CONTRACT CONTRACT REVIEWREVIEW

Contract Audit NeedContract Audit Need

• The Value and importance of The Value and importance of contractual expenditure in regard to contractual expenditure in regard to capital and revenue budgetscapital and revenue budgets

• High turnover and diversity of High turnover and diversity of contractscontracts

• Inherent risk of loss, waste fraud Inherent risk of loss, waste fraud resulting from such turnover and resulting from such turnover and expenditure levelsexpenditure levels

Audit ObjectivesAudit Objectives

• Policy versus procedures reviewPolicy versus procedures review• System adequacy from initial System adequacy from initial

planning to post completion planning to post completion assessmentassessment

• Management informationManagement information• Utilization of resources efficientlyUtilization of resources efficiently

Audit ReasonsAudit Reasons

Four areas to ask about the CONTRACTFour areas to ask about the CONTRACT

Effectiveness – best meeting of objectivesEffectiveness – best meeting of objectivesEconomy – best goods and services Economy – best goods and services Efficiency – best managing of contract Efficiency – best managing of contract

processprocessCompliance – policies and directives being Compliance – policies and directives being

followedfollowed

Stages of Proper Contract Stages of Proper Contract ManagementManagement

A.A. Pre- Contract planning, review, Pre- Contract planning, review, coordinationcoordination

B.B. Payment of Contract(s)Payment of Contract(s)

C.C. Performance of Contract(s)Performance of Contract(s)

D.D. Post Completion of Contract(s)Post Completion of Contract(s)

E.E. Problems of Contracts (s)Problems of Contracts (s)

Stages of Proper Contract Stages of Proper Contract ManagementManagement

A.A. Pre- Contract planning, review, Pre- Contract planning, review, coordinationcoordination

COJ’s main problem areaCOJ’s main problem area

B.B. Payment of Contract(s)Payment of Contract(s)

Some issues – contract manager should Some issues – contract manager should addressaddress

C.C. Performance of Contract(s)Performance of Contract(s)

Need business as well as legal review. Need business as well as legal review. Legal may need enhanced than just “as to Legal may need enhanced than just “as to form”form”

Stages of Proper Contract Stages of Proper Contract ManagementManagement

D.D. Post Completion of Contract(s)Post Completion of Contract(s)

Analyze what went well and what Analyze what went well and what needed improvedneeded improved

E.E. Problems of Contracts (s)Problems of Contracts (s)

Address Contractor issues ie Address Contractor issues ie Bankruptcy, Poor Performance, Bankruptcy, Poor Performance, Difficult to work with etc.Difficult to work with etc.

Stages of Proper Contract Stages of Proper Contract ManagementManagement

WRITE YOUR OWN CONTRACTS OR WRITE YOUR OWN CONTRACTS OR OTHERS WILL WRITE THEIRS FOR YOUOTHERS WILL WRITE THEIRS FOR YOU

1.) Obtain/subscribe to contracting software1.) Obtain/subscribe to contracting software2.) Include audit provision for large 2.) Include audit provision for large

contracts, need to be able to inspect their contracts, need to be able to inspect their books, ours are open.books, ours are open.

3.)If specialized contract – obtain outside 3.)If specialized contract – obtain outside specialized legal counsel/reviewspecialized legal counsel/review

4.) Do not be afraid to say NO!. Just 4.) Do not be afraid to say NO!. Just because prior contractors got Cost- plus because prior contractors got Cost- plus does not mean COJ does it now.does not mean COJ does it now.

Basic StatisticsBasic Statistics

• Contracts in general reviewed 30Contracts in general reviewed 30• Contractors in general reviewed 5Contractors in general reviewed 5• Number of “contractor jobs” 11Number of “contractor jobs” 11• $ amount of contractor jobs $ amount of contractor jobs

$1,284,916$1,284,916

Contracts in GeneralContracts in GeneralItems ReviewedItems Reviewed

• AuthorizationAuthorization• SignaturesSignatures• DatedDated• Actual Contract – Actual Contract –

Not Bid Not Bid SpecificationSpecification

• Contract TermsContract Terms

• Legal ReviewLegal Review• PaymentsPayments• Change OrdersChange Orders• Bid DocumentationBid Documentation• Final ExecutionFinal Execution• Close out Close out

ProceduresProcedures

Contract Review Contract Review StatisticsStatistics

• 19 of 30 Not dated by Mayor19 of 30 Not dated by Mayor• 11 of 30 Not signed by Counter 11 of 30 Not signed by Counter

PartyParty• 4 of 30 No contract only Bid Specs4 of 30 No contract only Bid Specs• 4 of 30 Not signed by City Officials4 of 30 Not signed by City Officials• 4 of 30 No problems4 of 30 No problems• 3 of 30 Not notarized as required 3 of 30 Not notarized as required

by contractby contract

Contract Review Contract Review StatisticsStatistics

• Several Payments not signed by city officialsSeveral Payments not signed by city officials• Change Order was found on counterparty Change Order was found on counterparty

fax not COJ documentation.fax not COJ documentation.• External service providers not signing off on External service providers not signing off on

work for payments ( engineers, architects work for payments ( engineers, architects etc.)etc.)

• Finance Department not in possession of Finance Department not in possession of change orderschange orders

• Final executed copy not in City Clerk Final executed copy not in City Clerk PossessionPossession

Larger ContractorsLarger Contractors

Asked Finance Accounts Payable staff Asked Finance Accounts Payable staff who was larger contractors. who was larger contractors. Following listedFollowing listed

Cooper ConstructionCooper ConstructionRandy CallahanRandy CallahanAlvin CrabtreeAlvin CrabtreeCameron ConstructionCameron ConstructionVan HornVan Horn

Contractor StatisticsContractor Statistics

• Cooper Cooper 2 Jobs 2 Jobs $79,161 $79,161• Callahan Callahan 1 Job (2 parts)1 Job (2 parts) $415,690$415,690• Crabtree Crabtree 4 Jobs4 Jobs $192,044$192,044• Cameron Cameron 3 Jobs3 Jobs $460,432$460,432• Van HornVan Horn 1 Job1 Job $141,590$141,590• TotalTotal 11 Jobs11 Jobs $1,284,916$1,284,916

Contractor StatisticsContractor Statistics

• 6 of 11 jobs had contracts6 of 11 jobs had contracts$749,324$749,324

or 58%or 58%• 5 of 11 jobs had NO contracts5 of 11 jobs had NO contracts

$460,432 $460,432 or 42 %or 42 %• 4 of 11 jobs were brought in over bid4 of 11 jobs were brought in over bid

$876,122$876,122 or 68%or 68%• Average amount of each contract = Average amount of each contract =

$116,811$116,811

Contractor StatisticsContractor Statistics

• Overbids totaledOverbids totaled $100,321$100,321or almost 1 entire job’s worthor almost 1 entire job’s worth

Overbidding was a result of mismeasurement Overbidding was a result of mismeasurement by City officials for contract estimates.by City officials for contract estimates.

Some estimates were over 50% off.Some estimates were over 50% off.

Red Flags and alarms should be sounding!!!!!Red Flags and alarms should be sounding!!!!!

Contract/Project Approval Contract/Project Approval ReviewReview

Purpose to enable the COJ to:Purpose to enable the COJ to:

1.) Better track the intake of new 1.) Better track the intake of new contracts or internal projectscontracts or internal projects

2.) Conduct review/approval process to 2.) Conduct review/approval process to properly identify risk and relevant properly identify risk and relevant issues issues

3.) Serve as supplemental historical 3.) Serve as supplemental historical record for Clerk and COJ’s significant record for Clerk and COJ’s significant transactionstransactions

Contract/Project Approval Contract/Project Approval ReviewReview

Project Leader/ dutiesProject Leader/ duties• Single point of contract internally and Single point of contract internally and

externally for coordination of externally for coordination of REVIEW REVIEW process – NOT CONTRACT !!!process – NOT CONTRACT !!!

• Call and conduct multidisciplinary group to Call and conduct multidisciplinary group to discuss proposed project/ contractdiscuss proposed project/ contract

• Responsible for communication among all Responsible for communication among all partiesparties

• Ensure contract/project proceeds according to Ensure contract/project proceeds according to COJ and State of Arkansas rules, laws and COJ and State of Arkansas rules, laws and regulationsregulations

• Ensure execution of applicable documentationEnsure execution of applicable documentation

Contract/Project Approval Contract/Project Approval ReviewReview

Project Leader/ dutiesProject Leader/ duties• Circulate final executed completed Circulate final executed completed

documentation to appropriate COJ documentation to appropriate COJ personnelpersonnel

• Complete Project Approval sheets to Complete Project Approval sheets to all applicable departments all applicable departments

Contract/Project Approval Contract/Project Approval ReviewReview

• THIS REVIEW DOES NOT THIS REVIEW DOES NOT CIRCUMVENT LEGISTAR AND CIRCUMVENT LEGISTAR AND NORMAL REGULAR APPROVAL NORMAL REGULAR APPROVAL PROCESS !!!!!!!!!PROCESS !!!!!!!!!

• ALL APPLICABLE PROCESSES ALL APPLICABLE PROCESSES STILL IN USE AND PLACE!!!!!!!STILL IN USE AND PLACE!!!!!!!

RecommendationsRecommendations• Contract Policy/Procedure Manual Contract Policy/Procedure Manual

10/31/200710/31/2007• Contract Review and Project Approval Contract Review and Project Approval

Policy implement – refinePolicy implement – refine• Purchase/subscribe to contracting softwarePurchase/subscribe to contracting software

AIA - Engineering is an example.AIA - Engineering is an example.• Provide Contract Terms summary sheetProvide Contract Terms summary sheet• Utilize Contract Manager Utilize Contract Manager • Final executed contracts, notice to proceed, Final executed contracts, notice to proceed,

change orders and closeout documents to change orders and closeout documents to ClerkClerk

Recommendations/ Recommendations/ ThoughtsThoughts

• Policy Manual – Guidance providedPolicy Manual – Guidance provided• Contract Approval Policy – already Contract Approval Policy – already

working with Legistar this provides working with Legistar this provides assistance in group think planning.assistance in group think planning.

• Terms summary sheet – clarifies Terms summary sheet – clarifies payment and penalty clausespayment and penalty clauses

• Department heads, And Mayor Department heads, And Mayor Responsible for details.Responsible for details.