Audit of Contracting for Services (June 2004)
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Audit of Contracting for Services (June 2004)

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AUDIT OF CONTRACTING FOR SERVICESJUNE 2004Department of Foreign Affairs and International TradeOffice of the Inspector GeneralAudit Division (SIV)Table of ContentsE X E C U T IV E S U MMA R Y ............................................... 1INTRODUCTION ..................................................... 4S C OP E OF A U D IT A N D C R IT E R IA ....................................... 52.1 Scope of Audit 52.2 Audit Criteria and Work Undertaken .............................. 6A U D IT F IN D IN GS..................................................... 83.1 Response to Previous Recommendations ......................... 83 .2 C o n tra c tin g S e rv ic e s S e c tio n ................................... 93.3 The Departmental Contract Review Board/Contract Review Boards .... 133.4 Information Management and Technology Bureau .................. 163 .5 Ora l C o mmitme n ts .......................................... 2 03.6 Management Information System ............................... 213 .7 C o n tra c tin g a t Mis s io n s....................................... 2 23 .8 C o n tra c t T ra in in g ........................................... 2 43.9 Departmental Processes for Contracting for Services ............... 26A N N E X 1 .......................................................... 2 9A N N E X 2 3 0ADDENDUM ........................................................ 31EXECUTIVE SUMMARYThe Department has made significant ...

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AUDIT OF CONTRACTING FOR SERVICES
JUNE 2004
Department of Foreign Affairs and International Trade Office of the Inspector General Audit Division (SIV)
Table of Contents
EXECUTIVE SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
SCOPE OF AUDIT AND CRITERIA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 2.1 Scope of Audit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 2.2 Audit Criteria and Work Undertaken . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
AUDIT FINDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 3.1 Response to Previous Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . 8 3.2 Contracting Services Section . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 3.3 The Departmental Contract Review Board/Contract Review Boards . . . . 13 3.4 Information Management and Technology Bureau . . . . . . . . . . . . . . . . . . 16 3.5 Oral Commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 3.6 Management Information System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 3.7 Contracting at Missions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 3.8 Contract Training . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 3.9 Departmental Processes for Contracting for Services . . . . . . . . . . . . . . . 26
ANNEX 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
ANNEX 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
ADDENDUM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
EXECUTIVE SUMMARY The Department has made significant headway in instilling rigour in the management of its contracting for services in the last five years, but there are major and minor shortcomings that still need to be addressed. Managerial accountability and contracting practices have continued to improve since benchmark conditions were described in the previous SIV audit of contracting for services in 1998. Such contracting is taken much more seriously in the Department today for both internal accountability reasons and the external values-and-ethics-oriented scrutiny that is impacting on the Public Service in general. A control framework is in place in the Department that adds rigour to the management of the contracting process. Its elements are: a contracting Centre of Expertise (Contracting Services Section -SPPG (formerly SMFG)); a Departmental Contract Review Board (DCRB); Contract Review Boards (CRBs) at Headquarters and missions; and structured ongoing training in the area of contract management. In terms of practice, there is now a broader pool of potential suppliers invited to bid on the larger departmental contracts, i.e. those above the $84,4001NAFTA (North American Free Trade Agreement) threshold. Since April 2000, use of MERX (Government electronic bidding system) has increased by 38.7%, with a corresponding decrease in the traditional method whereby only selected suppliers are invited to bid directly. The management of service contracts continues to operate without a dedicated information system. In consequence, it is not possible to determine with precision the volume of contracting activity, although the Department’s financial system (IMS) shows $147.7 million spent in 2002/03. The Department’s annual report to central agencies is incomplete in that the contracting activity reported relates only to those fund centres that respond in a variety of fashions to an annual call letter. It is anticipated that this situation will be resolved when the new version of IMS is released in November 2004, which will incorporate the appropriate mandatory controls and records. The Department’s largest user of service contracts is the Information Management and Technology Bureau (SXD) which let 269 contracts in fiscal year 2002-03 having a value, including amendments, of $19 million. Major projects accounting for these higher than normal numbers are the Infrastructure Renewal Project and the InfoBank Project. This has meant that a third of SXD’s workforce is under contract, suggesting that savings could be realized if SXD would explore converting some of these resources to Full-Time Equivalents (FTEs). Some consultants have been under contract with SXD since 1996. SXD has established as a priority the conversion of contractors to FTEs, where appropriate, in its Human Resources Strategic Plan for this year. Of the 269 contracts, 46 were reviewed by the DCRB because of their value.
1 Amended to $89,000 effective January 1, 2004. 1
This represented 53.2 percent of the total value of the contracts let by SXD. The traditional competitive method was employed in all 46 cases. In many cases, however, only two bids or less were received and in 18 cases, the winning firm was the one representing the incumbent contractor. Based on these findings, it is recommended that the use of MERX be explored, which could lead to a larger pool of qualified suppliers bidding on these contracts and, therefore, result in a more competitive process. SPPG, the Centre of Expertise, is an important mechanism to improve contract management. In keeping in line with modern comptrollership and to reduce risks, an in-house intranet Web site was developed which hosts more than 40 documents pertaining to policy issues, templates and guides. It also contains an innovative automated program, designed to facilitate the complex issues of intellectual property. The Web site enables departmental delegated officials with contracting authority to conduct procurement and contracting processes more efficiently. The Section has had difficulty in staffing and retaining employees, which has impacted its capacity to monitor contracting activity and to provide advisory services. Some clients would like SPPG to be more service and solutions oriented. Others complain about timeliness of service and sometimes perceive SPPG as overly challenging. Having service standards as a reference point for performance would help clients better understand the role of SPPG, its impact in the Department, and what they can expect. It would also clarify the clients responsibilities when contracting. A strategic plan, together with an annual work plan, is also needed. The DCRB’s advisory role can be strengthened with the addition of the Director General of the newly formed Headquarters Administration Bureau (SPD) and membership from Bureaux most actively engaged in contracting (SXD, SRD and BCD). This will promote more effective comptrollership within the Department. The DCRB recognizes the fine line that exists between ensuring due diligence and interfering in management processes, but has felt hamstrung when encountering issues dealing with the integrity of the selection process. It is suggested that the DCRB report to the Management Committee. The mandate of the Headquarters CRBs needs to be better defined and understood. Each CRB functions differently and their membership varies. Although contractor selection rests with the manager, some CRBs are making these decisions. The idea of a CRB retreat to standardize processes and share lessons is welcomed. There has been an increase in the use of oral commitments, which then must be followed up with Confirming Orders in lieu of written contracts for services with suppliers. Since 1999, 32 cases have amounted to over $500,000, 21 taking place in 2003. Confirming Orders are not intended to be a substitute for established contracting procedures, and the circumstances surrounding their use violate contracting regulations. These cases relate to only a few Bureaux in the Department.
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Although most missions have active CRBs (25 of the 30 surveyed), the dollar value thresholds for their use vary, and only 20 of them use the managerial checklist. CRBs are not always reviewing OGD contracts even though they are issued in the name of the Mission. Only one-third of the missions surveyed responded to the last call letter on contracting activity. Three missions are not aware of the departmental contracting Web site and missions generally are not using SPPG for advice.
Management and staff involved in contracting continue to lack the requisite training. Contracting course participants have concerns with the length of the courses and the fact that they are not being delivered by professional trainers. Course content developed by SPPG received high marks.
A sample of 50 Department-wide contract files ($4.47 million) were examined at Headquarters, including 26 which were “sole-sourced”, 19 which employed the traditional competitive process, and five which were call-ups against a Standing Offer or Supply Arrangement. The review indicated that contracting rigour has not completely reached everyday practice: the effectiveness of the selection process is difficult to gauge owing to the lack of documentation in files; the managerial checklist is seldom used; many contracts connote an employer-employee relationship, with little or no risk assessment undertaken; rationale for using contractors over other forms of engagement is seldom documented; ten contracts were signed after work had started; 14 contracts, because of the amended values, suggest poor planning; and there is no measurement of contractors’ performance.
RECOMMENDATION STATUS
This report contains 24 recommendations. Headquarters management has reported to each recommendation indicating the action already taken or decision made, including the steps to be undertaken in the future. Headquarters, in general, agrees with all recommendations. Given the responses received, one recommendation has been fully implemented and the others are in the process of being actioned. In most cases, a specific time frame for their implementation has been indicated.
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INTRODUCTION 1.1.1 An audit of contracting for professional and other services was conducted during the period September to November 2003. This audit is being carried out as a result of the Treasury Board Decision of April10, 2003 that was part of the response to the Department’s request for ratification of an amendment to a DFAIT contract. This Decision indicated that, in view of the circumstances surrounding the submission (contract splitting), the Treasury Board Ministers expected DFAIT to fulfill an earlier commitment (made in 2001) to conduct a comprehensive audit of service contracts in 2003. 1.1.2 In recent months, the federal public service has been under intense scrutiny from a Parliamentary Committee, the media and the Office of the Auditor General regarding financial management and contracting practices. The Secretary of the Treasury Board in a communique to all Senior Financial Officers emphasized that: “It is essential that there be a robust regime with respect to financial and contract management supported by clearly identified processes for effective comptrollership, and that you work with all the managers in your department to ensure that they exercise their responsibilities properly.”
1.1.3 In 1998, the Audit Division (SIV) conducted an audit on contracting for services that identified several shortcomings in the contracting process. These included an absence of a corporate focus for the contracting function, a deficient managerial information system, lack of standardized contracting procedures and a need for more meaningful challenge mechanisms at the delivery level to ensure receipt of best value for money and respect for the Government’s contracting policies. In February 2000, taking into account many of the recommendations of the 1998 audit, DFAIT submitted a Plan to implement a strategy on contract reform to the Treasury Board Secretariat. In the autumn of 2000, the International and Domestic Financial Management and Contracting Services Division (SMF) commissioned a consultant to assess the contracting framework in DFAIT and assess its compliance with TB guidelines and departmental requirements. In 2001, SIV, in a follow-up audit, concluded that it would be more appropriate to conduct a full comprehensive audit in 18 months time (i.e. 2003) to allow the intended corrective actions identified in the Plan to be fully implemented. This report is the result of that full comprehensive audit.
1.1.4 In fiscal year 2002-2003, according to the Department’s financial system (IMS), the Department spent $147.7 million on service contracts of which $53.7 million was contracted through PWGSC.
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2.1 Scope of Audit
SCOPE OF AUDIT AND CRITERIA
2.1.1 The scope of this audit focussed on contract management with emphasis on the integrity of the selection process and the role and functioning of the Contracting Services Section (SPPG, formerly SMFG), the Departmental Contract Review Board (DCRB), and the Contract Review Boards (CRBs) in each Branch. Further, the audit determined if contracts had been awarded and administered in accordance with established legislation, regulation, policies and procedures, and carried out with appropriate prudence and probity. The audit did not examine goods and construction contracts. The audit focussed mainly on contracting activities at Headquarters although thirty missions were contacted by telephone to determine, amongst other things, if there was a functioning CRB in place. The missions’ relationship with SPPG was also reviewed.
2.1.2 The audit work concentrated primarily on:
Following up on the 1998 audit recommendations, assessing if the contract reform initiatives have been fully realized, and if the suggestions contained in the SMF Consultant’s Report have been implemented;
Assessing the management control framework, including the role and function of the Contracting Services Section (SPPG), the DCRB, the Area Management CRBs and Mission CRBs;
Evaluating the resources allocated to the contracting process, including workload assessment, training requirements and actual training offered;
Assessing management information systems and corporate analysis capability, including data input, information gathering and reporting; and,
Determining if service contracts are being managed in accordance with the principles of Modern Management/Comptrollership and in compliance with the Financial Administration Act, Government Contract Regulations and departmental contracting policy. This included reviewing the awarding of contracts to ensure that justification is included on the contract file for non-competitive contracts and that the competitive process is conducted in an open, fair and transparent manner.
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2.2 Audit Criteria and Work Undertaken
2.2.1 Audit Criteria
The audit criteria used for this audit were drawn from: The Treasury Board Secretariat Contracting Policy which includes the Government Contracts Regulations (GCRs); current DFAIT contracting policies; the North American Free Trade Agreement (NAFTA); the Canadian International Trade Tribunal Act (CITT); the Values and Ethics Code for the Public Service; and modern management practices.
2.2.2 Work Undertaken The work conducted during the audit included: • Reviewing the above audit criteria; • Reviewing DFAIT audit reports (1998 and 2001), the SMF consultant’s report on contracting, DFAIT’s reform paper on contracting and a recent CIDA audit report on Sole Source Contracting; • Reviewing the contracting Web sites of DFAIT, PWGSC, TBS and MERX (Government Electronic Tendering System); • Interviewing the four employees of the Contracting Services Section (SPPG), the Director of SMF, the Chair of the Departmental Contract Review Board, all nine AMAs chairing Contract Review Boards, the SXMP Senior Procurement Officer, two CAM contracting staff, the BCD Operations Officer, three SRBE officers and the Directors of SMS and CFSM. • Interviewing the CIDA Contracts Manager (Americas), a DND Procurement Officer and a Case Officer at CITT; • Contacting Management/Consular Officers at 30 missions by telephone regarding their contracting practices; • Reviewing a sample of 50 contract files representing a cross-section of departmental service contracting activity;
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Consulting with the TBS Policy Advisor to Departmental Senior Financial Officers (SFOs) with respect to the role of the SFO in contracting management; and,
Consulting with PWGSC Policy Director regarding NAFTA exemptions.
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AUDIT FINDINGS
3.1 Response to Previous Recommendations
3.1.1 Many of the recommendations contained in the 1998 SIV audit report and the SMF Consultant’s Report have been implemented. The Department has instituted a corporate centre of expertise” with the etsablishment of the Contracting Services Section (SPPG) headed by a Deputy Director (PG-06) who is a professional Contracts Officer. This Section has recently moved from the Corporate Finance, Planning and Systems Bureau (SMD) to the newly formed Headquarters Administration Bureau (SPD), reporting to the Director of the Contracting and Procurement Division (SPP). Contract review mechanisms have been implemented at the departmental level. At Headquarters, a Departmental Contract Review Board (DCRB) has been established to review all contracts above the North American Free Trade Agreement NAFTA threshold. SPPG is the Secretariat and Advisor to the DCRB. Contract Review Boards (CRBs) at the Bureau and Branch levels have also been established which are chaired by the Area Management Advisors (AMAs) to review contracts below the NAFTA threshold. Mission Contract Review Boards (CRBs) run independently from Headquarters but mirror that of the DCRB for all contracts both below and above the NAFTA threshold. SPPG provides advice and guidance to all Contract Review Boards, when required.
3.1.2 A significant recommendation of both the SIV Audit Report and the SMF Consultant’s Study has yet to be implemented. There continues to be no reliable management information on contracting activity in the Department. As a consequence, the Department is unable to fully meet its regulatory contracting reporting obligations to central agencies. Currently, the Department attempts to satisfy these requirements through an annual call letter to departmental fund centres asking them to report on their volume and dollar value of contracting. Unfortunately, many fund centres, including missions, fail to respond to the call letter, with the result that the Department’s report to the central agencies is both inaccurate and incomplete. Good comptrollership calls for properly integrated business processes to be in place. This includes systems to allow for effective monitoring, review and reporting with respect to financial management and contracting management functions. Without such systems, SPPG is unable to fully carry out its mandated requirement to monitor and report accurately on contracting activity within the Department.
3.1.3 Based on SPPG’s Methods of Procurement Report for contracts over the $84,400 NAFTA threshold and on contracts submitted to the DCRB, there appears to be a broader pool of potential suppliers being invited to bid on the Department’s larger contracts. The report indicates that there has been an increase of 38.7% in the usage
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of MERX over the period April 2000 to October 2003 with a corresponding decrease of 41% in the traditional competitive method, which consists of soliciting three or more bids directly with potential vendors. The total number of cases presented to the DCRB has increased steadily from 34 in 2000 to 111 in 2002. Nevertheless, sole source contracting as a method of procurement has been increasing by approximately 5% per year over the past two fiscal years. Due to the lack of a reliable contracting information system, there has not been any measure of the procurement methods used for contracts below the NAFTA threshold. Since 2002, SXD has maintained a database that keeps track of all professional services contracts processed through SXM.
3.1.4 This audit is being conducted partly in response to the Treasury Board Decision of April 10, 2003 whereby TBS was concerned with a contract splitting case in the Communications Bureau (BCD). The audit found that BCD has improved its contracting processes. BCD now has supply arrangements in place and rely on several qualified firms for the acquisition of transcription services for the Department. Recently the Bureau placed a request for standing offer on MERX for 40 days. Moving to standing offers is expected to be more cost beneficial than the existing supply arrangements. BCD's resourcing efforts resulted in greatly reducing its total number of contracts by means of hiring term employees to do tasks previously done by contractors. Contractors are no longer allowed to work on site in BCD offices. These findings complement the review conducted by SMD on specific activities in the areas of sponsorship, advertising and polling (public opinion research) which largely focussed on BCD. The report was issued to Treasury Board on June 28, 2002 and demonstrated that DFAIT is meeting its obligations in the areas specifically identified in that review.
3.2 Contracting Services Section (SPPG)
3.2.1 SPPG, which now reports to the Director of SPP, was established in 2000 and is headed by a Deputy Director (PG-06) who is supported by two Senior Contracting Advisors (PG-04s) and a Data Base/Informatics Advisor (AS-01). The current Deputy Director is the third in the Section’s short history. The Senior Contracting Advisors and Informatics positions are new as of January 2003. One Senior Contracting Advisor left DFAIT during the course of this audit,thus reducing the capacity of the Section.
3.2.2 The Section has a departmental-wide mandate to advise and assist in the preparation of all contracts regardless of value. The ADM Corporate Services’ Reform Memorandum on Contracting in January 2000 describes the Section as a “walk-in contracting service centre”. In addition toits advisory function, SPPG is responsible for, inter aliato Treasury Board, assisting with the development of training, reporting courses, maintaining the Department’s intranet site on contracting, serving as Secretary
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