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My firm contracts with many public agencies at every level of government. I typically am involved in the cost estimate portion of proposals. In that capacity I deal (somewhat tangentially) with some of the details in contracting with those agencies. In particular, we often have to make sure our proposed estimates are in specified formats and with assumptions outlined by the client. In addition to that we often have to take into consideration any requirements that will likely be needed for reporting along with any invoicing if we win the job. From this perspective, I have endeavored to comment here and there on blogs and in Facebook to add to the context of discussions there regarding the HUD audit of the LHA. Lynne asked if I could add to the discussion in a LiL post. In truth, there has been a lot intelligent commentary (and not so intelligent) so far and I was hoping this blog post wouldn’t ultimately be necessary. However, looking at the “emergency” meeting called for tonight and the constant flacking of the story by the sun, I think some further reasoned and non-hyperbolic reflection might be warranted.
So, like many of my past posts, this will be a little long winded. I’m going to give some background on contracting with public agencies, then we’ll look at the audit, and then I’ll speculate as to what I think happened and what’s probably going to happen next. The story I’m about to tell is somewhat speculative, so there are probably places where others would dispute the specifics, but my I think in general this is probably how things went down. Also keep in mind that I never deal with contracts directly and what I know about contracting is largely from osmosis (admittedly a lot of osmosis).
Typically when an agency has a project they want outside firms to do, they’ll put out a Request for Proposals (RFP) or a Request for Qualifications (RFQ) and invite responses from firms that want to compete for the work. The process has a lot of steps to it (more on that later) and isn’t as simple as going out and hiring a plumber to fix your sink. For that kind of service you might use a force account contract, which is what the LHA utilized. What that basically means is that rather than prepare, they instead wanted to just supplement their staff with contractors on a “time and materials” basis, using force account contracts. This strategy has several advantages – you don’t necessarily have to prepare an RFP or do preliminary or independent cost estimating (more on this later). The other thing is that force account contracts are ‘nimble’ – they tend to be easy to implement and get into place and are well suited for ‘getting stuff done now’. Also, from a local political angle, this allowed the LHA to hire very locally and apply stimulus directly to the Lowell community. (I doubt many around here complained about at the time.) So if you can picture it, the local LHA contracting person just has the LHA people assign work to people that have been contracted and the invoices come in to the LHA as just some time and materials charges – they probably look a lot like the bill you yourself would get from any contractor or mechanic.
Now for the other shoe. There’s a thing in contracting called “Project Controls”. The point of ‘controls’ is essentially double checking and analyzing for efficiency. It’s also there to detect things that are ‘out of whack’ (including fraud). My firm has a whole group that do this both on projects that we are doing and as a service to clients for projects by others (where we act as an independent ‘check’ on what’s going on). Now the thing to understand about controls is that to do it properly, there has to be reporting. That is, certain information needs to be kept track of by the agency, by the client, and by any vendors. Often a way this is accomplished is though terms and requirements stipulated in the contract (or even in the RFP before there’s even a contract) for reporting – including exactly what kind of information needs to be on the invoice. A simple kind of project control that many people might be familiar with is an expense report. Ever go on a trip for business and get lunch knowing that it would be reimbursed by your boss later because it’s a business trip? I did this once and got a receipt that wasn’t itemized. It was for something like $15, but it didn’t include the list of items that I ordered. The accounting department flagged it and it took a conversation with my boss and accounting before it was accepted. The thing is, they wanted that missing information on my bill for a few reasons. For one, there’s a company policy regarding ordering alcohol and I might have had a liquid lunch. Moreover, the lack of itemized information might mean that they couldn’t charge the client of the project for which the business trip was necessary. Typically clients will have reporting requirements for invoices including getting itemized receipts for everything. My lunch may have been paid by my company (they let it slide) but it may have not ever been charged to the client – my company may have (I don’t actually know) ‘eaten’ the cost of my lunch because the receipt didn’t meet the requirements for invoicing.
Some other project controls include putting together cost and hours estimates. This involves developing a reasonable Scope of Work (SOW) that describes the various tasks to be performed. The SOW is usually developed at the RFP stage or at least the when the proposals in response to the RFP are put together by the bidders. Sometimes there has been a preliminary estimate put together (usually by a separate firm) that either the firms bidding use as a guide (and many times deviate from) or is kept from the bidding firms and used as a guide to help the client evaluate bids. Sometimes the detail in the proposal’s cost estimate is used as a basis for invoicing. For example, hours or costs charged to a particular task beyond the estimate of that task in the proposal might be disallowed by the contract (making the estimate ‘binding’ not just overall but also in the details within the specific tasks in the SOW).
So now that we have some background understanding agency contracting, let’s look at the audit and what it says. In particular the report indicates:
The Authority did not always operate its force account modernization program in compliance with HUD regulations. This condition occurred because Authority officials failed to establish adequate management controls for the force account program to ensure that funds were used in an economical and efficient manner.
In addition, Authority officials did not always follow proper procurement procedures. This condition occurred because of ineffective management controls over the procurement process. As a result, officials could not assure HUD that their procurement process was fair and equitable and that they obtained the most favorable prices or best quality for items…
Now I could go over each of the specific points they bring up but I’m getting the sense that I’m probably boring you (if I haven’t already lost half of you). The basic upshot is that HUD didn’t like LHA’s record keeping and found their project controls either inadequate or nonexistent. I don’t think every line item the audit brings up is probably fair, and there are probably items you could legitimately dispute. But overall, the HUD’s concerns are pretty legitimate.
So what I suspect really happened here is that they LHA was pressured by time restrictions in filing for stimulus funds from the American Recovery and Reinvestment Act. The prep work needed to do RFP’s was probably not available so they elected to proceed under force account agreements instead. The reporting and tracking of force account agreements is usually nowhere near as onerous as putting out RFPs and doing competitive bidding. There isn’t a need to develop a detailed SOW and estimates ahead of time. Moreover, the contract amounts sometimes come in different after bidding. That is, sometimes you put something out to bid and learn the hard way that your preliminary estimate was too low or the SOW wasn’t enough to actually accomplish what you’re asking for. The LHA probably thought that using force accounts let them run their projects much more like they were ‘internal’ projects and didn’t require all the controls that HUD outlines. They were wrong. (The real world of interagency funding is the same as our real world – using other people’s money usually comes with strings.) So the long and short of it is that they thought they were operating under a different set of rules than HUD really required (and some of the particulars are open to dispute IMO). Moreover, it really does look like the LHA started flying by the seat of their pants more than you’d think for best practices. They would have benefitted by having some kind of Program Manager position (internal or hired out) to deal with proper controls and record keeping as well as the coordination of activities. They just needed to be better organized in general and even more so if they were to keep up with HUD’s requirements.
So now what?
The first thing you should understand is about the $11M figure being harped on by opportunists. This isn’t an amount of money *lost*, this is the number identified by the HUD as money that they *might* want back if the mess can’t be cleaned up. HUD has identified specific steps they want done to clean up the mess and for the most part the steps should be doable. There will likely be some extra cost getting all this work done and I think LHA could benefit with some outside help beyond getting independent cost estimates. Moreover, there is some bureaucratic infrastructure that needs to be developed so that it’s easier to handle any controls requirements in the future.
Another thing to consider is that LHA isn’t alone. Other housing authorities in the state have had similar issues. Governor Patrick at some point floated the idea of changing the state housing authorities so there would be more centralization. In a more centralized model things like this probably wouldn’t have gotten dropped because in this more fractured organization each small part is trying to reinvent the wheel whenever they are presented with something unfamiliar. The centralization of institutional knowledge helps streamline a bureaucracy in this way. And remember, most of what we’re talking about here is paperwork. Important paperwork for controls purposes, but paperwork nonetheless.
So what will probably happen now is that the LHA will go through the list and accomplish as much as it can. It probably won’t 100% succeed and then at that point LHA and HUD will have a sit down and figure out what’s fair to do from there. Moreover, in order to go through the list the LHA will likely incur some additional costs (the independent cost estimates for example). The end result won’t be $11M given back to HUD and every time you read a reporter or opportunist emphasize that figure you should be thinking *hype* (or worse). Another thing to remember is that people will likely grandstand about waste, and the audit does make the case there was some waste (again, some of this is disputable). But the vast majority of what the audit identifies is about those project controls – which doesn’t prove waste at all but rather shows that it’s hard to ID if money was wasted or used efficiently. That is, LHA may have spent money very very wisely but without the paperwork it’s hard to tell. I wouldn’t be surprised if LHA did spend the money well – being cash strapped can have that tendency. We’ll know more when the independent cost estimates come in.
OK, but what about culpability? I do think that even if you buy that the force account use should have mitigated some reporting requirements, it appears that record keeping even at that level was inadequate. It’s obvious that they need to build some internal procedures and infrastructure to keep this in check in the future. Mr. Wallace’s resume indicates that he’s got certification in procurement (whatever that means) and that makes me think he should have known better in particular. I can’t imagine how the board could have possibly known or done anything about this – again it’s basically about paperwork internal to the LHA, so pointing at them is probably grandstanding by opportunists as well.
So here we are. The question is do we want to fix things or make campaign issues. Bernie is pretty good at fixing things. I wonder how much he’ll be listened to tonight. People will likely strike their poses as opposed to really help and the kabuki should be entertaining, if tragic.
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