Skip to content
Contracts, Procurements, and
Disadvantaged Business Enterprises
Because the area of purchasing is so prone to abuses and illegal activity, a public agency's procurement process and staff tend to set the ethical tone for the entire organization. The slightest deviation from legal requirements, regulations, and established policies and procedures can compromise integrity and ignite public outrage against the organization. After years of problems with its procurement process, Capital Metro finds itself in such a predicament today.
In the last three years, Capital Metro's Contracts and Procurement Department has faced four internal and external audits as well as an ongoing criminal investigation by the Federal Bureau of Investigation. The authority's managers have received numerous recommendations on ways to correct the authority's purchasing practices; yet problems continue, fostered largely by an organizational culture that does not hold employees and managers accountable for their actions.
Contracts and Procurement provides purchasing and contract support for Capital Metro. The department's budget is $600,826 for fiscal 1998.1 The department consists of a manager who reports to the chief financial officer, two senior buyers, five buyers, and three administrative employees.2 Three additional budgeted positions-a contract administrator, an administrative services representative, and an administrative secretary-are vacant at this writing.
In fiscal 1997, Contracts and Procurement spent $653,390 (Exhibit 21):
Contracts and Procurement Expenditures
|Type of Expenditure
||Percent of Total
|Salaries and Benefits
|| 76.4 %
|Travel and Training
Source: Capital Metro.
During fiscal 1997, Contracts and Procurement processed 7,390 informal requisitions (purchases under $15,000); 62 formal requisitions (for purchases of more than $15,000); and 14 formal amendments (to contracts worth more than $15,000).3 In May 1998, the department had 20 formal requisitions in progress.4
Capital Metro's Disadvantaged Business Enterprise (DBE) Department ensures DBE participation in its contracts. The department has two full-time-equivalent (FTE) staff members and a fiscal 1998 budget of $153,360.5 The department's primary activity is to certify small minority- and women-owned businesses as DBEs. The program is not complying with federal rules requiring on-site visits of all vendors seeking DBE certification.
In this chapter, TPR recommends ways to enforce Capital Metro's contract and procurement policies and procedures more effectively. TPR also proposes that the authority complete a new purchasing policies and procedures manual; report violations of these policies and procedures to the general manager and the board's Finance Committee on a monthly basis; adopt federal best practices in the development of a formal procurement plan for the authority; develop an in-house training program on contract management for project managers; and acquire in-house expertise in cost and price analysis. TPR also recommends ways to improve the efficiency and customer service offered by Capital Metro's DBE program.
TPR's recommendation to hire an employee with experience in cost and price analysis would cost the authority an estimated $58,520 annually in salary and benefits. The other recommendations could be implemented with Capital Metro's existing resources. TPR's recommendations in this chapter should produce significant savings that cannot be estimated at this time.
Hold managers accountable for complying with the authority's purchasing and contract policies and procedures.
On August 25, 1997, Capital Metro's board adopted an "Acquisition, Disposal, and Delegation of Authority Policy" that states that all acquisition and disposal transactions shall be conducted in accordance with the following primary goals:
All procurement of materials and services that are necessary for the day by day operation of the Authority shall be conducted in a manner that ensures maximum open and free competition.
The board also delegates authority to the general manager in the award of contracts as outlined below (Exhibit 22):
The Authority's acquisition and disposal procedures shall provide for maximum participation by disadvantaged business enterprises (DBEs).
The Authority's acquisition and disposal procedures shall be developed so as to instill public confidence in the acquisition process and provide for public access to all procurement information to the extent provided by law.
The Authority's acquisition and disposal procedures shall provide for safeguards to ensure a system of quality and integrity.6
Capital Metro Board-Delegated Authority
to General Manager or Designee
|Approve and execute all purchase requisitions.
|Formally advertise and issue solicitation documents, i.e. Information for Bids (IFBs) and Request for Proposals (RFPs).
|Issue solicitation documents (IFBs/RFPs) and award contracts for consumable items that are considered basic requirements for the authority's day-to-day transit operations, such as supply agreements for bus parts, supplies, petroleum products, tickets, and passes, regardless of dollar amount.
|Approve and execute purchase orders and contract instruments awarded under Capital Metro's small-dollar purchase procurements (under $15,000).
|Execute contracts resulting from IFBs that do not exceed $75,000 (or, in the case of contracts based on a rate per year, less than $75,000 per year) for the construction of improvements or purchase of material, machinery, equipment, supplies, and all other property except real property, and services solicited by IFB, provided the lowest responsible bid is within the dollar amount budgeted.
|Execute contracts resulting from RFPs that do not exceed $75,000 (or in the case of contracts based on a rate per year, less than $75,000 per year) for personal and professional services and all other services solicited by RFP, provided the most qualified proposal is within the dollar amount budgeted.
|Approve and execute contract amendments and change orders as may from time to time be necessary, so long as they do not exceed the amount of the original contract, in total or in combination.
|Approve and execute contracts or amendments in cases of emergency, which shall mean cases where postponement of the action until the next scheduled meeting of the Capital Metro Board of Directors will result in loss of property, danger to life or health, or major adverse effect on transit service, provided that the general manager shall request ratification of each action under this emergency provision at the next meeting of the Board of Directors.
|Approve and execute contracts or amendments in cases of urgency, which shall mean cases where postponement of action until the next scheduled Board meeting will result in substantial negative impact on Authority programs, activities, or service. In this case the general manager shall contact the Board and inform them of his proposed action. Unless there is substantial Board disagreement with the proposed course of action, the general manager shall proceed and shall request ratification of the action at the next scheduled Board meeting. The Board of Directors will be kept informed of these activities through the general manager's Open Procurement Project List at a level of detail and frequency satisfactory to the Board.
Source: Capital Metro.
In addition, Capital Metro has established the following purchasing procedure requirements:
$50 or less: petty cash purchase; no competitive bid required.
Invitation for bids (IFBs) are solicitations for goods or services whereby the successful bidder is chosen mainly on the basis of price and an award is made to the bidder who submits the lowest bid. Requests for proposals (RFPs) are solicitations for goods or services whereby the successful bidder is chosen based on an evaluation of price, qualifications, experience, equipment, facilities, and other factors deemed necessary to the requesting entity.
$50.01 to $1,000: one verbal, documented bid required (purchases must be rotated among several vendors with award history attached).
$1,000.01 to $5,000: two verbal, documented bids (one DBE bid minimum).
$5,000.01 to $14,999.99, three written, documented bids (one DBE bid minimum).
$15,000 and above: formally advertised bid (through a request for proposals or invitation for bids).7
The Contracts and Procurement manager and senior buyers have signature authority to approve and execute purchases up to $10,000. The general manager's signature authority runs from $10,001 up to $75,000. All purchases and change orders exceeding $75,000 must be approved by the board.8
Capital Metro's procurement process begins before each fiscal year (October 1-September 30) as a part of the budget preparation process. Each Capital Metro department manager incorporates anticipated purchases into his or her budget request for the upcoming fiscal year. These requests are submitted to the chief financial officer, who combines them into a formal budget document for board approval.
Upon approval of their budgets and the beginning of the fiscal year, department managers are authorized to approve purchases of materials or services by their personnel. These requisitions, their accompanying specifications, source lists, and bid quotes, if applicable, are submitted to Contracts and Procurement for processing and execution.
At the beginning of its review, TPR found that requisitions submitted to Contracts and Procurement first were reviewed by administrative employees for required elements such as appropriate budget line items; required documentation; a cost or price analysis, as applicable; vendor rotation history, if under $1,000; source lists (lists of potential vendors); and number of bid quotes, if applicable. The administrative staff then would enter the requisitions into the department's computer system and circulate them to the DBE staff, which would determine whether they presented opportunities for DBE participation and, if so, would assign DBE participation percentage goals-a percent of the project to be offered for DBE vendors to bid-to the requisitions.9 TPR found that DBE's approvals were delaying the procurement process unduly and, in recognition of this, Capital Metro's new director of Contracts and Procurement has changed the procedure.10
As of March 1998, administrative employees log in requisitions upon receipt and the manager of Contracts and Procurement reviews each for completeness and assigns it to a buyer.11 The requisitions then are submitted to DBE for assignment of goal percentages and attachment of DBE vendor list and are resubmitted to the applicable buyer for processing.
If the requisition is for materials or services valued up to $1,000, the assigned buyer reviews and may accept the quote(s) obtained by the requesting department. The buyer accepts or rejects the quote, based on whether it meets the minimum purchase order (PO) specifications. Upon approval of the low quote, the Contracts and Procurement manager signs the PO and the administrative staff mails the original PO to the vendor and awaits delivery of the product, which normally is received by the authority's Receiving Department. After Receiving accepts the product, it is inspected by the requesting department and Contracts and Procurement, if necessary. Accounts Payable is notified to pay the vendor if the product is not defective. If a defect is discovered, the vendor is notified and asked to replace it. If the vendor refuses to replace the product, the PO is canceled, the next lowest bid is identified, and the process begins anew.
A similar process is followed for purchases between $1,000 and $15,000. For such purchases, however, Contracts and Procurement obtains the vendor quotes, including one from a DBE; the buyer must draft a contract document. The Contracts and Procurement manager or senior buyers may approve orders up to $10,000. The general manager must approve orders above $10,000.
Formal bidding processes
Purchases valued at $15,000 or more are considered to be formal solicitations, requiring an invitation for bid (IFB) or a request for proposal (RFP), and involve a more detailed and time-consuming process.
Requirements for the IFB process include at least two newspaper announcements; a pre-bid conference, if needed to clarify the terms of the bid; and a time period to answer questions asked at any pre-bid conference, amend the IFB accordingly, and send the amendments to all bidding vendors.
Federal regulations require IFB contracts to be awarded to the lowest bidder, using a firm fixed-price (lump-sum or unit price) contract. IFB contract awards valued up to $75,000 must be approved by the general manager; all proposed awards in excess of $75,000 must be approved by the board.
The RFP process comprises the above steps, with the following exceptions. The RFP process requires an evaluation committee, which evaluates each proposal that is submitted by vendors; gives a score to each pre-identified factor of the offer (such as price, vendor qualification, expertise, and technical ability); totals each score; and recommends an award to the vendor with the best score. Proposals received pursuant to an RFP can be awarded by either a fixed-price or cost-reimbursement contract; the latter establishes an estimate of total cost and a ceiling that cannot be exceeded by the contractor, and must be awarded to the vendor whose proposal is most advantageous, taking into account price and the other factors listed above.12
As a starting point for its review, TPR requested and received a copy of the Cap Metro Procurement Regulations, as revised in August 1996. This 249-page manual was last revised to comply with a recommendation from a 1995 independent audit that noted the authority's need for revised and expanded purchasing procedures and a comprehensive set of procurement regulations.13
Despite its revision, however, the present procurement manual is unnecessarily lengthy; contains mutually contradictory statements concerning processes and rules; uses the phrases "competitive bid" and "competitive proposal" interchangeably-and incorrectly; and, in general, is written in an unnecessarily confusing manner that makes it difficult for novice purchasers and project managers to use.
Persistent purchasing problems
More significantly, TPR found a number of instances in which the authority's procurement policies and processes were circumvented by its employees. These include invoices submitted before the receipt of requisitions and purchase orders; invoices paid by the Finance Department without any documentation for the purchase; contracts made without competitive bidding, despite a requirement for such action; small-dollar purchases (under $1,000) made without vendor rotation; services purchased without evidence of work performed; and purchases made without required vendor quotations. TPR also saw evidence of missing file documents.
Of course, TPR was only the latest in a long chain of reviewers; before TPR's study, four other internal and external audits all found significant problems in Contracts and Procurement.
One of the first documents reviewed by TPR was the 1995 Final Report for the Review of Procurement/Contracting Process of Capital Metro by Tom Fitzgerald.14 Fitzgerald concluded, in part, that:
Existing procedures are inadequate and/or incomplete...No internal training program exists for either the procurement staff or project managers...virtually no procurement planning is accomplished by the Materials Management Department [now called Contracts and Procurement]...Small purchases are not effectively managed [resulting in] an unusual number [being] issued without any competition and almost all without any negotiation...Project managers routinely place purchase orders without any competition...There were an unusually large number of unauthorized purchase orders issued, i.e. prior to Contracting Officer signature...Contracts are awarded without any cost analysis, and with little or no negotiation on price.15
Very few of the above problems were addressed, even though the report offered detailed solutions. As a result, many of the same problems persist. A January 1997 internal report entitled "Contracts and Procurement: The Manager's View," noted other problems including "renegotiated [project] scopes due to exceeded budget, expiration of contracts causing continuous amendments, failure to indicate if project is budgeted or not budgeted, wrong or obsolete requisition forms submitted, no budget line item for capital items or sign off, and project managers assessing liquidated damages and taking legal contract action rather than C&P staff."16
In October 1997, the Contracts and Procurement manager was fired amid allegations that he had showed favoritism towards certain vendors in awarding contracts and approving contract awards for which Capital Metro did not receive contracted deliverables, such as a policy and procedures manual.17 In the same month, the Federal Bureau of Investigation (FBI) began an investigation into Capital Metro's "business practices" by issuing subpoenas for boxes of contract documents concerning "everything from the company that runs the cafeteria in Capital Metro's headquarters to contracts dealing with printing, office supplies, maintenance and the construction of a park-and-ride lot at...a local church."18
On November 11, 1997, Capital Metro's external auditing firm presented its audit of the authority's financial statements for fiscal 1997. In this report, the auditors noted that they had tested controls over cash disbursements and found four contracts out of a sample of 40 that were executed outside Contracts and Procurement, even though authority policies specifically required the department to handle these. The costs for these goods and services ranged from $2,500 to $13,750. Based on its findings, the auditor recommended that all purchases be made following established procedures and that "all purchase orders be completed and approved by the Contracts and Procurement Department prior to the goods and services being delivered, completed and invoiced."19 Capital Metro concurred with the recommendations and stated in writing that Contracts and Procurement plans to require all solicitations between $1,000 and $15,000 to be handled solely by the department by June 1998.
On December 19, 1997, the authority's former internal auditor released the results of his review of documents and records subpoenaed by the FBI, which was requested by the former general manager. The internal auditor noted "violations of established Capital Metro policies and procedures in the processing and award of some contract and small-dollar purchase transactions," including "a consistent pattern of mismanagement of the small-dollar procurement system, circumvention of the procurement processes, and failure to ensure that Capital Metro obtains its monies [sic] worth."20 In January 1998, Capital Metro asked the Federal Transit Administration (FTA) to perform the same type of review the FBI is conducting.
The FTA's preliminary audit findings-presented to Capital Metro on February 6, 1998-were similar to the findings of past audits. The FTA recommended that Capital Metro go back to the 1995 Fitzgerald report and simply implement those recommendations. As of June 1998, the FTA has not issued its final audit report on Capital Metro's procurement practices.
Capital Metro's sorry record on purchasing appears to be due to a general disregard by the authority's employees and managers for its own policies and for the basic principle of accountability. In its interviews, TPR repeatedly heard that there was little anyone could do to stop inappropriate and questionable purchases, and that Contracts and Procurement can only return incomplete or incorrect specifications to the requesting department. Other than this, Capital Metro has no enforcement mechanisms for employees who do not comply with its purchasing procedures and policies.
Accountability at other transits
TPR determined how other transit authorities hold their managers accountable for following procurement policies and procedures. Houston Metro stated that failure to follow procurement procedures is a "firable offense."21 Dallas' transit authority covers such failures under its disciplinary policies and the staff interviewed remembered an incident in which an employee was dismissed for not following procedures.22 A San Antonio transit representative stated VIA too has disciplinary policies that outline consequences for employees who fail to follow purchasing rules.23 Again, Capital Metro rather astoundingly lacks such policies.
A new beginning
On December 15, 1997, Capital Metro hired the former director of procurement for the state's General Services Commission (GSC) to serve as the new manager for Contracts and Procurement. This manager has taken several significant steps to bring credibility and integrity back into Capital Metro's purchasing practices. She has begun enforcing existing policies; updating and improving old, ineffective procedures; cutting procurement processing times; and has filled vacancies with qualified people.
For example, in January 1998, Contracts and Procurement began developing a new policies and procedures manual by requesting and reviewing procurement manuals from other transit authorities and governmental agencies.24 The department is attempting to extract the best practices and procedures from these manuals and adapt them for Capital Metro.
The Contracts and Procurement manager also is enforcing existing contracting policies and procedures within her direct control, such as the requirement that purchases under $1,000 be rotated among vendors, and is "demanding better documentation and file maintenance."25 In addition, the department is significantly reducing processing times for IFBs and RFPs. Capital Metro's previous goal for processing IFBs was 120 days and 180 days for RFPs.26 As of April 10, 1998, Contracts and Procurement had achieved an average 71-day processing time for IFBs, as measured from the department's receipt of the requisition to award of the contract, a 41 percent reduction.27 The processing time for RFPs has been reduced to 63 days, a 65 percent reduction. The manager also returns incomplete requisitions to the requesting department with a request for supporting information or documentation, and refuses to process the requisition until all of the required information is attached.
The department is conducting on-line purchases through an interlocal agreement with the GSC, for items including vans, office supplies, fax machines, copy paper, air conditioning filters, and three-ring binders. The GSC agreement has yielded some substantial savings over previous vendor contracts, such as a fax machine for $2,125 rather than $3,200; cases of copy paper for $21 rather than $25 each; and a 40 percent savings on air conditioner filters and three-ring binders.
Because purchases through state contracts require a minimum order that often exceeds Capital Metro's needs, and because some goods that Capital Metro requires cannot be obtained through state contracts, Contracts and Procurement also has established "annual contracts" with vendors. Contracts and Procurement asks other Capital Metro departments to estimate their annual needs for certain items, and then solicits competitive bids from vendors based on these estimates, while making it clear that the estimates are not guaranteed. This significantly reduces the number of times Contracts and Procurement has to seek competitive bids. When the departments need the items or goods, they submit a requisition to Contracts and Procurement that cites the appropriate PO number and the department places an order at the established price. Annual contracts have helped Contracts and Procurement save as much as half of the unit price on such items.
Contracts and Procurement also has simplified the standard contracting package they send to prospective vendors. The only improvement Contracts and Procurement still needs, according to one newly hired buyer, is adequate automated purchasing software, and they are working to obtain this as well.
TPR was told that as of July 1, 1998, a new authority policy requires all requisitions for more than $1,000 to be handled by Contracts and Procurement. Previously, the requesting departments would call vendors to obtain from three to six bids on purchases of up to $15,000. Contracts and Procurement staff said that requesting departments often did not provide all vendors with adequate and equally specific requirements and thus were not receiving accurate bids.
While the arrival of an experienced Contracts and Procurement manager has made a dramatic difference in the department's practices, it is important to realize that the responsibility for accountability and integrity in purchasing is not limited to the department. All Capital Metro employees, and particularly its managers, must be held accountable for the authority's purchasing policies and procedures. Respect for and adherence to these policies and procedures must be institutionalized within Capital Metro.
A. The Contracts and Procurement manager should report directly to the general manager and be given authority to enforce all contract and procurement policies and procedures.
Without this authority, the Contracts and Procurement manager cannot ensure that other managers support and follow the department's policies and procedures. Given the critical problems that have existed in this area, it is imperative that the authority stay focused on ensuring ethical and appropriate purchasing practices. Raising the Contracts and Procurement manager to a direct reporting relationship with the general manager would aid this effort.
B. Contracts and Procurement should complete an improved purchasing policies and procedures manual and desk reference by August 31, 1998.
The manual should be clear, concise, and user-friendly. At minimum, it should document Capital Metro's purchasing policies and all applicable federal, state, and local laws, rules and regulations; a set of procedures, including instructions and examples, on soliciting proposals via IFB versus RFP, to ensure the most timely, efficient, and effective purchases possible; procedures for handling unsolicited proposals (that is, proposals to provide goods and services that Capital Metro did not request); procedures for emergency purchases; and procedures for establishing and obtaining approval from an evaluation committee. The evaluation procedures also should include methods for evaluating vendor proposals.
Contracts and Procurement should complete development of this manual and desk reference by August 31, 1998; obtain general manager approval by September 15, 1998; and submit them for board approval by the first scheduled board meeting in October 1998. The board should review, amend as necessary, and adopt the new manual and desk reference by November 1, 1998.
C. The general manager should enforce authoritywide compliance with the purchasing manual by establishing strong disciplinary consequences for noncompliance.
Each procurement and DBE staff member and all departmental and project managers should be given a copy of the manual. They should be required to sign a form developed by Contracts and Procurement stating they have read, understand, and will comply with the established policies and procedures. These forms should be placed in the appropriate personnel files.
For consistent noncompliance, the following remedies should be incorporated into the Capital Metro employee handbook and in Contracts and Procurement policy and procedures manual and enforced:
the general manager should reduce department managers' budgets by the amount of inappropriate purchases;
This policy should be submitted for board approval by the first scheduled board meeting in September 1998. The board should review and adopt the policy by December 1, 1998.
individual employee noncompliance should be documented in their annual performance evaluations; and
in cases of consistent and blatant disregard, employees should be subject to firing, and, where appropriate, be required to personally pay for improper goods or services.
D. The Contracts and Procurement manager should develop a report listing all procurement violations by department, with names, dates, dollar amounts, and descriptions, and provide this report monthly to the general manager and the board's Finance Committee. The report should identify remedies for these problems.
This would facilitate consistent disciplinary actions for authority personnel who do not comply with established purchasing policies and procedures. Contracts and Procurement would compile the violations, in a format developed by Contracts and Procurement, by the 25th of each month and forward them to the general manager's management support specialist. The specialist then would aggregate all of the departments' violations into one document and submit it to the general manager by the 27th of each month. The general manager or his or her designee would in turn submit the violations to the Board Finance Committee by the first of every month.
These recommendations can be accomplished with existing funding.
Strengthen Contracts and Procurement contract planning, administration and monitoring.
The FTA encourages its grantees, including Capital Metro, to develop and implement annual or long-term (more than one year in advance) procurement plans. Careful long-term planning is recommended for large transit systems and those planning major transit investments, complex capital projects, or a substantial number of operating contracts that will span several years.28 Annual procurement plans are recommended for all other systems.
A good procurement plan can help alleviate backlogs in the process and facilitate sound purchasing decisions, while minimizing waste by identifying opportunities to coordinate and consolidate purchases. The FTA recommends the following best practices (Exhibit 23).
Federal Transit Administration: Best Practices for Procurement Planning
|Sources for Plans - The preparation of an advance procurement plan can begin with data already prepared for service and financial planning purposes. Both state and local Transportation Improvement Programs list major federally funded projects for all modes of transportation. While the preparation of the plans is the responsibility of the local Metropolitan Planning Organization and the state, most transit agencies are involved in assisting with development of the transit element of the plans which lists their projects separately. An internal capital budget is another source which may have more detailed or up-to-date information on planned capital procurements.
|Although projects funded with operating funds are often smaller and the operating budget does not usually offer as much specificity, contracting officials may be able to identify many planned procurements from the operating budget as well. Historical usage is another valuable source for the plan, particularly when compared to the operating budget and reviewed by your customers.
|Another method available to assist with preparation of the plan is to conduct a survey of internal customers. They may provide more detail on the budgeted projects and may be able to identify projects that are not distinguished in the budget. An annual survey of the major customers will encourage the customers themselves to plan their needs for goods and services.
|Annual procurements accounting for a great deal of activity such as parts, fuel, and other supplies can be projected at most agencies based on historical need and agency-wide plans and projects.
|Plan Contents - In addition to the identity of each procurement, plans normally identify the customer contact(s) |
(at medium and large agencies), time requirements, and funding sources. Tentative start dates, publication dates, opening dates and award dates are usually based on the type and size of procurement contemplated.
Time should be allowed for:
preparation of a source selection plan (if not already complete or in progress), where appropriate;
preparation of specifications;
assembly of the solicitation of offers;
publication period and time for preparation of offers, including pre-bid/proposal conference, where appropriate;
receipt and evaluation of offers; and
required reviews and approval actions.
|Complex projects will require more time in preparing specifications. Negotiated procurements will require more time after receipt of offers. If governing board approval is required, and the governing board meets on a fixed schedule, time would be added for this step. Based on the schedule and resources, contracting officials would assign responsibility within the procurement function. In all major procurements and cases where negotiated procurement is intended, and whenever the internal customer is prepared, the planning process can evolve into a source selection plan for each major procurement.
Source: Federal Transit Administration.
The authority has no systematic method or requirement in place for departments to alert Contracts and Procurement of anticipated purchases, or to provide a timeline of expected requisitions.29 This prevents Contracts and Procurement from scheduling its activities effectively and leads to backlogs.
TPR identified several situations indicative of poor procurement planning. A review of the "General Manager's Procurement Project Lists" for November 1997 and March 1998, for instance, found contracts that were amended several times to raise the contract ceiling amount because the original ceilings had been reached; several contracts also were amended to extend the contract, often more than once, because the agency did not allow enough time prior to the contract expiration date to competitively bid the goods or services. One annual contract for temporary services was amended for a mere two months and was increased by 73 percent of the original amount.30
This example not only reflects poor procurement planning; it is a clear violation of Capital Metro's Acquisition, Disposal, and Delegation of Authority Policy, which states that the general manager or his or her designee shall "[a]pprove and execute contract amendments and change orders as may from time to time be necessary which cannot exceed in total or combination the amount of the original contract."31
It should be noted that some amendments in active Capital Metro contracts that TPR analyzed were properly planned and appeared motivated by sound business decisions, such as amendments to exercise first- and second-year options that were authorized by the original contract. Nevertheless, TPR found a consistent lack of planning and noncompliance in contracting practices.
The new manager of Contracts and Procurement acknowledges this and is building a matrix into the fiscal 1999 budget that will identify and schedule budgeted procurement projects. She also is starting a process to notify user departments of contract expiration dates up to one year in advance.
Contracts and Procurement outlines contract administrator duties in its procurement policies, solicitations for bids or offers, and actual contracts. The contract administrator, a staff member of Contracts and Procurement, prepares contract modifications, interprets the contract, reviews contractors' expenses and claims for payment, performs audits for contract compliance, verifies vendor compliance with contract insurance requirements, conducts any contract-related administrative correspondence, and carries out termination or suspension actions.
Capital Metro's policies, solicitations, and contracts specify that project managers, who normally are staff members of the department that requests a contract, are responsible for technical direction only. Technical direction refers to the supervision, inspection, and review of technical work, deliverables, reports, payment requests, vendor deliverables schedules, budget administration, and similar matters.
Whose job is it?
Despite these guidelines, staff interviews reveal significant confusion regarding the relative responsibilities of project managers versus contract administrators. An example of this confusion is the Alternative Transportation Operations van-pool contract with VanPool Services, Inc. (VPSI).
The VanPool Services contract was let on May 1, 1994 and originally budgeted for $2,565,000 over three years. This contract has been amended eight times (Exhibit 24). These amendments increased the cost of the contract to $4,191,455 over the original three-year term, costing Capital Metro an additional $1.6 million over its original estimated costs. The contract has risen further, to $5,466,863, following board authorization on May 26, 1998.
Capital Metro VanPool Services Contract Amendments
|Amendment 1 (June 21, 1996)
||Change in contract language only.
|Amendment 2 (November 7, 1996)
||Raised ceiling amount for continued services for fiscal 1997 ($1,445,880) and reflected increases of ceiling amounts for fiscal 1995 ($855,000) and fiscal 1996 ($925,000).
|Amendment 3 (December 20, 1996)
||Simplified the billing process, reserved the right for Capital Metro to limit personal mileage, and modified the pricing of demonstrator/emergency vehicles.
|Amendment 4 (April 24, 1997)
||Corrected calculation errors that did not properly identify the correct "Not to Exceed" amounts (NTEs) for fiscal 1996 and fiscal 1997. The NTE for fiscal 1996 was amended to increase by $925,000, from $855,000 to $1,780,000. The NTE for fiscal 1997 was amended to increase by $1,445,880, from $1,780,000 to $3,225,880.
|Amendment 5 (May 9, 1997)
||Ceiling amount was increased to reflect contract period extension from May 1, 1997 through December 31, 1997 for an additional $965,575-$463,078 of which was an amended amount to the existing contract period and $502,497 for the first quarter of the fiscal 1998 budget. The NTE was increased to $4,191,455.
|Amendment 6 (January 12, 1998)
||Changed wording of contract to reflect increase in revenue fares from $10 per month per passenger to $25 per month per passenger.
|Amendment 7 (January 26, 1998)
||Increased contract amount by $631,924 to extend contract for an additional six months. The NTE was increased to $4,823,379.
|Amendment 8 (May 26, 1998)
||The board authorized the general manager or his designee to negotiate and execute an amendment to the VPSI, Inc., contract extending the term for an additional six-month period with the option to terminate after five months. Raised ceiling amount by $643,485 to extend contract through December 1, 1998. The NTE was increased to $5,466,863.
Source: Capital Metro.
The project manager in this case told TPR she did not believe it was her responsibility to "administer" the contract; she thought someone in Contracts and Procurement should be monitoring the contract budget and notifying her well in advance of excessive budget expenditures.32 While she was correct that contract administration was not her responsibility, her assumption that she was not responsible for budget monitoring was both wrong and costly. The RFP's scope of services clause identifies her as the project manager and specifically states that as project manager she is responsible for budget administration.
The VPSI contract also reflects poor contract administration and monitoring. As noted in Exhibit 24, Amendment 2 raised the ceiling amount for continued service and also reflected increased ceiling amounts for 1995 and 1996. Essentially, the ceiling amount was raised and higher payments were made to the vendor, but the contract was not properly amended until two years later. Amendment 4 was required to correct calculation errors of "not to exceed" contract ceiling amounts in Amendment 2. Moreover, Amendment 5 increased the ceiling amount to reflect a contract extension from May 1997 to December 1997, for an additional $965,575.
This substantial amount, however, is not reflected in the general manager's contract monitoring logs for November 1997 or March 1998, indicating a lack of effective monitoring. These logs, which are supposed to document the status and all activity of active contracts, are maintained by an administrative employee in Contracts and Procurement.
A. Contracts and Procurement should use the Federal Transit Administration's best practices as a guide in its ongoing development of a formal procurement plan.
These best practices would facilitate the department's effort. The plan should be complete by October 1, 1998.
B. Contracts and Procurement should develop an in-house training program on contract management for all current and future project managers.
This training should be intensive and comprehensive, covering all contract management functions that a project manager would encounter. At minimum, it should include an in-depth discussion and explanation of "technical direction" and an examination of all its components, including "supervision, inspection, and review of technical work, deliverables, reports, payment requests, schedule, financial budget administration and similar matters," as stated in the "Project Manager/Contracting Officer" section of Capital Metro's formal solicitation documents. Each of these components should be an individual training chapter. An additional training topic should clearly delineate and contrast the responsibilities of the contract project manager and the contract administrator. All chapters should conclude with a "quiz" that measures comprehension of each chapter's subject matter.
This training should be developed by December 1, 1998, with classes beginning in January 1999. The general manager should make this training a requirement for all project managers and hold project managers and contract administrators accountable for any negligence in their respective duties.
C. Contracts and Procurement buyers should submit all contract activities, such as amendments and change orders, to the employee responsible for maintaining the monitoring log no later than 24 hours after any contract change.
This would ensure that the status of active contracts is accurately reflected in the contract monitoring log.
The administrative employee should immediately begin carefully reconciling the monitoring log to actual contract files, noting and correcting any discrepancies. This process should be complete by August 31, 1998.
Every effort should be made to always present accurate information to the general manager, who must in turn make accurate status reports to the board. Current contract status, including amendments, must be accurate to avoid noncompliance with authority policy.
These recommendations can be implemented with existing funding.
Train a buyer in cost and price analysis.
A cost or price analysis is required for all purchasing actions conducted by FTA grantees such as Capital Metro. The method and degree of analysis may vary according to the particulars of the situation, but some kind of independent estimate must be made before bids or proposals are received.
The FTA lays out the following guidelines for cost or price analyses:
A cost analysis must be performed when the vendor is required to submit the elements (such as labor hours, overhead, materials, etc.) of the estimated cost, as with professional consulting and architectural and engineering services contracts.
A cost analysis also is necessary when adequate vendor competition is lacking and for sole-source procurements, including contract modifications or change orders, unless price reasonableness can be established on the basis of a catalog or market price of a commercial product sold in substantial quantities to the general public or on the basis of prices set by law or regulation.
Capital Metro's former Internal Audit Department performed cost and price analyses on vendor proposals prior to negotiations with the vendors. The authority credits these analyses with saving Capital Metro about $3 million in fiscal 1997.34
A price analysis may be used in all other instances to determine the reasonableness of the proposed contract price....
Grantees will negotiate profit as a separate element of the price for each contract in which there is no price competition and in all cases where cost analysis is performed. To establish a fair and reasonable profit, consideration will be given to the complexity of the work to be performed, the risk borne by the contractor, the contractor's investment, the amount of subcontracting, the quality of its record of past performance, and industry profit rates in the surrounding geographical area for similar work. 33
Despite these significant savings, however, this activity was misplaced in Internal Audit. Internal Audit should be responsible for guaranteeing internal departmental functions, not operational functions. According to the Institute of Internal Auditors, "Internal auditors should be independent of the activities they audit. [They] should not assume operating responsibilities... because performing such activities is presumed to impair audit objectivity."35 Moreover, the number of formal solicitations needing an analysis in fiscal 1997-53-diverted Internal Audit's resources away from its traditional duties.36
During TPR's review, as mentioned elsewhere in this report, Capital Metro reorganized and eliminated the internal auditor function, despite the fact that solicitations were awaiting cost and price analyses. A senior buyer simply made notes to several solicitation files indicating that an analysis was needed, but these were not conducted because the authority had no one qualified to do so.37 These instances represent a clear violation of federal regulations and leave Capital Metro in jeopardy of receiving poor value on its contracts.
As an interim measure, the manager of Contracts and Procurement decided that cost and price analyses could be completed by the authority's external financial auditors, Martinez, Mendoza & Colmenero. The auditors completed three at a cost of $850, $750, and $900 respectively; thereafter, Contracts and Procurement contracted with another firm to perform the analyses at a cost of $170 per hour. At this writing, one analysis has been completed for $480.50.
While the external financial auditing firm is capable of performing the analyses needed, this arrangement could become quite costly for Capital Metro. Recognizing this, Capital Metro has posted a job opening and budgeted for a contract administrator to perform cost/price analyses.
The Contracts and Procurement manager should train a buyer with specific expertise in cost/price analysis techniques by December 1, 1998.
Given TPR's recommendation to bolster the authority's contract administration activities, it is important not to divert the new contract administrator from his or her primary duties. Capital Metro would be better served by placing this responsibility with a buyer position.
The FTA offers a four and one-half day training course in cost and price analysis and contract negotiation through its National Transit Institute at Rutgers University. The course is free for FTA grantees.
The cost of sending a single buyer to Rutgers University, including meals, car rental, and lodging, should not exceed $1,500.
Improve efforts to contract with disadvantaged business enterprises.
Capital Metro's Disadvantaged Business Enterprise program is intended to ensure DBE participation in its contracts. Capital Metro has an overall agency DBE contracting goal of 27 percent of all dollars spent on contracting in each fiscal year, excluding contracts for buses and bus manufacture; DBE goals for these items are set by the transit vehicle manufacturers each year.38 According to the Code of Federal Regulations, "each [FTA grantee] shall require that each transit vehicle manufacturer, as a condition of being authorized to bid on transit vehicle procurements in which [FTA] funds participate...establish and submit for [FTA] approval, an annual percentage overall goal...based on the amount of [FTA] financial assistance participating in transit vehicle contracts to be performed by the manufacturer during the fiscal year in question."39
In fiscal 1997, DBE contracts constituted 20.1 percent of the authority's total contracted dollar value, considerably less than the previous year's level of 25.3 percent.40 In the first two quarters of fiscal 1998, however, DBE contracting rose to 25.4 percent.41
The DBE Department has a staff of two and a fiscal 1998 budget of $153,360.42 The department's primary function is to certify minority- and women-owned businesses as DBE vendors. As part of the certification process, the DBE staff reviews applications and documentation submitted by vendors and performs unannounced site visits to ensure that they meet the authority's requirements.
Capital Metro also has reciprocal agreements with other transit authorities whereby it accepts DBE certification established by another authority. Such agreements make the certification process much simpler and faster. Capital Metro has such agreements with two Texas transit agencies, including VIA in San Antonio and the Regional Transportation Authority of Corpus Christi. Capital Metro also automatically honors DBE certifications from the federal Small Business Administration (SBA). In calendar 1997, Capital Metro accepted 29 certifications from other entities, including 10 from SBA and 19 from other transit authorities.43
In addition to its certification function, the department maintains a database of DBE vendors; establishes a DBE subcontracting goal for each purchase in excess of $15,000; provides Contracts and Procurement with a list of certified and non-certified DBE vendors for each of these requisitions; and evaluates bids to determine if they meet the requirements for DBE participation. DBE staff also attend pre-bid and pre-proposal conferences to answer DBE-related questions from vendors.
DBE staff interact with the Contracts and Procurement Department to ensure that the purchasing process includes DBE participation whenever possible. For procurements of more than $15,000, specific DBE goals are determined for each project, prior to issuance of an IFB or RFP. The goals are set using a methodology that takes into account the number of DBEs available to bid on a project or a component of a project.
DBE goal-setting process
The Contracts and Procurement Department logs in each purchase requisition and then forwards it to DBE. DBE staff members review the requisitions to determine whether the project offers DBE vendors the opportunity to contract with Capital Metro, in whole or as subcontractors. If they determine that the project can be subcontracted, the project is broken down into particular areas of vendor expertise, such as barricades, construction, debris removal, and concrete installation. DBE then reviews the vendor database to determine whether DBE vendors are available in those areas of expertise. The department determines what percentage of the project DBE vendors could handle, including 100 percent of the project, and sets the contract goal accordingly. If there are no opportunities for DBE vendors, no goal is set.
The DBE goal-setting process takes about two days. DBE staff then forward the goal and the list of certified and non-certified DBE vendors for the project to Contracts and Procurement for processing. When bids and proposals are submitted, DBE staff evaluate them to determine if they meet the requirements for DBE participation.
TPR commends the DBE staff for working cooperatively with the Contracts and Procurement staff to improve the efficiency and effectiveness of the contracting process. DBE staff also have worked with Contracts and Procurement to simplify the DBE instructions and forms contained in IFBs and RFPs, to help minimize the number of DBE vendors eliminated from consideration as participants for problems with their paperwork.
Delays in DBE certification
Despite these improvements, TPR found that the process for certifying DBE vendors still takes too long. The department takes about four to six months to certify new DBE vendors who are not bidding on upcoming contracts. If a new DBE vendor is bidding on an upcoming contract, however, certification takes less than two weeks.44
Capital Metro does not require DBE vendors to be certified when they bid on contracts. They are required, however, to submit a DBE application with their bid and to be certified before they can be awarded a contract. Some contract awards have been delayed pending DBE certification, but this does not happen often, according to DBE staff.45 In calendar 1997, 107 DBE vendors were certified by Capital Metro and 196 were recertified. Annual recertifications are not as labor-intensive as initial certifications. For recertification, the department simply checks income limits to make sure the DBE has not exceeded the income size standard set by the Small Business Administration; reviews minutes for the companies' most recent corporate meeting, if the recertification is for a corporation; and assesses any changes in the structure of the business, such as changes in ownership shares and address changes.
Violations of federal regulations
According to federal regulations, Capital Metro is required to perform unannounced site visits on each new DBE as part of its certification process to determine if DBE status is valid.46 These site visits are conducted by DBE staff, but TPR found that the visits are not performed for many DBEs. Capital Metro is violating federal regulations in such cases. That department cited limited resources as a justification for this violation.
In calendar 1997, DBE staff conducted 10 site visits and relied on reciprocal agreements with the SBA and other transit agencies to satisfy the site-visit requirement for 23 DBEs.47 The remaining 74 DBEs were not visited.
Austin Minority Supplier Development Council
The Austin Minority Supplier Development Council was established in May 1998 to help minority vendors in the Austin area gain access to procurement opportunities. The council was modeled on similar programs in the Houston and Dallas areas, and serves as a clearinghouse for information on minority business development programs.
Capital Metro is considering joining the council at a cost of $2,000. Membership benefits include assistance in the identification of additional DBE vendors and opportunities for increasing DBE participation. The council also provides programs and services for a fee, including certification of DBE vendors, site visits, referrals to member buyers, educational seminars and training. At this time, administrative support to the council is being provided by the Houston Minority Business Council. The Austin council should be fully staffed and operating no later than January 1999.
A. The DBE program should maximize its number of reciprocal agreements with federal, state, and other transit and local government agencies for certifications.
DBE vendors should not have to wait four to six months for certification. Establishing reciprocal agreements with other entities would help reduce the DBE Department's workload and speed up processing times.
B. When the Austin Minority Supplier Development Council becomes fully functional, the DBE program should consider contracting with the council for certifications, recertifications, and site visits.
Outsourcing some or all of the certifications and site visits could free up limited DBE resources, reduce the processing time for certifications, and put the authority in full compliance with federal regulations.
These recommendations would have no fiscal impact beyond the cost associated with contracting for certifications and site visits. This cost cannot be determined, as the number of certifications and site visits that could be contracted for and the fees that would be charged by the Austin Minority Supplier Development Council are unknown at this time.