City Agency Audit Reports

Audit Report on the Department of Education’s Awarding of Milk Distribution Contracts

ME12-093A
February 26, 2014

AUDIT REPORT IN BRIEF

This audit determined the adequacy of the Department of Education’s (DOE) controls over the awarding of milk distribution contracts.  The scope of this audit covers the period from April 2008 through June 2013.

DOE provides education to over one million pre-kindergarten to 12th grade students in more than 1,700 New York City public schools.  These schools serve over 850,000 meals per day to their students.

In May 2008, DOE solicited bids for five-year contracts to supply and deliver milk to schools.  DOE awarded milk distribution contracts totaling $134,139,354 to three vendors covering eight aggregate classes (geographical zones) in the City.  Beyer Farms, Inc. (Beyer) was awarded a contract amount of $111,207,157 for Brooklyn zones 1 and 2, Queens zones 1 and 2, and the Bronx zones 1 and 2.  Elmhurst Dairy, Inc. (Elmhurst) was awarded a contract amount of $17,647,481 for Manhattan, and Bartlett Dairy, Inc. (Bartlett) was awarded a contract amount of $5,284,716 for Staten Island. These distribution contracts became effective on November 1, 2008, and were set to expire on August 31, 2013.

In October 2008, Beyer and Elmhurst requested and obtained approval from DOE to subcontract to Bartlett the delivery of milk in Queens zones 1 and 2, the Bronx zones 1 and 2, and Manhattan. DOE’s approval of the subcontracting was based on the understanding that Beyer and Elmhurst, as the principal contractors, were responsible for all contractual terms, conditions, and requirements.

On December 11, 2012, Beyer declared bankruptcy and closed its operations.  Beyer notified DOE that it could no longer perform milk distribution services under its contract. DOE was able to award contracts to two vendors to continue the distribution of milk to the schools without interruption.

Audit Findings and Conclusion

DOE’s controls over the awarding of milk distribution contracts were adequate as they relate to many aspects of the contract award process.  In reviewing DOE’s controls over the awarding of milk distribution contracts, we found that: DOE’s controls over the receipt of the bids were adequate; the contract files generally contained, with some exceptions, the required documentation in support of DOE’s awarding of the contracts; the Request for Bids (RFB) and contract award processes were followed in the proper sequence; and DOE selected the lowest bidder for each geographical zone based on accurate bid tabulations. 

However, DOE did not adequately review the financial capacity of the vendors that were awarded milk contracts.  In addition, DOE lacked adequate procedures for detecting the warning signs of possible collusion. As a result of those deficiencies, the risks that a financially unsound vendor could be awarded a major contract or that collusion could occur and go undetected are increased.  To ensure that the contracts are awarded to the lowest responsive and responsible bidder, DOE needs to strengthen its controls in these areas.

Audit Recommendations

To address these issues, the audit recommends, among other things, that DOE:

  • Develop and implement adequate written procedures that are sufficiently detailed to govern the review of the financial capacity of the lowest bidders for milk distribution contracts. 
  • Ensure that the contract files contain adequate evidence of the review of the financial capacity of the lowest bidders.
  • Develop and implement adequate written procedures that are sufficiently detailed to detect the warning signs of possible collusion.
  • Identify any warning signs of possible collusion, review them, and then explain and support its conclusions relative to their significance.

Agency Response

DOE officials generally agreed with the audit’s nine recommendations, but disputed most of the findings upon which the recommendations were based. We found DOE’s arguments against these findings to be unpersuasive. Accordingly, we stand by our findings.  A detailed discussion of DOE’s arguments is presented in the body of this report, and the full text of the DOE response is included as an addendum to this report.