Audit of Contract Management

Final Report

Foreign Affairs and International Trade Canada
Office of the Chief Audit Executive

February 2012

Executive Summary

Recent audits carried out in a number of areas highlighted significant control weaknesses related to contracting. As a result, the Departmental Audit Committee recommended the conduct of this audit as a high priority. The objective of the audit was to assess the extent to which controls to reduce risks of malfeasance are in place and working adequately.

Why is this important?

The Department of Foreign Affairs and International Trade (DFAIT) relies on contracting to fulfill its mandate. In 2010/2011, DFAIT expended $352 million^{Footnote 1} or 8.8% of its budget on contracting. Ensuring that contracting practices are open, fair and transparent respects public service values and reduces the risk of malfeasance and subsequent reputational loss.

What did we examine?

Contracting activities are decentralized in the department. Contracts are processed by:

• Contracting Policy, Monitoring and Operations Branch (SPP) within the Chief Financial Officer Branch who are the Departmental functional authority;
• Centres of expertise (Security, Real Property and Informatics);
• 15 Area Management Offices at headquarters; and,
• Missions abroad.

These different groups operate autonomously and have different processes and controls in place. Consequently, they represent different levels of risk. As such, our randomly selected, statistically valid sample was stratified to reflect this situation. In total we tested 145 files established in 2010-2011. The results represent a confidence level of 95%.

This audit focussed on those components of the contracting lifecycle that represent the highest risk of malfeasance. The following key areas were examined.

• The openness, fairness and transparency of the contract solicitation process;
• The fairness and transparency of the contract award process;
• The validity of the justifications for the use of sole source contracts; and,
• The review, approval and justification of amendments and change orders.

What did we find?

• In two of the areas responsible for processing contracts, (1) the Contracting Policy, Monitoring and Operations Branch and (2) the Real Property Bureau, preventive controls were in place to guard against malfeasance.
• There is a need to clarify the distinction between bidder selection processes using a Call-Up Against a Standing Offer as opposed to a Supply Arrangement.
• The application of the control framework at missions needs to be strengthened to ensure it is sufficient to [REDACTED].
• There is a need to more consistently apply compensating monitoring controls across the organization to strengthen detection.

Key Recommendations

To address vulnerabilities, the audit recommends that:

• The Chief Financial Officer in consultation with the Assitant Deputy Minister (ADM) International Platform Branch, implement measures to strengthen departmental level control over contracting activities in the Real Property Bureau.
• The Contracting Policy, Monitoring and Operations Branch develop and apply a more rigorous training process, over and above that provided by Public Works and Government Services Canada, before granting contracting authority to ensure that processes for making Call-Ups Against Temporary Help Services System (THS) Standing Offers and Supply Arrangements are followed.

All of the recommendations contained in this report relate to control weaknesses that have been identified in previous audits. The Chief Financial Officer is developing an integrated Management Action Plan to address these issues and should ensure that the specifics of the recommendations of this report are addressed in the integrated plan.

Conclusion

The effectiveness of the control framework to reduce the risk of malfeasance varied across processing units.

Where Contracting Policy, Monitoring and Operations Branch or the Real Property Bureau is responsible, the bid solicitation and contract award processes were open, fair and transparent and amendments were justified. Documentation on file demonstrated that contracting was in compliance with Treasury Board Policy. We did not discover any files that contained indications that controls were being circumvented.

Temporary Help Services, an area of known weakness, were not always used for the intended purpose. As well, the “right of first refusal” for Call-Ups Against a Standing Offer was not respected. [REDACTED] and has a significant impact on the operating budget of the Department.

The solicitation and award processes at Missions are not always open, fair and transparent. Controls to reduce [REDACTED].

Statement of Assurance

In my professional judgment as Chief Audit Executive, sufficient and appropriate audit procedures have been conducted and evidence gathered to support a high level of assurance on the accuracy of the information in this report. The results are based on a comparison of the conditions, as they existed at the time, against pre-established audit criteria that were agreed upon with management. The results are applicable only to the processes examined. The evidence was gathered in compliance with Treasury Board Policy, Directives, and Standards on Internal Audit for the Government of Canada.

Original signed by:
Yves Vaillancourt
Chief Audit Executive

1.0 Introduction

The Department of Foreign Affairs and International Trade’s (DFAIT) Risk-Based Audit Plan for 2011-2012 identified this Audit of Contract Management as a high priority. Recent audit work within the department had identified control weaknesses for contracting. These audits include: Corporate Service Delivery at Headquarters; Materiel Management; Real Property; and Exceptional Contracting Authorities in Afghanistan.

The objective of this audit was to assess the extent to which controls to reduce risks of malfeasance were in place and operating effectively.

The Contracting Environment at DFAIT

The Department of Foreign Affairs and International Trade (DFAIT) relies on contracting to fulfill its mandate. In 2010/2011, DFAIT expended $352 million or 8.8% of its budget on contracting. These contracts range in risk and complexity from Call-Ups Against a Standing Offer and Supply Arrangements established by Public Works and Government Services Canada (PWGSC), to large complex contracts established through a departmental request for proposal process.

Contracting activities are dispersed throughout the department. Contracts are processed by:

• Contracting Policy, Monitoring and Operations Branch (SPP) within the Chief Financial Officer Branch who are the Departmental functional authority;
• Centres of expertise (Security, Real Property and Informatics);
• 15 Area Management Offices at headquarters; and,
• Missions abroad.

These different groups operate autonomously and have different processes and controls in place. Consequently, they represent different levels of risk. In addition to the risks related to effectiveness, efficiency and compliance posed in this delivery structure, there is a risk that procurement and contracting is not managed to reduce the risks of malfeasance.

Procurement Methods

There are a number of different procurement methods available to the Department to acquire goods and services. The following table provide a brief description of the main procurement methods used.

MERX

This is the Government electronic distribution system to meet NAFTA requirements. The use of MERX is mandatory for posting all requirements greater than $76,600 (the NAFTA threshold for the audit period) for service contracts.

Traditional Competitive

A minimum of three bidders need to be invited to submit a proposal. This method can be used for requirements below the NAFTA threshold.

Sole Source

A sole source contract is directed to a specific supplier without competition. There is no opportunity for other firms to submit a proposal. This method can be used when:

• Requirement is less than $25,000 for general services or less than $100,000 for architectural or engineering services;
• Only one supplier is qualified (i.e. proprietary software);
• It is not in the public interest to advertise the requirement (i.e. security consideration);
• There is a pressing emergency and delay would be injurious to the public interest.

Temporary Help Services

Temporary Help Services is an appropriate procurement method when specific criteria are met. These include:

• Public Servant is absent for a period of time;
• Position is vacant and staffing action is underway; and,
• Temporary workload increase with no suitable staff available.

Standing Offer

A Standing Offer is a pre-qualified list of suppliers, established by PWGSC, for specific streams of goods and services. The list is established from the lowest priced qualified bidder to the highest priced qualified bidder. When a Call-Up Against a Standing Offer is made, the lowest price qualified bidder must always be given the “right of first refusal”.

Supply Arrangement

A Supply Arrangement is a pre-qualified list of suppliers, established by PWGSC, for specific streams of good and services. The list contains the name of the supplier as well as the quoted rate. When the Department wishes to use a Supply Arrangement, at least 3 suppliers must be provided the opportunity to submit a proposal for the requirement. The request for proposal must be sent to:

• Lowest priced qualified bidder;
• At least one randomly selected from the list of qualified suppliers;
• Any additional suppliers that the project authority would like to invite.

Delegation of Authority

The dispersion of authorities across the Department creates potentially different risk level. This had an impact on the selection of contracting files to be included in the audit. Our audit focussed on contracts processed through:

1. Contracting Policy, Monitoring and Operations Branch;
2. Real Property Bureau (ARD);
3. Temporary Help Services (THS); and,
4. Missions abroad.

During most of the audit period covered, Area Management Offices could issue contracts or amendments up to $25K in value and Call-Ups against THS Standing Offers and Supply Arrangements (up to $400K and / or 48 weeks in duration). Contracts greater than $25,000 in value and some specific security and IT equipment were required to be processed through one of the Departmental Centres of Expertize (COE) – Contracting Policy, Monitoring and Operations Branch, Security, Real Property Bureau or Information Technology (Shop@DFAIT).

Effective February 2011 Area Management Offices were required to use the Contracting Policy, Monitoring and Operations Branch for access to Supply Arrangements greater than $25,000 in value.

Currently Missions can issue contracts up to the North American Free Trade Agreement threshold (currently $76,600) in value. All contracts greater than $76,600 in value as well as some specific security and IT equipment are required to be processed through one of the Departmental Centres of Expertise.

Methodology

We tested a sample of randomly selected contract files stratified across the four areas of processing and across the type of procurement method used. This resulted in a review of 145 files. This sampling methodology has a confidence level of 95%.

We expected to review documentation that was in compliance with  Treasury Board Policy that demonstrated that controls were in place and working effectively to reduce the likelihood of malfeasance occurring. It was expected that documentation would exist to support key steps in the contracting life-cycle which include: planning; bid solicitation; evaluation and contract award, and, amendments. Furthermore, it was expected that documents and files would be easily accessible.

The key controls to reduce the risk of malfeasance across the contracting lifecycle are included in the table below.

Lifecycle Stage: Planning
Key Controls:

• Contract Review Board Approval

Lifecycle Stage: Bid Solicitation
Key Controls:

• Public notification or invitation of sufficient suppliers
• Clear, non-restrictive Statement of Work
• Evaluation criteria
• Segregation of duties through the involvement of arms-length contracting authority

Lifecycle Stage: Evaluation & Award
Key Controls:

• Bids assessed against published Evaluation Criteria
• Selection methodology is pre-determined (i.e. lowest bid or lowest price per point)
• Winning bid selected based on selection methodology
• Participation of Contracting Authority
• Results well documented

Lifecycle Stage: Amendment
Key Controls:

• Amendments are substantiated
• Reviewed by Contracting Authority and Contract Review Board as required

2.0 Audit Findings and Recommendations

2.1 The Contracting Control Framework applied by the Contracting Policy, Monitoring and Operations Branch is well designed and operating as intended to prevent malfeasance

We reviewed a statistically valid, random selection of 28 Headquarters (HQ) contract files processed through the Contracting Policy, Monitoring and Operations Branch. The selected files had a total value of $2,867,886 and included:

• 19 Call-Ups Against a Standing Offer;
• 3 Sole Source Contracts;
• 3 Supply Arrangements;
• 2 Traditional Competitive; and,
• 1 MERX.

The Design and Application of the Control Framework

Planning

Currently contract requirements that exceed $200K, with the exception of Temporary Help Services are required to go through the Departmental Contract Review Board (DCRB) for approval. This ensures that an arms-length, corporate-level challenge is in place to guard against the possibility of unsubstantiated contracting requirements and the risk of malfeasance through circumvention of the rules in place.

Once approval is granted by the Departmental Contract Review Board, files are assigned to a procurement officer within one of the Centres of Expertise to manage the Request for Proposal (RFP) process. This ensures appropriate segregation of duties between the Project Authority and the Contracting Authority.

Audit testing demonstrated that all necessary Departmental Contract Review Board approvals were in place. Documentation on file demonstrated that Contracting Policy, Monitoring and Operations Branch participated as the Contracting Authority and provided an arms-length review through the contracting life cycle. These steps contribute to reducing the likelihood of malfeasance occurring.

Bid Solicitation

Public Notification of requirements or the invitation of a sufficient number of firms to ensure competition is essential to reducing the likelihood of malfeasance and to ensure best value to the government.

Clearly defined, non-restrictive, Statements of Work are important. They ensure fair competition by providing suppliers a clear understanding of the requirement in order to submit an appropriate bid. As well, this ensures best value to the government by opening competition to the widest number of potentially qualified bidders.

Evaluation criteria need to be developed which are appropriate to the Statements of Work as a guarantee of contract award based on merit.  Contracting Policy Monitoring and Operations Branch, as the Contracting Authority, works with Technical Authorities and Managers from program areas to tailor the evaluation criteria to the requirement being purchased.

Audit testing demonstrated that where required, public notification was in accordance with policy. In all cases a sufficient number of firms were invited to submit bids. Statements of Work were clear and non-restrictive and associated Evaluation Criteria were appropriate to the work to be performed.

Evaluation and Award Stage

At this stage of the process bids must be assessed against published Evaluation Criteria and the winner selected accordingly. The key controls are the participation of a Contracting Authority which provides segregation of duties, and the documentation of evaluation results, preferably with signed individual and consensus assessments. Applying these controls ensures that the contract is awarded based on pre-determined criteria and official evaluation results.

The Contracting Authority participates in all stages of the solicitation and award process and provides for an arms-length challenge mechanism.

Audit results indicated that evaluation criteria were applied as set out in Request for Proposal documents and evaluation results were documented. This demonstrates that the competition is transparent and it reduces the risk of malfeasance while also ensuring best value for the government.

For the 19 Call-Ups Against Standing Offers reviewed, the “right of first refusal” was respected. This is a result of being processed either through Contracting Policy, Monitoring and Operations Branch or through Public Works and Government Services Canada. This guards against malfeasance as the project authority is not permitted to select a preferred supplier. As well, “right of first refusal” helps ensure best value to the Department while complying with policy and procedures.

Amendments

All contract amendments issued by Contracting Policy, Monitoring and Operations Branch require a supporting rationale. Also, the contract timeframe must not have lapsed prior to an amendment being completed. In addition any amendments that put the value of a contract issued by Area Management Offices over $25,000 must be reviewed and processed through Contracting Policy, Monitoring and Operations Branch.

Our testing determined that, where applicable, amendments were reasonable, reviewed by the Contracting Policy, Monitoring and Operations Branch and the contracts were still in effect. This guards against the risk of malfeasance through arbitrarily increasing project scope and/or costs as well as contract splitting.

Conclusion

Although there were minor “housekeeping” issues related to file maintenance and documentation, we did not discover any contract files processed through Contracting Policy, Monitoring and Operations Branch that contained indications that controls were being circumvented. The controls in place are effective and working as intended.

2.2 The Contracting Control Framework applied by the Real Property Bureau is well designed and operating as intended to prevent malfeasance

We reviewed a randomly selected sample of 47 Real Property Bureau contract files. The 47 files represent a value of $46.1 million within the overall population of 212 files valued at $87.8 million.

The Design and Application of the Control Framework

Planning

Since 2006 all requirements for contracts have gone through an ISO certified process.  This requires contract advisors from International Platform Branch Contracting and Materiel Management Division which are arm’s length to the Real Property Bureau, to perform quality assurance and risk identification at all stages of the process. This includes review of the Procurement Plan; solicitation documents; moderation of bid evaluations; contract award and amendments. This ensures appropriate segregation of duties during the contracting life cycle. The bureau has two internal decision bodies that act as controls for contracting management. The Bureau Project Committee (BPC) is responsible for formal approval for the initiation, development and implementation of Bureau projects. The Bureau Contracting Review Board (BCRB) approves proposed contracts to ensure that they consistently achieve the bureau’s objectives in a manner that respects government contracting regulations, policies and best practices. These review bodies constitute a challenge to guard against the possibility of unsubstantiated contracting requirements.

In order to initiate the contracting process, project managers have to obtain Bureau Project Committee and Bureau Contracting Review Board initial approval. Amendments over 20% of the project’s initial value have to be reapproved by the Bureau Contracting Review Board. The key document is the Procurement Planning F301 which is submitted to the Bureau Contracting Review Board after a review completed by an advisor from the International Platform Branch Contracting and Materiel Management Division. The procurement planning document captures all key information about contract values, solicitation methods, risk assessment, change orders / amendments, results of solicitation and approvals required.

The internal Bureau Contracting Review Board reviews and approves all construction related contracts. Architectural and Engineering services related contracts over $200,000 are approved by the Departmental Contract Review Board which provides an additional control to reduce the possibility of unsubstantiated contracting requirements and the risk of malfeasance through circumvention of the rules in place.

The Director of Capital Project Delivery is responsible for introducing files to the Bureau Contracting Review Board, approving Procurement Plans, signing most contracts, signing invoices over a pre-determined amount (Based on ISO process Directors are required to sign construction invoices over $500K unless the Senior Project Managers or Project Managers have been given a higher authority), approving the use of contingencies and approving amendments over pre-approved percentages. This role provides for oversight and segregation of duties for work performed by the Project Managers who act as project authority on contracting initiatives.

Audit testing demonstrated that all necessary Bureau and Departmental Contract Review Board approvals were in place. Documentation on file demonstrated that the key controls, the Bureau Contract Review Board initial approval and the International Platform Branch Contracting and Materiel Management Division acting at arm’s length as contracting advisors were in place. These steps contribute to reducing the likelihood of malfeasance occurring.

The recently revised Terms of Reference for the Bureau Contract Review Board calls for participation of the Director, Contracting Policy, Monitoring and Operations Branch.  This is the only corporate oversight of Real Property contracting other than for Architectural & Engineering contracts greater than $200,000, which go to the Departmental Contract Review Board for approval.

Bid Solicitation

Public Notification of requirements or the invitation of a sufficient number of firms to ensure competition is essential to reducing the likelihood of malfeasance while ensuring best value to the government.

Clearly defined, non-restrictive, Statements of Work are required, again, to ensure competition and reduce the likelihood of malfeasance while ensuring best value to the government.

Evaluation criteria need to be developed which are appropriate to the Statements of Work as a guarantee of contract award based on merit. The International Platform Branch Contracting and Materiel Management Division Contracting Advisor, works with Project Managers to tailor the evaluation criteria to the goods or service being purchased, providing for segregation of duties.

The preferred way to engage a firm for work related to any construction project is through a two stage solicitation using MERX. First is an expression of interest and then Real Property Bureau proceeds to the Request for Proposal (RFP) stage. A key control is the involvement of a contracting professional from International Platform Branch, Contracting and Materiel Management Division acting at arm’s length (i.e., they do not report to Real Property Bureau management) as the Contracting Advisor throughout the solicitation and award process. This provides for segregation of duties in the contracting process.

In building source lists of local companies for architectural & engineering or construction projects the Real Property Bureau works with local professional associations where they exist or ask Missions to identify local consultants. Real Property Bureau also places ads in local papers to build awareness of up-coming requirements and do other informal research such as asking local Architectural & Engineering consultants for reputable firms, asking other governments or international firms who had done work in the area for names of reputable firms. From this, the Project Manager will interview a few and develop a short list of qualified firms from which to request and hopefully obtain bids.

Audit testing demonstrated that where required, public notification was in accordance with policy and/or a sufficient number of firms were invited to submit bids. Statements of Work were clear and non-restrictive and associated Evaluation Criteria were appropriate to the work to be performed.

Evaluation & Award Stage

At this stage of the process bids must be assessed against published Evaluation Criteria and the winner selected accordingly. The key controls are the participation of the International Platform Branch Contracting and Materiel Management Division Contracting Advisor which provides segregation of duties, and the documentation of evaluation results, with signed individual and consensus assessments. This helps ensure that competition is transparent and reduces the risk of malfeasance while ensuring best value for the government.

The outcome of this process is that the contract is awarded based on the pre-determined criteria and official evaluation results.

Audit results revealed that evaluation criteria were applied as set out in Request for Proposal documents and evaluation results were documented. However not all individual or consensus evaluations were signed, as this is not a current policy requirement. Where there were gaps in documentation other compensating controls were in place such as a review by the Contracting Advisor and email confirmation of consensus by evaluation participants.

Audit results also indicated that the Real Property Bureau does not record contracts in the Departmental Material Management Module of Integrated Management System (IMS). The only complete record of real property contracts is kept by a Financial Management Support Officer at Physical Resources (SWCP) on an Excel spread sheet. This spread sheet records contracts that are sanctioned by International Platform Branch Contracting and Materiel Management Division. A unique numbering sequence is used to differentiate contracts originated from different Real Property Bureau divisions. With a small number of exceptions where the real property contracts are initiated outside of Real Property Bureau (e.g. at missions), the contracts from this record are not recorded in the departmental contracting system. We were advised that there are system related concerns which make the recording of Real Property Bureau contracts in the corporate system a challenge and that this issue is currently under review within the Branch. In the interim, this means that these transactions could be “invisible” for monitoring or audit purposes and pose a potential risk for abuse.

Amendment or Change Order Stage

Real Property Bureau staff believes that the best way to protect against unfounded Change Orders is to demand a detailed breakdown of costs to verify the validity of the requirement. This is a part of the due diligence required of the Project Manager. Where demands for changes come in very fast they are still subject to review to minimize any risk of abuse. This, in concert with the fact the Project Managers will have a sense of the validity and reality of the Change Order requirement can minimize the risk of malfeasance.

All Change Orders that individually or in aggregate take the contract 20% over the initially approved contract value must be re-submitted to the Bureau Contract Review Board for approval. As such these Change Orders are subject to review by the arms-length Contracting Advisor and the Director, Capital Project Delivery. This provides for oversight, challenge and segregation of duties in aid of reducing risk of malfeasance.

Front end work like geophysical studies help to minimize the unknowns and reduce the likelihood of Change Orders as soil conditions are known in advance of construction.

Change Orders are reviewed by engineering staff (structural, mechanical and electrical engineers) to ensure they are adequate and code compliant. If the Architectural & Engineering firm is not Canadian they will have a more in-depth review of the local company’s drawings as they may not be familiar with Canadian code and performance requirements. This is a critical part of the Quality Assurance process as these are the same drawings that will be used by the Site Supervisor and for commissioning.

[REDACTED]. In many contracts in Canada it is the contracted Construction Manager who is responsible to request and assess bids from sub-trades for specific work packages. To mitigate against this risk in Real Property Bureau issued contracts, the Construction Manager contractors do not have financial authority. Bids for construction work packages are requested and assessed by the Project Manager, not the local Construction Manager. This greatly reduces the ability of the Construction Managers and local sub-trades to conduct fraud.

Audit testing revealed that Change Orders were well documented, appropriately justified and subject to review by the Bureau Contract Review Board as required.

Recommendations

1. The Chief Financial Officer in consultation with the ADM International Platform Branch, should implement measures to strengthen departmental level control over contracting activities in the Real Property Bureau.
2. The Real Property Bureau should ensure the completion of signed individual and consensus evaluation forms.
3. The Real Property Bureau, working in conjunction with the CFO Branch to resolve any system issues, should ensure that all real property contracts are recorded in the departmental contracting system (Materiel Management Module of the IMS).

Conclusion

While there were some gaps in documentation, other compensating controls were in place. We did not discover any files processed through the Real Property Bureau that contained indications that controls were being circumvented. The planning phase is comprehensive enough to guard against unnecessary contracts being awarded. The solicitation and award processes are open, fair and transparent and amendments are justified. The controls in place to reduce risks of malfeasance are effective and working as intended.

With the exception of the reporting relationship of the International Platform Branch Contracting and Materiel Management Division, the controls in place are effective and working as intended. Ensuring CFO Branch oversight would strengthen accountability.

2.3 The distinction between Temporary Help Services (THS) bidder selection processes using a Call-Up Against a Standing Offer as opposed to a Supply Arrangement were not appropriately applied

A sample of 25 THS files with a value of $2,259,768 was randomly selected from a population of 117 THS files with a total value of $10.676.802. This represents 21.17% of the total value of THS transactions in the past year, excluding the contracts under $25,000. The 25 files selected included 16 THS Call-Ups Against a Standing Offer and 9 Supply Arrangements.

In addition, the Chief Audit Executive was requested to review a number of Temporary Help Services call-ups made against a Supply Arrangement.

Auditors expected to review documentation that was in compliance with Treasury Board policy and the DFAIT guide on procurement on the usage of Temporary Help Services and that respected the process specified by Public Works and Government Services Canada.

The THS Standing Offer or Supply Arrangement can be used by federal departments in the following situations:

• a public servant is absent for a period of time; or
• there is a requirement for additional staff during a workload increase, and there is an insufficient number of public servants available to meet the requirement; or
• a position is vacant and a staffing action is in process.

The THS On-Line System (the Standing Offer) is a procurement tool designed to assist Federal Departments in their procurement of temporary help services up to $400,000 or 48 consecutive weeks. A call-up/contract can be extended by an additional 24 consecutive weeks with the prior approval of Public Works and Government Services Canada. Area Management Offices are the primary users of this procurement method with little oversight from Contracting Policy, Monitoring and Operations Branch. Since February of 2011 the Supply Arrangement aspect of this procurement method is managed by Contracting Policy, Monitoring and Operations Branch who process call-ups and are responsible to ensure adherence to protocols.

The THS On-Line System includes 5 streams which are: Office support; Administrative Services; Operational Services; Technical Services; and, Professional Services.

The key control to ensure proper use of the THS Standing Offer is to be a valid THS account holder. To obtain this status successful completion of training provided by Public Works and Government Services Canada is mandatory.

The proper use of the THS Standing Offer for temporary help is important as Public Works and Government Services Canada has conducted an open, fair and transparent competitive process to rank proponents based on best value to the Crown. They have awarded the right of first refusal to the lowest priced qualified proponent accordingly. Not properly following the protocols has a direct cost to the government of Canada.

Planning

Justification for using the Temporary Help Service Standing Offer or Supply Arrangement method was not adequately documented in any of the files reviewed. Therefore, auditors were unable to conclude if the usage of the two methods of supply met the pre-determined criteria to justify the use of the procurement method.

Bid Solicitation

THS can be set up through two (2) components. First, a Standing Offer enables federal department users to issue Call-Ups Against Standing Offers based on the “right of first refusal”. A Supply Arrangement requires a specific delegation of authority within the user's department for the award of contracts based on a subsequent prescribed evaluation process. Both mechanisms were put in place by Public Works and Government Services Canada as the result of an open, fair and transparent competitive process to qualify proponents.

Evaluation & Award

Audit testing revealed that Temporary Help Service Call-Ups Against a Standing Offer did not respect the “right of first refusal” requirement in 10 of the 16 files audited. Users would request bids and CVs from several firms and then conduct a subsequent evaluation in contradiction selecting the lowest-priced qualified bidder. Based on documentation on file it is apparent that THS system users do not sufficiently understand the requirements for the use of this method of supply or are consciously circumventing the process. This means that the department is not in compliance with related policy and is paying a premium for services. The table below shows an example of what could have been saved for the Crown if the “right of first refusal” was respected in the four cases noted during file testing. The savings are considered on the conservative end as we used the median rate rather than the lowest possible rate in the standing offer. The variance is greater than $100,000 (16.9%) on this limited sample.

We found that with one significant exception the Supply Arrangement component of the Temporary Help Services administered by Contracting Policy, Monitoring and Operations Branch were operating as intended. All requirements under the Supply Arrangement method were followed in 10 of the 11 cases reviewed.

In the one exception, the contract was issued based on the user stating “there was a requirement for additional staff during a temporary workload increase, in which there is an insufficient number of public servants available to meet the requirement”. However, the same contractor has been on virtually uninterrupted contracts since 2008. This indicates that the workload increase is not temporary. The contract in question was for in excess of $250,000 and similar contracts had been issued by the Area Management Office in the two preceding years for, $236,000 and $269,000, for a total value of $759,000. This means that the reviewing Contracting Authority did not consider previous contract history and the challenge function was not effective. [REDACTED].

Amendments

Three of the files reviewed did not have adequate justification on file to substantiate extension and were extended beyond the 48 week limit without seeking PWGSC approval as required.

This means that the department is not in compliance with policy but there is a greater risk of abuse without adequate oversight.

Conclusion

The “right of first refusal” for THS Call-Ups Against a Standing Offer was not respected as specified by Public Works and Government Services Canada and the DFAIT Guide on procurement. [REDACTED]. As well, it has an impact on the operating budget of the department.

Contracts using the THS Supply Arrangement, processed through Area Management Office, do not generally meet the specific criteria for appropriate use of this method of procurement. As well, one THS that was processed by the Contracting Policy, Monitoring and Operations Branch did not meet the criteria either. [REDACTED].

Recommendations

4. That the Contracting Policy, Monitoring and Operations Branch ensure that processes for making Call-Ups Against THS Standing Offers and Supply Arrangements are followed.
5. That Contracting Policy, Monitoring and Operations Branch ensure that contractor history is requested and reviewed to ensure compliance with policy prior to making call-ups against THS Supply Arrangements.

2.4 Strengthen the application of the Contracting Control Framework at Missions to ensure it is sufficient to guard against malfeasance of contracting

We reviewed 22 randomly selected files and 22 judgmentally selected files for a total value of $15,392,519. These files were selected from the population of 1174 contracts with a value of $44,216,504.

We expected to review documentation that was in compliance with Treasury Board policy. We also expected to review documentation that demonstrated key steps and controls in the contracting process which include; review and approval by the Mission based Contract Review Board (CRB), non-restrictive statements of work, clear evaluation criteria for bid selection and amendment approvals were in place and working to reduce the likelihood of malfeasance occurring. Furthermore, it was expected that documents and files would be easily accessible.

Planning

Currently Mission staff (Head of Mission or Mission Consular Officer) can issue contracts up to the North American Free Trade Agreement threshold (currently $76,600) in value. Contracts of higher value must be processed through one of the departmental Centres of Expertize (COE) – Contracting Policy, Monitoring and Operations Branch, Real Property Bureau, Security or IT (Shop@DFAIT).

Currently, all requirements for contracting that are for values in excess of $200,000 must also go through the Departmental Contract Review Board (DCRB).

Three (3) of the 44 contracts audited were not reviewed and approved by appropriate contract authorities, two (2) of which related to large amendments (over 50% of initial contract value). This means that the key controls over contracting are not applied, thereby increasing the risk of abuse.

Bid Solicitation

Public Notification of requirements or the invitation of a sufficient number of firms to ensure competition is essential to reducing the likelihood of malfeasance while ensuring best value to the government.

Clearly defined, non-restrictive, Statements of Work are required, again, to ensure competition and reduce the likelihood of malfeasance while ensuring best value to the government.

Audit testing determined that there was only one file where there was explicit use of criteria for a competitive process where only one supplier would likely be able to bid.  In this instance a significant amount of carpet was requested but was identified as a stock item of a specific manufacturer / supplier rather than being based on performance specification. This practice [REDACTED].

Evaluation & Award

Segregation of duties is an important control against malfeasance that can be perpetrated by an individual, especially in a decentralized setting such as a Mission.

There was not sufficient segregation of duties for vendor selection, evaluation and award processes in 4 of the 44 files reviewed. Given the availability of human resources at the Missions, it is difficult sometimes to have different people to solicit, evaluate and award contracts in every case. In exceptional cases Missions should have a second person “validate” the process.

Audit testing found that in five files the financial proposal and technical proposal were not evaluated separately. This means that evaluators know in advance who the lowest bidder is and may be unduly influenced in their assessments which can contribute to abuse.

In 11 of the 26 files that went through a competitive process did not contain evidence to demonstrate that there was an assessment of each bidder by each evaluator individually.  15 of these 26 files did not contain a ranking in a consensus form signed by all members of evaluation committees. These are not policy requirements but weaken the fairness and transparency of the process.

Complete documentation that demonstrates a fair and open contracting process is not always on file. 7 of the 44 files did not provide complete audit trails to tell “the story” of the contracting process. This means that auditors cannot confirm that processes were open, fair and transparent [REDACTED].

Amendments

To ensure that amendments that result in significant increase in total contract amount are justified and the amount reasonable, DFAIT’s procurement guide recommends that amendments exceeding 50% of the original value must be documented in greater than usual detail and an authority higher than the original authority must sign off on the request for Amendment.

As noted, two (2) significant amendments (over 50% of initial contract value) were not [REDACTED].

From interviews with Inspector General’s and Contracting Policy, Monitoring and Operations Branch staff as well as from recent audit work we understand that not all Mission issued contracts are recorded in the corporate system, the Material Management Module of IMS, and therefore are de facto invisible for audit purposes.

Recommendations

6. Missions need to ensure that appropriate documentation is maintained on file to demonstrate that contracting is conducted in an open, fair and transparent fashion.
7. Missions need to ensure that where segregation of duties for contracting is not practical that a second person reviews the process to demonstrate that the contract authority does not operate completely autonomously.
8. Missions need to ensure that significant amendments to contracts are subject to review and approval and an authority higher than the original authority must sign off on the request.
9. Missions need to ensure that all contracts are recorded in the departmental contracting system (Materiel Management Module of the IMS).

Conclusion

The solicitation and award processes at Missions are not always open, fair and transparent. Controls [REDACTED] need to be strengthened.

Despite issues related to file maintenance and documentation, we did not discover any files that contained indications that controls were being circumvented for personal benefit.

While segregation of duties is generally well addressed in most of the Missions examined, we found some instances were better segregation is required.

2.5 Consistently apply compensating monitoring controls for contracting across the organization

There is limited oversight and monitoring currently applied to contracting activities within the department. Contracting Policy, Monitoring and Operations Branch is responsible to conduct the required systematic monitoring of contracting at Headquarters and Missions. We understand that the Chief Financial Officer plans to address this need through the Management Action Plan for Contracting and Procurement.

3.0 Conclusion

The effectiveness of the control framework to reduce the risk of malfeasance varied across processing units.

Where Contracting Policy, Monitoring and Operations Branch or the Real Property Bureau is responsible, the bid solicitation and contract award processes were open, fair and transparent and amendments were justified. Documentation on file demonstrated that contracting was in compliance with Treasury Board policy. We did not discover any files that contained indications that controls were being circumvented.

Temporary Help Services, an area of known weakness, were not supported by documentation to indicate that this procurement method was used for the intended purpose. As well, the “right of first refusal” for Call-Ups Against a Standing Offer was not respected. [REDACTED] and has a significant impact on the operating budget of the [REDACTED].

The solicitation and award processes at Missions are not always open, fair and transparent. Controls [REDACTED] need to be strengthened.

Appendix A: Management Action Plan

Audit Recommendation: 1) The Chief Financial Officer in consultation with the ADM International Platform Branch, should implement measures to strengthen departmental level control over contracting activities in the Real Property Bureau

Management Action:

The International Platform Branch (ACM) Real Property Contract Review Board to be strengthened as a sub-committee which reports to the Departmental Contract Review Board (DCRB) under the CFO. The committee to be co-chaired by ACM and SCM.

Under the new committee structure, quarterly reports of approval decisions are to be provided to the DCRB.

The Chief Financial Officer has created a Procurement Modernization Initiative team (PMI) which will be reviewing the overall monitoring and oversight framework, which includes reviewing the structure of the Contract Review Boards.

Area Responsible:

International Platform Branch (ACM) / Corporate Finance and Operations Branch (SCM)

Corporate Finance and Operations Branch (SCM)

Expected Completion Date:

Complete

Audit Recommendation: 2) The Real Property Bureau should ensure the completion of signed individual and consensus evaluation forms

Management Action:

(a) The Physical Resources Bureau (ARD) ISO-certified Quality Procedure on Contract Management (QP-215) and related Work Instructions will be revised to ensure proper document retention is completed.

(b) Training will be provided to Contracting Advisors for ARD to standardize proposal evaluation procedures and ensure all Advisors are aware of required documentation.

(c) ARD and Real Property Contracting Services Division (AACR) Contracting Advisors will work with the DFAIT Information Management Improvement Program (AIMB) to explore information management solutions to better retain electronic contracting files and all related documentation.

Area Responsible:

Physical Resources Bureau (ARD)

Expected Completion Date:

Complete

Audit Recommendation: 3) The Real Property Bureau, working in conjunction with the CFO Branch to resolve any system issues, should ensure that all real property contracts are recorded in the departmental contracting system (Materiel Management Module of the IMS)

Management Action:

The Procurement Modernization Initiative (PMI) will be investigating the feasibility and cost of the integration of the IMS materiel management module into present ARD financial practices.

Area Responsible:

Physical Resources Bureau (ARD) / Corporate Management Systems, Policy and Reporting (SMS)

Expected Completion Date:

 March 2016

Audit Recommendation: 4) The Contracting Policy, Monitoring and Operations Branch ensure that processes for making Call-Ups Against THS Standing Offers and Supply Arrangements are followed

Management Action:

Increase monitoring of THS contracts through Reports (SPP)  with a focus on agreements that exceed thresholds.

Strengthen understanding of processes and rules related to THS. Provide  training session to Procurement community, AMA Offices and other THS users (delivered by PWGSC).

Area Responsible:

Contracting Policy, Monitoring and Operations (SPP)

Contracting Policy, Monitoring and Operations (SPP)

Expected Completion Date:

Complete

Audit Recommendation: 5) Contracting Policy, Monitoring and Operations Branch ensure that contractor history is requested and reviewed to ensure compliance with policy prior to making call-ups against THS Supply Arrangements

Management Action:

Process changes to ensure that contractor history is reviewed to ensure compliance with policy prior to making call-ups.

Strengthen understanding of processes and rules related to THS. Provide training session to Procurement community, AMA Offices and other THS users (delivered by PWGSC).

Area Responsible:

Contracting Policy, Monitoring and Operations (SPP)

Contracting Policy, Monitoring and Operations (SPP)

Expected Completion Date:

Complete

Audit Recommendation: 6) Missions need to ensure that appropriate documentation is maintained on file to demonstrate that contracting is conducted in an open, fair and transparent fashion

Management Action:

PMI will be reviewing and strengthening the overall monitoring and oversight framework. As part of this, record management procedures to ensure consistent storage of all procurement records will be established.

Area Responsible:

Contracting Policy, Monitoring and Operations (SPP)

Expected Completion Date:

Complete

Audit Recommendation: 7) Missions need to ensure that where segregation of duties for contracting is not practical that a second person reviews the process to demonstrate that the contract authority does not operate completely autonomously

Management Action:

Missions have been made aware of the need for segregation of duties which is typically an issue in the smaller Missions. The transition to Common Service Delivery points and Regionalization will significantly improve this issue.

Through the PMI, significant effort is being put on Talent Management and developing learning roadmaps for non-PG specialists including MCOs/LESs.

Area Responsible:

Contracting Policy, Monitoring and Operations (SPP) / International Platform Branch (ACM)

Expected Completion Date:

Complete

Audit Recommendation: 8) Missions need to ensure that significant amendments to contracts are subject to review and approval and an authority higher than the original authority must sign off on the request

Management Action:

The transition to Common Service Delivery points and Regiona lization will significantly improve this issue. Regional Contract Review Boards will be required to review and approve all significant amendments.

Area Responsible:

Contracting Policy, Monitoring and Operations (SPP) / International Platform Branch (ACM)

Expected Completion Date:

Complete

Audit Recommendation: 9) Missions need to ensure that all contracts are recorded in the departmental contracting system (Materiel Management Module of the IMS)

Management Action:

The transition to Common Service Delivery points and Regionalization will significantly improve this issue.  Policy on the use of Materiel Management (MM) at Missions to be clarified and communicated by CFO.

A Simplified Purchase Order has been created and implemented to assist smaller Missions in entering contracts into IMS/MM.

Area Responsible:

Chief Financial Officer (CFO) / International Platform Branch (ACM)

Chief Financial Officer (CFO)

Expected Completion Date:

Complete

Complete