Performance Audit of Contract Administration

Transcription

1 Performance Audit of Contract Administration City of Gresham City Auditor's Office Audit Report #10-1 November 18, 2009 Gresham City Auditor Julie Nieminski, CPA, CIA, CFE, CISA, MPA Performance Audit of Contract Administration #10-1 1

2 Table of Contents I. EXECUTIVE SUMMARY...3 A. INTRODUCTION... 3 B. OBJECTIVES, SCOPE AND METHODOLOGY... 3 C. CONTRACTING CYCLE OVERVIEW... 4 Figure 1 A Model Contract Management Cycle... 4 D. THE CITY of GRESHAM S CONTRACT PROCESS... 5 Figure 2. Summary of Competitive Process:... 7 E. SUMMARY OF AUDIT RESULTS... 7 Management Response:... 8 F. MANAGEMENT ACCOMPLISHMENTS to DATE Contract Database Project HTE Financial System - Contract Number Tracking Project... 9 II. DETAIL of AUDIT RESULTS...10 Figure 3. Contract Setup and Administrative Controls by # of Exceptions Finding 1: Inadequate contract administration procedures and controls to ensure consistent compliance with GARS Article , GARS Articles and (see Exhibit II and III, pgs ) Finding 2: Amendments (including renewals) not completed until several months after the contract expired Finding 3: Contract work being started prior to contract execution Finding 4: Contract work being performed after contract expired Recommendation #1 (related to findings 1, 2, 3, and 4) Finding 5: The contract number field is not currently activated on the HTE Recommendation #2 (related to finding 5): Management Response to recommendation #1 and #2: Exhibit I GARS ARTICLE AWARD AND APPROVAL OF CONTRACTS GENERAL PURCHASES OF MATERIALS, SUPPLIES, SERVICES AND ASSETS CONTRACTS FOR PERSONAL (PROFESSIONAL) SERVICES CONTRACTS FOR PUBLIC IMPROVEMENTS AND MAINTENANCE... SERVICES MULTI YEAR CONTRACTS PUBLIC BIDDING EXEMPTIONS EMERGENCY EXEMPTION SOLE SOURCE EXEMPTION Exhibit II GARS ARTICLE CITY CONTRACTS LOCATION OF ORIGINALS INDEX OF CONTRACTS NOTIFICATION OF EXPIRATION OF CONTRACTS Exhibit III GARS ARTICLE CONTRACT EXECUTION PURCHASE ORDERS CONTRACT EXECUTION COUNCIL AGENDA ITEMS RELATING TO CONTRACTS Performance Audit of Contract Administration #10-1 2

3 Performance Audit of Contract Administration I. EXECUTIVE SUMMARY A. INTRODUCTION Faced with economic uncertainty and heightened regulatory requirements, organizations are under ever-increasing pressures to develop and execute strategies to continuously improve performance, mitigate risk, and ensure fiscal accountability. Contract Administration encompasses all dealings between the organization and the contractor from the time the contract is awarded until the work has been completed and accepted or the contract terminated. Contract administration constitutes the primary process that assures the organization gets what it paid for. Effective contract administration is essential for ensuring that contractors produce desired results and that public funds are protected from fraud, waste or inefficient use. A good system of internal controls should minimize the potential for errors or irregularities to occur. Therefore, standardized policies and procedures that are consistently used and enforced are critical to a successful contract management program in order to protect public assets and promote efficient and effective services. Properly trained staff and sound management all serve to maintain operating systems and environments that promote strong internal controls. B. OBJECTIVES, SCOPE AND METHODOLOGY This audit was scheduled as part of the fiscal year 2010 audit plan. Objectives of the audit include: 1. To determine if established internal controls over contract administration provide reasonable assurance that the contract administration process is being managed in the most efficient, economical, and effective way. 2. To determine if contract administration practices are in compliance to established rules and regulations. The scope of the audit consisted of selecting a sample of 25 active and expired personal service contracts, standard public contracts, and standard requirements contracts from the City s contract database system. Due to the specialization of large construction project contracts, a separate construction contracts audit is recommended to specifically test their unique forms and processes. The methodology used to complete this audit was primarily through: Review of the City s online contract database system. Review of: OGM s original contract files, the City Attorney s records, the Project Manager s records, and the HTE purchasing and payment system records. Discussions with CAO, City Recorder, FMS purchasing and payment staff as well as various project managers and their staff provided valuable input as to contract documentation maintenance practices. Performance Audit of Contract Administration #10-1 3

4 The audit was conducted in accordance with generally accepted government auditing standards, issued by the Comptroller General of the United States. Those standards require that the planning and performance of the audit work obtains sufficient and appropriate evidence to provide a reasonable basis for the findings and conclusions based on the audit objectives. C. CONTRACTING CYCLE OVERVIEW Contract lifecycle management is the process of systematically and efficiently managing contract creation, execution, and analysis for maximizing financial and operational performance and minimizing risk. The principles of contract administration are generally applicable to all types of contracts, whether they relate to minor or major works or whether they are financed from capital or operating budgets. Figure 1 A Model Contract Management Cycle - shows what a model contracting management cycle should look like. Each of these contract management phases provides critical planning, execution, and control of the overall contracting process, and is integral to the success of the resultant contact and contractor performance. Figure 1: Model Contract Management Cycle Source: Multnomah Auditor's Office Decision to Buy -- "Make or Buy" decision-- Decision to renew Procurement Decision and Development -- Decision as to what sort of procurement is appropriate -- Develop specifications and solicitation Contract Administration -- Payment processing -- Performance monitoring -- Compliance monitoring -- Contract and program evaluation -- Fiscal monitoring Contract Approval and Negotiation -- Negotiate specifics -- Write contract -- Legal review -- Contract approval Award Process -- Develop bid evaluation criteria and process -- Receive bids -- Evaluate bids -- Award contract -- Determine viability of contractors The process begins with a make or buy decision, followed by development of specifications, procurement, and award of the contract. Management of the contract then moves into the phase commonly known as contract administration, where compliance and performance are monitored, payments are made and the performance of the contract is evaluated. The results of Performance Audit of Contract Administration #10-1 4

5 the evaluation should then feed into the ongoing discussion of whether to continue to contract in the future and whether to continue with the existing vendor. Risk is inherent in each phase of the contracting process. From procurement through contract signing, risks are generally associated with finding qualified vendors to provide services, defining specifications, securing a fair price, and writing a contract that is sufficient to protect the City. After the contract has been awarded, risk moves to vendor compliance, performance, and billing (the scope of this audit). Because the City is not providing these services directly, it must have a system in place to mitigate or manage the intrinsic risks in contracting. Purchasing via contracts can be relatively straightforward with limited risk, or very challenging with much higher risk, depending on the nature of the goods or services being purchased. Contract purchases of relatively common services and commodity goods tend to be more straightforward because: The goods or services are widely available from a variety of vendors, ensuring competition on price and quality. Specifications are well understood, so both the purchaser and vendor are clear on what is being purchased. Measures of quality and/or success are understood and data to measure performance are available. However, when purchasing personal or consulting services 1 it becomes more challenging because: Fewer providers may exist to perform services, making it more difficult to establish a fair price and limiting the leverage of the purchaser. Clear specifications are harder to develop, making it more difficult for the purchaser and the provider to have a clear understanding of what is being purchased. Success and quality are more difficult to measure, decreasing the likelihood of including or enforcing performance requirements in the contract. D. THE CITY of GRESHAM S CONTRACT PROCESS Contracts play an important role in the way the City of Gresham meets its statutory obligations and provides services to its citizens and customers. Whether contract performance generates revenue or creates out going disbursements, the City government is responsible for using public funds in a prudent and responsible manner. The City has five basic contract forms: 1. Purchase Orders; 2. Personal (Professional) Services Contract; 3. Standard Public Contract; 4. Public Improvement Contract, and 5. Public Works Standard Contract (CIP Agreement). 1 The Gresham Revised Code defines a personal service contract as a contract primarily for the provision of services that require specialized technical, creative, professional or communication skills or talents, unique and specialized knowledge, or the exercise of discretionary judgment skills, and for which the quality of the service depends on the attributes that are unique to the service provider. Source: Y: CAO\Training Material\Contract Training\Legal Requirements (10/07). Performance Audit of Contract Administration #10-1 5

6 Also available are: Requirement Contracts, Master Contracts, a Contract Amendment Form, an Agreement for Grant Funds, and a CIP Change Order. The City Attorney must approve any change to a contract form except CIP Change Orders. These forms are templates that are generally applicable but each situation may have special needs that require modification to the forms; therefore, making these forms available for use by city employees is not a substitute for obtaining legal advice. The City of Gresham relies on contractors to provide numerous products and services. To achieve this objective, the City has established specific contracting rules based on the State of Oregon s public contracting statutes (ORS Chapters 279A, 279B, and 279C) 2. These rules define how contracting is to be performed. The Attorney General (AG) Rules, OAR Chapters 137, Divisions 46, 47, 48 and 49, provide the specific process by which bids and proposals are solicited and contracts awarded. The city has the option of adopting its own rules, but has chosen to use the AG Rules, as these rules meet the city s needs and provide the flexibility to deal with unique circumstances. The Gresham Revised Code (GRC) Article 2.80 establishes threshold limits for when informal quotes and formal bids/proposals are required and when council action is required to award a contract (Figure 2, pg.7). Procurement practices differ based on the type of contract and the estimated dollar amount. In addition to the GRC Article 2.80, the Gresham Administrative Rules (GARS) Articles 6.05 and 6.15 provide details regarding compliance to the GRC and ORS. To help ensure compliance is maintained, the City Attorney s Office developed and implemented a CAO Document Review form several years ago to aid the project managers in the preparation of the contract package before submitting to the City Attorney s Office for their review to form in the contract process. By providing project managers this form to use as a tool in the initial contract or amendment setup cycle, it works as a hard copy reminder of what legal criteria the City Attorney s Office will need before contracts are brought forward for their review to form. The initial review to form starts with the CAO Risk Manager s review of insurance certificates to verify that valid and adequate insurances are in place and comply with Exhibit C of the contract form before the contract becomes effective. It is City administration s responsibility to establish a system that ensures contractors shall provide updated certificates of insurance throughout the term of the contract. [Note: The CAO recently modified the Document Review form to now remind the project managers of the date the various insurances expire.] After approval by Risk Management, the CAO Document Review form and contract package are forwarded to the City Attorney for his review and approval. If the City Attorney determines that the contract is satisfactory to form, the contract will be signed, dated and returned to the project manager. If the City Attorney determines the contract is unsatisfactory, information regarding necessary corrections will be provided on the Document Review form and the contract will be returned to the project manager for correction. If an amendment or renewal is later needed, the CAO will require the same steps be performed as described above including review of up-dated insurance certificates. 2 ORS Chapters 279A, 279B, and 279C contain the state statutes applicable to public contracting. The general requirement is that all public contracts are to be let by formal competitive bids or competitive proposals. A formal competitive process need not be used to award small contracts, sole source contracts, and emergency contracts. State law allows the city to exempt other contracts from the competitive process. Performance Audit of Contract Administration #10-1 6

7 The City Attorney s Office must approve contracts and amendments as to form before a city official signs as final approval and/or work commences. The project manager then obtains the final city approval signature for the contract based on established award authorization limits (Figure 2- Column 5). Once signed the original is filed with the OGM City Recorder. Figure 2. Summary of Competitive Process: Summary of Competitive Process Type of Contract Direct Appointment Informal Quotes Formal Bids, Proposals Who Awards the Contract Goods & Services $5K or less, if quotes not practical $5K - $50K More than $50K $25K or less: Dept.Dir. $50K or less: Manager Over $50K: Council Personal (professional) Services $15K or less, if quotes not practical $15K - $50K More than $50K $25K or less: Dept.Dir. Budgeted CIP: Manager Over $50K & not budgeted CIP: Council Construction: Public Improvements $5K or less, if quotes not practical $5K - $50K More than $50K $25K or less: Dept.Dir. $50K or less: Manager Budgeted CIP: Manager Over $50K: Council Source: CAO Training PowerPoint Purchasing and Contracts 101, dated: Nov E. SUMMARY OF AUDIT RESULTS The audit results indicate that the City s master contracts database, which is the official and complete record of City contracts both active and expired, contains numerous incomplete and out-dated contract information that can not be fully relied on as an accurate and complete central depository of the City s contracting information. As a result, the total value and number of contracts initiated by the City could not be fully determined based on the current centralized contract database information. In addition, the current design of the contracts database does not allow efficient and effective monitoring of the contract administration processes (i.e. ensuring a signed contract, amendment, or renewal is in place before work commences). The following recommendations include steps that will help the City have greater assurance that best practice standards are in place and are consistently being maintained and that the contract administration process is managed in the most efficient, economical, and effective way. 1. Contract lifecycle management automation delivers measurable improvements in financial and operational performance. To ensure the contract database is providing users the most efficient and effective level of valid up-to-date contract information, it is highly recommended that the contracts database be redesigned with more robust preventive controls. Implementing this recommendation should streamline contracting cycles, minimize risk, and maximize compliance. Performance Audit of Contract Administration #10-1 7

8 2. Include the contract number as a component in the HTE financial system s purchase requisition as a means to automatically capture and track contract costs in a more streamline manner. This automation of a manual process should provide users a much more efficient and streamline process in monitoring the contract s financial transactions (purchase orders and invoices) for compliance with contract terms. Combined, these two recommendations should increase users efficiencies in the contract administration process and help ensure greater compliance to the established rules and regulations. (For details, see below Section F. 1. MANAGEMENT ACCOMPLISHMENTS to DATE). Management Response: Accepted with implementation pending. There is a significant effort underway to move forward with both recommendations. The Audit Report has provided additional details of the benefits achieved from each of these projects (Section F Management Accomplishments to Date.) The implementation of these recommendations should provide the necessary preventive and corrective internal controls with the ultimate goal to increase contract administration accountability. F. MANAGEMENT ACCOMPLISHMENTS to DATE 1. Contract Database Project The initial audit planning phase identified that the current contracts database system could not be relied on to determine the total value and number of contracts initiated by the City due to incomplete and out-dated information kept on the database system. To immediately address where controls could be strengthened to ensure greater accuracy and completeness of the database, the FMS purchasing staff and OGM City Recorder took the lead and assembled a variety of technical experts throughout the City including DES, CAO, IT, OGM, FMS and the City Auditor s Office to discuss the feasibility of a redesigned contracts database. The Contract Database Project Team is currently in the process of reviewing and segmenting the system requirements, engaging in a variety of business process analyses and redesigning key contract process activities to identify and eliminate non-value added or duplicate tasks. To ensure key stakeholder support is obtained, other potential users of the system have been invited to participate in various system testing and development activities during the project s design phase. The redesigned contracts database is anticipated to be completed by early Prior to the launch of the redesigned system, a well structured hands-on training program will be developed and provided to the various departments users. This training is a critical component to the success of the database achieving the benefits stated below. Performance Audit of Contract Administration #10-1 8

9 The benefits of a redesigned centralized contracts database: Provides greater integrity of contract information since the direct users will be allowed to setup the initial contract criteria and edit for accuracy and completeness before the pending contract setup moves to the active contract database once final approval is obtained and the contract is received by OGM. Provides greater reliability to the purchasing staff that the active file is up-to-date before issuing contract related purchase orders. Provides greater efficiency by allowing the users to conduct various types of on-line searches/queries based on a broader range of different contract attributes thus reducing most of the time-consuming and inefficient manual searches. Provides greater effectiveness in contract administration by providing the users the ability to run their own routine and customized reports to support management decision or for post audit purposes. Provides greater compliance by automatically providing the project managers with proactive alerts of contract milestones, compliance, and violations, [for example, the information in the database can flag contract expiration dates, insurance expiration dates and send notification to the project managers, City Recorder, CAO.] 2. HTE Financial System - Contract Number Tracking Project The IT and FMS Purchasing staff have been working to finalize the HTE purchase requisition screen s ability to capture the contract number in the City s financial reporting system. Capturing the contract number in HTE will provide the ability to automatically generate a list of contract related purchase orders as well as corresponding payment data into one concise report. This automation of a manual process should provide users a much more efficient and streamline process in monitoring the contract s financial transactions (purchase orders and invoices) for compliance with contract terms. Performance Audit of Contract Administration #10-1 9

10 II. DETAIL of AUDIT RESULTS Figure 3. Contract Setup and Administrative Controls by # of Exceptions Contract Processing: Number of Exceptions Noted in Sample of 25 Contracts contracts with no exceptions noted contracts with 1 exception contracts with 2 ot 4 exceptions contracts with no exceptions 5 20% contracts with 1 exception 10 40% contracts with 2 to 4 exceptions 10 40% Total Contracts Sampled % The audit identified that 80% of the 25 contracts selected for audit testing had some degree of contract administration internal control breakdown including: 1. Inadequate contract administration procedures and controls to ensure consistent compliance with GARS Article , GARS Articles and (see Exhibit II and III, pgs. 17 & 18). 2. Amendments (including renewals) not completed until several months after the contract expired. 3. Contract work being started prior to contract execution. 4. Contract work being performed after contract expired. In addition, it was noted during the audit that the contract number field is not currently activated on the HTE system s Purchasing requisition application and that monitoring contract performance was done mainly from hard copy records, such as copies of purchase orders and invoices. Finding 1: Inadequate contract administration procedures and controls to ensure consistent compliance with GARS Article , GARS Articles and (see Exhibit II and III, pgs ). Example 1: During the development of the initial audit testing program, the auditor selected a service that would likely require a contract due to the nature of the work. This was done in order to determine what standard contract processes are needed to ensure the final central depository (contract database) records are accurate and complete. Selected was elevator maintenance service and the responsible department was contacted for the contract information; however, only a copy of an expired contract could be provided. The contract, executed on July 1, 2000, was for elevator maintenance for City Hall and the PSS building for a sum not to exceed $5, The contract s original expiration date was June 30, 2003 but contained two additional one-year renewal options. Performance Audit of Contract Administration #

11 When the contract finally expired in 2005, the City continued using the same vendor although a contract was no longer in place. Per the FY2009 payment records, total annual payments to this vendor had risen to $9,174. Work performed without a contract in place appears to violate GARS (b) that states, A purchase order may be used for services or public improvements if the dollar amount for the work is $5,000 or less. The payments made to this vendor have exceeded the annual $5000 amount since Example 2: The scope of the audit consisted of selecting a sample of 25 active and expired contracts from the City s contract database system. Of the 25 contracts sampled, one contract for consulting services could not be located. After contacting the employee that the system indicated was the project manager for more information, the project manager indicated that a contract number was requested from the prior City Recorder to expedite a purchase order requisition for $15,000. It appears that after the $15,000 blanket purchase order was issued, the remaining steps of executing a valid contract were not completed nor was the prior City Recorder notified that the contract was not executed and that it should be removed from the active contract database. This appears to violate GARS (c) that states, A formal contract shall be signed if there is a reasonable risk of property damage or personal injury, when the work is for consulting services where the advice will be used to design or evaluate the design of a project or if the cost of the work exceeds $5,000. It is an established procedure for the City Recorder to issue a contract number and immediately update the contract database before verification that an executed contract is in place. This process has been in existence for many years and was implemented as a means to ensure a contract number was included on the contract form before submitting to the CAO for their review. Also noted is that there is an established procedure that requires the Purchasing staff to verify a contract is in place by researching the active contract database by the contract number or party name. As a result of current procedures that 1) allow updating the contract database before an executed contract is verified and 2) the purchasing staff relying on this database when issuing purchase orders, the purchasing staff assumed the contract was active since it was recorded in the database and consequently issued the requested $15,000 purchase order. Both these examples demonstrate where weak contract monitoring controls and procedures resulted in noncompliance with GARS Article Although the issued purchase orders do provide some protection to the City by the fact that the form includes an indemnification and hold harmless clause and the vendor agrees to be bound by them, the contract setup step to verify current required insurances exist was not performed. This increases the risk to the City if the vendor was to cause harm and in fact did not have the required insurances in place. In addition, GARs Article that states, (a) The Office of the City Manager (OCM) shall maintain all original agreements and contracts that the City is a party to.(revised 02/03). Both examples of noncompliance to GARS Article could have been detected if monitoring and follow-up procedures were more effectively designed to ensure an executed contract was received before up-dating the active database. Performance Audit of Contract Administration #

12 Finding 2: Amendments (including renewals) not completed until several months after the contract expired. Best practice research advises to not issue amendments (including renewals) after the contract expires. However, the audit noted that the City s established contract amendment practices do allow for some leniency if the project manager initiates the amendment (including renewals) within a reasonable amount of time after the contract expires. There is nothing in writing that defines what is considered reasonable and it appears to be left up to the reviewers and approvers involved in the amendment (including renewals) process. The audit results indicated that 32% of the total exceptions noted in the contracts sampled were due to amendments and renewals occurring after the contract expired and that initiating the amendments (including renewals) were sometimes taking as long as six months after the expiration. Another 5% of the audit exceptions related to amendments (including renewals) not filed with the OGM City Recorder as required by GARS resulting in the contract database not getting up-dated with the amendment information. This leaves a high risk that there is not adequate assurance that the contracts database is the official and complete record of City contracts both active and expired. As noted below in Finding 4, contract work was found to be occurring after the contract expired. Technically, once a contract expires, the terms and conditions of the initial contract are null and void. The practice to allow reasonable time between the expiration date and completion of an amendment puts the City at risk because work continues to be performed without an active binding contract; especially if the initiation of the amendment does not start until after the contract expires. Finding 3: Contract work being started prior to contract execution. and Finding 4: Contract work being performed after contract expired. Both findings are the result of internal control breakdowns identified in the current contract administration procedures. These include: 1) allowing the contract database to be up-dated before an executed contract/renewal is verified as active and 2) allowing project managers additional time to amend a contract once it has expired thus maintaining the contract as active in the database after the expiration date. These weaknesses combined with the procedure where purchasing staff relies on the contract database information when issuing purchase orders results in allowing authorization for work to commence/continue although the contract is not executed or may be technically expired. Executed means signed by all parties to the agreement (the Contractor, the Project Manager, City Attorney, and City Manager/designee). The process of executing the contract ensures that the service is authorized and that the contractor is in compliance with City requirements, including insurance provisions, payment provisions, and Council directives. When a contractor starts work on a contract prior to the contract being executed or after the expiration of the contract, it could result in any number of problems including: Possible violations of law. Possible violations of contract terms, scope, and conditions. Possible litigation due to poor quality work performed by unqualified contractors. Increased risk of liability to the City due to lack of adequate insurance. Increased risk of liability for unpaid or underpaid wages and cost increases. Performance Audit of Contract Administration #

13 Recommendation #1 (related to findings 1, 2, 3, and 4): Many users rely on the centralized contract database to provide up-to-date contract information to manage their contracts. As noted in finding 1, the Purchasing staff relies on the contract database to verify a contract is in place before issuing a purchase order which is an important part of the authorization for work to commencement. To ensure the contract database is providing users the most valid up-to-date contract information, it is highly recommended that the contracts database be redesigned with more robust preventive controls. Finding 5: The contract number field is not currently activated on the HTE system s Purchasing requisition application. While performing an automated HTE query on specific vendors that have contracts with the City, it was discovered that the purchase requisition screen has a contract number field that is not being used. Based on discussion with the IT Director, the contract number field was never activated when the system was original put in place but that it could be activated easily enough with no additional costs to the City. Based on discussion with the Purchasing staff, it was determined that automatically capturing the contract number during the purchase requisition cycle would provide an excellent tool to drill down to specific contract purchasing information and make their work more efficient. Furthermore, project managers could better monitor contract performance by running automated cost reports by contract number. This would increase the project manager s efficiency in monitoring contract performance by reducing the time needed to compile the same information from hard copy records, such as copies of purchase orders and invoices. Recommendation #2 (related to finding 5): The HTE purchase requisition screen has the ability to capture a contract number in the purchase order process. However, this field was not currently being utilized. Since each contract should have a designated purchase order, the HTE purchase requisition contract number data field could easily be activated as a tool to assist the project managers to more efficiently track and monitor their contract costs. A report could then be generated that would provide all purchase order and invoice data related to that specific contract. Management Response to recommendation #1 and #2: Accepted with implementation pending. There is a significant effort underway to move forward with both recommendations. The Audit Report has provided additional details of the benefits achieved from each of these projects (Section F Management Accomplishments to Date, pgs. 8& 9.) The implementation of these recommendations should provide the necessary preventive and corrective internal controls with the ultimate goal to increase contract administration accountability. Performance Audit of Contract Administration #

14 Exhibit I GARS ARTICLE AWARD AND APPROVAL OF CONTRACTS GENERAL. (a) The Gresham Revised Code, Article 2.80, provides for the systematic and uniform administration of all matters relating to public contracts for the City. Article 2.80 ensures that purchases and sales are in the best interest of the public and accomplished in a cost effective manner. (b) GARS Article 6.05 identifies sub-delegation responsibility for all City purchases consistent with Gresham Revised Code (c) As used in GARS Article 6.05, Award means the selection of a vendor or contractor Approve means the signing, including electronic sign-off, of any documents relating to the purchase or contract Budgeted means the expenditure is within budgeted appropriations. (Revised 07/02) PURCHASES OF MATERIALS, SUPPLIES, SERVICES AND ASSETS. GRC (a) Department Directors are authorized to award and approve budgeted purchases of $25,000 or less and such other purchases as authorized by the Manager. (Revised 10/07) (b) Budgeted purchases for services, other than personal (professional) services, of more than $25,000 to $50,000 or less are awarded and approved by the Manager. (Revised 10/07) (c) Budgeted purchases of materials and supplies that are regularly purchased, consumed or utilized by the city that are more than $25,000 are awarded and approved by the Manager. (Revised 10/07) (d) Budgeted purchases of equipment, vehicles, construction equipment and assets that are more than $25,000 but $50,000 or less are awarded and approved by the Manager. (Revised 10/07) (e) Council awards all other purchases of more than $50,000. The Manager shall approve all contracts awarded by Council. (Revised 10/07) CONTRACTS FOR PERSONAL (PROFESSIONAL) SERVICES. GRC (a) Department Directors are authorized to award and approve budgeted personal (professional) services contracts for amounts of $25,000 or less. (Revised 10/07) (b) Budgeted personal (professional) services contracts that are more than $25,000 but $50,000 or less are awarded and approved by the Manager. (New 10/07) Performance Audit of Contract Administration #

15 (c) Council awards all personal (professional) services contracts for more than $50,000 except as provided in subsection (d). The Manager shall approve all contracts awarded by Council. (Revised 10/07) (d) Contracts for personal (professional) services relating to the design or construction that are included in the Capital Improvement Plan as funded and within budgeted expenditures are awarded and approved by the Manager. (Revised 10/07) CONTRACTS FOR PUBLIC IMPROVEMENTS AND MAINTENANCE SERVICES. GRC (a) The Director of DES is authorized to award and approve contracts for budgeted public improvement of $25,000 or less. (b) Budgeted public improvements that are more than $25,000 but $50,000 or less are awarded and approved by the Manager. (New 10/07) (c) Council awards contracts for public improvement and maintenance services of more than $50,000 except as provided in subsection (d). The Manager shall approve all contracts awarded by Council. (Revised 10/07) (d) Contracts for the construction of public improvements that are included in the Capital Improvement Plan as funded and within budgeted expenditures are awarded by the Manager. (e) The Director of DES may approve contract change orders if the additional work is included in the Capital Improvement Plan as funded and within budgeted expenditures. (Revised 02/03) MULTI YEAR CONTRACTS. The anticipated aggregate amount of a contract shall govern which process will be used to select a vendor. For purposes of award and approval of the contract, the amount of a contract commitment will not include the amount in future fiscal years if the term of the contract expires in the current fiscal year and renewal is optional PUBLIC BIDDING EXEMPTIONS. In addition to those exemptions provided by the Public Contracting Code (ORS Chapters 279A, 279B and 279C), the Council has adopted Resolution 2803 establishing the following class special procurements: 1. Advertisements 2. Animals for City Business 3. Attorneys, Litigation Support, and Related Services 4. Intellectual Property (Art, Copyrighted Materials, Subscription Services, Proprietary Software Licenses, and Other Products of the Creative Process) 5. Insurance Contracts Property, Liability, Workers Compensation, and Employee Benefit Insurance 6. Equipment Maintenance, Repair, or Conversion of Existing Equipment 7. Medical Services Physicians, Psychologists, and Other Medical or Mental Health Professionals 8. Price Regulated Items or Services 9. Software and Hardware Maintenance Contracts Performance Audit of Contract Administration #

16 10. Special Contract Award or Amendments 11. Temporary Extensions or Renewals 12. Used Personal Property The Manager delegates the authority to determine an exemption pursuant to Resolution 2803 to the same level as the authority to award the contract. The reasoning for approving an exemption must be documented in writing. The City Attorney and Purchasing Agent are available to review all exemptions. (Revised 09/06) EMERGENCY EXEMPTION. ORS 279B.080 (goods or services) and ORS 279C.335 (6) (public improvements), authorizes the award of a contract without competition in an emergency. The Manager must approve all exemptions based on an emergency. The Department requesting the emergency exemption must submit written documentation supporting their reasoning for an exemption. (New 09/06) SOLE SOURCE EXEMPTION. ORS 279B.075 authorizes the award of a contract for goods or services without competition if the goods or services are available from only one source. The Manager delegates the authority to determine whether the goods and services are available from only one source to the same level as the authority to award the contract. The reasoning for approving an exemption must be documented in writing. Public Notice of sole source procurements required by OAR (2) shall be provided if, but for the sole source exemption, the procurement would be subject to competitive sealed bids or proposals. (Revised 10/07) Performance Audit of Contract Administration #

17 Exhibit II GARS ARTICLE CITY CONTRACTS LOCATION OF ORIGINALS. (a) The Office of the City Manager (OCM) shall maintain all original agreements and contracts that the City is a party to. (b) If the City does not have possession of the original contract or agreement, then a signed true copy shall be filed with OCM. (c) In the case of Capital Improvement Project (CIP) contracts, a copy of the title page of the CIP Contract Documents and a copy of the two-page CIP Agreement shall be provided of OCM. DES shall retain the original CIP contract document. (d) This regulation in no way restricts any department from keeping a copy for use. (Revised 02/03) INDEX OF CONTRACTS. A listing of all agreements and contracts shall be maintained by OCM. (Revised 02/03) NOTIFICATION OF EXPIRATION OF CONTRACTS. OCM will notify the department director responsible for administering the agreement or contract 60 days before the expiration date to determine if the agreement or contract should be renewed. (Revised 02/03) Exhibit III GARS ARTICLE CONTRACT EXECUTION PURCHASE ORDERS (a) A purchase order may be used as the sole documentation of the purchase of materials, equipment and supplies. A formal contract is recommended if the purchase exceeds $25,000 or if the specifications/delivery schedule is complex. (b) A purchase order may be used for services or public improvements if the dollar amount for the work is $5,000 or less. (c) A formal contract shall be signed if there is a reasonable risk of property damage or personal injury, when the work is for consulting services where the advice will be used to design or evaluate the design of a project or if the cost of the work exceeds $5,000. (d) The following issues will be considered when staff requests and when FMS/Purchasing issues a purchase order: (1) Whether insurance requirements should be attached to the purchase order (2) Whether there are independent contractor issues (3) Whether a formal contract should be required Performance Audit of Contract Administration #

18 CONTRACT EXECUTION. (a) Contracts forms are available from the City Attorney. In addition, some contract forms are located in Outlook Public Folders along with samples of signature blocks and notary. (b) All contracts to which the City is a party shall have a uniform signature format. Signature block samples are available in the Outlook Public Folders, CAO, Contract Forms. (c) All contracts, shall be Approved as to Form by the City Attorney. This signature indicates that the City Attorney approves the format and legal sufficiency of the contract. It is not for the review and approval of the scope of work or policy of the contract. (d) All contracts shall have a signature line for the Manager and project manager, if applicable. All contracts approved by Council shall also have a signature line for the Mayor, unless the Council action delegates to the Manager specific authority to sign the contract. (e) Notary acknowledgments are not required on contracts, unless required by law or another governmental agency. (f) Prior to any contract being submitted for approval, a City of Gresham Contract Number shall be obtained from the Office of the City Manager. If Council approval of a contract is required or requested, a contract number is obtained after Council approval. (g) The City Attorney shall review all documents with an indemnity or hold harmless provision. (h) Whenever possible, the other party shall sign the contract before it is routed for signatures by the City. (i) As used in the section, contract does not include a purchase order. (Revised 12/03) COUNCIL AGENDA ITEMS RELATING TO CONTRACTS (a) Award of Contracts by Council. When Council is required or requested to award a contract, the agenda item shall include the contract and the City Attorney s sign-off of the contract shall be obtained. The motion shall state that the Council awards the contract and authorizes the Manager to approve the contract. If appropriate, the motion may authorize the Manager to renew the contract for subsequent years. (Revised 10/07) (b) Approval of Contracts by Council. When Council is required or requested to approve a contract, the agenda item shall include a copy of the contract and the City Attorney s sign-off of the agenda item shall be obtained. The original contract documents shall be provided to the City Recorder. When requested, the City Attorney will review the contract and agenda item prior to submission of the agenda item to the City Recorder. The motion shall state the Council approves the contract and may authorize the Manager to sign the contract. (Revised 10/07) Performance Audit of Contract Administration #

19 (c) Authorize Manager to Award a Contract or Approve a Contract. In some cases when Council would otherwise be required to award a contract and/or approve a contract, it may be desirable for Council to delegate such authority to the Manager. The City Attorney does not need to sign-off on the agenda item delegating authority. The City Attorney must review the contract when it is routed for signatures. The motion shall state the Council delegates to the Manager the authority to award and/or approve the contract. (Revised 03/05) (d) Agenda Items. Agenda items for the award of a contract should include the following information: Competitive Process. A brief discussion of the competitive process used to identify the desired contractor. Include manner of publication of notice, any special efforts to notify Gresham businesses of the contract opportunity, the criteria by which bids or proposals were evaluated, a summary of the evaluations of each bid or proposal, and the recommended contractor. Initial Term. Distinguish between single year, single year with option to renew, multi-year or multi-year with option to renew. State the end date of initial term of contract. Renewal. If contract contains an option to renew, state conditions under which the contract will be renewable. While the City Manager has code authority to approve certain contract renewals, as a matter of policy all contract renewals over $25,000 will be submitted to Council for review. Therefore, state that the City Manager will negotiate the terms of renewal but that the renewal will be submitted to Council for approval. State the end date of contract if all renewals are exercised. Price. State the price of the contract. If contract is for multiple years, state the first year price. For multiple year contracts, state the total price of all years, if there is no price escalation. Price Escalation. If a multiple year contract, subject to price escalation, state the conditions of price escalation. If based on a known index, state the index and whether price escalation is automatic or subject to city termination of contract by City if price escalation is unacceptable. State whether Council will review price escalation before renewal. If price escalation is to be negotiated, state if price escalation will be subject to Council review or whether the request is to give the City Manager authority to negotiate the new contract price. If City Manager will have authority, state any conditions that will be applicable to price escalation. (New 03/31/05) Performance Audit of Contract Administration #