Contract Management Performance Audit. Office of Internal Audit

Transcription

1 Performance Audit Office of Internal Audit June 2015

2 Office of Internal Audit The Office of Internal Audit is an independent audit office within the Fairfax County Public Schools. The Office performs performance, compliance, and financial audits, and reports to the School Board through the Board s Audit Committee. Audit Committee The Audit Committee is composed of four School Board members, with the Superintendent, Deputy Superintendent, and Chief Operating Officer serving as nonvoting participants. The Board s Strategic Governance Manual provides that the Audit Committee serves as the Board s liaison with the Office of Internal Audit by: reviewing the annual audit plan prepared by the Office and submitting its recommendation to the School Board for approval; mediating the auditors relationship with management; reviewing audit reports and management responses, and reporting to the Board monthly; following up on the of internal audit recommendations; monitoring progress against the approved annual audit plan; acting as a conduit for School Board member requests for ad hoc reviews; periodically reviewing audit-related policies for approval by the Board; and assisting the Board with the evaluation of the Auditor General in accordance with Human Resources guidelines, policies, and regulations. The School Board has final approval in regard to the audit plan, the audit budget, and the of any significant recommendations. FY 2015 Audit Committee Members Ilryong Moon, Committee Chair (At Large) Pat Hynes (Hunter Mill) Dan Storck (Mount Vernon) Jane Strauss (Dranesville) Audit Staff Chris Horton, Ph.D., CIA, CGAP, CCSA, CRMA, Audit Manager 1

3 TABLE OF CONTENTS EXECUTIVE SUMMARY... 4 Finding 1: Further Developing Central Controls Would Enhance Contract Monitoring... 5 Finding 2: Three Departments Need to Develop and Implement Key Best Practices for Contract Monitoring... 5 Finding 3: Three Functions Have Generally Well-Developed Monitoring Structures, and Additional Refinement is Needed... 6 Finding 4: Audit Findings and Recommendations in This Report Indicate the Value of Reviewing in other Departments and in Schools... 7 INTRODUCTION & BACKGROUND... 8 Overview... 8 Roles and Responsibilities... 8 FOCUS Financial System Audit Independence, Compliance, and Acknowledgements SCOPE, OBJECTIVE, & METHODOLOGY Scope Objective Methodology FINDING Further Developing Central Controls and Practices Would Enhance Contract Monitoring FCPS Provides Some Key Contract Controls Additional Enhancements Are Needed to Improve Central Guidance and Monitoring OPS Can Take Specific Steps to Improve Oversight and Guidance of FCPS Contract Monitoring Practices RECOMMENDATIONS & RESPONSE FINDING Three Departments Need to Develop and Implement Key Best Practices for Contract Monitoring Departments Management of Contract Monitoring Should be Centralized to Improve Effectiveness Improvements Needed to Assist Contract Monitoring Staff Department Monitoring and Reporting Functions Should be Developed and Implemented.. 44 RECOMMENDATIONS & RESPONSE

4 FINDING Three Functions Have Generally Well-Developed Monitoring Structures, and Additional Refinement is Needed Each of the Three Functions has Implemented Numerous Monitoring Best Practices Some Needed Refinements are Common to Each Function Additional Efforts Needed to Monitor Claims and Eligibility in Benefits and to Track SWaM Status in FTS RECOMMENDATIONS & RESPONSE FINDING Audit Findings and Recommendations in This Report Indicate the Value of Reviewing in other Departments and in Schools RECOMMENDATION & RESPONSE

5 EXECUTIVE SUMMARY In accordance with the FY 2015 audit plan approved by the Fairfax County Public Schools (FCPS) School Board, this audit reviewed current practices and procedures related to FCPS contract procurement and contract monitoring within six units. These were: the Department of Facilities and Transportation Services (FTS); the Department of Human Resources (HR); the Department of Information Technology (IT); the Instructional Services Department (ISD); the Department of Special Services (DSS); and the Office of Procurement Services (OPS), within the Department of Financial Services. For FTS the audit only reviewed contract processes for contracts that fall outside the central procurement process managed by OPS. The audit s objective was to determine whether general contract management practices within key FCPS central services departments, including the contract procurement process, the award process, and contract monitoring, adhere to best practices for organizational contract management. Contract management combines the functions of procurement and contract monitoring. In FCPS, primary contract management responsibilities are shared between OPS and various departments and schools, while some contracts related to school construction are both procured and monitored by FTS. The term contract management incorporates both the procurement of goods and services and the monitoring of contractor performance to ensure that goods and services are received with contracted levels of pricing and quality. The audit found that while some key contract controls are in place throughout FCPS, several improvements are needed in both central FCPS controls and in the contract structures and processes in the various departments. While this audit reviewed both procurement and monitoring processes, the findings and recommendations relate primarily to contract monitoring. 1 1 The audit team did not review individual contracts for the purpose of performing an independent assessment of contract compliance. The audit focuses on risks of non-compliance, but does not make any conclusions regarding vendor noncompliance for any specific FCPS contract. 4

6 Finding 1: Further Developing Central Controls Would Enhance Contract Monitoring Further developing FCPS central contract management controls and practices would enhance contract monitoring throughout FCPS. FCPS provides some key contract controls, such as policies, notices, and regulations, while OPS has additional purchasing processes that enhance overall contract management. While these provisions form a helpful structure, additional developments would increase FCPS effectiveness in contract monitoring, helping to ensure that FCPS contractors are providing quality goods and services at contracted prices. FCPS can further strengthen contract management by developing a policy or regulation specifically about contract monitoring, and by continuing efforts to extract helpful contract monitoring data from the FOCUS financial management system. These efforts would help FCPS management overcome current limitations in determining how much money is expended for each contract. Furthermore, FCPS should ensure that updated certificate of insurance information received by Risk Management is provided to OPS when the original certificate of insurance expires. Finally, OPS should implement improvements including additional oversight for sole source and best practicable source contracting requests, regular contract monitoring reports from FCPS departments for which OPS procures goods and services, altering the form of contracts to create a simpler document that is easier to monitor, creating centralized policies and procedures within OPS, codifying OPS internal processes and measures, formally tracking the use of Small, Women-owned, and Minority-owned businesses in FCPS, and considering the formal use of a performance-based contracting approach for FCPS procurement. Finding 2: Three Departments Need to Develop and Implement Key Best Practices for Contract Monitoring Within three departments, the Department of Instructional Services (ISD), the Department of Special Services (DSS), and the Department of Human Resources (HR), some key best practices for an effective contract monitoring system should 5

7 be implemented. 2 Each department has identified individuals who conduct some contract monitoring activities. For example, each of the departments discussed in this finding has designated invoice management personnel to track and process contracting invoice payments through the FOCUS financial system. However, additional development is needed in the departments contract monitoring structure by formally designating a central person responsible for tracking the department s contract monitoring practices. Additionally, the departments should enhance the abilities of its contract monitoring staff by codifying internal policies and procedures assessing the training needs of internal contract monitoring staff. Finally, the departments should improve their monitoring and reporting by assisting with the development of additional contractor performance measures, creating internal contractor performance reports, and implementing internal performance measures. While having a varied set of contractor performance measures in each contract would represent better practice, different contracts carry different levels of risk and a lower number of performance measures may be warranted in some kinds of contracts departments determine to be lower risk. Finding 3: Three Functions Have Generally Well-Developed Monitoring Structures, and Additional Refinement is Needed In two FCPS departments and one FCPS office contract monitoring structures were observed that generally reflect best practices, although some additional refinements to monitoring practices can be made in each. Among the contracting activities that demonstrated best practices were those within FTS, which are conducted outside of normal procurement process administered by OPS. In addition, the Office of Benefit Services (Benefits) and the Department of Information Technology (IT) demonstrated contracting structures and processes with key hallmarks of best practices. Specifically, these functions all contain a central person who is aware of and tracks contracts. All of the functions have a list of contracts, and an associated list of the persons responsible for monitoring the contracts. Each of these functions also has active ongoing monitoring activities, which produce monitoring logs that are available for management 2 References to HR in this finding do not apply to the Office of Benefit Services (Benefits), which is located within the Department of Human Resources. The audit reviewed Benefits and found more developed contract management practices similar to the recommendations presented in this finding. Benefits is discussed further in Finding 3. 6

8 review. Finally, each of the functions has designated invoice management personnel tracking and processing contracting invoice payments through the FOCUS financial system. Some best practices, however, can be implemented in each of the areas. For example, each of the three should further enhance their monitoring activities by developing internal performance measures for contract monitoring, as well as ensuring that all contracts, particularly any sole source contracts, have clear performance measures developed in conjunction with best practice guidelines. Furthermore, FTS, Benefits, and IT should ensure that contractor performance reports are developed and provided to internal management and, as necessary, to OPS. This is particularly important in FTS for contracts that are procured and monitored outside of the OPS procurement process. While FTS Office of Design and Construction has developed very strong internal policies and procedures, IT, Benefits, and FTS Office of Infrastructure and Environmental Engineering would benefit from developing and codifying a central set of internal guidance for contract monitoring. Finally, two developments that would strengthen Benefits and FTS, respectively, are the of claims audits and annual eligibility attestations, and implementing a process that would track, monitor, and assess trends in small, women-owned, and minority-owned business used for construction-related activity. Finding 4: Audit Findings and Recommendations in This Report Indicate the Value of Reviewing in other Departments and in Schools This audit did not review and does not conclude on contract management practices in FCPS departments or schools outside the audit scope. However, the contract management findings and recommendations of this audit strongly suggest that other central departments within FCPS would benefit from a management review of their contracting processes, especially in regard to contract monitoring. Similarly, the findings in the audit indicate that schools would likely also benefit from a management review regarding their contract monitoring structure and processes. 7

9 INTRODUCTION & BACKGROUND Overview Contract management combines the functions of procurement and contract monitoring. In Fairfax County Public Schools (FCPS), contract management responsibilities are shared between the Office of Procurement Services (OPS), within the Department of Financial Services, and various departments and schools. This audit reviewed the contract management practices for non-school based contracts, specifically reviewing the contract management practices in the Office of Procurement Services, the Department of Special Services, the Instructional Services Department, the Department of Human Resources, the Department of Information Technology, and the Department of Facilities and Transportation Services. Roles and Responsibilities Contract management requirements for state and local governments in Virginia derive primarily from the Virginia Public Procurement Act. 3 In Fairfax County, the Department of Purchasing and Supply Management sets forth additional requirements in the Fairfax County Purchasing Resolution, which FCPS follows. Finally, FCPS has developed and implemented 19 unique organization-wide policies and regulations dealing with contract management, as well as allowing for further departmental level guidance. 4 Role of OPS In FCPS most procurement occurs through OPS, which is the central procurement office for FCPS. OPS operates with delegated authority from the Fairfax County purchasing agent, who is the head of the County s Department of Purchasing and Supply Management. OPS is responsible for all procurements except those related to school system facility construction. 5 3 Code , et. seq. 4 The policies are P1801, P4120, P4430, P5011, P5015, P8220, P8240, P8250, and P8320. The regulations are R2671, R3014, R4111, R4120, R4235, R4294, R4421, R4650, R5012, and R8320. While R3861 is listed on the FCPS website as related to contracts, this regulation has been rescinded. 5 See the following page for more information about FCPS authority related to construction. 8

10 Types of procurements overseen by OPS OPS oversees three main types of procurements: Requests for Proposal (RFP); Invitations for Bid (IFB); and sole source (or sole practicable source). 6 RFP This type of solicitation is also called competitive negotiation and is typically used for selecting a contractor for goods or services at an estimated value of $100,000 or more. RFPs may be written with less specificity to allow possible contractors room to offer creative solutions to FCPS needs. FCPS staff may also negotiate with bidders for greater level of service or in relation to price. RFPs look for best value, which means that price is not the only criterion for selection. IFB This type of solicitation is written with great specificity, and potential bidders must be willing to provide the product or service as specified. Price is the only criterion for selection. Sole source Sole source contracts are used when the purchasing environment is determined to be void of competition. Sole source procurements require written justification and formal findings from OPS confirming the lack of a competitive environment. Only then can a sole source procurement proceed. Construction contracts School system facility construction contracting can be performed under FCPS own authority, rather than under delegated authority from the County. The Fairfax County Purchasing Resolution states: The Fairfax County Public School Board shall be responsible for construction, related architectural and engineering services, related consulting services, maintenance, repair and related services in connection with building, furnishing equipping, renovating, maintaining, and operating the buildings and property of the school division in accordance with of the Code of Virginia. The school division's Superintendent or his designee shall have the same authority as the County Purchasing Agent to execute and administer contracts. Execution of contracts under this section shall be conducted under the rules and 6 Under the Virginia Public Procurement Act and the Fairfax County Purchasing Resolution, FCPS has the authority to engage in emergency procurement. This type of procurement is rare and consequently was not reviewed as part of this audit. 9

11 regulations established by the Fairfax County School Board in accordance with the mandatory sections of the Code of Virginia. 7 In FCPS, construction contracts are procured and managed by the Department of Facilities and Transportation Services (FTS), which ultimately reports to the Superintendent. FCPS Policy provides that construction contracts above $100,000 must be awarded to bidders who have been pre-qualified to perform construction work for FCPS. 8 Facility construction contracts under $100,000 should go to bidders who have been registered, and in some cases, such as for time and materials contracts, contractors will need to be pre-qualified. In general, construction contracts must be awarded to the lowest bidder in a competitive sealed bid solicitation. However, FTS has the authority under the Virginia Public Procurement Act and under FCPS Policy to use sole source procurement or emergency procurement as needed. These procurements must be conducted in accordance with Virginia Public Procurement Act requirements. School Board and Superintendent approval levels FCPS has set out thresholds for School Board approval authority in its internal guidance. FCPS Policy provides that School Board shall approve the following contracts: Any contract or contract amendment between the School Board and another government entity that exceeds $250,000. Contracts or amendments greater than $100,000 for professional and consultant services as defined in the Fairfax County Purchasing Resolution. Any facilities contract or contract amendment for the improvement of school system facilities, including architectural and engineering services, construction, renovation, maintenance, and related services that exceeds $250,000, subject to all applicable policies and regulations. 9 7 Fairfax County Purchasing Resolution, July 1, 2014, 36. The Purchasing Resolution is located at 8 Policy is entitled Construction, Maintenance Services, Bids, Contracts, Bonds, and Conflict of Interests and is located at 9 Policy is entitled Authority to Contract and is located at 10

12 In addition, FCPS Policy provides that unless otherwise expressly authorized by the School Board, any change order that, when aggregated with the base contract and all prior change orders for such contract, results in an adjusted contract amount that exceeds $250,000 shall be approved by the School Board. Policy further provides that the Superintendent or her designee may approve contracts below the School Board approval thresholds, with the exception that the Superintendent may approve any contract using local school activity funds. For example, FCPS Policy clarifies that, with some defined exceptions 10, the superintendent approves professional and consultant services contracts ranging from $30,000 up to $100,000, while department heads approve lower amounts. For such contracts, an initial review of the potential contractors must be done by a Selection Advisory Committee (SAC) appointed by the Superintendent or department head. 11 Small and informal purchases Many purchases in FCPS are for relatively small amounts, called small purchases and informal purchases. The current version of the School Finance Handbook, effective September 1, 2014, notes that small purchases are purchases of less than $5,000. For these purchases competition is encouraged, but not required; though the Department of Financial Services strongly recommends using competition, when possible. The School Finance Handbook defines informal purchases are those ranging from $5,000 to $49,999. Purchases from $5,000 up to $9,999 require three oral or written quotes, and purchases from $10,000 up to $49,999 require four written quotes. 12 The School Finance Handbook separately provides for informal solicitations, which are for amounts ranging from $5,000 to $99,999. Informal solicitations involve preparing, soliciting, evaluating and making an award, and may take from two days up to ten days. According to the School Finance Handbook, the preferred 10 One of the exceptions is for the procurement of legal services, which is performed outside the provisions of Policy This Policy is entitled Procurement of Professional and Consultant Services and is located at 11 For the approval thresholds see Policy , VI-F and VI-G. Selection Advisory Committees are covered in multiple areas of the Policy, primarily IV-A, IV-B, and IV-C. 12 See School Finance Handbook (September 1, 2014), p

13 method of informal solicitation is a Quick Quote using eva, Virginia s electronic procurement portal. 13 Contract monitoring Contract monitoring is generally performed by the department or school who requested a procurement. Contract monitoring typically involves a review of invoices against contract terms to assess for pricing discrepancies or work performed out of the contract scope. In some departments contract monitoring delves further into activities that help to assure the quality of goods and services contractors provide. FOCUS Financial System FOCUS (Fairfax County Unified System) is the approved financial accounting system used by FCPS and Fairfax County. The FCPS School Finance Handbook contains a succinct description of how FOCUS is used for the expenditure of appropriated funds. Through FOCUS, users can purchase goods and services through shopping carts that are converted to purchase orders and electronically transmitted to the vendor. As an added benefit, users may also shop through the Marketplace, whereby users may access contracted vendor catalogs, select desired products and finalize purchases via a shopping cart. Marketplace orders do not require a receipt entry in the FOCUS system, which expedites the payment process. Procurement cards (PCards) are widely used to purchase contracted items and to secure travel arrangements. 14 Audit Independence, Compliance, and Acknowledgements The is free from organizational impairments to independence in our reporting as defined by government auditing standards. The office reports directly to the School Board Audit Committee. We report the results of our audits to the Audit Committee and the reports are made available to the public through the School Board Auditor page on the FCPS website ( This audit was conducted in accordance with auditing standards generally accepted in the 13 See School Finance Handbook (September 1, 2014), p. 15. Virginia s e-procurement portal is located at eva.virginia.gov. 14 See School Finance Handbook (September 1, 2014), p

14 United States of America, and the standards applicable to performance audits contained in government auditing standards, excepting peer review, issued by the Comptroller General of the United States. The audit staff expresses its appreciation to the management and staff of the Department of Financial Services especially the Office of Procurement Services, the Department of Special Services, the Instructional Services Department, the Department of Human Resources, the Department of Information Technology, and the Department of Facilities and Transportation Services for their assistance in the performance of this audit. 13

15 SCOPE, OBJECTIVE, & METHODOLOGY Scope Objective This audit reviewed current practices and procedures related to FCPS contract procurement and contract monitoring within six units. These are: the Department of Facilities and Transportation Services (FTS); the Department of Human Resources (HR); the Department of Information Technology (IT); the Instructional Services Department (ISD); the Department of Special Services (DSS); and the Office of Procurement Services (OPS), within the Department of Financial Services. For FTS the audit only reviewed contract processes for contracts that fall outside the central procurement process managed by OPS. The audit team did not review individual contracts for the purpose of performing an independent assessment of contract compliance. The audit focuses on risks of non-compliance, but does not make any conclusions regarding vendor non-compliance for any specific FCPS contract. The audit s objective was to determine whether general contract management practices within key FCPS central services departments, including the contract procurement process, the award process, and contract monitoring, adhere to best practices for organizational contract management. Methodology Audit data was gathered and conclusions were formed using the following primary methods. Gathering information from FCPS staff in the six departments and offices discussed within the scope statement. This was primarily done through face-to-face interviews, although data was also gathered using structured question protocols delivered via . Supporting documentation was obtained and reviewed, as needed, to support staff statements. Reviewing and analyzing central FCPS contracting guidance, including the Virginia Public Procurement Act; FCPS enacted policies and 14

16 regulations; the adopted Fairfax County Purchasing Resolution; and the FCPS School Finance Handbook. Reviewing and analyzing contract procurement and monitoring procedures provided by various departments. Reviewing and analyzing contract monitoring logs provided by various contract monitoring staff. Reviewing the list of FCPS contracts generated by OPS through FOCUS, the FCPS financial system. Reviewing a sample of 42 contracts, including 36 sole source contracts, for various provisions, formatting, recurring terms and conditions, and whether clear contract performance measures were in place. The contracts gathered from IT, DSS, and ISD. ISD contracts were gathered and reviewed on February 20 and 23, DSS contracts were gathered and reviewed on March 3, IT contracts were gathered and reviewed on March 3, 2015 and validated on April 27, No validation of the ISD and DSS was determined to be needed. The validation of the IT contracts resulted in no change to the original findings. All contracts were gathered from the Fairfax County contract register, which provided an opportunity to observe the utility and completeness of the contract register. In all cases, contracts were limited to those procured by FCPS, rather than including contracts procured by Fairfax County. All contract analysis was limited to information contained in the Fairfax County contract register. Additional information regarding the composition of the sample is provided below. Sample information is listed in the order in which contract groups were selected and reviewed. o A judgmental sample of 14 ISD contracts, including 13 sole source contracts, from the Fairfax County Contract Register were reviewed, from a total population of 174 contracts the audit team identified as related to ISD The original sample was 15 contracts. However, one contract did not appear in the Fairfax County contract register. Thus, the sample is reported as 14. The audit team determined that reselecting a sample to ensure 15 results would not result in a material change to the quality of the sample. 15

17 o A systematic random sample of 15 DSS contracts, including 10 sole source contracts, were selected from a total of 32 that OPS identified as related to DSS. o Once it became clear that these contracts were almost all sole source contracts with virtually identical language, the audit team decided to select a group of sole source contracts from IT. Thirteen IT sole source contracts were selected by querying the Fairfax County contract register for all sole source contracts identified as related to IT. The group is likely all of the sole source IT contracts procured by FCPS, so within the realm of IT contracts this group of 13 likely represents a population rather than just a sample. Reviewing contract management best practices from: the Office of Federal Procurement Policy; selected articles in the Journal of ; the State of Texas Guide; the Virginia Information Technology Agency s procurement guide, specifically Chapter 21 on performance-based contracting; a report from the Georgia State Auditor s Office entitled Components of an Effective Contract Monitoring System; and various documents from the State of Washington s performance-based contracting webpage. Reviewing best practices in performance measurement development. Reviewing information from the federal government s guidance on performance-based contracting. Observing a contractor monitoring meeting and site visit performed by a coordinator within FTS Office of Design and Construction. Gathering information from the Fairfax County website and relevant Fairfax County staff regarding its tracking and reporting of Small, Women-owned, and Minority-owned business usage. 16

18 FINDING 1 Further Developing Central Controls and Practices Would Enhance Contract Monitoring Further developing Fairfax County Public Schools (FCPS) central contract management controls and practices would enhance contract monitoring throughout FCPS. FCPS provides some key contract controls, such as policies, notices, and regulations, while OPS has additional purchasing processes that enhance overall contract management. While these provisions form a helpful structure, additional developments would increase FCPS effectiveness in contract monitoring, helping to ensure that FCPS contractors are providing quality goods and services at contracted prices. FCPS can further strengthen contract management by developing a policy or regulation specifically about contract monitoring, and by continuing efforts to extract helpful contract monitoring data from the FOCUS financial management system. These efforts would help FCPS management overcome current limitations in determining how much money is expended for each contract. Furthermore, FCPS should ensure that updated certificate of insurance information received by Risk Management is provided to OPS when the original certificate of insurance expires. Finally, OPS should implement improvements including additional oversight for sole source and best practicable source contracting requests, regular contract monitoring reports from FCPS departments for which OPS procures goods and services, altering the form of contracts to create a simpler document that is easier to monitor, creating centralized policies and procedures within OPS, codifying OPS internal processes and measures, formally tracking the use of Small, Women-owned, and Minority-owned businesses in FCPS, and considering the formal use of a performance-based contracting approach for FCPS procurement. FCPS Provides Some Key Contract Controls FCPS provides some key contract controls, through various contracting regulations and through the work of the Office of Procurement Services (OPS) within the Department of Financial Services. Among these controls are approval thresholds for contracting authority and OPS purchasing processes. 17

19 Purchasing authorization levels have been set FCPS derives its purchasing authority from Fairfax County and from the Virginia Public Procurement Act. Fairfax County s purchasing agent has delegated to FCPS the ability to conduct purchasing on her behalf, and in a memo granting this delegation of authority the County s purchasing agent lays out who may approve purchases up the certain dollar thresholds. These thresholds are reiterated in the Fairfax County Purchasing Resolution, and in various School Board policies. During the audit, staff from various departments demonstrated knowledge of internal guidance provisions regarding the authorization levels. OPS has several contract management processes in place OPS provides additional contract management through its staff and processes. Multiple OPS contract administrators have attained certifications as public procurement buyers or officers, and these OPS staff members play an important role in guiding and counseling department staff. For example, numerous department contracting staff reported that they rely on OPS for guidance and assistance with purchasing. Furthermore, OPS provides an overview of key aspects of purchasing in FCPS through its Procurement 101 training. Moreover, OPS recently implemented a quality control process whereby contract administrators review the contract files of their colleagues for accuracy and completeness. This internal review process helps to reinforce the importance of high quality file maintenance. OPS has also worked with the Office of the Fairfax County Attorney and FCPS s Division Counsel to develop contracting templates that help ensure contract language adequately protects the interests of FCPS. Because the Division Counsel s office is relatively small, using preformed contract language templates allows OPS to process contracting more efficiently than it could if each contract must pass through the Division s Counsel s office prior to execution. While the use of contract templates is generally helpful, the audit identified a small number of cases where FCPS used contract templates directly from the contractor. Though there may be a business need for contractor templates in some cases, it is important to use FCPS templates as much as possible to ensure that FCPS interests are protected adequately. In cases where there may be a business need for using contractor templates to form contract language, the Director of OPS should develop guidance for its contract administrators to assist in making this evaluation. 18

20 OPS works with Fairfax County to complete the contract register Fairfax County provides an online contract transparency tool called the contract register. This tool allows staff of Fairfax County and FCPS, as well as members of the public, to review contract provisions, thus increasing transparency and public accountability for the contracting process. FCPS aids Fairfax County in ensuring that contracts are on the register by placing relevant contract documents in the FOCUS financial system, from which Fairfax County staff can pull forward into the contract register. In reviewing a small sample of contracts, the audit found that the register was generally complete. However, one improvement that should be made is adding the list of items incorporated into the contract s memorandum of negotiation. The memoranda of negotiation exist within contracts that have been competitively bid, and refer to items such as s that include terms to which both FCPS and a contractor agree. While these terms are explicitly incorporated into the contract, they are not available for public inspection on the contract register. In the interest of transparency and public accountability, the Director of OPS should ensure that items referred to in a memorandum of negotiation are included on the contract register unless they are specifically exempted from public inspection by the Virginia Freedom of Information Act. 16 Additional Enhancements Are Needed to Improve Central Guidance and Monitoring While the existing contract control provisions form a helpful contract management structure, the Superintendent and Department of Financial Services can guide two additional developments that would increase FCPS effectiveness in contract monitoring. These are implementing central guidance for contract monitoring, identifying ways to overcome the limitations in the FOCUS financial system on reporting contract expenditure information, and ensuring that current contractor certificates of insurance are provided to OPS. Guidance for contract monitoring needed in central contracting regulations On its website, FCPS lists 19 unique, active policies and regulations that relate to contracting, as well as the Fairfax County Purchasing Resolution, which FCPS has 16 Code , et. seq. 19

21 adopted. These include policies and regulations regarding: contracting authority; construction contracting; school-based contracting; personnel contracts; ethics in procurement; and inventory management. 17 However, none of these policies and regulations specifically cover contract monitoring, nor does the Fairfax County Purchasing Resolution. Specific guidance on how contracts are to be monitored would help in clarifying roles and responsibilities for contract monitoring, providing general guidance for methods of contract monitoring, creating organization-wide consistency for processes such as dispute resolution, and enhancing a culture of accountability. In FCPS, the approach to contract monitoring is left to each department. Consequently, this audit revealed significant variation in how contract monitoring is implemented, and significant confusion regarding whether departments or OPS is primarily responsible for contract monitoring. Furthermore, some departments indicated concern about the lack of staff preparation for contract monitoring. Central guidance can form a starting point for helping staff to see best practices for approaches contract monitoring. Moreover, key processes such as dispute resolution and possible contractor sanctions need clear guidance to help ensure that such processes are managed fairly and in a way that minimizes liability to FCPS. Finally, implementing central guidance regarding contract monitoring reinforces for all FCPS departments that contract monitoring is important and that staff and contractors should be accountable for providing quality goods and services that are best value for the organization. The Superintendent should cause appropriate central guidance to be created, including polices, notices, or regulations as necessary, regarding contract monitoring. This guidance should at minimum emphasize the importance of contract monitoring for all departments in FCPS, clarify the roles of OPS and the contracting departments with respect to contract monitoring and dispute resolution, and help departments identify best practices for developing their own internal contract monitoring guidance specific to their individual business practices. 17 The policies are P1801, P4120, P4430, P5011, P5015, P8220, P8240, P8250, and P8320. The regulations are R2671, R3014, R4111, R4120, R4235, R4294, R4421, R4650, R5012, and R8320. While R3861 is listed on the FCPS website as related to contracts, this regulation has been rescinded. 20

22 FOCUS financial system s contract expenditure information is limited OPS conducts its procurement work within FCPS FOCUS financial system, and contract invoice payments are also made through FOCUS. However, FCPS management s ability to gather the total amount spent on individual contracts is limited. For example, the audit was not successful in determining from FOCUS, or from FCPS staff, how much money has been spent for the audit s sample of 36 sole source contracts. Without easy access to information regarding aggregate contract spending, OPS and the Department of Financial Services are limited in their ability to determine key information about contract usage strategic planning and oversight purposes. To its credit, OPS and the Department of Financial Services recognize this problem and have taken proactive steps to address it. Specifically, according to OPS management, as of March 2015 a contract was being finalized by FCPS and Fairfax County to enlist a third-party contractor for the purpose of using FOCUS data to perform a contract spending analysis for FYs 2013 and A subsequent analysis of FY 2015 is anticipated. In addition, Department of Financial Services management reports that the planned data warehouse under joint development with Fairfax County will also assist in gathering contract spending more readily. To ensure that access to individual and aggregate contract expenditure information is readily available for monitoring and planning purposes, the Assistant Superintendent of Financial Services should continue working to create more regular access to contract expenditure monitoring information that is currently limited in FOCUS. Current contractor certificates of insurance not received by OPS OPS is responsible during the procurement process for ensuring that contractors provide certification that they have obtained the required level of liability insurance. However, after the original certificate of insurance expires, subsequent insurance certifications are provided to FCPS Risk Management rather than to OPS. To ensure that this information is captured in the central contract file, the Assistant Superintendent of Financial Services should ensure that updated certificate of insurance information received by Risk Management is provided to OPS, when the original certificate of insurance expires. 21

23 OPS Can Take Specific Steps to Improve Oversight and Guidance of FCPS Contract Monitoring Practices OPS is not singularly responsible for all improvements to central guidance and tracking for contracts, but it does have authority to effect some changes that would improve contract monitoring practices in FCPS. These include additional oversight for sole source and best practicable source contracting requests, regular contract monitoring reports from FCPS departments, altering the form of contracts to create a centralized document that is easier to monitor, codifying centralized policies and procedures within OPS, formally tracking and analyzing the use of Small, Women-owned, and Minority-owned (SWaM) businesses in FCPS, and considering the formal use of a performance-based contracting approach for FCPS procurement. Additional controls needed for sole source FCPS has the authority under the Virginia Public Procurement Act to enter into some contracts that are not competitively bid. The two main types of non-competitively bid contracts are sole source contracts and best practicable source contracts. Sole source contracts are used when there is only one entity that provides the goods or services that FCPS needs to procure. Best practicable source contracts are used when there are multiple providers, but only one whose service can be practically provided. 18 While these contracts are at times useful, the Virginia Public Procurement Act emphasizes the preference for competition by stating that contracts shall be awarded through competitive means unless otherwise authorized. 19 In accordance with the Virginia Public Procurement Act, OPS requires departments to submit a written sole source proposal (or justification), and then produces a determination and findings regarding the sole source request. Furthermore, when FCPS awards a sole source contract, notice is placed on the eva state procurement website. OPS contract administrators review sole source proposals, typically by conducting their own search for possible competitors or reviewing other available contracts to determine whether they may apply. However, while contract administrators have a generally consistent approach to reviewing the 18 For the remainder of this discussion, both sole source and best practicable source contracts will be referred to simply as sole source. The findings and recommendations of this audit, however, apply to both contract types. 19 Code (A) 22

24 sole source proposals, OPS has not developed guidelines for evaluating these proposals. Guidelines would help to ensure consistency regarding the review of sole source proposals, and would help to create continuity when new contract administrators are hired. The review of sole source contracts and related processes identified three areas that the sole source evaluation process can be enhanced. Performance measures not used consistently Some sole source contracts do not have clear performance measures. Performance measures help to ensure that FCPS is paying contractors for appropriate levels of performance. Performance measures are important for all contracts, and especially in contracts that are entered without a competitive process. Further, developing performance measures outside the language of the contract creates a risk that FCPS will be unable to enforce its performance measures through any contract sanctions. This audit reviewed a sample of 36 sole source contracts to assess whether they demonstrated clear performance measures, and found that 32 of the contracts had a scope of work without specific measures to ensure that the work was performed at an acceptable level. While in some cases performance measures may be difficult to develop, departments requesting a sole source contract should have strategically determined the need for the good or service and created measures that help clarify whether their need is met. Consequently, the Director of OPS should require that departments include performance measures in the sole source proposal, and these performance measures should clearly relate to the overall strategic purpose for the proposed sole source contract. In addition to requiring performance measures, the Director of OPS should ensure it provides departments a common method, such as a standard form, on which performance measures can be provided. Finally, the Director of OPS should provide guidance to departments as needed regarding best practices in the development of these measures. Sole source contract timeframes could be shorter In Fairfax County contracts may extend for up to five years, and may be renewed for an additional three. This applies to sole source contracts as well, though the competitive environment may have changed before a contract must be 23

25 re-awarded. If contracts are awarded for shorter timeframes, however, and more frequent tests can be made for possible changes in the competitive environment for a good or service. Since the preference in FCPS is for competitive contracting whenever possible, the Director of OPS should set a time limitation on sole source contracts that is more restrictive than the five years currently allowed for other contracts. This would allow for more frequent evaluation of the competitive environment for goods or services. Signature authority needs clarification In addition to clarifying performance measures, there is also an opportunity to clarify who has the authority to approve a sole source proposal. The current process requires that OPS contract administrators know who has authority to commit budget resources from a particular department. However, these may change during periods of transition, leading to miscommunication and possible approval by OPS of sole source proposals that have not been properly authorized. To mitigate this risk, the Director of OPS should require that departments designate a specific person(s) to approve sole source proposals. As discussed in Findings 2 and 3, departments who do not have a specific person designated to oversee contract management should assign this responsibility to a specific person. Departments may determine that this person should be the one to approve sole source proposals. OPS needs more information from departments on contractor performance As the office responsible for most FCPS purchasing, OPS has created over 700 current contracts to procure goods and services for FCPS. To perform its role effectively, OPS needs as much useful information as possible about prospective contractors. However, while existing processes allow OPS to gather significant information for prospective contractors themselves, there is no regular, formal process for gathering information about past contractor performance from individual departments. Determining that a contractor has provided sub-standard performance is meaningless, if the procurement officers are unaware of this determination. To close this communication gap, OPS needs additional performance reports from 24

26 the various departments. It would be ideal if the contract performance reports were regular, such as quarterly reports, which could then allow OPS to assist departments in performing early intervention to improve poor contractor performance. Regular reports may also help OPS provide feedback to departments about whether additional training for contract monitors is needed. Consequently, the Director of OPS should require that FCPS departments provide regular reports on contractor performance that are sufficient to allow for both early intervention with contractors, as needed, and for proper evaluation before a contract is extended or re-awarded. Furthermore, the Director of OPS should develop a standard template for this report, and guidance for departments to use in providing their update on contractors performance. Finally, the Director of OPS should consider creating contractor performance ratings, similar to how employees are rated, and providing guidance to departments regarding the performance that should result in each rating level. FCPS contract structure appears to inhibit contract monitoring Most contracts in FCPS are competitively procured, through invitations for bid (IFB) or requests for proposal (RFP). 20 For these procurements, the final contract includes all the original FCPS solicitation documents, negotiated terms (in an RFP), attachments, and the acceptance agreement. During the audit, staff from multiple departments reported that structuring contracts in this way presents a challenge to the contract monitor, since the scope of work, performance requirements, payment information, and other relevant terms and conditions may be presented across several documents. An additional complication is the presence of bidding process information that may no longer be relevant to the final terms of the agreement. Department staff reported that the structure created time inefficiencies in the contract monitoring process. Furthermore, basic management principles suggest that this type of a decentralized contract structure makes orientation of new contract monitors more difficult, as well as raising the risk of missing a key area of performance monitoring. An alternative approach is a centralized contract, where the scope of work, payment information, performance requirements, and other relevant terms and 20 Invitations for bid set out very specific technical requirements for the purpose of identifying the lowest bidder. Requests for proposals provide more general requirements for the purpose of soliciting the best overall value for service, which does not require choosing the lowest bidder. 25