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1997 October Report of the Auditor General of Canada

Main Points

21.1 This audit wa

s conducted in response to a request from the Standing Committee on Public Accounts.

21.2 Some 19,000 employees were moved by the federal government in 1995-96 - one quarter of all moves by the van lines in Canada and several times more than the next-largest Canadian employer. The federal government is well placed to obtain favourable terms from the moving industry.

21.3 The tariff paid by the government has been falling significantly in recent years. A number of factors have contributed to this decline, including introduction of the competitive bidding process in 1992. The tariff is below that paid by all but a few Canadian organizations procuring similar services. Nevertheless, there are a number of areas that warrant action.

21.4 The level of satisfaction of government employees with the quality of service was below that of relocated employees of other Canadian organizations. One reason is that emphasis has been placed mainly on obtaining the lowest price, not the "best value" - a concept based on both price and quality as measured in terms of employee satisfaction.

21.5 The existing contracting arrangements, which incorporate a formula for allocating business among qualified bidders, have proved to be brittle. For two consecutive years, problems have arisen in either the tendering or the implementation phase.

21.6 A potential exists for overcharging due to "weight bumping" as well as excessive weight for other reasons. The inherent risk that billed weights can be manipulated is high, yet controls to prevent this are weak.

21.7 The number and cost of personnel employed to administer household goods removal activities have not been falling despite the significant decline in volume of moves. Potential efficiency gains have been identified that could achieve savings of an estimated $1.5 million yearly. Enhanced use of information technology, centralization, simplification of rules and regulations, and elimination of unproductive activities are some areas that need action.

21.8 There are other areas of potential cost savings. For instance, yearly savings of $1 million to $2 million in operating costs may be possible if a feasible alternative to weighing shipments can be found for pricing moves.

21.9 The employment of several former senior National Defence officials by the moving industry has created a perception of non-arm's-length relationships. Further, a specific situation being looked at by National Defence may determine whether or not any abuse actually occurred.

Introduction

Government moves of household goods involve several players

21.11 Treasury Board issues the Relocation Policy that governs the relocation of government employees of departments, agencies and Crown corporations as listed in the Financial Administration Act . DND and the RCMP have their own policies for the relocation of their members. The IDC establishes the Statement of Work for transportation services. PWGSC is the contracting authority and is responsible for establishing contract requirements. Each IDC member department is responsible for the administration of contracts (including the ordering of moves, audit and payment of invoices).

21.12 There are approximately 3,000 carriers of household goods in Canada; about 500 of them are affiliated with van lines. There are four major van lines in Canada, each comprising a number of carriers. Originally, the main function of the van lines was to co-ordinate trips to and from a destination so the carrier did not return empty. Because the federal government contracts mainly with the van lines instead of with individual carriers, van lines are the prime contractors for government work and the carriers or agents are subcontractors.

21.13 Approximately 60 percent of federal government moves are made in three summer months, June to August. Some of the capacity built up to handle this peak load may understandably be underused in the rest of the year.

21.14 All federal government departments and agencies cover the costs of relocating the household goods of staff who have been assigned to new locations. In 1995-96, by far the largest number of moves was undertaken by DND (14,000), followed by the RCMP (2,200). PWGSC managed 2,600 moves for other departments.

21.15 The number of moves has been declining in both the government and the private sector ( Exhibit 21.1 ). During this period of decline, the federal government's share of moves handled by van lines has remained fairly constant at about one quarter of the total number ( Exhibit 21.2 ).

Focus of the audit

21.17 Further details on the audit objectives, scope, criteria and approach can be found at the end of the chapter in the section About the Audit .

Observations and Recommendations

Value Obtained under Contracting Arrangements

Prices paid by the government are comparatively low

21.20 Changes made in the government procurement system in 1993 and 1995 contributed to the decline in tariff. Other factors at work include the deregulation of the industry coupled with a rapid decline in the number of moves in the federal government and elsewhere, and a consequent overcapacity in the industry.

21.21 The federal government pays a tariff significantly lower than the tariffs paid by other organizations we contacted. No other organization in Canada contracts for anything close to the number of moves by the federal government, so one would expect the tariff it pays to be relatively low.

21.22 The federal government's transportation costs have not declined as much as tariffs, since the average weight of a household of goods has risen over the same period. From 1993 to 1996, the average weight of government shipments increased ( Exhibits 21.4 and 21.5 ). It is reportedly now slightly higher than in the corporate sector. Average weights for both government and corporate moves are in the order of twice the average for moves paid for by individuals. Industry officials attribute this difference partly to the fact that when individuals pay they are far more selective in what they choose to move.

Greater emphasis on employee satisfaction needed

21.24 We found that the federal government has given this aspect less attention. It has defined quality of service largely as the carrier's conforming with specified standards, for example, for packing and unpacking. The IDC has used an employee feedback form to ascertain satisfaction with moves, but this information has been collected inconsistently and has not been analyzed sufficiently.

21.25 PWGSC assesses the contractor's broad capability to comply with regulations governing move procedures, but not its past performance in terms of customer satisfaction with completed moves. A bidder on a contract must obtain a minimum number of technical points but, after this initial screening of eligibility, employee satisfaction in the past has had limited influence on who is awarded how much work. There is little incentive provided to movers to ensure that government employees are fully satisfied.

21.26 From our look at best practices, we concluded that there are a number of ways information on customer satisfaction can be used in the contracting process - by providing a pricing incentive or penalty; by providing an increased share of business, particularly by granting more off-peak business to contractors that deliver good customer satisfaction; by considering the past track record of customer satisfaction when awarding each contract; or by tracking customer satisfaction with different contractors and providing the information, with a choice of contractors, to the relocating employee or the employer.

Employee satisfaction is below that of other organizations

21.28 We found that about two thirds of those we surveyed were satisfied or very satisfied; 18 percent were neither satisfied nor dissatisfied; and 14 percent were either dissatisfied or very dissatisfied. Many factors can influence satisfaction, including whether or not the move is voluntary, but to have one in seven employees dissatisfied or very dissatisfied indicated room for improvement. Dissatisfaction was highest with unpacking and claims settlement. According to the IDC, the recent decline in the settlement amount (see paragraph 21.102) could reasonably be seen as a contributing factor.

21.29 We compared levels of satisfaction between government employees and employees of other organizations. Because of differences in the survey methodologies, only limited comparisons are possible. Given this limitation, it appears that government employees were consistently less satisfied than employees of other organizations with the quality of the moving service, by a notable degree (see Exhibit 21.6 ). The government has not specified what level of customer satisfaction it expects. However, it expects that its development of performance measures will help to establish benchmarks for customer satisfaction.

Fairness and competitiveness of the system are at issue

21.31 In May 1996, the Bureau started an inquiry into allegations that one or more of the van lines had breached a 1983 order issued by the Supreme Court of Ontario by preventing affiliated carriers from providing services to the federal government except through van lines. The four major van lines reportedly had entered into agreements to provide moving services to each other in areas where they were not represented, but would not enter into similar agreements with any other bidder on the federal government tenders.

21.32 Without commenting on competition issues presently being pursued by the Bureau, we can make some observations. With the exception of one competitive element, the PWGSC system of procuring relocation services for household goods is a "managed" system of work sharing. The work is allocated on a percentage basis among a small number of contractors. Whether the eligibility-to-bid requirements constitute significant barriers against new suppliers, especially smaller businesses, is also an open question. The system's one competitive element is that the largest share of business goes to the low bidder. Once the low bid is identified, the other bidders are asked to match it. PWGSC has sought a maximum of four bidders (a minimum of three) who are willing to match the low bid price, based on the IDC's belief that there is insufficient capacity with fewer than three suppliers.

21.33 We have several concerns about the workability of the process. First, as we have noted, price and not "best value" is the key determinant in allocating business among competing bidders. Employee satisfaction is not built into the selection of contractors.

21.34 Second, the bidders are not asked what percentage of government moves they can handle, and the lowest bidder is not necessarily awarded a volume of business to the full capacity that it is willing to commit to government work. Bidders cannot offer different prices for different volumes of work or different levels of service, or for sub-packages of particular types or locations of moves. To participate in the work, bidders are required to meet the low bid price even though they may differ in their particular competitive advantages, volumes of work and levels of service. Smaller organizations that might be very capable of handling moves in one zone (say between Quebec and Ontario) are not able to bid on that basis. The "me too" concept does not match a particular carrier's capability with a particular move, nor does it sort moves into packages that might economically be handled together. However, DND is not convinced that changing its current approach would necessarily lead to better value for money.

21.35 Third, if contractors participate in the bidding process their only option is to bid as if they had the capacity to undertake the largest percentage of the work, although some do not have that capacity. Therefore, some may bid high enough to ensure that they do not win. They want to be in a position to match the low bidder, but for a smaller share of work. This gives the appearance, but not the reality, of full and open competition. Indeed, it would appear that only two bidders have been interested in obtaining the largest share of business, so only those two bids have been aggressively priced.

21.36 Fourth, the contract could be more flexible. There is a need to encourage further innovation and piloting of new ideas. For instance, it may be timely to try other options for pricing moves (paragraph 21.98).

21.37 Finally, the bidding system has proved to be brittle. The structure depends on a sufficient number of bidders who both are qualified and agree to match the low bid. This has led to difficulties in the tendering process.

21.38 In tendering for the procurement of the household goods removal services for 1996-1997, for example, the government evaluated the capacity of the bidders to provide the required services. The low bidder, who was a new entrant, was reportedly unable to perform to the government's full satisfaction. Shortly after the start of the contract, the bidder was informed by PWGSC that it was non-compliant, due to alleged non-performance by a subcontractor. Rather than face contract termination for default, the low bidder changed subcontractors to one of the van lines that had been unsuccessful in the original bidding.

21.39 In 1997, the same bidding process was followed. Again, problems resulted. This time only one other bidder was willing to match the low bid. Negotiations led to various changes that had the effect of increasing the previous year's tariff by about 8 percent before the third van line would agree to a new contract. The unsuccessful bidder challenged the process in court. Subsequently, a still higher price (by 14 percent) was negotiated, along with some changes in the percentage shares of work.

21.40 In addition to these questions about the workability of the bid matching approach, there are concerns about fairness. On the basis of its experience with the tendering process, PWGSC now believes that "the bid matching process is fundamentally unfair in that contractors are obligated to provide services at the lowest bidder's rates, regardless of their volume of business share."

21.41 A further concern of some in the industry is that contract awards have been announced about two months before the start of the contract period. Industry personnel argue that this provides insufficient time to adjust to potentially large changes in business share, and that this risk, too, may serve as a barrier against the entry of new suppliers. However, in the latest procurement the government let a two-year contract, which may provide for longer lead times at the next competition.

21.42 The business allocation system needs to be re-examined. A number of alternative contracting structures are possible that could encourage more competitive bidding and service innovation (see Exhibit 21.7 ).

21.43 Public Works and Government Services Canada, in consultation with the Interdepartmental Committee on Household Goods Removal Services, should implement a fairer and more effective contracting arrangement that:

• gives greater weight to employee satisfaction with past moves in determining "best value";
• improves the fairness and competitiveness of the contracting arrangements, including concerns that may be raised by the Competition Bureau; and
• allows for innovation and piloting of new ideas.

Cost and Efficiency of Household Goods Removals Management

21.45 The activities performed by each of the departments at its headquarters include planning and overall monitoring of the activities that are contracted out, and supervising those carried out in-house by regional offices. The activities in the regions include registering all information related to moves, communicating with contractors, providing assistance to relocating employees, monitoring and controlling services performed by the contractors and verifying invoices. In PWGSC all invoices are verified and paid centrally.

Studies have been undertaken to improve efficiency and reduce costs

21.47 Between 1991 and 1994, the IDC initiated three studies to analyze the cost of managing household goods removal services and to identify potential savings. One aspect examined was whether it would be more cost-effective to contract out certain activities to the private sector or to continue to manage them in-house. An interdepartmental senior review board concluded, based on the studies, that a business case could not be made to contract out the management and delivery of the services and that in-house efficiency gains should be pursued.

21.48 The last internal study undertaken by the IDC on the cost of managing household goods removal services was performed in 1994. The study showed that it cost about $5.6 million in direct expenditures (salaries and benefits) to manage 22,933 moves in 1993-94, reportedly involving some 123 full-time equivalents (FTEs). The cost per move at that time was $242 and the number of moves per person employed in the function was 186.

21.49 We reviewed the IDC's most recent information on the cost of managing household goods removal services at DND, RCMP and PWGSC. The total cost was $5 million in direct expenditures (salaries and benefits) for 1996-97, involving the equivalent of some 110 person-years (67 military personnel and 43 civilians). The IDC has very limited performance measures for assessing the efficiency and effectiveness of its activities.

21.50 In 1995, a series of negotiations took place between DND and PWGSC on transferring the latter's move-management responsibilities to DND in order to consolidate management activities in one location to minimize overlap in responsibilities and duplication of work. This consolidation had not taken place at the time of the audit. In addition, discussions have begun for the transfer of the RCMP responsibilities to DND.

Government's management costs per move are comparatively high

21.52 DND told us that it plans to continue to pursue additional efficiencies. In 1995, DND began in-house development of the Automated Move Management System (AMMS), aimed at moving from a largely manual system to a paperless contracting, invoicing and payment system. This system was expected to be operational on 1 April 1998; the most recent projection by DND is that the project will be completed by April 1999. The improved Automated Move Management System is now expected to save at least 30 full-time equivalents.

21.53 Industry officials informed us that van lines fully support the government's plans for automation. However, in their view the entire process needs to be reviewed before any further investment is made in developing the proposed system. They recommend continued and further consultation with industry on both process and technical design.

21.54 Some private sector organizations gave us data on the costs of managing their household goods removal services. One reported its average cost per shipment handled in-house at about $200, while another reported a range of $150 to $180 - both lower than in the federal government.

21.55 Fees charged by third-party companies generally range from $200 to $350 per move, depending on volumes and levels of service. It is important to note that reported federal government costs involve only salaries and benefits, not overhead costs, while third-party fees cover all costs and some provision for a profit margin.

21.56 As a further example, Removals Australia appears to manage a larger number of moves than the Canadian federal government on a somewhat smaller total budget. It should be noted that Removals Australia is a special agency of the Australian national government that handles all aspects of household moves for all federal government departments as well as other levels of government.

Household goods management control activities do not always meet expectations

21.58 Exhibit 21.9 shows our analysis of the differing activities carried out by DND, the RCMP and PWGSC. Our own view is that these differences among departments in most cases call for one of two possible courses of action - either decide that an activity is necessary and provide it consistently, or decide that it is not needed and eliminate it.

21.59 Results of our review of best practices suggest that not all of the activities provided are essential. In particular, quality control inspections and warehouse inspections are not performed by the vast majority of other organizations we examined. As one major public sector organization noted, relocated employees are their "quality control inspectors", through the mechanism of monitoring customer satisfaction and incorporating the results in the contracting process. Some of the more notable move management practices used by other organizations are described in Exhibit 21.10 .

21.60 In addition to consolidating management activities in one department (see paragraph 21.50), there are possible benefits to be gained from centralizing geographically. A decision to no longer conduct quality control inspections and warehouse inspections would eliminate much of the need to keep staff at various locations throughout the country. The federal government is one of the few organizations that does not manage household goods removal services from a single location. People in the industry whom we interviewed would prefer to see administration and service delivery standardized across all departments, and management activities centralized to eliminate duplication, wherever practical, and to better control the balance between price and service levels.

21.61 Some industry officials believe that aspects of the current structure are necessitated by the rules, regulations and reporting requirements involved in federal government moves. They argue that many of the steps in the process, such as warehouse inspections and attendance at employee homes, do not add sufficient value and have simply become entrenched over time. Industry officials maintain that some of these steps do not reflect common practice in the private sector and represent higher costs of compliance for industry.

21.62 A number of officials in the moving industry also indicated that because of high turnover of key federal government staff involved, the level of knowledge about industry practices has suffered. For example, the Chair of the IDC has changed yearly for the past few years. If the federal government could find a way to control the frequency of staff rotation, it could increase expertise and provide continuity in management.

21.63 In our view, given the number of opportunities for improving the efficiency of move-management activities discussed in this section of the chapter, savings are possible in the order of $1.5 million out of the $5 million spent annually on the administration of household goods removal.

21.64 Industry officials noted that the cost of moving federal employees could be reduced further without adverse impact on service, in areas such as less storage in transit and the spreading of the workload more evenly during the busy summer months when the majority of moves understandably take place. DND and the RCMP believe that while this may be true, this kind of action could have a significant negative impact on morale and operations.

21.65 An improved performance measurement and reporting system is needed. We found that little performance data on cost and quality had been collected or used by management for 1996-97 due to computer system failures at DND. Early in our audit, the IDC informed us that developing a good performance information system was among its top priorities, and IDC actively participated in our benchmarking exercise as a way to make progress in improving its own performance measurement and reporting systems.

21.66 Senior management needs to consider carefully the future direction of the management of household goods removal services in the federal government. The management information systems in place are functioning only partially, and the Automated Move Management System is still in the pre-operations stage, as discussed in paragraph 21.52. Officials have postponed the transfer of the PWGSC responsibilities to DND that had been agreed to in 1995. Contracting out the management of the household goods removal function remains an option to consider.

21.67 The Interdepartmental Committee should act to strengthen and improve the efficiency of the household goods move-management function, including:

• implementing an improved performance measurement and reporting system;
• making greater use of information technology for communicating with contractors, and for providing management with timely information;
• minimizing overlap in responsibilities among National Defence, the RCMP, and Public Works and Government Services Canada; and
• reconsidering the need for existing move-management activities such as inspections of warehouses and attendance at employees' homes.

Managing the Risk of Overcharging

The inherent risk of overcharging is high

21.70 Compensation schemes for drivers. Many drivers are paid a significant percentage of the amount billed. The amount billed is mainly a function of the weight of the shipment. There are many opportunities for drivers who might wish to manipulate recorded weights to their advantage. Exhibit 21.11 lists some examples of some methods a driver could use to manipulate the gross weight shown on a weigh scale in a way that inflates the net weight of the household goods.

21.71 Lowering of government tariff rates. The decrease in government tariff rates in recent years can put pressure on a carrier's profit margin, increasing the inherent risk that weights may be manipulated for billing purposes. This is particularly true in situations where the carrier is significantly dependent on government business.

21.72 Decrease in the number of government moves of household goods . The significant reduction in the number of government moves in recent years could also reduce the income earned from government moves, thus increasing the inherent risk of manipulation.

21.73 Relaxation of certain regulations in the 1996-97 contract. The government allowed some of the regulations to be relaxed in the 1996-97 Tariff Agreement. We noted that the 1996-97 Tariff Agreement did not specifically provide penalties for weight bumping, such as suspension of a carrier. As a result, there is less to deter drivers from manipulating the system. Also, we noted that a two-hour ``window" was added for the driver to unload before contacting the destination base. This was introduced at the request of industry to minimize waiting. However, this could allow a driver who may wish to hide a weight bump to do so more easily.

21.74 It should be noted that under the present system the ultimate control over this risk resides with the integrity of the driver.

Controls to manage the risks are weak

21.76 Under section 34 of the Financial Administration Act (FAA), the Deputy Minister or an authorized representative is responsible for ensuring "that the work has been performed". In the movement of household goods this means, among a number of things, ensuring that the proper weight was reported by the driver and subsequently billed by the prime contractor. Departments are expected to have in place satisfactory financial controls and procedures to ensure that the invoices received from contractors are processed in accordance with their policies and procedures.

21.77 The main control procedures to ensure that the proper weight was billed are the verification of weight on invoices against weigh scale tickets, payment of no more than 110 percent of the estimated weight, billing for liquidated damages in cases where weight "errors" are detected, DND's reweigh program, and quality control inspections.

21.78 Weight scale tickets. The current system of invoice verification and the fulfilment of section 34 requirements rely heavily on the validity of the weigh scale tickets. According to DND, the "accuracy of the ticket is of prime concern. Accordingly, tickets must be from a government-certified scale, completely filled out and be the original signed copy provided by the scale operator." In our view, information on weigh scale tickets is unfortunately not always a reliable, independent basis for payment.

21.79 Some examples of weaknesses in the way the controls are applied included a case where the driver submitted a weigh scale ticket with a gross weight that was used for billing purposes. However, the weigh scale operator's copy did not have a gross weight entered. As noted above, the amount of the payment is based on the weigh scale ticket. In one case, the weigh scale ticket was reported lost, and therefore no payment should have been made. However, the invoice was paid by the government based on an estimated weight, without sufficient and independent verification that the work had been performed to the extent reported.

21.80 We also noted an instance where a photocopy of the ticket rather than the original was the only support for billing.

21.81 Payment of no more than 110 percent of the estimated weight. The departments attempt to limit their exposure to potential weight bumping by limiting the amount the government will pay in any one move to 110 percent of the original estimate of weight. However, our discussions with industry officials suggest that the tendency has been to overestimate the weight of shipments. We noted that one estimate was increased during a move at the request of the carrier without sufficient explanation or documentation to justify it. The 110 percent maximum payment rule has limited value as an effective control to minimize the risk of overcharging.

21.82 Liquidated damages in cases where discrepancies are detected. In years prior to 1996-97, "fines" ranging from $10,000 to $25,000 in the form of reduced business and suspensions could be imposed on contractors in cases where errors in weighing were detected by the government. However, in the 1996-97 Tariff Agreement this regulation was relaxed to change the fines and suspensions to a penalty-like system called "liquidated damages". Liquidated damages are fines levied on contractors for violating contract conditions. These fines are either flat amounts up to $1,000, and/or certain amounts per day, item or pound of infraction. However, liquidated damages are not as severe as the previous penalties and therefore the deterrent effect is lessened. Furthermore, the lengthy process for establishing the damages reduces their impact. For the contract year 1996-97, a total of $392,000 was established as liquidated damages. As of 31 March 1997, $22,000 had been collected. DND officials informed us that at that date a large portion of all identified liquidated damages had yet to be invoiced. Liquidated damages, therefore, have provided limited control against the risk of weight manipulation.

21.83 DND's reweigh program. DND's reweigh program is another means to minimize the risk of weight bumping: a sample of shipments are reweighed under the supervision of a trained employee at destination. The objective is to verify that the driver's weigh scale ticket obtained at origin has not been manipulated.

21.84 On one reweigh we witnessed at the point of destination, the driver had not obtained weigh scale tickets at the origin. Therefore, the transportation agent was unable to assess whether a weight manipulation had occurred.

21.85 During the course of conducting our tests, we noted cases where individuals performing the reweigh did not appear to have sufficient and appropriate training and experience.

21.86 Our concern is that the existing reweigh program is also largely ineffective as a control against weight bumping, for two main reasons. First, the driver is not required to declare to the government the weight of the shipment at the point of origin to allow for a proper comparison with the result of the reweigh at destination. Second, the number of reweighs actually performed is insufficient: fewer than 0.2 percent of moves were reweighed and in many locations no reweighs were performed at all.

21.87 Quality control inspections to ensure that proper weight was established. Trucks are required to be weighed twice prior to leaving the city of origin - once when empty and again after loading. DND's quality control inspections check for compliance with a number of the rules and regulations contained in the government tariff, including ensuring that the truck's fuel tanks are full. This is designed to minimize the risk that the driver can manipulate the weight of the shipment by refuelling after the original weighing. Although control inspections are conducted after the truck is loaded, they are not conducted between original weighing and loading. Quality control inspection is therefore limited as a control procedure because it addresses only one opportunity for manipulating weights.

21.88 Overcharging can also be due to excessive weight on account of unusual items included in shipments. We identified some apparently unusual, albeit ``admissible" items, particularly in the case of shipments to overseas locations. We asked DND whether there is an opportunity here to save on costs. DND officials told us that the carriage of such items is consistent with policy and is not considered inappropriate.

21.89 None of the three departments involved in the supervision of moves critically reviews inventory listings for unusual or non-admissible items. In many cases, such items would not be detected because the listings are not always sufficiently descriptive of the nature and volumes of items carried.

Overcharging may have occurred

21.91 It is the position of PWGSC (the contracting authority) and DND that the government have full and free access to the records of all four contractors as it deems necessary to audit their invoices. Following our advice, the government has now obtained records from the fourth contractor; however, the government has decided not to analyze at this time the charges billed by this contractor.

21.92 Our sample of moves of household goods was selected from the population of moves between 1 April 1996 and 31 December 1996. The examination was not designed to reach conclusions about individual shipments but rather to identify bias, if any, in the aggregate amount of billed weight. The methodology for determining our estimate of the shipment weight on a per-item basis was developed in consultation with the van lines. The basis for estimation was a standard weight assigned for each type of item normally carried.

21.93 Based on the testing of a sample of invoices from three of the four contractors, on an aggregate basis the weight billed exceeded our estimate of the aggregate weight of shipments moved. The extent of the identified bias is statistically significant.

21.94 We discussed this observation with the three contractors. They agreed that using the methodology designed for this audit, the number and extent of variances in weight we found could reasonably lead to our overall conclusion at the aggregate level. However, the testing did not, and could not, demonstrate that there was any deliberate attempt by contractors or their agents to alter weights of shipments in order to receive higher payment from the Government of Canada. There is nonetheless a very real risk of recording excess weight, due either to weight manipulation or to the shipment of unusual items as previously described, given the high inherent risk and the weaknesses in the systems and controls in place as we have already noted. As a result, the perception remains that the potential for weight bumping still exists.

21.95 It should also be noted that the average weight per government move has increased by approximately 14 percent since 1994. The trend in the corporate sector is reportedly not as high. DND informed us that the increase in average weight can be attributed to several factors; given that an increasing number of its personnel live in private dwellings rather than military housing where major appliances are provided and basements are often unfinished, and that a higher proportion of personnel are married, it views the rise in shipment weights as reasonable and expected. There was no analytical information available to measure the impact of the above factors and we could not determine the extent to which the increase could be attributed to weight manipulation, if at all.

21.96 Removals Australia appears to avoid controversy about potential weight bumping. It obtains a detailed inventory from the relocating employee before calling for bids and, on the basis of that inventory, estimates the volume of the household goods to be moved. Carriers are asked for a fixed-price bid based on this volume rather than on the shipped weight. If subsequently there are significant changes to the inventory list, the carrier may negotiate a price change with Removals Australia.

21.97 In our view, if the government continues to use weight as one criterion (along with distance) to determine price, it needs proper controls to ensure that the price it pays is the correct price, that is, based on the correct weight. Certain controls have been established that, as our audit has shown, have not been used correctly or adequately. It could be argued that, at a minimum, these controls should be applied more rigorously. However, the other important question is whether the controls can actually ensure correct weight, and consequently correct payment. There appear to be too many systemic problems and costly procedures associated with accurately measuring weight to use it as a basis for pricing moves.

21.98 All four van lines and the IDC agree on the need for a simple and auditable method for pricing moves of household goods - one that reduces the risk of error, the risk of weight bumping, and the cost of controls for both the government and the industry. Savings of $100 per move in operating costs - $1 million to $2 million a year - are viewed by some industry officials as entirely realistic, provided there is no significant offsetting expense involved in the new basis for pricing moves.

21.99 We followed up with RCMP headquarters the specific allegation raised by the CBC television program ``Marketplace" about the alleged overcharging for an RCMP move. Officials informed us that the local police force where the incident occurred was still investigating. They further informed us that any decision to follow up on such matters rests with each divisional Commanding Officer but, while concerned about the impact of weight bumping, in their view the risk is not high.

21.100 Public Works and Government Services Canada, in consultation with the Interdepartmental Committee and the moving industry, should minimize the risk of overcharging due to weight bumping and strengthen the auditability of invoices from contractors. Consideration should be given to introducing an alternative to the existing basis for pricing moves or, in the absence of workable alternatives, implementing a satisfactory reweigh program.

Insurance claims declined in 1995-96

21.102 On behalf of the IDC, PWGSC undertook a study in 1996 to address the Public Accounts Committee's concern about potential claims abuse. Our examination was limited to a review of the PWGSC working papers and report, which found that the average settlement amount for insurance claims from federal employees decreased by 26 percent - from $762 in 1994-95 to $558 in 1995-96 - although the average settlement, the frequency of claims and the number of items per claim remained higher than in the industry in general.

21.103 Moreover, the report found that the cost of insurance services had declined by about 15 percent between 1992-93 and 1996-97. The federal government's average cost per claim is higher at $558 than that of a number of private sector organizations that reportedly average $435.

Insurance claims abuse is not excessive

21.105 It should be noted that these findings are based on a limited-scope study: an examination of claims for one van line, with the largest percentage of business for 1995-96. The other van lines to which the remaining business was allocated were not examined due to the cost and complexity of this review. We concluded that the incidence of potential abuse and waste in the area of insurance claims is declining. This conclusion was corroborated by senior industry officials.

Potential for Conflict of Interest

21.107 We examined the risk associated with the relationship between the moving industry and officials of DND, the RCMP and PWGSC who form the IDC. We focussed on the allegations made in testimony before the Public Accounts Committee on 31 October 1995 stating that certain former government officials were in a conflict-of-interest situation. We also reviewed the departments' compliance with the government's conflict-of-interest and post-employment policies and procedures. Our review as such was limited to assessing the potential for conflict of interest.

The risk of conflict of interest is changing

21.109 There is always some risk that members of an organization can influence contract specifications in favour of established contractors, which potentially gives them an advantage after leaving employment. In post-employment the potential exists, particularly for former IDC members, to influence government officials to maintain contract specifications and operational requirements that favour established contractors. This risk is increased if former IDC members do not respect the government's post-employment codes.

21.110 The risk regarding IDC members relates mostly to potential impact on competitiveness. We noted that the Competition Bureau is examining the competitive aspects of the way the federal government purchases household goods removal services; the results were not available to us during our audit. The employment of several former senior DND officials by the moving industry has created concern in some quarters that fair and open competition is affected. Partly in response to such concerns, the IDC requested that PWGSC take over the function of contracting with the moving industry. This recent event has changed the risk of potential conflict of interest between IDC officials and the household goods moving industry by establishing a separation of responsibilities. As PWGSC takes increased leadership in the contracting process, this risk should become lower.

21.111 PWGSC supply officers do not appear to have had a significant impact on defining operational requirements for household goods removal services, nor are we aware of any having taken employment with the moving industry after leaving the public sector.

21.112 Staff who administer individual moves in each IDC member department have potential opportunities for personal gain by influencing the quality, quantity and selection of quality control measures, including inspections. However, they do not have as much influence as members of the IDC to warrant preference in offers of employment from the moving industry.

21.113 Specific allegations. We reviewed the details of allegations of conflict of interest included in parliamentary records and in documents provided to us by the Public Accounts Committee. In total, we reviewed the circumstances of 14 former DND officials associated with the IDC, 11 of whom had chaired that committee or were subject to the government's codes. In addition to the requirements of the federal government's codes, we noted that in 1989 DND put in place Supplementary Compliance Measures pursuant to section 11 of the government's Conflict of Interest Code. DND had files for 8 of the 14 cases, which we reviewed. In the other 6 cases the conflict-of-interest code was not applicable. We found that DND had properly applied its conflict-of-interest and post-employment code, including the Supplementary Compliance Measures, to the senior officials who took employment with the moving industry. Based on our review of the 8 cases, we found no evidence to support the concern that officials of DND were in a non-arm's-length relationship with the moving industry.

21.114 Representations from deputy ministers . As part of our approach we sought confirmations from the deputy ministers of DND, the RCMP, and PWGSC of actions they have taken in response to concerns of potential conflict of interest, and any knowledge they may have of such situations. Such representations are significant, in that they require the most senior departmental officials to ensure that codes of conduct are complied with. We therefore expected that they would disclose any information related to the subject under review that in their opinion warrants the attention of our Office. We received responses from all three departments confirming that their policies, practices and codes have been complied with, and stating that they were not aware of any conflict of interest between their officials and the moving industry.

21.115 On 16 July 1997 DND informed us that on 8 May it had received information from another agency suggesting that in 1994 a sensitive protected document that originated in that agency may not have been given appropriate care while in the possession of National Defence staff. The Department is still looking into this allegation and has indicated that it will advise us further.

21.116 Interviews with senior officials responsible for overseeing conflict-of-interest policy. We met with the conflict-of-interest officials at DND, the RCMP, and PWGSC. We reviewed the details of their policies and their application to the circumstances under review. We confirmed with each of them the official representation sent to us.

21.117 In summary, we have determined that PWGSC, the RCMP and DND have applied the Conflict of Interest and Post-Employment Code appropriately in the situations that we reviewed. Any potential for conflict of interest, including non-arm's-length relationships between government officials and the household goods moving industry, is changing. This is partly attributable to the recent transfer of responsibility for contracting from the IDC, which is chaired by DND, to PWGSC. A final conclusion can be drawn only after the matter under review at DND is resolved.

Conclusion

21.119 The tariff paid by the government for household goods removals has been declining in recent years. Nevertheless, we have concluded that the contracting arrangements in place need strengthening. The business allocation formula used to distribute business among qualified contractors has proved to be brittle. Least cost and not best value has been the primary basis for allocation of business. Major stakeholders are seeking a better alternative to the current contracting arrangements.

21.120 The government's costs for managing household goods removals have not been falling commensurate with the significant decline in the volume of moves. There are several areas where changes in management and operating policies could result in improved cost and quality of service.

21.121 The government has identified potential opportunities to save some $1.5 million yearly by improving efficiency in managing the services. Enhanced use of information technology, centralization, simplification of rules and regulations and more attention to customer satisfaction are areas that need action.

21.122 The management of the risk of overcharging due to "weight bumping" and the carriage of unusual items needs to be strengthened. The inherent risk in this area is high; the systems and controls in place to prevent abuse are not working as intended. While it is extremely difficult to determine the precise nature and extent of overcharging that may be occurring, our analysis points to a systemic upward bias in the aggregate weight billed in 1996-97. The government recognizes the problem and has indicated that it will seek to create workable solutions with all stakeholders in consultation with industry. Further, savings of $1 million to $2 million in operating costs can be achieved if a basis for pricing moves is found that eliminates the requirement for weighing shipments.

21.123 The potential for claims abuse is not excessive. Finally, the potential for non-arm's-length relationships between the moving industry and the IDC remains, but the risk is changing.

Response from the Department of National Defence, Public Works and Government Services Canada and the Royal Canadian Mounted Police: The taxpayer receives good value for its money and we are pleased that the Office of the Auditor General recognizes that we receive significantly lower prices for household goods removal services. Nevertheless, the OAG's recommendation to place more emphasis on employee satisfaction may have merit. Where feasible and cost-effective, it is our intention to place greater emphasis on employee satisfaction as a factor in the performance measurement framework.

This audit found no evidence of weight bumping. However, we are committed to mitigating this risk and continue to strengthen controls through such measures as increased inspections and reweighs.

The report observes that the average weight per government move is increasing. The government's average weight per move is still less than half of the entitlement. This increase is a result of socio-economic factors and of entitlement and policy rather than transportation pricing, contracting and controls.

The report also observes that the potential risk of non-arm's-length relationships between the moving industry and government employees is changing. The management and contracting responsibilities for household goods removal services are now separated. In addition, the OAG has observed that Treasury Board's Conflict of Interest and Post-Employment Code policies are being appropriately applied. These two factors have reduced the risk of non-arm's-length relationships.

We continually seek to improve how we administer the household goods removal business and have worked closely with the OAG audit team to that end. Outlined below is the plan to achieve the following objectives:

• strengthen the contract framework
• improve management efficiencies
• pursue potential additional savings

Major changes to the contract framework were undertaken in response to Internal Audit and Bureau of Competition recommendations to increase competitiveness, permit new entrants, and reduce the regulations of the industry. These fundamental changes have directly contributed to achieving one of the lowest tariffs in Canada for the past two contract terms. Nevertheless, we agree that the contracting framework can be strengthened. Notably, analysis and alternatives to the bid-matching provisions, opportunities to provide greater emphasis on employee satisfaction in contractor selection/business share allocation, innovation and alternatives to the basis of payment will be sought.

The complexities of contracting for household goods removal services are recognized and the government encourages competition. It is our intention, together with the major stakeholders in the government and the industry, to evaluate potential solutions in a more detailed cost-and-benefit assessment, beginning this fall. It is our intent to examine the impact on rates, in particular in remote and low-volume areas, as well as the increase/decrease of service levels provided to government employees. In addition, any recommendations from the Bureau of Competition will be incorporated into the analysis where feasible.

The current contract expires 31 March 1999. This will provide us sufficient time to assess options with the aim of incorporating changes into the Statement of Work for the next contract.

In the interim, steps have already been taken to strengthen control procedures to reduce the risks associated with the use of weigh scale tickets until a better alternative is found. The reweigh program has been strengthened by increasing the frequency and the RCMP has begun conducting Quality Control Inspections (QCIs). As well, liquidated damages for weigh scale ticket irregularities have been instituted in the 1997-99 contract. Discussions have also taken place with a third-party move-management firm to provide a proposal for an alternative basis of payment for the government's consideration.

B. Improve Management Efficiencies

Currently, based on a Senior Review Board decision, the government has put in place a plan to centralize the management function of household goods removal services and to improve its automation tools. The implementation of the Automated Move Management System (AMMS), scheduled for implementation in April 1999, will result in a marked advance for government to effectively manage household goods removal services and increase efficiencies. The transfer of PWGSC/Central Removal Service (CRS) is planned to coincide with the implementation of AMMS. The AMMS project is currently funded, a team has been established, and the project is progressing on schedule. Discussions have begun with the RCMP to also transfer portions of its responsibilities to DND as an initiative to further eliminate overlaps.

Coincident with progressing on the AMMS project and the development of a PWGSC/CRS transfer implementation plan, an assessment is planned to validate that in-house alternatives remain more cost-effective than contracting the move-management function to the private sector. In addition, the rationale supporting the transfer of PWGSC/CRS to DND will be revisited. These activities are planned to be completed this fall.

The Furniture and Effects Administrative System (FEAS) program currently used to support the management of household goods within DND remains problematic. However, the program is largely functional, with the exception of electronic communication links with contractors, and it is capable of providing some management reports. As a consequence, an assessment is being prepared to determine the possibility of DND using the PWGSC/CRS computer system. The performance measurement project is also nearing completion and will be further enhanced with the implementation of AMMS.

C. Pursue Potential Additional Savings

The OAG suggests additional savings can be achieved through further reductions in Storage in Transit (SIT), spreading moves over larger periods of time and cancelling QCIs and warehouse inspections, together with the creation of an alternative to the current basis of payment. The potential for reducing costs for both the government and for the industry are recognized; however, it must be appreciated that these are only marginal costs, which again suggests that the government is receiving good value for money (i.e. potential savings of $1.5 million in industry operating costs if a mechanism other than scales is used and if the alternative does not add any other costs). The main cost to government remains that of the tariff and any changes made must ensure that the government continues to obtain a competitive tariff.

With respect to reducing SIT and spreading moves over a larger period of time, significant gains have already been made over the past several years in these areas. Additional substantive gains would not be easily achievable without significant, potentially negative, impacts on morale and could pose operational limitations. This matter will be reviewed.

The need for QCIs, warehouse inspections and establishing an alternative basis of payment can be addressed only within the contract framework. As such, these items will form part of the government's plan to review the contract framework described above.

Within DND, the Cost Move Steering Committee has been re-instituted with its first meeting planned for this fall. Potential options for further reducing SIT and spreading moves is a planned discussion item.

About the Audit

The overall audit objective was to assess whether there is scope to improve value for money from the arrangements in place to procure and manage household goods removal services - more specifically, whether:

• present contracting arrangements provide reasonable cost and quality of service and a fair and competitive process;
• the government's management of removal services is economical and efficient; and
• satisfactory controls are in place to guard against overcharging through weight bumping, the potential for excessive insurance claims, and conflict of interest.

Our audit focussed on those government household goods moves that are the responsibility of the Interdepartmental Committee on Household Goods Removal (IDC). These mainly cover:

• moves handled by the Removal Section of DND and the RCMP;
• those handled by the Central Removal Service of PWGSC (a common service organization); and
• overseas moves that are the responsibility of DND.

Criteria

The audit criteria were built on the foundation for government contracting as it appears in the Treasury Board Contracting Policy, which points to, among others, the following:

1. The objective of government procurement contracting is to acquire goods and services and to carry out construction in a manner that enhances access, competition and fairness and results in best value or, if appropriate, the optimal balance of overall benefits to the Crown and the Canadian people.

2. Government contracting shall be conducted in a manner that will:

(a) stand the test of public scrutiny in matters of prudence and probity, facilitate access, encourage competition, and reflect fairness in the spending of public funds;

(b) ensure the pre-eminence of operational requirements.

In addition, Treasury Board, in its Comptrollership Policy, requires Departments to establish and document internal policies outlining the extent of accounts verification required, to:

(a) certify that the work has been performed, the goods supplied or the services rendered or

(b) in the case of other payment, the payee is entitled to or eligible for the payment.

This Policy also requires that the accounts verification process be audited by the departmental internal audit group.

Approach

We pursued several lines of audit inquiry to answer the following questions:

First, has the contracting arrangement in place resulted in a reasonable cost and quality of service and is the process fair and open?

Second, are the accounts verification processes and related controls operating satisfactorily to guard against overcharging resulting from weight bumping, excessive insurance claims and non-arm's-length transactions, if any, between officials of the IDC and the moving industry?

Third, does the actual cost of the household goods management function reflect the government's own expectations in terms of cost and efficiency, and are the activities carried out as required?

In addition to the above, we benchmarked the government's costs and quality of service with several other organizations that move significant numbers of employees. We also identified best practices in these organizations that could be beneficial to the federal government. Finally, we examined the roles and responsibilities of the key organizations involved with household goods removal to determine whether any significant weaknesses in the government's performance could be attributed to gaps, if any, in accountability.

Our approach was to first determine what actions, if any, have been taken by the government to address concerns that were brought to the attention of the Standing Committee on Public Accounts in 1995. Next, we assessed the nature and extent of actions taken by the government since 1995. Finally, we conducted such tests and procedures as we considered appropriate to assess the systems in place to prevent waste and abuse in the stated areas of concern to the Public Accounts Committee.

We did not conduct an investigation to determine the extent of fraud, abuse or conflict of interest; rather, we examined the government's management practices to assess the potential for such behaviour.

Household goods relocation has been the subject of internal audit and reviews on several occasions; to the extent that the findings of these studies remain relevant, we took them into account. For example, a 1990 internal audit at DND that examined Military Move Claims dealt with important aspects of the relocation of military personnel. Between 1991 and 1994, three studies were initiated by the IDC to analyze the cost of managing household goods removal services and to identify potential savings. In 1996, a review of the 1996-97 process for soliciting and contracting for household goods moving services was carried out by the Audit and Review Branch of PWGSC. There were no such examinations relating to the accounts verification process.

Audit Team

Manfred Kuhnapfel
Neil Maxwell
Jacques Marquis
Martha Lywak
Anne Hardy

For information, please contact Vinod Sahgal, the responsible auditor.

Appendix

Exchange of Correspondence between the
Public Accounts Committee Chair and the Auditor General

Letter from the PAC to the OAG, June 20, 1996

Mr. Denis Desautels
Auditor General of Canada
Office of the Auditor General of Canada
240 Sparks Street, 11th Floor
Ottawa, Ontario
K1A 0G6

Dear Mr. Desautels,

As you may be aware, the Standing Committee on Public Accounts has developed an interest in the manner in which the federal government of Canada arranges the relocation of household goods of its employees who have been transferred from one location to another.

According to a 1994 estimate, the costs of the moving contracts alone for relocating federal employees was between $100 and $120 million. During the same period, it was estimated that the federal government accounted for 30 to 40 percent of the 80,000 to 100,000 total household moves handled by the moving industry in Canada. These data indicate that these relocations represent a considerable cost to federal treasury and to the taxpayers of Canada They also suggest that actions by the federal government in this area have an impact on the moving services industry as a whole and on the rates paid by individual citizens to have their belongings relocated.

The Committee has studied the matter and has determined that further investigation is warranted. Therefore, as a consequence of the need for further study and of the costs involved in relocating the household goods of government employees, the Standing Committee on Public Accounts is formally requesting that you and your Office examine and report on this aspect of government expenditure. As part of your audit, we also request that you investigate the following elements associated with federal government household goods removal services:

• the potential of claims abuse or "weight bumping," and, in particular, allegations raised during a November 28 1995 segment of the CBC television program "Marketplace";
• the systems in place to prevent waste and abuse, either by moving companies or by federal government employees;
• the number and cost of both military and civilian personnel employed by the government to manage household goods removals;
• the potential existence of non-arm's-length relationships between the moving industry and the Interdepartmental Committee (IDC), the committee responsible for moving contracts; and
• the operation of the new business allocation formula, including the criteria - such as the infrastructure in place - employed to select winning bidders, used by the IDC to award moving contracts.

Because the issue is serious and the costs considerable, the Standing Committee asks that you give this matter your immediate attention. The Committee's research staff is prepared to provide any relevant documents that have been acquired in order to assist in the investigation.

In closing, and on behalf of the Committee, I would like to thank you and your Office for the assistance provided to the Committee during the past session of Parliament.

Yours sincerely,


Original Signed by
Michel Guimond, MP
Chairman

Letter from the OAG to the PAC, July 8, 1996

8 July 1996

Mr. Michel Guimond, MP
Chairman
Standing Committee on Public Accounts
726 Avenue Royale
Beauport, Québec
J1E 1Z4

Dear Mr. Guimond:

Thank you for your letter of 20 June regarding your Committee's request that my Office examine and report on federal government household goods removal services. I am pleased to inform you that we have considered the Committee's request carefully and have decided to conduct a value-for-money audit of household goods removal services including the specific points in your letter.

I have assigned a high priority to the completion of this audit. Accordingly, we will reassess other planned audit priorities in order to report this audit to Parliament at the earliest opportunity. Given the scope of matters expressed in your letter, I plan to report the results of our audit in the first periodic report of 1997 scheduled for tabling in April or May. Meeting this tentative reporting date will depend on the complexity and difficulty of the audit and of dealing with many government departments. Audit work of this complexity requires a minimum of six months field work in addition to planning, report writing and publishing time.

I trust that this will fully meet the Committee's expectations. Should you require clarification on the scope and timing of this audit or on any other matter of interest to the Committee, please do not hesitate to call me.

I would like to take this opportunity to thank the Committee for its interest in the work of the Office over the past year. Your hearings and reports play an important role in government accountability.

Yours sincerely,

Original Signed by
L. Denis Desautels, FCA

cc: Bernard Fournier