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1982 Report of the Auditor General of Canada

Synopsis

3.1 In our audit of contracting procedures for compliance with regulations, we paid particular attention to the use of exceptions under Section 8 of the Government Contracts Regulations. Section 8 allows for contracting without tender, or sole source contracting, under certain circumstances. We conducted our examination in five line departments, as well as in Treasury Board and the Department of Supply and Services-Supply Administration (DSS-Supply).

3.2 Our audit sample of 324 contracts revealed that contracting without tender is a general practice. In our sample, 254 or 78 per cent of the contracts were let under Section 8. On a government-wide basis, our figure compares to statistics provided by DSS-Supply which show that up to 70 per cent of the number of contracts processed by them could be defined as sole source.

3.3 When we analysed Section 8 contracts, we found a significant difference in the quality of documentation used to support the definition of requirements and the selection of suppliers. When departments have to go to a central agency for contract approval -- either to Treasury Board or DSS-Supply -- the documented substantiation for a sole source contract is better than when departments have authority to proceed on their own. Treasury Board and DSS-Supply provide an effective control over departmental use of Section 8 by challenging these contracts until they conclude that they are in the public interest and satisfy the intent of legislative and regulatory requirements. This challenge applied to approximately $3.4 billion worth of Section 8 contracting during 1981-82.

3.4 Documented challenge and substantiation are much less rigorous when departments have the delegated authority to approve Section 8 contracts. As a result, contracts are difficult to monitor for payment purposes and to evaluate for contractor performance.

3.5 This is significant because, first, there is a high volume of sole source contracting within departments' delegated authority (123 of the 254 sole source contracts in our sample, or 48 per cent) and, second, it constitutes a high dollar value ($2.9 million in our sample). Although this is a small percentage of the total dollar value of sole source contracts in our sample (7.1 per cent), it is material on a government-wide basis -- possibly as high as $300 million.

3.6 Whether a contract is tendered or not tendered, we found that there is usually some lack of compliance with government contracting policies and guidelines. For example, this chapter discusses the following compliance issues:

    - In 19 per cent of the cases audited, contracts were "approved" by people who did not have authority, or departmental approval procedures were not followed.
    - In 22 per cent of the cases audited, goods were received or services rendered before a contract was awarded.
    - In 23 per cent of the cases audited, there was insufficient evidence that pre-audit steps had been taken to ensure proper approval and payment under Sections 26 and 27 of the Financial Administration Act.
    - In 62 per cent of the cases audited, no post-contract evaluation had been done to feed back into the contracting process.
3.7 The information obtained during our audit indicates that deficiencies in the contracting process are symptoms of deeper problems in government contracting. We concluded that the following three causes of contracting deficiencies must be treated before fundamental improvements can take place:

    - Although Treasury Board guidance on contracting is appropriate for goods and high dollar value service contracting, for service contracts within a department's delegated authority, this framework is open to wide variations in interpretation.
    - The monitoring of departments' contracting activities could be more effective. Although Treasury Board does monitor departments through the contract submission proposal process, reports and regular evaluations, it does not generally carry out on-site audits. To do so would require a large increase in central agency resources. In our opinion, it would be more appropriate to have this function performed by internal audit within departments. However, our audit reveals that this is not always done.
    - We observed that the efforts of contracting staff in departments to ensure that contracting policies and regulations are followed are not adequately supported by senior management. For example, they are often asked to "bend the rules" to meet an operational requirement.

Audit Scope

3.8 In January 1981, the Public Accounts Committee asked the Auditor General" to proceed with an evaluation of the use of exceptions under Section 8 of the Government Contracts Regulations." Section 8 of the Government Contracts Regulations states that tenders are required, except where:

    - the estimated expenditure does not exceed $30,000;
    - there is a pressing emergency;
    - the nature of the work is such that it would not be in the public interest to invite tenders; or
    - only one person is capable of performing the contract.
3.9 To conduct the evaluation, we developed an audit program which we implemented in five line departments (Energy, Mines and Resources; National Health and Welfare; Communications; Industry, Trade and Commerce; and Environment) as well as in Treasury Board and DSS-Supply, where appropriate.

3.10 The audit was based on an examination of files. Interviews were used for corroborative purposes only. The size of the audit sample and the number and value of Section 8 contracts included in it are shown below:

Audit Sample

Contracts

Value

Total sample 324 $ 63,360,000
Section 8

254

$ 40,450,000

Section 8 as a percentage of total

78%

64%


Each contract in the sample was audited against the following phases of the contracting process:

    - requirements definition;
    - supplier selection;
    - contract approval and award;
    - contract administration; and
    - contract evaluation.
3.11 Audit criteria were established for each phase based on Treasury Board regulations and guidelines and on DSS-Supply requirements for contracting.

Observations

Quality of Contracting

3.12 Our sample of 254 contracts let under Section 8 fell into two groups: those that required Treasury Board or DSS-Supply approval, and those that could be handled within the departments' delegated authority. The number, dollar value and percentage of the sample in each of these groups is shown below.

Section 8 Audit Sample

Description

Approved by
TB/DSS-Supply

Approved by
Departments

  • number of sample contracts

  • 131

    123

  • value of sample contracts

  • $,37,576 000

    $ 2,872,000

  • percent of Section 8 value

  • 92.9%

    7.1%


    3.13 When we analysed the results of our examination of the contracts in these two groups, we found that the documentation supporting the requirements definition and supplier selection phases of the contracting process usually met audit criteria if the contract had been approved by Treasury Board or DSS-Supply. This was not the case for sole source contracts let within a department's delegated authority, as shown below.

    Deficiencies in Sole Source Contracts

    Requirements Definition/Supplier Selection

    Approved by
    TB/DSS-Supply

    Approved by
    Departments

    Deficiency

    No.

    %

    No.

    %

  • Inadequate Definition of Requirement

  • 12

     9%

    46

    37%

  • Inadequate Justification of Supplier

  • 17

    13%

    55

    45%


    3.14 We recognize that the requirement for a sole source contract cannot always be precisely defined and that final selection of a qualified supplier may be based on personal compatibility where technical or professional qualifications are equivalent. In fact, the rationale behind Section 8 is to allow program managers some flexibility within the contracting process. However, when it is difficult to define the requirement, we would expect to find a better justification of the sole source selection than a tick in an "urgency" box on a purchase order or no documented justification at all, which was often the case when departments approved contracts within their delegated authority.

    3.15 We carried out further analysis on the available data in the two groups to determine whether significant inadequacies in the requirements definition or supplier selection have an impact on the adequacy of the contract itself. We found that when Treasury Board or DSS-Supply approved a contract there was reasonable certainty that a proper rate was being charged and that contract terms were adequate to monitor contract progress and to hold a supplier accountable. As shown below, this was not the case when a contract was approved within a department's delegated authority.

    Deficiencies in Section 8 Contracts

    Fees/Contract Terms

    Approved by
    TB/DSS-Supply

    Approved by
    Departments

    Deficiency

    No.

    %

    No.

    %

  • Inadequate Fee Challenge

  • 6

    5%

    22

    18%

  • Inadequate Contract Terms

  • 6

    5%

    40

    33%


    3.16 Based on the above analysis, we observed that the controls in the government contracting process work well up to the contract award phase when sole source contract approvals rest with Treasury Board or DSS-Supply. This applies to the majority of sole source contract dollars. Although there are some problems, they appear to be exceptions and do not form a pattern.

    3.17 On the other hand, we observed that requirements definition and supplier selection of Section 8 contracts within authority delegated to departments are not well controlled. Although this is a small percentage of the total sole source contract dollars (7.1 per cent in our sample), the absolute dollar values are material ($2.9 million in the sample and possibly as much as $300 million government-wide).

    3.18 Some examples of deficiencies in sole source contracts let by departments within their delegated authority are described below to show that inadequate challenge at the requirements definition and supplier selection phases often results in questionable prices being charged. It also results in the absence of milestones and specified outputs against which progress can be monitored and payments can be made.

      - A $26,000 contract was let "to develop and document procedures." There was no project plan, no milestones and no phased outputs. Two more contracts were let and two amendments were required to extend this project, for a final total of $113,000. The contract extensions were justified on the grounds that "the initial estimate was optimistic in that the complexity of the procedures to be developed was underestimated." Not only was the initial "requirement" underestimated by $87,000, but a situation was established whereby the department was locked in because of the special knowledge developed by the contractor, who increased his per diem rate by 40 per cent (from $215 to $300) over the term of this 18-month project.
      - There was no justification for a sole source supplier to conduct a "special project" for $49,000. There were no specific terms of reference for the contract, and provision was made for payments in advance as requested by the supplier. When the funds were spent, the department had to enter into a second contract for $9,800 to get the outputs not specified in the first contract, such as presentations by the supplier, documentation collected during the study, and an index and bibliography of reference material. Had these outputs been defined at the outset, either the scope of the first contract would have had to be reduced to keep the contract within the department's delegated limit of $50,000, or the contract would have had to go to Treasury Board or DSS-Supply for challenge and approval.
      - A four-month sole source contract was awarded for $25,000. Tenders were not sought because of the "urgency" of the requirement, which was "to give advice and assistance". The contract did not specify milestones or outputs. To meet the "urgent" requirement, five contract amendments were let for "reasons of additional research" which extended the contract over a full year and brought the fees to a total of $47,500.
      - A 15-month contract was let for $24,975 to provide administrative assistance. After 10 months the contract limits had been reached. In some of the months, the supplier billed for 30 or 31 days even though most months have only 20 to 22 regular working days. There were no provisions in the contract to control the number of working days per month. A new contract and amendments brought this contract requirement up to 22 months and $43,000. No further overtime was recorded -- the per diem rate had been increased by 20 per cent.

    Contract Splitting

    3.19 Because there is less scrutiny of sole source contracts within a department's delegated authority, departments may find it convenient to "arrange" contracts to fit within their authority. The general limits within which departments have authority are shown below. Since DSS-Supply is involved in the procurement of virtually all goods, these limits apply primarily to services and those few items for which a delegated authority has been given by the Minister of Supply and Services.

    Departmental Delegated Authorities

    Goods Services

    Non-Consulting

    Consulting

    Competitive

    $ 100,000

    $ 100,000

    $ 50,000

    Non-Competitive

    $ 40,000

    $ 50,000

    $ 25,000


    3.20 Usually these limits can be doubled by amendment. That is, a $50,000 non-competitive, non-consulting contract can be amended for a further $50,000 and a consulting contract for $25,000 on a non-competitive basis. Therefore, if a department wants to bypass the central agency control process, it can split consulting contracts at the $25,000 level or define them as non-consulting. The difference between "consulting" and "non-consulting" is not clear, as the following definitions from the Government Contracts Regulations illustrate:

      - consulting services means the provision of advice by a person who is qualified to provide that advice;
      - a non-consulting service contract means an agreement for the provision of services other than consulting services....
    3.21 We analysed our sample of departmental sole source contracts and found evidence to show that departments sometimes split their requirements. This indicates that there is an inadequate challenge in departments to ensure that the intent of the Government Contracts Regulations is being met and that contracts above the dollar limits are exposed to outside review. Some examples of contract splitting follow:

      - A consulting contract for $16,500 was amended to a total of $21,300. A second contract was then proposed for $57,000, for the same job. It was subsequently reduced to $50,000 and defined as "non-consulting". This kept it within departmental delegated authority. The two sole source contracts amounted to $71,300, which is well above the department's limit for single contracts.
      - Two sole source contracts split the fees for one job. To clarify billing arrangements, the supplier wrote to the department: "In dividing the fees to conform to the limits of your contracts,... we started the work... (priced at $24,300) after having given you an estimate of $38,000 to complete the study. Your instructions were to advise you when we had spent $24,300, at which time a second contract was to be issued to cover the remainder."
      - A contract for $50,000 was sent to DSS, which refused to process it. The departmental project manager then wrote to the contracting staff: "As you know, DSS is returning the original requisition.... Would you please arrange for a departmental contract...." A series of contracts and amendments was let. One contract was for $24,999. The total value to the contractor was $47,000.
      - To keep costs within departmental limits, two non-competitive contracts, totalling $43,100, were issued to a supplier. The requirement was for a display. One contract, for $22,200, provided for refurbishing and repairing the display; the next contract, for $20,900, allowed for putting it up and taking it down.
    3.22 Our observations on the quality of contracting lead us to conclude that the departmental challenge process is not adequate to ensure the proper balance between the need for a reasonable amount of flexibility and the need for adequate control.

    3.23 First, the departmental challenge process does not prevent contract splitting; therefore, it does not ensure that all Section 8 contracts above a department's delegated authority are exposed to central agency review. Second, it does not provide sufficient assurance that a reasonable requirement has been identified, that a qualified supplier has been selected at a fair price, and that contract planning has ensured the adequacy of contract terms for monitoring contract performance and holding the supplier accountable.

    Other Compliance Issues

    3.24 Whether contracts are tendered or not tendered and whether they are approved by Treasury Board, DSS-Supply or departments, we observed various inadequacies in the award and approval, administration and evaluation phases of the contracting process. For example:

      - A consulting contract, including $33,600 worth of professional fees, was let by a department to "review information systems". To keep such a contract within a department's delegated authority, the Government Contracts Regulations requires that three competitive proposals be considered. In this case, only two competitive proposals were received, and there was insufficient documented evidence to show that appropriate criteria were set, both in the Invitation for Proposals and in the evaluation of the proposals. The contract did not result in the achievement of milestones and production of outputs as presented in the work statement. The contract had to be amended and extended before it could be completed to the department's satisfaction. In addition, the pre-audit function was inadequate: one invoice was paid although it indicated that work was performed before the contract was approved, and payments in the amount of $3,300 were made in excess of the authorized professional fees provided for in the contract. Furthermore, there was no documented evaluation of the contractor's performance. The department entered into a second phase of this contract that brought the total value to $73,850.
    3.25 Examples like this are symptomatic of inadequate management systems and procedures. A summary of our audit findings related to compliance deficiencies is given in the table below, followed by examples of lack of compliance.

    Summary of Compliance Deficiencies
    (324 sample contracts)

    Deficiency

    Number

    Per Cent
    of Total

  • Inadequate pre-contract approval

  • 62

    19%

  • Work prior to contract award

  • 71

    22%

  • Inadequate authorization

  • 75

    23%

  • No contract evaluation

  • 201

    62%


    3.26 Contract approval and award. This phase is designed to ensure that contracts are issued in accordance with statutory requirements, regulations, policy directives, and internal departmental policies. Requirements for this phase are all clearly documented and provide controls to ensure that taxpayers' money is being used economically.

    3.27 In 19 per cent of the cases we audited, contracts were entered into without the appropriate authority, according to the department's delegated levels of approval authority or approval and award procedures. Examples are:

      - In one department, a senior review committee had responsibility for reviewing contracts and the authority to approve, amend or revoke contract proposals. However, in a sample of 15 contracts, we observed 11 instances where approvals had been given after work had begun or after the contract had been signed, or where the contract was improper or contract terms were poor.
      - In another department, 11 of 42 contracts audited (26 per cent) were not approved properly. For example, the procurement chief approved contracts or amendments beyond the $15,000 limit delegated to that position.
    3.28 We also found that, in 22 per cent of our sample cases, goods were received or services were rendered before a contract was awarded. For example:

      - In one department, over an 18-month period $74,800, including up to $18,700 worth of travel, removal and living expenses, was charged by the contractor. The three contracts for the work were signed two months after it was completed.
      - In another department, we found contracts for goods based on the suppliers' invoices -- a formal contract had not been issued before the goods were received.
      - On 15 June, a supplier's invoice, covering fees and travel expenses for a consultant's European trip during the first week of June, was sent to a department. Subsequently, a director requested a $100,000 contract to begin 29 June and, on 31 August, DSS-Supply awarded the contract. However, this did not allow the department to pay for the travel expenses incurred by the contractor in the pre-contract period. A contract amendment changed the starting date to 1 June, and in February the department paid the travel expenses for 1 June to 7 June.
    3.29 Contract administration. This phase includes following specified pre-audit steps to ensure that authorization under section 27 of the Financial Administration Act gives assurance that goods or services have been received according to the contract terms. In 23 per cent of sample cases, there was insufficient evidence to show that pre-audit steps had been taken to ensure that payment of accounts was authorized and accurate. For example:

      - A standing offer was made for EDP supplies in which firm prices were quoted. These prices were changed and the changes were accepted without a contract amendment.
      - In one contract, approval was given in both March and May to requisition a $4,000 cheque against the supplier's invoice. The result was a duplicate payment which took the department nine months to recover.
      - A $33,400 claim for a progress payment was paid as submitted even though it included expenses that were inadequately supported by vouchers, inconsistent with the accompanying vouchers, or not allowable under the terms of the contract (such as entertainment). As well, there was an error in arithmetic. The claim had been signed off by a project officer and a DSS-Supply procurement officer, and payment was authorized by a departmental financial officer. This was the first payment claim against a $313,200 contract.
    3.30 Contract performance evaluation. This phase is concerned with assessing the contractor's performance. It is an essential feedback to the contracting process. Errors in selecting contractors can be reduced with comprehensive information on contractor performance.

    3.31 In 62 per cent of contracts we audited, there was no evidence of post-contract evaluation as suggested by government contracting guidelines. DSS-Supply does evaluations on an ad hoc, or exception, basis. Evaluations by departments are rare and are usually conducted as a result of a request by DSS-Supply or Treasury Board.

    Recommendations

    3.32 We have concluded that our findings represent symptoms of three fundamental deficiencies in the government contracting process.

    3.33 First, departmental contracting activities are governed by a series of objectives, guidelines, regulations and circular letters issued and revised continually by Treasury Board. Although it is intended that these policies should cover the complete range of contract values, they are more appropriate for high dollar value contracting. The result is a framework that is not well suited to departmental contracting, particularly when specifications are imprecise, as in service contracting.

    3.34 For example, the Government Contracts Regulations allow departments to enter into untendered contracts for consulting services up to $25,000 and non-consulting services up to $50,000 without Treasury Board approval. However, the distinction between consulting services and non-consulting services is not precise. Consequently, in some cases departments are confused by these provisions and in other cases use them to exploit the contracting process by defining a contract within their delegated authority to avoid the requirement of going to Treasury Board or DSS-Supply.

    3.35 Although Treasury Board encourages post-contract evaluations, it does not specify that evaluations must be done. In addition, when a contract is approved by Treasury Board or DSS-Supply, the Treasury Board guidelines are not clear on who would be responsible for conducting the evaluation -- the central agency or the department where the contract is performed. This ambiguity allows contracting authorities to ignore the need for post-contract evaluation by passing the responsibility on to the other party.

    3.36 Further, Section 8 is susceptible to abuse. For contracts under $30,000, there is no requirement to justify the selection of a supplier. On the basis of our examination, it appears that departmental contracting authorities believe that when a contract is under $30,000 there is no further need to justify and document the requirement for the contract or the selection of the supplier. This is not the intention of government policy. However, current Treasury Board guidance on what constitutes adequate justification for Section 8 contracts is not entirely satisfactory.

    3.37 Treasury Board should clarify its contracting policy directives and guidelines for contracting by departments and agencies, particularly the use of Section 8, to reduce misuse and provide for clear accountability by departmental users and contracting authorities.

    3.38 The second basic cause of inconsistent quality of contracting is that there is limited auditing of departmental contracting activity. It would be unreasonable to recommend that central agencies increase their audit staff to an appropriate level to conduct such monitoring activities. The most reasonable solution would be for departmental internal audit groups to conduct their own reviews of contracting within guidelines issued by the Office of the Comptroller General. Of the five departments we audited, one had conducted a contracting audit and another audits contracting activities as a part of its on-going audit program.

    3.39 Internal audit in each government department and agency should develop an audit program for contracting and should put more emphasis on audit of the contracting area.

    3.40 The third principal reason for the low standard of contracting by departments is that, in most of the departments audited, the contracting staff group has little influence over why, how or to whom contracts are let. Frequently, their advice is ignored and their control function overridden or avoided by departmental managers when it is convenient to do so. Consequently, the credibility and effectiveness of the contracting staff is being eroded.

    3.41 The role of contracting staff in departments and agencies should be strengthened and should receive support from senior management.