[Evaluation of Office of Insular Affairs Oversight of Capital Improvement Projects, Commonwealth of the Northern Mariana Islands]
[From the U.S. Government Printing Office, www.gpo.gov]

Report No. P-GR-NMI-0004-2005

Title: Evaluation of Office of Insular Affairs Oversight of Capital
       Improvement Projects, Commonwealth of the Northern Mariana
       Islands 	



Date:  June 8, 2007


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This file contains an ASCII representation of an OIG report.  No attempt has been made to display graphic images or illustrations.  Some tables may be included, but may not resemble those in the printed version.  A printed copy of this report may be obtained by referring to the PDF file or by calling the Office of Inspector General, Division of Operations Support, at (703) 487-5443.
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United States Department of the Interior
Office of Inspector General
Washington, D.C. 20204



Memorandum

To:  		David B. Cohen
		Deputy Assistant Secretary for Insular Affairs

From:		Earl E. Devaney/Signed/
		Inspector General

Subject: 	Evaluation of Office of Insular Affairs Oversight of Capital Improvement Projects, Commonwealth of the Northern Mariana Islands
		(No. P-GR-NMI-0004-2005)
		

Our evaluation of the Commonwealth of the Northern Mariana Islandsï¿½ (CNMI) Saipan Public Health Facility Project (Project) raises serious concerns about the quality of oversight exercised by your office over CNMI capital improvement projects (CIP) in general and this Project in particular.  Our objective was to evaluate CNMIï¿½s management of the Project and to identify opportunities for improvement.  Because of serious management deficiencies, however, we also evaluated your officeï¿½s oversight of the Project.  
        
We undertook our evaluation, in cooperation with the CNMI Office of the Public Auditor, at the request of the Legislature of CNMI, which was alarmed by the Projectï¿½s cost overruns and delays.  The attached report to the CNMI Governor and President of the CNMI Senate (Appendix 4) identifies the audit objective, scope, methodology, and management deficiencies, as well as opportunities to significantly improve CNMIï¿½s contracting performance and results.  These opportunities may not be realized, however, without the active involvement of your office. 
        
The Office of Insular Affairs (OIA) has stated that CIPs are the ï¿½building blocks for self-sufficiency in the insular areas,ï¿½ thereby creating a clear nexus between the success of a CIP and the success of your office in meeting the Secretaryï¿½s mandate to establish sound financial practices, increase economic development, and demonstrate federal responsiveness in insular area communities.  As one of the largest and most significant CIPs underway in CNMI, the Project merited your close oversight to help ensure its success.  Instead of proactive oversight, however, your office failed to heed obvious red flags, which indicated serious Project management problems, and to use the tools at your disposal to keep the Project on target.  Specifically:

  *Troubled Project History.  Since funding was initiated 10ï¿½years ago (see Figure 1), the $17.6ï¿½million Project has experienced significant problems as it evolved from a hemodialysis center to a state-of-the-art health facility.  From the outset, CNMIï¿½s Department of Public Works staff lacked the experience and expertise to contract for and manage a project of this size.  Deficiencies included inadequate evaluations of contract proposals and price negotiations, unsupported sole source procurements, and unaddressed contractor nonperformance.  The result:
    
    > Questionable contractor selection.  The best qualified firms may not have been selected at the most favorable prices.  For example, the architectural and engineering (A&E) contracts were awarded absent any price or cost analysis.
    
    > Excessive costs and duplicative contracts.  CNMI issued contract modifications, without competition, for work that was not critical for a fully functioning facility.  It also contracted with two, rather than one, A&E firms and with two construction management firms because in-house expertise was not available.  When the first construction management firm failed to comply with its requirement to analyze contractor delay claims, CNMI took no action to recover costs for nonperformance, but instead issued a contract to another firm for this work.  
    
    > Disruptions, unnecessary delays, contractor claims, and ultimately a Project that may not be operable because of the failure to plan for the $5ï¿½million to $8ï¿½million needed annually to operate and maintain the Project.  

  *U.S. Army Corps of Engineers (Corps) Reports.  Asked by CNMI to look at CNMIï¿½s contracting process, the Corps issued two reports, 1 one in 2003 and another in 2005, both of which identified serious deficiencies in CNMIï¿½s contract management.  The 2003 report addressed weaknesses in CNMIï¿½s management of the CIP program, including the lack of a project team to efficiently administer the program and an experienced legal counsel to help resolve contractual issues.  These weaknesses have yet to be corrected.  The 2005 report, which evaluated the design of the public health facility, concluded that the A&E contracts lacked critical provisions to ensure quality and timely deliverables, a condition that we determined was a significant factor in CNMIï¿½s inability to resolve design problems with the initial A&E firm.  The report also recognized that CNMI lacked the necessary contracting expertise to manage large-scale CIPs and recommended that CNMI seek external assistance in the short term, while it developed long-term expertise.  


Figure 2  Photos, see PDF version - page 3
	

Warning signs, such as costly contract modifications, were clearly present throughout the life of the Project and should have prompted your office to step up its oversight to ensure that CNMI had the qualified and experienced officials necessary to administer large-scale CIPs.  Although cognizant of the problems that surfaced throughout the Projectï¿½s history, as evidenced by site visit reports by the two OIA staff located in the CNMI, your office took no action.  In fact, your office continued to allocate funds ($6.5 million to date) and reported the following in its fiscal year 2006 Budget Justification to the Interior and Related Agencies Appropriations Subcommittees:

    CNMI has made great strides to strengthen the governmentï¿½s ability to effectively manage infrastructure grants and accelerate the spending of grant funds, and it has been especially diligent by assigning capable individuals to manage grant funds and by supporting project manager positions to monitor projects. 

Contrary to OIAï¿½s assertions, our evaluation disclosed that CNMI mismanaged the Project to the extent that the new facility may not be fully operational and that OIA now needs to recover its portion of over $1.2 million of questioned costs identified during our evaluation (see Table 1).  Had OIA heeded the early warning signs that the Project was in jeopardy, it could have mitigated the problems that surfaced and helped to ensure that CNMI had qualified and experienced officials administering the Project.  
        

	Table 1- Costs Questioned During Evaluation (see PDF version - page 4)
        
 
Necessity of Active OIA Oversight 

Given CNMIï¿½s current economic downturn and its lack of contracting expertise, your office must actively oversee CNMIï¿½s CIP program to ensure the successful completion of projects.  OIA is not using the tools it developed specifically to improve performance and accountability in the insular areas.  Your competitive allocation system, implemented in fiscal year 2005, could provide the catalyst for helping CNMI develop a contracting office with highly skilled professionals capable of managing CIP grants.  Under the system, any insular area not spending CIP funding effectively could receive less funding in the future.  OIAï¿½s 2006 Budget Justification delineates the criteria for determining CIP allocations to insular area governments.  Key criteria include: 

  > Reliability and timely completion of single audits, including resolution of findings.
  > Prudent financial management.
  > Compliance with grant reporting requirements.
  > Extent to which CIP projects fulfill economic goals and meet community needs.
  > Effective contract administration.

We found that OIAï¿½s initial CIP rating in December 2005 did not include ï¿½effective contract administrationï¿½ in its scoring sheets for all four insular areas rated.  CMNI, for example, received essentially the same level of CIP funding as the prior year, despite its highly ineffective contract administration of the Project.  The problems we found are not unique to the health facility, as CNMI followed similar practices on other CIP projects.  
        
Another management tool is imposing sanctions under Title 43 of the Code of Federal Regulations (43 CFR 12.52),2 as appropriate, for a grantee that has a history of unsatisfactory performance.  These sanctions include:  
        
 > Withholding approval to proceed from one project phase to another until receipt of acceptable evidence of contract performance.
 > Additional project monitoring.
 > Requiring the grantee to obtain technical or management assistance.

OIAï¿½s oversight failure, coupled with CNMIï¿½s poor management, has jeopardized the successful completion and operation of the Project.  A project that is not complete or usable as planned not only negates your officeï¿½s goal of helping CNMI develop an ï¿½economic backbone,ï¿½ but also endangers the quality of health care for CNMI citizens.  Without a fully functioning facility, CNMI will not be able to improve the quality of care for its sick and most vulnerable patients, among them those patients requiring life-sustaining hemodialysis.


Recommendations 

We recommend that you take actions to: 

1. Participate with CNMI in developing a CIP planning process that ensures the completion of the health facility Project and the funding of both construction and operation and maintenance costs of future CIPs.  

2. Initiate appropriate and timely sanctions, such as reducing CIP funding under the competitive allocation system, should CNMI fail to implement the corrective actions in response to our recommendations in the attached report Evaluation of Saipan Public Health Facility Project: Oversight of Capital Improvement Projects, Commonwealth of the Northern Mariana Islands (Appendix 4). 

3. Take an active role in helping CNMI develop a contracting office with professionals who have the experience and expertise to effectively manage large-scale CIPs.  This could include modeling the contracting office along the lines of federal acquisition education, training, and experience requirements.  

4. Recover OIAï¿½s portion of the questioned costs identified in Table 1 and Appendixï¿½1 of this report.  

OIA Response and OIG Reply 

Based on your January 22, 2007 response (Appendix 2) and subsequent discussions with OIA staff, we consider Recommendations 1, 2, and 4 to be resolved but not implemented and Recommendation 3 to be unresolved.  The status of audit recommendations is shown in Appendix 3.
        

Recommendation 1

In your response you stated that the CNMI health facility is ï¿½substantially completeï¿½ and that ï¿½OIA will continue to work closely with the CNMI Government to ensure satisfactory completion of the Project.ï¿½  You also stated that OIA, CNMI Government, and Office of the Solicitor have discussed possible solutions to develop the resources necessary to operate and maintain all CIPs on a long-term basis, including developing ï¿½a maintenance account funded by a percentage of the CNMI Governmentï¿½s annual CIP allocationï¿½ to cover operation and maintenance (O&M) costs of CIPs and ï¿½allocating building space for private-sector use to help generate revenues to cover operating costs.ï¿½  In subsequent communications with your office, staff identified the OIA official responsible for implementing the recommendation, but stated that determining a completion date would be unrealistic, as the authority to ensure funding of CIP O&M costs may ultimately rest with the Office of the Solicitor or Congress.  

  OIG Reply.  We are pleased to learn of ongoing discussions to address the important issue of ensuring long-term O&M for CIPs, particularly in the case of the health facility, which is essential to improving the quality of health care available to the residents of CNMI.  While OIA may not have the final decision-making authority to determine how to cover long-term O&M for CIPs, it is the agency charged with carrying out the Secretaryï¿½s mandate to assist in the economic development of the insular areas and to be responsive to their needs.  As such, OIA is the logical agency to pursue resolution of the issue of O&M funding for CIPs.  Moreover, regardless of who makes the final decision, OIA will be a vital player in that decision, given its special relationship with and knowledge of the insular areas.  Finally, we believe that the urgency of addressing long-term O&M costs requires a timetable, particularly when considering the near disastrous effect of the failure to consider these costs on CNMIï¿½s public
  health facility, which was not completed in October 2006 as scheduled and which has not yet been opened.  We therefore request that you provide us with the target date for resolving the issue with the Office of the Solicitor and determining final decision authority.


Recommendation 2
In your response, you stated that your funding allocation process is based, in part, on a granteeï¿½s timely resolution of audit recommendations and that OIA would ï¿½incorporateï¿½ our ï¿½reportï¿½s recommendations, as applicable, into the process of allocating OIA funding.ï¿½  You also stated that over the past several fiscal years, OIA ï¿½has reduced the CNMI Governmentï¿½s CIP funding levelsï¿½ and that ï¿½an initial preparation of the budget for FY 2008 indicates a similar reduction.ï¿½  

  OIG Reply. We commend OIAï¿½s current use of the allocation process to encourage accountability in funding CIPs and request that you provide a target date for incorporating our reportï¿½s recommendations into your process for allocating CNMI funding.   
        
       
Recommendation 3
In your response, you ï¿½respectfully assert[ed] that OIA has provided appropriate and effective oversight of the Projectï¿½ and identified a number of actions taken ï¿½to help the CNMI Government to more effectively perform its contract management responsibilities.ï¿½  In addition, during subsequent communication with your office, staff indicated that OIA cannot mandate a contracting office.   

  OIG Reply.  We disagree on the effectiveness of OIAï¿½s oversight and point to the troubled history of the Project itself as proof of the failure of your office to heed obvious warning signs, such as the 2003 and 2005 Corpsï¿½ reports, and step up your oversight to keep the Project on target.  The oversight actions cited in your response primarily addressed your assistance in helping CNMI develop project and construction management expertise.  While project and construction managers, engineers, and architects may have highly developed technical skills, they generally do not possess the highly specialized contracting expertise needed to effectively manage large-scale CIPs.  Recommendation 3 reflects our findings, as well as the conclusions of both Corpsï¿½ reports, which identified serious contracting deficiencies and spoke to an urgent need to develop contracting expertise.  Without this expertise, the deficiencies identified in both our report and the Corpsï¿½ reports will continue to undermine your goal of using CIPs as the ï¿½building blocks for self-sufficiency in the insular areas.ï¿½  While your office may not be able to mandate a contracting office, it can hold CNMI accountable for implementing our audit recommendation and thereby take a proactive role in helping CNMI effectively manage large-scale CIPs.  We are therefore requesting that you reconsider the recommendation (see Appendix 3).  


Recommendation 4  
In your response, you stated that OIA did ï¿½not agree with the recommendationï¿½ and identified actions that had been taken to address the cost issues.  You also asked us to provide you with any additional information on the costs regarding the installation of air conditioning.  

  OIG Reply.  As requested, we provided supporting documents for the air conditioning costs in January 2007.  Based on your response and subsequent communications with your staff, we consider Recommendation 4 to be resolved, but not implemented (see Appendix 3).   
        


The legislation, as amended, creating the Office of Inspector General requires that we report to Congress semiannually on all audit reports issued, the monetary effect of audit findings, actions taken to implement our audit recommendations, and recommendations that have not been implemented.  The monetary effect of the findings is shown in Table 1 and Appendix 1 of this report.


Please provide a written response to this report by July 13, 2007.  The response should supply the information requested in Appendix 3.  We appreciate the cooperation shown by your office during our evaluation.  If you have any questions regarding this report, please call me at (202) 208-5745.  


APPENDIX 1
Monetary Impact 


       Finding Areas                       Questioned Costs

Installation of Air Conditioning	     $  503,151
				        
SSFM Deduction for Nonperformance                45,000

Allocation of Project Management	        103,680
Contract Costs
          
Construction Delay Claim                        588,313

                           Total             $1,240,144


APPENDIX 2
OIA Response

(see PDF version, pages 9-13)


APPENDIX 3
Status of Recommendations


Recommendations:  1 and 2
Status:  Resolved; Not Implemented 
Action Required:  Provide target dates for completion of implementation.

Recommendation: 3
Status:  Unresolved
Action Required:  Reconsider the recommendation and provide a plan identifying actions to be taken, target dates for completion, and titles of officials responsible for implementation

Recommendation: 4
Status: Resolved; Not Implemented 
Action Required:  Provide (1) documentation showing target dates for resolution of questioned costs related to installation of air conditioning and SSFMï¿½s deduction for nonperformance and (2) copies of change orders showing deductions for $250,000 and $67,000 for construction delay claims.   


APPENDIX 4
OIG Report:  Evaluation of Saipan Public Health Facility Project: Oversight of Capital Improvement Projects, Commonwealth of the Northern Mariana Islands 

(see PDF version)



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