Audit Report on the Department of Environmental Protection’s Procurement Practices and Payment Process for Professional Services

EXECUTIVE SUMMARY

The objectives of this audit were to determine whether New York City Department of Environmental Protection (DEP) made accurate and appropriate payments to professional service contractors; ensured compliance with the terms of its contracts and applicable City payment requirements; and complied with City requirements for procurement including the Procurement Policy Board Rules (PPB Rules) and applicable Comptrollers’ Directives.

DEP is responsible for the management and conservation of the City’s water supply, transmission, and distribution systems. It is also responsible for overseeing capital construction programs for such systems. In order to meet its responsibilities, DEP contracts with various companies for professional services such as engineering and architecture to assist it in overseeing its capital projects. DEP is required to comply with the City’s procurement and payment guidelines as established in the City’s PPB Rules and in Comptroller’s Directive #2, “Procedures for the Audit of Payment Requests Submitted Under Cost Reimbursable Contracts,” Directive #7, “Audit of Requests for Payment Received Under Contracts for Construction, Equipment and Construction Related Services,” and Directive #24, “Agency Purchasing Procedures and Controls.”

For Fiscal Years 2012 and 2013, DEP reported 521 active professional service contracts, for which it made approximately $1.8 billion in payments.¹

Audit Findings and Conclusion

Although DEP is generally in compliance with the procurement practice requirements, it does not have adequate controls over its contract payment process. Specifically, we found that DEP did not effectively review contractors’ invoices to ensure that requested payments were accurate, appropriate, and adequately documented. As a result, among the contracts sampled, DEP processed questionable payments of $7.9 million for titles not listed on the contracts and processed excess payments of $364,834 using incorrect title rates and overhead rates. Additionally, we found that DEP did not:

• Adequately document certain aspects of the procurement process. We found that some contract files were missing the conflict of interest statements signed by contract proposal evaluators, Notices of Vendor Selection, and statements entitled Intent to Enter into Contract for awards over $100,000. The absence of these documents from contract files makes DEP’s selection process less transparent and increases its vulnerability to a challenge alleging that the solicitation process was not impartial.
• Follow the approval procedures for awarding or registering emergency contracts as required by PPB Rules. As a result, these contracts could have been executed without the required independent review and approval by the Comptroller’s Office to ensure the City is protected against contractors with a history of substandard performance.

Audit Recommendations

This report recommends that DEP should:

• Recoup the $364,834 in overpayments from its contractors.
• Conduct a review of the $7.9 million in questionable payments identified in this audit report and determine whether the contractors billed the City appropriately and/or whether any overpayments were adjusted in subsequent payment requests or at contract close-out.
• Review all previous payments for contracts cited in this report that received excess and questionable payments and determine any amounts that should be recouped from these contractors in accordance with the contracts, change orders and the EAO audits.
• Track all hours billed against change order limitations in order to control the hours billed and prevent project overpayments.
• Ensure that interim payments accurately reflect the overhead rates and title rates in accordance with the City law and rules, the applicable contracts and/or EAO audits, to prevent overpayments.
• Ensure contractors only bill for work performed by contractor staff in titles listed in the contracts and change orders at the rates associated with those titles to avoid improper payments and overpayments.
• Ascertain compliance with the terms of the contracts and City law and rules prior to approving and processing contractor payment requests to prevent excess payments.
• Perform required audit steps mandated by Comptroller’s Directives #2 and #7 for reimbursement of direct and indirect labor costs.
• Ensure that contractors maintain adequate insurance coverage for the duration of the contract in accordance with the contract, and that documentation of this (i.e., insurance certificates) be maintained in the contract files.
• Ensure that all statements regarding potential conflicts of interest are signed and on file before proceeding with ranking each contract proposal.
• Ensure that contract files maintain all documentation to support the award of the contract to specific professional service contractors.
• Obtain the required approvals and registration with the Comptroller’s Office in a timely manner.

Agency Response

In its response, DEP generally disagreed with our report findings and stated that “All DEP payments are reviewed and approved in accordance with all applicable Comptroller’s Directives: numbers 2, 7, and 24. Individual payments are reviewed and approved by Project Managers as well as by the Office of Engineering Audit (OEA). OEA is an office independent of, and not subject to, the control of the project management teams. DEP staff reviewed all of the payments in question and found that none were made in error.”

While it is commendable that the OEA is independent of the project management teams, the audit shows that the OEA’s independent review of these vendor invoices fell short as discussed in our detailed findings. Considering that DEP undertakes projects worth billions of dollars, it is critical for DEP to establish tighter controls over its approval process in order to prevent processing excess and questionable payments.

Despite DEP’s disagreement over the audit findings, DEP officials agree with 9 of the 12 recommendations in this report.

The full text of the DEP response is included as an addendum to the report.