HUD Management: Contracting Issues Need Continued Attention (Testimony,
06/05/98, GAO/T-RCED-98-222).

GAO discussed issues related to contracting activities at the Department
of Housing and Urban Development (HUD), focusing on the: (1) extent of
HUD's reliance on contractors to carry out the Department's
responsibilities; (2) weaknesses in HUD's current contracting practices,
particularly with respect to the oversight of property management
contractors; and (3) HUD's actions to address its contracting
weaknesses.

GAO noted that: (1) HUD's annual obligations for headquarters contracts
have steadily increased in recent years, growing from $213 million in
fiscal year (FY) 1991 to $376 million in FY 1996, according to HUD's
data systems; (2) furthermore, the Department will continue to rely
heavily on contractors to help carry out its responsibilities under its
2020 Management Reform Plan; (3) for instance, the plan calls for HUD to
contract with private firms for a number of functions, including
physical building inspections of public housing and multi-family insured
projects; legal, investigative, audit, and engineering services; and
activities to clean up the backlog of troubled assisted multi-family
properties; (4) GAO, HUD's Inspector General, and the National Academy
of Public Administration have identified weaknesses in HUD's contract
administration and monitoring of contractors' performance; (5) the three
HUD field offices GAO visited varied greatly in their efforts to monitor
real estate asset management contractors' performance, and none of the
offices adequately performed all of the functions needed to ensure that
the contractors meet their contractual obligations to maintain and
protect HUD-owned properties; (6) GAO's physical inspection of the
properties for which the contractors in each location were responsible
identified problems at the properties, including vandalism, maintenance
problems, and safety hazards, which may decrease the marketability of
HUD's properties, decrease the value of surrounding homes, increase
HUD's holding costs, and in some cases, threaten the health and safety
of neighbors and potential buyers; (7) HUD has recognized the need to
improve its contracting processes and has begun taking actions to
address the weaknesses that GAO and the Inspector General have
identified; (8) HUD has recently appointed a chief procurement officer
and is also establishing a contract review board; and (9) HUD is taking
steps to revise its property disposition activities which could reduce
its reliance on asset management contractors.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  T-RCED-98-222
     TITLE:  HUD Management: Contracting Issues Need Continued Attention
      DATE:  06/05/98
   SUBJECT:  Contract administration
             Contractor performance
             Privatization
             Federal property management
             Community development programs
IDENTIFIER:  HUD 2020 Management Reform Plan
             HUD HOPE VI Program
             
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Cover
================================================================ COVER


Before the Subcommittee on Human Resources,
Committee on Government Reform and Oversight
House of Representatives

For Release
on Delivery
Expected at
10 a.m.  EDT
Friday
June 5, 1998

HUD MANAGEMENT - CONTRACTING
ISSUES NEED CONTINUED ATTENTION

Statement of Stanley J.  Czerwinski, Associate Director
Housing and Community Development Issues,
Resources, Community, and Economic
Development Division

GAO/T-RCED-98-222

GAO/RCED-98-222T


(385750)


Abbreviations
=============================================================== ABBREV

  FHA -
  HUD -
  REAM -

============================================================ Chapter 0

Mr.  Chairman and Members of the Subcommittee: 

We are pleased to be here today to discuss issues related to
contracting activities at the Department of Housing and Urban
Development (HUD).  Each year, the Department purchases millions of
dollars worth of supplies and services through contracts.  However,
HUD's downsizing plans and allegations of contracting abuses have
raised concerns about the Department's ability to effectively manage
its contracting workload.  Our statement today will discuss (1) the
extent of HUD's reliance on contractors to carry out the Department's
responsibilities; (2) the weaknesses in HUD's current contracting
practices, particularly with respect to the oversight of property
management contractors; and (3) HUD's actions to address its
contracting weaknesses.  This statement is based on reports that we
issued regarding HUD's contracting activities, oversight of property
management contracts, and 2020 Management Reform Plan\1 and reports
issued by HUD's Office of Inspector General and the National Academy
of Public Administration. 

In summary, we found the following: 

  -- HUD's annual obligations for headquarters contracts have
     steadily increased in recent years, growing from $213 million in
     fiscal year 1991 to $376 million in fiscal year 1996 (in
     constant 1996 dollars), according to HUD's data systems. 
     Furthermore, the Department will continue to rely heavily on
     contractors to help carry out its responsibilities under its
     2020 Management Reform Plan.  For instance, the plan calls for
     HUD to contract with private firms for a number of functions,
     including physical building inspections of public housing and
     multifamily insured projects; legal, investigative, audit, and
     engineering services; and activities to clean up the backlog of
     troubled assisted multifamily properties. 

  -- We, HUD's Inspector General, and the National Academy of Public
     Administration have identified weaknesses in HUD's contract
     administration and monitoring of contractors' performance.  For
     example, our work on HUD's oversight of real estate asset
     management contractors, who are responsible for safeguarding
     foreclosed HUD properties, found that HUD did not have an
     adequate system in place to assess its field offices' oversight
     of these contractors.  The three HUD field offices we visited
     varied greatly in their efforts to monitor real estate asset
     management contractors' performance, and none of the offices
     adequately performed all of the functions needed to ensure that
     the contractors meet their contractual obligations to maintain
     and protect HUD-owned properties.\2 Our physical inspection of
     the properties for which the contractors in each location were
     responsible identified problems at the properties, including
     vandalism, maintenance problems, and safety hazards, which may
     decrease the marketability of HUD's properties, decrease the
     value of surrounding homes, increase HUD's holding costs, and in
     some cases, threaten the health and safety of neighbors and
     potential buyers. 

  -- HUD has recognized the need to improve its contracting processes
     and has begun taking actions to address the weaknesses that we
     and the Inspector General have identified.  For instance, HUD
     has recently appointed a chief procurement officer and is also
     establishing a contract review board.  In addition, HUD is
     taking steps to revise its property disposition activities which
     could reduce its reliance on asset management contractors. 


--------------------
\1 Procurement:  Overview of HUD's Contracting Activities
(GAO/RCED-97-132R, May 9, 1997), Single-Family Housing:  Improvements
Needed in HUD's Oversight of Property Management Contractors
(GAO/RCED-98-65, Mar.  27, 1998), and HUD Management:  Information on
HUD's 2020 Management Reform Plan (GAO/RCED-98-86, Mar.  20, 1998). 

\2 We performed audit work at the Illinois State Office in Chicago,
the Massachusetts State Office in Boston, and the Texas State Office
in Fort Worth. 


   BACKGROUND
---------------------------------------------------------- Chapter 0:1

HUD's procurement offices annually award and administer millions of
dollars worth of contracts on behalf of HUD's program offices.  This
process entails receiving descriptions of need, soliciting and
receiving offers, awarding contracts, making necessary contract
modifications, resolving disputes, and closing out completed
contracts.  The Office of Procurement and Contracts performs these
functions for headquarters offices, and the three Administrative
Service Centers (located in New York, N.Y.; Atlanta, Ga.; and Denver,
Colo.) perform them for HUD's field offices.  The major types of
goods and services procured by headquarters include information
technology hardware and software, mortgage-accounting and
claims-processing services, advertising for the sale of HUD's
properties, and various professional, technical, and administrative
management support services.  The typical goods and services
purchased by the field offices include real estate management
services and mortgage insurance-related activities, such as mortgage
credit analyses, appraisals, and mortgage insurance endorsement
processing. 


   HUD'S PLANS INCLUDE CONTINUED
   RELIANCE ON CONTRACTORS
---------------------------------------------------------- Chapter 0:2

HUD's staffing levels decreased from 12,823 in 1993 to 9,200 in 1998. 
While HUD has been downsizing, its annual obligations for
headquarters contracts have steadily increased.  According to HUD's
data systems, the annual contract obligations at HUD's headquarters
grew from $213 million in fiscal year 1991 to $376 million in fiscal
year 1996 (in constant 1996 dollars).  No historical data are
available for field office contracting activities.\3

HUD's 2020 Management Reform Plan and supporting documents indicate
that the Department's reliance on contractors to help carry out its
responsibilities will remain significant.  For instance, the plan
calls for HUD to contract with private firms for a number of
functions, including physical building inspections of public housing
and multifamily insured projects; legal, investigative, audit, and
engineering services; and activities to clean up the backlog of
troubled assisted multifamily properties.  Previously, physical
inspections of multifamily projects were carried out by HUD
personnel, mortgagees, and regional contractors.  The plan also
encompasses the potential use of contractors to manage construction
under the HOPE VI program.\4 Finally, the 2020 reforms call for
transferring the Office of Housing's contract administration
activities for its rental assistance programs to contract
administrators.  The new arrangement would be similar to the process
under the Office of Public and Indian Housing's rental assistance
programs.  Currently, approximately 1.1 million assisted rental units
are administered by the Office of Housing under contracts with
project owners.  The Office of Housing performs the role of contract
administrator and makes monthly rent payments to owners on behalf of
eligible families.  Under HUD's proposal, these activities would be
carried out directly by contractors (often, housing finance agencies
or housing authorities) instead of HUD employees. 


--------------------
\3 HUD used to maintain contracting data at each location that
performed contracting.  We found that the data varied considerably in
terms of its completeness and reliability.  In 1997, HUD implemented
a new procurement system that combined the Department's headquarters
and field procurement systems.  We have not reviewed the reliability
of this consolidated procurement system. 

\4 The HOPE VI program provides funds for, among other things, the
demolition, rehabilitation, and construction of public housing. 


   WEAKNESSES EXIST IN HUD'S
   CONTRACTING PRACTICES
---------------------------------------------------------- Chapter 0:3

We, HUD's Inspector General, and the National Academy of Public
Administration have identified weaknesses in HUD's contracting
practices.  For example, our review of HUD's oversight of real estate
asset management (REAM) contractors, who are responsible for
safeguarding foreclosed HUD properties, found that HUD did not have
an adequate system in place to assess its field offices' oversight of
these contractors. 


      WEAKNESSES EXIST IN HUD'S
      OVERSIGHT OF REAM
      CONTRACTORS
-------------------------------------------------------- Chapter 0:3.1

Our audit work found that HUD does not have a system in place for
monitoring its field offices' administration of REAM contracts.  To
safeguard and maintain the approximately 30,000 properties that HUD
has in its inventory at any given time, HUD obtains the services of
REAM contractors.  These contractors are to secure and inspect the
properties, report their condition to HUD, notify interested parties
of HUD's ownership, perform exterior maintenance, and ensure that the
properties are free of debris and hazardous conditions.  REAM
contractors are therefore essential to HUD's achieving its goal of
returning these properties to private ownership as soon as possible,
while obtaining a maximum sale price for HUD.  HUD's guidance makes
headquarters staff responsible for overseeing the administration of
REAM contracts.  Specifically, the guidance requires regional offices
to ensure that field offices are monitoring REAM contractors and
requires headquarters staff to review regional offices' oversight
actions through regional reviews.  We found, however, that
headquarters staff have not been reviewing the field offices since
HUD reorganized its field office structure in 1995 and eliminated the
regional offices.  According to HUD Single-Family Property
Disposition officials, the regional offices' oversight function was
never absorbed into headquarters after the regional offices were
eliminated.  Also, after the reorganization, HUD's guidance was not
updated to ensure that the administration of REAM contracts was
monitored by headquarters. 

In addition, HUD's field office staff are not consistently providing
adequate oversight of REAM contractors.  We believe this lack of
oversight contributed to some of the poor property
conditions--ranging from graffiti and debris to imminent safety
hazards--that we saw when we visited 66 HUD properties.  Such
conditions can decrease the marketability of HUD's properties,
decrease the value of surrounding homes, increase HUD's holding costs
and, in some cases, threaten the health and safety of neighbors and
potential buyers.  Our report made recommendations to HUD for
improving its oversight of REAM contractors. 


      SOME KEY OVERSIGHT
      RESPONSIBILITIES ARE NOT
      ALWAYS PERFORMED
-------------------------------------------------------- Chapter 0:3.2

HUD's field office staff are directly responsible for overseeing REAM
contractors.  We found, however, that some key oversight
responsibilities were not always performed by staff at the three HUD
field offices we visited.  For example, HUD's field staff did not
always evaluate REAM contractors as required.  Field office staff are
supposed to evaluate the REAM contractor's performance every year in
the month prior to the contract's anniversary date.  This annual
evaluation is used to make decisions on contract extensions and, if
necessary, to act on inadequate performance.  However, at all three
field offices we visited, these evaluations were not always conducted
or were not always completed in time to provide useful information
for contract renewal decisions.  For example, one of the field
offices we visited has evaluated the REAM contractor's performance
only once since the REAM contract was awarded in June 1995, and that
evaluation was conducted several weeks after the contract had already
been extended beyond the base year.  Officials in that field office
told us that performance evaluations were not performed because they
did not have the staff resources or travel funds to visit the
contractor's office.  However, it should be noted that the REAM
contractor's office is only 37 miles from HUD's field office. 

Furthermore, in the one evaluation conducted, field office staff did
not convey the results of the evaluation to the REAM contractor, as
required.  In this evaluation, HUD cited the contractor for failing
to remove debris from some properties.  Our inspection of properties
in this field location revealed that the debris removal problem still
existed at the time of our review, more than 1 year later.  One
property had been shown by realtors eight times while it contained
debris.  In fact, a realtor noted that the only accessible entrance
to the property was blocked with furniture and debris, which was the
case when we visited the property.  During our August 1997 inspection
of 24 properties in this location, we found that most of the
properties contained either interior or exterior debris. 
Consequently, prospective buyers were sometimes viewing properties
littered with household trash, personal belongings, and other debris. 

In addition, HUD's field office staff did not always inspect the
properties managed by REAM contractors, as suggested by HUD's
guidance.  Because HUD recognizes that physical inspections are the
best method for monitoring the contractors' work, HUD's guidance
suggests that field office staff conduct monthly physical inspections
of a minimum number of properties assigned to each contractor.  To
help meet this target, the guidance allows the field offices to
contract out for property inspection services.  Without adequate
on-site inspections, HUD cannot be assured that it is receiving the
services for which it has paid.  In two of the field offices we
visited, property files contained evidence that some properties were
being inspected.  However, of the 42 property files we reviewed in
the third field office, HUD's field office staff had not inspected
any of those properties.  Field office staff told us they did not get
out to inspect properties because they did not have the travel funds
or staff resources to do so.  Subsequent to our visit, in December
1997, this field office started using contractors to make property
inspections. 

Moreover, HUD's field office staff did not always ensure that the
REAM contractors conducted property inspections and submitted
appropriate reports for HUD's review.  HUD's guidance requires REAM
contractors to submit initial inspection reports within 5 working
days of being notified that a property has been assigned, but it
offers no specific guidance on the submission of routine inspection
reports.  The REAM contractor's submission of initial and routine
inspection reports is essential for HUD to determine its marketing
strategy for the properties and to mitigate potential losses to the
properties.  For example, the initial inspection reports, along with
appraisals, are the primary tools for determining the repairs that
must be made and whether the property meets certain standards that
would allow it to be sold with HUD-insured financing.  At the three
offices we reviewed, the requirements placed on REAM contractors for
submitting inspection reports and the extent to which the reports
were actually submitted to the field offices varied considerably. 
For example, at one location, all of the property files we reviewed
contained initial inspections, while in another location, 43 percent
of the files contained no initial inspections.  Without inspection
reports, HUD is unable to readily determine whether the contractors
are conducting inspections as required. 


      REAM'S INADEQUATE
      PERFORMANCE AND WEAKNESSES
      IN HUD'S OVERSIGHT
      CONTRIBUTE TO POOR PROPERTY
      CONDITIONS
-------------------------------------------------------- Chapter 0:3.3

At all three locations that we visited, we found instances where
properties were not maintained as required by the REAM contracts. 
During our inspection of approximately 20 properties in each
location, we identified properties that (1) were not properly
secured, (2) had physical conditions that did not match those that
the REAM contractor had reported to HUD, or (3) had imminent hazards. 

For instance, of the 66 properties we visited in all three locations,
we found that approximately 39 percent were not sufficiently secured
to prevent access to the property.  The failure to properly secure
properties can lead to trespassing, vandalism, and the property's
deterioration.  In fact, we visited unsecured properties that had
broken windows, graffiti, and exposed walls in the bathrooms where
valuable copper piping had been ripped out. 

In addition, we found physical conditions that did not match those
that the REAM contractors had reported to the three HUD field offices
we visited.  For example, one property contained animal feces, fur,
and personal possessions, while the contractor's inspection report
indicated that the house was free of debris.  If contractors do not
accurately report on the condition of properties, HUD may lack vital
information on which to make disposition decisions and to address
safety hazards.  As a result, the government may sell the property
for less than it is worth or incur unnecessary holding and
maintenance costs because it is not marketable. 

Furthermore, almost 71 percent of the properties we visited in one
field office, and about 37 percent in another, contained imminent
hazards, such as broken or rotting stairs.  Inspection reports
submitted to HUD for one property noted that the front steps were
dangerous--a condition warranting immediate repair by the contractor. 
Nonetheless, when we inspected the property about 3 months after the
contractor initially reported the problem, the stairs still had not
been repaired.  Other imminent hazards that we saw included a
refrigerator with the door intact on a back porch and properties
containing household waste, food, soiled diapers, paints, and
solvents.  The failure to address imminent hazards endangers would-be
buyers, as well as neighbors, and puts the government at risk of
litigation. 

On the basis of our review of files and properties in the three
locations, we found that the properties were generally in better
condition in the locations where staff more actively monitored the
contractors' performance.  We recognize, however, that the condition
of the properties is not totally attributable to HUD's oversight of
the contractors.  Other factors can contribute to the condition of
the properties, including the overall quality of the contractor's
work and the susceptibility of the neighborhood to crime and
vandalism. 


      OTHER WEAKNESSES EXIST IN
      HUD'S CONTRACTING
-------------------------------------------------------- Chapter 0:3.4

We, the Inspector General, and the National Academy of Public
Administration have identified other weaknesses in HUD's contracting
with respect to the Department's procurement systems, needs
assessment and planning functions, and oversight of contractors'
performance. 

  -- Both we and the Inspector General found that HUD's ability to
     manage contracts has been limited because its procurement
     systems have not always contained accurate critical information
     regarding contract awards and modifications and their associated
     costs.  Although HUD recently combined several of its
     procurement systems, the new system is not yet integrated with
     HUD's financial systems, thus limiting the data available to
     manage the Department's contracts. 

  -- The Inspector General reported in September 1997 that (1)
     inadequate oversight of contractors' performance has led HUD to
     pay millions of dollars for services without determining the
     adequacy of the services provided and (2) many HUD staff had a
     poor understanding of their contract management roles and have
     not always maintained adequate documentation of their reviews of
     contractors.  This situation limits assurances that adequate
     monitoring has occurred.\5

  -- In a May 1997 preliminary report on the contracting activities
     of HUD's Federal Housing Administration (FHA), the National
     Academy of Public Administration identified a variety of problem
     areas associated with the procurement process, including the
     fact that procurements took too long; FHA's oversight of
     contracted services was inadequate; and FHA sometimes used
     contracting techniques that limited competition.\6 The Academy
     is in the process of carrying out a more in-depth review of
     FHA's contracting activities and is also reviewing procurement
     practices in other parts of HUD. 

In a December 1997 report, HUD's Inspector General noted that a
potential reliance on contractors as a means of supplanting HUD staff
may not be in the best interests of HUD and the taxpayers.\7 The
report noted that HUD relies heavily on contractors to perform
studies, design systems, administer functions, and develop plans and
strategies but has made little effort to date to formally evaluate
the effectiveness and cost/benefits of its contracted work. 


--------------------
\5 HUD Contracting, HUD, Office of Inspector General, 97-PH-163-0001
(Sept.  1997). 

\6 A Preliminary Review of Federal Housing Administration Acquisition
Activities, National Academy of Public Administration (May 1997). 

\7 Department of Housing and Urban Development, Office of Inspector
General Semiannual Report to the Congress as of September 30, 1997
(Washington, D.C., HUD, Dec.  29, 1997). 


   HUD HAS TAKEN STEPS TO IMPROVE
   ITS CONTRACTING OPERATIONS
---------------------------------------------------------- Chapter 0:4

HUD has recognized the need to improve its contracting processes and
has begun taking actions to address weaknesses that we and the
Inspector General have identified.  In its latest self-assessment of
management controls under the Federal Managers' Financial Integrity
Act,\8 HUD added contracting as a new material weakness.  The 2020
plan also includes an effort to redesign the contract procurement
process. 

HUD has recently appointed a chief procurement officer who will be
responsible for improving HUD procurement planning and policies,
reviewing and approving all contracts of over $5 million, and
implementing recommendations that may result from an ongoing study of
HUD's procurement practices by the National Academy of Public
Administration.  HUD is also establishing a contract review board,
composed of the chief procurement officer and other senior HUD
officials, that will be responsible for reviewing and approving each
HUD program office's strategic procurement plan and reviewing the
offices' progress in implementing the plans.  In addition, HUD is
establishing standard training requirements for the HUD staff
responsible for monitoring contractors' progress and performance by
including standards relating to monitoring contractors in its system
for evaluating employees' performance.  HUD is also planning actions
to integrate its procurement and financial systems. 

In addition, HUD officials told us that they are planning to take
actions to strengthen the Department's oversight of REAM contractors
and to involve headquarters in ensuring that field staff effectively
oversee the contractors' performance.  Furthermore, with respect to
the problems found in property disposition contracting, single-family
housing officials have proposed changes that they anticipate would
result in only a minimal inventory of properties and therefore only a
limited need for REAM contractor services.  Specifically, according
to HUD Single-Family Housing Division officials, the Department plans
to sell the rights to properties before they enter HUD's inventory,
thus enabling them to be quickly disposed of once they become
available.  Although the details of these sales, which HUD refers to
as "privatization sales," remain to be developed, HUD envisions that
properties would be pooled on a regional basis and purchased by
entities that could use their existing structures to sell the
properties in the same way that the Department currently does,
namely, through competitive sales to individuals.  In addition, as a
part of its budget request for fiscal year 1999, HUD proposed new
legislation to allow the Department to take back notes when a claim
is paid, rather than requiring lenders to foreclose and convey
properties.  HUD would then transfer the note to a third party for
servicing and/or disposition. 

We view the actions that HUD has taken to improve its contracting
procedures as positive steps.  However, some key issues concerning
their implementation are still being finalized, such as the precise
role of the contract review board in overseeing HUD's procurement
actions, and HUD's ability to have the necessary resources in place
to carry out its procurement responsibilities effectively.  Perhaps
even more important is the extent to which these actions will lead to
a change in HUD's culture, so that acquisition planning and effective
oversight of contractors will be viewed by both management and staff
as being intrinsic to HUD's ability to carry out its mission
successfully. 


--------------------
\8 U.S.  Department of Housing and Urban Development FY 1997
Accountability Report, Office of Chief Financial Officer. 


-------------------------------------------------------- Chapter 0:4.1

Mr.  Chairman this concludes our statement.  We would be pleased to
respond to any questions that you or Members of the Subcommittee may
have. 


*** End of document. ***