Audit Report on the Department of Education’s Controls Over Non-Competitive and Limited-Competition Contracts

Executive Summary

The objectives of this audit were to determine whether the Department of Education (DOE) has adequate controls over the awarding of contracts on a non-competitive and limited-competition basis and whether DOE adequately monitors and evaluates vendor performance on such contracts.

According to DOE’s Procurement Policy and Procedures (PPPs), the preferred method for awarding contracts is through the competitive process.  When it is not feasible or appropriate to do so, DOE uses limited competition procurement methods.  Awarding of these contracts must be done in accordance with the PPPs and is subject to varying levels of approval, including approval of the Principal or Head of Office, the Executive Director of the Division of Contracts and Purchasing, and the Chancellor of DOE.  In addition, the PPPs require all vendors with contracts to have their performance evaluated and monitored on an ongoing basis.

In Fiscal Year 2013, DOE awarded 421 contracts valued at $595,852,433 using non-competitive and limited competition award methods.  These contracts were for a variety of goods and services including student bus transportation, textbooks and computer software, as well as training and support programs for teachers.

Audit Findings and Conclusions

While the files we sampled generally contained written statements justifying the use of a non-competitive or limited competition procurement process and evidence of the required authorizations, this was not the case with assignments of existing contracts.  Rather, where existing contracts were assigned, the audit identified weakness in the assessment of vendor performance, justifications for assignments, and DOE’s rationale for granting assignments.  These weaknesses should be addressed by DOE to decrease the risk of collusion among bidders, some of whom we found lost bids only to be assigned the same contracts a short time later.

The audit also found that DOE had not strongly enforced the requirement that its contract managers formally monitor and evaluate the performance of vendors.  As a result, vendors with past poor performance on DOE contracts were more likely to be awarded or assigned new contracts.  In addition, DOE had not established minimum guidelines for monitoring contracts nor has it developed a standard format with criteria for its contract managers to follow in conducting performance evaluations.  Finally, DOE failed to consistently submit contracts to the Comptroller’s Office on time for registration, which reduces the transparency of DOE’s contracting processes.

Audit Recommendations

To address the issues raised by this audit, we make eight recommendations including that DOE should:

• Ensure that the supporting documentation, including comprehensive checks, performance evaluations (when applicable), and justification for the assignment requests, is obtained and carefully reviewed before approving assignment requests.
• Develop and implement sufficiently detailed written procedures to detect the warning signs of possible collusion.  The procedures should include, among other things: the different forms of collusion that could exist; conditions favorable to collusion; and the steps to be taken when the possibility of collusion has been identified (such as winning vendors requesting that their contracts be assigned to other vendors that bid on those contracts).
• Establish minimum guidelines for contract monitoring. Such guidelines should include, but not be limited to, a detailed description of the monitoring process, including frequency of contact with a vendor, documentation of monitoring efforts made, and the recommended actions where instances of vendor non-compliance are identified.
• Develop a standard format with standard criteria and ratings for evaluating vendor performance and establish a schedule indicating when such evaluations should be performed.
• Ensure that it submits contracts for registration to the Comptroller’s Office in accordance with applicable timeframes.

Agency Response

In its response, DOE officials generally agreed with five of the audit’s eight recommendations, stating that they will implement three recommendations and claiming that they were already in compliance with two other recommendations.  DOE partially agreed with one recommendation regarding the need to obtain and review supporting documents before approving assignment requests, claiming that they are already in compliance with this aspect of the recommendation, but appear to disagree with the need for to obtain and review justifications prior to the approval of contract assignments, claiming that they already scrutinize assignments sufficiently.  In addition, DOE did not agree to implement a recommendation regarding the development and implementation of written procedures to detect the warning signs of collusion and a recommendation advising DOE to establish minimum guidelines for contract monitoring.  DOE also raised objections to our classification of the award methods and to our audit scope.

DOE also challenges our finding regarding the inadequacy of its controls over the contract assignment process and dismisses our concern that the risk of collusion is increased when vendors are allowed to assign contracts without a comprehensive review by DOE.  DOE’s primary argument is that no benefit to the vendors was achieved because there was no price inflation subsequent to the contract award; hence, they contend there is no indication of collusion. However, this argument fails to recognize that if there is collusion, “competing” vendors agree in advance which vendor will submit the lowest bids and thus no real competition exists and all the collusive bids, including the low bid, are artificially high.  In such a scenario, there would be no need to attempt to inflate the price after the contract award because the winning bid would already include the price inflation.  We have discussed this issue with DOE several times during the course of this audit; unfortunately, DOE’s argument indicates that officials still have a fundamental misunderstanding of collusion.  In such an environment, we are concerned that DOE may not develop and impose the necessary safeguards to mitigate the risk of collusion.

After carefully reviewing DOE’s arguments, we do not find a basis to alter any of our findings or recommendations.

The full text of DOE’s response is included as an addendum to the report.