Follow-Up Audit Report on the Department of Education’s Controls over Non-Competitive and Limited-Competition Contracts and Contract-Related Actions

The objective of this audit was to determine whether the New York City Department of Education (DOE or the Department) implemented the eight recommendations made in our prior audit report entitled Audit Report on the Department of Education’s Controls Over Non-Competitive and Limited-Competition Contracts (Audit # MG13-119A), issued on June 17, 2015.

DOE contracts with outside vendors to acquire and provide necessary goods and services, including student bus transportation, universal pre-kindergarten, food, textbooks, educational software, and training and support materials for teachers.  DOE also contracts with outside vendors for certain special education and assessment services (known as related services) for special needs students.

Rules governing DOE procurements and contracts are found in the Department’s Procurement Policy and Procedures (PPP) manual.  According to the PPP manual, the preferred method for awarding contracts is a fully competitive solicitation, which generally involves a Request for Bids or a Request for Proposals.  However, when a fully competitive process is not feasible or appropriate and specific criteria have been met, DOE may use other methods to award contracts, providing that there is a clear written justification for the need.  This follow-up audit focuses on the following seven types of contract actions that do not involve fully competitive solicitations: contract extensions; listing applications (used for certain content provided directly to students); contract renewals; sole-source procurements; contract assignments; negotiated services; and emergency purchases.

The prior audit found problems in DOE’s contract assignment processes.  In particular, the audit found weaknesses in the Department’s assessments of the past performance of vendors who received contract assignments.  There were also deficiencies in the justifications provided by the vendors who sought to assign these contracts and with the Department’s approval determinations.  In addition, the prior audit found that DOE had not (1) effectively enforced the requirement that contract managers formally monitor and evaluate the performance of vendors; (2) established minimum guidelines for monitoring contracts; and (3) developed a standard format with criteria for managers to follow in conducting performance evaluations.  Further, the prior audit found that DOE failed to consistently submit contracts to the Office of the New York City Comptroller (Comptroller) for registration in a timely manner.  In connection with the prior audit, the Comptroller issued eight recommendations to improve DOE’s performance.

Audit Findings and Conclusions

We determined that three of the prior audit’s eight recommendations had been partially implemented and that five had not been implemented.  Among other things, we found that:

• DOE still does not provide sufficient guidance for contract assignments, and, in particular, it fails to ensure that a proposed new vendor’s capacity and history are adequately assessed. In addition, assignment files lack sufficient information justifying the assignments, detailing prior performance and documenting adequate insurance coverage, among other things.
• DOE has not developed written procedures or guidelines to help staff detect the warning signs of possible collusion when awarding contracts via actions other than fully competitive solicitations.
• While general guidance to contract managers appears to be available now in DOE’s contract management training manual, it does not offer the contract managers specific instruction about handling their responsibilities. For example, the training manual is silent on the performance evaluations that must be conducted throughout the contract period and on the frequency of such evaluations.
• Despite DOE’s representation in response to the previous audit that it would implement a standard format with standard criteria and ratings for evaluating vendor performance and a schedule for conducting such evaluations, we found that no such implementation has taken place.
• DOE still does not conduct required performance evaluations of contractors seeking renewals or extensions.
• DOE still does not adequately monitor its contract managers to ensure that contract monitoring and performance evaluations are conducted in accordance with its PPP manual.
• DOE does not ensure that limited-competition and non-competitive contracts are registered with the Comptroller prior to vendors beginning performance. As a result, vendor payments are delayed, which could potentially decrease competition and raise prices.

In addition, we found other areas where DOE’s controls over contract actions other than fully competitive solicitations need to be improved.  In particular, this follow-up audit disclosed that:

• DOE has inadequate controls over its procurement of contracts though the negotiated services method;
• Procurement files of approved contracts did not consistently contain background review reports or show that issues of concern identified in the reports had been satisfactorily resolved;
• Contract assignments in our sample were not approved by DOE’s Vendor Research & Price Analysis (Vendor Research) unit before their starting dates; and
• Procurement files did not consistently contain the documents and approvals needed to support contract awards as specified in the PPP manual and other Division of Contracts and Purchasing (DCP) guidelines.

Because of DOE’s deficient oversight of contract actions that do not involve fully competitive solicitations, there is a risk that the Department is not selecting the best vendors or obtaining the best prices for goods and services.  This risk is of particular significance since we found that over $2.7 billion (approximately 64 percent) of DOE’s contract dollars registered with the Comptroller were awarded through one of the seven less than fully competitive contract actions.  Moreover, since we found that the vast majority of vendors commence performance under their contracts prior to those contracts being registered, there is an added risk to DOE because the vendors cannot be paid until their contracts have been registered.  As a result, the pool of vendors willing to bid on DOE contracts could be limited.  Further, costs could increase because bid prices would potentially include a factor covering the risk to the vendor of not being paid timely or at all.

Audit Recommendations

To address the issues that still exist and other areas where DOE’s controls need to be strengthened, this report makes a total of 20 recommendations, including the following:

• DOE should ensure that performance evaluations are conducted, especially of those contractors seeking renewals or extensions, and should maintain the results of these evaluations for future reference.
• DOE should monitor its contract managers to ensure that their activities are documented in well-organized files and are readily available.
• DOE should ensure that it submits contracts for registration to the Comptroller prior to their start dates.
• DOE should ensure that vendors do not commence performance under non-emergency contracts until they are registered with the Comptroller.
• DOE should monitor the heads of offices more closely to ensure that they do not make purchases exceeding $25,000 without an approved contract being in place to reduce the risk of negotiated services contracts having to be awarded later to pay for services that have already been provided.
• DOE should ensure that all noteworthy adverse information issues cited on Background Review Summary sheets are satisfactorily resolved prior to contract approval.
• DOE should ensure that all required background reviews are conducted.
• DOE should ensure that assignments receive final internal approvals in accordance with applicable rules prior to the assignment start dates.
• DOE should ensure that the procurement files contain all required supporting documents and approvals for the awarding of contracts and for any increases to original contract awards.

Agency Response

In its written response, DOE purports to “agree” with all but one of the audit’s 20 recommendations, but often qualifies that agreement by stating that its agreement is “inasmuch as it reflects current practice.”  Since the audit found deficiencies in DOE’s current practices that the recommendations seek to address, DOE’s facial “agreement” is often, in fact, not an agreement at all when read in the context of the full response and with DOE’s current practices as documented in the original audit and this follow-up.  Based on the detailed narrative in DOE’s response, we conclude that it agreed with 7 of the audit’s 20 recommendations, partially agreed with 7, and disagreed with the remaining 6.  Specifically, DOE disagreed with our recommendations that DOE develop more specific written procedures for its reviews of requested contract assignments; require the assignors to submit documentation that supports their written justifications for assignment requests; develop written procedures to assist staff in identifying the warning signs of possible collusion in the assignment process; ensure that contract managers maintain well-organized, readily-available contract management files; ensure that vendors do not commence work under non-emergency contracts until they have been registered with the Comptroller; and ensure the maintenance of required supporting documents and contract award approvals in DOE’s procurement files.

In addition, DOE disputed some of the findings and conclusions upon which the recommendations were based.  However, after a careful review, we found DOE’s arguments unpersuasive and accordingly conclude that they provide no basis to alter our findings.

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