the subrecipient meeting the terms of the Subrecipient Agreement
    and HUD regulations? Discuss both positive conclusions and any
    weaknesses identified.

2.  Identify any follow-up measures to be taken by the grantee and/or
    the subrecipient as a result of this monitoring review.

    a.  List the required schedule for implementing corrective actions
        or making improvements.

    b.  List the schedule for any needed technical assistance or
        training and identify who will provide the training.

Project Monitor Date

+-----------------------------------------------------------------------+
| #### *OUTLINE FOR A SUBRECIPIENT MONITORING WORKBOOK*                 |
|                                                                       |
| *The monitoring checklist is a tool to help you ensure that you       |
| monitor your subrecipients in all important areas of program          |
| administration and regulatory compliance. These areas include 1)      |
| program performance review (National Objectives, eligible activities, |
| contract objectives, scope of work, contract schedule, contract       |
| budget); 2) general management practices; 3) financial management     |
| practices (accounting system, internal controls); 4)                  |
| record-keeping/reporting practices; 5) anti-discrimination compliance |
| (civil rights and Section 504); and 6) activity-specific monitoring   |
| (housing rehabilitation, economic development, public facilities and  |
| infrastructure, acquisition and disposition, public services, and     |
| administration and planning).*                                        |
|                                                                       |
| *The following outline provides a list of the key elements comprising |
| a comprehensive subrecipient monitoring checklist. Yours may differ   |
| depending on the activities and programs you support. The outline can |
| be used as a source for developing your own monitoring checklists or  |
| workbook.*                                                            |
+-----------------------------------------------------------------------+

***[REVIEW ITEM]{.underline} [COMMENT/ REFERENCE]{.underline}***

**1. 0 Overview of Monitoring Procedures**

*NOTE: This section should describe the overall purpose of your
monitoring program and how it is to be undertaken. See discussion in
text of Chapter 5. It should include at least a statement of monitoring
goals and objectives and a summary of the three principal monitoring
phases: in-house preparation, on-site review, and follow-up.*

**2. 0 Program Performance Review *Required by 24 CFR 570.501(b) & 24
CFR ***

***85.40(a) as modified by 570.502(a)(14)***

2\. 1 National Objectives Compliance *Which one(s)& how addressed,*

*24 CFR 570.208*

2\. 2 Eligible/Ineligible Activities *Which activities, on what basis,*

*24* *CFR 570.201−207*

2\. 3 Objectives *Compare current v. original in Agreement*

2\. 4 Statement of Work *Compare actual work performed v. planned*

2\. 5 Performance measurements *Planned accomplishments v. actual*

2\. 6 Project Schedule *Compare actual progress v. planned*

2\. 7 Budget Line Item *Compare actual expenditures v. planned*

2\. 8 Conclusion *Performance Assessment*

a\. Summary of Achievements *Acknowledge major accomplishments*

b\. Summary of Corrective Actions/Deadlines *Schedule for corrective
actions*

*or improvements*

> c\. Technical Assistance and Training *Schedule for technical
> assistance or training*
>
> d\. Identifying High-Risk Subrecipients *24 CFR 85.12*

**3. 0 Record-Keeping Systems *Required by 24 CFR 570.506***

3\. 1 Filing System *Orderly, comprehensive, up-to-date*

3\. 2 Security Procedures (office & site) *Confidentiality/safety of
records,*

*24 CFR 85.42(e) and (f) and 84.34(f)*

3\. 3 Location and Accessibility *Assuring availability and access,*

*24 CFR 570.508*

3\. 4 Documentation (activities & costs) *Re: National Objectives,
Eligible Activities,*

*Program Costs 24 CFR 570.506*

3\. 5 Environmental Review Documentation *24 CFR 570.503(b)(5)*

3\. 6 Retention of Records *24 CFR 85.42 and 84.53 as amended by*

*24 CFR 570.502(a) and (b)*

**4. 0 Financial Management Systems** ***Required by 24 CFR 85.20 and***

> ***24 CFR 84.20−28, as modified by 570.502(a) and (b) as applicable***

4\. 1 Systems for Internal Control *Accounting policies & procedures,
staffing;*

*24 CFR 85.20(b)(3) and 84.21(b)(3)*

4\. 2 Components of Financial Mgt System *Chart of accounts, journals,
ledgers, reconciliation data processing, reporting system*

4\. 3 Accounting Records: accurate, current *Compare latest CAPER,
drawdown requests,*

> and complete disclosure of financial results *bank records, payroll
> records, receipts/disbursements,*

4\. 4 Eligible, Allocable, and Reasonable Costs *Time sheets, cost
allocation plan,*

> *expense tracking, 24 CFR 84.27 and 85.22, OMB Circulars A-87, A-122*

4\. 5 Cash Management/Drawdown Procedures *Treasury Circular 1075,*

*24 CFR 85.20(b)(7) and 85.21*

4\. 6 Management of Program Income *24 CFR 570.504*

4\. 7 IPA Audit Reports/Follow-up *OMB Circular A-133*

4\. 8 Maintenance of Source Documentation *24 CFR 85.20(b) and 84.21*

4\. 9 Loan Servicing Capabilities *24* *CFR 85.20(b)(3) and 84.51*

4\. 10 Budget Control *Actual expenditures match budget,*

> *24 CFR 85.20(b)(4)*

4\. 11 Revision to Financial Plans & *24 CFR 570.503*

Close-out

**5. 0 Non-Discrimination and Actions *Required by 24 CFR 570.506(g),
570.601,***

**to Further Fair Housing *570.602, 570.607***

5\. 1 Equal Employment Opportunity *Direct benefit activities:*

*24 CFR 570.506, 570.602*

5\. 2 Section 3: opportunities for *24 CFR 570.506(g)(5), 570.607(b),*

training & employment for local residents *and 84.44(d)* *affirmative
action,*

> *documentation*

5\. 3 Fair Housing Compliance *Review criteria: 24 CFR 570.904,
570.601(b)*

5\. 4 Requirements for Disabled Persons *§504(24 CFR 8.6), Title VIII,
Federal*

> *Accessibility Standards, Americans with Disabilities Act (ADA)*

5\. 5 Women & Minority Business *24 CFR 570.506(g)(6), 24 CFR 85.36(e)*

Enterprises *and 84.44(b) affirmative steps documentation*

**6. 0 Property Management *24 CFR 85.31−33 and 84.30−37***

6\. 1 Acquisition Records Maintenance *Acquisition records, inventory
maintenance*

6\. 2 Security for Protection of Assets *Security procedures 24 CFR
85.32(d)(3*)

6\. 3 Disposition of Assets *Disposition process and records, program*

> *income requirements, 24 CFR 85.32−33*
>
> *and 84.33−35; 24 CFR 570.503(b)(7)and 570.505*

**7. 0 Procurement and Bonding *24 CFR 85.36 and 84.40−48***

7\. 1 Procurement Procedures *Written policies/enforcement/compliance*

7\. 2 Competitive Bids *Bid packages & award procedures*

7\. 3 Use of Debarred, Suspended or *Prohibition/documentation required
b*y

> Ineligible Contractors or *24 CFR 570.609; 24 CFR 85.35; 24 CFR*

Subrecipients *84.44(d)*

7\. 4 Small Purchases (\$100,000 or less) *Purchase orders & petty cash*

*24 CFR 85.36(d)(1)*

7\. 5 Noncompetitive Procurement *Procedures, limits 24 CFR 85.36(d)*

7\. 6 Conflict of Interest Provisions *24 CFR 570.611, Part 85.36 and
84.42*

7\. 7 Bonding Requirements *24 CFR 85.36(h) and 84.48*

**8. 0 Labor Standards Monitoring *Required by 24 CFR 570.603, ***

> ***HUD Handbook 1344.1 Rev. 1; compliance with Davis-Bacon and related
> acts, Copeland Act, Contract Work Hours and Safety Standards***

8\. 1 Prevailing Wages (applicability) *24 CFR 570.603, Handbook 1344.1
Rev. 1*

8\. 2 Dissemination, Notices Posted *(same as above)*

8\. 3 Person in Charge of Labor Standards *(same as above)*

8\. 4 Documentation in Files *(same as above)*

8\. 5 Field Inspections/Payroll Review *(same as above)*

8\. 6 Contractor Eligibility *24 CFR 570.609*

**9. 0 Relocation and Anti-Displacement *Required by 24 CFR 570.606***

> **(See Appendix, Chapter 4)**

**SPECIAL MONITORING FOR PARTICULAR ACTIVITIES**

**10. 0 Rehabilitation *24 CFR 570.202 (Eligible Activities)***

[Part A. Review of File Records and Progress]{.underline} *[Review
Progress Reports/Agreement/Plans]{.underline}*

10\. 1 Regulatory Compliance

\- Location (census tract, *If low/mod benefit claimed*

redevelopment area) *(24 CFR 570.208(a)(3)*

*or slums/blight (570.208(b)(1) or (2))*

-Type of Housing (SF/MF), *Davis-Bacon & ADA applicability*

Commercial

\- Number of units per structure *Davis-Bacon where 8 or more units;
ADA*

\- Historic preservation *24 CFR 570.202(d)*

\- Lead-based paint *24 CFR 570.608, 24 CFR Part 35*

(inspection/remediation) *24 CFR Part 35 (doc/mitigation)*

\- Household income (low/mod benefit) *Verify occupants' income v.
limits*

\- Procurement & Bonding *See Section 7 above*

\- Labor Standards Review *24 CFR 570.603 (Davis-Bacon, etc.)*

\- Relocation and Real Property Acquisition *24 CFR 570.606*

*relocation/anti-displacement*

\- Environmental Review (date/findings) *24 CFR 570.604 grantee review
procedures*

> \- Project in Special Flood Hazard Area *24 CFR 570.605 flood
> insurance required*

\- Section 504/ADA compliance *§504 (24 CFR 8.6), Title VIII, Uniform*

> *Federal Accessibility Standards (UFAS), ADA*

10\. 2 Comparison of Performance Records *Check progress reports,
documentation*

With Agreement/Application

> \- Scope of Work (work write-up, *Compare scope with
> Agreement/Application*
>
> plans & specs, and original cost estimate) *Compare with schedule in
> Agreement*

\- Contract award date; date work began *(same as above)*

\- Date final inspection; completion notice *Compare with number units
proposed*

\- Number of dwelling units completed *Compare with
Application/Agreement*

\- Actual delivery schedule *Review overall performance regarding*

v\. Application & Agreement *scope and schedule; 24 CFR 570.503(b)(1)*

10\. 3 In-house Cost & Productivity Review

\- Method used to assure reasonable costs *24 CFR Parts 84 and 85, OMB
Circulars*

> *A-87 and A-122*

\- Direct construction costs (per unit) *Review progress reports &
drawdown requests*

\- Indirect/administrative costs; *Check cost allocation plan*

> comparison with cost allocation plan;
>
> \% of total

\- Costs within 10% of in-house estimate *Explanation of variances*

\- Cost per Unit v. Budget *Written explanations of overruns*

> *(good practice); 24 CFR Parts 84 and 85; OMB Circulars A-87 and
> A-122*

[Part B. Subrecipient File Review & Property Inspection]{.underline}

10\. 4 Source Documentation in Subrecipient Files

> \- Low/Mod Benefit *24 CFR 570.506(b)(4)*

\- Slums/blight *24 CFR 570.506(b)(7), (9*), *(10), and (11)*

\- Urgent need *24 CFR 570.506(b)(12)*

\- Eligible activity (rehab, other) *Documentation of work performed*

\- Project costs (allocability, reasonableness) *Source documentation*

\- Plans & specifications/changes *(same as above)*

\- Bids received (fair and open competition) *(same as above)*

\- Contractor bonding and insurance *(same as above)*

\- Section 3 training/hiring *24 CFR 570.607(b), source documentation*

\- Anti-discrimination & affirmative action *24 CFR 570.607(a),
publication &*

*source* *documentation*

> \- Lead-based paint *24 CFR 570.608, 24 CFR Part 35*
> *(doc/mitigation)*

10\. 5 On-site Inspection *Required by 24 CFR 85.40*

\- Verification of location, number of units *(same as above)*

\- Verification of payroll *Davis-Bacon*

\- Verification of statement of work *Required by 24 CFR 85.40,*

*24 CFR 570.503(b)(1)*

> \- Verification of progress reported *(same as above)*
>
> \- Pct. of work completed v. costs/drawdowns *24 CFR Parts 84 and 85.
> See also*
>
> *24 CFR 570.513*

*.* - Verification of quality and standards *Good business practice*

10\. 6 Overall Project Management *24 CFR 570.905*

\- Target for completion *Good business practices & indicators*

> \- Staffing capacity/turnover *(same as above)*
>
> \- Performance ranking *(same as above)*

\- Corrective/remedial actions *(same as above)*

**11. 0 Economic Development *24 CFR 570.203* *and 570.204***

[Part A. Activity Meets National Objectives]{.underline} *24 CFR
570.208(a)--(d); 24 CFR 570.506(b)*

11\. 1 National Objective: Low/Mod Benefit, Job Creation, **51% of Jobs
Created**

\- Verify number full-time equivalent (FTE) jobs created/retained

\- (Activity complete) % of FTE jobs created actually [taken
by]{.underline} low/mod persons

\- (Activity complete) % of FTE jobs [available to]{.underline} low/mod
persons

\- (Activity complete) "first consideration" process of referrals

\- (Activity complete) number of low/mod persons interviewed for "made
available" jobs

\- Efforts to increase accessibility of "made available" jobs to low/mod
persons

\- Training opportunities offered to low/mod persons not qualified for
position(s)

> \- (Activity underway) evidence of written contractual commitment for
> jobs to be held by or made available to low/mod persons
>
> \- (Activity underway) listing of permanent jobs to be created and
> either: a list of the jobs [filled]{.underline} and those held by
> low/mod persons, or an indication of which jobs to be created will [be
> made available]{.underline} to low/mod persons on an FTE basis, 51%
> commitment, and actions be taken to ensure "first consideration" for
> low/mod persons
>
> \- (Activity underway) adequacy of tracking mechanism to ensure
> fulfillment of 51% low/mod commitments

\- Adequate procedures for documenting/verifying income status of
employees/applicants

\- CDBG funds per created/retained job meets public benefit, if
applicable

11\. 2 National Objective: Low/Mod Benefit, Job Retention, **51% of Jobs
Retained**

\- Objective evidence to show that job(s) would have been lost without
CDBG assistance

> \- Date CDBG assistance first made available
>
> \- A list of jobs retained on FTE basis and which are held by low/mod
> persons
>
> \- Proof that at least 51% of jobs retained were held (or taken upon
> turnover) by low/mod persons
>
> \- Verification/documentation of income status of employees in jobs
> retained

\- Subrecipient relied on job turnover to meet 51% criterion

> \- Total number of retained jobs known to be held by low/mod persons
> plus jobs not known to be held by low/mod persons but, upon turnover
> within a 2-year period, were taken by low/mod persons, exceeds 51% of
> the total retained jobs on a FTE basis
>
> \- If no, consider the number of retained jobs not held or taken by
> low/mod persons that were claimed to have been made available to
> low/mod persons (would their addition meet the 51% requirement?)

\- If not met, precautions taken to avoid outcome

\- If met, were efforts taken to make jobs available adequate?

> \- If 2 years have not elapsed, what is the likelihood that the
> business will be able to attain the 51% jobs retained criterion?

\- CDBG funds per created/retained job meets public benefit test, if
applicable

11\. 3 National Objective: Low/Mod Area Benefit, **assistance to
commercial businesses serving low- and moderate-income residential
area,** **24 CFR 570.208(a)(1)**

> \- Verify definition of service areas (geographic limits, census
> tract/block groups)
>
> \- Verify percentage of low/mod income persons in service area is 51%
> or more
>
> \- Alternatively, verify community qualifies for the exception
> criteria at *24 CFR 570.208*(a)(1)(i) and that percentage of low/mod
> persons in the service area is high enough under that exception
>
> \- Verify area is primarily residential
>
> \- Verify that assisted businesses provide services to all area
> residents

11\. 4 National Objective: **Slums & Blight**

> \- [Area basis]{.underline}: area clearly defined? *CFR 570.208(b)(1)
> and 570.506(b)(7)*
>
> \- Local conditions qualify the area? *verify location & basis for
> classification*
>
> \- State/Local law citations for classification
>
> \- Inspections of non-residential rehabilitation;

verify improvement of all substandard conditions

> \- [Spot Basis]{.underline}: activity limited to eligible ones? *24
> CFR 570.208(b)(2) and*
>
> *570.506(b)(9)*
>
> \- Adequate documentation of conditions
>
> being eliminated?
>
> \- [Urban Renewal/NDP Area Completion]{.underline}: *24 CFR
> 570.208(b)(3) and*
>
> Conformance with Urban Renewal Plan *570.506(b)(10)*

11\. 5 Eligible Activities:

**Special Economic Development** *24 CFR 570.203*

\- Assistance to for-profit businesses *24 CFR 570.203(b)*

\- Identification of high-risk subrecipients *24 CFR Part 85.1*2

\- Adequate underwriting? *24 CFR 570.203(b)*, 570.209

> *(See Appendix A to 24 CFR 570 for factors to consider)*

\- Steps taken to minimize displacement *24 CFR 570.203*

\- Other Criteria ([public benefit]{.underline}): *24 CFR 570.209*

-   Assists businesses providing goods

services to low/mod residents

-   Creates or retains jobs

11\. 6 On-site Verification: required documentation *24 CFR 570.506*

on file

**12. 0 Public Services** *24 CFR 570.201(e) and 570.506(b)(3)*

12\. 1 National Objectives *24 CFR 570.208*

> \- Low/mod Benefit (Area) *24 CFR 570.208(a)(1)*
>
> \- Low/mod Benefit (Direct)-Limited Clientele *24 CFR
> 570.208(a)(2)(i)(A) and 570.506(b)(3)*
>
> \- Presumption of L/M benefit for certain groups *24 CFR 570.208(a)(2)
> and 570.506*
>
> \- Slums & Blight (Area) *24 CFR 570.208(b)(1)*
>
> \- Slums & Blight (Spot) *24 CFR 570.208(b)(2)*
>
> \- Urgent needs *24 CFR 570.208(c)*

12\. 2 Eligible Activities Review

> \- Prohibition against inherently religious activities *24 CFR
> 570.200(j)*
>
> \- Prohibition against political activities *24 CFR 570.207(a)(3)*
>
> \- Exception for interim assistance activities *24 CFR 570.201(f)*
>
> \- New/increased levels of public service *24 CFR 570.201(e)*
>
> \- Cap on overall public service activities *24 CFR 570.201(e)(1)-(3)*

12\. 3 Definition of Units of Service in Statement of Work *24 CFR
570.503(b)(1)*

**13. 0 Public Facilities and Improvements *24 CFR 570.201(c)***

13\. 1 National Objectives *24 CFR 570.208*

13\. 2 Special Considerations

> \- Prohibition against political activities *24 CFR 570.207(a)(3)*
>
> \- Attribution/allocation of costs for multiple- *24 CFR
> 570.200(b)(1)*

use facilities

> \- Prohibition against excessive fees *24 CFR 570.200(b)(2)*
>
> \- Removal of barriers for disabled persons *24 CFR 570.200(c) and
> 207(a)(1)*
>
> \- Requirement for continuity of use (5 years) *24 CFR 570.503(b)(7)
> and 570.505*

**14. 0 Acquisition, Disposition, Relocation *24 CFR 570.201(a),(b),(i)
***

14\. 1 Acquisition & Disposition

> \- Document [planned use and actual use]{.underline} of *24 CFR
> 570.208(d)(1)*

property to meet a National Objective

> \- Requirements for appraisals *49 CFR part 24*
>
> \- Reversion of assets/continuity of use *24 CFR 570.503(b)(7) and
> 570.505*
>
> \- Program income on disposition *24 CFR 570.503(b)(7); 24 CFR
> 570.504*

14\. 2 Relocation *24 CFR 570.606*

> \- URA compliance *49 CFR 24; 24 CFR 570.606(b*)
>
> \- Residential Anti-displacement and Relocation *24 CFR 570.606(c)*

Assistance Plan under Section 104(d)

**15. 0 Planning and Administration *24 CFR 570.205, 206***

15\. 1 Planning/Admin activities considered to *24 CFR 570.208(d)(4)*

address National Objectives automatically

> \- Grantees\' combined expenditures on planning *24 CFR 570.200(g)*

and administration limited to 20% of

total grant plus program income

15\. 2 Planning Activities *24 CFR 570.205*

\- Planning activity not directly related

to specific project (e. g., environmental

review, engineering/planning studies)

> \- Eligible planning activities *24 CFR 570.205*

15\. 3 Program Administration *24 CFR 570.206*

> \- Verify any limitations in Agreement *24 CFR 570.200(g)\**

\- Verify "reasonable and necessary" costs *OMB Circulars A-87, A-122*

> \- Documentation of admin/planning costs *24 CFR 570.200(h)*

incurred [before]{.underline} grant period

> \- Verify limitations on consultant costs *24 CFR 570.200(d)*

*∗NOTE: The percentage limitation on Planning/Administration costs
applies to the overall administration of the CDBG grant by the grantee,
and not to individual activities.*

#### EXAMPLE OF A GRANTEE MONITORING LETTER TO A SUBRECIPIENT

> August 9, \_\_\_\_\_\_\_\_

Mr. John Brown

Executive Director

Midtown Community Development Corporation, Inc. (MCDC)

606 Main Street

Midtown, California xxxxx-xxxx

RE: Monitoring of MCDC\'s CDBG Activities

Dear Mr. Brown:

On July 21 and 22, \_\_\_\_, Elaine Black and Joshua Green, Monitoring
Specialists for the Midtown Office of Community Development, monitored
the MCDC\'s CDBG activities. The MCDC is a subrecipient of the City of
Midtown, and is carrying out two CDBG-funded programs: an economic
development loan program and a housing rehabilitation loan and grant
program. The economic development loan program provides financing for
both existing and start-up businesses, and funds a variety of business
needs such as real estate, equipment, inventory, leasehold improvements,
and working capital. The housing rehabilitation program assists
primarily owner-occupied, low- and moderate-income housing in the East
End neighborhood.

The period under review was from July 1, \_\_\_\_ to June 30, \_\_\_\_.
In addition to examining relevant files in the course of the review, the
Monitoring Specialists met with you, the MCDC Finance Director (Jane
White), and the MCDC program directors for the economic development and
housing rehabilitation programs (Bill Blue and Yvonne Grey,
respectively). The Monitoring Specialists also visited two assisted
projects/cases for each program. An exit conference was held with you
and your staff at the MCDC offices on July 22, \_\_\_\_, to discuss the
results of the monitoring.

The purpose of a monitoring visit is to determine whether the
subrecipient has implemented and administered CDBG-funded activities
according to applicable Federal requirements. In this monitoring review,
particular attention was paid to compliance with eligibility and
National Objective requirements. Other areas emphasized were financial
management systems, procurement practices, compliance with civil rights
requirements, and use of program income.

Overall, the MCDC is making diligent efforts to comply with applicable
Federal requirements. The Monitoring Specialists found that the MCDC had
achieved significant improvements in their financial management systems
and management of program income. During the previous monitoring visit,
these two areas had been the source of several serious findings
regarding inadequate internal controls and failure to keep proper
records on receipt and use of program income. The most recent review,
however, revealed that the MCDC\'s systems and procedures in these areas
are now satisfactory. In fact, the MCDC\'s new bookkeeping system for
tracking and reporting on the use of program income, with its automated
generation of monthly reconciliations and reports, is exemplary. This
office will be recommending its adoption by several other subrecipients
in our community.

As a result of this most recent review, we are making two new findings
and one concern regarding the use of CDBG funds. A *finding* is defined
as a program element that does not comply with a Federal statute or
regulation, whereas a *concern* is either a potential finding or a
program weakness that should be improved to avoid future problems. The
findings and concern are detailed below:

[Finding Number 1 -- Public Benefit Requirements for Economic
Development Loans]{.underline}

Section 570.203 of the CDBG regulations provides that CDBG funds may be
used to assist a for-profit business, provided the grantee ensures that
the appropriate level of public benefit will be derived before funds are
obligated for that purpose. In the case of your economic development
loan program, this means that a minimum number of full-time equivalent
(FTE) jobs must be created or retained for each business assisted, in
relation to the amount of CDBG funds being provided to the business.
Moreover, in order to ensure that the assistance provided does not
unduly enrich the business, the subrecipient is expected to perform
basic financial underwriting of each potential loan to determine that
the amount of the contemplated financial assistance is not excessive,
taking into account the actual needs of the business in making the
project financially feasible. Therefore, a CDBG grantee must review a
subrecipient\'s files for documentation demonstrating that both of these
requirements are being met.

The recent review revealed that at least some of MCDC\'s project files
lack sufficient documentation to demonstrate that basic financial
underwriting was conducted. Three loans were reviewed in our sample of
the files: No-Pest Termite Control, Sportsworld, and New Day Bakery. The
files contained financial statements from each business. However, other
documentation was not found to indicate that a financial analysis was
conducted and a determination made that the level of assistance provided
was appropriate. There was also a lack of information that would
demonstrate that the number of FTE jobs to be created by these
businesses will meet the public benefit standards (i.e., that no more
than \$35,000 per FTE job to be created was being provided to each
business).

[Corrective Action]{.underline}

MCDC must provide documentation to demonstrate that, for each of these
loans listed above, a financial analysis was conducted and a
determination made that the level of loan provided was appropriate given
the circumstances, and that a determination was made that the public
benefit limit mentioned above would be met, given the number of jobs
expected to materialize. This documentation must be provided to the city
of Midtown within thirty (30) days of the receipt of this letter. MCDC
must also certify to this office that each of the remaining project loan
files contains the documentation missing from these three case files.
Lastly, for the next two loans, MCDC is requested to submit
documentation supporting these two requirements (financial underwriting
and public benefit) to our office for review in advance of loan
approval.

[Finding Number 2 − Program Benefit from Economic Development
Loans]{.underline}

Section 570.200(a) of the CDBG regulations requires that each activity
assisted with CDBG funds meet one of the three National Objectives. Each
provision of assistance to a for-profit business is considered a
separate activity; therefore, each business so assisted with CDBG funds
must meet a National Objective, and each loan file must contain relevant
documentation to that effect. The MCDC has indicated that its economic
development loans will meet the National Objective of principal benefit
to low- and moderate-income persons through the creation of jobs for
low- and moderate-income persons, and Section 570.506(b)(5) sets forth
the requirements for documentation of the National Objective in such
cases.

The July \_\_\_\_ monitoring visit revealed, however, that some MCDC
economic development loan project files (cases number A-13, A-17, and
A-18) lack the necessary documentation to demonstrate that a National
Objective has been met through the creation of jobs, per 570.506(b)(5).

[Corrective Action]{.underline}

MCDC must provide this office with documentation regarding the creation
of jobs for loans number A-13, A-17, and A-18. The documentation should
include an accounting of the actual number of full-time equivalent
positions created, by title, and the number of positions filled by low-
and moderate-income persons. For each low- and moderate-income person
hired, MCDC must also identify the method it used to determine family
income prior to the person's being hired, e.g., the Private Industry
Council (PIC) referral or copies of the self-certifications. If a
self-certification is used, it must be signed by the employee and
clearly advise that the information may be subject to verification.

Secondly, for all future activities, MCDC must assure this office that a
system is in place to maintain documentation for a National Objective
for each provision of assistance to a for-profit business.

Lastly, we advised the MCDC staff to provide language in its written
loan agreements that would impose consequences upon any business failing
to demonstrate a good faith effort in hiring the necessary percentage of
low- and moderate-income persons.

[Concern Number 1 − Compliance with the escrow account requirements set
forth in 24 CFR 570.511]{.underline}

The above referenced regulation sets forth four basic requirements for
the use of escrow accounts:

> 1\. The use of escrow accounts is limited to loans and grants for the
> rehabilitation of primarily residential properties containing no more
> than four units each.
>
> 2\. An escrow account shall not be used unless the contract between
> the property owner and the contractor selected to do the
> rehabilitation work specifically provides that payment to the
> contractor shall be made through an escrow account.
>
> 3\. All funds withdrawn under this section shall be deposited into one
> interest earning account with a financial institution.
>
> 4\. The amount of funds deposited into an escrow account shall be
> limited to the amount expected to be disbursed within 10 working days
> from the date of deposit.

Although the MCDC housing rehabilitation program has been able to meet
these requirements thus far, a proposed change in the structure,
staffing level and procedures of the MCDC\'s Finance Office has raised
some concerns about the continued ability of MCDC to achieve the 10-day
standard for disbursement of escrow account funds.

[Requested Action]{.underline}

We request that MCDC, within thirty (30) days of receipt of this letter,
forward a detailed description of the proposed MCDC Finance Office
re-organization that will reassure this office that there will continue
to be a capacity to disburse escrow account funds within ten working
days.

We look forward to receiving your responses within thirty (30) days of
receipt of this monitoring letter by MCDC. If there should be any reason
why your organization would have difficulty responding by this deadline,
please contact me immediately.

We should add that the findings from our review, in our view, do not
reflect negatively on MCDC\'s staff and their dedication to ensuring the
success of the referenced programs. As previously mentioned, this
office\'s Monitoring Specialists saw ample evidence of significant
improvements that have been made by MCDC over the last year in the
operations of its two CDBG-funded programs.

The Monitoring Specialists also appreciated the MCDC staff\'s continued
assistance throughout the monitoring visits.

> Sincerely,
>
> Ilsa Aqua
>
> Director
>
> Midtown Office of
>
> Community Development

REVIEW OF IPA AUDIT REPORTS

In reviewing IPA audit reports, ask yourself the following questions:

-   ***Does the audit accurately reflect program requirements and
    funding allocations, and the condition of subrecipient
    record-keeping systems?***

**Verify IPA Audits**

There can be considerable variation in the quality of the work done by
IPAs. Therefore, before you can use the information in an IPA audit, you
must first decide whether the auditor\'s review was adequate. Check to
make sure that:

(1) the IPA is properly qualified;

(2) the allocations, program periods, categories of expenses, and other
    data relative to the CDBG program are consistent with your
    understanding of what the correct figures should be;

(3) the audit reflects the compliance tests and reporting requirements
    specified in OMB Circular A-133; and

(4) the audit report reflects any uncorrected deficiencies in the
    subrecipient\'s system that you already know about.

  -----------------------------------------------------------------------
  ***A good audit will include a "Management Letter," which is sometimes
  not appended to the formal Audit Report.***

  -----------------------------------------------------------------------

-   ***Did the IPA give an "unqualified" or "qualified" opinion?***

A "qualified" opinion may mean that the subrecipient\'s systems were so
inadequate or its documentation so incomplete that the auditor could not
offer its opinion with assurance. This is usually a sign of **serious**
problems.

-   ***Were there "repeat" findings?***

You should always be concerned if the subrecipient hasn\'t corrected
findings from a previous audit.

-   ***Were there any questioned costs?***

Most IPAs go to considerable lengths to resolve questionable expenses
before they issue a report. Therefore, numerous questioned costs, or a
single questioned cost of significant size, may mean the subrecipient is
doing other things wrong.