AC Attachment 1. Furniture Purchase Audit

Transcription

1 AC Attachment 1 Furniture Purchase Audit April 6, 2011

2 THIS PAGE INTENTIONALLY LEFT BLANK

3 EXECUTIVE SUMMARY The objective of this audit was to assess whether office furniture was purchased with due regard for economy. The audit assessed: 1) The contract award to supply furniture to The City 2) Compliance with policies governing the purchase of furniture 3) Furniture standards to ensure quality and control costs The audit examined a sample of office furniture purchased between 2006 and 2009 and included a review of applicable policies, procedures, contracts, and other relevant documentation. During the period audited, The City purchased furniture primarily from one vendor, who reached agreement with The City in 2003 to supply office furniture for an initial five-year term. The agreement was extended for a further four years in Through our review we conclude that office furniture was generally purchased by The City with due regard for economy. The competitive award process to reach agreement with the preferred supplier, which included cost as a key criterion, helped The City purchase furniture at an economical price. We are satisfied, based on our sample of furniture purchases reviewed, that The City is purchasing furniture from the preferred supplier. This allows The City to exercise as much purchasing power as possible by taking advantage of negotiated prices. Retrospective benchmarking information indicates that subsequent agreements with the preferred supplier did provide value for money when compared to industry inflation indexes. Furniture standards were in place to ensure quality, to control costs, and were in line with applicable standards. Standards were generally complied with, and non-standard furniture purchases were appropriately supported, providing assurance that furniture purchased by The City is appropriate, and obtained at an economical price. We include three recommendations in this report. Two are directed towards improving the management of the furniture contract: 1. Formalize the process to extend and renew agreements to ensure that decisions are supported by clear rationale as to how the extension would continue to provide value for money to The City (e.g. a price comparison); 2. Set and monitor delivery time targets as part of vendor performance for future furniture purchasing agreements. The third recommendation relates to the furniture purchasing policy. The policy is outdated and needs revision. Compliance with the policy was not consistent; for example, some purchases were not charged appropriately to the Operating or Capital Funds and no furniture inventory or tracking process was in place. The City Auditor s Office would like to thank staff and Management in Corporate Properties & Buildings and Supply Management who assisted with the audit. City of Calgary

4 City of Calgary THIS PAGE INTENTIONALLY LEFT BLANK

5 AUDIT REPORT 1.0 Introduction This audit was conducted as part of the approved Audit Plan as part of the City Auditor s focus on procurement. 1.1 Audit Objectives and Scope Objectives The objective of this audit was to assess whether office furniture was purchased with due regard for economy. The audit assessed: 1) The contract award to supply furniture to The City 2) Compliance with policies governing the purchase of furniture 3) Furniture standards to ensure quality and control costs Scope and Approach The audit examined a sample of office furniture purchased between 2006 and 2009, and included a review of applicable policies, procedures, contracts, and other relevant documentation. The audit did not include Calgary Police Service policies or guidance relating to furniture. Office equipment such as photocopiers, although charged to the same general ledger account code as office furniture, has been excluded from this audit. 1.2 Background Office furniture consists of moveable objects that constitute both the furnishing of a typical office work space and related common areas. Typical purchases include workstations, chairs, and paneling to create office cubicle areas. Increases in the number of City employees, the consequential need to re-stack office space or occupy new accommodation, and the requirement to replace broken or obsolete furniture all contributed to the purchase of office furniture during the period audited. The City uses one general ledger account code to identify expenditures on office furniture (desks, chairs), repairs to furniture, and office equipment (photocopiers, calculators). Chart 1 on the following page shows that between 2006 and 2009, The City spent $27.2 million through both the Operating and Capital Funds for office furniture, repairs and office equipment. It is not possible to isolate the amounts spent specifically on furniture from this overall total due to The City s recording procedures. City of Calgary 1

6 Chart 1 City Expenditures on Office Furniture, Repairs, and Office Equipment 2006 ($ 000) 2007 ($ 000) 2008 ($ 000) 2009 ($ 000) Total ($ 000) Operating 1,160 1,416 2,129 1,917 6,622 Capital 2,590 7,074 5,310 5,569 20,543 Total 3,750 8,490 7,439 7,486 27,165 Chart prepared by the City Auditor s Office using City financial data (Internal Management Reports) run from the General Ledger. The City purchases furniture primarily from one vendor, who reached agreement 1 with The City in 2003 to supply office furniture for an initial five-year term. The agreement was extended for a further four years in Figures provided by the vendor (not audited) indicate that over the period , they supplied The City with furniture costing $22.1 million. The agreement was negotiated by Supply Management, with specialist input from Corporate Properties and Buildings (CP&B). Business Units order furniture either through the on-line provider catalogue or through a quote followed by purchase order, and sign for the receipt of furniture upon delivery. CP&B staff provide specialist assistance and liaise with the preferred supplier on an ongoing basis. In January 2006, the Administrative Leadership Team (ALT) approved a new Furniture Purchase Policy (VE-001). The policy has three stated objectives: To provide a process that will be consistent with accounting principles regarding the treatment of operating and capital purchases; To provide a degree of flexibility for business units in their individual furniture purchases; and To standardize the purchasing and inventory control of furniture. No single City business unit has been given the mandate to monitor overall compliance with the policy. 1 The agreement between the supplier and The City consists of the Request for Proposal (RFP), bid response and associated correspondence. City of Calgary 2

7 2.0 Observations and Recommendations 2.1 Contract to Supply Furniture We assessed whether the furniture contract provided acquisitions at the most economical price, and whether the contract was adequately managed regarding price, terms, and conditions Contract Award There was a competitive contract award process culminating in the agreement with the current provider. The successful provider was ranked the best on cost, as well as ranked highest based on all criteria evaluated. The evaluation was not restricted by brand decision or any undue specification (e.g. specification of furniture that was not ergonomic in nature). Therefore, we conclude that purchases under the initial agreement were made at the most economical prices. The agreement between the supplier and The City consists of the Request for Proposal (RFP), bid response and associated correspondence. A separate Memorandum of Agreement or contract was not created for the agreement Contract Monitoring Regular informal monitoring has been conducted by both Corporate Properties and Buildings (CP&B) and Supply Management over the course of the agreement. Regular weekly meetings were held between CP&B staff and the supplier to monitor the furniture purchase process and resolve any issues. Prices were monitored on an ongoing basis by CP&B and Supply Management staff, to ensure that prices quoted and charged were in line with the agreement. More formal quarterly meetings were also held to review performance. We reviewed the following three functions relating to monitoring the agreement: a) price, b) contract renewal/extension, and c) delivery times. a) Price The initial RFP stated that the provision of furniture was to be at fixed prices for the first two years of the agreement. Following this, price increases were to be negotiated. The supplier and The City abided by the terms of the agreement; prices were fixed for 24 months, and subsequent multi-year agreements were negotiated. Our interviews indicated that benchmarking furniture price increases to the Statistics Canada Industry Price Indexes was carried out as part of the contract extension process. However, formal documentation of this exercise was not retained. Chart 2 on the following page illustrates our retrospective comparison of Index data to contract price increases during City of Calgary 3

8 the period audited. The comparison indicates that, overall, The City was receiving good value for money during this period. City price increases were lower in percentage terms than those set out in the benchmarking data. Chart 2: Price Index Values Compared to Supplier Price Increases Year Industry Price Index value Agreed price increases City s Price Index value Difference between values Contract start Assume % % (2.3) % (3) (6.1) (7.1) % Chart prepared by the City Auditor s Office using Statistics Canada Industry Price Index b) Contract Renewal/Extension In 2008, the agreement with the supplier was renewed for an additional four years. We observed two issues with this renewal: i) The initial RFP indicated that there were two options for renewal, the first not to exceed three years, and the second not to exceed two years. ii) Contract pricing prior to 2008 was as set out in the RFP for the initial term of the contract. However, the pricing structure of the contract extension in 2008 (fixed price for 18 months, then a 4% increase for another 18 months) did not match the structure set out in the original RFP, which indicated that prices should be fixed for the period of any extension. As noted in a) above, documentation of benchmarking conducted by Supply Management was not retained to support the decision to renew the agreement. The process to renew or extend an agreement has not been formally documented. When evaluating extensions to agreements, Supply Management assigns its buyers the responsibility for monitoring economic conditions, labour agreements, and professional tactics that may affect the supply of goods and services to The City. It has also been an accepted Supply Management practice that The City s buyers would review the terms and conditions of the agreement to determine City of Calgary 4

9 what length of renewal is permissible, and discuss renewals with the relevant customer in The City before making a recommendation. The recommendation is then reviewed by the relevant supervisor (and by the Manager of Supply Management, if required by the value of the agreement), before a decision on renewal/extension is made. Recommendation 1 The Manager, Supply Management, formalize the process to extend agreements, to ensure that decisions are supported by documented analysis indicating how the proposed agreement extension will continue to provide value for money to The City. Documentation should: a) Establish criteria by which the agreement will be reviewed (such as price, service quality, etc.); b) Analyze recent performance of the supplier against the criteria; and c) Reference back to the original provisions of the agreement (e.g. length, options to extend etc.) to demonstrate that any proposed extension is in line with original agreement, or justify why a variation to the initial agreement is required. Management Response Agreed Action Plan Supply Management is in the process of implementing contract management software which will automate and formalize contract processes. The software is in the final stages of development and testing, and is expected to be fully implemented during Q Responsibility Lead: Manager, Supply Management Support: N/A Completion Date: 2011 Q2 c) Delivery Times Delivery time was ranked as an important criterion in the RFP. However, no formal targets for delivery times were set as part of the agreement. In the bid response, the supplier indicated that delivery times for items likely to be purchased by The City was around 3-6 weeks. Audit interviews indicated that delivery times were much longer in practice, particularly early in the contract. This caused some issues for Business Units in obtaining the required items in a timely fashion to meet business needs. City financial data only provides partial information about actual delivery time as it does not record the actual furniture dispatch and receipt dates. We analyzed a sample of deliveries from the available data from 2006 and observed that deliveries averaged 12.6 weeks. Our sample also City of Calgary 5

10 indicated a significant range in delivery times, with the same type of office chair taking anywhere between 2.4 and 18.3 weeks to be received. Delivery times have been informally monitored by CP&B staff through the follow up of deficient/outstanding orders. Our interviews indicated that delivery times have improved since the start of the contract with the preferred supplier. Recommendation 2 The Manager, Supply Management, set and monitor delivery time targets as part of vendor performance for future furniture purchasing agreements. Management Response Agreed Action Plan Supply Management, along with Corporate Properties & Buildings, will include additional criteria and monitoring requirements in the next furniture RFP that address delivery times. Responsibility Lead: Manager, Supply Management Support: Director, Corporate Properties & Buildings. Completion Date: 2011 Q2 2.2 Furniture Purchase Policy Our review of the Furniture Purchase Policy included assessing: a) The adequacy of the policy and guidance covering furniture purchasing; b) Compliance over the audit period to three key policy areas: - The use of the Operating Fund - The use of vendors - Tracking of furniture Adequacy of Policy and Guidance To be regarded as adequate, a policy must be sufficiently comprehensive, and be accessible to all employees to whom the policy applies. Policies should be supported by appropriate procedures to aid employees in complying with the policies. The policy and associated guidance in place at the time of audit was not adequate to meet the needs of City Business Units. The furniture purchasing policy available to all staff through the Administration Policy Library (Furniture Purchase Policy VE-001) expired January 2009, and requires review and updating in the following areas: City of Calgary 6

11 a) Information in the policy is out of date as the requirements of the Tangible Capital Assets (TCA) 2 program and relevant practices are not reflected. b) Information in the current policy on recharging to the Reserve fund is not set out clearly, and is likely to confuse readers from Business Units not familiar with City accounting practices. c) The policy notes that self-supporting Business Units are expected to comply with Corporate furniture standards, and use City approved vendors. This does not mandate using the supplier that The City has negotiated an agreement with. This can result in some loss of purchasing power if Business Units procure furniture elsewhere. d) Guidance available on The City s intranet directs employees purchasing furniture to the supplier s website. Supplementary information in City guidance available on the intranet provides all employees with the appropriate codes required to access the website, and information as to how to order furniture. However, there is no written guidance available to employees setting out: - Under what circumstances new furniture can be ordered; - Restrictions on the type or design of furniture that can be ordered; - Details of any further authorisation/involvement of Corporate Properties and Buildings or Supply Management Compliance Furniture Purchase Policy VE-001 states that: - Small scale furniture replacements, where individual purchases of furniture up to a value of $10,000, with an expected life span of less than 5 years of value, should be charged to the Operating Fund; - Large scale furniture replacements should be charged to the Capital Fund; - The limit for furniture purchases by Business Units from the Operating Fund is $50,000 annually; - Self supporting operations are expected to comply with Corporate furniture standards, and use City approved furniture vendors; - Systems and controls on inventory must be in place to track the whereabouts of assets. Additional guidance for Corporate Credit Cards also notes that credit cards cannot be used to purchase furniture. 2 The Tangible Capital Asset project resulted from the Public Sector Accounting Board (PSAB) and CICA handbook section 3150 which required all local government bodies to recognize tangible capital assets; and amortize (depreciate) them over their expected useful life in the financial statements from 1 st January 2009 onwards. The City has been working to identify and inventory assets during City of Calgary 7

12 During the period reviewed, we observed that policies and guidance were not consistently complied with in the following areas: a) Use of Operating/Capital Fund i) Classification of expenditure We sampled 80 furniture transactions over the period ( ) and identified that: - Of 40 purchases charged to the Operating Fund, 38 were correctly recorded as operating expenditures based on policy VE Two transactions charged to the Operating Fund appeared to be capital in nature as per the policy - one purchase was not operating (a full office refit with an invoice value of over $55,000) and one purchase was for seven workstations, which is more of a "large scale purchase" i.e. capital expenditure than an Operating Fund purchase. - Of 40 purchases charged to the Capital Fund, 15 did not appear to be in accordance with policy VE-001 as they were for small scale purchases (i.e. $470 for flooring components) with values less than $10,000. These results indicate that, even though there may be valid accounting reasons why these purchases were charged either to the Operating or to the Capital Fund, the requirements of the furniture policy were not consistently applied. ii) $50,000 Limit The Furniture Purchase Policy states that Business Units should not spend more than $50,000 per annum on furniture from the Operating budget. It is not clear what the underlying rationale is for this restriction, and whether it needs to continue as part of furniture policy. We observed that in 2006, at least six Business Units exceeded this limit; at least seven exceeded the limit in 2007, seven in 2008 and six in b) Use of Vendors Self-supporting Business Units are expected but not mandated to use City approved furniture vendors. Our sample testing identified 15 purchases out of the sample of 80 where an alternate supplier was used. Of these 15, only 3 (4% of the total sample) were for items that the preferred supplier may have been able to supply other items were for office equipment rather than for office furniture. Where a significant quantity of furniture was required for the newly built Water Centre, Supply Management confirmed that the existing contract required that the preferred supplier should be used for this large order. This gives assurance that, in general, the preferred supplier has been used where appropriate. Our sample testing did not identify any instances where furniture was purchased using a Corporate Credit Card. City of Calgary 8

13 c) Tracking of Furniture During the period audited, there was no furniture inventory or tracking system in place at The City. Recommendation 3 The Director, Corporate Properties & Buildings, revise the Furniture Purchasing Policy, and update associated guidance including determining in conjunction with other Directors and General Managers appropriate mandates, roles and responsibilities; what purchasing controls are reasonable (given TCA requirements, need to control spending, etc.); and how these requirements are to be monitored and enforced. Management Response Agreed Action Plan The Furniture Purchasing Policy and procedures to be revised: Amend purchasing controls and limits; Incorporate monitoring and reporting process and system for policy compliance as per established criteria; Ensure TCA compliance is simplified; Clarify mandates, and associated roles and responsibilities. Responsibility Lead: Director, Corporate Properties & Buildings Support: Director, Finance; Manager, Building Infrastructure, Corporate Properties & Buildings; Manager, Supply (Finance). Completion Date: 2011 Q3 2.3 Furniture Standards Furniture Standards During the period audited, The City had furniture standards in place (set out in the RFP and winning bid response) which considered ergonomic principles, and were in line with industry standards as set out by the Canadian Standards Association. An ergonomic program was also in place at this time, whereby nonstandard, ergonomic furniture could be ordered to meet specific individual needs if an ergonomic assessment had been completed for the staff member/team. City of Calgary 9

14 2.3.2 Compliance with Standards We reviewed 80 furniture purchases made by The City between 2006 and 2009: - 37 purchases were for items included on the preferred supplier price list (in line with the RFP and bid response) and therefore were deemed in compliance with City furniture standards. - A further 36 purchases were for items that appeared reasonable and standard, i.e. were required for a modern office without undue specifications. - The remaining seven purchases appeared to be non-standard. Note that there may have been good business reasons why non-standard items were required, e.g. to accommodate a specific business need, an unusual space, or an ergonomic requirement. The diverse nature of business needs and accommodation across the Corporation means that it is unlikely all furniture could ever be entirely standard. Based on this sample testing, less than 10% (7 out of 80) of transactions appear to be non-standard. From this sample testing, we conclude that during the period audited, furniture was generally purchased in compliance with City standards. City of Calgary 10