59

Training process was not in complete compliance with established procedures.

‘The training process in many offices was not in complete compliance with established
procedures because Individual Development Plans (IDP) were not complete or not current. In
addition, we found that one office was not maintaining training records for all agents located in
that office.

OIG Manual Chapter 1092 requires IDPs for all OIG employees.

Offices have stated that they thought IDPs were no longer required. They said it was
their understanding that the new OASIS system made IDPs unnecessary.

As aresult, employees are receiving training without formal planning. This could lead to
employees receiving training which is not job related or will not enhance their performance.

‘Recommendation:

The Office of Management and Policy should determine if the training module in OASIS
will adequately replace IDPs. If so, OIG Manual Chapter 1092 should be revised to reflect this
change in policy. If it is determined that OASIS will not adequately cover planning, the Office
of Management and Policy should remind offices of their responsibility for maintaining IDPs for

all employees. Offices should also be told that they are responsible for maintaining training
records for all employees.

4


2RESENTATION BY:
Patricia Fields
Kitty Woodley

Danialla Weatherly
Russ Greata

Wanda Ritter
Kitty Woodley

Phil Schulte

123

AGENDA
PAGE?
3
3

12

17


25

latest self-assessment of management controls under the Federal Managers’ Financial
Integrity Act,* HUD added contracting as a new material weakness. The 2020 plan also
includes an effort to redesign the contract procurement process.

HUD has recently appointed a chief procurement officer who will be responsible for
improving HUD procurement planning and policies, reviewing and approving all contracts
of over $5 million, and implementing recommendations that may result from an ongoing
study of HUD's procurement practices by the National Academy of Public Administration.
HUD is also establishing a contract review board, composed of the chief procurement
officer and other senior HUD officials, that will be responsible for reviewing and
approving each HUD program office's strategic procurement plan and reviewing the
offices' progress in implementing the plans. In addition, HUD is establishing standard
training requirements for the HUD staff responsible for monitoring contractors’ progress.
and performance by including standards relating to monitoring contractors in its system
for evaluating employees’ performance. HUD is also planning actions to integrate its
procurement and financial systems.

In addition, HUD officials told us that they are planning to take actions to strengthen the
Department's oversight of REAM contractors and to involve headquarters in ensuring that
field staff effectively oversee the contractors’ performance. Furthermore, with respect to
the problems found in property disposition contracting, single-family housing officials
have proposed changes that they anticipate would result in only a minimal inventory of
properties and therefore only a limited need for REAM contractor services. Specifically,
according to HUD Single-Family Housing Division officials, the Department plans to sell
the rights to properties before they enter inventory, thus enabling them to be quickly
disposed of once they become available. Although the details of these sales, which HUD
refers to as ‘privatization sales," remain to be developed, HUD envisions that properties

Office of Chief Financial Officer.


COMMITTEE ON GOVERNMENT REFORM AND OVERSIGHT
DAN BURTON, Indiana, Chairman

BENJAMIN A. GILMAN, New York HENRY A. WAXMAN, California
J. DENNIS HASTERT, Illinois IM LANTOS, California
CONSTANCE A. MORELLA, Maryland ROBERT E. WISE, JR., West Virginia
CHRISTOPHER SHAYS, Connecticut MAJOR R. OWENS, New York
CHRISTOPHER COX, California EDOLPHUS TOWNS, New York
ILEANA ROS-LEHTINEN, Florida PAUL E. KANJORSKI, Pennsylvania
JOHN M. McHUGH, New York GARY A. CONDIT, California
STEPHEN HORN, California CAROLYN B. MALONEY, New York
JOHN L. MICA, Florida THOMAS M. BARRETT, Wisconsin
‘THOMAS M. DAVIS, Virginia ELEANOR HOLMES NORTON, Washington,
DAVID M. McINTOSH, Indiana DC
MARK E. SOUDER, Indiana CHAKA FATTAH, Pennsylvania
JOE SCARBOROUGH, Florida ELIJAH E. CUMMINGS, Maryland
JOHN B. SHADEGG, Arizona DENNIS J. KUCINICH, Ohio
STEVEN C. LaTOURETTE, Ohio ROD R. BLAGOJEVICH, Illinois
MARSHALL “MARK” SANFORD, South DANNY K. DAVIS, Illinois
Carolina JOHN F. TIERNEY, Massachusetts
JOHN E. SUNUNU, New Hampshire JIM TURNER, Texas
PETE SESSIONS, Texas ‘THOMAS H. ALLEN, Maine
MICHAEL PAPPAS, New Jersey HAROLD E. FORD, Jr., Tennessee
VINCE SNOWBARGER, Kansas —
BOB BARR, Georgia BERNARD SANDERS, Vermont
DAN MILLER, Florida (Independent)

RON LEWIS, Kentucky
Kevin BINGER, Staff Director
DanieL R. MOLL, Deputy Staff Director
Davip A. Kass, Deputy Counsel and Parliamentarian
JupiTH McCoy, Chief Clerk
PHIL ScHILIRO, Minority Staff Director

SUBCOMMITTEE ON HUMAN RESOURCES
CHRISTOPHER SHAYS, Connecticut, Chairman

‘VINCE SNOWBARGER, Kansas EDOLPHUS TOWNS, New York
BENJAMIN A. GILMAN, New York THOMAS H. ALLEN, Maine
DAVID M. McINTOSH, Indiana ‘TOM LANTOS, California
MARK E. SOUDER, Indiana BERNARD SANDERS, Vermont (Ind.)
MICHAEL PAPPAS, New Jersey THOMAS M. BARRETT, Wisconsin
—_ — DENNIS J. KUCINICH, Ohio

EX OFFICIO
DAN BURTON, Indiana HENRY A. WAXMAN, California

LAWRENCE J. HALLORAN, Staff Director and Counsel
SAMANTHA SHERMAN, Professional Staff Member
Jesse S. BUSHMAN, Clerk
CHERRI BRANSON, Minority Counsel

ap


119

EXECUTIVE OFFICE OF THE PRESIDENT
OFFICE OF MANAGEMENT AND QUDGET
‘WARANNETON, OC. SOsno

EMDEANDUA TO EMELDA JOHNSON

‘SUBJECT: A-76 Waiver
four August 10, 1995, memorandum requests a waiver frow the OMB

Sirculer ‘A-76 requirements for a cost-penefit study before
contracting for certain Single Fenfiy Servicing and 4 Binge Family
Property Dicposition activities. I am confirsang the results of
your cofversations vith OMS and Rational Performance Review staff
concerning the request.

The decision to consolidate Single Family Servicing and single
raaely Preece Disposition from 70+ locations to five ave servace
Centers, ject to union consultation and Congressional
notification, is consistent with the 19 Departaent 's reinvention
Dlueprint. ‘The decision, in turn, to contract for certain
activities at the consolisated sites (or any individual site) is
aubject to the requirements of both Section 5.g. of the Federal
Workforce Restructuring Act and Circular A~

As discussed with grate. the requirements of Section 5.9, of the
Restructuring Act take precedence. The Act requires, under
certain circumstances, a i cost-benerit study before an ayency
contracts out activities. Unlike A-76, there is no provision for
waiving this requirement. If the Department determines that the
Act does not apply, then the requirexents of A-76 must be net.

Circular A-76 sets out several conditions which must be set
before a waiver for a cost-benefit study can’be granted. This
detexuination and waiver can be made by the Departwent. Xf the

Department 38 not willin to waive the requirement, then the
cost-benefit study should be conducted, or another approach
carrying out the activities found. I understand that Bob Dodge
of the EPR discussed with you the possibility of “joint ventures”
with the private sector for asset sales. Asset sale joint
ventures are not considered contracting out, and are not

Other technical comments concerning the requirements of the
Restructuring Act and the Circular are provided in the
attachment. I would specifically arav your attention the


68

So we've gone into it in greater depth in our committee with our
staff work.

Til just end by saying, is there anything that any of the four of
you would like to say before we go to the next panel? OK, thank
you very much.

Our next panelist is Stephen Carberry, the Chief Procurement
Officer, Department of Housing and Urban Development; accom-
panied by Howard B. Glaser. And I'd invite both of you to come for-
ward and remain standing and I'll swear you in.

Mr. Kucinicu. Mr. Chairman, I don’t know Mr. Carberry, but I
know HUD.

Mr. Suays. I know that. [Laughter.]

If you would stand, please.

‘itnesses sworn.)

Mr. Suays. Mr. Carberry, just before you start your testimony,
I just want to make sure we have the proper perspective. You are
hired as of when? How long have you been working at HUD?

Mr. CarBErry. About 2% months. I came on March 17.

Mr. Suays. We all recognize that you've been in for 2%2 months,
and we know that you have tremendous expertise in this area be-
cause of your past employment, but we know that you are just get-
ting your feet wet in a sense. The bottom line is we recognize
you've been in 2¥2 months.

Mr. CARBERRY. Thank you, Mr. Chairman.

Mr. SHays. And we welcome your testimony and we look forward
to having a dialog with you.

STATEMENT OF V. STEPHEN CARBERRY, CHIEF PROCURE-
MENT OFFICER, DEPARTMENT OF HOUSING AND URBAN DE-
VELOPMENT, ACCOMPANIED BY HOWARD B. GLASER, DEP-
UTY GENERAL FOR PROGRAMS AND REGULATIONS

Mr. CARBERRY. All right, thank you.

Secretary Cuomo had taken a personal, intense interest in pro-
curement reform at HUD. That’s why he generated the system of
the Chief Procurement Officer. That’s why I am at HUD. I came
here because I am convinced: that HUD really wants to do it well,
they are going to do it well, and they have the resources to do it

well.
Tl go through some of the elements of what we plan to do. What
we don’t have a problem with is whether or not this agreement on
the definition of the procurement problem at HUD. There is no dis-
agreement on that. IG, GAO, NAPA, everybody has looked at it.
'e all agree. And I have come for 2¥2 months. We all see the same
things and agree that, yes, they have their serious problems and
they need to be taken care of.
it we are having a disagreement on? What are the processes
needed to improve the process? Mr. Czerwinksi had said it earlier;
it depends on what we do now and we'll be doing that. We have
not done a good job of needs assessment. We have not done a good
job in procurement planning. Contracting oversight and monitoring
as not been what needs to be done.
What we have not followed is fundamentally sound business
practices. That’s been changed. First the Department indicated
that—or declared that—procurement was a major weakness, and


719

© Improve and Integrate Procurement and Financial Systems

‘We will continue to work with FSI team to create interfaces between the HUD
Procurement System (HPS) and the accounting system. In addition, we will modify HPS
to produce reports which will assist GTRs and contract specialists in their contract
monitoring and administration responsibilities.

slementatit ile:

Complete new release of HPS which
includes improved edits for data

integrity. Completed.
Complete coding for HPS/HUDCAPS

interfaces for reservation and obligation. By July 17, 1998
Interface operational By October 1, 1998
Modify HPS to incorporate improved By December 15, 1998

monitoring reports.


15
Mr. Chairman and Members of the Subcommittee:

We are pleased to be here today to discuss issues related to contracting activities at the
Department of Housing and Urban Development (HUD). Each year, the Department
purchases millions of dollars worth of supplies and services through contracts. However,
HUD's downsizing plans and allegations of contracting abuses have raised concerns about
the Department's ability to effectively manage its contracting workload. Our statement
today will discuss (1) the extent of HUD's reliance on contractors to carry out the
Department's responsibilities; (2) the weaknesses in HUD's current contracting practices,
particularly with respect to the oversight of property management contractors; and (3)
HUD's actions to address its contracting weaknesses. This statement is based on reports
that we issued regarding HUD's contracting activities, oversight of property management
contracts, and 2020 Management Reform Plan' and reports issued by HUD's Office of
Inspector General and the National Academy of Public Administration.

In summary, we found the following:

- HUD's annual obligations for headquarters contracts have steadily increased in
recent years, growing from $213 million in fiscal year 1991 to $376 million in fiscal
year 1996 (in constant 1996 dollars), according to HUD's data systems.
Furthermore, the Department will continue to rely heavily on contractors to help
carry out its responsibilities under its 2020 Management Reform Plan. For
instance, the plan calls for HUD to contract with private firms for a number of
functions, including physical building inspections of public housing and multifamily
insured projects; legal, investigative, audit, and engineering services; and activities
to clean up the backlog of troubled assisted multifamily properties.

"Procurement: Overview o ement: Overview of HUD's Contracting Activities (GAO/RCED-97-132R, May 9,
1997), Single-Family Housing: Improvements Needed in HUD's Oversight of Property
Management Contractors (GAO/RCED-98-65, Mar. 27, 1998), and HUD Management:
Information on HUD's 2020 Management Reform Plan (GAO/RCED-98-86, Mar. 20, 1998).


45

128

expense for your staff and so forth, as to what your net return is on
the property?

MS. WOODLEY: Do we ~~

AUDIENCE MEMBER: Could we know that number?

MS. WOODLEY: You know, the real issue is, I am not sure that we can
fine tune it, but we have some idea. I would think the, the answer te
that is, when we get a financial advisor onboard, we will certainly
work with that financial advisor to fine tune those kinds of expenses
and costs. I don’t think that that is something necessarily important
at this stage, for you to know. What we are really interested in, we
aze looking for some innovative ideas, some creative ideas as to what
you think the marketplace will bear based on your experiences as
perhaps being realtors or in the retail business, for REO. We don’t
have experience with the marketplace in this arena. And so, what we
are looking for is, through your experiences and your contacts, for
you to tell us via a proposal that you submit what you think the
market will go for. We don’t know. So, that is what we are really
looking for, What kind of an arrangement could be used for HUD to
accomplish its objective, with reduced staff, taking into
consideration that we don’t want to give properties away, but would
consider deferred payments, create financial arrangements, etc. Based
on what we have discussed here today, again, keeping in mind, that
there is, if you look at this as a spectrum from pipeline to bulk,
what could we do in-between, I mean, what is available? Maybe
pipeline is too extreme. I don’t know. How would you pool these
properties? You know, we certainly don’t necessarily think that we
are going to have some company come in and bay up our whole inventory,
considering the fact that we are largest retailer of REO propecties.
We are selling approximately 55 to 60,000 properties a year, so, we
don’t expect anybody to come in and buy up all of these properties for
some given period of time. So, what will the market bear? You know,
what kind of pool arrangemeat should we consider, regional, national?
What kind of investors, or purchasers do we need to gear this up
toward? We don’t know. We know that this is a new industry. I mean,
we know that there are not a lot of companies out there in the REO


134

What HUD is doing under its 2020 program is designed to con-
tract out. It is not designed to get the most efficient job done.

Mr. Towns. Let me thank you, Mr. Carlson and Mr. Harnage.
Mr. Chairman, I yield back.

Mr. Suays. Thank you, one of the companies in my district is
Pitney-Bowes, and I am not bringing it up as it relates to the fact
that they do services down in here for the Postal Services.

T just want to briefly say that when I went to visit the plant,
what was very exciting was that the people who showed me around
the plant were the workers, the union leaders, and they talked
about how jointly they had taken an entire floor in the building
and were able to do what they did in four plans into one floor just
because they had become so much more efficient, working together,
the laborers and management, and then they'd even been able to
reduce what happened on that one floor into half a floor.

And I am talleng a fairly large building. And it was just amaz-
ing. And the productivity of the workers was pretty incredible.

happen to believe that sometimes the private sector can do it
better, and I happen to believe that sometimes the public sector
can do it better. What I am struck by your message, Mr. Harnage,
is that you’re saying basically that the downsizing hap ened first.
It wasn’t a team effort to say how can we be more efficient and
then no longer need employees. And I think that’s pretty clear.

And so I have to take a role in that because it’s to my side of
the aisle to see if we can reduce the size of the Government, but
your message to me is that it’s got to be a cooperative effort.

But the other thing is that you urge us to—it seems to me, and
Td like you to expand on this—you urge us to compare what the
public can do at cost and how the private sector could do it, to see
if sometimes we're farming out something when in fact the public,
the employees within house, can do it more efficiently? How do we
do that? at’s the process that would determine that?

Mr. HARNAGE. Well, an A-76 is the process for doing that, and
I think the message that we're giving is sometimes misunderstood
because it’s a little untraditional. We’re not saying we're totally
against contracting out. There are times out that contractors can
do it better. The private sector can do it better, and we recognize
it.

What we're saying is competition—the competition saves the tax-
payers money regardless of who wins—and therefore competition

taking place in every instance where you can do that. It
ought to be fair competition, and that’s where the debate becomes.
Each side argues, is is not fair. This is fair.”

But A-76 is the best we’ve been able to come up, in cooperation
with the private sector, in cooperation with the administration, in
cooperation with the unions, and even the public. A-76 was rewrit-
ten about a couple of years, and it was improved, and there was
a provision put in there to bring it back in-house if it was more
feasible. That’s not being utilized. In’ fact the HUD officials didn’t
even know it was there until this morning.

Where we make a mistake, we make a mistake—an honest mis-
take but a mistake—it shouldn’t be a permanent one. And so, if
we're really into competition and we're really into getting the tax-
payers the best bargain, why aren’t we re-competing that every so


14

our large service contracts. For critical, complex HUD programs, Integrated Project
Teams (IPT) are being established. The IPT is comprised of personnel from the program
office, Office of General Counsel and contract specialists, along with other functional
specialists, as appropriate. This concept has been used in private industry and other

government agencies with great success.

Fifth, the Department is establishing ~again for the first time in its history—
mandatory training and certification for these contract managers. This includes both
program managers and contracting officers. Our goal is to create the best trained and

most professional cqntract management workforce in the federal government.

Sixth, the Department is well on its way to establishing an integrated financial
payments data system to provide contract managers with the information they need

through the enhancement of our information systems.

Finally, and perhaps most important, there is a culture change taking place across
the board at HUD in which protecting the public trust is seen as a key mission for all

employees; with zero tolerance for waste, fraud or abuse of HUD programs.

As the IG audit report indicates, contract problems at HUD are long-standing. In
fact, of the $1.5 billion in contracts identified in the audit, $1.1 billion involve contractors
with whom the Department contracted prior to 1993. In spite of the fact that these

contracts stretch as far back as 1984, the Department is committed to taking aggressive

4


32

just go get contractors. The trouble with contracting is actually
quite a difficult task, not an easy out.

Mr. Kucinicu. Well, I think this is very easy to sum up, Mr.
Chairman. It’s in my charts. Staffs go down—and this is kind of
like Newsweek, you know—staff down, contracts up, controls out.
I mean how difficult is this to understand? I thought Mr.
Czerwinski’s testimony here was right on. He described staff reduc-
tions for the 12,823 in 1993 to 9,200 in 1998. It’s downsizing. It’s
contracts increase. Now there’s contractors that have contractors.

Mr. Chairman, I am glad you've called this hearing. I am looking
forward to hearing more. This is becoming more and more interest-
ing, and by the way, through all of this we should remember there
are people who live at these places.

Mr. Towns. Will the gentleman yield? So what are you saying,
as soon as we finish this hearing we should go to the Budget Com-
mittee?

Mr. KucInNIicH. No, I think we should go over to HUD’s office and
talk about why they run the Department this way. But this is a
culture. This just didn’t happen. That’s the problem. This is a cul-
ture, and we have a culture which has developed to dismantle gov-
ernment.

Let everyone all over the country know that when you get into
a situation where you contract out all these services, you’re goin;
to end up losing control and this idea of continuing to cut personne!
inevitably produced chaos. It has to.

But people are still paying the same taxes. Mr. Chairman, I have
never been a fan of privatization. Back in the days when I was
mayor of Cleveland, I stopped a takeover of a municipal light sys-
tem, and as I get more and more involved in the Federal Govern-
ment I can see that privatization just ends up setting up a system
which doesn’t serve anyone except the contractors.

And that might be a broad-based statement that doesn’t take
into account these many contractors who are toiling on behalf of
the people, but I haven’t met them yet, but I'll find them some-
where. Maybe you'll find them. I am going to go vote.

Mr. SHays. ox. I am going to just say that we will go and vote.
We are going to have disagreements because I happen to believe
that privatization can be done well. It just depends on how you do
it. So this is why we have fun in this committee.

Mr. Towns. We definitely have disagreements, but I think that,
here again, cutting the budget I mean to the point, you know, what
do you do here? That’s the point. You're talking about, you need
some resources as well. There’s a lot of things here that have to
be addressed. So I agree with you, Mr. Chairman. I think we're
going to have an interesting day.

Mr. SHays. My understanding is when HUD was at about 20,000
people they had the same problems. So we'll keep debating this
issue, and I got the last word. (Laughter.]

Mr. Kucinich, are you coming back?

Mr. Kucinicu. I wouldn’t miss it.

[Recess.]
Mr. Towns [presiding]. Let me begin by—I have some concerns
that the audit procurement practices will have a chilling effect on


103

Curriculum Vitae of Terry A. Carlson

Mr. Terry A. Cartson has experience in applying and interpreting the rules, regulations,
standards and guidelines applicable to companies doing business with the US
Goverment. He concentrates primarily in helping contractors use the procurement
regulations to their advantage when preparing proposals, evaluating business structures,
‘selecting information technology solutions, preparing requests for equitable adjustments,
defending claims made against them by the Govemment.

‘Some of Mr. Carlson's recent engagements include:

* Developing policy and procedures manuals covering cost estimating, purchasing,
project management and contract administration;

* Providing expert testimony on cost and pricing issues before the GSBCA and the
GAO;

* Assisting in the selection and implementation of an enterprise wide resource
planning system;

* Assisting in the resolution of audit issues raised during final indirect cost rate
audits;
‘= Assisting contractors in preparing claims stemming from contract termination and
delays; and
= Assisting contractors in resolving defective pricing issues.
Before establishing T.A. Carison & Company, Mr. Carlson was a Professor of Financial
Management at the Defense Systems Management College. He also served time as a

consultant in the goverment contractor advisory services department of a “Big 6”
‘accounting firm.

‘As an assistant professor of accounting at Villanova University, Mr. Carlson taught
courses in financial accounting and management information systems. Mr. Carison has
also developed and presented courses on contracting and the procurement process for
the George Washington University Schoo! of Continuing Education and the George
‘Washington University Law School.

Mr. Carlson also served as an auditor with the Defense Contract Audit Agency, where he
‘was responsible for evaluating contractor submissions to ensure that they were prepared
in accordance with applicable regulations and standards.

Mr. Carlson eamed the Bachelor of Science degree in Accounting from Virginia
Commonwealth University and the Master of Business Administration degree from
George Mason University. Mr. Carlson is a certified public accountant in the
Commonwealth of Virginia and is a member of the American institute of Certified Public
Accountants, the Virginia Society of Certified Public Accountants, and the National
‘Contract Management Association.


39

that is, there was for instance not a supervisory signature on an
invoice when there should have been, there wasn’t a review by the
proper secondary level—that kind of thing.

But that review covered not just Safe Home, it covered all ex-
penditures—travel vouchers, everything in the OIG—and I have a
copy of it for you, if you would like. I brought it because it’s dis-
cussed this morning in the Wall Street Journal, so I brought a copy
if you would like to have a copy.

Mr. Towns. Mr. Chairman, yes, may I ask that we receive the
information and also share it with the Banking Committee?

Mr. Suays. Without objection.

Ms. GaFFNEY. Absolutely. Absolutely.

[The information referred to follows:]


64

Mr. Towns. I yield back.

Mr. Suays. There are different elements of this hearing that
we're not going to get into in depth. I mean one is how much.
Should there be any contracting and at what level? I don’t care to
get into the debate now about that because we have to vote—a lot
of time on that policy issue. What I care about is determining
what, under present law, is allowed to be contracted out and then
how well we oversee it.

What I hear is a pretty devastating report that HUD contracts
out and doesn’t do very good oversight, doesn’t have the people ca-
pable to do the oversight, and even if it has the ple capable,
they seem incapable of following through and making sure that
people who are paid for services actually do the job. It’s pretty seri-
ous, and we're not talking about a few million dollars; we’re talking
really in terms of billions of dollars.

Just very briefly, I have three urban areas I represent, and our
public housing authorities are pretty good, but one was on the trou-

led list and was taken over by HUD; and we spent literally tens
of millions of dollars, if not over $100 million, and we had to redo
what was sent to the Bridgeport Housing Authority because it was
done so poorly.

We have a new housing director who for the last 10 years—11
years—has taken money, and he spent it so well, and what I see
are beautiful facilities, well run and well kept; and I am very proud
of what we did with our public money.

So, we are sending lots of money to the housing authorities, and
we want to make sure they’re overseen well. I’d also say for the
record that this committee has not provided the kind of oversight
of HUD in the last few years because we feel we’ve had two ve
good secretaries, and we have five different departments we loo!
at, but we give a lot of weight to what both of you have done—your
agencies have done—and feel our contribution is just making sure
that your story hears the light of day because we are seeing HUD
start to respond to it.

What I am hearing, though, is that our responsibility in the next
year is to make sure that they carry out on their plans, and if they
garry out on their plans, rather than our criticizing them for past
deeds, we are going to congratulate them for what they found and
just move from there.

So, we have capable people managing HUD. They've come into
a culture that’s difficult, and we are going to just make sure that
they do their job, and we are going to obviously speak with Mr.
Carberry and find out what he thinks about his challenges.

Let me just ask this question: How do we distinguish between
what can be done and what can’t be? I guess what we do is we say
there are certain prohibitive services. Aside from the service that
we do, that we contract out, how well do we over see them, but
there are some services we can’t get into: personal service con-
tracts, advisory and assistant service contracts, State legislative
initiatives, and contracts to perform inherently governmental func-
tions.

This would probably be where Mr. Kucinich and I would prob-
ably get in our debate as to what is inherently government service.
Is the third area the one where we would tend to have the biggest


AUG-03-98 MON 10:56 AH  OIG-HIDATLANTIC

Advanced Technology Systems (ATS)
‘American Management Systenss, Ine,

35

‘5889

5953

16326
16330
12644
14877
14488
18501
14703
14753
18065
18150

FAX NO, 215+656+3409

Orig
Contract
Amount

$100,000 - $2,500,000
$200,000 - $3,000,000
$29,790,334
$243,604

$292,000 - $3,761,731
$350,000 - $2,907,578
$29,117 - $2,271,235
$1,680,257
$525,908,431
$38,229,572
$1,900,000
$13,000,000

P02

Final,
Contract
Amount

$3,049,741
$3,119,642
$51,763,505
$16,073,098
$38,539,294
$43,083,678
$30,929,554
$3,680,257
'$1,000,000,000+
129,044,265
‘$9,582,790
$41,846,000


67

Mr. KucINIcu. So your testimony then would be corrected to in-
dicate that——

Ms. GaFFNEY. It happened after my testimony, yes.

Mr. Suays. But the record should state that, and you did state
that you were pleased, but the statement here does not reflect what
you said.

Ms. GAFFNEY. No, that’s correct, but the second part of what you
are reading, which is we have yet to see a definition of the Con-
tract Review Board’s charter, all those other things. That remains
correct.

Mr. Kucinicu. OK, then let me continue. We have the form of
a solution with a chief information officer, and yet we see no offi-
cial definition of those authority’s responsibilities are placed in an
organization. Is that still correct?

Ms. GAFFNEY. That’s correct.

Mr. Kucinicu. And we have the form of a solution with a con-
tract management review board. See, I have to tell you, I am not
as optimistic about what I am seeing here. I don’t see a—this is
a problem with some kind of bureaucratic schematic. I see it as a
virus that infects every decision that’s made at every level because
you start with the logic of a system which is set up guaranteeing—
where contractors are contracting out the contractors, lack of con-
trol by HUD, and it’s good news that they have defined some re-
sponsibilities for Mr. Carberry. We will be looking forward to hear-
ing him, but I don’t know fH 'D’s learned anything.

Frankly, Mr. Chairman, it’s going to be—it’ll remain to be seen
whether HUD has learned anything at all from any of this, instead
of just coming up with cosmetics, and this is, you know, I too rey
resent an urban area where there’s a lot of people who live in pub-
lic housing and in Government-subsidized housing, and people de-
pend on us to be able to see government work.

And I am a supporter of the administration, generally speaking.
I am very concerned when I see these pictures, but it’s not just the
pictures. I’ve seen it in my own district, and I see it in lack of con-
trol over Government programs which impact on people’s lives. I
Want the administration to know, cosmetics are not going to work

ere.

There needs to be some—apparently, in my view, there need to
be some structural changes in the way that HUD is doing business,
and simply doing the same old thing a different way isn’t going to
cut it. I want Mr. Cuomo to understand that. Cosmetics are not
going to work here, and if you think you can come—if HUD thinks
it can enter into this by just appointing some committees and giv-
ing someone a title and no responsibilities will not work.

I just want to say that, on behalf of the people I represent, who
live in subsidized housing and who are not getting the services
they ought to be getting or who are not being taken care of in the
way they ought to, where the Government is passing off its respon-
sibility, | happen to think Government can work. I really believe
it can, but I also believe that we have a process here that is out
of control. So that’s my homily for the day.

Mr. Suays. If Mr. Towns is not objecting, I think what we'll do
is get to the next panel. You've introduced this issue nicely, and I
know you’ve been in contact with our staff on a lot of these issues.


104

Mr. Suays [presiding]. Thank you, Mr. Carlson.

Mr. Harnage.

Mr. HaRNAGE. Yes, thank you, Chairman Shays, and ranking
member, Mr. Towns, and other members of the Committee. T want
to thank you for the opportunity for appearing today and give you
some of the concerns OF AFGE. I have submitted my statement and
asked that it be entered into the record.

Now, Mr. Chairman, you’ve heard much today about how vulner-
able HUD is to contractor waste, fraud and abuse; and basically it’s
because HUD doesn’t properly manage or monitor its contracts for
commercial service. So I am not going to spend a lot of my time
talking about that except to urge Congress to get a handle on this
and protect the American taxpayers from such obvious mismanage-
ment of its resources.

I want to focus my remarks on the problems of HUD which are
self-inflicted, premeditated mismanagement, if you like, of the re-
sources with which Congress and the taxpayers have entrusted it.
HUD’s management is not about saving money or being efficient.
It’s about downsizing for the sake of downsizing. It’s downsizing
but it’s not rightsizing, and much of the testimony you’ve heard
today clearly supports that fact.

It looks to me as if someone out there wants to brag about how
small HUD has become or will become. But, in fact, in the future
HUD will be much larger, much more expensive and much more
wasteful if something isn’t done now. They’re pa ing a shell game
with the numbers of full time equivalents [| esi while under-
neath those shells are the hard-earned dollars of the taxpayers.

In the end HUD will be larger because of Federal contractor em-
ployees instead of Federal civilian employees. It will be more costly.
HUD does have a choice, although some of the indications of today
would lead you to believe they don’t have a choice. As I said, this
is a self-inflicted circumstance of downsizing.

I can tell you that it’s not the OMB A-76 process that they’re
using for contracting decisions. They’ve said today that they don’t
use it, but the reason is that they don’t have to. They didn’t say
it was a bad process, that they shouldn’t have to use. They simply
said they don’t have to.

And contrary to what you hear, my information is that an A-76
study has not been done at HUD in the past 10 years. In 1995
there was a request that went over to the administration request-
ing for a waiver from the A-76 and although they didn’t receive the
waiver they did receive a way around it by telling them that they
should classify it as a joint venture. Then they didn't have to come
under the A-76 study.

But sound business practices and Federal Government policy dic-
tates that any initial decision to make or to buy should be based
on sound cost comparisons, and A-76 requires that comparison.
The policy is in the best interests of the taxpayer, and HUD should
be following those rules.

Contracting out is a business decision. It’s an option to be consid-
ered, but HUD is making it a necessity. HUD has taken away the
options, ignoring sound business practices and ignoring the rules,
and HUD is doing so at your expense. A-76 is not the panacea. Ev-
eryone has a disagreement with some parts of it, but it’s the rules


a

126

you give me some other details?
AUDIENCE MEMBER: Too many people here for that.

MS. WOODLEY: On, okay. Okay.

Let me just say this, if I can help you somewhat, okay. We know that
we could improve our current operation. We know right now how we coul:
cut costs. We know how we could cut holding costs. I mean, if it is
a matter of re-engineering our current operation to get there, that i:
not the answer. We know how to do that. The issue here 4s that while
60 percent of our current operation is privatized right now. We use
contractors and national contractors and brokers, etc. The issue is
that even with such an operation that takes a sizeable number of HUD
staff, those staff are not going to be available to us in the future
to oversee contractor activities even, and to make decisions about
how, you know, We should go about selling our properties, you know,
should we lower the price, should we do an auction, etc., etc. We
know how to re-engineer our business. We know how to re-engineer this
program. So, if that is what you are getting at, that is not the
answer. We know how to do that. The answers that we are not going
to, the issue is, we are not going to have the staff out there to
maintain such an operation even if we were to re-engineer it. We are
just not going to have the staff available to use to do that. So,
what we have to do is to come‘up with an entizely different way of
doing business. And that is the real issue here.

So, I don’t know if that answered your question, but I hope that it
did.

RODIENCE MEMBER: Thanks.

MS. WOODLEY: Okay.

AUDIENCE MEMBER: The solicitation, if I remember correctly, talked
about the pipeline concept and the possibility even of the deal that,
in effect, conveys the defaulted loans before foreclosure is complete.
MS. WOODLEY: No, no, he said loans, but I am sure he meant properties.
I mean, he may have referred to loans, if that is what you are leading
to. No, we are not talking about loans at this point. We are
steictly dealing with properties.

AUDIENCE MEMBER: I understand, but I want to talk about loans, that



45

TABLE OF CONTENTS

Executive Summary

Objective, Scope and Methodology
Results of Review:
Major Findings
Minor Findings
‘Other Items
Appendix A
Appendix B
Appendix C

ok

2

15

7
18


87

Mr. Says. Thank you, Mr. Carberry. It’s nice to have you here
Mr.—is it Glaser?

Mr. GLASER. Glaser, yes.

Mr. SHays. Thank you, Mr. Glaser. I don’t think we need to
spend a lot of time now, but I do think that we're establishing a
relationship, and you know that our staff will be in contact with
you, and you know that there will be continual review and over-
sight.

So, as far as I am concerned, you start with a clean slate with
us, and you’ve won my heart in the sense that youre willing to ac-
cept accountability and that you feel you have the authority as well
as the resources to do the job. If yo find that that’s not the case,
then you need to get back to us. We are going to hold you account-
able, and then we need to be held accountable, if we don’t give you
the resources if you need them.

One thing that I want to say for the record: The initial response
of HUD to the IG was one that was seemingly resistant, and who-
ever at HUD who counseled HUD to be more willing to accept the
fact that the system was flawed and that we need to move forward
deserves congratulations, and if anything that rson has done a
lot to protect HUD from our getting in the dialog of proving how
bad it is, and we don’t have to do that. I am convinced that you
know it’s bad and that we need to make changes, and I am con-
vinced the Secre does as well.

So whoever at was able to get that across deserves a pat
on the back. He or she has protected the Secretary, not hurt him.

Mr. CARBERRY. Mr. Chairman, when I was interviewed by—one
of the interviews was with the gentleman on my left. He’s the one
that told me before I got hired by HUD that was the case.

Mr. Says. OK, well, it’s nice, Mr. Glaser, that you did that. I
want to know these questions, and they’re general, but what’s the
biggest challenge so far that you're having to face. Then I want to
know how do you change a culture not just a process that a culture
could corrupt. In other words, how do you change the culture?
That’s a big thing, but first tell me what's the biggest challenge?
Or maybe changing the culture is the biggest challenge.

Mr. CarBERRY. I don’t want to minimize that at all. The first one
for me was just learning HUD. My experience in contracting—I
think I know contracting pretty well, but what I didn’t know was
HUD and how to put the two together, and I’ve gotten a lot of help,
and on the other hand, I needed a lot of help, but I think it’s
worked well.

T’ve been learning HUD—I've still got a lot to learn. I don’t even
know at this point how much I don’t know about HUD, but that’s
the critical part, is the most difficult thing that I’ve got to do. I
think it’s true of anybody coming into a new job.

On changing the culture, I think——

Mr. Suays. Let me just ask you this: You’ve been there 2¥2
months. So what do you think is going to be the most difficult area
of change in procurement? What area will be the most difficult—
the training, getting a handle on what all the contracts are? What
will be the biggest?

Mr. CarRBERRY. I don’t think the training is. I think we're well
on our way to solving the training problem, and that’s going to be


contracts. Under this type of contract, one of the
critical steps for the Department is the final or
close-out audit. This is the Department’s agsurance
that the contractor charges only costs directly related
to the contract and that applicable overhead rates and
other fees are appropriate. OIG auditors found a high
number of cost plus contracts that had been completed,
for which close-out audits had not been performed or
requested.

7. Interagency Agreements. The Department paid other
Federal Agencies over $263 million for services
provided under numerous interagency agreements. In
some instances, these agreements go back many years,
and current GTRs could not explain certain provisions
of the agreements, or what cost methodology was used to
determine reimbursable amounts.

The September 30, 1997 audit report illustrates each of
these problems in terms of specific HUD contracts.

While the OIG audit was in process, the Department
contracted with the National Academy of Public Administration
(NAPA) for a review of contracting by the Federal Housing
Administration (FHA). The initial NAPA review, issued in May of
1997, concluded that FHA’s contracting system neither responded
effectively to Department needs nor adequately ensured
accountability. The Congress then directed HUD to contract with
NAPA for, among other things, a top-to-bottom redesign of the HUD
procurement system.

The first deliverable under the expanded NAPA contract was a
February 1998 Interim Report, which focuses on improvements
needed in FHA/Office of Housing contracting and makes
recommendations on how to bring about those improvements. NAPA’s
Interim Report reiterates the findings of the O1G’s September 30,
1997 Audit Report, as well as the findings of NAPA’s initial
review of FHA contracting. It concludes that:

©  Housing/FHA cannot accomplish its critical work with
the current [contracting] system.

© "Fixing" specific steps in. [the contracting] process
will not be sufficient to address [the] complex,
interdependent challenges of: ensuring accountability
and integrity; effective risk management; and effective
contract administration.

© Housing/FHA is unlikely to implement these [(NAPA’s]
recommendations without a clear mandate and
accountability.


HUD CONTRACTING: VULNERABILITIES AND
PROPOSED SOLUTIONS

FRIDAY, JUNE 5, 1998

HOUSE OF REPRESENTATIVES,
SUBCOMMITTEE ON HUMAN RESOURCES,
COMMITTEE ON GOVERNMENT REFORM AND OVERSIGHT,
Washington, DC.

The subcommittee met, pursuant to notice, at 10:05 a.m., in room
2203, Rayburn House ice Building, Hon. Christopher Shays
(chairman of the subcommittee) presiding.

Present: Representatives Shays, Towns, and Kucinich.

Staff present: Lawrence J. Halloran, staff director and counsel;
Samantha Sherman, professional staff member; Jesse S. Bushman,
clerk; and Cherri Branson, minority counsel.

Mr. Suays. I will call this hearing to order; welcome our wit-
nesses and welcome our guests.

Each year the Department of Housing and Urban Development
[HUD], enters into contracts totalling more than half a billion dol-
lars. Through thousands of complex agreements, HUD procures a
broad array of goods and services from the state-of-the-art software
to old-fashioned locks and hardware. Unquestionably, in pursuing
its mission to improve housing opportunity and build communities,
HUD believes contracting to be a critical tool.

But others have been very critical of HUD’s contracting. The
General Accounting Office [GAO], last year said HUD poses a,
“high risk,” and abuse, in part due to lax contracting practices. The
National Academy of Public Administration [NAPA], found signifi-
cant weakness in procurement practices at the Federal Housing
Administration [FHA], a part of HUD. Last September the HUD
inspector general [IG], issued a detailed audit report concluding the
Department’s inattention to contract management had, in many in-
stances, “resulted in effective and extremely costly contracts.”

These independent analyses raise serious questions about the
Department’s capacity to anticipate, negotiate, or monitor such a
diverse and costly contract portfolio. We address those questions
and HUD’s answers today.

Conceding the scope and gravity of the problem, HUD declared
contracting a material weakness, under the Federal Managers Fi-
nancial Integrity Act, and committed to systematic procurement re-
forms. The Secretary recently appointed HUD’s first chief procure-
ment officer.

These and other steps are a pood beginning, but today we seek
to be sure they are the start of a sustained effort to confront the

e))


42

EXECUTIVE SUMMARY

‘This review was performed of the Department of Housing and Urban Development's
(HUD) Office of Inspector General (OIG) operations. The review included operations of the
Immediate Office of the Inspector General, Office of Legal Counsel, Office of Management
and Policy, Office of Audit, and Office of Investigation in Headquarters. ‘The Offices of Audit
and Investigation operations in all district offices were reviewed, We reviewed records and
performed tests of transactions that occurred between October 1, 1994 and March 31, 1997 for
both the Salaries and Expenses and Operation Safe Home appropriations.

The objective of this review was to determine if OIG Headquarters components and
Git fs of Ani en Investigation ad conve an roses in lace prove
reasonable assurance that funds expended by the OIG were planned, approved, proper!
supported and for eligible purposes. In order to accomplish this, re eviewed toons fom al
aspects of OIG operations. ‘These included but were not limited to funds control, payroll,
credit card usage, ADP and other equipment, travel, and training.

We performed tests of transactions from the Salaries and Expenses appropriation for all
Headquarters operations and the Offices of Audit and Investigation in all district offices. In
addition, we performed tests of transactions for the Operation Safe Home appropriation in the
Office of Investigation. Our tests covered expenditures from both appropriations by selecting a
statistical sample of transactions excluding payroll and travel. Detailed results of our statistical
sample are presented in Appendix A. Based on our sample of Salaries and Expenses
expenditures, we have concluded with 95 percent confidence that errors in this appropriation
did not exceed $7,500. This equates to less than 0.1 percent, based on the population we
tested. For our sample of Operation Safe Home expenditures, we concluded with 95 percent
confidence that errors in this appropriation do not exceed $16,100. This equates to less than
1.7 percent based on the population we tested.

As part of our statistical sampling we also tested internal controls in the Salaries and
Expenses and Operation Safe Home appropriations to assess whether controls to ensure that
transactions were properly recorded and assets were adequately safeguarded from loss or
misuse were functioning as intended. Based on this testing, we concluded with 95 percent
confidence that the exception rate for Salaries and Expenses expenditures was at least 4.2
percent. For Operation Safe Home expenditures, we concluded with 95 percent confidence
that the exception rate was at least 12.6 percent (See Appendix A).

We used a judgmental sample to test payroll and travel. Results of this testing are
presented in the “Results of Review" section of this report.

We classified findings disclosed by this review as major and minor. Major findings
were categorized as such due to their being serious in nature or having occurred in mmerous
offices. Minor findings were less serious or occurred in only a few offices. This report does
not identify specific offices where the findings occurred, but they did not occur in all offices.


73

examines program offices’ strategic procurement and staffing plans to assure that they
encompass the critical needs of the Department and are not duplicative of other proposed,
ongoing or completed work. The CMRB reviews all plans for contracts that will exceed
$5 million, including legal review. New programs will be approved only after detailed
cost, schedule and performance parameters have been reviewed and justified. For capital
asset acquisition, HUD will follow the capital programming principles in OMB's capital
programming guide. For service contracting, we will use performance-based service
contracting, as appropriate, to reduce costs (including contract administration costs) and
increase satisfaction with contractor performance. These same parameters will then be
used to evaluate annual performance of the programs and for measuring the success of
programs when completed. As the chair of this committee 1 am currently leading the
Board in the review of planned FY 98 procurements. This summer, we will review

planned procurements for FY 99.

Fourth, for the first time in HUD’s history, contract management will be a full
time job. Until now, contract management was minor ancillary duty for staff already
overburdened with too many conflicting responsibilities. By creating a core group of full
time contract managers in each program area whose only responsibility is contract
management, the critical function of contract oversight and management will finally get
the attention and resources it deserves. Full-time personnel will manage the cost,
schedule and performance parameters of critical HUD programs using earned value

management system reporting for capital assets and formal quality assurance plans for


82

Provisional certification. The CPO may provisionally certify a GTR nominee who has
not completed the basic training requirements prior to appointment. The provisional
certification will specify the period in which the nominee must meet the requirements.
All provisionally certified GTRs shall complete intranet-based self-instructional GTR
course. GTRs with provisional certification shall be given priority for placement in the
next available formal GTR course.

Experience in lieu of training. As approved by the CPO, relevant experience may be
substituted for formal training requirements (either basic or advanced) on a case by case
basis.
Management Training. Departmental management personnel with programmatic
oversight for contracts are advised to complete a course providing a basic overview of the
contracting process and the role of the program office, e.g.
Procurement for Executives and Managers (1 day)
Re-certification Requirements

To maintain an active status, GTRs must renew their certification every two years. Re-
certification requirements include:

Continuing education. This may be met by completing ** hours of procurement and
contract-monitoring related training. Such training may include:

GTER refresher courses (HUD-sponsored or external)

HUD's intranet-based self-instructional GTR course (Note: the HCA may deny
the repeated use of this course if it used as the sole means of meeting this
requirement.)

Other procurement-related courses as approved by the HCA; and,

Satisfactory performance of GTR or GTM duties assigned during the
two-year period.

Lapsed certifications. GTRs whose certification have expired (i.e., not been renewed), will
have to complete the requirements for new certification.

Responsibilities:

Certifying GTRs. The CPO shall certify GTRs who have completed all requirements for
certification. The cognizant Primary Organizational Head in Headquarters or the cognizant field

3


HUD CONTRACTING: VULNERABILITIES AND
PROPOSED SOLUTIONS

HEARING

BEFORE THE

SUBCOMMITTEE ON HUMAN RESOURCES

OF THE

COMMITTEE ON GOVERNMENT
REFORM AND OVERSIGHT
HOUSE OF REPRESENTATIVES

ONE HUNDRED FIFTH CONGRESS
SECOND SESSION

JUNE 5, 1998

Serial No. 105-165

Printed for the use of the Committee on Government Reform and Oversight

ae

U.S. GOVERNMENT PRINTING OFFICE
50-816 WASHINGTON : 1999

For sale by the U.S. Government Printing Office
‘Superimendent of Documents, Congressional Sales Office, Washington, DC. 20402

ISBN 0-16-057983-X
3



108

competitive organizational structure and the staffing necessary to ensure that the service
is performed in an efficient and cost effective manner. This is usually referred to as the
Most Efficient Organization, or MEO. Under the OMB Circular A~76 guidelines, HUD
could consider existing managementreinvention, consolidation, re-engineering, personnel
classification, market and other analyses to identify and develop the MEO. In short,
public-private competition under current federal policy encourages HUD management to
retool its operations as needed. During the development of the MEO the agency must
plan for real workload and real staffing levels to achieve a competitive bid.

In addition, the in-house cost estimate, including the MEO, is to be prepared with
the participation of employees and their unions.

OMB Circular A-76 is the rule book for contract competition. Yet, HUD has not
used the OMB Circular A-76 cost comparison process in over ten years. In
essence, HUD has played the game but gotten around the rules for more than a decade.

HUD should be following the federal policy and practice under OMB Circular
A-76, not avoiding it. HUD does not need to reinvent basic procurement policy;
HUD needs to stop circumventing existing sound federal contracting policy and
practice.

Current federal policy under OMB Circular A-76 is already designed to safeguard
against wasteful contracting out by using a full and fair competition for federal work that
is not inherently governmental (i.e., not so integrally related to the exercise of the public
interest as to mandate that it must be done by federal employees) before an agency

contracts out work.


131

Mr. Suays. Well, that’s the way I read it though. I am going to
take the HUD IG report and say, “Are there lessons to be learned?”
and we are going to work our new procurement officer to just have
him give us some feedback on that.

accepts the criticism of this, and I think rightfully so and
is taking action. So, let me just tell you where I get a little sus-
picious. Mr. Towns and I had a hearing on procurement of health
care services and equipment, and we have in our statute that we
can only re-bid and lower the price on these products if it was
grossly excessive.

So we were paying excessive prices, but as long as they weren’t
grossly excessive, it was OK. I mean it was this kind of inane proc-
ess. So I am just suspicious of —

Mr. CARLSON. Well, I don’t blame you for being suspicious. I
think that you should be suspicious, but the answer is not to go
and take action based on subsequent events. I mean I think it’s ab-
solutely a legitimate exercise to go back and say, “What were the
facts that were available to the contracting officer before he or she
made the award in the firm fixed-price contract?”

Mr. Suays. Yes, that would be fair. That’s what I would—and
that’s what I am suggesting.

On that we agree. And then we can come to conclusion, but then
I also want to know the person at HUD that they had the expertise
to really evaluate it.

Mr. CARLSON. Well, that’s another whole issue that I have given
a lot of thought to, because training—you know, I have been doing
this for a long, long time—training is very important to me. I do
a lot of lecturing and teaching, and I’ve had an opportunity to talk
toa lot of contracting officers in the Government and on the indus-
try side.

And for the most part, when you get the two of them together
it’s amazing the things that they learn from each other. ybe,
when I get a chance to talk to Mr. Carberry I have some ideas as
to how he might want to approach it.

Because that is the critical thing. To give someone a CD-ROM
and say, “Here, go work through this,” is not training. Training
needs to be something that’s interactive and all those sorts of
things.

Mr. Suays. Thank you. Mr. Towns.

Mr. Towns. Right. Thank you very much, Mr. Chairman. You
know, I am concerned about privatization and accountability. I am
concerned about accountability and privatization. Can you tell me
what steps should be taken to assure accountability?

Mr. CARLSON. To assure accountability of the Government rep-
resentatives and then holding contractors accountable as well?

Mr. Towns. Right.

Mr. CaRLSON. Well, I think there are several steps that can be
taken. First, as Mr. Carberry and others have said, is the procure-
ment planning process. You know, within all organizations there
are two groups of people. There are—sometimes we jokingly say,
“They’re the program people who are trying to get things done. On
the other side are the contracting people trying to prove to the pro-
gramming people that they can’t do that.”




109

Not surprisingly, previous GAO studies show that when an agency decides to
consider the option of contracting out, A-76 public-private competitions can generate
savings.’ AFGE believes that HUD too could safeguard taxpayer dollars and give federal
employees a fair chance to defend their jobs if HUD utilized the OMB Circular A-76
process for public-private competitions prior to contracting out work.

Given HUD's more than ten-year history of ignoring the OMB Circular A-76
competitions and HUD's current plans to depend more and more on contracting out
activities, it is imperative to ask key questions regarding HUD's reform efforts in
contracting decisions and practices.

Mr. Chairman, will HUD's reformed contracting procedures ensure that HUD wilt
follow federal policy prescribed in OMB Circular A-76, rather than continue to side-step
the process? Does HUD plan to do any cost-comparison analyses to make sound and
justifiable business decisions that outsourcing HUD work will result in a more efficient and
economic performance of that work than if HUD used current employees and/or hired
additional staff? Before HUD is allowed to continue to deviate from federal procurement
policy, HUD should show why its new way of doing business is sufficiently comparable
to current federal policy under OMB Circular A-76.

Absent a public-private competition, what steps is HUD taking to ensure that it has.

done an adequate cost-benefit analysis and has demonstrated that the performance of

' General Accounting Office, BASE OPERATIONS: Challenges Confronting DoD.
as It Renews Emphasis on Outsourcing (March 1997), p. 8. Although this report
discusses the Department of Defense, the agency responsible for most contracting
out, its conclusion applies to HUD.


30

Mr. SHays. Thank you very much. Mr. Towns hasn’t told any-
body, but he has learned how to get his seat so it can get up high-
er. There are four controls on these seats, and we are just trying
to figure them out here. [Laughter.]

First off, let me ask both of you. What is anecdotal here? How
can we respond to some criticism? Are you just taking these anec-
dotes and magnifying them as if they are in fact the rule rather
than the exception? When you went out to look, when you went out
to see sites, did you find that most was done well, but then you
have a wonderful picture you can show?

Mr. CZERWINSKI. Mr. Chairman, we would not do that. The types
of things we found were pretty widespread. For example, the pic-
ture you see about properties needing immediate attention but not
being given that attention was fairly typical. Over half the prop-
erties at two of the field offices we visited fell into that category.

HUD’s requirement is that when an immediate hazard is de-
tected, it should be corrected in 24 hours, but we were going back
in many cases months afterwards and finding that over half the
cases that that wasn’t corrected. So this is not an isolated incident.

Mr. SHAYS. So it’s almost the rule rather than the exception?

Mr. CzERwINSKI. In the places we looked it was very frequent.

Mr. Suays. OK.

Ms. GAFFNEY. Mr. Shays, we looked at—in our audit—we looked
at $1.5 billion worth of contracts. During that period the total
amount of HUD contracting was $3.2 billion. So we looked at 50
percent of the contracting, and we found problems in virtually
every contract.

Mr. Suays. Well, it raises the question of what would be the ex-
planations as to why they weren’t dealt with, besides the fact that

asically there’s a tremendous amount of dishonesty when someone
says something has been done and it hasn’t been done. What would
HUD’s response be in the field when you would point out these
kind of outrageous circumstances?

Ms. GaFFNEY. I'll let Mr. Momorella answer that, but I am cer-
tain we would get the same answer we'd get on virtually every one
of our audits, that they don’t have enough staff to do their jobs;
they don’t have enough staff to oversee the contractors; they don’t
have enough staff to spend carefully planning contracts.

Mr. MomoreELLa. Yes, that’s correct. That was the general opin-
ion. Also, there were a number of contracts that were awarded on
a nationwide basis, and the Government technical representative
would be located in Washington, but the work would be performed
all throughout the country. So it was very difficult for someone in
Washington to monitor work that’s being done in Los Angeles by
a contractor, et cetera; and again, the staffing and just the amount
of contracts that were out there.

Mr. Suays. Explain to me why it’s in the District of Columbia
and not being monitored outside the District of Columbia in the
field.

Mr. MoMORELLA. Well, the general practice was that when a con-
tract was awarded by let’s say, for example, the Office of Public
Housing, if it was generated by the Assistant Secretary’s Office in
Washington, someone from that office would be designated as the
Government technical representative for the contract. And this was


89

Mr. CARBERRY. We’ve established the Contract Management Re-
view Board. It’s up. It’s running. It’s met. I have been meeting with
all the program managers and assistant secretaries, telling them
exactly what we're going to be doing, what’s going to be required.
We've got a detailed plan for training of the people and the pro-
gram offices.

The Secretary has announced that the people who are managing
contracts are going to be full time in all of the programs. They are
not going to part time. They were all part time Before, and it didn’t
work well, and it’s one of those things—if you design it poorly, it’s
going to work poorly. It was a poor design. The Secretary has
turned that around.

Those things are going to have payoffs and benefits in the next
month or two because that’s when they’re going to be occurring.
The need to track and monitor our contracts more closely is already
getting through. The message is there. The Secretary has said it

repeatedly.
don’t know if that’s responsive to your question.

Mr. Towns. That’s basically—yes. On that note, let me just ask
ou, can you tell us about your contract closeout procedure which
as been a problem?

Mr. CaRBERRY. You know, it really is a problem. It’s such a small
roblem at HUD compared to the one I left with the Navy. I was

ind of glad to see it. We’ve got about 91 contracts we need to close
out. That was an issue raised by the IG. What we’ve done is com-
bined all of those and had them—we need to have the Defense Con-
tract Audit Agency go through and do a final audit. We've re-
quested those. We're getting the audits in. We’ve got a process
we've set up to send a lot of those contracts to the field and have
them closed out.

We have some really big problems at HUD in procurement that
T’ve discussed. I don’t consider contractor closeout to be a major
one, and it’s also getting resolved.

Mr. Towns. Thank you very much, and let me just say that this
Member is prepared to work with you in every way to try and
make certain that the problems that we've had down through the
years—I want you to feel free to work with us in terms of—I think
that this committee—you know the chairman is not here, but I get
the feeling that he too feels very strongly about working with you
to try to fix the things that are broken, rather than just point the
finger and criticize.

At this point I yield to my colleague.

Mr. CARBERRY. Thank you very much, Mr. Towns.

Mr. KucinicH. Thank you very much, Mr. Towns, and I wanted
to also tell Mr. Carberry that I’ve worked with every single depart-
ment in this administration, and I'll be glad to work with HUD be-
cause I’ve worked with them before. When it comes to procurement,
though I am a Member from Ohio, I am also going to adopt the
views of my friends from Missouri when they say, “show me.”

Now it’s our understanding that HUD has not used the OMB cir-
cular A~76 process to conduct a public-private competition in over
10 years. Is that correct?

Mr. CARBERRY. No, I don’t think it is. When I first came to HUD,
I kept hearing repeatedly that we had problems with A-76, and I


84

ws, . iment of Housing and Urban Development
rae 1&5. Depart spoon 88 208109000
Bes es

¥, i : March 10, 1998

eee

A FFICE OF THE ASSISTANT SECRETARY
DR ADMINISTRATION

MEMORANDUM FOR: Susan M. Gaffney, Inspector General, G
FROM: Willie H. Sie , SeSiay Assistant Secretary for Administration, A

SUBJECT: Response to Final Audit Report on Procurement

Thank you for the opportunity to respond to the final audit report on HUD
Contracting.

‘The report is the latest in a series of recent undertakings by the Department to
review its contracting and procurement systems. At the Secretary's direction, a review
of the Federal Housing Administration (FHA) procurement system was conducted by
the National Academy of Public Administration (NAPA). The study found that the
current system neither responds effectively to Department needs nor adequately
ensures accountability. As a result of the NAPA review, the Secretary incorporated
contract reform as a priority in the HUD 2020 Management Reform Plan. The plan
calls for NAPA to engage in a top-to-bottom redesign of the HUD procurement system,
with an emphasis on safeguarding taxpayer dollars with a system that ensures quality
and value( Management Reform Plan, page 16),

The Office of the Inspector General's final report is consistent with the
conclusions reached by NAPA and the Secretary and provides further support for
HUD's contract reform efforts. The OIG's recommendations have been provided to
NAPA for consideration as part of the contract system redesign. | also repeat an earlier
invitation to you and your staff to join the NAPA team in the redesign effort. | am sure
that you will agree that there is no better way to ensure that the expertise and
experience of the OIG is fully utilized in resolving the issues identified by NAPA and
your office. We look forward to your participation in this crucial effort.

‘As your report indicates, contract problems at HUD are longstanding. In fact, of
the $1.5 billion in contracts identified in the audit, $1.1 billion involve contractors with
whom the Department contracted prior to 1993. ‘Nonetheless, the Department does
not believe that the fact that these contracts stretch as far back as 1984 should prevent
the Department from taking aggressive action now to ensure integrity and efficiency in
the HUD procurement system.


12

Mr. Suays. Thank you. Should we to the GAO or does Mr.
Momorella have some comments that he would like to make? OK,
so we'll just let you jump in on the questions and feel free to elabo-
rate on your answers as well. Thank you for your statement, Ms.
Gaffney.

Mr. Czerwinski.

Mr. CZERWINSKI, Mr. Chairmen Mr. Kucinich, frst of all, thank
you for getting my name right. I mean it’s probably the toughest
thing welll get today.

Mr. SHays. You have said one of the nicest things to me that
anyone has ever said. I always mess up names. If I got your name
right, it was a total accident. [Laughter.}

tr, CZERWINSKI. And Mr. Kucinich, it’s a pleasure having you
because somebody has a name more difficult than mine.

Mr. Suays. Is it “Koocinich” or “Kucinich?” I call him “Kucinich?”

Mr. Kucinicu. Don’t call me late for breakfast.

Mr. Suays. OK. Thank you. Nice to have you here.

Mr. CZERWINSKI. Thank you. We're pleased to be here to discuss
issues related to HUD'’s contracting, and today I would like to talk
about three basic issues. The first one is HUD's overall reliance on
contractors. The second is weakness that we, the HUD inspector
general and the National Academy of Public Administration have
identified in that contracting. And third, I’d like to talk a little bit
about HUD’s plans to address those weaknesses.

To elaborate further on each of those points, even as HUD
downsizes, its contracting obligations continue to grow steadily. Ac-
cording to HUD’s own data, annual contract obligations in head-
quarters have grown from $213 million in 1991 to $376 million in
1996. And 1996 is the most recent year for which HUD has data.
This is going to be a theme that I will be addressing later on, and
that is the amount of information available to HUD as they try to
manage contracts. And this is particularly important, because
HUD’s plan is to continually rely on contracting in the foreseeable

ture.

To illustrate the kind of weaknesses that we identified in HUD’s
contracting, I’d like to highlight a report that we issued earlier this
spring. Our report focused on the oversight of real estate asset
management contractors or REAMs. HUD has an average inven-
tory of about 30,000 properties, and this makes them the largest
real estate manager, with the biggest portfolio in the country. The
REAMs are responsible for managing this inventory.

REAMs are supposed to be overseen by HUD’s field offices. Now
I want to tell you a little bit about what we found about oversight.
The first point that we found is that the field offices don’t always
evaluate how well REAMs are doing.

For example, we found that one field office had only reviewed the
REAMs contract one time since 1995, and specifically that office
went out in 1996 and evaluated the REAM contractor and found,
among other things, that the contractor had failed to remove debris
from some properties; but in this case, even though HUD’s field of-
fice found this problem, they didn’t tell the REAM what it found.

So we went back and looked at some of the properties a year
after HUD did its review and found, not surprisingly, debris at a
lot of properties. And just to illustrate, there’s a photo that we took


‘Recommendation:

‘The Office of Investigation, in an August 27, 1997 memorandum to Special Agents in
Charge of investigation offices, issued final procedures and policies relating to Operation Safe
Home funds control. These procedures, if implemented as written, will address the condition
noted regarding Safe Home expenditures. Paragraph 5 of this memorandum establishes specific
procedures for requesting Safe Home funding and setting up task forces. It states the types of
expenditures Safe Home funds will cover and requires appropriate documentation to support
expenditures. Paragraphs 6 on processing requests for Safe Home funds and 7 on financial
controls, establish controls over Safe Home expenditures. Paragraph 8 on using cooperative
agrecments states that finding for such is typically on a reimbursable relationship. We strongly
recommend that the Office of Investigation implement the procedures and policies contained in
the August 27, 1997 memo and enforce its provisions.

Rules regarding government owned and leased vehicles were not strictly enforced.

Rules for the use of government owned and leased vehicles were not strictly enforced by
offices. OIG employees were using these vehicles for transportation between home and office
without proper written justification and approval. Also, not all offices were maintaining an
inventory of these vehicles. In addition, a review of vehicle records in one office led us to
question the necessity for having two vehicles. The two vehicles were driven a total of 2,054
miles over a period of 16 months.

Offices only recently became aware of restrictions regarding the use of government
owned and leased vehicles for transportation between home and office. They state that this usage
is necessary for the efficient performance of their law enforcement duties but were unaware of
criteria that had to be met for such use. At the time of our review, the Inspector General was in
the process of developing a written policy. Offices who were not maintaining an inventory of
these vehicles did not have knowledge of the requirement. As far as the necessity for having two
vehicles, the office bas agreed that two vehicles are not needed and has taken action to return
one.

‘Recommendations:

1. On August 8, 1997 the Inspector General issued procedural requirements for the approval
of home to office use of government vehicles for law enforcement duties, This includes
quarterly certifications by first-line supervisors and annual certifications by second-line
supervisors. The Office of Investigation needs to ensure that this policy is strictly
adhered to.

2. The Office of Management and Policy should remind offices of their responsibility to
maintain an inventory of government owned and leased vehicles-under their control. The
continuing need for such vehicles should be assessed on an annual basis.


96

Mr. Chairman and Members of the Subcommittee:

‘Thank you for inviting me to testify today about issues raised by recent audits and reviews.
of HUD's procurement and contracting capacity and to discuss the potential for contract
reforms to correct any identified deficiencies or weaknesses.

‘The primary basis for my statement today is a review of the Office of Inspector General's
‘Audit Report on HUD Contracting (97-PH-163-0001, Dated September 30, 1997).
However, my statement also reflects my personal observations made over the last twenty
years while consulting with companies performing on Government contracts, including
HUD contracts, and teaching procurement-related courses to both Govemment and
contractor program and contracting officials.

Executive Summary

4. The audit report issued by the HUD Inspector General is manifestly unsuitable for
determining it HUD's procurement challenges require legislative reforms. In fact, this
audit report makes it clear that the Office of Inspector General, rather than HUD's
contracting organization, needs some legislative reform. To protect the integrity of the
procurement process it is imperative that the Inspector General be required to assign
auditors possessing substantial procurement knowledge to these types of reviews.
Otherwise, the Inspector General will undoubtedly issue similarly misleading audit
reports.

2. The potential damage of this audit report is incalculable. Most importantly, it will have
2 chiling effect on the wilingness of HUD contracting officers to apply innovative
contracting techniques. The audit report criticizes HUD contracting officers for
complying with all of the applicable rules, regulations and standards as well as
contract terms and conditions. It also criticizes HUD procurement officials for taking
actions that were clearly HUD's best interest.

in many of these cases, the report inappropriately characterized the contract actions.
taken, and criticized when it should have been congratulating. In such an environment
is it reasonable to expect HUD contracting officials to commit professional suicide by
applying innovative contracting techniques in an attempt to streamline the
procurement process. | think not despite Congresses attempts to encourage such
action, How can anyone expect procurement reform to make any real headway i
audit reports such as this one affect the procurement process? And, while the
taxpayer is aways the ultimate loser when reforms fail, companies doing business
with HUD will feel adverse effects almost immediately.

3. The preceding statements are not to imply that the HUD contracting organization has
‘no problems. Abundant anecdotal evidence exists to clearly demonstrate to HUD's
‘management that action needs to be taken to improve procurement workforce training
in contracting skils, human relations, team building and other fundamental business.
skils. However, HUD's management can adequately address these challenges. If
HUD's managers are not up to the task, the Secretary can change managers. But
passing additional legislative reforms to address these procurement problems is not
the answer particularly if the basis for the reforms are the conclusions reached in the
Inspector General's report.

TESTIMONY OF MR. TERRY A. CARLSON
BEFORE THE SUBCOMMITTEE ON HUMAN RESOURCES.
PAGE 10F6


15

action now to fundamentally restructure its procurement system.

Mr. Chairman, Ranking Member Towns, I have been a contracting professional
for over 30 years. I am confident that the changes the Department is making in its
procurement systems will transform HUD from what Secretary Cuomo has called the
“poster child” for how not to contract, into a model for federal government procurement
activities. Independent objective reviewers including the General Accounting Office, the
National Academy of Public Administration, and Booz-Allen all agree that these are the
right steps. And implementation is well underway. I am excited about being a part of

HUD’s management team and I plan to ensure that we succeed.

Thank you.


36

Mr. Towns. Let me just——

Mr. Suays [presiding]. You’re in charge.

Mr. Towns. Could you give us some Perspective here? What per-
centage of HUD’s procurements do you believe are a problem be-
cause you indicated in your report that most of HUD’s contracts de-
livered efficient and cost effective goods and services. What percent
would you say that’s not?

Ms. GaFFNEY. That are significantly troubled, not just small?

Mr. Towns. Yes. What percent of the problem? Well, could you
give us—I mean I’m just trying to get some perspective here what
we're dealing with.

Mr. MoMORELLA. Well, I think our report tried to do that. What
we said was—of course of the 9,000 contracts that we talked about
in the universe—these ranged from doing elevator service in the
HUD building, to running the cafeteria and in other words, there
are a number of contracts.

The 30 contractors that we selected provided various types of
services, consulting services, more than just hardware services; and
I think that presents a pretty good cross representation from dif-
ferent program areas and types of services. And we weren't focus-
ing on contract by contract as much as looking at the overall sys-
tems—the fact that the financial system gave no support. The con-
tract monitors had very poor tools to do their job.

They couldn’t go to a system and find out how much this contrac-
tor had been pad to date. In some cases, they had to call the con-
tractor to find out because they were newly assigned to that, and
the records weren’t available from a previous representative.

So, again, what we tried to highlight in our report is not this con-
tract is wrong, that contract is wrong. All together, what those five
main areas were that we highlighted in our report: the cost con-
sciousness, the needs planning and the monitoring.

Ms. GAFFNEY. Mr. Towns, could I try it a different way?

Mr. Towns. Sure.

Ms. GaFFNEY. I think there’s a range of activities, and at one end
there are things as straightforward, as Ed said, as elevator mainte-
nance; and we tend not to find problems—or office cleaning—very
straightforward, easily measured kinds of activities. And we tend
not to find problems in those kinds of contracts.

There is a spectrum though of activities that become increasingly
complex, and the vulnerability increases with the complexity and
with the knowledge and the expertise of HUD’s staff. So let me
give me you an example of an extreme, a complex level.

HUD, a couple of ‘oars ago, embarked on a program to sell mul-
tifamily and single family notes. HUD had never done that. It was
a huge unde: ing. I mean this involved billions and billions of
dollars. HUD had no one on staff with any expertise in that area
and was unable for reasons that I cannot explain to you to get any-
one on staff.

They contracted out the function, and they were essentially then
left in a position of totally relying on—I am not saying the contrac-
tors did anything wrong—but HUD was in a position of having to
rely on those contractors totally because HUD had no one on staff
who knew how to do that or how to manage that kind of a program.

So, it’s a big range.


48

RESULTS OF REVIEW

This report separates the results of our review into two categories, major and minor
findings. Major findings were categorized as such due to their being serious in nature or having
occurred in numerous offices. Minor findings were less serious or occurred in only a few offices.
‘We also discovered two minor situations which are classified as other items. We feel that all
findings need to be addressed in order to stop the occurrence of major findings and to prevent
minor findings from becoming major.

MAJOR FINDINGS
Periodic reconciliations of amounts charged to office budgets were not performed.

OIG field and Headquarters components were not periodically reconciling charges to
their budgets to ensure their accuracy and validity. The reconciliation becomes more important
with revised procedures put into place by the Department in June of 1997. The new procedures
state that all invoices below $25 will be paid and not sent to the program office for approval.
Invoices between $25 and $2,500 will be paid without program office approval but a random
sample of these invoices will be selected for a post-payment review. All invoices $2,500 or over
will be sent to the program office for approval prior to payment. This places a greater
importance on performing reconciliations of what is charged to an office's budget.

Our review of field office invoices revealed two disbursements in Fiscal Year 1996
totaling $2,456 that were erroneously charged to an OIG office. They should have been charged
to other program offices within HUD. This fact was not known until our review questioned.
them. This would have been discovered sooner if a monthly reconciliation had been performed.
‘Steps are currently underway to charge the appropriate Departmental accounts.

‘The November 1996 publication on financial management responsibilities and Federal
Financial Systems (FS) states that the OIG has the responsibility of data stewardship for all
transactions entered into FFS. Data stewardship addresses the process of managing information
to ensure that information entered into FFS is accurate, accessible, timely and usable. Included
in the management process is providing for segregation of duties, establishing a structure of
approval and data entry authorities, and performing reconciliation and adjustment processes.

OIG officials gave various reasons for not performing periodic reconciliations. Among
these were that they did not know of their reconciliation responsibilities and have not been given
instruction on how to perform their reconciliations.

Due to the fact that periodic reconciliations were not being performed, OIG field and
Headquarters components have not ensured the accuracy and validity of amounts charged to their
respective budgets. As stated above, the advent of new procedures implemented by the
Department places greater importance on reconciliations.


uz

House Rule XI, Clause 2(g)

AFGE has no grants or contracts to declare.


53

deadline after which invoices for the task force will not be accepted or reimbursed. This
deadline should be no longer than three months after expiration of the task foree. Ifa task
force still has funds obligated when the deadline is reached, they should be de-obligated
and made available for use by other Safe Home operations.

3. Investigative assistants should be reminded of their FFS responsibilities and should
Process invoices in a timely manner in accordance with these responsibilities.

4, In formulating future budget requests for Operation Safe Home, the Office of
Management and Policy should consider the availability of funds from prior years’
‘appropriations.

Various conditions existed regarding Operation Safe Home expenditures.

Our review of Safe Home expenditures revealed a number of issues. First, supporting
documentation for some expenditures was not available for review. Also, we concluded that
‘some of the support that was available was inadequate. In addition, advances were made for task
forces whose agreements called for cost reimbursements and expenditures were made for task
forces that did not have agreements outlining the responsibilities of the parties. Moreover,
offices expended funds for task forces and did not maintain copies of the task force agreements
or the agreements were not signed by the other agency.

This occurred because formal written procedures were only recently established to control
the expenditure of Operation Safe Home funds. Offices were given procedural guidelines which
in many cases were distributed by CCmail. It is not known whether these guidelines were
viewed as being authoritative. Based on the variety of methods offices have employed regarding
Safe Home expenditures, it appears that offices did not view the guidelines as authoritative.

Guidelines that were set forth state that use of Operation Safe Home funds are limited to
combating violent crime in public and assisted housing and cannot be used for normal operations
or administrative expenses. This increases the importance of having adequate documentation to
support expenditures.

For the situations where there was a lack of or inadequate supporting documentation,
offices did not have records to prove that Safe Home expenditures were used for their stated
purpose. When task forces did not have valid agreements there was no official written document
governing expenditures made by the other agency to ensure that they are in accordance with the
stated purpose of Operation Safe Home. Advances made on cost reimbursable agreements were
not in accordance with the agreements and unless the other agencies provide an accounting of
how advances were expended, OIG has no documentation to prove that expenditures were in
accordance with Operation Safe Home rules.


49

‘Recommendation:

‘We recommend that the Office of Management and Policy establish procedures requiring
that offices perfonn reconciliations of amounts charged to their budgets. The policy should
require offices to perform reconciliations of amounts charged to budgets at least on a monthly
basis. This information should suggest a report from FFS to be used for this purpose and be
explicit as to the extent of the reconciliations and resolution of discrepancies.

Payroll processing procedures were not consistently followed.

OIG was not consistently complying with procedures or intemal controls established for
processing payroll. Various conditions exist which were not in accordance with established
procedures. First, timekeepers were preparing and maintaining their own Time and Attendance
(T&A) report without proper approval. In addition, supporting documentation was not always
attached to the T&A report or the supporting documentation that was attached was not approved
or not approved in a timely manner. We also noted that some supervisors were not properly
reviewing or documenting their review of TANDARPTs. We also found occasions when leave
or credit hours from one pay period were being recorded in another pay period.

The Department's T&A Reporting Procedures require that only under extenuating
circumstances can a timekeeper maintain and/or prepare his/her own T&A report. If a supervisor
believes these circumstances exist, a request and justification must be submitted to the
appropriate Departmental personnel office for approval. This was not done for any of the
situations where timekeepers were maintaining and preparing their own T&A report. Reporting
procedures also require that T&A reports contain supporting documentation that is approved in a
timely manner. The reporting procedures also state that supervisors must compare TANDARPT
data (generated by the National Finance Center) to the certified T&A report and document their
review by initialing the TANDARPT.

These conditions existed because supervisors were not aware that the requirements
existed or were not aware of the extent of the requirement.

Due to the existence of the above conditions, the OIG was not in compliance with
procedures or intemal controls established for processing payroll. Also, the OIG had insufficient
assurance that its payroll records or those of its employees were accurate and reliable.

Recommendation:

‘We recommend that the Office of Management and Policy inform supervisors of
provisions set forth in the Department's T&A Reporting Procedures. Supervisors should ensure
that these procedures are followed in order to comply with established payroll processing
procedures and ensure accurate and reliable payroll records.


78

Implementation Schedule;

Issue memorandum to program Completed
and contracting staff concerning

these areas.

Revise GTR training to incorporate Completed
a module concerning “personal

services” and “governmental functions.”
© Timely closeout of contracts.

To simplify the method by which the procurement office initiates audit requests which
are subsequently transmitted to the Defense Contract Audit Agency (CAA). By
consolidating audit requests on a contractor basis (this includes contracts which are
under the $500,000 audit threshold) we have requested 104 audits representing
$379,463,933.

To assure that backlogs do not develop in the future, we will take the following steps:
=> OPC’s Policy and Evaluation Division will generate a monthly list of cost-
reimbursement contracts which have been completed and follow-up with the

operating divisions to assure that audit requests are generated.

=> Closeout of cost-reimbursement contracts requiring audits will be reassigned
to the Administrative Service Centers after submission of the request.

Implementation Schedule:

OPC’s Policy and Evaluation By June 30, 1998
Division generates monthly list

of completed cost-reimbursement

contracts and follows-up with

operating divisions regarding

audit requests.

Procedures are established for ‘Completed.
assigning contracts with requested
audits to the Field.


88

well on the way to solving I guess what I’d say is the most critical
one is establishing fundamentally sound business practices in
HUD. We're in a business. All of the things that apply to business
apply to us. It’s kind of like the laws of gravity. You don’t have to
believe in them for them to apply.

Cost and supply and demand. Cost schedule performance in all
our contracts, all of our programs. And we'll be doing that, and
there’s a lot of enthusiasm for doing it, but that’s the tough one.

Mr. Suays. Let me do this—let me yield to my colleagues and
maybe they'll get at the culture, but I'd like you to come back to
that if it’s not answered. Mr. Towns.

Mr. Towns [presiding]. Yes, thank you very much, Mr. Chair-
man. Let me just begin by saying I am not as pessimistic as some
of my colleagues. I am optimistic. First of all, I know of Mr.
Carberry’s work and his background, and of course he comes with
the reputation of a man that says something and he goes about
doing it. It’s really the follow through.

Also I know the Secretary. I've known him for many, many
years, and I know in terms of his ability to make things happen.
So, I am optimistic. I want you to know that, and I feel very good
about some of the things that are going on. I think that, sure, we
can look at HUD down through the years, but I think that we have
somewhere at this point begun to focus on the new leadership, and
I think that that’s important.

Let me just ask: Can you tell us what role the Contract Review
Board will play in overseeing HUD’s procurement actions?

Mr. CARBERRY. We are going to be reviewing the strategic plans
and the procurement plans of every program that HUD has. We
are going to be reviewing in detail all of the contracts that are pro-
posed over $5 million. We are going to do that from a needs assess-
ment. We are going to do that from the point of view of cost sched-
ule and performance. We're going to do it from the point of view
of inherently governmental functions, personal services, all the
basic things that need to be looked at.

And once we get that information we are going to be—we'll be
filing it, and we'll go back and review programs as they go along
to make sure that’s the case. We need to make sure we don’t have
duplication in our efforts. We need to make sure that what we are
buying is consistent with the strategic plan of HUD, and, you
know, when we give our managers programs, we give them three
things: We give them time and money and people. And we need to
make sure the priorities of HUD are being met and the time and
the money and the people that they are being given are being man-
aged well.

So that’s the function of that Contract Management Review
Board. It’s brand-new. It hasn’t occurred before, but that’s probably
the single most effective way we are going to instill an institu-
tionalized, fundamentally sound business practices into HUD.

Mr. Towns. Right. When the chairman asked the question, I
thought you might say that integration of information technology
might be the toughest thing for you. Can you tell us about the chal-
lenge you face in accomplishing this goal, what actions have been
taken so far by you?


43

Information regarding the number of offices where major findings occurred can be found in
Appendix

Major Findings

Following are the findings that we classified as Major:

Offices were not performing periodic reconciliations of amounts charged to their
budgets.

Payroll processing procedures and controls were not consistently followed by offices.

OIG usage of the International Merchant Purchase Authorization Card (IMPAC) credit
card was not always in accordance with established procedures.

The official system for reporting Operation Safe Home funding shows that funds were
being committed and obligated, but were slow in being liquidated and reported as
expended.

‘Transaction testing of Operation Safe Home funds revealed a number of conditions
including lack of or inadequate supporcing documentation, advances made for task
forces that had cost reimbursable contracts, and expenditures for task forces that did not
have agreements.

Rules for the use of government owned and leased vehicles were not strictly enforced
by offices.

Controls over Operation Safe Home advances to special agents for evidence or
information purchases were lax.

Some offices were not enforcing established procedures for controlling ADP
‘equipment.

Minor Findings

Following are the findings that we classified as Minor:

Various problems with processing travel vouchers were discovered.
Office equipment was not maintained as required.
‘A few problems with Law Enforcement Availability ‘Pay (LEAP) were discovered.


129

Mr. SHays. Mr. Harnage, I think your requests are urging some-
thing our committee is very comfortable with. So we will certainly
include that as part of our oversight effort. Mr. Towns, why don’t
you start off and then I'll join you.

Mr. Towns. Thank you very much, Mr. Chairman. Mr. Carlson,
the IG recommends that HUD conduct a cost-benefit of all major
contracts. I am concerned that this will add to the costs of the con-
tracts. Can you tell me whether that concern is justified on my
part’

Mr. CaRLson. I can try. I think one of the things that happens,
and we talked a lot about review boards and those sorts of things—
as long as you have a process that requires a lot of review, that
takes time. Time costs money for both the contractor and the Gov-
ernment.

I think a cost-benefit analysis makes a great deal of sense at the
outset. Obviously, it’s an integral part of the procurement planning
process. But you may be referring to some of the recommendations
that, for example, in the Lockheed contract we’ve spent $500 mil-
lion on a certain aspect of it, and the audit criticism was that HUD
didn’t do periodic cost-benefit analyses rather than renewing op-
tions.

In part 17 of the FAR it does talk about making sure that before
an option is renewed it makes sense, but it also says, before you
give options, there is a reasonable “surety” that you'll exercise
them. So the question becomes: Does it make sense to do a cost-
benefit analysis if there’s nothing you can do about it anyway ex-
cept perhaps to terminate the contract?

mean it’s really kind of a shadow exercise. The audit says, “Oh,
we're getting really shafted,” but so what? It’s a firm fixed-price
contract. HUD spent a lot of money on it, and at the outset, when
it was awarded in accordance with the regulations and a com-
prehensive cost-benefit, it was the right thing to do.

I think that being able to sit back after the contract has closed,
and the IG has done this in several instances—they said, “Boy, the
contractor made a lot of money. We shouldn’t have done it that
way.” But at the time that HUD made the award it made a great
deal of sense for Lockheed to provide computers, for example.

And I am not picking on the inspector general. I don’t mean to
do that, but when you say that having a firm fixed-price contract
to buy services or goods in a decreasing market, when the prices
are going down, is not d—I would agree with that, but a firm
fixed-price contract is a firm fixed-price contract. And you just don’t
decide, “OK, we’re paying our contractor a lot of money. We're
going to terminate it,” because that’s an option.

Mr. Suays. Will the gentleman yield?

Mr. Towns. I'll be glad to yield.

Mr. Suays. Isn’t the issue though that we made a mistake in the
first place, and we need to need to understand why we made a mis-
take and make sure that we don’t do that kind of mistake again?
I think that’s how I read the inspector general’s report.

Mr. CaRLSON. Well, I was afraid you’d do that because one of the
things that happens is, after the cards have been dealt and the
hands are all up, it’s easy to say that you made a mistake. I think


113

Last September at a pre-proposal conference for the contract solicitation for the
financial advisory services, HUD's Director of the Single Family Property Disposition
Division, Ms. Kitty Woodley, conceded that even though HUD already knew how to make
its operation more cost-effective it wouldn't. It would contract out its work because it just
won't have the staff.

“We [HUD] know that we could improve our current operation. We know right now

how we could cut costs. We know how we could cut holding costs. | mean, if it

is a matter of re-engineering our current operation to get there, that is not the
answer. . . .The issue is that even with such an operation that takes a sizable
number of HUD staff, those staff are not going to be available to us in the future
to oversee contractor activities even, and to make decisions about how, you know,
we should go about selling our properties, you know, should we lower the price,
should we do an auction, etc., etc. We know how to re-engineer our business.

We know how to re-engineer this program. So, if that is what you are getting at,

that is not the answer. We know how to do that. The answers [sic] that we are not

going to, the issue is, we are not going to have the staff out there to maintain

such an operation even if we were to re-engineer it." (Emphasis added.)
See attached Transcript of September 22, 1997, HUD Pre-Proposal Conference, at page
41, lines 4-21.

The driving force for contracting out work was not cost-savings or efficiency but
staff reductions.

Mr. Chairman, in HUD's efforts to reform its contracting practices, the agency
needs to commit to managing its work by its budget, not through self-inflicted staffing
shortages.

Self-inflicted staffing shortages, which appear to be the reason HUD has ignored
full and fair public-private cost comparisons, is also undermining HUD's capacity to
manage and assure adequate contract oversight. Staffing shortages leave HUD even

more vulnerable to contractor fraud, waste and abuse. As you know well, GAO has

8


122

ATTACHMENT 2

DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

RRR RR RR RR RIO RK
In the Matter of:

PROPOSED CONFERENCE

FINANCIAL ADVISORY
SERVICES

*
*
*
*
*
*

TOI III ROR tO a i a i toe

Monday, .
September 22, 1997

451 7th Street, S.w.
Washington, D.C.

The above-entitled hearing came on for

aring, pursuant to notice at 9:32 a.m,
PRESENT:

PATRICIA FIELDS

KITTY WOODLEY

WANDA RITTER

PHIL SCHULTE

DANILLA WEATHERLY

ROSS GREATA

MAUDE WILLIAMS


46

127

business, and those that are, we do recognize do not retail as many
properties on an annual basis as we do. So how cen we make this
workable for those entities out there that are selling foreclosed
properties? Or maybe even interest some new entities out there in
such a venture. How can we make this a joint money making effort?
That is the bottom line. MWe are not, don’t look at this as a way of
HUD moving its properties. Again, that is only half of the objective.
How can we make this enticing? How can we make this a profit making
venture for both HUD and some entities that may not even be players in
this game at this point in time? And that is why, you know, we have
included the marketing aspect.

So, we need you to think more so than anything. I mean, we can give
you all kind of data, but we know what the tried and true answers are.
If we had other ways of doing this, we could do it. We could, under
the current, under our current operation, with a few tweaks here and
there, we could improve this program 150 percent without a doubt. And
be even better than we are today and we know that. But, we can’t do
that. We are Limited because of staffing, We can’t deed you to help
us think about doing it in a different way.

yes?

AUDIENCE MEMBER: Going back to the previous question on firms that
assisted you in coming to the preliminary work coming on this
solicitation, if you determine that consultant firms that assisted you
are eligible to bid on this financial advisor contract, will you
disclose to the rest of us which firms had been helping you in the
preliminary work on this?

MS. WOODLEY: I think we have said yes to that already.

AUDIENCE MEMBER: No, you said thet you would make a determination as
to whether they would be eligible to bid on this or not. fut, if you
determine if they are eligible to bid, would you tell us who they are,
30 we know that -
MS. WOODLEY: Okay. Yes. Yes.

AUDIENCE MEMBER: My mind Just went blank. I think of it and raise my
hand again.

MS. WOODLEY: Okay.



CONTENTS

Hearing held on June 5, 1998 ..
Statement of:
¢c ,.V. Stephen, Chief Procurement Offi tment of Housing
irban Development, accompanied by Howard B Glaser, Deputy
General for Programs and Regulations .
Carlson, Terry A., president, T.A. Carlson and Co. and Bobby L. Harnage
Sr. national president, American Federation of Government Employ-

Gaffney, Susan, inspector General, Department of Housing and Urban
Development, accompanied by Edward F. Momorelia, district Ing
eral for Audit, id-Atlantic, 3 AGA; Stanley J. Gzerwinksi,
Director, Housing and Community Development Issues, Us Sen.
eral Accounting Office; and Rick Hale, Assistant Director, Housing
and Community Development Issues
Letters, statements, ete, submitted for the record by
Cs V. Stephen, Chie Procurement Officer, Department of Housing
and Urban Development, prepared statement of
Carlson, Terry A., president, T.A. Carlson and Co., prepared statement

Czerwinksi, ley J., Associate Director, Housing and Community De-
velopment Issues, U.S. General Accounting Office, prepared statement

catioey, ‘Susan, inspector General, Department of Housing and Urban
Development:
Information concerning review of operations of the Office of Inspector

Prepared statement
Harnage, Bobby L., Sr., nation resident,
ernment Employees, 5 Prepared statement of ..
Momorella, Edward F., district Inspector General for Au
3 AGA, information concerning contractors ..
Towns, Hon. Edolphus, a Representative in
of New York, prepared statement of ..

erican

db



106

Mr. Chairman and Subcommittee members, my name is Bobby L. Harnage, Sr.,
and | am the Nationa! President of the American Federation of Government Employees,
AFL-CIO (AFGE). The AFGE is the largest union for government workers, representing
600,000 federal employees serving worldwide, as well as employees in the District of
Columbia. | appreciate the opportunity to present our views here today.

The General Accounting Office (GAO) and HUD's Inspector General have focused
‘on HUD's failure to follow federal policy and sound practices with regard to contract
management. AFGE too believes that HUD’s contract management failings place HUD
at greater risk for waste, fraud and abuse. Much of HUD's contract management
Problems stem from self-inflicted in-house staffing shortages and failure to replace
needed in-house staffing expertise.

My testimony, however, is focused on how HUD's decides whether or not to
contract out work. It is at this initial stage in the procurement process that HUD's
contracting problems begin, primarily because HUD routinely fails to comply with
existing federal procurement policy and practices, particularly with regard to
public-private competitions.

AFGE is deeply dismayed that HUD fails to comply with basic federal procurement
policy. AFGE members are determined to see that the federal government's dollars are
spent wisely; we are conscientious employees and patriotic Americans, as well as hard-
working taxpayers. Contrary to sound business practices and federal policy, HUD does
not ask, let alone study, whether it would make more sense economically for in-house

staff or private contractors to complete a service.

1


66

The third is: Well, once you are carrying it out, you have to mon-
itor contracts, but you can’t monitor every single one. So you have
to choose. So what priority setting does HUD have?

The fourth is: Even if you set your priorities, you need the re-
sources. So I would ask: What kind of resource commitment the
Secre' is giving Mr. Carberry to do his job.

And the final one is, even if ou have the resources, you must
have the information. How g are HUD’s data? How much do
they have and how reliable are those data and what are they doing
to ensure that reliability?

So that’s sort of the management perspective that we have ver-
sus the compliance view.

Mr. Suays. OK.

Ms. GaFFNEY. Maybe I could help you.

Mr. Suays. Then I'll get to my colleagues, and we'll get to the
next panel. Yes.

Ms. GaFFNEY. I think you are right, that there is ambiguity in
this area. I don’t think it’s a huge problem in terms of inherently
governmental functions and contracts for them, but the kind of
thing that we question is using a contractor to prepare congres-
sional testimony. We consider congression: testimony
essentially ——

Mr. SHays. Does that happen?

Ms. GAFFNEY. That has happened. Now HUD’s answer to that
would be, “We just had the contractor doing drafts, you know. We
really had final approvals so there’s nothing wrong with a contrac-
tor working on congressional testimony.” I don’t think that kind of
issue is a huge issue. I think it happens in isolated

Mr. Suays. Yes, it’s not a huge issue and I am happy it is not
happening often, but the bottom line is I would think that almost
anyone reading the law would say that was improper.

is. GAFFNEY. I think that’s right.

Mr. Suays. We have two other panels——

Mr. Kucinicu. I'll try to be brief, if I may, Mr. Chairman. I
looked at Ms. Gaffney’s testimony, and there are a few things that
strike me, and I'd just like to share this with the members of the
committee. It seems that when—Ms. Gaffney writes—the Depart-
ment has committed itself to prospective corrective actions but has
not embraced the opportunity to right past wrongs and extract an
exact accountability for them, and then you go on to talk about the
current efforts to improve HUD contracting.

What I see here, Mr. Chairman, is the offer by HUD in their ef-
forts to improve contracting is the form of a solution but not nec-
essarily the substance. We have a form of a solution through a
chief procurement officer being appointed; yet, as Ms. iney
points out, there has been no official definition of Carberry’s au-
thorities, responsibilities or placement in the organization, no effort
to get advice from the IG’s office and counsel up front——

Ms. GaFFney. Mr. Kucinich, could I just interrupt for 1 second?
The definition of his roles and responsibilities happened yesterd: lay,
just the day before this hearing, and it wasn’t an appropriate defi-
nition.

Mr. Kucinicu. Well, we are making progress.

Ms. GaFFNEY. That’s good news. That’s good news.


52

‘The police departments have been slow in producing the necessary invoices and
documentation.

+ Itis difficult to estimate the amount of funds a task force will need for evidence buys and
information purchases. This amount may be over estimated and result in an obligation
that is too large.

= SACs have been delayed in purchasing larger equipment because it is necessary for these
purchases to go through proper procurement channels which can be time consuming.

- Investigative assistants have had training on FFS but many still don't know what their
responsibilities are when they receive invoices. Because of this, invoices remain in the
field office for a long time prior to being paid. .

Our review of two task forces in one office illustrates this point. The two task forces
began during Fiscal Year 96 and obligated a total of $201,122. As of July 1997, only $6,090
(3 percent of the total obligated) had been reported as expended for these task forces. In another
office, $44,000 was obligated for a one year task force that was to expire on August 4, 1997. As
of July 24, 1997, the task force reported only $4,775 as expended.

This has resulted in Operation Safe Home funds that were slow in being liquidated and
reported as expended. Some task forces may not be operating as originally planned or may not
need the total amount of funds originally obligated. As a task force progresses, experience
should provide information about whether the total amount obligated will eventually be
expended. If the total obligation is not expected to be expended, an amount can be de-obligated.
This would more accurately reflect the status of Operation Safe Home funds and provide
‘management with better information when making funding decisions.

Recommendations:

We recommend that the Office of Investigation take the following steps to improve
administration of Operation Safe Home funds:

1 By March 31, 1998, the Office of Investigation should perform a review of Operation
Safe Home obligations in order to determine if all task force obligations are still valid and
likely to be expended. Any obligations not likely to be expended should be de-obligated
and made available for use by other Safe Home operations. For task forces with valid
obligations that are slow in being expended, a legitimate reason for the slow expenditure
should be documented in order to justify not de-obligating the finds, We further
recommend that the Office of Investigation perform a similar review of Safe Home
obligations at least quarterly 1o determine their validity.

2. Remind local police departments of their responsibility to promptly provide invoices and
supporting documentation for expenditures relating to Safe Home operations. Task force
agreements should be for a specified period of time and should include a clause setting a

7


101

actions. Certainly there are abuses in the procurement process. That is why oversight of
the procurement process is necessary.

However, the focus of these aversight activities must change when oversight becornes the
source of problems instead of a source for identifying and recommending solutions to
problems. The system has to change if managers find they cannot perform their day-to-
day duties because they are responding to audits containing unfounded allegations of
wrongdoing oF incompetence. The system has to change if the public thinks all of the
Contracting officers at HUD are largely inept because of improper audit allegations that
HUD has foolishly squandered taxpayer money.

These changes resuire a retiring of what we wart the Ispecoe Goneras offce f

accomplish. If they are to review contracting issues, they must be required to have
knowledgeable staff perform the audits, Otherwise, we will make no progress toward more
efficient and effective procurement operations.


26

would be pooled on a regional basis and purchased by entities that could use their
existing structures to sell the properties in the same way that the Department currently
does, namely, through competitive sales to individuals. In addition, as a part of its budget
request for fiscal year 1999, HUD proposed new legislation to allow the Department to
take back notes when a claim is paid, rather than requiring lenders to foreclose and
convey properties. HUD would then transfer the note to a third party for servicing and/or
disposition.

We view the actions that HUD has taken to improve its contracting procedures as positive
steps. However, some key issues concerning their implementation are still being
finalized, such as the precise role of the contract review board in overseeing HUD's
procurement actions, and HUD's ability to have the necessary resources in place to carry
out its procurement responsibilities effectively. Perhaps even more important is the
extent to which these actions will lead to a change in HUD's culture, so that acquisition
planning and effective oversight of contractors will be viewed by both management and
staff as being intrinsic to HUD's ability to carry out its mission successfully.

Mr. Chairman this concludes our statement. We would be pleased to respond to any
questions that you or Members of the Subcommittee may have.

(885750) 12


Pe 0} ions

At all three locations that we visited, we found instances where properties were not
maintained as required by the REAM contracts. During our inspection of approximately
20 properties in each location, we identified properties that (1) were not properly
secured, (2) had physical conditions that did not match those that the REAM contractor
had reported to HUD, or (3) had imminent hazards.

For instance, of the 66 properties we visited in all three locations, we found that
approximately 39 percent were not sufficiently secured to prevent access to the property.
‘The failure to properly secure properties can lead to trespassing, vandalism, and the
property's deterioration. In fact, we visited unsecured properties that had broken
windows, graffiti, and exposed walls in the bathrooms where valuable copper piping had
been ripped out.

In addition, we found physical conditions that did not match those that the REAM
contractors had reported to the three HUD field offices we visited. For example, one
property contained animal feces, fur, and personal possessions, while the contractor's
inspection report indicated that the house was free of debris. If contractors do not
accurately report on the condition of properties, HUD may lack vital information on
which to make disposition decisions and to address safety hazards. As a result, the
government may sell the property for less than it is worth or incur unnecessary holding
and maintenance costs because it is not marketable.

Furthermore, almost 71 percent of the properties we visited in one field office, and about
37 percent in another, contained imminent hazards, such as broken or rotting stairs.
Inspection reports submitted to HUD for one property noted that the front steps were
dangerous-a condition warranting immediate repair by the contractor. Nonetheless, when
we inspected the property about 3 months after the contractor initially reported the

8


105

with the best we could come up between the Government and pri-
vate sector and union officials, and it’s one that we all try to live
by. It works, and it is in the best interests of the taxpayer.

I want to talk briefly about one aspect of A-76, and that’s the
MEO, the most efficient organization. The provision is to prevent
exactly what HUD is doing. If you determine what the most effi-
cient organization is and then compete the jobs with the public-pri-
vate competition, the taxpayer wins every time.

If you contract out inefficiency, you still have inefficiency. If the
contractor eliminates the inefficiency, it has not reduced the cost
to the taxpayer. It’s merely increased the contractor’s profit mar-
gin. The taxpayer loses every time. Should HUD be required to
manage by budget, not arbitrarily self-inflicted staff ceilings is a
question that we ask you to ask yourselves.

I urge you to secure HUD’s commitment to start playing by the
rules and using the A-76 public-private competition in determining
whether to contract out or not. I urge you to require HUD to start
conducting cost comparisons before it makes contracting out deci-
sions, and I urge you to require HUD to demonstrate that it is

ing contracting out decisions for reasons of cost and efficiency,
not simply because it has downsized and is half-staffed and created
its own inability, incapability to carry out its mission.

The fact that HUD does not know if they are doing the job the
least expensive way. If they say so, they cannot prove it.
Downsizing at HUD should be stopped until they comply with the
rules and prove that they are doing it in the best interest of the
taxpayers.

And I urge you to investigate even deeper into HUD’s contracting
out policies to ensure that the taxpayers of this country are not
getting taken to the cleaners. Taxpayers deserve it and the Federal
employees have requested it and Congress should want it. Thank
you very much for this opportunity to appear before you, and I'll
answer any questions you might have.

[The prepared statement of Mr. Harnage follows:]


34

ancing act between the pressures of the program people who have
a mission and a program goal and expediency; and the trust is
placed into the contract officials to see that the dollars are spent
properly.

And you often see these battles. And what the inspector general
has also indicated, is where the chief procurement officer sits in the
organization goes a long way in setting the attitude as to how HUD
can contract in the best possible manner for the taxpayers and to
accomplish the goals of the program as spelled out by Congress.

In other words, in our review we found that there needs to be
a much, much closer agreement. That’s why we recommended that
someone other than just in a specific cylinder, for example, if you
have just housing folks going ahead, saying, “We need to do this,
let’s contract.” We recommended that you bring in the budget peo-
ple and the chief financial officer, so somewhere along the line
someone can say, “Wait a minute. Is this still the best thing for the
Department? Is this still the most cost efficient way to get this
work done?,” and that was, quite frankly, what was lacking.

They were just so over worked, so overwhelmed, they didn’t have
time to monitor the Government technical representatives as they
were required to do, and quite frankly, they couldn’t manage and
maintain and do the daily housekeeping chores, enter the data into
the systems, because they were busy awarding new contracts and
constantly being asked to issue new ones.

So, I think it’s really important to recognize that from our stand-
point there are very good, qualified, knowledgeable people at HUD,
and they’re trying to do the right thing; but there needs to be more
of a coordination effort from the entire Department: the fiscal
records, the procurement records, and the program records, and
also the general counsel. Some of these contracts didn’t have coun-
sel review ahead of time and ended up with loopholes that were
very costly for the Government to terminate.

And we tried to say a little bit of prevention in the front of this
would go a long way to making sure that it was an efficient effort
by everybody involved.

Mr. Kucinicu. I just had a very quick followup question. Do you
have a list of the cost overruns on these contracts?

Mr. MOMORELLA. We have—

Mr. KucInicH. You mentioned that one contract started at $1
million, ended up $9 million.

Mr. MoMorELLA. Right. I guess technically, Congressman, it’s
not a cost overrun because they extended it. In other words, they
modified it——

Mr. KucINICH. Well, these contracts—have you done a study
where you have “contract began at $1 million and now it’s $9 mil-
lion?” Do you have a number of those instances?

Mr. MOMORELLA. We can get you that information.

Mr. Kucinicu. That would be very interesting to have. Thank
you, with the permission of the Chair if we could get that informa-
tion. Thank you.

{The information referred to follows:]


115

contracted out. | urge you to secure HUD's commitment to demonstrate that its
contracting decisions are not being driven by self-inflicted staffing shortages. | also urge
you to insist that HUD maintain the human resources adequate to monitor contractors’
performance and to maintain the in-house capacity to perform such work, in the event
that contractors perform inadequately or perpetrate waste, fraud, and abuse.

That completes my statement. | will be happy to answer any questions.


136

Mr. CARLSON. Oh, I would not disagree with that, but I think the
thing that I would caution is that there are things in the audit that
are, I guess inflammatory. For example, that Price Waterhouse, a
contractor that big, ought to buy its own computers. There’s a cost-
standard which talks about consistency that allows a contractor to
charge direct for equipment if it’s for a different purpose.

If the Government requires a contractor to use a total cost input
base for allocating general and administrative expenses, they have
to get a markup; otherwise, the general administrative cost comes
out of profits. And yet, these proper treatments are characterized
as things that are evil, that are the result of incompetence, and it’s
not.

And for people to think that all of our contracting officers are
stupid and our contractors are crooks is unacceptable to me.

Mr. Suays. Now, first off, I think you do a disservice to yourself
by making that statement and also to the inspector general and
GAO because they specifically did not say all of them were.

Mr. CARLSON. Oh, that was Mr. Kucinich’s statement.

Mr. Suays. Oh, OK.

Mr. CaRLSON. I am sorry. And I would be glad to introduce him
to a good contractor if he’d like.

Mr. Suays. I happen to disagree with Mr. Kucinich.

Mr. Towns. You know, you raised a very interesting point. In
going over the information, seeing it in terms of how they raised
the question of the contract, but then when you look at other agen-
cies in the Government, where they do buy this equipment—I
mean it’s done all the time and nothing is said.

The inconsistency here sort of bothers me. I think, Mr. Chair-
man, that maybe we need to look at that as well because for them
to be criticized and then to know that other agencies are doing it,
and HCFA in particular I mean does it every day. They buy equip-
ment and all kinds of things for people in contracting and then
criticize this, I just find that very interesting.

Mr. SHays. Well, the inspector general doesn’t oversee other
agencies. So they got a job to look at their own agency.

Mr. Towns. Yes, but I am saying that if it’s wrong and inefficient
and all these other kind of ugly things, you know, over here. Then,
God, it must be really ugly over on the other side. That’s all I am
saying. That’s the only point I am making.

Mr. Suays. OK, well, if that’s your only point then OK. Let me
just say to you that my approach in this first hearing is just to in-
troduce us to this issue and to—Mr. Carlson, I think we'll have
more contact, and Mr. Harnage, I appreciate the tone of your testi-
mony because the bottom line is the public sector is going to find
itself out of business if it can’t compete with the private sector.
Therefore, it’s important that we make sure the public sector has
the tools to adequately compete.

But I do believe in contracting out. I just think sometimes you
can be far more efficient. I realize this is kind of a stretch to make
an analogy, but our local electric plant in Bridgeport, they’re ulti-
mately going to sell it to a smaller company and they'll sell to a
larger—and be part of a larger grid because they can’t always oper-
ate at peak performance. And sometimes they’re not operating the


58

Because some offices were not following requirements for maintaining office equipment
these offices may have a difficult time establishing responsibility or recovering on lost, stolen or
destroyed equipment.

‘Recommendation:

‘We recommend that the Office of Management and Policy remind offices of their
responsibilities under OIG Manual Chapter 1120 to establish and maintain a furniture and
‘equipment inventory control system. This system should require that custody receipts be
maintained for equipment assigned to employees on a temporary basis.

A few instances of problems with procedures regarding Law Enforcement Availability Pay
(LEAP) were discovered.

Our review of LEAP records in one office found that there were discrepancies between
the Investigative Case Management System (ICMS) monthly report and the agent's monthly
LEAP report. Reconciliations of these two reports were not performed and the discrepancies
were not discovered until our review. In another office, one of the three months of LEAP reports
we attempted to test was not maintained. Also, we found that not all agents were retaining daily
time records to substantiate their LEAP.

IG Bulletin 95-IG-01 states that the supervisor will perform a monthly review of each
criminal investigator's hours worked. It states that appropriate supporting documentation should
be generated using existing ICMS case hour input forms and report summaries, Although not
required by regulation, agents should maintain some form of daily time records to substantiate
LEAP.

This condition has resulted in these offices not being in complete compliance with LEAP
documentation requirements and could lead to questions as to whether all agents performed the
hours required for LEAP.

Becommendation:

The Office of Investigation should remind their offices of procedures required to perform
monthly reviews of each criminal investigator's monthly LEAP report and appropriate reports
from ICMS. Also, the Office of Investigation should require that all agents maintain some form
of daily time records to substantiate LEAP. In 2 revision to the Investigation/Operations Manual
dated September 12, 1997 the Office of Investigation requires that criminal investigators track
and maintain a record of availability hours. However, it stops short of requiring that the record
be maintained on a daily basis. We feel this requirement could be strengthened by requiring
daily record maintenance.

13


112

The NAPA study confirms that HUD's contracting decisions were not based on
cost considerations or based upon improving HUD's ability to carry out its mission and
key functions but on arbitrary and inaccurate personnel ceilings.

Unfortunately, the September 1997 HUD Inspector General audit report on HUD's
contracting activities from 1992 through 1996, which has been discussed in more detail
at today's hearing, indicates that HUD continues to pay higher costs to contract out work
due to a self-destructive course of needless downsizing.

“Management's contracting environment needs to change to seek ways to

emphasize cost consciousness and assure the best value for dollars spent.

Because HUD managers did nat have the staff to complete the product or

service in house, the question of ‘What will it cost?’ was often not seen as

an issue.”

(Audit Report #97-PH-163-0001, Executive Summary, page iv.)

| direct you to the IG audit of HUD's contract with KAJAX Engineering, Inc. HUD
has paid nearly $12 million from September 1993 through February 1997, for the private
company to handle written and telephone inquiries from mortgage companies, HUD Field
offices, homeowners and other interested parties. The KAJAX employees sit in the HUD
building in Washington, DC, represent themselves as HUD employees and process
roughly $13 million of HUD proceeds received in the mail each year. The decision to
contract out this work rather than perform the work in-house was not made based on a
cost comparison.

"HUD's Deputy Director for Financial Services stated that HUD lacks

available staff to handle the volume of calls received and the department

‘was not allowed to hire additional employees. Further, he noted that it was

easier to obtain funding for contract services rather than for hiring additional

staff.”
(Id. at Section V, page Ixx.)


16

ATTACHMENT A

ACTION PLAN
‘Management Improvements in the Contracting Process

« Needs Determination, Planning and Periodic Assessments.

The Department will establish a Contract Management Review Board (CMRB) chaired
by the Chief Procurement Officer and comprised of senior officials from the Office of the
Secretary, the Chief Financial Officer, the Office of General Counsel and the Assistant
Secretary for Administration the Office of Policy Development and Research. The
CMRB will perform the following functions:

=> Review and approve each program office's procurement strategic plan for all new
procurements and interagency agreements estimated to exceed $5 Million.

=> Conduct periodic reviews of each program office's progress in implementing their

approved strategic plans.

Proposed Implementation Schedule:

Appoint CMRB members Completed.
Hold initial CMRB meeting to adopt rules Completed.
Hold first business meeting Completed.

Complete review of procurement
components of FY 1999 Business Operating
Plans By September 1, 1998

© Contract Oversight and Monitoring.
The Department will improve contract oversight and monitoring by:
=> Appointing a Chief Procurement Officer (CPO) who will chair the CMRB, review
new contracts and interagency agreements over $5 Million and supervise an ongoing
program to improve GTR monitoring performance.

=> Implementing a Government Technical Representative (GTR) Certification Program
which would:

© Assure that all GTRs have received basic training (the current GTR course or
equivalent) in their responsibilities prior to their assignment;


28

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OPENING STATEMENT OF

REP. EDOLPHUS TOWNS, RANKING MINORITY MEMBER
SUBCOMMITTEE ON HUMAN RESOURCES

JUNE 5, 1998,

Mr. Chairman, thank you for holding today’s hearing on procurement activities at the
Department of Housing and Urban Development. HUD has long had problems with procurement
awards. In the 1980's, this subcommittee, under the leadership of Rep. Lantos uncovered major
‘examples of fraud, waste and abuse in HUD contracting practices.

HUDs procurement process entails receiving descriptions of need, soliciting and
receiving offers, awarding contracts, making necessary contract modifications, resolving disputes
and closing out competed contracts, One must remember that the purpose of procurement
allow the program offices to perform the mission of the agency. Mr. Chairman, we would make
‘a mistake if we failed to consider the difficult and important mission of this agency. HUD is

10

charged with spurring community development. encouraging private home construction and
rehabilitation, providing housing assistance for low and moderate income individuals, the elderly
and the handicapped. Additionally, HUD is charged with the responsibility of promoting fair
housing laws. In carrying out this diverse mission, this agency has annual contract obligations of
approximately $400 million.

HUD’s contracting practices have long been an area of concem and were a major factor
in GAO's decision to place HUD on its “high risk” list, HUD's IG found that many of HUD's
procurement actions resulted in quality, cost efficient products. However, the IG also found that


94

budget number, which they represented as a government estimate,
and we were criticized for that as well.

The inspector general was talking about the Lockheed contract
for $800 million or whatever, kind of leaving the impression that
there was a 50 percent problem in the dollar amount of the con-
tracts reviewed, Dut if you look at what the IG wrote, there was
nothing in the audit report that said that anything was improper
or contrary to the regulation on the Lockheed contract.

So I think when you take a look at trying to empower contractors
and contracting officers to be innovative and creative in solutions
to problems that HUD and other agencies for that matter are fac-
ing, you have to be sensitive to what audit reports like this do.

‘he audit demonstrates a lack of understanding in contracts. I
think it’s important for people to know that when you have an in-
definite quantity contract, normally the Government will say,
“We're going to give you $10 million worth of awards,” or what-
ever—it’s a huge number, usually, the value of the contract, but it’s
not a contract. It’s merely an opportunity to go after additional
task orders.

Well, contractors use that information to develop overhead rates
and other sorts of factors. I don’t want to bore you with all the me-
chanics, but what happens is if the contractors don’t get that vol-
ume of work, then they could potentially, and likely will, experi-
ence a financial loss on the contract.

So when you do the original IQC there’s tremendous competition
because, if you don’t get into the initial cut as a contractor, you
have no opportunity to get any task orders. So you want to ensure
that your price is as competitive as possible. The problem comes in
when you have an IQC and the contracting officer doesn’t award
you any task orders. That can be devastating to a contractor.

I am sorry your colleague from Ohio left because contractors
aren’t motivated solely by profit. There are contractors that I know
of that work with HUD who every day face decisions in taking
marginal contracts because they have 700 employees who have
families to feed. They take contracts that a normal business person
wouldn’t take.

But be that all as it may, we talk about the regulations. I mean
in the audit report there are even instances where it says that the
contracting officer complied with all the regulations, and they still
didn’t like it. And so my concern is that as long as we keep doing
these inspector general kinds of audit reports by »ple who don’t
understand how cost plus contracts work, who don" t understand
how overhead rates are truly applied, and give the impression that
this is a process run amok where contractors just walk in with
shovels and take out bags full of money, there is a problem.


HUD's Reactions to the OIG Audit Report

The audit report was issued in draft to HUD’s former Deputy
Secretary on August 7, 1997. The former Deputy Secretary
responded on September 8, 1997 with a two-part message. First,
the former Deputy Secretary said that the OIG draft report
validated the conclusions reached by NAPA in its initial review
of FHA contracting, and the OIG recommendations would be provided
to NAPA for consideration as part of the contract system
redesign. Second, the former Deputy Secretary said that the OIG
draft report was "flawed in its methodology, [contained] factual
inaccuracies, and [was) unbalanced in its characterization of
specific contract actions," and therefore inconsistent with
Generally Accepted Government Auditing Standards. The Deputy
Secretary’s response is Appendix A of our September 30, 1997
audit report.

When the audit report was issued in final on September 30,
1997, the OIG requested--within 60 days--a status report on each
recommendation in the report, indicating i) the corrective action
taken; ii) any proposed corrective action and the date to be
completed; or iii) why action is not considered necessary.

The Department’s response came 160 days later, on March 10,
1998. The response promised immediate institution of the
following procurement reforms: establishment of a Chief
Procurement Official (CPO); mandatory training and certification
for GTRs/GIMs; inclusion of contracting rating elements in the
performance plans for GTRs/GTMs; Office of General Counsel
participation in certain procurements; and improvements in HPS.
The response also reported that the Office of Procurement and
Contracting had made substantial progress in requesting overdue
close-out audits, and had also taken measures to prevent future
backlogs in this area.

Notably, the Department’s response disagreed with the OIG’s
assessment that certain HUD contracts were prohibited under the
Federal Acquisition Regulations, but failed to provide any basis
for this disagreement. Further, despite the delay in responding
to the audit, the Department reported no action on the OIG’s
recommendation that the Department i) review problems identified
by the OIG with regard to specific contracts and interagency
agreements; then ii) determine what steps are necessary to
protect the Department's interest; and iii) where necessary,
either amend or terminate contracts/agreements not providing a
necessary service or cost efficient results. The response was
simply that the Chief Procurement Officer, when hired, would be
tasked with reviewing these matters.


1
© Require advanced GTR training for individuals charged with monitoring large
and/or complex contracts; and,
¢ Require annual contracting-related training to maintain active certification.
=> Placing the GTR course on HUDWEB to make it more accessible.

=> Developing a performance element to be included in the EPPES of all GTRs.

Proposed Implementation Schedule:

Hire Chief Procurement Officer Completed
Develop proposals for GTR training, Completed
certification and EPPES element.

Place GTR training course on Completed
HUDWEB.

Issue memorandum to Principal Completed

Staff establishing GTR training
and certification requirements.

Major program offices establish
full-time monitoring staffs By September 1, 1998

Provide basic classroom training By September 30, 1998
to full-time monitoring staff.

© Prohibited Services

To sensitize staff to concerns related to “personal services” and “governmental
functions,” the Department will take the following steps:

=> Program and contracting staff will be reminded of the prohibitions related to
personal services” and “governmental functions.”

=> The GTR training course will be revised to incorporate a module with appropriate
case studies concerning these areas,

= All new contracting requirements for services will be reviewed by OGC staff to
assure their legality.


83

program office head shall be responsible for the accuracy of information reported to the
cognizant HCA concerning training and past performance of GTRs and GTR nominees.

Maintenance of GTR training records. The CPO will maintain a list of all certified GTRs.
The list will be available on the Department's HUDweb Contracting homepages. It shall be the
responsibility of personnel appointed as GTRs to provide the CPO with information needed to
update and maintain their status (¢.g., evidence of courses completed).


STATEMENT OF

SUSAN GAFFNEY, INSPECTOR GENERAL
BEFORE THE

SUBCOMMITTEE ON HUMAN RESOURCES

COMMITTEE ON GOVERNMENT REFORM AND OVERSIGHT
HOUSE OF REPRESENTATIVES

JUNE 5, 1998
HUD CONTRACTING: VULNERABILITIES AND PROPOSED SOLUTIONS

Chairman Shays and Members of the Subcommittee, I appreciate
the opportunity to testify, along with Edward Momorella, about
HUD contracting issues. Mr. Momorella, the OIG’s District
Inspector General for Audit in Philadelphia, directed the
nationwide audit that resulted in the Office of Inspector
General's (OIG’s) September 30, 1997 report titled "HUD
Contracting."

Our testimony today will review i) the principal findings of
the OIG’s September 30, 1997 audit report; ii) HUD’s reactions to
the audit report; iii) current efforts to improve HUD
contracting, as the OIG understands them; and iv) the importance
of efficient and effective contracting to HUD’s 2020 Management
Reform Plan.

The OIG‘s September 30, 1997 Audit Report on HUD Contracting

By letter dated November 14, 1996, Senator Bond, Chairman of
the Subcommittee on VA/HUD Appropriations, and Senator Faircloth,
Chairman of the Subcommittee on HUD Oversight and Structure,
asked the OIG to comprehensively review HUD’s use of its
contracting authority. Their request was based on concern, as
HUD downsizes, about the risks associated with HUD’s reliance on
contracting its responsibilities.

In response to the Senators’ request, between February 1997
and June 1997 Mr. Momorella directed a team of 26 auditors in
reviewing HUD contract activity from 1992 through 1996. During
this period, HUD awarded about 9,600 contracts worth over $3.2
billion. The OIG team examined in detail 63 contracts worth $1.5
billion held by 30 contractors. In the process of the audit, the
team interviewed more than 225 persons, including HUD managers,
Contract Specialists, Government Technical Representatives and
Monitors, contractors and unsuccessful bidders.

our selection of the contractors and contracts for detailed
review was judgmental--we wanted to provide broad coverage of HUD
programs and services and to focus on areas of greatest
vulnerability. This targeted focus notwithstanding, it is
significant that the auditors found problems in virtually every
contract they reviewed.


lll

practices. It simply needs to follow, rather than use clever tactics to avoid, existing
federal policy and best practices under OMB Circular A-76.

HUD has a history of eschewing full and fair public-private cost comparisons
and directly resorting to contracting out work because of self-inflicted in-house
‘Staffing shortages.

OMB reported three years ago, that several agencies-—including HUD -~ each
could have saved several million dollars by performing functions directly rather than
having them performed by contractors. They did not do so because either their requests
to OMB for the necessary full time employee equivalents (FTEs) were refused or the
agencies were so sure such requests would be refused that they were not even
submitted.

Independent experts from the National Academy of Public Administration (NAPA)
performed an extensive review of HUD's ability to carry out its mission efficiently and
effectively. "Because of staff shortages, HUD has relied on contractor assistance in
instances where considerations of efficiency and economy would favor performance in
house." (Renewing HUD: A Long-Term Agenda for Effective Performance, page 140.)

The NAPA report was published in 1994, years before HUD embarked on its plan
to cut its federal work force to an arbitrary number of 7,500 by 2002, a 28 percent cut in
staff. Even with HUD's updated forecast that it needs approximately 9,000 FTEs, the

problem of contracting out solely because of lack of staff, not cost savings, is increasing.

? Office of Management and Budget, Summary Report of Agencies’ Service
Contracting Practices (January 1994), p. v.

6


81

1 course (40 hours) covering the GTR's role in the entire contracting process,
including: contract planning and request; proposal solicitation and evaluation;
contractor selection and award; contractor performance monitoring, (including.
record keeping and technical guidance) and contract administration (including
modifications, disputes and terminations); or

1 course (20 hours) covering the GTR’s role from planning through contract
award; and,

1 course (20 hours) covering all aspects of contract administration.

Advanced curriculum. GTRs who monitor large (exceeding $5 million) and/or highly
complex contracts (or significant portions of such contracts, e.g., task orders over $5
million) are required to complete training in advanced topics such as:

Writing Performance Work Statements, (24 hours) (Note: Courses in writing work
statement other than performance work statements will be considered on a case by

Cost Estimating for Technical Personnel (24 hours)
Evaluating Contractor Performance (24 hours)

GTRs assigned to monitor multiple contracts may also be required to meet the advanced
training requirements.

Substitution of other training. The Chief Procurement Officer (CPO) may on a case
by case basis, approve the substitution of substantially similar instruction for the
requirements listed above. The following are provided as examples of potentially
acceptable substitutions for the basic courses. The CPO may approve other courses based
upon an individual's expertise and experience.

Introductory course in Federal Procurement with an emphasis on types of
contracting most frequently used in HUD (.g., services vs. supply)

Basic Federal contract administration with an emphasis on services contracts (vs.
supply)

Completion of HUD's intranet (HUDweb)-based self-instructional GTR course

Normally, these courses will be offered in-house


107

HUD is trying to get its own house in order by reforming its contracting practices
but, thus far, we have seen no indication that HUD plans to comply with existing basic
federal procurement policy that requires public-private competitions. HUD seems to be
reinventing itself to further circumvent sound federal contracting policy and practices.

For years HUD has eschewed following the Office of Management and Budget's
Circular A-76, which is supposed to guide agencies on determining who should perform
commercial activities, and encourage competition and choices in management. Under
the OMB Circular A-76 process, agencies utilize a public-private cost-comparison to
make sound and justifiable contracting decisions,

The Basics of the OMB A-76 process.

At the heart of a public-private cost competition are three core components -- a
‘statement of the performance of work, an in-house cost estimate, and a comparison of
the in-house bid against a proposed contract.

The statement of performance of work defines what services are being requested,
the performance standards and measures, and time frames required. It is a performance
‘oriented document, specifying what outputs or measures are desired and directions as
to how the results are achieved. Without a good performance of work statement, an
agency cannot get reliable bids. Failure to prepare a thorough, well-thought out
performance of work statement will leave agencies practically unable to monitor contract
performance.

Under OMB Circular A-76, HUD's in-house cost estimates must reflect the scope

of the performance of work statement. The in-house cost estimate is based upon a


92

Mr. KuciNicH. For managers to revisit or reverse that
outsourcing decision, such as if there’s contractor default, overruns
and nonperformance?

Mr. CarBERRY. Yes, we are going to review those contracts on an
annual basis to see what extent the parameters are given to us to

et the program approved are actually being met. Those are the
inds of reviews that are done on a regular basis in private indus-
try, and we are going to be doing the same thing.

Mr. KucinicuH. And so at a minimum you're going to—will you
have annual audits of the post contract award performance of
outsourced activities?

Mr. CARBERRY. We'll be reviewing the performance. I would not
call it an audit.

Mr. Kucinicu. Will you recompete commercial activities if they
don’t realize their savings in performance protection?

Mr. CARBERRY. It depends on what the circumstances are. I
mean we could cancel p: s, too. I mean if it’s not accomplish-
ing what it was intended to accomplish, if it’s going to take too
long, we can decide we are not using the resources like that any-
more and cancel it entirely.

Mr. Kucinicu. You know, as we all know, Mr. Cuomo is a major
proponent of labor-management partnership and the process of gov-
ernment reinvention, and I just wonder how that principle could be
applied to the new Contract Review Board.

ir. GLASER. We should note that as part of the overall reorga-
nization of HUD which is called the HUD 2020 Management Plan.
That plan was developed in consultation with AFGE and NAFE,
our two major unions, and in something which is unprecedented as
far as we understand in the Federal Government, we actually
signed an agreement, several agreements, with both unions last
summer, accepting the components of the plan.

The union agreed to do certain things. d to do certain
things. Last week our AFGE local president addressed HUD em-
ployees to say he was very satisfied with the progress of what HUD

as done. It truly has been a model of labor partnership.

Mr. Kucinicu. I applaud you for that, and I wonder if you'll take
the next step and put a member of the union on your .

Mt. GLASER. It’s certainly something we will consider thinking
about.

Mr. Kucinicu. I think that would take an important step toward
coordinating because, as you know, the people who are doing the
work out there at the front line, they get the information and could
probably make things work a little bit more effectively. I just
thought that I would offer that for—

Mr. GLASER. It’s a very interesting idea.

Mr. KucinIicu. I wish you well in your work, Mr. Carberry. It’s
a task that I think, given the amount of evidence that is available
for your review, must at times appear to be daunting. But I will
support you in your efforts to try to straighten out the contract pro-
curement process and to try to make sure that the ple of the
United States are getting full value for their tax dollar and to
make sure the people that HUD serve will find that the agency will
be Fore responsive. I wish you, and the people working with you,
well.

Mr. CARBERRY. Thank you very much.


60

OTHER ITEMS

We also encountered two other minor situations. One was that an evidence log
maintained by one office did not contain enough information to adequately identify the evidence
or its location. To remedy this, the Office of Investigation should remind offices that
information contained in evidence logs should adequately identify the evidence and its location.

‘The other situation involved one office not performing unannounced counts of the
cash/imprest fund at the location. This would be remedied by periodic cash counts being
performed and documented by someone other than the responsible cashier. The Office of
Management and Policy should remind offices that if they hold a cash/imprest fund a periodic (at
least quarterly) unannounced cash count should be performed on the fund by someone
independent from the responsible cashier.


56

Procedures established to control ADP equipment were not being enforced.

Intemnal controls established for maintaining ADP equipment were not being enforced in
all offices. Various conditions existed regarding the maintenancé of ADP equipment. Some
offices were not maintaining an inventory of all ADP equipment or the inventory was not
current. Offices did not always maintain custody receipts for notebook computers. One office
assigned a notebook computer to a non-OIG employee of HUD and no custody receipt was
signed by the employee. Also, field office and headquarters ADP inventory lists did not agree.
Another point regarding ADP equipment is that there was no hard plan which states the number
and types of equipment to be purchased during the fiscal year. Instead, a minimum standard for
equipment was set and purchases were made if they met this standard and funds were available.
This has led to many purchases taking place at the end of the fiscal year which gave the
appearance of year-end spending.

OIG Manual Chapter 1054 establishes controls over microcomputers, associated
hardware, software and documentation. It states that such equipment should be included in a
local and central inventory. It also states that employees must sign custody receipts for portable
computers assigned to them.

Because all offices were not maintaining a current inventory of all ADP equipment or
requiring custody receipts for notebook computers, OIG was not in compliance with procedures
established to control ADP equipment. Should equipment be lost or stolen, recovery or
replacement of this equipment would be more difficult. This would be especially true in the case
of custody receipts, if it is concluded that an employee is to blame for lost equipment.

Recommendations:

1 We recommend that the Office of Management and Policy remind offices of their
responsibility to follow the provisions of OIG Manual Chapter 1054 regarding ADP
equipment. They should remind offices to pay particular attention to the section on
inventory control and maintain a current inventory, keep Headquarters advised of any
purchases made and require custody receipts for all portable equipment assigned to

employees.

2. As far as purchasing ADP equipment is concerned, the Office of Management and Policy
should establish a more detailed plan. This plan should give more detail about the
number and type of equipment to be purchased during the fiscal year. Planning for the
purchase of this equipment should be spread out over the course of the fiscal year.


18

HUD's 2020 Management Reform Plan and supporting documents indicate that the
Department's reliance on contractors to help carry out its responsibilities will remain
significant. For instance, the plan calls for HUD to contract with private firms for a
number of functions, including physical building inspections of public housing and
multifamily insured projects; legal, investigative, audit, and engineering services; and
activities to clean up the backlog of troubled assisted multifamily properties. Previously,
physical inspections of multifamily projects were carried out by HUD personnel,
mortgages, and regional contractors. The plan also encompasses the potential use of
contractors to manage construction under the HOPE VI program.‘ Finally, the 2020
reforms call for transferring the Office of Housing's contract administration activities for
its rental assistance programs to contract administrators. The new arrangement would be
similar to the process under the Office of Public and Indian Housing's rental assistance
programs. Currently, approximately 1.1 million assisted rental units are administered by
the Office of Housing under contracts with project owners. The Office of Housing
performs the role of contract administrator and makes monthly rent payments to owners
on behalf of eligible families. Under HUD's proposal, these activities would be carried
out directly by contractors (often, housing finance agencies or housing authorities)
instead of HUD employees.

WEAKNESSES EXIST IN HUD'S CONTRACTING PRACTICES

We, HUD's Inspector General, and the National Academy of Public Administration have
identified weaknesses in HUD's contracting practices. For example, our review of HUD's
oversight of real estate asset management (REAM) contractors, who are responsible for
safeguarding foreclosed HUD properties, found that HUD did not have an adequate
system in place to assess its field offices' oversight of these contractors.

“The HOPE VI program provides funds for, among other things, the demolition,
rehabilitation, and construction of public housing.

4


47

- funds control over Salaries and Expenses and Operation Safe Home,
= control of ADP and other equipment,
= controls over purchased or seized evidence, and
= controls over travel and training.
We performed work at Headquarters and each District level office during the period from
June through September 1997. While we structured our review based on the requirements of

Government Auditing Standards, this review was not in accordance with those standards. In this
regard, the Office of Audit is not organizationally independent of the Office of the Inspector
General.


51

Recommendations:

The following recommendations for the Office of Management and Policy should bring
OIG into compliance with procedures and internal controls established for IMPAC credit card

1. Remind offices of procedures established in HUD Handbook 2212.1, REV-2 for
approving statements in a timely manner and maintaining copies of supporting
documentation. A second or altemate approving official should be assigned to approve
the statements in the absence of the approving official.

2 ‘Obtain written authority from the Office of Administration to purchase ADP equipment
with the credit card. If this written authority is not received, OIG should comply with the
provision not to use the credit card for this purpose.

3. Remind offices of the $2,500 limit placed on purchases and the prohibition on splitting
purchases to remain within that limit.

The official system for reporting Operation Safe Home funding showed that funds were
being committed and obligated, but these commitments were slow in belng liquidated and
reported as expended.

The Office of Investigation was allocated $2.5 million in Fiscal Year 1996 and $5 million
in Fiscal Year 1997 for Operation Safe Home activities. This is no-year money and as such is
not lost at fiscal year end. As of July 10, 1997, the FFS reported the following regarding the
total Operation Safe Home allocation of $7.5 million:

- $2.7 million has been committed

= $1.8 million has been obligated

- $0.9 million has been expended

- $2.1 million was uncommitted/unobligated

Only $900,000 or 13 percent of the $7.5 million allocated for Operation Safe Home was

reported as expended in FFS as of July 10, 1997. This means that $6.6 million or 87 percent of
Operation Safe Home funds were reported as unexpended in FFS on this date. The $4.5 million
of commitments and obligations were slow in being liquidated. The Office of Investigation has

given several reasons for the slow liquidation of obligations and reporting of Safe Home
expenditures. They include:
- Memorandums of understanding with local police departments call for reimbursement of
overtime expenditures. Funds cannot be disbursed unti] police departments submit
invoices with supporting documentation requesting reimbursement for services provided.

6


80

ATTACHMENT B
GTR CERTIFICATION PROGRAM.

Purpose

As the Contracting Officer's authorized technical representatives, the Government
Technical Representative (GTR)! and Government Technical Monitor (GTM) play critical roles
in the success of Departmental contracting.

In the pre-award phase of a procurement, the GTR helps the Contracting Officer ensure
that HUD accurately portrays its needs to potential contractors and accurately estimates the cost
of the ensuing contract to the Department. The GTR may also assist in the selection of the
contractor and in negotiating the final terms of the contract.

Once a contract has been awarded, the GTR is the Contracting Officer's technical “eyes
and ears.” The GTR monitors contractor progress and the quality of work performed, and guides
contractors in using the most efficient, cost-effective methods of performing the contract. When
contractor performance is deficient or when problems associated with the technical requirements
of the contract arise, the GTR is expected to be the first to know and to quickly alert the
Contracting Officer. The GTR is also expected to help the Contracting Officer determine the
best remedial action for deficient contracts and contractors. (See Handbook 2210.3, Procurement
Policies and Procedures, Chapters 4, 5, 11 and 12.)

Given the critical nature of the GTR's role in the procurement process, HUD staff serving
as GTRs must; (1) be thoroughly knowledgeable of the technical areas covered by the contract;
and, (2) possess a solid fundamental understanding of the Federal contracting process as
implemented by HUD.

Therefore, this certification program is designed to ensure that all otherwise technically
qualified GTRs receive appropriate procurement instruction sufficient to prepare them to perform
their duties.

Training Requirements

Basic Curriculum. Prior to their assignment, all GTRs must complete the following
courses of instruction, or an acceptable substitution (see below):

Government Technical Representative’

"The term °GTR" is @ HUD creation. Most Federal agencies use the terms “Contracting Office's Representative (COR) or
Contracting Officer's Technical Representative (COTR). As those names reflect, the GTR is truly the Contracting Officers
representative

Except as specifically noted, the term GTR shall include GTM.


135

often to determine is it now better to bring it back in-house and
save the taxpayers money or should it stay outside, as well as
studying those that are in-house, whether or not they should go
outside.
Mr. Suays. Mr. Carlson, that seems logical to me and reasonable.
Would you disagree with what you just heard? You know, I ex-
Mr. Harnage to come in and basically say, “It’s your civic
responsibility to make sure that if it’s public, it’s done by the pub-
ic.

That’s not the message I’ve heard from him. It’s not the message
as I’ve gone through his statement. His response was that the pub-
lic sector should also be able to compete for it as well as the pri-
vate. Would that be a statement you’re comfortable with?

Mr. CaRLSON. I have no philosophical disagreement with that. I
think, however, that if a contract has been awarded to someone
that is firm fixed-price for 4 years or whatever, that while it may
be an interesting exercise it would be a purely academic exercise
to test it prior to the end of that contract unless someone were to
decide that a contract termination would be appropriate. To change
horses in the middle of the stream, so to speak.

But I can tell you from personal experience, because that’s what
I do for a living, that if you terminate a firm fixed-price contract
in that kind of circumstance, someone could put together what is
called a termination settlement claim that would knock your socks
of

Mr. SHays. Well, it seems to me that if you have a firm fixed-
price contract that sometimes the private sector could lose on that,
and sometimes it can gain. The benefit to the public is that at least
we know we are paying. We are not going to pay more. We are not
going to pay less.

Now, but what I am also hearing from the private sector in other
areas is that sometimes we bid out to the private sector and then
the private sector comes back and asks for more and asks for more
and that to me is a legitimate complaint on the part of the public
sector employees.

Mr. CARLSON. Well, Mr. Chairman, I don’t know if I can speak
to the public sector employees. I am just not familiar enough with
A-76 and those sorts of things. I think Mr. Kucinich, the gen-
tleman from Ohio, was talking about contract growth but all the
contracts that were referred to in the Inspector General’s report
grew properly at HUD.

Indefinite quantity contracts are just that. If there is a need for
more than anticipated, the contract value would grow. You can get
very dramatic responses by saying a contract ‘fee from $9 million
to $30 million. People’s eyes will flutter and their ears will smoke.
But in reality it’s all legitimate because the requirement was not
known at the outset, and if HUD has an IGC contract which is
based on competition at the outset, that’s what the vehicle is de-
signed for. And I don’t know how that relates to Government em-
ployees.

Mr. Suays. Well, but one of the things that I think comes out
pretty loud and clear from the IG and GAO is that we have people
who aren’t qualified to bid out these contracts and oversee them,
and frankly I'd be surprised if you would disagree with that.


13

at one of the properties, and you can see off to your left. That prop-
erty that was showing there, realtors had been showing that prop-
erty just like that, and I can’t imagine too many people wanting
to buy that property. In fact, one of the realtors mentioned that the
entrance to the property was blocked with furniture and debris.

So that was the first point that, when evaluations are made,
they’re not really telling the contractor what’s coming out. Also, we
found that when they’re doing evaluations, HUD field offices often
aren’t visiting the properties This photo represents a case where
this property they did visit, but in a lot of cases they weren’t. For
example, 1 field office, we evaluated 42 properties, found that HUD

dn’t done onsite inspections of any of them, and as a result of
this, the properties were in a certain physical condition, but the
REAM contractor was able to tell HUD that things were fine. For
example—and we didn’t show you this picture just out of sensibil-
ity—we went to one property and found animal feces, fur, and per-
sonal possessions. However, the contractor had told HUD that that
Property had been cleaned out. Of course it hadn’t.

thermore, we visited properties and found health and safety
hazards, warranting immediate repair by the contractor. And we
have another photo there of a Property, 3 months after HUD
learned that the front steps were dangerous and needed immediate
attention. Yet, as the photo shows, in those 3 months that defi-
ciency had not been co! .

It gives you a little bit of the flavor of the kinds of deficiencies
that we are finding in the REAM’s contract. That’s just one illus-
tration of the contracting problems. Overall, we, the inspector gen-
eral, and the National Academy of Public Administration, have
identified numerous weaknesses in contract. And I'll just give you
a couple for an example: procurement systems that contain inac-
curate information, inadequate oversight of contractor perform-
ance—I’ve sort of given you some examples of that today—and staff
who have poor understanding of their contract management roles
and responsibilities.

To their credit, HUD has recognized the need to improve its con-
tracting process, is beginning to take action to address the prob-
lems which we, the IG and NAPA, have identified. I'll just give a
few examples. I am sure Mr. Carberry will go into these in more
detail during his statement of the kind of things that HUD is talk-
ing about.

In its self-assessment under the Financial Integrity Act, HUD
itself cited contracting as a material weakness. The 2020 plan that
HUD has put together includes efforts to redesign contracting pro-
curement processes. HUD has appointed a chief procurement offi-
cer; they've established a Contract Review Board, and finally, ad-
dressing REAM’s contracts themselves, HUD has modified its re-
quirements so that the field offices will now be required to submit
routine reports on the performance of the contractors.

We view HUD’s actions as positive steps, but obviously key ques-
tions remain, and as I mentioned, information is a key word that
we had focused on. Another would be implementation. I think
HUD’s ideas are good, but I think you really have to focus on the
follow-through, and just a couple of thoughts to help guide that:
first, the question of whether HUD will have the resources it needs


187

plant at peak performance and peak efficiency, whereas if it was
part of a er grid, they could and reduce costs for everyone.

And I realize that’s the private sector actually selling out, and
in some cases the private sector contracts out for services. I was
meeting with Mr. Walch at GE, and they don’t do the food in their
cafeteria anymore, and the people who do the laws, they’re private
contractors, and it’s much more efficient for the company and then
all the other employees who work in the company can be focused
on their primary responsibility.

It just makes me make one more point that I want to make: It
seems to me that some of what Hi! has to do will be, as we do
downsizing in some cases, that the employees who remain will
have to have an expertise sometimes in contracting out, but the
other part is that the employees who remain also have to have the
ability to know how they can compete and actually make a bid
presentation and show how they can do it better than the private

sector.

So we look forward to having that dialog and I appreciate Mr.
Carberry staying and just listening to this testimony as well.

Bottom line, this is just our introduction. Either way, T don’t
know what party will be in power next year, but I do think that
on that side a ranking member that you know—{laughter}—let me
say this to you: He did this to me last time and told me he was
going to have the gavel, and he didn’t get it. And he was duly hum-

le when he came back.

I will say, though, given our record in the last few weeks, I am
getting concerned. [Laughter.]

But we'll see how we can change that. At any rate, great to have
you here, and we'll be working with you regardless of who’s in
charge. Thank you. Take care. And this hearing is adjourned.

ereupon, at 12:35 p.m., the subcommittee adjourned subject
to the call of the Chair.]

oO


55

Controls regulating advances of Safe Home funds to special agents for evidence or
information purchases were lax.

Advances of Safe Home funds using the American Express debit cards were not always
used for their stated purpose of evidence or information purchases. Offices were using these
advances to purchase supplies and equipment. In addition, some advances were given verbal
approval and this approval was not documented. In another situation, the supporting
documentation for advances was maintained by the field agents who were not documenting
‘expenditures or reporting outstanding balances to the district office on a regular or monthly basis.
We also found situations where supporting documentation accompanied the advance but did not
contain adequate information such as the related task force or the evidence or information
purchased.

‘A memorandum from the Assistant Inspector General for Investigation dated September
5, 1996 established basic procedures for controlling the use of the debit cards. The memo stated
that debit cards should only be used for drug buys or informants on projects or task forces that
have been approved by Headquarters. This memo gave primary responsibility for establishing
procedures and maintaining adequate documentation and ensuring appropriate use within the
approved budget to the Special Agent in Charge of the district office.

Lack of specific policies and procedures governing the use of the American Express debit
card has led to the conditions that existed in the field offices. There were no uniform internal
controls or documentation requirements established to provide procedures for the use of the
‘American Express debit cards.

This has resulted in some advances not being in accordance with the general guidelines
established for their use. Moreover, the lack of uniform procedures and internal controls has led
to a variety of methods for administering this program. This includes everything from approving
advances to documentation requirements and the return of any unused amounts.

Recommendation:

The Office of Investigation, in its August 27, 1997 procedures and policies relating to
Operation Safe Home funds control, if implemented as written, will address the condition noted
in this finding. Paragraph 12 sets forth specific purposes for which advances can be used.
Paragraphs 13, 14, and 15 establish specific procedures and controls for the requesting,
approving, safeguarding, documenting and returning unused advances. We strongly recommend
that the Office of Investigation implement the procedures and policies contained in this memo
and enforce its provisions.


2

bureaucratic culture and cronyism some believe lie at the heart of
HUD’s longstanding contract woes,

On this, the IG, GAO, and the Department appear to agree: The
success of the HUD 2020 Management Reform Plan depends heav-
ily on types and volumes of contracting not now possible at HUD.
It will place growing demands on the very elements of contracting
capacity the IG found so lacking: accurate needs assessment,
strong negotiating positions, cost consciousness, and vigilant con-
tract oversight.

We asked witnesses today to describe the full extent of HUD’s
contracting vulnerabilities and to help us measure the potential of
planned reforms to correct these deficiencies. We appreciate their
willingness to be a part of our oversight work, and we welcome
their testimony.

At this time I recognize the gentleman from Ohio, Mr. Kucinich.

Mr. Kucinicu. Thank you very much, Mr. Chairman. In my
years of rience in government, mainly local government, what
I found is that every time government gets involved in contracting-
out services, it generally loses control.

It’s just a matter of fact. That’s the way it works, and the prob-
lem is that government in this current climate—there’s such great
pressure for government to contract out services. It’s almost be-
come a religion, privatizing services, contracting out, and as a re-
sult the taxpayers aren’t really getting the benefit of their tax dol-
ars.

I am glad you're having this hearing, Mr. Chairman, to look at
the effects of contracting-out procedures, to see if there’s been any
improvements, but fr: , | am skeptical about this whole theory
that says that the private sector ought to be performing jobs and
duties that are more rightly—should be under the control and prov-
ince of government employments.

And so while we are looking at this and hearing these reports,
I want to say I’m skeptical about everything you represent when
you're involved in this contracting-out practice, and so—and again,
I say this from years of experience at a local level where we found
tremendous amounts of waste and inefficiency because government
lost the ability to control various functions through contracting
them out.

And when I see telephone inquiries being handled by—or being
contracted out—the simple responses that people want from gov-
ernment—no wonder people think government doesn’t work be-
cause they’re not dealing with the government half the time.
They’re dealing with agents of the government who have the man-
tle of the government but not the accountability.

So this is a good hearing. It’s important, Mr. Chairman. Thank
you very much for holding it. I am looking forward to it.

Mr. Suays. I thank the gentleman, and I look forward to the
hearing and considering all aspects of the issue. If I could, I'd like
to just deal with two requirements that we have as a committee—
to ask unanimous consent that all members of the subcommittee be
permitted to place any opening statement in the record and that
the record remain open for 3 days for that purpose. Without objec-
tion, so ordered.


72

National Academy of Public Administration (NAPA) to assist with the procurement

redesign.

Our review of the HUD procurement system indicates two fundamental
weaknesses. First, the Department has done a poor job of needs assessment and
procurement planning. Second, contract oversight and monitoring do not receive
sufficient allocation of resources or attention. The GAO and IG reviews confirm these
findings. To address these weaknesses, the Secretary directed that the Department take a
number of concrete steps to improve accountability and performance. A more detailed
conclusion of our Action Plan has been included with my written testimony. I'd like to

briefly describe the main points of the plan.

First, the Department identified procurement as a material weakness of
Departmental management. This step tells Department managers that procurement

reform is a top priority and deserves the highest level of attention.

Second, the establishment of a Chief Procurement Officer, responsible directly to
the Deputy Secretary and the Secretary, is a strong signal of the importance of
procurement management and creates accountability for procurement activities at the

highest levels of the agency.

Third, the Department has established a Contract Management Review Board
(CMRB) to improve needs determination, planning and monitoring. The CMRB

2


27

Mr. Suays. Thank you very much. Let me just welcome our rank-
ing member. I know he’s just getting down and not able to sit
down. He serves on many committees, and he has been just a tre-
mendous active member of this committee, and I am very grateful
for his work. I don’t know if you want to make a statement. We’ve
concluded the testimony. Should we just get into questions?

Mr. Towns. No, I'll just submit my statement for the record.

[The prepared statement of Hon. Edolphus Towns follows:]


70

we can’t lose all the things that we got for the good contract award.
So we have to finish off what we start.

Also for the first time in history we are going to have mandatory
training of the ple both in contracts, which we’ve had in the
past, and also of the people in the program offices. We're going to
train them separately. We are also going to train them individ-
ually—excuse me, as a team. We're going to do just-in-time train-
ing.

We expect a lot of these people to work as a team. We are going
to make sure they have the individual skills that they bring to the
team, and we're going to make sure they have the team skills to
make sure they can work together as a team, with the team headed
up by the project manager.

We're also adding an integrated financial system. It’s been men-
tioned before—certainly this morning by GAO—but good manage-
ment is dependent upon good data. We have a system that’s going
to provide that data. We are also going to train people to learn how
to use it.

And last, and this is a critical one, we’re trying to change the cul-
ture at HUD so that the problems we've seen in the past, which
may well have been systemic, aren’t. And I think we've got a good
beginning for making those changes.

The IG reports—and even before I got hired I went through and
reviewed those—they involve about $1.1 billion that were con-
tracted for before 1983, and some of them even go back as early
as 1984, but I also believe that some of the same problems that
caused those still apply.

We have not done well in the management of our programs and
our contracts, and one of the reasons I’m at HUD personally is to
make sure that changes. Secretary Cuomo has said that the con-
tracting function at HUD has been a poster child on how not to do
it, and for my 2¥2 months I think he’s right. We don’t need to turn
everything around, but there’s a lot of awfully smart, capable peo-
ple at HUD who want to do the right thing.

The timing is right at HUD. HUD is changing in so many dif-
ferent ways, and the concept that HUD needs to change signifi-
cantly and radically is complete throughout the whole organization,
that when you raise a problem as has been raised by the IG that
these are problems that need to be fixed, we lose our credibility en-
tirely as a department unless we get them fixed.

Now if a program needs to be contracted out, therefore it’s impor-
tant to the Department we need to put the resources on it to make
sure we get what we contract for. Those things are now being un-
derstood, and changes are occurring relatively rapidly. I am opti-
mistic.

I really came to HUD to make this all work, and I plan to see
that that’s the case. Now with me is Howard Glaser, who is the
deputy general counsel for HUD, and he’s also on the Contract
Management Review Board that will be reviewing all the pro-
grams, both in their initiation and throughout their life.

If you have any questions, I’d be glad to answer them.

[The prepared statement of Mr. Carberry follows:]


REPORT DISTRIBUTION

Deputy Inspector General, GD

Counsel to the Inspector General, GC

Assistant Inspector General for Management and Policy, GF
Assistant Inspector General for Investigation, GI

Deputy Assistant Inspector General for Audit, GA

Deputy Assistant Inspector General for Investigation, GI
District Inspectors General for Audit, GA
Special Agents in Charge, GI

18

- Appendix C


Some Key Oversight Responsibilities Are Not Always Performed

HUD's field office staff are directly responsible for overseeing REAM contractors. We
found, however, that some key oversight responsibilities were not always performed by
Staff at the three HUD field offices we visited. For example, HUD's field staff did not
always evaluate REAM contractors as required. Field office staff are supposed to
evaluate the REAM contractor's performance every year in the month prior to the
contract's anniversary date. This annual evaluation is used to make decisions on contract
extensions and, if necessary, to act on inadequate performance. However, at all three
field offices we visited, these evaluations were not always conducted or were not always
completed in time to provide useful information for contract renewal decisions. For
example, one of the field offices we visited has evaluated the REAM contractor's
performance only once since the REAM contract was awarded in June 1995, and that
evaluation was conducted several weeks after the contract had already been extended
beyond the base year. Officials in that field office told us that performance evaluations
were not performed because they did not have the staff resources or travel funds to visit
the contractor's office. However, it should be noted that the REAM contractor's office is
only 37 miles from HUD's field office.

Furthermore, in the one evaluation conducted, field office staff did not convey the results
of the evaluation to the REAM contractor, as required. In this evaluation, HUD cited the
contractor for failing to remove debris from some properties. Our inspection of
properties in this field location revealed that the debris removal problem still existed at
the time of our review, more than 1 year later. One property had been shown by realtors
eight times while it contained debris. In fact, a realtor noted that the only accessible
entrance to the property was blocked with furniture and debris, which was the case when
we visited the property. During our August 1997 inspection of 24 properties in this
location, we found that most of the properties contained either interior or exterior debris.
Consequently, prospective buyers were sometimes viewing properties littered with
household trash, personal belongings, and other debris.

6


37

Mr. Towns. So, I guess what I am really saying is: Is there any
kind of a percent that you can put to this? Eighty percent? Eighty-
five percent is good?

Ms. GAFFNEY. In terms of dollars——

Mr. Towns. Well, dollars, yes. Actually what percent would you
say? Yes, dollars.

is. GAFFNEY. I don’t think we can give you a percent. I don’t
think we have a basis for that. Do we?

Mr. Towns. Well, can you give me any kind of a percent that is
something we might be able to measure? Got any other ideas? I am
trying to figure out, you know, I just can’t get a handle on this in
terms of how big is the problem.

Ms. GaFFNEY. Well, we looked at 50 percent of the dollars.

Mr. MoMORELLA. Well, we looked at the most significant infor-
mation technology contract—that was Lockheed Martin—and the
contractor that was hired, NYMA, to monitor Lockheed Martin.
And that area alone represented over $800 million, and there were
some significant problems we had with the administration and
monitoring, direction, periodic assessment and so forth with that

area.

So that’s $800 million out of—I mean that was a significant
chunk right there. Just to give you some kind of ballpark figure
that you're indicating.

Ms. GAFFNEY. That contract alone, during this period, would rep-
resent about 25 percent of the total contract expenditures, correct?

Mr. MOMORELLA. Yes.

Mr. Towns. It is my understanding that your report set forth
several recommendations, and I am going to run through this right
fast. I would like to go through a summary of those recommenda-
tions and have you tell us whether those recommendations have
been 1 implemented or whether there are plans to have them imple-
mented.

First, perform comprehensive planning and assessment of infor-
mation technology needs.

Mr. MoMORELLA. We—and I will answer your question, sir, as we
understand it. Perhaps Mr. Carberry can give you more up-to-date,
but what we have been informed to date is that that has been
given over to Mr. Carberry to plan to do that. To our knowledge
it hasn’t been completed. It’s been——

Mr. Towns. Establish a threshold dollar amount for review of
contract proposals by the CFO and others prior to contract award.

Mr. MoMORELLA. HUD has established that board.

Mr. Towns. Establish specialized positions for " personnel respon-
sible for contract oversight and monitoring to make them full time
jobs with performance standards and training requirements.

Ms. GAFFNEY. Yes.

Mr. MoMORELLA. They have a plan established with target dates
for improving their ernment technical representative and
monitor—

Mr. Towns. So that’s a yes.

Ms. GaFFNEY. Yes.

Mr. Towns. Integrate data system and payment system so that
contract performance and contract payments will relate and can be
systematically monitored.


57

MINOR FINDINGS
Problems with processing travel vouchers were discovered.

‘Some problems in the processing of travel vouchers were discovered during our review.
‘Some offices did not maintain copies of all vouchers. In some cases a copy of the travel order
‘was not maintained. Other vouchers were not supported by necessary invoices. In other offices,
the copy of the voucher maintained by the office did not contain evidence of supervisory review
and approval. Another office had telephone charges which were not supported by charges on
hotel receipts. Offices have given various reasons for the above conditions. They stated that the
originals contained all the necessary documentation and approvals, the accounting office would.
not process the vouchers without all the necessary documentation and signatures, and they did
‘not want to bulk up their files with copies of the supporting documentation for travel vouchers.

OIG Manual Chapter 1031 on records management states that files should be retained by
subject, such as travel. It goes on to state that copies of travel vouchers should be maintained. It
does not state that the voucher should include all supporting documentation. However, good
business practices would require maintaining signed copies of vouchers and supporting
documentation in case the original travel voucher is lost. This would facilitate quick replacement
of the voucher.

As a result of the above conditions some offices of the OIG were not in compliance with
records management requirements of O1G Manual 1031. In addition, they were not following
good business practices by not maintaining signed, complete copies of the vouchers and
supporting documentation.

Recommendation:

The Office of Management and Policy should remind offices of their records
management responsibilities. Offices should be told to maintain signed copies of vouchers and
clarification should be given on the extent of records to be maintained with travel vouchers.

‘Some offices were not complying with requirements for maintaining office equipment.

Some offices we reviewed were not following required procedures for maintaining office
equipment. In some cases the offices were not maintaining an inventory contro} system or the
inventory list was not current. One office did not require agents to sign out equipment, such as
cameras or VCR's, used by them on a temporary basis.

OIG Manual Chapter 1120 requires that offices establish and maintain a furniture and
‘equipment inventory control system. Good business practices would require custody receipts for
equipment assigned to employees on a temporary basis.


23

problem, the stairs still had not been repaired. Other imminent hazards that we saw
included a refrigerator with the door intact on a back porch and properties containing
household waste, food, soiled diapers, paints, and solvents. The failure to address
imminent hazards endangers would-be buyers, as well as neighbors, and puts the
government at risk of litigation.

On the basis of our review of files and properties in the three locations, we found that the
properties were generally in better condition in the locations where staff more actively
monitored the contractors’ performance. We recognize, however, that the condition of
the properties is not totally attributable to HUD's oversight of the contractors. Other
factors can contribute to the condition of the properties, including the overall quality of
the contractor's work and the susceptibility of the neighborhood to crime and vandalism.

0 Exist in HUD's .

We, the Inspector General, and the National Academy of Public Administration have
identified other weaknesses in HUD's contracting with respect to the Department's
procurement systems, needs assessment and planning functions, and oversight of
contractors’ performance.

— Both we and the Inspector General found that HUD's ability to manage contracts has
been limited because its procurement systems have not always contained accurate
critical information regarding contract awards and modifications and their associated
costs. Although HUD recently combined several of its procurement systems, the new
system is not yet integrated with HUD's financial systems, thus limiting the data
available to manage the Department's contracts.

— The Inspector General reported in September 1997 that (1) inadequate oversight of
contractors’ performance has led HUD to pay millions of dollars for services without
determining the adequacy of the services provided and (2) many HUD staff had a poor

9


90

haven't found any yet. All of the requirements that are placed on
us by A~-76 I think we’ve accomplished. We have not done the spe-
cific—we’ve done a few but no specific A-76 studies. That’s because
they weren't required.

(r. KUCINICH. So, but I want to know—how is it that HUD has
managed to spend millions and millions of the Federal dollars to
procure commercial services and never fully followed the Federal
policy, on performance of commercial activities. I know you just got

ere, but are you aware of that?

Mr. CARBERRY. No. I do believe that all the requirements of A-
76 have been complied with.

Mr. Kucinicu. OK, that’s fine. And HUD is planning to depend
more and more on contractors to perform work either currently
done by HUD employees or that was Greviously, done by HUD em-
ployees. Now, do you plan to use the OMB circular A-76 in the up-
coming conversions from HUD employees performing work to pri-
vate contractors performing work? you going to use that?

Mr. CARBERRY. If we did contract out things that formerly had
been done by HUD employees, we’d have to be—be required to use
A-~76. We don’t plan to contract out any work that’s formerly been
done by HUD employees.

The amount of contract we are going to be doing this year is
about the same as what we did last year. That contracting may
well go down. With the kind of detailed review with the Contract
Management Review Board, it’s really unusual where reviews in-
crease the amount of contracting out that you do.

So I don’t think we're going to have an A-76 issue.

Mr. Kucinicu. Well, let me ask you this. For sxample, it’s my
understanding—f this is incorrect, tell me—that HUD already
held preproposal meetings with contractors about its managing and
marketing services contracts for home ownership centers in Phila-
delphia and Atlanta, and under these contracts the role of the con-
tractor is to do everything HUD staff does to manage HUD’s port-
folio property and everything the real estate assets management
contractors currently do. Is anyone here familiar with that?

Mr. GLASER. Yes, if I may, Con; man. What that refers to is
actually what GAO was ti King out earlier today. I missed the
beginning of their testimony, but I understand that they spoke
about the real estate asset management problem at HUD which
has—is actually much worse than they described it to you.

That is a situation where HUD has an inventory of 30,000 prop-
erties that——

Mr. Kucinicu. I heard that and actually read her testimony—
read the testimony.

Mr. GuasErR. OK, I won’t detail with that. What HUD has to do
in those situations is take care of the property. That’s mowing the
lawns, fixing the windows, making sure the lights stay on and tak-
ing care of the thousand little things that a landlord does.

at is not something the Federal Government does or has ever
done itself, We don’t employ lawn mowers or gardeners or any of
the other things that deal with Property management.

Mr. Kucinicu. Well, if I may, Mr. Glaser, reclaiming my time,
did HUD conduct an A-76 study for these contracts specifically,
these contracts? Was there an A-76 study?


44

- Training procedures lacked Individual Development Plans. In addition, one office did
not maintain training records for all agents located in that office.

‘Numerous recommendations have been made to management to correct the findings
Histed above. Some of the most significant were to perform reconciliations of amounts charged
to office budgets, follow established procedures for processing payroll, improve administration
of Operation Safe Home funds by more closely monitoring their expenditure, and implement
provisions of the recently issued procedures and policies memorandum on Operation Safe
‘Home funds control.

‘Upon completion of our work in each office, we gave a copy of our findings to the respective
supervisors and asked for written comments. We received both written and oral comments to
the findings. We took these comments into consideration when determining which findings to
include in this report and how to classify them.


85

2

Although the final results of the NAPA effort are not expected until late this year,
we believe that there are some immediate steps which can be taken to improve contract
oversight. We briefed you and your staff concerning our proposals and invited your
comments. You indicated that you would have none. We also discussed our approach
with NAPA and have adjusted it based upon some of the concems they expressed.
Accordingly, the Secretary has directed me to immediately institute the following
procurement reforms:

. Establishment of a Chief Procurement Officer (CPO)

We are hiring a Chief Procurement Officer who will report directly to the
Secretary and Deputy Secretary and be responsible for procurement planning and
improving the Department's contract oversight capabilities. Priorities include emphasis
on cost estimates and cost consciousness, needs determination, and periodic
assessments. The CPO must review and approve all contracts over $5 million, and
will be charged with review of all interagency agreements.

. Mandatory Training and Certification for GTR/GTMs

The Office of Administration is implementing mandatory training for all new
GTRIGTMs prior to assuming these duties; all current GTR/GTMs will be required to
complete mandatory training by the end of FY 1998. Certification must be renewed
every two years, and requires continuing advanced training in procurement and
contract oversight. Mandatory training will also be instituted for senior program
managers to emphasize the importance of contract oversight.

. Rating GTR Responsibilities

The Department is adding performance standards for all GTR/GTMs. All
GTRIGTMs will be evaluated on the performance of these responsibilities. Ratings for
GTRIGTM elements will be reviewed by the Chief Procurement Officer.

. Legal Review of Procurements -

The Office of General Counsel will establish a team of contract specialists to
review contract terms and assist in negotiations. OGC review and input will be required
‘on all contracts over $5 million.

. Systems Enhancement
The Chief Procurement Officer will be charged with standardizing GTR/GTM

record-keeping, and making integrated financial payments data systems accessible to
GTRIGTMs.


62

Appendix B
NUMBER OF OFFICES WHERE MAJOR FINDINGS OCCURRED

Following are the findings that we classified as Major followed by the number of offices

where at least one of the items mentioned in the finding occurred:

Offices were not performing periodic reconciliations of amounts charged to their budgets.
(IS offices)

Payroll processing procedures and controls were not consistently followed by offices.
(22 offices)

OIG usage of the International Merchant Purchase Authorization Card (IMPAC) credit
card was not always in accordance with established procedures. (19 offices)

The official system for reporting Operation Safe Home funding shows that funds were
being committed and obligated, but were slow in being liquidated and reported as
expended. (5 offices) :

Transaction testing of Operation Safe Home funds revealed a number of conditions
including lack of or inadequate supporting documentation, advances made for task forces
that had cost reimbursable contracts, and expenditures for task forces that did not have
agreements. (6 offices)

Rules for the use of government owned and leased vehicles were not strictly enforced by
offices. (13 offices)

Controls over Operation Safe Home advances to special agents for evidence or
information purchases were lax. (4 offices)

‘Some offices were not enforcing established procedures for controlling ADP equipment.
(17 offices)


86

3
. Broader Use of GSA Schedules and GSA Contract Vehicles

To avoid overreliance on contractor and industry influence in the award or cost
proposals of HUD contracts, the Department will utilize a GSA schedule contractor for
major contracts where a GSA schedule meets the Department's needs. If there is an
available GSA schedule contractor, the program office must seek consent of the Chief
Procurement Officer before conducting a new procurement.

Finally, the report profiles 30 procurements undertaken by the Department since
1984. With regard to these specific procurements, the Chief Procurement Officer will
be asked to undertake appropriate action on each of these contracts.

Attached is an action plan for responding to the major concems raised in your
report.

Once again, we look forward to continuing to work with you and your staff to
improve the Department's contract systems.

Attachment
ce: S. Ramirez

H. Glaser
R. Keevey


1

121

ADDITIONAL COMMENTS ON A-76 WAIVER REQUEST

In the short term, exieting staffing shortfalls are causing
performance problems in the areas identified. BUD proposes

to contract these activities. Short term, emergency,
coctrents ‘may be authorired to meet these exingencies,
Yithour gost comparison. OMB does not interpret Section

S.g,, of the Federal Workforce Restructuring Act or the

requirements of OMS Circular A-76 to preclude the avard of
emergency service support contracts.

Subject to Section 5.g., OMB Circular A-76 permits agencies
to convert functions of 10 FTE or less directly to contrast
without a cost comparison and to waive larger A-76 sort
comparisons, Certain conditions, hovever, must exist in
order to vaive an A-76 cost comparison. These  nelodes Q
@ determination that effective price competits
available; and (2) an in-house operation, operating under
its Most Efficient organization {MEO), could not win &
competition with the private sector.

The attachnents to the August 10 memorandum should be clarified
with regard to “price” competition rather than general competition
with the private sector. This can be done by comparing private
sector prices plus contract administration with an in-house labor
=a waterial cost estimate. The attachments do not address the

MEO competition question and would need to do so in order to
justify a vaiver. If cost comparisons are to be conducted, the
Jess thon 10 FTE rule is defined by the scope of vork in the
contract solicitation.


er aueene

124

PROCEDINGS
(9:32 A.M)

MS. FIELDS: Good morning. My name is Patricia Fields. And I am
from the Office of Procurement Contracts. And we would like to welcom
you this morning to the pre proposal conference for the Financial
Advisory Procurement.

We are going to tell you about the program, answer your question:
that were faxed into us or mailed and questions that we don’t have the
answers to, yet, will be mailed out in the amendment to this
solicitation. And you will be getting them. And that will be all of
the questions and answers. We will send you a copy of the transcript,
and any other changes that are going to be made to the solicitation.
Now, I will turn this over to Ms. Woodley.

MS. WOODLEY: Good morning, Good morning. I am Kitty Woodley,
the Director of the Single Family Property Disposition Division. I ar
so glad to see so many of you today. We are interested in getting as
many proposals as possible to our request.

Let me go over, not in a lot of detail, but at least to give you
perhaps a better idea of what we are looking for in this solicitation
or what we expect to receive from a financial advisor.

As you are aware, the Department is undergoing downsizing and ce-
engineering. And so our current property disposition program will be
downsized and re-engineered as a result of che changes.

In reading the solicitation, I am sure that you see that what we
are interested in and attempting to do is to sell our single family
properties via another method, And that method is what we are calling
“privatization sales”. Sometimes these have been referred to as bulk
sales, but we don’t want to use that terminology. Bulk sales, by our
current definition, refers to properties that have been in our
inventory for some extended period of time and we are now trying to
get rid of them. The idea here is’to sé11 our properties ina
different manner, other than on a direct sales basis or competitive
sales basis to individuals, but we are still interested in maximizing
our profits.

We have sketched out some ideas as to how we want co go about


31

a weakness in monitoring that they didn’t have sufficient Govern-
ment monitors throughout the area.

Mr. SHays. OK, but don’t they take advantage of the local hous-
ing authorities to help them oversee? These are not public housing
projects? These are——

Mr. MoMoRrELLA. No, this would be contracts, for example, where
in public housing HUD would hire a contractor to go out and do
specific work at different housing authorities and report back to
HUD, not to the housing authority.

Mr. Suays. Mr. Czerwinski.

Mr. CzERWINSKI. I think there Probably may be three areas, and
they are related, and they probably all come under the rubric of
management emphasis and priority setting. HUD has not placed as
high a priority on contract management as we would like and
that’s why you're seeing some of the problems. And I think that it
signals an intention to start to change that, but, again, I think it’s
a matter of follow-through.

Second, within that, it would be the information available. If
you're not paying as much attention to what’s going on with the
contract, you just don’t know and you don’t have the data that you
need to manage, and of course related information is the resources
needed, as the inspector general mentioned, to go out and get the
information to keep an eye on the contractors.

I think the incentives of the Government and the contractor
sometimes differ. The contractors want to maximize their profit—
do the least to get the most. We, on the other hand, are looking
to get the most for the least and to keep that kind of balance you
need the resources to oversee them.

Mr. SHays. One of the questions Mr. Kucinich raises is, whether
should we even be contracting out? It seems to me we have two
issues: First, are we contracting out the things that we need to con-
tract out, and the other is, once we are contracting out, are we
making sure that those contractors are doing their job?

It’s my understanding that sometimes we hire contractors to
oversee contractors.

[Witnesses nod in agreement.]

Mr. Suays. You all nod your head here. OK.

Mr. HALE. Mr. Chairman, I mean that’s something that’s done in
REAM’s contracting and will maybe be done even more in the fu-
ture, because now some field offices actually do go out, and inspect
properties themselves to make sure that the REAMs have been
there and have done a good job, but in other cases they hire other
contractors to § out and do the inspection.

Then HUD downsizing in the single-family area; I think certainly
at least in the short run that’s likely to happen more rather than

less.

Mr. Suays. Any other comment? I think what I am going to do
is allow Mr. Kucinich to do his. Yes. I just want to know, do you
have anything to add?

Ms. GAFFNEY. Yes. I’d like to say that essentially HUD has
downsized to the point where it doesn’t have the choice; it has to
contract. It doesn’t have the staff to do it, and the problem is con-
tracting is seen in HUD as an easy way out. If you don’t have staff,


3

OIG auditors found
contract monitoring very lax throughout HUD programs.
In some cases, HUD had contractors monitoring
contractors. Many Government Technical Representatives
(GTRs) and Monitors (GTMS) had a poor understanding of
their respective roles and responsibilities. Indeed,
training was not a prerequisite to being assigned as a
GTR or GTM

In several instances, the current GTRs were not
involved in the original award or even knowledgeable
about the purpose or usefulness of the contracts.
Where top level managers were assigned as GTRs, often
they were too busy addressing other organizational and
program crises to pay much attention to contract
management. Where mid and lower level staff were
assigned as GIRs and GTMs, most regarded their
contracting roles as ancillary to their positions--
something to do only if they had the time. In fact,
contract management was not one of the performance
elements they were rated on.

w_Prohibi ices. OIG auditors
found several instances where HUD has contracted for
services that appear to be prohibited under the Federal
Acquisition Regulations and HUD’s Procurement Policies
and Procedures. These prohibited services included
personal services contracts, advisory and assistance
services contracts to aid legislative initiatives, and
contracts to perform inherently governmental functions.

Data and Financial Systems. Until early 1997, the
Office of Procurement and Contracts (OPC) had
maintained a data system to keep track of contracts
awarded at headquarters; field offices had maintained
separate systems to keep track of their contract
awards. OIG auditors found numerous data errors and
omissions in the OPC system, and concluded that it was
not reliable for comprehensive contract management.

In early 1997, HUD combined the OPC and field office
systems into one system, the HUD Procurement System
(HPS). While this goes a long way in improving OPC
coordination and standardization between Headquarters
and the field, HPS still lacked integration with the
financial systems in HUD’s Office of Finance and
Accounting. This integration is essential so that GTRs
can readily determine exactly what has been paid or
drawn per contract per task order.

= Approximately 50
percent of the contracts awarded by HUD are cost plus


46

Background

In 1978, Congress created the Office of Inspector General (OIG) for the Department of
Housing and Urban Development (HUD) and other Federal Agencies through the Inspector
General Act of 1978. The OIG is an independent organization. It’s mission is independent and
objective reporting to the Secretary and the Congress for the purpose of bringing about positive
change in the integrity, efficiency, and effectiveness of HUD operations.

The OIG is comprised of distinct organizational units with different authorities and
responsibilities:

- the Office of Audit

- the Office of Investigation

- the Office of Management and Policy

- the Office of Legal Counsel

This review was conducted at the request of the Inspector General. Each of the above
offices were reviewed during this examination, as well as the immediate office of the Inspector
General. The OIG participates in an external quality control review program with other Federal
Offices of Inspectors General and has an internal quality assessment review function in place.
To our knowledge this is the initial review of this type of the OIG as a whole.

Objective, Scope and Methodology

Our overall objective was to determine if OIG had controls and procedures in place to
provide reasonable assurance that funds expended by the OIG were planned, approved, properly
supported and for eligible purposes. To accomplish this objective, we reviewed the operations of
Headquarters and all District offices, for the period October 1, 1994 through March 31, 1997.

‘We reviewed regulations and guidance governing OIG operations to become familiar
with systems and procedures. We interviewed key staff at Headquarters and each District Audit
and Investigative office. We performed tests of transactions and reviewed records to determine
whether procedures and controls were implemented and functioning properly. With respect to
our analysis of Operation Safe Home obligations and expenditures, our procedures did not
attempt to determine the validity of OIG obligations recorded in the Department’s financial
system at the end of our review period. We also did not review the effectiveness or qualitative
results of any Safe Home task force. The procedures we performed related to the following:

= process for ensuring the accuracy of amounts charged to budgets,
= proper payroll processing to assure accuracy and reliability of payroll records,

+ compliance with controls to ensure proper use of the government-wide credit card,


The September 30, 1997 audit report identifies seven major
categories of problems in HUD contracting:

1.

ni i i essments.
A lack of adequate planning, needs assessment, good
initial estimates, monitoring, and control of
performance and cost expenditures on several
multimillion dollar contracts has made HUD vulnerable
to waste and abuse.

While initial need determinations were documented for
most contracts, OIG auditors found little in the way of
periodic reevaluations to assure the contract was still
beneficial to the Department and worth the cost. Many
contracts were extended longer than anticipated and
more costly than originally estimated. In some
instances, products or studies took so long to complete
that the results were no longer useful to HUD because
of changing program priorities.

Cost Consciousness. HUD often contracted for a desired
outcome without specifically knowing what tasks to
request to achieve the outcome. While this may be a
time saving process to award the contract, it often is
the most costly, as HUD was unable to prepare good cost
estimates on the tasks needed to accomplish the end
product. As a result, the contractors had a clear
advantage, as HUD was not in a position to reject
costly modifications or time extensions, at the risk of
having to start all over again.

By paying closer attention to negotiating contract
terms, contract types, and overhead rates, HUD could
save millions of dollars, especially in the area of
information technology and consulting contracts.
Management's contracting environment needs to change to
seek ways to emphasize cost consciousness and assure
the best value for dollars spent. Because HUD managers
did not have the staff to complete the product or
service in house, the question of "What will it cost?"
was often not seen as an issue.

Current contract costs could be significantly reduced
by providing better government estimates and allowing
more competition. Indefinite Quantity Contracts (IQCs)
gave HUD the flexibility of quicker and easier
procurement, but often cost more because no competition
was required for individual task orders. Without well
defined task orders, HUD often had no idea what the
final cost would be for these services.


40

U.S. Department of Housing and Urban Development
‘Weshingion, B.C. 20410-4500

-
w

(core OF meECTON mEMERAL

JAN 2.1 1998

MEMORANDUM TO: Susan Gaffney, Inspector General

Kathi, Loy Daten
FROM: Kathryn Kuhl-Inclan, Assistant Inspector General for Audit

SUBJECT: Review of the Office of Inspector Ger.cral Operations

As requested by you in May 1997, the Office of Audit conducted a review of the
operations of the HUD Office of Inspector General for the period October 1, 1994 through
March 31, 1997, including Operation Safe Home. Attached is our repart which presents the
resulls of our review and discusses our findings and other matters we identified. Our report also
contains recommendations fo assist HUD, OIG in its efforts to correct these problems. We
appreciate the courtesies and cooperation extended to the Office of Audit staff by the
Headquarters and District staffs.

Within 60 days, please give us, for each recommendation in this report, a status report on:
(1) the corrective action taken; (2) the proposed corrective action and the date to be completed;



120

pricing the opie ng the Most Eeficient Organization (Eo) used in
under cost benefit comparison.
pa  enployee on staffing requirements in the five

centralizes service centers. The OMB staff believe that you will
achieve economies of scale for FTE with the centralized centers,
sean without aagite contracting beyond the current level.

comparison, ve
@o not that FTE ceilings would prevent you from fully
Staffing the HBO.

IT hope this information is helpful. Please let me know if we can
be vf any further assistance.

Attachment:


19

¥ Exist in HUD's Oversight of REAM C

Our audit work found that HUD does not have a system in place for monitoring its field
offices’ administration of REAM contracts. To safeguard and maintain the approximately
30,000 properties that HUD has in its inventory at any given time, HUD obtains the
services of REAM contractors. These contractors are to secure and inspect the
properties, report their condition to HUD, notify interested parties of HUD's ownership,
perform exterior maintenance, and ensure that the properties are free of debris and
hazardous conditions. REAM contractors are therefore essential to HUD's achieving its
goal of returning these properties to private ownership as soon as possible, while
obtaining a maximum sale price for HUD. HUD's guidance makes headquarters staff
responsible for overseeing the administration of REAM contracts. Specifically, the
guidance requires regional offices to ensure that field offices are monitoring REAM
contractors and requires headquarters staff to review regional offices’ oversight actions
through regional reviews. We found, however, that headquarters staff have not been
reviewing the field offices since HUD reorganized its field office structure in 1995 and
eliminated the regional offices. According to HUD Single-Family Property Disposition
officials, the regional offices' oversight function was never absorbed into headquarters
after the regional offices were eliminated. Also, after the reorganization, HUD's guidance
‘was not updated to ensure that the administration of REAM contracts was monitored by
headquarters.

In addition, HUD's field office staff are not consistently providing adequate oversight of
REAM contractors. We believe this lack of oversight contributed to some of the poor
property conditions-ranging from graffiti and debris to imminent safety hazards-that we
saw when we visited 66 HUD properties. Such conditions can decrease the marketability
of HUD's properties, decrease the value of surrounding homes, increase HUD's holding
costs and, in some cases, threaten the health and safety of neighbors and potential
buyers. Our report made recommendations to HUD for improving its oversight of REAM
contractors.


14

to effectively carry out some of the plans that it has; and also, just
spelling out the specifics of some of its ideas, For example, what
would the role of the Contractor Review Board be?

I just wanted to throw a couple of those ideas out. That con-
cludes my statement, Mr. Chairman. We'd be pleased to answer
any questions that you may have for us.

The prepared statement of Mr. Czerwinski follows:]


3

I ask for unanimous consent that all witnesses be permitted to
include their written statements in the record, and without objec-
tion, so ordered.

At this time we will hear from our first panel: Susan Gaffney,
Inspector General, Department of Housing and Urban Develop-
ment; accompanied by dward Momeorella, District Inspector Gen-
eral for Audit, Mid-Atlantic District; and also Stanley Czerwinksi,
Associate Director, Housing and Community Development Issues,
U.S. General Accounting Office, accompanied by Rick Hale, Assist-
ant Director, Housing and Community Development Issues.

We welcome them to come and ask them to remain standing so
I can swear them in. Let me just say I think we’re having two pres-
entations and then the others who accompanied will be responding
to questions. It would be helpful, if there’s anyone else that may
be responding to questions, if they would stand and be sworn in at
that same time.

[Witnesses sworn.}

Mr. Suays. For the record, all four of our witnesses have re-
sponded in the affirmative, and we appreciate that.

My daughter is going to her senior prom this evening, so I am
going to be very punctual. [Laughter.]

Ms. Gaffney.

STATEMENTS OF SUSAN GAFFNEY, INSPECTOR GENERAL, DE-
PARTMENT OF HOUSING AND URBAN DEVELOPMENT, AC-
COMPANIED BY EDWARD F. MOMORELLA, DISTRICT INSPEC-
TOR GENERAL FOR AUDIT, MID-ATLANTIC, 3 AGA; STANLEY
J. CZERWINKSI, ASSOCIATE DIRECTOR, HOUSING AND COM-
MUNITY DEVELOPMENT ISSUES, U.S. GENERAL ACCOUNT-
ING OFFICE; AND RICK HALE, ASSISTANT DIRECTOR, HOUS-
ING AND COMMUNITY DEVELOPMENT ISSUES

Ms. GAFFNEY. Thank you, Mr. Chairman. As you know, last year
we did a comprehensive review of HUD contracting. That review
was led by Mr. Momorella. So he knows the ins and outs of all of

Our first briefing for the HUD senior principal staff on our work
was just about a year ago, and HUD is now making plans to cor-
rect the weaknesses. HUD is notoriously good at making plans and
notoriously bad at implementing corrective action plans.

I am hopeful that this will be a different circumstance for one
principal reason, and that is that HUD has hired a chief procure-
ment officer who has 34 years of experience. He knows the busi-
ness. He believes in doing the business right, and I’ve been quite
concerned about what his authority would be in the agency, and
just yesterday—perhaps related to this hearing—that was resolved.

The deputy secretary has said that he will report directly to the
secretary and the deputy secretary. The contracting office will re-
port to him. Those are all very good signs, but, Mr. Kucinich, tc
go to your point, this is not going to be an easy task because HUD
has a tradition, has a culture that used contracting as almost ar
easy thing to do.

n contracts from weakness. If we don’t have the exper
tise, we think,. well, we'll just go out and buy it, but if you don’
have the expertise, that means you can’t define precisely what you


132

In reality you need to have a leader that brings the two together.
The program manager, the technical person that’s buying the serv-
ices to have the skills, the interpersonal skills, and those sorts
of things to build a team out of the people that are going to be sup-
porting his or her program. Making those people accountable, and

don’t know how you do that in the Government. It’s been a long
time since I worked for the Government, but it’s a matter of mak-
ing them accountable and giving them the tools to do the job.

‘ou don’t need millions of pieces of data. What you need is infor-
mation, and there’s a big difference between having access to every
little bit of minutiae that a contractor may have available as op-
posed to useful information such as how much effort has been ex-
pended, how much physical progress has been made. Those are two
or three numbers. You don’t need reams and reams of data to track
and monitor a contract.

But a lot of times we get seduced by the fact that we can have
access to everything. We had HUD ‘ical people say they want
to know by the hour what a person on a services contract charges.
That’s wild. There’s nothing you can do about it because it’s been
spent.

You can argue about whether you want to reimburse the cost on
a cost reimbursement contract, but it’s not going to change the fact
that the individual charged that. So the metrics have to be re-eval-
wated to see if we’re really measuring the things that make a dif-
ference.

Most successful managers pick four or five things that they want
to track. That tells them whether their program is in trouble or
not. I don’t think that HUD has the skills necessarily available to
them to do that, identify what makes a successful program.

And those are the things that need to be done. It’s not putting
in a $600 million computer system. It’s allowing people to work in
little roups responsible for certain areas, making them account-
able for it; letting them have some respite from oversight that
draws inferences that are incorrect or that say you complied with
the regulations but you still made a mistake.

Protect them from those sorts of things. Tell them, “You have the
responsibility for this area.” Set up the five or six things you want
to do. Set up your data base, but we need these 10 key elements
sent up to headquarters. I mean it’s all very easy to do. It’s not
rocket science. It’s just a matter of somebody having the will to do
it and realize that a whole bunch of little solutions is better than
one big one that will never work.

I mean procurement’s been in reform since 1776. There were
problems with contractors in the French and Indian War who con-
tracted to provide rations to troops up in Michigan, and they only
got some of the rations there.

We have words that. were created out of government contracting.
For example shoddy. Shoddy was generated as a result of the Civil
War where contractors took old material and chopped it up into lit-
tle pieces called shod and rewove it. The troops would wear it, and
it would melt off their backs, and so they called it shoddy. It has
come to mean shoddy workmanship.

We've had the Grace Commission. We’ve had the Packard Com-
mission. They all say exactly the same thing. So you’ve been doing


no

specified work by a private contractor would result in a cost savings to the Department
‘over the life of the contract? Such a cost benefit analysis should be available to the
public.

| would like to direct you to the attached letter from OMB to Emelda Johnson,
HUD's Deputy Assistant Secretary for Single Family Housing. The undated fetter is in
response to HUD's August 10, 1995 request for a waiver from OMB Circular A-76
requirements for a cost-benefit study before contracting out extensive work in Single
Family housing disposition. In the letter OMB explains to the Deputy Assistant Secretary
for Single Family Housing that an A-76 study is not required if the proposal is a “joint
venture" with the private sector. Not surprisingly, HUD's did not conduct a OMB A-76
study before considering the option to contract out its single family property disposition
program.

OMB also advised HUD that it could achieve economies of scale for the then
current staffing level, "even without additional contracting beyond the current level."
Indeed OMB told HUD that “if the FHA employees did ‘win' the cost comparison" HUD
would not be precluded from fully staffing the most efficient organization as proposed in
an in-house cost estimate bid. HUD did not give its employees a fair and full opportunity
to defend their jobs because HUD preferred to use a clever tactic to avoid OMB Circular
A-76.

AFGE urges HUD to commit to following the A-76 process when it chooses to

consider the option of contracting out. HUD does not need to invent new contracting


69

this makes it clear to everybody at HUD that that has to be im-
proved on.

T’ve been named as the chief procurement officer. I have both the
authority and the accountability for fixing the problem. I don’t have
any reservations whatsoever with regard to the authority that Sec-
retary Cuomo has given me and given to the whole Department to
get this fixed. And I am going to be here a year from now, and
longer, and I'll be able to come back and tell you, “This is what
we've done instead of talking about it.” This is to some extent the
easy stage.

Mr. SHays. Well, the thing you need to remember is that I may
not be chairman. It may be Mr. Towns or Mr. Kucinich, but we'll
all be here. We just may be moved over.

Mr. CARBERRY. All right.

Mr. Towns. Thank you very much, Mr. Chairman, for that com-
ment. Thank you very much. [Laughter.]
tet CARBERRY. But there won't Te any change on this side of the

le.

Mr. SHays. No, but what Mr. Towns doesn’t know is maybe Mr.
Kucinich might be the chairman instead of him. [Laughter.]

Mr. KucInicu. I want Mr. Shays to know that I am comfortable
if it’s Mr. Shays or Mr. Towns.

Mr. CARBERRY. One of the things we've established is the con-
tract management review board, and what we’re doing is designing
end quality management and business functions at the very begin-
ning of processes.

No programs are going to be approved unless they have come for-
ward and gotten approved in terms of what their proposed cost
schedule performance parameters are going to be, and that’s sim-
ply: how long is it going to take, how much is it going to cost, and
What are we going to get for it. They are all measurable.

We are going to use those measurements to approve a program.
We are going to make sure that the programs are properly staffed.
We are going to make sure that the team that’s supporting that
program is properly trained, and we are going to use those meas-
‘ures on an annual basis to go back and review this to see what ex-
tent those parameters are being met, and we are going to use them
ultimately to see whether or not we’ve had a successful program.

These are the kinds of things that DOD has been using for many,
many years. They are effective in working on these. Private indus-
try uses the same things, and we'll be doing that at HUD.

‘A big change again that’s occurring—this is the first time it’s
going to in HUD—in the program offices we’re going to going to

ave full-time GTRs, full-time people responsible for program and
contract management. In the past that’s been an ancillary function,
and it’s been given marginal support.

And to a great extent I think people do exactly what they are
told to do and what they are managed to do, and what we are tell-
ing and managing people to do is that this is critical, once we
award those contracts we have to make sure we got what we've
contracted for.

There’s no way in the world we can award a contract so well and
so perfectly, and if it’s not properly managed after contract award,


24

understanding of their contract management roles and have not always maintained
adequate documentation of their reviews of contractors. This situation limits
assurances that adequate monitoring has occurred.>

In a May 1997 preliminary report on the contracting activities of HUD's Federal
Housing Administration (FHA), the National Academy of Public Administration
identified a variety of problem areas associated with the procurement process,
including the fact that procurements took too long; FHA's oversight of contracted
services was inadequate; and FHA sometimes used contracting techniques that limited
competition.’ The Academy is in the process of carrying out a more in-depth review of
FHA's contracting activities and is also reviewing procurement practices in other parts
of HUD.

In a December 1997 report, HUD's Inspector General noted that a potential reliance on
contractors as a means of supplanting HUD staff may not be in the best interests of HUD
and the taxpayers.’ The report noted that HUD relies heavily on contractors to perform
studies, design systems, administer functions, and develop plans and strategies but has
made little effort to date to formally evaluate the effectiveness and cost/benefits of its
contracted work,

HUD HAS TAKEN STEPS TO IMPROVE ITS CONTRACTING OPERATIONS,

HUD has recognized the need to improve its contracting processes and has begun taking
actions to address weaknesses that we and the Inspector General have identified. In its

‘HUD Contracting, HUD, Office of Inspector General, 97-PH-163-0001 (Sept. 1997).

°A Preliminary Review of Federal Housing Administration Acquisition Activities, National
Academy of Public Administration (May 1997).

“Departmen

sil a a. eve e of Inspec eral Semiannua
Report to the Congress as of September 30, 1997 (Washington, D.C.: HUD, Dec. 29, 1997).
10



10

In summary, the Department has committed itself to
prospective corrective actions, but has not embraced the
opportunity to right past wrongs and exact accountability for
them.

t_Ef fort

Most importantly, HUD has hired Steve Carberry, a highly
experienced contracting professional, as Chief Procurement
Officer. Today, you will undoubtedly hear about Mr. Carberry's
plans for/progress in establishing a Contract Management Review
Board; establishing a cadre of full-time GTRs and GTMs;
instituting GTR/GTM training; placing procurement rating elements
in GTR/GTM performance plans; and establishing meaningful
performance measures for a reformed HUD procurement system. This
is all good news.

The not-so-good news is that there has been no official
definition of Mr. Carberry‘s authorities, responsibilities, or
placement in the organization. This is a critically important
matter: reforming HUD contracting is going to require, among
other things, a change in the HUD culture, and the CPO is not
going to be in a position to force that change if he is
understood to be in a subordinate position vis a vis the program
Assistant Secretaries.

Similarly, Mr. Carberry briefed the HUD Management Committee
this week on his plans and progress, but we have seen no written
definition of these efforts. This is not just a matter of being
bureaucratii the OIG would like to see the proposals laid out
so that we could offer our advice and counsel up-front, rather
than our criticism after the fact.

In the same vein, we applaud the Department for meeting its
obligation to appoint a Chief Information Officer (CIO). This
position is critically important to the reform of HUD
contracting, since information technology contracts represent the
highest dollar amount of contracting in HUD. Again, Gloria
Parker, the new CIO, has superb credentials for this position.
But, as yet, there has been no official definition of Ms.
Parker's authorities, responsibilities, or placement in the
organization

rt E: ee
2020 Management Reform

As noted above, HUD has historically done a: substantial
amount of contracting: 9,600 contracts worth over $3.2 billion
were awarded from 1992 through 1996. Under the Secretary’s 2020
Management Reform plan, HUD staff has been downsized while
ambitious new performance goals have been set throughout the
Department. Attaining the new performance goals will be heavily



29

inadequate planning, needs assessment, monitoring and control, and lack of integrated financial
‘and management data systems, made HUD vulnerable to waste and abuse and made the
department overly reliant on the knowledge and expertise of existing private sector contractors.

‘The IG made several recommendations to fix these problems. In my reading of the
HUD’s procurement reform plan, it seems that many of those recommendations have been
implemented. HUD recently appointed a Chief Procurement Officer who is charged with the
responsibility of establishing and enforcing procurement policies and procedures, HUD is in the
process of establishing a contract management review board which would be charged with the
responsibility of reviewing and approving each program office’s strategic plan for new
‘procurement, reviewing interagency agreements, and conducting periodic review of each
program office’s progress in implementing their strategic plans. The Chief Procurement Officer
is in the process of establishing specialized positions for contract award, monitoring and
oversight. These positions would require advanced training and on-going recertification. Within
the last 30 days, HUD has hired a Chief Information Officer who is charged with the
responsibility of implementing the integration of the various information systems at the agency.
Mr, Chairman, Iam not saying that all is right at HUD. In particular, am concerned about field
office implementation of procurement policies and the use of the private sector to perform
traditionally governmental functions. However, I believe that the witnesses today will be able to
‘substantiate that HUD has made significant progress toward the implementation of many of the
IG’s recommendations and look forward to hearing their testimony.

Neer


98
Discussion

General Observations

It is not my intention to critique the Inspector General's audit report. Rather, | intend to
point out areas where the conclusions reached by the auditor are inconsistent with the
factual descriptions provided by the auditor in the audit report. This is imperative since
actions taken based on an improper interpretation of the facts is far worse than doing
nothing at all.

Fundamental Sampling and Interviewing Flaws in the Audit Report

The Inspector General's basis for the conclusions in the audit report came from a
judgmental sampling of what the auditors termed HUD's problem contracts. A judgmental
sampling, by itself, is not problematic. However, any inferences about an entire population
drawn from results obtained by testing a judgmental sample are invalid. Thus, any
generalizing of procurement shortcomings at HUD using this audit as a basis would be
invalid.

Second, the auditors relied on opinions solicited from the Govemment Technical
Representatives (GTR's) and Government Technical Monitors, (GTM's). Since the audit
report did not address the procurement training or experience these technical
representatives possess, it is unlikely these technical representatives are aware of when
the Federal Acquisition Regulations require competition. Nor, for that matter. is there any
indication in the audit report that the GTR's or GTM's have any concept of what
constitutes a fair and reasonable price. Nor is there any indication that the GTR's or
GTM's have any indications of whether or not a contractor is complying with contract
terms and conditions, except for required reports that are submitted directly to them.

On the other hand, in the body of the audit report, the Inspector General concludes that
the GTR’s and GTM's do not know their jobs or view their GTM or GTR tasks as ancillary
tasks. Yet, comments from these same individuals form the basis for several audit
conclusions.

Fundamental Contract Interpretation Flaws

‘The audit report examples repeatedly mischaracterize what the various contract types
allow HUD to do. For example, the inspector General cites an example where “HUD is
paying a higher price than needed for the $71.6 milion of computer hardware and
peripheral equipment purchased by Lockheed Martin for HUD.” However, the contract
between Lockheed and the Government set firm fixed prices, subject to adjustment, This
contract type normally has an adjustment clause that specifies the time periods affected
by the adjustment and the parameters within which the price adjustments can roam.

‘The auditor is saying that HUD should pay lower prices to Lockheed Martin because the
contractor is making a profit. However, that profit is the result of the contractor accepting a
‘cost risk (increasing costs for computer hardware and peripherals) that did not materialize.

‘TESTIMONY OF MR. TERRY A CARLSON
BEFORE THE SUBCOMMITTEE ON HUMAN RESOURCES
PAGE30F6


91

Mr. GLASER. No, there was not.

Mr. Kucinicu. OK, and then why not?

Mr. GLASER. Because it’s already contracted out with 400 con-
tracts, the results of which the GAO discussed this morning.

Mr. Kucinicu. Was there a waiver in the process?

Mr. CARBERRY. Excuse me, Congressman, it wasn’t done because
under the A-76 requirements it wasn’t required.

Mr. Kucinicu. So it’s your position it was not required?

Mr. CARBERRY. Yes.

Mr. Kucinicu. So, therefore, a waiver wasn’t necessary?

Mr. CARBERRY. Right.

Mr. GLaseER. If it’s already been contracted out, if it’s currently
contracted out, the agency continues to contract it with no A-76 be-
cause it’s not performed by HUD employees presently.

Mr. KUCINICH. Well, let me ask you something. If you have a sit-
uation where—isn’t it true that under your rules for performance
on commercial activities that it’s within the agency’s authority to
contract work back in-house if the performance of a contractor is
poor? We heard a lot about poor contractor performance. Has HUD
ever used that option?

Mr. GLASER. This is an option. I am not aware that HUD has
used it, has migrated work back into the agency.

Mr. Kucinicu. It is an option, though? It is an option?

Mr. GLASER. It is an option, yes.

Mr. Kucinicu. But you haven’t used it?

Mr. GLASER. No.

Mr. Kucinicu. Why not?

Mr. GLASER. Well, as an example, for the REAM contractor,
those are tasks that are done by maintenance operations across the
country. Again, we are talking about maintaining individual prop-
erties. It’s not something that HUD is generally in the business of
doing. The only reason we have the properties is so that they can
be sold and put back into the private market so people can buy the
homes. It’s a short-term, intermittent process. We don’t have the
capacity to have individuals in each of our field offices—we would
have not the geographic coverage. The agency went to these so-
called REAM contracts in the past to do the job. There are way too
many of these contractors. The contracting system doesn’t work.
We intend not to contract that out anymore.

Mr. Kucinicu. Well, let’s think about this. Mr. Carberry just tes-
tified you are going to review all the contracts over $5 million. I
am sure you have contracts that are in the millions, not five, where
there may be performance respecting the tax dollars of the people
of the United States of America.

So in theory contracting out is supposed to be of benefit, result-
ing in savings, efficiency. I am just wondering what post contract
provisions will HUD put in place to determine whether or not pro-
jected outsourcing costs and efficiencies are being realized.

Mr. CARBERRY. When we do the Contract Management Review
Board work, we are going to be getting the data from the program
offices as to what they plan to accomplish, what the outcome is.

Mr. Kucinicu. Are you going to put some measures in place?

Mr. CARBERRY. Yes, we are.


i

7

dependent on additional procurements for services such as single
family property disposition, physical inspections of multifamily
and public housing, Section 8 contract administration, and
definition of a resource estimation system for HUD. The OIG
estimates that these additional contracts could easily involve
more than a billion dollars a year.

It is unfortunate that HUD staff was downsized and plans
were developed for additional contracting without a cost benefit
analysis. At this point, however, that is water under the
bridge. The key point is that an efficient and effective
procurement and contracting system is absolutely critical to
HUD‘s meeting its HUD 2020 Management Reform goals. To
illustrate this point:

© =A major objective of HUD 2020 is to integrate HUD’s
financial systems. In the information technology area,
HUD’s reliance on contractors is virtually total.

© Another major objective of HUD 2020 is to ensure that
the multifamily and public housing programs in fact
provide decent, safe, and sanitary housing. This
objective is heavily dependent on a new HUD physical
inspection program to be carried out by contractors.

® Inthe single family area, HUD 2020 aims to improve the
property disposition function by contracting it out.
Single family staffing has already been reduced
accordingly.

@ ‘HUD has contracted with NAPA to devise a resource
estimation system for the Department. This is intended
to correct HUD‘s material weakness in the area of
staffing and administrative resource management.

® HUD 2020 further intends to better assure the accuracy
of project-based Section 8 payments by using
contractors rather than HUD staff to administer this
payment function.

Mr. Chairman and Members of the Subcommittee, that concludes
our testimony. We thank you for holding this important hearing,
and giving us the opportunity to testify.


oT

4, There seems to be structural impediments in Goverment that often prevent 3
manager from building a well-trained, highly motivated staff. One such impediment is
being the subject of a misguided audit. While oversight is a necessary function, in the
end the overseer has to be able to provide constructive recommendations. Perhaps it
is time to hold the Inspector General accountable for the ready foreseeable fall-out
from such a far reaching but unsupported audit report. It is not as though HUD's
contracting personnel have to remain at HUD to be subjected to this type of innuendo.


102

Affidavit Regarding Contracts With The US Government

TA Carlson & Company does not now have nor has it ever had any contracts or
subcontracts with the US Goverment. | personally have no contracts or subcontracts with
the US Government. | am not representing any organization.

Tong be Gham

Teny A. Carison
June 3, 1998


118

ATTACHMENTS:

13


65

dispute; where you might have the biggest disagreement with
HUD? I mean the first two, you know what’s prohibitive, but what
about in this third area of prohibition, contracts to perform inher-
ently government function. Give me an example of where you
might draw the line and where HUD might draw the line; where
you'd have a disagreement.

Mr. MoMorELLA. Yes, Mr. Chairman, that’s correct. That was
one area where we do have and still have a disagreement. The De-
partment has agreed that they will reaffirm the policy that’s
spelled out by the Office of Federal Procurement, the guidelines for
this area with all the procurement officials and the programming
officials and the Deputy Secretary has done that.

However, we have not yet received and are looking forward to
keeping the specific reasons why they disagree. Once we review
those, on the specific cases that we brought up, we will then pos-
sibly be asking the Office of Management and Budget, whose rules
they are, who wrote the rules, to decide if in their opinion——

Mr. SHays. Yes, I want to ask—-

Mr. MoMORELLA. We have an opinion and HUD Program has an
opinion.

Mr. SHays. I want to ask Mr. Czerwinski if the GAO has gotten
into this issue. I mean, I would gather that my colleague from
Cleveland might decide that he would want to err on the side of
providing as many prohibitives and giving HUD an inherent re-
sponsibility to do a lot more than others may, but is HUD erring
on the side of not contracting out too much or contracting out too
much in what some might call an inherent government service?

Mr. CZERWINSKI. We haven’t gotten into the area of compliance
for what is contracted out or not. Back about a year or two ago,
House and Senate Banking and Senate Appropriations came to us
and asked us to get into issues such as these. However, the time
the inspector general was doing it, was just in the process of start-
ing up a very broad-based audit and contracting.

So rather than duplicate their efforts, what we agreed to do is
to do two things: One was to focus, in detail, on the specific con-
tract of REAM’s and illustration, and two, then later on do the re-
view that we did for you, Mr. Towns, on HUD’s 2020 to get a feel
for the overall management.

So what I would add is a little bit different perspective, and that
is to look at the cost-benefit issues of deciding when or when not
to contract out, and I would probably then throw in maybe four or
five criteria that you might want to consider when you talk to HUD
to oversee how they’re doing that, because really it becomes a man-
agement decision.

So the first criterion that I would throw out would be the overall
vision that HUD has for contracting as well as the commitment
from the Secretary because for Mr. Carberry to do his job, he really
needs that commitment, because you really have to reconcile the
interests of the contracting office versus the program office, as Ms.
Gaffney talked about, and that’s essential. So that’s the first one.

The second one is: What plans are in place to carry out this vi-
sion?


1
Statement For V. Stephen Carberry
‘Oversight Hearing
HUD Contracting

Good Morning, Mr. Chairman and members of House Subcommittee on
Government Reform and Oversight. I am V. Stephen Carberry, Chief Procurement

Officer (CPO), of the Department of Housing and Urban Development (HUD).

On behalf of Secretary Cuomo and the Department, I appreciate the opportunity to

come before you on HUD’s procurement reform initiatives.

Irecently came to HUD from the Navy where I worked for 34 years in contracts.
T have been assigned to all three of the Navy’s major systems acquisition commands, and
for the last ten years, I was the Executive Director for Contracts with the Naval Air
Systems Command and responsible for annual obligations from $9 to $12 billion. The
position of HUD Chief Procurement Officer, for which I have been selected, was recently

created by Secretary Cuomo to lead the efforts on HUD procurement reform.

Secretary Cuomo has taken an intense and personal interest in procurement
reform at HUD. In the HUD 2020 Management Reform Plan, he directed that the
Department engage in a top to bottom redesign of the HUD procurement system with an
emphasis on safeguarding taxpayer dollars with a system that ensures quality and value.

In addition, Congress gave its support to HUD by authorizing the agency to retain


16

- We, HUD's Inspector General, and the National Academy of Public Administration
have identified weaknesses in HUD's contract administration and monitoring of
contractors’ performance. For example, our work on HUD's oversight of real
estate asset management contractors, who are responsible for safeguarding
foreclosed HUD properties, found that HUD did not have an adequate system in
place to assess its field offices’ oversight of these contractors. The three HUD
field offices we visited varied greatly in their efforts to monitor real estate asset
management contractors’ performance, and none of the offices adequately
performed all of the functions needed to ensure that the contractors meet their
contractual obligations to maintain and protect HUD-owned properties.’ Our
physical inspection of the properties for which the contractors in each location
were responsible identified problems at the properties, including vandalism,
maintenance problems, and safety hazards, which may decrease the marketability
of HUD's properties, decrease the value of surrounding homes, increase HUD's
holding costs, and in some cases, threaten the health and safety of neighbors and
potential buyers.

- HUD has recognized the need to improve its contracting processes and has begun
taking actions to address the weaknesses that we and the Inspector General have
identified, For instance, HUD has recently appointed a chief procurement officer
and is also establishing a contract review board. In addition, HUD is taking steps
to revise its property disposition activities which could reduce its reliance on asset

management contractors.

*We performed audit work at the Hlinois State Office in Chicago, the Massachusetts State
Office in Boston, and the Texas State Office in Fort Worth.

2


99

With absolute knowledge of decreasing prices in the computer hardware and peripherals
market, the Inspector General is criticizing a contract that actually sounds fairly well
thought out The fact that the audit conclusion would have been different had prices
increased serves to cut the heart out of the audit conclusion that the Government is
overpaying for hardware and peripherals. The Govermment is paying for the hardware and
peripherals as well as avoiding having to pay increased prices if computer hardware and
peripheral costs increase.

The Inspector General uses the same approach on the J.W. Thompson contract. Again
with perfect knowledge the auditor concludes that HUD could have saved $790,000, if
HUD had done a better job of upfront cost analysis or HUD had selected a different
contract type. There is no basis for such a conclusion.

‘The auditor demonstrates a lack of understanding as to how Indefinite Quantity Contracts
(IQC) work. indefinite Quantity Contracts normally have very competitive beginnings. The
initial competition for the award of the opportunity to receive an award helps ensure that
the technically qualified contractor offering the best price receives the award - an award
based on competition. This ensures that the Goverment has a supplier, offering a fair and
reasonable price, capable of satisfying the Goverment's requirements without having to
go through the competitive process again,

‘The auditor is critical of HUD contracting for a *... desired outcome without specifically
knowing what tasks to request to achieve the outcome. While this may be a time saving
process to award the contract, it often is the most costly, as HUD is unable to prepare
‘good cost estimate on the tasks needed to accomplish the end product.” (Emphasis in
original.)

This criticism is inconsistent with contracting theories. The procurement community is
beginning to recognize that contracting for the desired outcome without specifying how to
achieve that outcome actually results in a less costly solution. Furthermore, the
Government's estimate does not establish the contract value. The contractors cost
estimate sets the contract value.

Another broad area challenged by the Inspector General is contracting for prohibited
services. The Inspector General cites as an example of prohibited services contracts with
outside accounting firms to:

1. review the contractor’s accounting records to determine whether
GNMA's fees were appropriately accounted for,

2. determine whether billings submitted to GNMA were for services actually
rendered by the contractor or subcontractor, and

3. determine whether billings submitted to GNMA were in accordance with
the terms of the relevant contract.

‘The Inspector General says in the audit report that only HUD staff can perform these
activites. The basis for this conclusion is OMB Circular A-76 which states that
*..determining if contract costs are reasonable, allocable and allowable...” are inherently
govemmental functions. Of course, the audit fims performing on these contracts cannot
disallow the costs of any contract, other than their own. Only the contracting officer can
disallow costs. The accounting fimms only recommend an action to their customer — the
‘accounting firms do not direct their customer to act.


21

In addition, HUD's field office staff did not always inspect the properties managed by
REAM contractors, as suggested by HUD's guidance. Because HUD recognizes that
physical inspections are the best method for monitoring the contractors’ work, HUD's
guidance suggests that field office staff conduct monthly physical inspections of a
minimum number of properties assigned to each contractor. To help meet this target, the
guidance allows the field offices to contract out for property inspection services. Without
adequate on-site inspections, HUD cannot be assured that it is receiving the services for
which it has paid. In two of the field offices we visited, property files contained evidence
that some properties were being inspected. However, of the 42 property files we
reviewed in the third field office, HUD's field office staff had not inspected any of those
properties. Field office staff told us they did not get out to inspect properties because
they did not have the travel funds or staff resources to do so. Subsequent to our visit, in
December 1997, this field office started using contractors to make property inspections.

Moreover, HUD's field office staff did not always ensure that the REAM contractors
conducted property inspections and submitted appropriate reports for HUD's review.
HUD's guidance requires REAM contractors to submit initial inspection reports within 5
working days of being notified that a property has been assigned, but it offers no specific
guidance on the submission of routine inspection reports. The REAM contractor's
submission of initial and routine inspection reports is essential for HUD to determine its
marketing strategy for the properties and to mitigate potential losses to the properties.
For example, the initial inspection reports, along with appraisals, are the primary tools for
determining the repairs that must be made and whether the property meets certain
standards that would allow it to be sold with HUD-insured financing. At the three offices
we reviewed, the requirements placed on REAM contractors for submitting inspection
reports and the extent to which the reports were actually submitted to the field offices
varied considerably. For example, at one location, all of the property files we reviewed
contained initial inspections, while in another location, 43 percent of the files contained
no initial inspections. Without inspection reports, HUD is unable to readily determine
whether the contractors are conducting inspections as required.

7


50

IMPAC credit card usage was not always in accordance with established procedures.

Conditions in this area included copies of credit card statements maintained by offices not
containing evidence that they were properly supported or approved, ADP equipment purchased
with the credit card, statements not processed in a timely manner and one situation where an
office appeared to split purchases to remain below the $2,500 limit. We encountered many
instances where copies of credit card statements did not contain evidence of approval or
documentation to adequately support the purchases made. Adequate documentation includes
items such as the invoice that supports the purchase on the credit card statement. The situation
where it appeared purchases were split occurred during October 1996. In that month, an office
had five transactions with one vendor which totaled $4,784 for the purchase of furniture. Also,
ADP equipment was purchased with the credit card. Regarding approval, some copies of credit
card statements maintained by offices did not contain evidence that the approving official
reviewed and certified purchases made during the preceding month.

HUD Handbook 2212.1, REV-2 requires that the cardholder certify the credit card
statement within five working days of receipt and forward it to the approving official. The
approving official must review and certify the appropriateness of all purchases within fifteen
working days of receipt. Approving officials are tasked with establishing appropriate intemal
controls and documentation procedures. This entails maintaining copies of records including,
statements of transactions and accountability, all supporting invoices, and related documents.
The handbook limits an individual purchase transaction to $2,500 and states that purchases may
not be split in order to stay within that limit. In addition, the handbook specifically prohibits the
purchase of ADP equipment with the credit card.

‘Some offices stated that they did not maintain copies of supporting invoices or the
approved statements because they did not want to bulk up their files. They stated that they can
get a copy of the statement or invoice from the Office of Accounting should a discrepancy arise.
They also state that the Office of Accounting will not pay the statement unless it is properly
certified and approved so there is no need to maintain copies. We did encounter a situation
where the approving official was out and the Office of Accounting instructed the cardholder to
sign as the approving official in order to pay the monthly statement in a timely manner. This
could lead one to conclude that timely payment is more important to the Office of Accounting
than ensuring proper approval of statements. For ADP equipment purchases made using the
credit card, offices have stated that they were told by the Office of Management and Policy that
they could purchase ADP equipment with the credit card. We contacted the Office of
Management and Policy who stated that HUD's Office of Administration gave OIG the authority
to purchase ADP equipment with the credit card. However, the Office of Management and
Policy could not produce a written document supporting this assertion.

Based on the above, OIG is not complying with the procedures and internal controls
established to assure that purchases made with the IMPAC credit card are proper and that
approval is documented.


95

The other problem is we end up with contracting officers putting
together strategies that are designed to solve audit recommenda-
tions, not the regulations, and I don’t think that’s what anybody in-
tends. But a person’s not crazy. If you’re a government contracting
officer—and I run into this every day—if you’re a government con-
tracting officer, you are not going to do anything, even though it
may make business sense, to facilitate a contractor because 4 years
later some auditor might do a review and decide that they didn’t
like what you did and will penalize you for it.

[The prepared statement of Mr. Carlson follows:]


33

bringing about procurement reform. What is your response to that
concern’

Ms. GAFFNEY. I am sorry, Mr. Towns. Could you restate that
question?

Mr. Towns. Yes. I have some concerns really that the audit or
procurement practices—now these are people that are following the
rules, doing their jobs—will have a chilling effect on bringing about
procurement reform. And I want to know your response to that.

Ms. GAFFNEY. Our audit tends not to deal with the people who
are called contracting officers. They are on the whole doing a good
job. Our overall concern is with the program people, who have to
interface with the contracting officers. it we're trying to say is
they need—there needs to be a marriage between the program peo-
ple and the contracting people.

It’s the program people who presumably know the business who
need to define the needs for the contracting officer, who need then
to monitor the work that’s being done after the contract is award-
ed, and our primary message is: The program people need to take
more seriously their role in contracting because the contracting of-
ficers cannot do it by themselves.

Does that answer your question?

Mr. Towns. Yes, sort of, but I am trying to really sort this out.
It is my understanding the HCFA pays for equipment used by con-
tractors in Medicaid and Medicare buildings. This is my under-
standing. And yet the report questions that practice in a contract
with Price Waterhouse. you believe that the practice should
cease throughout the Federal Government even though it might
make it more difficult to obtain qualified contractors? I am trying
to sort this out. I mean, what do you really think?

Ms. GAFFNEY. No, I think—Ed, do you want to deal with that?

Mr. MomorELLA. Yes. I believe that the points that we were try-
ing to raise, the five critical findings where we talk about the over-

need determination, the cost consciousness approach to con-
tracting and the periodic assessment is what we were trying to
bring up here.

For example, in most instances that we looked at, at the time the
contract was executed there appeared to be a good reason as to
why HUD should enter into this contract, but, as you know, the or-
ganization was constantly changing and things change, and as time
went on, some of these contracts, which originally were estimated
to only $1 million, now mushroomed through additional task orders
up to $9 million.

And what we were saying is there was no information to say that
periodically along the way someone would say, “Is this still a good
idea? Is this still within our mission? Should we still be spending

is

We have heard proposals about, well, let’s take procurement and
gize it to another agency; let’s take the procurement officials and
let’s give it all, the responsibility, to Program people. I think, as the
inspector general indicated, to be very effective it has to be a really
good marriage and joint effort. There is an extremely large number
of competent and well-qualified, professional procurement people
that work for HUD, and they want to do the right job. They are
the sworn officials, the procurement officials; and they are in a bal-


133

this for 222 years. You look around and say, “What’s happening
here? We know the problem. We know the solutions,” but we can’t
seem to put the two together.

And if someone is sitting on the outside, trying to work between
the contractors and the Government, it’s incredibly frustrating.

I taught at DSM Center—I don’t mean to get on a soapbox; I
apologize—but when I taught at the Defense Systems Management
College, I would explain to the Government program managers
there about what happens if they affect a contractor's cash flow,
what that meant to a contractor. They had no idea. They said, “Oh,
my God, that’s kind of serious, isn’t it?” Yes, it is.

And so that is the kind of education people need. You need to do
training with contractor and Government employees there, with an
inspector general representative there too. We need to give them
a couple of days training, let them go back to work for 2 months,
bring them back for 2 more days and say, “OK, this is what we
sugested you do. Did you try it?” “Yes. It didn’t work.” “Why?”
And you work though the problems together.

It’s all not like this and it’s not working.

Mr. Towns. Mr. Harnage, do you want to add anything to that?
He brought us from 1776 up. [Laughter.]

Mr. HaRNAGE. Well, in his examples I point out a whole lot
hasn’t changed. No, I'd just say the reference to why do a study if
the end result is going to be the same, there’s a way with the A~
76 under those circumstances. If you know the outcome is going to
be what the current is, then you are not required to do an A-76
study.

One of the questions that was asked by Mr. Kucinich was an-
swered, but it wasn’t really answered to the full extent, and that
had to do with a particular contract that is being considered now
with three contractors and they were told, “Well, A-76 was not
used because Federal employees didn’t do this.” Yet the very state-
ment by the official of HUD was telling these three contractors,
“You're to do the work currently done by HUD employees plus that
work done by REAM’s.”

Now he’s signaled in on the latter part of it and omitting the first
part of it. Under the first part of it where you’re doing work pres-
ently performed by HUD employees, A-76 is required. But, more
importantly, I think the question needs to be asked, “Why not use
it?”

If it works and it makes sure that the taxpayer gets the best
deal, why not use it? Why aren’t we making these cost compari-
sons? Why aren’t we doing these performance statements? What
aren’t we getting the most efficient organization before we do these
studies? And where A-76 is being able to be circumvented in HUD
is they are reducing the number of employees so that they are not
there to do the job and then that justifies the contracting out.

If they looked at it now and.came up with the most efficient or-
ganization and then made the decision how many HUD employees
are to be there, you wouldn’t be in this dilemma, but they have the
cart before the horse. They downsize the employees and then de-
cide what the job needs to be done. Oops, we don’t have any em-
ployees. Let’s contract it out.


WwW
BACKGROUND

HUD's procurement offices annually award and administer millions of dollars worth of
contracts on behalf of HUD's program offices. This process entails receiving descriptions
of need, soliciting and receiving offers, awarding contracts, making necessary contract
modifications, resolving disputes, and closing out completed contracts. The Office of
Procurement and Contracts performs these functions for headquarters offices, and the
three Administrative Service Centers (located in New York, N.Y.; Atlanta, Ga; and Denver,
Colo.) perform them for HUD's field offices. The major types of goods and services
procured by headquarters include information technology hardware and software,
mortgage-accounting and claims-processing services, advertising for the sale of HUD's
properties, and various professional, technical, and administrative management support
services. The typical goods and services purchased by the field offices include real estate
management services and mortgage insurance-related activities, such as mortgage credit
analyses, appraisals, and mortgage insurance endorsement processing.

HUD'S PLANS INCLUDE CONTINUED RELIANCE ON CONTRACTORS

HUD's staffing levels decreased from 12,823 in 1993 to 9,200 in 1998. While HUD has
been downsizing, its annual obligations for headquarters contracts have steadily
increased. According to HUD's data systems, the annual contract obligations at HUD's
headquarters grew from $213 million in fiscal year 1991 to $376 million in fiscal year 1996
(in constant 1996 dollars). No historical data are available for field office contracting
activities”

*HUD used to maintain contracting data at each location that performed contracting. We
found that the data varied considerably in terms of its completeness and reliability. In
1997, HUD implemented a new procurement system that combined the Department's
headquarters and field procurement systems. We have not reviewed the reliability of this
consolidated procurement system.


61

Appendix A
STATISTICAL SAMPLE RESULTS

We tested transactions for both the Salaries and Expenses and Operation Safe Home
appropriations in order to ascertain whether expenses recorded in these two appropriations were
accurate. To accomplish this, we determined the maximum amount of errors that could have
occurred during the period under audit. We selected a statistical sample of transactions from the
audit period of October 1, 1994 through March 31, 1997 for each appropriation. We used
stratified random sample methodology to select transactions for testing. Our statistical sample
did not include payroll and travel expenditures because they were tested separately using a
judgmental sample. Following are the results of our statistical sample for each appropriation.

For the Salaries and Expenses appropriation, our population totaled $22,240,557 in
expenditures. Based on our sample, we concluded with 95 percent confidence that errors in these
accounts (due to expenditures that were in error, not allowable or not reasonable) did not exceed
$7,486. This equates to less than 0.1 percent of the tested population. For the Operation Safe
Home appropriation, our population totaled $946,450 in expenditures. Based on our sample, we
concluded with 95 percent confidence that errors in these accounts (due to expenditures that were
in error, not allowable or not reasonable) did not exceed $16,047. This equates to less than 1.7
percent of the tested population.

As part of our statistical sampling we also tested internal controls in the Salaries and
Expenses and Operation Safe Home appropriations to assess whether controls to ensure that
transactions were properly recorded and assets were adequately safeguarded from loss or misuse
were functioning as intended. For Salaries and Expenses expenditures, we tested sample
transactions as to whether they were: (1) properly planned, (2) supported by vendor invoice
where appropriate, and (3) approved by an authorizing official. If one or more of these
conditions was not met for a given transaction, the transaction was considered an exception for
purposes of evaluating our sample results. Based on this testing, we concluded with 95 percent
confidence that the exception rate for Salaries and Expenses expenditures was at least 4.2
percent.

For Operation Safe Home expenditures, we tested transactions as to whether they were
(1) properly planned, (2) supported by vendor invoice where appropriate, (3) approved by an
authorizing official, and (4) covered by a cooperative agreement approved by Headquarters,
‘where appropriate. If one or more of these conditions was not met for a given transaction, the
transaction was considered an exception for purposes of evaluating our sample results. Based
‘on this testing, we concluded with 95 percent confidence that th exception rate for Operation
Safe Home expenditures was at least 12.6 percent.

To the extent that we considered these internal control deficiencies significant, we
discussed them in the body of our report.


130

the real decision point, where you want to analyze the events, is
prior to the award of the contract.

Mr. Suays. No. No. But what we want to do is to make sure in
the next contract we don’t make that same kind of mistake.
That’s——

Mr. CARLSON. Yes, but Mr. Chairman, that’s not a mistake. You
see, that’s the gross flaw in the inspector general’s—I don’t mean
to pick on the inspector general—many—— .

Mr. Suays. Let me just say something. That’s disingenuous to
say you don’t mean to pick on her. You have a disagreement. We
want to know the disagreement. I, frankly, don’t agree with you,
so I'd like to hash it out a bit.

Mr. CarLson. I would, too.

Mr. Suays. Let me just say I am going to come back to this be-
cause we'll pursue it a little bit more. I kind of injected myself.

Mr. Towns. That’s OK. Sometimes the flow is very good, so I
don’t want to break the flow that you have there.

Mr. Suays. OK, if you didn’t mind then, just pursue it. I don’t
understand your logic.

Mr. CARLSON. Well, when you look at a firm fixed-price contract,
what happens——

Mr. Suays. I understand a firm fixed-price contract. The contrac-
tor may win or it may lose, and the public may win or they may
lose, but if it’s so out of line, then I want to know what is the cul-
ture and the process that allowed it to happen and are we doing
that consistently?

Mr. CARLSON. Well, let me—you’re two steps ahead of me. If I
may just take two steps back. In the firm fixed-price contracting
rules, the fact finding and the decisionmaking and all of those proc-
esses occur prior to the contract being awarded.

What I am suggesting is that what’s evident in the audit report
doesn’t support the conclusion that it was an improper award. If,
in fact, it made sense—let’s just say that at that point when the
contract was awarded in 1984, whatever it was, computer prices
were rising. The costs of PC’s were rising. For HUD to enter into
a firm fixed-price contract would have made a great deal of sense
because they would then have protected themselves against further
price increases.

The fact that the prices decreased, and HUD theoretically paid
more than they should have, is irrelevant.

Mr. Suays. No, it isn’t irrelevant. No, it’s not irrelevant, and I'll
tell you why—at least I don’t think it’s irrelevant. It may be that
we didn’t have the proper level grade person with the education
and expertise to know that it was 9 out of 10 that prices would
drop. And that’s all I am saying.

I am not going to over read, but it may be that’s the—we don’t
have people that have the expertise to really understand when they
should have one kind of contract versus another. And I am not
going to make a determination on that other than to say it’s some-
thing we need to look into.

Mr. CarLson. Oh, absolutely, and I think in my testimony I indi-
cated that. I am not in any way implying that HUD doesn’t need
to take a look at its contracting practices.


114

questioned whether HUD will have the capacity to carry out its responsibilities once the
downsizing target is reached.

HUD's targeted personnel ceiling of 9,000 FTE's chokes the agency's capacity to
perform work in-house and tethers the agency to contractors, even when efficiency and
‘economy would dictate that public employees are the better way to do the job. The policy
‘of managing by ironclad personnel ceilings rather than the agency's budget is unsound.
Forced contracting out means HUD will have no option but to depend on contractors and
to pay whatever they demand. HUD should not be held hostage to contractors because
of a rigid ceiling on in-house staff.

Mr. Chairman, it is imperative that at the starting point in HUD's procurement --
the decision whether or not to contract out -- HUD make sound and justifiable decisions,
not simply outsource work because HUD has mandated that no staff can be replaced or
new staff hired. Contracting out as a refiex to self-inflicted in-house staffing shortages
is unwise, and costly to the taxpayer. What steps is HUD taking to ensure that when it
contracts out work it does so for the right reasons and not because of self-destructive
‘staffing reductions?

CONCLUSION

Again, Mr. Chairman, thank you for inviting me to testify at today’s hearing. AFGE
is ready to work with you to ensure that HUD uses OMB Circular A-76 public-private
competitions when it chooses the option to contract out work. | urge you to require that
'HUD, when it chooses to consider the option of contracting out, comply with federal policy
under OMB Circular A-76 of public-private competitions before any work is to be


116

BOBBY L. HARNAGE, SR.
NATIONAL PRESIDENT
AMERICAN FEDERATION OF GOVERNMENT EMPLOYEES, AFL-CIO

As national president of the American Federation of Government Employees (AFGE),
AFL-CIO, Bobby L. Harnage, Sr. leads the nation's largest union for government workers
representing 600,000 federal employees in the United States and overseas, as well as
employees of the District of Columbia.

Mr. Harnage, an activist with AFGE for over 30 years, was AFGE's national-secretary
treasurer for six years, from 1991 to 1997, before filling the vacant position of national
president. While secretary-treasurer, Harnage also served as chair of the union's
privatization committee ~- a watchdog for defense workers and the vital role they serve.
'Harnage's distinguished military career, which includes stints as an Air Police Investigator
at Clark Air Force Base in the Philippines and the Strategic Air Command at Warmer
Robins Air Force Base in Georgia, makes him a vigilant defender of America's national
security.

‘Subsequent to his election as national secretary-treasurer, Harnage's reputation as a
trusted leader earned him a 13-year term as 5th District national vice president, from
1978 to 1991. The 5th District represents federal government employees in Alabama,
Florida, Georgia, South Carolina, Tennessee, Puerto Rico and the Virgin Islands. He was
a member of the Labor Advisory Board, Center for Labor Education and Research at the
University of Alabama and served on the Board of Directors of the Atlanta Metropolitan
Area Red Cross.

Harnage is married to the former Sharon G. Turner of Jacksonville, Florida, who was

president of her AFGE local for 12 years and also served as a vice president and
president of the AFGE National Housing and Urban Development Council.

W


4

need or want, and it means you can’t oversee what you're getting.
So the balance of power shifts to the contractor almost inevitably.

So what Mr. Carberry, the new chief procurement officer, is
going to have to do is much more than fix individual processes in
HUD. He is going to have to change the culture and attitude of
HUD employees, and we are going to stay on top of this and make
sure that that happens because, as you have indicated, there is an
enormous amount of money involved here, and it’s getting bigger
and bigger and bigger, and I don’t see any way that that won’t hap-
pen.

Just one concern about the plans that HUD has: They're quite
good, these plans, except in one area. HUD has also appointed a
chief information officer, but her duties and responsibilities have
not yet been defined because the biggest of HUD’s contracting is
in the area of information technology. This is really a critical issue.
If she is subordinate to the program assistant secretaries, she will
not be able to turn that area of contracting, so that’s my one major
concern about the plan at this time.

Thank you.

{The prepared statement of Ms. Gaffney follows:]


93

Mr. GLASER. Thank you.

Mr. Towns. Thank you very much, Mr. Carberry, and thank you
very much, Mr. Glaser. Thank you very much. Now our third
panel: Terry Carlson; Bobby Harnage Sr., national president of the
American Federation of Government Employees.

Mr. Kucinicu. Mr. Chairman, before you swear in the witnesses,
I have two other committee meetings that I am having simulta-
neously that I have to move on to, but I certainly will have my staff
here to get the information, and I appreciate your indulgence.

Mr. Towns. Thank you very much. I understand that we have
these conflicts. They do come about.

{Witnesses sworn.]

Mr. Towns. Mr. Carlson, you may proceed first.

STATEMENTS OF TERRY A. CARLSON, PRESIDENT, T.A. CARL-
SON AND CO. AND BOBBY L. HARNAGE SR., NATIONAL
PRESIDENT, AMERICAN FEDERATION OF GOVERNMENT EM-
PLOYEES

Mr. CARLSON. Thank you. I guess I have a little different per-
spective on some of these things than others. The first thing I did
to take a look at this, was to take a look at it from the perspective
of the relationship between the contracting officers and the inspec-
tor general’s office, and the contracting officers and the contractors.

My perspective has been generated as a result of working with
companies that do business with the Federal Government for over
23 years as a consultant and advisor to them, and I was asked if
I wanted to do this kind of testimony, if I had anything meaningful
to contribute, and was given the inspector general audit to take a
look at.

And it raised several questions in my mind about the basis upon
which everybody is moving forward to reform the procurement
process at HUD. There were many, many examples in the audit re-
port where it did nothing but put the contracting officers in kind
of an impossible position.

For example, in three instances the audit talked about the gov-
ernment estimate of what the cost would be for a particular pro-
gram. In two of those instances, the contractor’s estimate was sig-
nificantly higher than the government’s estimate, which wouldn’t
be unusual. I mean that would not be an unusual event. And the
contracting staff were criticized for that phenomena having oc-
curred.
In the third instance, the auditor pointed out that the govern-
ment estimate was $500,000; although I think he or she was a lit-
tle confused about what the $500,000 was. HUD had no problem
in awarding contracts greater than the Government estimate. In
this particular case, however, HUD got the contractor to reduce the
scope of their work so that HUD could get it for $500,000, which
indicates to me it really was a funding number and not a govern-
ment estimate. And HUD was criticized for that, too.

So if you were a contracting officer trying to figure out what you
are supposed to do, we have two instances where we had a contract
awarded for greater than the Government estimate and we were
criticized, and we had one where we made the contractor meet the


38

Ms. GaFFNEY. Plans for doing that.

Mr. MoMOoRELLA. Plans. It’s not implemented.

Ms. GaFFNEY. No, they have plans for doing that.

Mr. Towns. Well, that would be a yes.

Ms. GaFFNEY. That’s a yes. Right.

Mr. Towns. Review current interagency agreements to determine
necessity of agreement and suitability of reimbursement rates.

Ms. GaFFNEY. I don’t—we do not have a response on that rec-
ommendation, to my knowledge.

Mr. MomorELLa. That’s correct. They just said that that would
be the responsibility of the chief procurement officer.

Mr. Towns. Yes. Let me—the audit process can sometimes lead
to controversy. Do you believe that there should be a forum where
people with concerns can be heard?

is. GAFFNEY. Of course. Mr. Towns, can I just step back for 1
minute and tell you——

Mr. Towns. Sure. Go ahead.

Ms. GaFFNEY [continuing]. That to me what is happening at
HUD now as the result of our work and NAPA’s work is extremely
positive. This is good news. As you run through those recommenda-
tions, we are answering yes to whether HUD has plans.

I consider it incredibly significant that HUD has moved to name
a chief procurement officer who is so well Guclified, who is taking
steps to make contracting important in HUD. That is a matter of
focus. This is good news.

Mr. Towns. Let me move, and I'll get out of the way, Mr. Chair-
man.

Mr. Suays. You got a green light, boss.

Mr. Towns. As you know, I have a high concentration of public
housing units in my congressional district. I think I have the third
highest or fourth highest in the Congress. I’m always interested in
programs that impact public housing. That is why I was concerned
about questions raised by the Senate Banking Committee as to
whether the IG’s office can both manage and oversee Operations
Safe Home.

In light of the Banking Committee’s concerns, have you produced
an audit report on this program relative to procurement practices
and expenditures?

Ms. GAFFNEY. Approximately 1 year ago, Mr. Towns, we had a
group of auditors in the OIG who audit HUD’s financial state-
ments. When they completed that work on the 1996 financial state-
ments, I asked them to undertake a financial review of OIG oper-
ations, and I asked them to do it in the most nitpicking possible
way as an internal management review.

They did so. They issued that internal management review in
January 1998. In the process of doing that review they looked at
$946,000 of Operations Safe Home expenditures. They found sup-
port problems for a total of $16,000 of those expenditures, saying
that the expenditures either Jacked supporting documentation or
appeared to be in error.

ir. Towns. How much?

Ms. GAFFNEY. It was $16,000 out of $946,000. That’s 1.7 percent.
They also found that in another—in 12 percent of the $946,000
there was some aspect of internal control that hadn’t held truth;


RR<BesessRVRosenesse

125

MS. WOODLZY: We, what we are interested in is selling properties in
pools, in large quantities at one time. Now, if they are coming up
with an arrangement outside of this, for this particular solicitation,
4 think you will have gone too far, because the idea, we are very muck
interested in seeing how we can sell large groups of properties at one
time, in somewhat of a pool arrangement. You know, the pools can be
broken down into groupings of 4,000, 5,000, whatever, as long as they,
1 the properties in the inventory are covered, or the projected
inventory are covered. If you go outside of that, if you go outside
of these options, you are not limited to these two options. This just
gives you some range of what we are looking for. But, if yoa go

outside of these two options, I think you may have gone too far.
Because we are definitely looking at the sale of properties via some
type of a pool arrangement.

yes?

AUDIENCE MEMBER: Tn our limited experience, dealing with HUD is often
a significant factor in the evaluation of the proposals, often is
prior HUD knowledge and experience. So, if you have never had prior
HUD knowledge and experience, of course, you will get a contract with
HUD because it is 25 instead 100. I noticed the absence of that
criteria here. Is that really, really true? I am sorry, but, I mean,
you know -~ MS. WOODLEY: No, that is really, really true. Simply
because we are going to such a different, we are proposing such 2
different mode of operation. what we currently do we did not see as
being as important as coming up with some new or innovative ideas.
The idea is to move away from what we currently do. And so, yes, that
is really true.

AUDIENCE MEMBER: Thank you.

MS. WOODLEY: Okay.

AUDIENCE MEMBER: If you pool them, you are going to move them off the
books a lot quicker, but if you pool them, you are going to move the
book a lot quicker, but what if you come up with a disposition way
that reduces your expenses from that, from that 120 days or 160 days
‘that you have there? .

MS. WOODLEY: What can you give me, you can elaborate some more? Can



The position taken by the Inspector General or parca curious since one of the
fit is that HUD expedite contract close-outs by
contracting out audits to determine # contract costs are reasonable, allocable and

Contract Specific Observati

This statement might already be too long but | would be remiss in not identifying a couple
of other areas that cause concem.

1. The Inspector General identified as a problem a contract with ABT. The audit criticized
HUD for reducing the scope of a contract in order to stay within the budget amount
available to do the work. Unfortunately, the auditor is somewhat confused. The auditor
states that the HUD cost estimate for the job was $500,000. The only proposal
received by HUD for this effort contained a cost estimate of $200,000.

HUD then worked with the contractor to reduce the scope of work to the point where
the agreed upon tasks could be done for $500,000. Rather than being a government
cost estimate, the $500,000 appears to be the amount available to do the work. (HUD
hhas no problem in exceeding its own cost estimates, nor should it)

HUD's actions in this case were prudent. A cost reimbursement contract requires the
Contractor to execute the statement of work up to the point where funding is no longer
available. At that point, HUD receives the contractor's product. Before completion,
work notes gathered in a box might represent the contractor's work product By
‘ensuring the available funding fit the statement of work, HUD maximized the
probability of receiving a useful product.

The Inspector General also noted as a deficiency a contract with Price Waterhouse.
‘The Inspector General was critical of the fact that HUD is paying for Price Waterhouse
‘employees’ equipment. HUD paid a total of $45,583 for 17 laptop computers for Price
Watertiouse’s employees to use. The $45,583 includes $39,814 for the cost of
laptops and $5,769, which is a 14 percent add-on fee by Price Waterhouse.

N

If this 14 percent represents the recovery of Price Watethouse's General and
Administrative expenses, which appears likely, the auditor is creating another straw
issue. A cost input base allocates G&A expenses to all final cost objectives. If Price
Waterhouse uses a total cost input base for allocating general and administrative
costs to final cost objectives it must recover the general and administrative costs on all
elements of cost. There is no relationship between any benefit received by the
contract and the general and administrative expenses allocated to the contract. It is
strictly for cost recovery.

| repeat that 1 do not mean to critique the Inspector General's audit report although that is
how it probably appears. For far too long various audit agencies in the Goverment were
able to present allegations of abuse by contractors without being accountable for their
errors or assigning auditors lacking the skils and knowledge necessary to conduct a
responsible audit These auditors have also been able to raise allegations of abuse by
Government procurement personnel. Again, without fear of being accountable for the
‘TESTIMONY OF MR. TERRY A. CARLSON

BEFORE THE SUBCOMMITTEE ON HUMAN RESOURCES
PAGE SOF 6


41

REVIEW OF THE OPERATIONS OF
THE OFFICE OF INSPECTOR GENERAL
DEPARTMENT OF HOUSING AND
URBAN DEVELOPMENT

JANUARY 21, 1998

OFFICE OF AUDIT
WASHINGTON, DC