Summary

Statewide Procurement Practices: Proposed Reforms Should Help Safeguard State Resources, but the Potential for Misuse Remains March 2003 2002-112 rotiduA etatS ainrofilaC S T I D U A E T A T S F O U A E R U B The first five copies of each California State Auditor report are free. Additional copies are $3 each, payable by check or money order. You can obtain reports by contacting the Bureau of State Audits at the following address: California State Auditor Bureau of State Audits 555 Capitol Mall, Suite 300 Sacramento, California 95814 (916) 445-0255 or TDD (916) 445-0255 x 216 OR This report is also available on the World Wide Web http://www.bsa.ca.gov/bsa/ The California State Auditor is pleased to announce the availability of an online subscription service. For information on how to subscribe, please contact David Madrigal at (916) 445-0255, ext. 201, or visit our Web site at www.bsa.ca.gov/bsa Alternate format reports available upon request. Permission is granted to reproduce reports. � � � ��������� ���� ������ ������������� ������������������� ������������ ����������������������� March 26, 2003 2002-112 The Governor of California President pro Tempore of the Senate Speaker of the Assembly State Capitol Sacramento, California 95814 Dear Governor and Legislative Leaders: As requested by the Joint Legislative Audit Committee, the Bureau of State Audits presents its audit report concerning statewide procurement practices. This report concludes that, while proposed reforms to procurement practices should help safeguard state resources, additional changes should be made to reduce the potential for misuse. Before the governor’s May 2002 Executive Order called for sweeping reforms in the State’s contracting and procurement practices, departments generally ignored the policies and procedures established by the Department of General Services (General Services) for the use of the California Multiple Award Schedules (CMAS). However, in the months immediately following issuance of the Executive Order departments more consistently obtained competing quotes from CMAS vendors. In addition, a lack of centralized accountability over the state Web portal project resulted in undisclosed costs and violations of state policy. Ensuring that the State receives the best value when acquiring goods and services requires all state departments to make changes in their purchasing procedures. In addition, General Services needs to strengthen its review of sole-source contracts and emergency purchases and its oversight of other state purchasing activities, including the use of CMAS and master service agreements. The Governor’s Task Force on Contracting and Procurement Review (task force) recommended significant changes to the State’s contracting and procurement procedures. However, since the task force made its recommendations in August 2002, only a few have been fully implemented and these few recommendations have not been in effect long enough for us to measure their effectiveness. Respectfully submitted, ELAINE M. HOWLE State Auditor ������������������� �������������������������������������������������� ���������������������������������������� ������������������ Statewide Procurement Practices: Proposed Reforms Should Help Safeguard State Resources, but the Potential for Misuse Remains CONTENTS Summary 1 Introduction 9 Chapter 1 Departments Often Used the California Multiple Award Schedules Program to Purchase Goods and Services Without Comparing Prices or Determining Best Value 17 Recommendations 24 Chapter 2 The Lack of Accountability for State Web Portal Project Purchases Resulted in Undisclosed Costs and Violations of State Policy 25 Recommendations 41 Chapter 3 By Strengthening Its Review Processes, General Services Could Reduce Departments’ Misuses of Sole-Source Contracts and Emergency Purchases 43 Recommendations 57 Chapter 4 General Services Needs to Strengthen Its Oversight of State Purchasing Activities 59 Recommendations 70 Chapter 5 Recommendations of the Governor’s Task Force on Contracting and Procurement Review Should Improve Controls on Contracting and Procurement 73 Recommendations 88 Appendix A Comparison of Selected Multiple-Award Schedules Programs From Other Government Entities 91 Appendix B Recommendations From the August 2002 Governor’s Task Force on Contracting and Procurement Review 95 Appendix C History of Maximum Purchase Limits for the California Multiple Award Schedules Program 103 Responses to the Audit State and Consumer Services Agency 105 Department of General Services 107 Business, Transportation and Housing Agency 119 Stephen P. Teale Data Center 120 SUMMARY RESULTS IN BRIEF State departments spend billions of dollars each year using the California Multiple Award Schedules (CMAS) program, master service agreements (MSAs), sole-source Audit Highlights . . . contracts, and emergency purchase orders. However, until an Executive Order required extensive reforms, many departments Our review of the State’s ignored the guidelines the Department of General Services California Multiple Award (General Services) developed to ensure that state resources Schedules (CMAS) program and sole-source and were not wasted. Specifically, departments did not always emergency procurement compare prices or evaluate other factors when selecting vendors practices revealed the following: from the list compiled by the CMAS program—vendors that þ Until the governor’s have agreed to sell specific products and services at approved May 2002 Executive Order prices throughout the terms of specific contracts. In addition, requiring departments departments frequently misused sole-source contracts and to adhere to stricter emergency purchases. While state departments are responsible contracting and procurement procedures, for complying with laws and policies governing purchasing, departments did not many of the problems with their purchasing practices were compare prices among exacerbated by inadequate oversight and administration of those CMAS vendors. practices by General Services, which is responsible for setting þ Inadequate oversight guidelines for using the CMAS program, approving CMAS and and administration noncompetitively bid contracts, and performing periodic audits by the Department of of certain CMAS transactions and vendors and noncompetitively General Services (General Services) contributed to bid contracts. the problems we identified with departments’ The Bureau of State Audits has issued a number of reports purchasing practices. pointing out weaknesses in the use of the CMAS program and þ Without comparing prices, noncompetitively bid purchases, the most recent of which the State purchased millions was our April 2002 report titled Enterprise Licensing Agreement: in goods and services for The State Failed to Exercise Due Diligence When Contracting the Web portal project from vendors that played a role With Oracle, Potentially Costing Taxpayers Millions of Dollars. in defining the approach Attempting to eliminate the faulty practices of purchasing and architecture for the departments, the governor issued an Executive Order in project. May 2002 requiring departments to adhere to interim guidelines þ Estimated Web portal created and implemented by General Services. In August 2002, project costs given to responding to the Executive Order, the Governor’s Task Force on administrative control Contracting and Procurement Review (task force) recommended agencies and the Legislative Analyst’s Office were sweeping changes to the State’s contracting and procurement sometimes inaccurate. procedures. General Services provided staff support to the task force and developed the recommendations for the task force’s consideration and is responsible for implementing continued on next page those recommendations. California State Auditor Report 2002-112 11 One example of making a CMAS purchase without comparing þ Before the Executive prices or determining the best value is the Department of Order, departments Corrections’ purchase of $4.6 million in computer hardware frequently misused maintenance services. Another significant example of using the alternative procurement CMAS program without comparing vendors’ prices occurred practices—sole-source contracts and emergency in the project that developed the state Web portal—an award- purchases. winning Web site from which California’s citizens can access þ General Services’ information on various state services. For this project, the procedures for adding Stephen P. Teale Data Center (Teale Data Center), the Health new vendors and products and Human Services Data Center, and two units within to the CMAS list are weak. General Services, largely at the request of two former officials þ Recent improvements of the Governor’s Office, purchased more than $3.2 million in recommended by goods and services from one CMAS vendor. Further, General General Services and the Services and the Health and Human Services Data Center Governor’s Task Force purchased $8.4 million in consulting services for the Web portal on Contracting and Procurement Review using CMAS and an MSA. However, despite General Services’ should address many own recommendation to compare vendor prices when using of the weaknesses we the CMAS program and the terms of the MSA, neither General identified, but further Services nor the other state entities involved in purchasing changes are needed. goods and services for the Web portal did so. Moreover, the State purchased $2.5 million in goods and services from private companies that played roles in defining the conceptual approach and specific architecture for the Web portal. Because, as in the case of most other purchases for the Web portal, these companies’ products were selected without price comparison, questions of fairness exist. Additionally, even though General Services was responsible for the administration of the project, the former officials of the Governor’s Office directed many of the purchases used to develop the Web portal, resulting in a lack of accountability over the project. Consequently, estimated project costs given to administrative control agencies and the Legislative Analyst’s Office were sometimes inaccurate and potentially misleading. The Teale Data Center is now responsible for the management, maintenance, and support of the Web portal project and has achieved some reductions in cost through competitive bidding. Another defect in state procurement practices that occurred frequently before the Executive Order was departments’ misuse of emergency purchase orders and sole-source contracts— contracts in which only one vendor is selected because only that vendor can meet the State’s needs. These alternative procurement practices, when misused, call into question the reasonableness of prices paid for goods and services and the possibility of unfairly restricting competition. For 22 California State Auditor Report 2002-112 California State Auditor Report 2002-112 33 instance, eight of 23 requests for sole-source contract approval we reviewed did not demonstrate that they met statutory requirements. Similarly, for 17 of 25 other purchase requests we reviewed, departments did not sufficiently document that the situations warranted emergency purchases, departments’ poor planning resulted in the need for quick purchases, or departments believed that they had special needs. In one instance, the Department of Motor Vehicles, on behalf of the California Complete Count Committee, purchased $125,000 in teddy bears for the Census 2000 campaign, stating that it needed the bears to entice citizens to complete their census forms. While the purchase did not fall within the exceptions to competitive bidding requirements, General Services approved the department’s purchase request. Insufficient monitoring and oversight by General Services has contributed to an environment that has allowed these pur- chasing practices to continue virtually unabated. Specifically, General Services has not adequately reviewed requests for sole- source contracts and emergency purchases before approving the requests. Only 15 of the 23 sole-source contract requests we reviewed included documents justifying the departments’ requests. Nonetheless, General Services approved all 23 requests. General Services’ inability to properly administer and monitor state purchasing practices is also evident in the failure of its Procurement Division to conduct consistent and prompt compliance audits of state departments’ contracting and purchasing practices. Moreover, since fiscal year 1998–99, Audit Services completed only 19 audits of the 40 departments it includes in its rotational audit plan, and General Services has not fulfilled its responsibility to review current CMAS vendors. Further, General Services’ procedures for adding new vendors and products to the CMAS list are weak, relying too heavily on the strength of contracts between the vendors and other government entities. Specifically, General Services needs to take additional measures to ensure that local governments and other states that award multiple-award contracts—contracts on which CMAS contracts are based—truly compare prices of goods and services to those offered by competitors. In one instance, a contract established by the Merced County Fast Open Contracts Utilization Services program was used as the basis for a CMAS contract with the StateStore Incorporated (StateStore), a vendor repeatedly used to make purchases for the state Web portal. However, we found that Merced County does not have procedures to competitively assess all contract amendments. As 22 California State Auditor Report 2002-112 California State Auditor Report 2002-112 33 a result, General Services could not ensure that the costs of the goods and services purchased through the StateStore’s CMAS contract were fair and reasonable. General Services also needs to improve its information technology (IT) systems for the CMAS program. Several departments we visited complained that the current system was too cumbersome and did not contain the information needed to make efficient CMAS purchases. For instance, access to vendor product and pricing information is severely limited. Additionally, unlike similar departments in some states, General Services does not have copies of CMAS contracts online, although it directs departments to document certain portions of the contracts when making purchases. Many departments contend that it is difficult to obtain copies of the contracts from General Services or the vendors, making it hard to comply with General Services’ direction. Further, General Services IT systems for the CMAS program contain inaccurate expenditure data. According to reports prepared from General Services’ Procurement Information Network (PIN) system, which captures data on CMAS purchases, departments spent $889 million purchasing goods and services from CMAS vendors in fiscal year 2000–01. In comparing data in the PIN system to data at departments, we identified several transactions in which wrong amounts had been entered and others that were entered more than once. To recoup the cost of administering the CMAS program, General Services charges each state department a fee for purchasing goods and services from CMAS vendors. The fees are based on the purchase amounts recorded in the PIN system. Therefore, errors in the PIN data result in over- or undercharges to the departments. For the 10 billings we reviewed, General Services overcharged departments more than $219,000 for its services. However, General Services’ PIN system did not contain records of some purchases made by departments, leading us to believe that not all departments are reporting their purchases as required. Prompted by the May 20, 2002, Executive Order, General Services issued interim guidelines on May 28 that establish new restrictions on purchasing. In addition, the task force proposed changes in the State’s contracting and procurement procedures that should address most of the weaknesses we identified. However, since the task force made its recommendations in August 2002, only a few have been fully implemented and these few recommendations have not been running long 44 California State Auditor Report 2002-112 California State Auditor Report 2002-112 55 enough for us to measure their effectiveness. Nonetheless, if properly implemented, the policy changes would place stricter requirements on the use of multiple-award contracts by California departments than do the policies of several other states. The task force’s goal in recommending the changes was to ensure that state departments use open and competitive bidding whenever possible. In line with that goal, one of the most notable reforms requires state departments to obtain three price quotes before purchasing from a CMAS vendor. Another critical recommendation is to prohibit the use of CMAS contracts or MSAs for acquisitions related to large IT projects. This prohibition, if enforced, relates directly to purchases made in developing the state Web portal. The task force agreed that MSAs and the CMAS program were not designed to be used for such complex projects and acknowledged that stringing a series of CMAS or MSA purchases together to implement a large IT system circumvents the controls and oversight built into the State’s IT acquisition process. In response to other task force recommendations, General Services has placed significant restrictions on the use of non- competitively bid contracts (that is, sole-source contracts and emergency purchases) and plans to increase its level of audits and legal reviews for all contracts and other purchasing vehicles. Unfortunately, because of limited resources and other restric- tions, the effect of many of the task force’s recommendations will likely not be felt for several years. For instance, the task force acknowledged that upgrading General Services’ existing IT system and developing a comprehensive training program for state purchasing personnel are long-term projects. RECOMMENDATIONS Ensuring that the State receives the best value when acquir- ing goods and services requires all state departments to make changes in their purchasing procedures, including the following: • State department officials should stress adherence to CMAS and sole-source contracting requirements and reject requested purchases when these requirements are not met. • State departments should institute procedures to accurately identify and monitor their procurement needs to ensure that sufficient time exists to properly plan for the acquisition of 44 California State Auditor Report 2002-112 California State Auditor Report 2002-112 55 goods and services. Additionally, departments should continu- ously assess the effects of legislative and other requirements on their procurement needs. The Teale Data Center, which has assumed responsibility for the management, maintenance, and support of the state Web portal project, should continue to competitively bid purchases for the project and maintain accurate and clear accountability over project cost estimates and expenditures. As the administrator of the State’s contracting and purchasing procedures, General Services should take the following actions: • Increase the frequency of its audits and reviews of CMAS vendors. • Obtain assurance that other government entities’ processes for awarding and amending multiple-award contracts are in accordance with CMAS goals before accepting these contracts as bases for CMAS contracts. • Implement the recommendations made by the task force. Immediate actions General Services should take include the following: Enforce the laws that limit the conditions under which u the State can make sole-source and emergency purchases. If General Services believes it is in the State’s best interest to grant more latitude for making noncompetitively bid purchases, it should seek changes in legislative authority for such purchases. Consider reducing or eliminating the delegated purchasing u authority of departments that fail to comply with contract- ing and procurement requirements. Consult with departments to determine what can be done u to facilitate monthly reconciliations of CMAS purchasing and billing activities. Explore the cost of upgrading its existing Web site to u include more comprehensive information about CMAS vendors, including a complete price list of available goods and services for each vendor. 66 California State Auditor Report 2002-112 California State Auditor Report 2002-112 77 AGENCY COMMENTS General Services and the Teale Data Center agree with our recommendations. Accordingly, both departments stated that they would take the necessary actions to address the recom- mendations. In fact, General Services indicated that it has already begun to implement many of the recommendations in our report. n 66 California State Auditor Report 2002-112 California State Auditor Report 2002-112 77 Blank page inserted for reproduction purposes only. 88 California State Auditor Report 2002-112 California State Auditor Report 2002-112 99 INTRODUCTION BACKGROUND The State has established processes for departments to use when acquiring goods and services. Competition is typically at the core of these processes, which are designed to promote fairness, value, and the open disclosure of public purchasing. State law and the policies of the Department of General Services (General Services)—the State’s contracting and procurement oversight department—generally require state departments to conduct a competitive bidding process that gives vendors an opportunity to submit price quotes or proposals for purchases of goods costing $25,000 or more and for services valued at $5,000 or more, with certain exceptions. Public policy strongly favors competitive bidding, and state contracts established without competitive bidding are limited by either statute or Executive Order. However, the traditional process of competitive bidding that departments generally must use to make purchases can be lengthy. A department typically prepares a request for proposal or an invitation to bid that, among other things, describes the product or service it wants, invites prospective vendors to submit written proposals or bids that identify their prices, and describes the procedures the department will use to evaluate the proposals. After advertising its request for proposal, the depart- ment evaluates the proposals received, selects a winning vendor or vendors, and resolves any protests filed by losing vendors. Information from General Services indicates that the process often takes from three to eight months, depending on the nature of the good or service, the number of vendors bidding, and the number of protests filed, among other factors. California Multiple Award Schedules Program General Services has developed several procurement methods that are intended to be competitive but include procedures generally not found in standard competitive bidding. One such method is the California Multiple Award Schedules (CMAS) program, which is based on the federal multiple-award schedules (FMAS) program. The CMAS program relies on competitively established contracts between other government entities and multiple vendors. Each vendor on the CMAS list agrees to 88 California State Auditor Report 2002-112 California State Auditor Report 2002-112 99 provide an indefinite quantity of some good or service through- out a contract term for no more than an approved price—a price usually reserved for high-volume purchases. According to legislation enacted in 1993, the CMAS program was intended to reduce the time and administrative expense state departments incurred acquiring information technology (IT) goods and services under traditional procurement processes while preserving reasonable price protections. Although departments initially could use CMAS vendors for IT goods and services, such as electronic data processing equipment and maintenance services, and non-IT goods, such as furniture and copiers, they can now use CMAS contracts to purchase non-IT services, such as photography and records management. As a result of an Executive Order dated May 20, 2002, General Services issued interim guidelines that required departments to obtain three offers (price quotes) from vendors before purchasing any goods or services from CMAS vendors. Before the Executive Order, General Services had recommended but not required that departments compare prices. Appendix C provides an overview of the CMAS requirements in effect before and after the Executive Order. General Services oversees the CMAS program and is responsible for developing and maintaining the program’s policies and procedures. General Services also provides workshops and guidance for state departments, CMAS vendors, and prospective vendors and has established processes designed to screen out irresponsible vendors. Further, General Services is responsible for awarding and amending the State’s CMAS contracts. Once contracts for specific goods or services are established, General Services prepares a list of multiple-award schedules that contain relevant information on vendors approved to sell the specific goods or services to state departments. Using vendors from the approved CMAS list allows departments to purchase goods or services without going through the lengthier process of identifying and evaluating potential vendors. For example, a department intending to purchase a camera using a CMAS vendor would first obtain the schedule listing the names of all the approved camera vendors and providing other information the department needs to make a purchasing decision. Although a department must solicit and obtain, if possible, offers from three vendors for the good or service it wants to purchase, the department can also consider qualitative factors, including the quality of the product or service, reliability of delivery and 1100 California State Auditor Report 2002-112 California State Auditor Report 2002-112 1111 implementation schedules, warranties and return policies, and vendor expertise in addition to price when determining which vendor provides the best value. Under the CMAS program, the State does not conduct its own competitive bidding process to establish its vendor list. Instead, CMAS contracts are awarded to vendors that have already been awarded contracts with the FMAS program or a similar program operated by another state or local government entity. However, General Services does require each vendor to submit, among other things, product and price lists that the other government entity approved when awarding its contract. These products are generally the only ones the vendor can sell and departments can buy through the approved CMAS contract. For example, a vendor that is listed to sell desks but not chairs cannot sell chairs through a CMAS contract. Under the CMAS program, General Services currently imposes a spending cap of $500,000 for each purchase of IT goods and services, $250,000 for each purchase of non-IT services, and $100,000 for each purchase of non-IT goods made by a department. General Services approves vendors to sell goods or services through the CMAS program in two ways. If a vendor agrees to provide goods or services to the State on the same terms as it does to the FMAS program or to another government entity’s multiple-award contract, General Services will approve the vendor’s application to become a CMAS vendor. Alternatively, a vendor that does not have an existing contract with the FMAS program or another government entity can obtain a CMAS contract by agreeing to provide goods or services on the same terms as a vendor that does have a multiple-award contract through the FMAS program or another government entity. These types of contracts, which comprise about 87 percent of all CMAS contracts, are commonly referred to as piggyback contracts because the available goods or services and corresponding prices are based on another entity’s CMAS contract. CMAS contracts based on vendors’ own FMAS contracts account for 12 percent of all CMAS contracts. The remaining 1 percent of CMAS contracts are based on vendors’ own contracts with other state and local government entities. Since its inception in 1994, the CMAS program has grown in both purchase dollars and the number of approved CMAS vendors. According to General Services, purchases through the CMAS pro- gram for fiscal year 2000–01 totaled $889 million, a 958 percent increase from the total for fiscal year 1994–95 of $84 million. 1100 California State Auditor Report 2002-112 California State Auditor Report 2002-112 1111 The number of vendors participating in the CMAS program rose from 121 in fiscal year 1994–95 to 2,352 by the end of fiscal year 2001–02, an increase of more than 1,800 percent. Master Service Agreements Master service agreements (MSAs) are contracts that General Services establishes with vendors to provide specified services (and some goods) to any state entity. General Services awards an MSA after conducting a bidding process so that each state entity does not need to go through the bidding process repeatedly for the same products or services. When more than one vendor is awarded an MSA to provide the same service, General Services may, depending on the nature of the MSA, prescribe a variety of procedures a department must follow to select the vendor it will use. For instance, one MSA requires the department to give the vendor offering the lowest price the first opportunity to accept an assignment. If this vendor cannot accept the assignment, the department must then offer it to the second lowest priced vendor. On another MSA, General Services prescribes no such steps. Several MSAs encourage, rather than require, departments to obtain and evaluate proposals from more than one vendor, explaining that the practice enables departments to obtain ser- vices at the best value and describing the specific steps involved. Exceptions to Competitively Bid Procurements State law allows for certain limited exceptions to the requirement that departments conduct a competitive bidding process for IT goods and services and non-IT goods: (1) when only one good or service can meet the State’s needs and (2) when the good or service is needed because of an emergency—that is, when immediate acquisition is necessary for the protection of the public health, welfare, or safety. State law also allows General Services to determine the conditions under which a contract for non-IT services may be awarded without competition. General Services exercises this authority by making these determinations based on what is in the best interests of the State. Purchases that rely on these two exceptions are commonly known as sole-source contracts and emergency purchases, respectively. To ensure compliance with competitive bidding requirements, a noncompetitively bid procurement is authorized only when the requesting department can adequately document that one of the two exceptions exists. For the first five months of 2002, General Services reported 576 sole-source contracts totaling approximately $812 million and nine emergency purchases totaling approximately $9 million. 1122 California State Auditor Report 2002-112 California State Auditor Report 2002-112 1133 Sole-Source Contracts On certain occasions, a department may need to contract with a specific vendor. This type of noncompetitively bid contract is referred to as a sole-source contract. The State Contracting Manual describes the conditions under which it is appropriate to issue sole-source contracts as well as those for which General Services’ approval is required. Generally, before a department can establish a sole-source contract, it must show that there is no other vendor in the marketplace that can meet the State’s needs. Emergency Purchases Emergency purchases use a single source, or provider. However, it is important to note that different criteria must be applied when justifying an emergency purchase than when justifying other types of sole-source contracts. When a department experiences an emergency involving public health, welfare, or safety and conse- quently needs to purchase supplies or equipment immediately, the department must justify that immediate need. Additionally, a department officer must approve the emergency purchase. The justification must demonstrate that the department could not have avoided the emergency condition by reasonable care and dil- igence or that there is an immediate threat of substantial damage or injury to persons committed to the department’s care, to employees of the department, to members of the general public, or to property for which the department is responsible. General Services evaluates each emergency purchase request and either approves it or sends it back to the department for further review. Proposed Purchasing Reforms In April 2002, we issued an audit report criticizing the Oracle enterprise licensing agreement—the $95 million sole-source contract for 270,000 database licenses. Then, a month later, the governor issued an Executive Order creating the Governor’s Task Force on Contracting and Procurement Review (task force). The mission of the task force was to review the State’s contracting and procurement procedures and recommend any statutory, regulatory, or administrative changes necessary to ensure that departments use open and competitive bidding as much as possible before awarding state contracts. In addition, the task force was to recommend statutory or regulatory changes that would ensure adequate oversight of the procurement processes by state agencies and departments. Using a process that included meetings with state departments and a series of public forums held throughout the State, the task force completed its 1122 California State Auditor Report 2002-112 California State Auditor Report 2002-112 1133 directive from the governor in August 2002, recommending reforms that call for broad changes in the State’s contracting and procurement procedures, including changes in the use of noncompetitively bid contracts and the CMAS program. Some of these recommendations can be implemented in less than a year, but the task force acknowledged that other recommendations will require more time to implement. SCOPE AND METHODOLOGY The Joint Legislative Audit Committee (audit committee) asked the Bureau of State Audits to audit the CMAS program and the State’s sole-source contracting procedures. Specifically, the audit committee asked that we review the process used by General Services when establishing the CMAS vendors list and the procedures and practices used to identify qualified contractors and consultants when using noncompetitively bid and CMAS contracts to procure goods and services. To understand whether General Services’ administration of noncompetitively bid procurements and the CMAS program are in compliance with applicable criteria, we reviewed relevant state laws, rules, regulations, and General Services’ policy and procedures manuals, and we interviewed staff at General Services. We also reviewed records of General Services’ actions related to its administration of noncompetitively bid procurements and the CMAS program. To determine whether departments have complied with existing laws, contracting procedures, and terms for CMAS contracts, we chose nine departments—the Health and Human Services Data Center, the Teale Data Center, the Department of Consumer Affairs, the Department of Corrections, the Department of Food and Agriculture, the Department of Justice, the Department of Motor Vehicles, the Department of Transportation, and the Office of Emergency Services—and selected a sample of CMAS purchase requests made by these state departments from January 1999 through September 2002. To assess how departments had been complying with General Services’ previous CMAS procedures and whether departments were complying with the new guidelines, we evaluated our sample of CMAS purchases from the nine department based on two periods: before the governor issued his Executive Order on contracting practices in May 2002 and after the Executive Order was issued. 1144 California State Auditor Report 2002-112 California State Auditor Report 2002-112 1155 To determine whether adequate safeguards and controls are in place to protect state resources and to ensure that the State receives the best value for its purchases, we reviewed and assessed the procedures and practices departments use to choose the most qualified vendors from the CMAS list to purchase goods and services. Using the sample of CMAS purchases selected at each department we visited, we evaluated whether departments followed General Services’ recommendations for determining which vendor represented the best value for that purchase. We also interviewed staff at each of the nine departments. The audit committee specifically requested that we include CMAS and noncompetitively bid procurements from Oracle, Logicon, and David Lema and Associates in our sample. How- ever, when reviewing the universe of sole-source contracts and CMAS purchases from which we selected our sample, we did not identify any significant transactions with these entities, with the exception of those purchases already addressed in our April 2002 report titled Enterprise Licensing Agreement: The State Failed to Exercise Due Diligence When Contracting With Oracle, Potentially Costing Taxpayers Millions of Dollars. The audit committee also asked us to include in our review procurements relating to the state Web portal. To determine whether the State adhered to proper protocols when procuring goods and services for the Web portal, we interviewed officials with various state departments that directed portal activities and purchased goods and services for the portal. Although we attempted to interview the former directors of eGovernment and Executive Information Services, these individuals did not grant our requests. We reviewed documents related to the Web portal at General Services, the Teale Data Center, the Health and Human Services Data Center, and the Office of Planning and Research. Further, we reviewed vendor payment information at the State Controller’s Office for vendors involved with the Web portal to determine the extent to which they sold goods and services to the State for the portal. To assess whether the procedures and processes General Services uses to administer the CMAS program are consistent with best practices, we reviewed applicable studies and processes of the federal government, four other states, and an agency of one California county. We then compared General Services’ current CMAS contracting process with the processes of these other 1144 California State Auditor Report 2002-112 California State Auditor Report 2002-112 1155 government entities, looking at several factors, including vendor qualifications, audits and reviews, and requirements for document- ing purchases. Appendix A contains the results of this review. To determine whether General Services adequately commu- nicates with departments regarding the CMAS program, we reviewed the training materials General Services provides to departments and attended a CMAS training class. We also reviewed General Services’ Web site for the CMAS program and surveyed the departments in our sample to obtain their assessments of General Services’ efforts at communicating relevant CMAS information. To determine how General Services establishes and main- tains the list of CMAS vendors, we interviewed staff with this responsibility and reviewed the criteria General Services uses to determine vendor qualifications. In addition, we selected a sample of vendor applications to assess whether General Services follows its own criteria and procedures for adding vendors to the CMAS list. We also reviewed General Services’ internal audit procedures to determine the adequacy of its periodic review of vendors. We then selected a sample of vendor reviews performed by General Services to determine the frequency of vendor reviews, whether General Services followed its audit procedures, and whether it monitored vendors and took corrective action when vendors did not comply with policies and procedures for CMAS contracts. To determine the adequacy of the oversight General Services gives to departments awarding noncompetitively bid and emergency purchases, we reviewed the relevant laws, rules, regulations, and General Services’ policy and procedures manuals to understand the criteria departments use to award noncompetitively bid and emergency procurements. We selected a sample of sole-source contracts and emergency purchases executed by departments to evaluate whether General Services ensured compliance with applicable legal requirements in its review and approval process. Finally, to determine whether departments have complied with the applicable legal requirements for noncompetitive bid contracts and emergency purchases, we reviewed the justifications provided by the departments. n 1166 California State Auditor Report 2002-112 California State Auditor Report 2002-112 1177 CHAPTER 1 Departments Often Used the California Multiple Award Schedules Program to Purchase Goods and Services Without Comparing Prices or Determining Best Value CHAPTER SUMMARY Because the State spends billions of dollars each year procuring goods and services, departments must take reasonable steps to ensure that funds are well spent. According to the Department of General Services (General Services), state departments spent $889 million purchasing goods and services from vendors participating in the California Multiple Award Schedules (CMAS) program in fiscal year 2000–01. In its capacity as administrator and monitor of the CMAS program, General Services provides departments with guidance intended to ensure that the State receives the best possible price or value when purchasing goods and services from CMAS vendors. However, before May 2002, when an Executive Order called for sweeping reforms in the State’s contracting and procurement practices, departments generally ignored the policies and procedures established by General Services. In our review of purchases made by nine departments, we found several examples of departments using CMAS vendors without comparing prices among the program’s vendors. For instance, the Department of Corrections (Corrections) made a $4.6 million purchase from a CMAS vendor for computer hardware maintenance services, but could provide no evidence that it compared that vendor’s prices with those of other vendors or that the selected vendor’s services represented the best value. In another example, four state entities made 20 CMAS purchases totaling $3.2 million from one vendor for the state Web portal—a single Web site from which California’s citizens can access various state services. In making the purchases, the four state entities did not compare prices or otherwise determine whether the selected vendor provided the best value to the State. 1166 California State Auditor Report 2002-112 California State Auditor Report 2002-112 1177 State laws governing contracts and CMAS purchases are intended to eliminate favoritism and to provide all qualified bidders with a fair opportunity to enter the bidding process, thereby stimulating competition in a manner conducive to sound state fiscal practices. To ensure this, state laws and policies generally require departments to solicit competitive bids when contracting or when procuring goods or services. While depart- ments often disregarded state purchasing policies and guidance before the May 2002 Executive Order, early indications are that departments are making improvement. However, because it is too early to tell how effectively the reforms prompted by the Executive Order are being implemented, doubt still exists about whether the State is paying fair and reasonable prices for goods and services. DEPARTMENTS LARGELY IGNORED RECOMMENDED PROCEDURES FOR PURCHASING FROM CMAS VENDORS Few departments took prudent steps, such as comparing prices, to ensure that they obtained the best value when acquiring goods and services from CMAS vendors. General Services had a process for the CMAS program that it assumed would result in fair and reasonable prices to the State. For example, in its poli- cies and procedures manual, General Services recommended that departments compare prices among CMAS vendors before acquiring goods and services. General Services also stressed that an acquisition could be based on factors other than price, such as vendor service or quality of goods, as long as the acquisition represented the best value for the department. Departments were to document their decision-making process regarding best value in their files. Table 1 shows the extent to which depart- ments ignored General Services’ guidelines before the Executive Order issued on May 20, 2002, and the extent to which they have improved their purchasing practices since then. Because a vendor does not directly compete against other CMAS vendors before being awarded a CMAS contract, departments will not necessarily obtain the best value simply by selecting CMAS vendors to provide goods or services. Among other things, prices and quality can vary from vendor to vendor. However, our review revealed that departments did not always take reasonable steps to ensure that they were receiving the best value when purchasing from CMAS vendors. 1188 California State Auditor Report 2002-112 California State Auditor Report 2002-112 1199 TABLE 1 Before the May 2002 Governor’s Executive Order, Departments Did Not Consistently Compare Prices or Document Best Value for CMAS Purchases Governor’s Executive Compared Documented Department Order Prices Best Value Department of Corrections Before 1 of 4* 1 of 4* After 2 of 3 2 of 3 Department of Food and Before 0 of 5 0 of 5 Agriculture After 1 of 1† 1 of 1† Department of Consumer Before 3 of 4‡ 4 of 5 Affairs After 3 of 3 3 of 3 Department of Justice Before 2 of 5 2 of 5 After 2 of 2§ 3 of 3 Department of Motor Before 3 of 5 3 of 5 Vehicles After 3 of 3 3 of 3 Department of Before 3 of 5 4 of 5 Transportation After 3 of 3 3 of 3 Health and Human Services Before 2 of 5 2 of 5 Data Center After 3 of 3 3 of 3 Office of Emergency Services Before 0 of 5 0 of 5 After 2 of 3 2 of 3 Stephen P. Teale Data Center Before 2 of 5 2 of 5 After 3 of 3 3 of 3 * One purchase order was from a statewide contract; price comparison or best value documentation is not applicable. † Only one purchase made through the CMAS program had been approved when we conducted our fieldwork. ‡ One purchase order we tested was for an expansion of an existing contract; price comparison is not applicable. § One purchase order was for a noncompetitvely bid contract; price comparison is not applicable. We reviewed 44 CMAS purchases executed by nine departments before the Executive Order and found that the departments frequently either failed to compare prices of similar products offered through the CMAS program or did not document that they had based their selection on other factors, such as delivery time, vendor reputation, or warranties. For example, our review included five CMAS purchases made by the Office of Emergency Services (Emergency Services), and we found no evidence that 1188 California State Auditor Report 2002-112 California State Auditor Report 2002-112 1199 it compared prices for any of the purchases. In one instance, Emergency Services purchased electronic components for Departments did not $498,000 from one vendor without determining whether the compare prices or amount paid represented the best available price or explaining determine best value for why the items obtained from the selected vendor represented CMAS purchases because the best value for the department. Similarly, at Corrections, they were not required we reviewed four transactions and could not find evidence to do so. Additionally, that price or other factors were considered for three of them. departments did not For instance, Corrections purchased computer hardware believe comparison maintenance services totaling $4.6 million. General Services shopping would result in indicated that it had received information from Corrections more favorable prices. that it had compared prices and service among various CMAS vendors. However, Corrections was not able to provide us with the documentation to confirm its statements to General Services. Departments had three reasons for their failure to ensure that they acquire goods and services at the best value. First, although General Services recommended that departments compare prices among CMAS vendors, it did not require them to do so before May 2002. Second, several departments we surveyed indicated that they believed that CMAS vendors had already gone through a competitive evaluation process and thus comparison shopping would not result in more favorable prices. Third, state purchasing personnel stated that it was too difficult to obtain contracts or price lists from General Services or vendors, making comparing prices problematic. The Executive Order of May 20, 2002, and the subsequent recommendations made by the Governor’s Task Force on Contracting and Procurement Review (task force) address these areas. The task force’s recommendations are discussed in detail in Chapter 5 and Appendix B. CMAS contracts were also used extensively to purchase hard- ware, software, and consulting services for the state Web portal. The purchases, made by at least four state entities, were often done at the direction of one or both of the former officials of the Governor’s Office—the former directors of eGovernment and Executive Information Services. Similar to the CMAS purchases we reviewed at other departments, the four state entities, including two divisions within General Services, generally failed to adhere to CMAS purchasing practices recommended by General Services. 2200 California State Auditor Report 2002-112 California State Auditor Report 2002-112 2211 When Developing the Web Portal, State Entities Disregarded Recommended Protocols for Using the CMAS Program and Failed to Comply With the Terms of a Master Service Agreement The state Web portal, also referred to as the California home page, is a multimillion-dollar project that facilitates access to the State’s government services. In April 2000, the former officials of the Governor’s Office proposed a major overhaul of California’s existing home page to address perceived shortcomings. The redesigned Web portal would allow public access to information about vital state services through a central Web site. Additionally, the Web portal would enable state agencies and departments to integrate new and existing Internet applications into the Web portal’s software and network applications. The four state entities that purchased hardware and software components, maintenance, and consulting services for the Web portal—the Stephen P. Teale Data Center (Teale Data Center), The Teale Data Center, the Health and Human Services Data Center, and General the Health and Human Services’ Enterprise Business Office and Telecommunications Services Data Center, and Division—did not follow General Services’ recommendations General Services failed related to purchasing from CMAS vendors and failed to comply to compare prices when with the terms and conditions of a master service agreement purchasing $3.2 million (MSA). Specifically, these entities purchased $3.2 million in in goods and services goods and services from one CMAS vendor and $8.4 million from one vendor for the in consulting services from another vendor without comparing Web portal. vendor prices or analyzing factors other than price, as recommended in the CMAS guidelines developed by General Services and the terms of the MSA. As a result, the State cannot ensure that the costs of some goods and services purchased for the Web portal were reasonable. Departments Ignored Established Procedures When Purchasing Goods and Services From the StateStore Incorporated and Deloitte Consulting Largely at the request of the former officials of the Governor’s Office, two units within General Services along with two other state departments purchased more than $3.2 million in goods and services from the StateStore Incorporated (StateStore)—a private reseller of IT goods and services (see Table 2 on the fol- lowing page).1 With the exception of one purchase for $83,000, none of the departments compared prices or used any other 1 The StateStore is a separate entity from CAL-Store, formerly known as the California State Computer Store, which is the name of a master purchase agreement. 2200 California State Auditor Report 2002-112 California State Auditor Report 2002-112 2211 means to determine that the StateStore provided the best value to the State, despite General Services’ own recommended pro- cedures. Similarly, largely at the request of the former officials, General Services and the Health and Human Services Data Center used an MSA and one CMAS purchase to obtain $8.4 million in services from Deloitte Consulting to act as the system integrator for the Web portal project. Although the terms of Deloitte Consulting’s MSA stipulated that departments compare the cost of its consulting services with similar services provided by other vendors, the departments chose not to do so. TABLE 2 For the State’s Web Portal, Four Agencies Made 84 Purchases Worth $15 Million From August 2000 Through December 2002 (Dollars in Thousands) StateStore Incorporated Deloitte Consulting Other Vendors Total Purchase Number of Purchase Number of Purchase Number of Purchase Number of State Department Amount Purchases Amount Purchases Amount Purchases Amount Purchases Enterprise Business Office of the Department of General Services $1,160 8 $7,530* 10 $ 10 3 $ 8,700 21 Telecommunications Division of the Department of General Services 40 1 980 3 100 2 1,120 6 Stephen P. Teale Data Center 1,810† 11 0 0 2,590 43 4,400 54 Health and Human Services Data Center 270 1 690‡ 2 0 0 960 3 Totals $3,280 21 $9,200 15 $2,700 48 $15,180 84 * The Enterprise Business Office made one purchase of $820,000 using an approved noncompetitively bid contract. † One $83,000 purchase made after the May 2002 Executive Order did not involve the CMAS program; Teale Data Center obtained a comparative quote for this purchase. ‡ In one instance, the Health and Human Services Data Center used the CMAS program rather than an MSA to purchase $450,000 in services. Between August 2000 and December 2002, General Services, the Teale Data Center, and the Health and Human Services Data Center made 36 purchases from the StateStore and Deloitte Consulting. Of those 36 purchases, 33 totaling $11.4 million were made at the direction of the former officials of the Governor’s Office between August 2000 and April 2002. How- ever, because the departments did not compare prices with those of similar goods and services available in the marketplace, the 2222 California State Auditor Report 2002-112 California State Auditor Report 2002-112 2233 State will never know whether the true cost of the Web portal— recently estimated by General Services and the Teale Data Center to exceed $20 million by the end of fiscal year 2004–05—rep- resents the best value that could have been achieved if proper protocols were followed. The StateStore’s CMAS Contract Did Not Include Some Goods and Services Purchased for the Web Portal General Services and the Teale Data Center inappropriately purchased items from the StateStore for the Web portal that were not included in the vendor’s CMAS contract. Purchasing person- nel in each department are responsible for ensuring that their departments purchase only the goods and services included in approved CMAS contracts. Despite the requirements, in four instances, General Services purchased goods and services totaling more than $181,000 from the StateStore that were not in the StateStore’s CMAS contract. For example, in June 2001, General Services purchased $21,000 in services from a StateStore subcontractor, Broadbase Software. Although as a subcontractor, Broadbase Software was included in the StateStore’s CMAS contract, the services that General Services purchased were not covered under the contract. In another instance, General Services purchased $79,200 in The Teale Data Center Verity Software licenses. Again, Verity was a subcontractor purchased goods included in the StateStore’s CMAS contract, but the licenses and services totaling that General Services purchased were not. Similarly, on three $509,000 that were occasions, the Teale Data Center purchased goods and services not covered under the totaling $509,000 from the StateStore that were not covered vendor’s CMAS contract. under the vendor’s CMAS contract. In one instance, the Teale Data Center purchased software licenses from Broadvision— another subcontractor included in the StateStore’s CMAS contract—for $400,000, but the specific type of license was not covered by the existing CMAS contract. We identified additional instances of items purchased through the CMAS program that were not included in the CMAS con- tracts during our review of nine state departments. Specifically, three of the 44 purchase orders we reviewed contained at least one item that was not in the approved CMAS contract. 2222 California State Auditor Report 2002-112 California State Auditor Report 2002-112 2233 Recent Changes to CMAS Requirements Have Slowed but Not Halted Departments’ Misuse of the CMAS Program Because the May 20, 2002, Executive Order was only issued a few months before our fieldwork, it is too early to adequately assess its effect on the State’s contracting and procurement activities. However, we found that although departments were more likely to obtain multiple price quotes from CMAS vendors during the months immediately following the Executive Order, two departments still did not consistently compare prices or adequately document their rationale for selecting a particular vendor. We reviewed 25 CMAS purchases made by nine departments after the date of the Executive Order and found that the departments did not obtain at least three price quotes in two instances. For example, Corrections purchased copiers and related equipment for $38,500. However, Corrections could provide no evidence that it had either solicited or obtained quotes from multiple vendors. Given the fiscal problems currently facing the State, it is essential that departments implement the new CMAS policies to ensure that they use state resources efficiently. RECOMMENDATIONS To ensure that the State receives the best value when acquiring goods and services, departments should take the following actions: • Disseminate the reforms arising from the May 2002 Executive Order and the task force’s recommendations to all departmental purchasing personnel. Additionally, departments should stress adherence to all CMAS purchas- ing requirements and reject requested purchases when the requirements are not met. • Require department purchasing personnel to review the appropriate CMAS contract before approving any purchase request to ensure that the requested good or service is included in the contract. n 2244 California State Auditor Report 2002-112 California State Auditor Report 2002-112 2255 CHAPTER 2 The Lack of Accountability for State Web Portal Project Purchases Resulted in Undisclosed Costs and Violations of State Policy CHAPTER SUMMARY The state Web portal, also referred to as the California home page, is a multimillion-dollar investment that makes California’s government services accessible to the public through one central Web site. In fact, the California home page is a valuable tool and has received a number of awards recognizing its excellence. However, because multiple departments used the California Multiple Award Schedules (CMAS) program and a master service agreement (MSA) to develop, build, and maintain the Web portal, no source of accountability for project purchases was established. As described in Chapter 1, the Web portal project involved a series of purchases made by four state entities: the Enterprise Business Office and the Telecommunications Division, both within the Department of General Services (General Services); the Stephen P. Teale Data Center (Teale Data Center); and the Health and Human Services Data Center. These departments made purchases largely at the direction of officials who were in the Governor’s Office at the time (former officials of the Governor’s Office). These officials received advice about the Web portal design and architecture from a Web council composed of officers from several large private businesses. In all, the design, imple- mentation, and maintenance of the Web portal required at least 84 purchases from 20 vendors. The departments used the CMAS program and MSAs to make $12.7 million (84 percent) of the $15.2 million in purchases for the project from August 2000 through December 2002. Because these purchasing methods could be and were used without comparing products and prices, some vendors were denied the opportunity to compete for the Web portal business. Omitting competition creates the appear- ance that some companies may have had an unfair advantage in selling Web portal components to the project. 2244 California State Auditor Report 2002-112 California State Auditor Report 2002-112 2255 In addition, because officers of some companies were on the council that made recommendations and approved the design and architecture of the Web portal project, the fact that those companies later sold products to the State for the Web portal without their prices being compared with those of other vendors could lead to questions about the fairness of those purchases. Moreover, the State has little assurance that it paid fair and reasonable prices for the project. If a policy prohibiting the use of CMAS contracts for large-scale information technology (IT) projects (unless specifically approved as part of a feasibility study) had been in place and followed, the former officials of the Governor’s Office or the four state entities that made purchases for the Web portal would have been precluded from using the CMAS program or MSAs for the project. The Governor’s Task Force on Contracting and Procurement Review has recently recommended such a policy. Using several departments to make purchases for a large-scale IT system such as the Web portal can easily result in a lack of adherence to established administrative and accounting controls and makes it more difficult to manage costs. The project received some review by the former Department of Information Technology (DOIT) and the Department of Finance (Finance). However, some modifications were made to the Web portal project that resulted in substantial increases in the cost of the project without General Services first obtaining the required approval from DOIT and Finance. In addition, General Services submitted one inaccurate report to DOIT, Finance, and the Legislative Analyst’s Office (LAO) that omitted more than $1.3 million in Web portal costs. The LAO is the office responsible for analyzing budgetary issues and giving fiscal and policy advice to the Legislature. Because the former officials of the Governor’s Office and General Services did not follow established IT controls and purchasing policies, there is less assurance that the State got the best value when making its sizable investment in the Web portal. ALTHOUGH INITIATED BY THE GOVERNOR’S OFFICE, THE WEB PORTAL PROJECT BECAME THE RESPONSIBILITY OF GENERAL SERVICES In spring 2000, the Governor’s Office concluded that the California home page did not adequately serve the needs of the public. California citizens and others who used the home page could not access much of the information about services 2266 California State Auditor Report 2002-112 California State Auditor Report 2002-112 2277 provided by state departments. Additionally, the home page was cumbersome and did not include Web analysis tools to track user statistics or site performance. Responding to these problems, the Governor’s Office submitted a feasibility study report to DOIT and Finance in April 2000 to propose a major overhaul of the home page.2 The report discussed the need for a Web portal that would enable state agencies and departments to integrate new and existing Internet technologies into the Web portal’s software and network applications. According to the feasibility study report, the development and maintenance costs for the Web portal would be $4.5 million over six years. On September 8, 2000, the governor issued an Executive Order saying that the Governor’s Office would work with both public and private sectors to establish a Web portal and directing state agencies and departments to integrate new and existing Web applications into the Web portal as much as possible. Also in September 2000, General Services assumed administrative responsibility for the Web portal project and subsequently submitted a revised feasibility study report to DOIT and Finance. DOIT and Finance discontinued review of the first feasibility study report and approved General Services’ report; DOIT subsequently notified the Governor’s Office of both Although General Services actions. General Services’ feasibility study report estimated was the administrator of the development and maintenance costs for the project the Web portal project, at $5.1 million—an increase of $600,000 over the original two former officials of the feasibility study report. Governor’s Office directed much of the purchasing Although General Services became the administrator of the Web and decision making. portal project, two former officials of the Governor’s Office—the former directors of eGovernment and Executive Information Services—directed much of the purchasing and decision- making activities. As shown in Figure 1 on the following page, numerous business and state officials played a role in the Web portal project. 2 A feasibility study report gives the business and technical reasons to justify investing state resources in an IT project, why the proposed project is needed, the means for ensuring its success, and a comprehensive analysis of its benefits and costs. 2266 California State Auditor Report 2002-112 California State Auditor Report 2002-112 2277 FIGURE 1 Numerous Private and State Entities Had Roles in Developing the State Web Portal ����������� ��������������� ����������������� �������������� ����������� ���������� ����������������� ���������������������������������������������������� ����������������������������������� ������������� ������ ���������������� ���������� �������� ������ ����������������������������������� �������������� ����������������������� �������� ����������� ���������� ������������������������� ����������������������� ����������������������������������� ���������������������������������������������� ������������� ������������ ������������ �������������� �������������� ��������������� ��������������� ������������������ ���������� ���������� ������������������ � ������������� � ������������� �������������� �������� � �������������������� � ������������� � �������������������� � ��������������� ����� ��������������������� � �������������������� ��������� ������� � � �������������� * Additional Web Council members were Arcot Systems Inc., EDS, Ariba, Primus Corporation, and Sybase. † The StateStore is a separate entity from CAL-Store, formerly known as the California State Computer Store, which is the name of a master purchase agreement. 2288 California State Auditor Report 2002-112 California State Auditor Report 2002-112 2299 THE STATE’S FAILURE TO COMPARE PRICES CREATED THE APPEARANCE THAT SOME COMPANIES MAY HAVE HAD AN UNFAIR ADVANTAGE IN SELLING WEB PORTAL COMPONENTS TO THE STATE The governor’s September 2000 Executive Order specified that the Governor’s Office would consult with technology experts from the private sector, among others, to ensure that the Web portal adopted best practices. In fact, the Web portal was devel- oped with guidance from a group of executives from several private businesses, some of which later sold products for the project. In a memorandum distributed by the Governor’s Office in October 2000 to all state agency secretaries, department directors, and chief information officers, members of this group, called the Web Council, gave their “unanimous blessing to the portal’s conceptual approach and its specific architecture.” According to the minutes and agendas from Web Council meetings, representatives of several companies participating Broadbase Software, in the council made presentations to discuss their companies’ Broadvision, and Hewlett- products. Three of these companies—Broadbase Software (now Packard—private Kana Software), Broadvision, and Hewlett-Packard—ultimately companies that assisted sold hardware and software components to the State for the Web with the conceptual portal totaling $2.5 million. These companies sold their products design and specific to the State, either directly or indirectly through resellers architecture for the with CMAS contracts, including the StateStore Incorporated Web portal project— (StateStore).3 The concept of obtaining guidance from industry ultimately sold hardware experts is meritorious if, after obtaining that guidance, the and software components State engages in an open, competitive procurement process. In totaling $2.5 million total, the State paid relatively little for the Web portal products without their prices sold by companies that were members of the Web Council being compared to compared with the total it paid to the company that provided other vendors. system integration and maintenance for the Web portal without having their prices compared to those of other vendors. However, if obtaining advice from industry experts is followed by procurement of the industry experts’ goods and services without comparing prices to those offered by others, as was the case with numerous CMAS purchases for the Web portal, an appearance of unfairness is created. We contacted the former officials of the Governor’s Office who were responsible for coordinating Web portal activities to deter- mine how the Web Council members were selected. However, they did not grant our requests for interviews. 3 The StateStore is a separate entity from CAL-Store, formerly known as the California State Computer Store, which is the name of a master purchase agreement. 2288 California State Auditor Report 2002-112 California State Auditor Report 2002-112 2299 In the week following the issuance of the September 2000 Executive Order, General Services’ senior staff counsel attended Former officials of a meeting with the former officials of the Governor’s Office and the Governor’s Office, the acquisitions manager at General Services at that time to wanting to avoid the discuss the possible procurement methods that would enable lengthy competitive Web portal purchases to be made without a lengthy bidding bidding process, elected process. According to the former chief of General Services’ to use CMAS and a Enterprise Business Office, the former officials of the Governor’s master service agreement Office indicated that certain phases of the Web portal needed for purchases for the Web to be completed by early January 2001. A lengthy competitive portal project. bidding process would have hampered their ability to meet that deadline. Therefore, it was ultimately decided that using one or more of the State’s available procurement processes that did not require solicitation and evaluation of competitive bids, specifically CMAS contracts and MSAs, would make meeting the deadline possible. General Services’ senior staff counsel stated that one of the former officials of the Governor’s Office selected the StateStore and Deloitte Consulting to provide the bulk of the goods and services for the Web portal project. It was not clear how the former official selected these two vendors. To determine how the StateStore and Deloitte Consulting were selected, we attempted to meet with the former officials, but they did not grant our requests for interviews. As discussed in Chapter 1, the State made more than $3.2 million in purchases from the StateStore for goods and services for the Web portal project. The StateStore is a reseller with a CMAS contract through which it sold the services and products of subcontractors to the State for the Web portal project. These subcontractors included Broadbase Software, Broadvision, Interwoven, and Verity Software. In addition, General Services and the Health and Human Services Data Center issued a total of 13 purchase orders to Deloitte Consulting totaling $7.9 million based on the vendor’s MSA contract. Deloitte Consulting was the main consultant on the Web portal project and was responsible for the design and integration of the Web portal. The consulting firm continues to provide maintenance services for the Web portal. We could find no evidence that the former officials of the Governor’s Office or the departments that made the actual purchases compared the prices of products and services provided by the StateStore and Deloitte Consulting with those of other vendors offering similar 3300 California State Auditor Report 2002-112 California State Auditor Report 2002-112 3311 goods and services, contrary to the guidance given by General In spite of guidance Services. Therefore, there is little assurance that the prices were to the contrary, the fair and reasonable and represented the best value to the State. Health and Human Services Data Center and General Services GENERAL SERVICES AND FORMER OFFICIALS OF THE purchased $7.9 million GOVERNOR’S OFFICE DID NOT FOLLOW STATE POLICY in consulting services GOVERNING INFORMATION TECHNOLOGY PROJECTS using an MSA with Deloitte Consulting At the direction of the former director of eGovernment, costly without comparing modifications were made to the Web portal project before prices to those of similar General Services obtained approval from DOIT and Finance. services provided by Further, General Services submitted one inaccurate report to other vendors. DOIT and Finance that omitted more than $1.3 million in Web portal costs. Because unauthorized modifications were made and inaccurate cost estimates submitted, DOIT and Finance could not accurately assess whether the modifications and associated costs were in the best interest of the State. We were also unable to determine if the officials at General Services who approved previous Web portal project reports had authorized an unsigned special project report that was submitted to DOIT, Finance, and the LAO. The unsigned special project report included cost estimates that were nearly double those that had been included in a previous special project report approved by the officials of General Services. According to officials at Finance, they met with one of the former officials from the Governor’s Office and representatives from General Services to discuss the proposed cost increases. Subsequent to this meeting, Finance approved the unsigned project report. Finally, General Services also submitted some incorrect cost estimates to the LAO. Consequently, the Legislature did not have accurate information on the costs of the Web portal. General Services Lacked Control Over the Web Portal Project General Services did not adequately coordinate and monitor Web portal purchasing and reporting activities. As a result, the special project reports submitted to DOIT, Finance, and the LAO did not accurately account for all Web portal purchases. More- over, it appears that responsible officials at General Services were unaware that a revised Web portal project report had been submitted to DOIT, Finance, and the LAO reflecting a significant increase in total project costs. 3300 California State Auditor Report 2002-112 California State Auditor Report 2002-112 3311 It was difficult for General Services, the department responsible for monitoring the budget and tracking expenditures for the A decentralized Web portal, to manage the project because many portal pur- purchasing method—with chases were made at the direction of the former officials of the the former officials of Governor’s Office. Several state entities, including the Enterprise the Governor’s Office Business Office, General Services’ Telecommunications Division, directing purchases the Teale Data Center, and the Health and Human Services Data made by several state Center, purchased goods and services for the project largely at entities—made it difficult the direction of the former officials. This decentralized purchas- for General Services to ing method made it difficult for the Enterprise Business Office to account for all Web account for all Web portal activities. portal activities. In addition, it appears that General Services’ former chief information officer did not approve the unsigned special project report submitted to DOIT and Finance on or about January 5, 2001. The unsigned report modified the November 2000 special project report, which estimated total Web portal costs at $6.8 million through fiscal year 2005–06. General Services’ former director, budget officer, and former chief information officer had approved the initial feasibility study report and the November 2000 special project report. However, none of these individuals signed the report dated January 5, 2001, which nearly doubled the estimated cost of the project to $13.5 million. State policy requires the department director or the director’s designee to sign all special project reports. Additionally, the unsigned January 2001 report provided no explanation for the significant increase in project costs. In fact, with the exception of a spreadsheet that showed the revised cost estimates, the unsigned report was virtually identical to the November 2000 special project report. According to information provided by Finance, it appears that the unsigned special project report was prepared by staff at the Employment Development Department (EDD) following a meeting between Finance officials, a former Governor’s Office official, and representatives from General Services to discuss, among other things, the increase in estimated Web portal project costs. According to officials at Finance, it is not uncommon for minor modifications to be made to a special project report after it has been submitted for approval. Such modifications generally are made to address questions or concerns raised by DOIT and Finance during their review. Moreover, according to Finance officials, such modifications do not always require formal approval on a signed cover sheet by the department’s director, budget officer, and chief information officer—the individuals who must approve special project reports. If department budget staff are involved in making the 3322 California State Auditor Report 2002-112 California State Auditor Report 2002-112 3333 modifications, Finance officials assume that the department’s staff have either been delegated the authority to act on behalf of the department’s responsible officials or have kept them informed and have obtained their concurrence. Finance officials could not tell us whether the increase in the Web portal project’s estimated costs were initiated by General Services, the former officials at the Governor’s Office, DOIT, or Finance. However, we believe that changes to a project that effectively double the estimated cost of the project do not constitute minor modifications. Finance is responsible for determining whether departments have adequately justified the business needs for the original IT projects and any significant changes to ongoing projects. In other words, Finance’s responsibility is to ensure that IT expenditures represent a prudent use of state resources. However, as previously discussed, the unsigned project report provided virtually no explanation for the significant increase in project costs. Moreover, Finance could not provide any documentation of its analysis of the proposed project changes to the November 2000 special project report and resulting cost increase. Finance stated that it would have preferred more complete cost information. However, it approved submitting the revised estimates to the Legislature based on available information, given the high priority of the project. The January 2001 report was delivered to the LAO in March 2001. DOIT also issued an approval letter to General Services; however, because it lacked specificity, we were unable to determine from the letter which project report it approved. Changes to the Web Portal Were Implemented Before Approval Was Sought General Services failed to obtain the necessary approvals from DOIT and Finance before significant changes were made to the Changes that increased Web portal project. The changes, which increased previously previously approved approved project costs by 94 percent, were made at the direc- costs by 94 percent were tion of one of the former officials of the Governor’s Office—the made at the direction of former director of eGovernment. Among the changes were sig- a former official of the nificant enhancements related to the energy crisis and terrorist Governor’s Office without threats and ongoing system maintenance provided by consul- the approval of DOIT tants rather than state personnel, as was originally planned. and Finance. As shown in Figure 2 on the following page, in its original feasibility study report, General Services estimated the total cost of the Web portal at $5.1 million. General Services subsequently 3322 California State Auditor Report 2002-112 California State Auditor Report 2002-112 3333 submitted a special project report on November 28, 2000. At the time the Web portal was being developed, state policy required a department to submit a special project report to DOIT, Finance, and the LAO if the total cost of an IT project deviated or was anticipated to deviate by more than 10 percent from the previously approved cost estimate. The department should not implement any changes to the IT projects until DOIT and Finance approved the special project report. Further, the policy also required the department to explain the reason for the project deviation. The explanation had to include sufficient information for agency management, administrative control agencies, and the Legislature to assess the merits of any project change. In the special project report of November 28, 2000, General Services estimated the Web portal costs to be $6.8 million—an increase of $1.7 million (32 percent) over the original estimate. However, the explanation of the cost increase included in the special project report was limited to general statements about expanding and upgrading the system to meet demands and did not identify the specific modifications or enhancements that caused the cost variance. FIGURE 2 Web Portal Project Cost Estimates Increased Dramatically Between September 2000 and 2002 ��� �� �� �� �� � � 3344 California State Auditor Report 2002-112 California State Auditor Report 2002-112 3355 ������ �������� ������ ������� ������� ������������������������������ ���������� ���������������������� ��������������������� ���������������� ��������� ����������� ����������� ��������� ����������� ����������� ���� ���� ���� On January 15, 2002, General Services submitted a special project report further increasing the cost of the Web portal to $26.2 million. While the report included an explanation for the increased cost, it was not submitted until after the project enhancements had been made. The special project report specifically identified four enhancements related to the energy crisis and concerns about possible terrorist threats prompted by the attacks on September 11, 2001, that would add $9.2 million to the total cost of the project. However, according to the special project report, the enhancements made in response to the energy crisis and terrorism concerns were completed four to six months before General Services submitted the report. For example, the enhancements developed in response to the energy crisis, which were projected to cost $8 million, were completed in August 2001. To its credit, in a March 2002 letter, DOIT informed the former director of General Services that it would not issue an approval letter for the project changes. DOIT also reminded General Services of the state policy requiring departments to obtain DOIT and Finance approval of significant proposed changes before engaging in those activities. We also question the validity of information General Services included in its special project reports. For example, in its November 28, 2000, special project report, General Services indicated that state personnel would be responsible for all con- tinuing costs associated with the project, which presumably would include maintenance of the Web portal. However, on January 29, 2001, General Services issued a purchase order for $980,000 in services from Deloitte Consulting to maintain the Web portal. Because this action represented a change in project approach, General Services should have submitted a special project report within 30 days of anticipating a change in approach and obtained prior approval from DOIT and Finance. However, it failed to do so. In fact, General Services did not acknowledge using a contractor to provide maintenance services until January 15, 2002, when it submitted its second special project report. By that time, General Services and the Health and Human Services Data Center had already paid Deloitte Consulting $5.7 million and had com- mitted the State to paying the company another $2.6 million. Moreover, in the January 2002 special project report, General Services reported that it had contracted with Deloitte Consulting for only $5.2 million. It is critical that departments provide cur- rent and accurate information in their IT project reports so that administrative control agencies and the Legislature can make informed decisions regarding the future direction of IT projects. 3344 California State Auditor Report 2002-112 California State Auditor Report 2002-112 3355 Web Portal Project Reports Were Inaccurate Because They Failed to Include Some Actual and Projected Costs At least one special project report that General Services submitted for the Web portal project was inaccurate because it did not include more than $1.3 million in Web portal costs incurred by its Telecommunications Division and the Health and Human Services Data Center. Furthermore, we believe the cost estimates included in the final two special project reports could be misinterpreted because the number of years of future maintenance they associated with the project was not the same as the number of years given in previous estimates. A former EDD employee prepared the feasibility and special project reports for the Web portal project. She told us that the former officials of the Governor’s Office and an analyst in the Governor’s Office provided her with all the information necessary to prepare the feasibility study reports and the November 2000 special project report. It was not until later, around September 2001, that she began getting information from the former chief of General Services’ Enterprise Business Office to prepare the January 2002 special project report. We do not know how the former officials arrived at the estimates seen in the feasibility study report and the November 2000 special project report. According to the former chief of General Services’ Enterprise Business Office, who dispersed and tracked most Web portal payments, certain costs incurred by the Telecommunications Division and the Health and Human Service Data Center were not included in the special project reports because those entities were not reimbursed for portal-related purchases. Former offi- cials of the Governor’s Office directed the Telecommunications Division to purchase $1.1 million in consulting services and software for the Web portal, none of which was reimbursed by the Enterprise Business Office. The Health and Human Services Data Center, in consultation with the former officials of the Governor’s Office, used its own funds to purchase $250,000 in services related to the Web portal from Deloitte Consulting. The former chief of the Enterprise Business Office explained that a lack of adequate funding was a problem and that one of the former officials, the former director of eGovernment, looked for “creative” ways to fund the project. For example, according to a former Telecommunications Division official, the former director of eGovernment asked her to purchase consulting services for the Web portal to help ensure that the project was 3366 California State Auditor Report 2002-112 California State Auditor Report 2002-112 3377 completed by January 2001. The former Telecommunications Division official stated that the purchases were made from Web portal project costs the division’s budgets for consulting services and training. An of $1.3 million were not official from the Telecommunications Division Support Services included in special project Section stated that the costs were recovered through service fees reports submitted to DOIT, charged to state departments for the State’s telephone network. Finance, and the LAO. Because the former chief of the Enterprise Business Office only communicated costs that were under her control to the individual preparing the January 2002 special project report, the total Web portal project estimates submitted to DOIT, Finance, and the LAO in that report were understated by at least $1.3 million. Further, it appears that the two most recent special project reports understated estimates for future years’ costs because they did not recognize any continuing costs through fiscal year 2005–06. Specifically, General Services’ original feasibility study report and first special project report included continu- ing costs through fiscal year 2005–06, but the special project report dated January 15, 2002, did not show any costs for fiscal years 2004–05 and 2005–06. Similarly, the most recent special project report, dated September 20, 2002, did not include any costs for fiscal year 2005–06 in its estimated total project costs of $20.3 million. We believe, as apparently General Services did in its November 28, 2000, special project report, that it is reasonable to assume that the State will incur some ongoing costs, most likely associated with system maintenance, for the Web portal during fiscal year 2005–06. Because General Services and the Teale Data Center stopped reporting estimated costs for fiscal year 2005–06 in their special project reports, anyone comparing the total estimated Web portal costs from one special report to another might be misled. Based on the most recent estimate of continuing costs of roughly $3 million annually for fiscal years 2002–03 through 2004–05, we believe General Services should have reported a similar amount for fiscal year 2005–06. If the September 2002 special project report had been adjusted to reflect continuing maintenance costs through fiscal year 2005–06, the total project costs would have been reported as $23.3 million rather than the $20.3 million actually reported. At a minimum, the change in reporting period should have been disclosed. 3366 California State Auditor Report 2002-112 California State Auditor Report 2002-112 3377 THE USE OF MULTIPLE DEPARTMENTS TO MAKE PURCHASES FOR THE WEB PORTAL RESULTED IN PAYMENTS FOR SOME SERVICES THAT WERE REQUIRED UNDER EARLIER AGREEMENTS Several departments made Web portal purchases rather than one office coordinating and making all purchases. Consequently, no one office carefully tracked existing purchases and compared them to newly requested purchases, and the State contracted for some services even though the same services had already been required under earlier agreements. For example, on March 26, 2001, General Services’ Telecommunications Division issued a $173,000 purchase order to Deloitte Consulting for project management of ongoing operations and maintenance support of the Web portal. The terms and services of this 33-day contract duplicated some of the terms and services of another purchase order that General Services’ Enterprise Business Office issued on January 29, 2001, to Deloitte Consulting. According to the former chief of the Telecommunications Division’s Network Services, she was unaware of the Enterprise Business Office’s purchase and therefore did not compare the statements of work. Likewise, the former chief of the Enterprise Business Office stated that because she was not aware at the time that the Telecommunications Division was making purchases for the Web portal, she did not attempt to compare Enterprise Business Office purchases with any Telecommunications Divi- sion purchases. The former chief of Network Services explained that the former officials of the Governor’s Office worked out the details of the purchases with Deloitte Consulting, and she did not feel obligated to scrutinize the particulars of the contracts because she trusted that the former officials were following the necessary processes. Similarly, in May 2001, the Health and Human Services Data Center entered into an agreement with Deloitte Consulting to create a plan to develop a Web portal mirror site at the Health and Human Services Data Center. At a cost of $246,000, the mirror site would help ensure continuous operation of the Web portal in case of a disaster that might incapacitate the original site at the Teale Data Center. In reviewing the three reports that Deloitte Consulting submitted in fulfillment of its agreement with the Health and Human Services Data Center, we found that the content of the reports was information Deloitte Consulting was already obligated to provide under earlier contracts with the Enterprise Business Office. 3388 California State Auditor Report 2002-112 California State Auditor Report 2002-112 3399 In addition, the three reports that Deloitte Consulting submitted to the Health and Human Services Data Center did not specifically address the stated purpose of the agreement. For example, two of the reports did not specifically address establishing the Health and Human Services Data Center as a Much of the content mirror site. We also found that five of the nine pages that made of reports submitted up the third report were exact duplicates of pages in a document by Deloitte Consulting the Enterprise Business Office paid Deloitte Consulting to in fulfillment of its prepare. The bulk of the remaining four pages consisted of agreement with the statements, graphics, and tables generally describing phases Health and Human of designing and implementing a disaster recovery site, not Services Data Center was specifically developing the Health and Human Services Data already covered by earlier Center into a mirror site for the Web portal. Indeed, the report contracts between the text indicated that it was intended as a discussion document consulting firm and the and said that the Health and Human Services Data Center was Enterprise Business Office. unlikely to be a long-term disaster recovery solution for the State due to its geographic proximity to the Teale Data Center. This kind of high-level observation could have been made under Deloitte Consulting’s maintenance agreements with the Enterprise Business Office and the Telecommunications Division, which required Deloitte Consulting to provide advice on disaster recovery for the Web portal. Although the Health and Human Services Data Center reviewed and accepted Deloitte Consulting’s three reports, it would not have known about the consulting firm’s other agreements cover- ing some of the same services unless it had access to purchase orders issued by General Services’ Enterprise Business Office and Telecommunications Division and compared the terms and conditions. In addition, the Health and Human Services Data Center paid Deloitte Consulting for its services under the contract before receiving the required deliverables. The Health and Human Services Data Center employee who approved pay- ment to Deloitte Consulting before receiving and reviewing the reports explained that he did so based on assurances given to him by one of the former officials of the Governor’s Office that the reports had been delivered to and accepted by the former officials. Accepting and paying for contract deliverables in this manner reduces assurances that the State is paying for services actually received. These questionable purchases illustrate the danger of having multiple departments making purchases for a single project but not communicating with each other. In this type of environ- ment, authority and accountability lines become vague, the chance of error increases, and the State has less assurance that its 3388 California State Auditor Report 2002-112 California State Auditor Report 2002-112 3399 resources are being spent wisely. We requested interviews with the former officials of the Governor’s Office to determine why they used multiple departments to make purchases for the Web portal project. However, these former officials did not grant our requests for interviews. RECENT ACTIONS BY GENERAL SERVICES AND THE TEALE DATA CENTER HAVE REDUCED WEB PORTAL MAINTENANCE COSTS As shown in Figure 2 on page 34, the most recent special project report estimated the total cost of the Web portal project at nearly $6 million less than the January 2002 estimate. General Services and the Teale Data Center jointly submitted the September 2002 special project report after completing cutbacks in Web portal maintenance that included a major reduction in the number of hours for Deloitte Consulting to maintain the Web portal. On June 12, 2002, the interim director of DOIT said that although Deloitte Consulting’s work product had apparently been exemplary, its Web portal agreements were expensive, and little had been done to transfer the consulting firm’s expertise to state employees so that the Web portal could ultimately be operated by a state agency. He recommended that General Services extend Deloitte Consulting’s Web portal maintenance agreement until a competitively selected contractor became available. However, he also recommended reducing the size of the agreement by restricting Deloitte Consulting’s role to limited maintenance and knowledge transfer functions, ultimately turning over the maintenance of the Web portal to state employees. Armed with these recommendations, General Services entered an $820,000 noncompetitively bid contract with Deloitte Consulting to maintain the Web portal for six months starting July 1, 2002, and ending December 31, 2002. The new contract limited Deloitte Consulting’s maintenance activities to normal work hours, whereas in previous maintenance agreements, Deloitte Consulting ensured portal operations 24 hours a day, seven days a week. In addition, the new contract did not require Deloitte Consulting to maintain certain components of the Web portal because they had been eliminated from the portal architecture to reduce continuing costs. The reduction in Deloitte Consulting’s maintenance activities allowed General Services to substantially reduce the number of consulting hours used to maintain the Web portal. 4400 California State Auditor Report 2002-112 California State Auditor Report 2002-112 4411 When General Services’ noncompetitively bid contract with Deloitte Consulting ended on December 31, 2002, state employees apparently were not yet prepared to maintain all aspects of the Web portal. Therefore, the Teale Data Center entered another six-month contract with Deloitte Consulting for $350,000 in Web portal maintenance. Unlike the manner in which previous maintenance contracts had been established, Using competitive however, the Teale Data Center solicited proposals from bidding, the Teale more than 20 different companies to perform maintenance Data Center achieved for the Web portal, and six firms responded. The Teale Data a 39 percent average Center evaluated the responses and eventually chose Deloitte reduction in Deloitte Consulting, achieving significant reductions in the hourly rate Consulting’s hourly rates. over previous Deloitte Consulting agreements. Indeed, the Teale Data Center achieved a 39 percent average reduction in Deloitte Consulting’s hourly rates from the hourly rates paid on earlier, noncompetitively bid contracts. By using a competitive bidding process to award its Web portal maintenance contract with Deloitte Consulting, the Teale Data Center achieved cost savings and entered a contract that used state resources advantageously. If General Services had gone through the same process for earlier Deloitte Consulting purchases, the State would have more assurance that its Web portal investment was reasonable and represented the best value to the State. Further, if General Services had gone through the competitive process for all the products and services associated with implementing and maintaining the Web portal, the State may have paid less for the Web portal than it did. RECOMMENDATIONS In the September 2002 special project report, General Services transferred responsibility for providing management, mainte- nance, and support for the Web portal project to the Teale Data Center. With that responsibility, the Teale Data Center should take the following actions to ensure that the State’s investment in the Web portal is a prudent use of taxpayer resources: • Continue to use the competitive bidding process for purchas- ing goods and services for the project. • Monitor project expenses by recording estimated costs when contracts and purchase orders are initiated and actual costs when they are paid. 4400 California State Auditor Report 2002-112 California State Auditor Report 2002-112 4411 • Submit special project reports to Finance and the LAO4 when required, and ensure that reported costs accurately reflect actual expenditures and commitments to date. • Make certain that special project reports contain estimates for at least the same number of years that earlier reports covered (fiscal years 2000–01 through 2005–06) so that reviewers can easily identify changes in the overall projected cost. To ensure that the State has not paid for goods or services twice, General Services should review past payments to Deloitte Consulting and the StateStore by General Services, the Health and Human Services Data Center, and the Teale Data Center. If duplicate payments were made, General Services should recover them. n 4 DOIT ceased to exist in July 2002. As of September 2002, state departments are required to submit feasibility study reports and special project reports only to Finance and the LAO. 4422 California State Auditor Report 2002-112 California State Auditor Report 2002-112 4433 CHAPTER 3 By Strengthening Its Review Processes, General Services Could Reduce Departments’ Misuses of Sole-Source Contracts and Emergency Purchases CHAPTER SUMMARY Before the May 2002 Executive Order, state departments often did not adequately justify the need for sole-source contracts. Requests for sole-source contracts were often ambiguous or failed to demonstrate that the contracted good or service was the only one that could meet the State’s needs. In addition, because they failed to make sufficient plans for certain purchases, departments often used sole-source contracts inap- propriately. Similarly, departments frequently misused the State’s emergency purchasing process by failing to demonstrate that they met the legal requirements for this type of procurement. To exacerbate the problem, the Department of General Services (General Services) approved requests for millions of dollars in questionable sole-source contracts and emergency purchases. State law allows a department to purchase information technology (IT) goods and services and non-IT goods without competitive bidding if the department and General Services agree that there is only one good or service that can meet the State’s needs. State law does not directly grant this exception for non-IT service contracts but gives the director of General Services broad discretion to determine the circumstances under which non-IT service contracts can be awarded without competitive bidding. General Services makes the determination of whether to permit a noncompetitive, non-IT service contract based on what it considers to be in the best interests of the State. A contract established using this exception is commonly known as a sole-source contract. The second exception to the requirement to engage in competitive bidding that is allowed by law is for a purchase that must be made immediately for the protection of the public health, welfare, or safety. An acquisition made on the basis of this exception is called an emergency purchase. 4422 California State Auditor Report 2002-112 California State Auditor Report 2002-112 4433 General Services refers to sole-source contracts and emergency purchases as noncompetitively bid contracts. Although an emer- gency purchase is, in fact, a contract that uses a single source or provider, it is important to note that an emergency contract and a sole-source contract are two distinct kinds of contracts that must be justified using criteria specific to each type of contract. STATE DEPARTMENTS IMPROPERLY USED SOLE-SOURCE CONTRACTS TO OBTAIN GOODS AND SERVICES We reviewed 23 requests for sole-source contract approval submitted by various state departments and identified eight examples of departmental misuse of this type of exception. General Services, however, approved all 23 requests. In four General Services approved requests that General Services approved, the departments failed eight of 23 sole-source to provide the kind or degree of justification we expected to see. contract requests we We could not determine whether the circumstances warranted reviewed even though a sole-source contract for one of the 23 requests because the requests did not the department’s justification was ambiguous. Specifically, the sufficiently justify the use justification did not clearly demonstrate what efforts were taken of sole-source contracts. to identify other potential sources or why the procurement was restricted to only one source. Finally, in three of the 23 sole-source requests we reviewed, the departments sought the contracts because they did not have sufficient time to acquire the goods or services through the normal competitive bidding process. However, we believe the departments had enough information well in advance of the procurement but failed to properly plan for the acquisition. Requirements for a Valid Sole-Source Contract Because both state law and public policy strongly favor competitive bidding, General Services must be judicious when granting exceptions that allow sole-source contracts. To enter a sole-source contract, the department proposing the purchase must provide General Services with a statement justifying the need to establish the sole-source contract. Simply stating that one provider has a superior good or service is not adequate justification for a sole-source contract; rather, the department proposing the purchase must demonstrate that only that good or service will meet the State’s needs. 4444 California State Auditor Report 2002-112 California State Auditor Report 2002-112 4455 The State Administrative Manual (SAM) provides guidance to assist departments in evaluating whether a sole-source contract is justified. For non-IT contracts for goods, the SAM requires the purchasing department to show at least the following: • The unique performance factors of the product. • Why the department requires the product’s unique factors. • The other products that the department has examined and rejected and why. The SAM also provides similar guidelines for purchasing repair parts and additional pieces designed to function with existing equipment. For IT goods and service contracts, the SAM gives the following examples of situations that may meet the criteria for a sole-source contract: • A survey of the marketplace shows there is only one vendor that can provide the service or article. The department should document the companies contacted, the dates of contact, and the price quote of the single vendor able to provide the service or article. • Only a single make or model of hardware or software is capable of interfacing and operating within the department’s existing IT environment. • The purchase consists of either added units that must match an existing system or currently leased equipment, provided the original contract contained a purchase option. • The purchase or lease comprises proprietary software available from only one source. Limited competition is appropriate if there are multiple distributors. • A maintenance service contract is needed to meet specific sole-source criteria. The SAM guidelines are designed to ensure that the purchasing department shows not only that the proposed item or brand name uniquely serves its needs but also that the department has attempted to determine whether there are, in fact, other provid- ers that offer the item or brand name. To justify a sole-source purchase, a department must complete a Contract Advertising Exemption Request as well as a sole-source questionnaire. The questionnaire requires the purchasing department to answer, 4444 California State Auditor Report 2002-112 California State Auditor Report 2002-112 4455 among other things, why only one vendor can provide the good or service, the consequence of not making the purchase, and how the price was determined to be fair and reasonable. Departments Frequently Sought Approval of Sole-Source Contracts That Did Not Include Adequate Justifi cation In four of the 23 sole-source contract requests we reviewed, the departments clearly did not provide the justifi cation we expected, yet they received approval for the contracts. Specifi - cally, three of the four departments did not document the steps they had taken to determine whether other providers of the good or service existed and none Information required for approval of of the four described why the uniqueness of the sole-source contract requests: good or service limited the acquisition to one vendor. Most often, the justifi cation was limited • Why the acquisition is restricted to one supplier. to a discussion of the vendor’s experience or the superiority of that vendor’s good or service. • The background of events leading to the acquisition. For example, the State Water Resources Control • The uniqueness of the acquisition; why the Board (State Water Board) requested approval for a good, service, and/or supplier was chosen. $490,000 sole-source contract to obtain technical • The consequences of not purchasing the expertise related to the electronic submission of good, service, and/or supplier. laboratory reports. In its June 7, 2001, sole-source • The market research conducted to request, the State Water Board’s justifi cation substantiate the sole source, including evaluation of other items considered. stated that time was of the essence because legislation required the electronic submission • How the price offered was determined to of data by September 1, 2001. Contrary to the be fair and reasonable. State Water Board’s assertion that legislation • The cost savings realized or costs avoided required the electronic submission of data by acquiring the good or service from the supplier. by September 1, 2001, the requirement was established by the State Water Board itself in its emergency regulations that it issued in response to the legislation. The legislation required the State Water Board to adopt emergency regulations that would implement this statewide program for electronic reporting by March 1, 2001, and to report to the Legislature on certain aspects of the implementation of the system by January 1, 2003. As a result of the short timeframe, the justifi cation indicated that the contractor’s services were required for immediate plan- ning, management, and implementation issues. The justifi cation provided by the State Water Board also stated that the law speci- fi ed a particular electronic format for submitting the laboratory reports and that the contractor was the only one providing the service required for that format. 4466 California State Auditor Report 2002-112 California State Auditor Report 2002-112 4477 It may be the case that the short timeframe within which the State Water Board had to adopt emergency regulations and make this system operational so that it could provide a timely report to the Legislature by January 1, 2003, reasonably led the State Water Board to believe that there was only one provider who could meet the State’s needs within that limited timeframe. However, we question the sufficiency of the justification provided by the State Water Board. Although the justification indicated that the chosen contractor was the only one providing the service required for the format, nothing in the justification demonstrates what kind of market survey the State Water Board did to make this determination. In another instance, the Department of Fish and Game (Fish and Game) requested approval for a $17.1 million sole-source contract to develop and maintain an online database supporting point-of-sale terminals for hunting and fishing licenses and permits. However, based on a vendor survey conducted by Fish and Game, there were at least two other vendors that could have designed a system that would meet its needs. While the selected vendor may have been able to perform the service, it is difficult to understand how Fish and Game concluded that it was the only vendor that could meet the State’s needs given the results of its own vendor survey. Although General Services approved the sole-source request, it appears Finance stopped the purchase on the basis that it should be competitively bid. Fish and Game canceled the contract and is now competitively procuring the database. We agree with Finance’s decision to intercede in the request for a sole-source contract. However, General Services is the department responsible for procurement and should have identified as invalid Fish and Game’s sole-source request. We also question whether General Services had enough information to assess the validity of one department’s assertions and whether the statements adequately justified the approval of a sole-source contract. For example, in 1997 the California Highway Patrol (CHP) sought approval of a five-year, $5 million sole-source contract with Level II Incorporated for software support and expansion of the CHP’s computer-aided dispatch system. The sole-source request indicated that using Level II could result in cost savings over continuing to use the consulting firm that was providing support services at the time. While the justification indicates that Level II is the provider of proprietary software, the fact that a consulting firm provided maintenance implies that vendors other than Level II might be equally capable of providing the 4466 California State Auditor Report 2002-112 California State Auditor Report 2002-112 4477 requested services. To review sole-source requests for IT contracts like the CHP’s, we obtained the services of an IT consultant. In this case, our IT consultant noted that the original contractor, in its role as system integrator, might have subcontracted the previous work to Level II and was not providing the actual maintenance or software for the dispatch system. Additionally, our consultant reasoned that the dispatch system might have been proprietary, making it necessary to retain the services of Level II to develop new systems consistent with the existing one. However, the CHP did not specifically state in its sole-source request that the dispatch system was proprietary or that Level II was the only vendor that could provide needed hardware, software, and maintenance services because of factors such as compatibility, licensing, and warranty concerns. Moreover, nothing in the materials suggested that the CHP conducted any marketplace research to determine whether any other supplier might have provided the support services. Based on his understanding of the requirements for sole-source contracts, our consultant concluded that General Services would have needed additional information to determine the adequacy of these justifications. Later, in November 2002, when the CHP wanted to extend the term of its sole-source contract with Level II, it included in its justification the kind of detailed information we expect to see when claiming that a vendor is the only one that can meet the State’s needs. Because Departments Failed to Properly Plan Some Procurements, They Requested Sole-Source Contracts to Obtain Goods or Services Quickly Departments occasionally leave themselves no alternative but to rely on a noncompetitive form of procurement because they have not adequately anticipated their procurement needs. We observed three instances when departments sought approval of a sole-source contract, not because there was no other vendor that could meet the State’s needs, but because poor planning necessitated an alternative to a competitive bidding process. One example of poor planning concerns the acquisition of pay-phone services for state and local government entities. In January 2002, General Services’ Telecommunications Division requested approval of two sole-source contracts with MCI WorldCom and Verizon for a three-year period from February 1, 2002, through February 1, 2005, with options for a fourth year. The contracts were designed to provide continuous pay-phone service to inmates in the State’s prison 4488 California State Auditor Report 2002-112 California State Auditor Report 2002-112 4499 system and other government buildings. According to the Telecommunications Division’s sole-source justification, until August 18, 1999, the services had been provided using master service agreements with MCI WorldCom and Verizon. Under the contracts, the telephone companies collected charges related to calls made from the prisons’ pay phones and remitted a portion of the revenue to the State. Transition agreements were established on August 19, 1999, for an 18-month period to allow General Services time to complete a request for proposal (RFP). However, the justification for the sole-source contracts also states that the RFP was eventually canceled. According to General Services, the reason for the cancellation was concern that the telephone companies had been charging too much for calls from inmates to their families in the past and that the bids submitted in response to the RFP could result in even higher fees in the future. Nevertheless, as a result of canceling the RFP, a second set of transition agreements was completed covering the period from February 1, 2001, to February 1, 2002. The two sets of transition agreements gave the Telecomm- unications Division 30 months to develop an RFP to solicit bids for the pay-phone service. However, it appears that the Telecommunications Division did little to plan for competitive procurement of the service before the second set of transition agreements expired in February 2002. Specifically, the Telecommunications Division waited until January 2002—one month before the transition agreements were to expire—to submit a request for three-year sole-source contracts with the same vendors. In its sole-source justification, the Telecommunications Division acknowledged that the two vendors did not provide unique services but were “uniquely in a position to provide the services and equipment without interruption and without transition during a period of time that encompasses not only a possible protest of the upcoming RFP, but also the transition process of the new vendor.” Because making changes to existing telephone systems in state prisons is logistically and technically complex, careful planning and implementation are critical. Therefore, awarding a contract covering three to four years appears reasonable. However, if the Telecommunications Division had embarked on a careful planning process well before its agreements with the telephone companies expired in August 1999, other companies would have been able to compete for these agreements much earlier. 4488 California State Auditor Report 2002-112 California State Auditor Report 2002-112 4499 In Addressing Concerns With Sole-Source Contracts, the State Should Consider Implementing Procedures Used by the Federal Government In some situations it may be necessary for departments to use noncompetitively bid procurement methods. Therefore, Gen- eral Services is obligated to thoroughly review requests for sole-source contracts and to seek additional information from any department that does not provide sufficient justification to The federal government determine whether the request meets the legal requirements for requires an agency to a sole-source contract. General Services should also implement post a public notice measures to address concerns about the validity of sole-source when seeking approval requests and ensure that prices paid for goods and services of a sole-source contract, obtained through sole-source contracts are appropriate. For and if poor planning example, the federal government requires its agencies to post necessitates the contract, public notices whenever they are seeking approval of sole-source the agency must specify contracts. This gives other vendors the opportunity to demon- how it will avoid similar strate their ability to provide the requested goods or services. situations in the future. Additionally, when a sole-source contract is necessary because of poor planning, the federal government requires the requesting agency to demonstrate the steps it is taking to ensure that the agency does not place itself in similar situations in the future. In addition to actions required by the federal government, General Services should consider other measures to ensure that the State’s interests are protected when sole-source contracts are necessary. Specifically, in every sole-source contract, General Services should include provisions that protect the State’s interest if the contract needs to be amended or if future goods and services are needed from the sole-source vendor. Such provisions are especially needed for contracts involving proprietary or unique IT systems. The State needs to recognize that technical support, maintenance, and future upgrades and modifications to existing IT systems may be limited to the application developer or manufacturer of the hardware and software components. In these instances, the State may be locked into these vendors for as long as the systems function. Therefore, in an initial IT contract, General Services should include safeguards that account for the effects of the vendor’s future pricing schedules, possible changes in support and maintenance packages, and future upgrades or obsolescence of hardware and software components and applications. Without adequate protections built into its contracts, the State could find itself at the mercy of its vendors and could be negatively affected by their future business decisions with little or no recourse. 5500 California State Auditor Report 2002-112 California State Auditor Report 2002-112 5511 DESPITE WELL-ESTABLISHED CRITERIA FOR EMERGENCY PURCHASES, DEPARTMENTS SUBMITTED INCORRECT OR INADEQUATE INFORMATION THAT GENERAL SERVICES IMPROPERLY APPROVED Although both state law and the SAM provide departments with a clear directive as to what constitutes an emergency purchase and what information must be provided to justify such a purchase, General Services did not use a form that specifically requests that information. Departments were compelled to fashion their own letters of explanation justifying why they had to make purchases on an emergency basis. Consequently, the information departments provided was inconsistent and often incomplete, making it difficult to ascertain whether the departments’ purported emergency needs had been adequately justified. When we began our review of the requests for approval of emergency purchases, we expected departments to identify the emergency situations that justified the purchases and to explain the connections between the proposed purchases and the threats posed by the emergencies. We further expected that departments would refer to the statutory definition of an emergency when making their requests. In our review of 25 purchase requests, all of which General Services approved, we found that in 17 cases the departments were requesting approval for emergency purchases. In the remaining eight cases, the departments were requesting approval for reasons other than meeting emergency needs, such as seeking the purchase of items to meet the special needs of the department. Of the 17 emergency purchase requests totaling $21.3 million that departments submitted to General Services, nine totaling $2.3 million completely failed to identify the existence of an emergency situation that fell within the statutory definition or to explain how the proposed purchase was related to address- ing the threat posed by an emergency. Our review revealed the following weaknesses in the way many departments used emergency purchases: (1) in five cases, the departments did not always have a clear understanding of what constitutes an emer- gency as defined by state law and, because of poor planning, confused a sense of urgency with an emergency and (2) in four cases, the departments did not adequately explain how the proposed purchase would address the threat posed by the emer- gency, even when a true emergency did exist. 5500 California State Auditor Report 2002-112 California State Auditor Report 2002-112 5511 Eight of the 17 purchase requests we reviewed did adequately justify the need to make an emergency purchase by describing Of the 17 emergency an emergency situation that fell within the statutory definition purchase requests we and explaining how the proposed purchase would address reviewed, only eight the problem posed by the emergency. The total cost of the adequately justified the eight justified purchases was $19 million. Four were related emergency need. to the energy crisis; two were related to safety concerns in the aftermath of the terrorist attacks of September 11, 2001; one was for equipment rental for firefighters; and one stemmed from a federally declared state of natural disaster. Each of these cases involved a clearly defined, legitimate emergency, and the proposed purchase directly related to addressing the problem posed by the emergency. For example, Fish and Game sought approval to purchase a $226,900 tractor for use in accomplishing restoration work necessitated by storms in 1995 that resulted in a federal declaration of disaster. The submitted request by the department clearly identified this emergency and explained how the proposed purchase would be used to conduct the restoration work. Requirements for a Valid Emergency Purchase State law allows a department to make an emergency purchase without competitive bidding when there is a “sudden, unexpected occurrence that poses a clear and imminent danger, requiring immediate action to prevent or mitigate the loss or impairment of life, health, or property, or essential public services.” Classic examples of an emergency include a flood, earthquake, or other natural disaster, or the declaration of an emergency situation by an authorized public official. An example of an emergency purchase that would be clearly justified under this exception is the purchase of additional fire- fighting chemicals during a season of severe and unprecedented forest fires. Our legal counsel has indicated that the test for determining the existence of an emergency that justifies an exception to the competitive bidding requirement is somewhat subjectively defined by the circumstances of each situation. Moreover, the determination made by a department requesting an emergency purchase will be accorded great deference, in the context of a legal challenge, when the health and safety of the public is at stake. The state courts have also placed greater emphasis on whether the purchase directly addresses the threat that the 5522 California State Auditor Report 2002-112 California State Auditor Report 2002-112 5533 emergency situation poses to the public health and safety than on whether the emergency situation could have been avoided in the first place. The SAM requires that a department proposing an emergency purchase prepare documentation showing that (1) the emer- gency situation could not have been avoided by reasonable care and diligence or (2) there is an immediate threat of substantial damage or injury to persons committed to the State’s care, to employees of the department, to members of the general public, or to property for which the department is responsible. The department must attach the documentation to the purchase request form and submit it to General Services for approval. In addition to providing this justification, all emergency pur- chase requests must be signed by the secretary of the requesting department or an appointed designee. Many Departments Misinterpreted What Constitutes an Emergency In our review of 17 emergency purchase requests, we found five totaling $1.1 million that were not prompted by actual emergencies but were examples of departments requesting Inadequate planning expedited purchases for other reasons. The common theme resulted in the need throughout many of the unjustified emergency requests was for the Prison Industry that the departments failed to properly plan for the competitive Authority to purchase bidding process for items used in the regular course of business. a bakery oven and For example, in one case, the Prison Industry Authority conveyers totaling purchased a bakery oven and conveyers totaling $791,000 on $791,000 on an an emergency basis. Although there is certainly a compelling emergency basis. need to have a functioning oven in a prison, the submitted materials indicated that prison officials had made numerous attempts to repair the existing oven over the previous four years and thus had plenty of time to plan for a new purchase using a competitive bidding process. The Prison Industry Authority obtained three informal price quotes and awarded the contract to the lowest bidder. However, this informal process does not satisfy the requirements of the State’s competitive bidding process. On one hand, departments hampered General Services’ ability to perform its oversight function by failing to provide adequate explanations for their emergency purchase requests. On the other hand, however, General Services failed to perform its over- sight function by approving many emergency purchases that did not include adequate justification. The consequence of both practices was a failure to protect the State’s interests. 5522 California State Auditor Report 2002-112 California State Auditor Report 2002-112 5533 In Some Cases, an Emergency Existed, but the Purchasing Department Did Not Provide Adequate Justification or Clearly Identify an Emergency We identified two emergency purchase requests for which the departments clearly identified emergency situations that would meet the statutory definition of emergencies but failed to establish any connection between the emergencies and the proposed purchases. Both requests came from the Department of Food and Agriculture (Food and Agriculture) and involved emergency purchases of vehicles costing a total of $505,000. Each request included a purchase order for the vehicles and a lengthy memorandum describing the impact of certain pest species on the natural habitat. Subsequent to our review, Food and Agriculture provided information explaining how the vehicles would be used to address the impact of the pest species. However, neither request submitted to General Services included this explanation. Despite the omission, General Services approved both emergency purchase requests. We reviewed two additional requests for emergency purchases in which the departments did not identify emergencies as required by state law, but the proposed purchases were clearly essential to protecting the public health and safety. In one request, the CHP sought approval for the emergency purchase of motorcycle helmets costing $107,000 for officers who were assisting in traffic congestion relief in the Los Angeles area. The other purchase request, also submitted by the CHP, was for $503,000 in ammunition that was in short supply because the State had failed to award a new statewide contract promptly. Neither traffic congestion nor a shortage of ammunition is “a sudden, unexpected event,” as the statute defines an emergency. Our legal counsel has advised us, however, that because these purchases were directly related to the protection of the public health and safety, it is very unlikely that a court would deem them invalid and would probably defer to General Services’ decision to approve the requests. ALTHOUGH IT DID NOT HAVE THE PROPER AUTHORITY, GENERAL SERVICES GRANTED EXCEPTIONS TO STATE COMPETITIVE BIDDING REQUIREMENTS General Services incorrectly exempted departments from the State’s competitive bidding process for eight of the 25 purchase requests we reviewed. In these cases, the departments did not state that the goods or services were needed because of 5544 California State Auditor Report 2002-112 California State Auditor Report 2002-112 5555 an emergency. Rather, in five of the eight instances, the General Services departments indicated the purchases were necessary because of incorrectly exempted special needs. In the remaining three instances, the departments departments from the requested approval to purchase used equipment, thereby saving State’s competitive the State money over the cost of new equipment. According to bidding procurement officials at some of these departments, General Services advised process for eight of the them to file for an exemption to the State’s competitive bidding 25 requests for purchases process for the requested purchase. we reviewed. As previously discussed, state law generally requires departments to use a competitive bidding process when obtaining goods and services. General Services can, by law, grant an exemption from this process if the department can demonstrate that there is only one good or service that can meet its needs or that immediate acquisition is necessary for the protection of the public health, welfare, or safety. Our legal counsel advised us that when a statute contains an exception, that exception must be strictly construed and no other can be allowed. Our legal counsel is not aware of any other exception in state law that would allow for an exemption from competitive bidding because of special needs or a savings to the State. Despite the fact the purchases did not meet the requirements of either a sole-source contract or an emergency purchase, General Services approved all eight purchases without requiring the departments to go through the formal bidding process. For example, the Department of Rehabilitation (Rehabilitation) submitted a request to purchase 36 vehicles for $924,000. According to Rehabilitation officials, the vehicles would be specially equipped for use by clients participating in the vocational rehabilitation program who are physically unable to use unmodified or alternative forms of transportation. Further, the officials stated that it is difficult to accurately anticipate the demand for vehicles, and they often need to make immediate acquisitions to meet clients’ needs. Any delays in the acquisition process, such as those that are inherent in the normal competitive bidding process, would threaten the clients’ participation in the program. To its credit, Rehabilitation obtained three informal price quotes and purchased the vehicles from the vendor that provided the lowest quote. While we agree that meeting its clients’ needs is a valid goal for Rehabilitation, current law does not appear to allow for an exemption from the competitive bidding process because of special circumstances that might exist at a particular department. We also question whether there was an immediate 5544 California State Auditor Report 2002-112 California State Auditor Report 2002-112 5555 need for 36 vehicles. In fact, according to records provided by Rehabilitation, 24 of the vehicles were not assigned to clients until six to 13 months after the purchase. Therefore, while there may have been a need to expedite the purchase of some vehicles, Rehabilitation would have been able to use the competitive bidding process for vehicles intended for future use. In another instance, the Department of Motor Vehicles, acting as the administrative support function for the California Complete Count Committee, requested approval to purchase teddy bears for $125,000 to use as promotional items during the 2000 census. The California Complete Count Committee program was authorized and funded separately by the Legislature. The department’s request indicated the bears would be distributed at outreach activities occurring within the next few weeks. In this case, the expeditious purchase of an item may be convenient, but is not allowable under current statutes. We also identified three purchase requests for used equipment that General Services ultimately approved. In one instance, the Department of Forestry and Fire Protection requested approval to purchase three used bulldozers for $492,500. In a letter to General Services accompanying the purchase request, the department stated that purchasing the used equipment would save more than $260,000 over the cost of similarly equipped new bulldozers. Although it may have been in the best interest of the State to purchase the used equipment, it appears there is currently nothing in State law to allow for this exemption. If General Services wants to continue to approve purchase requests based on factors that are unique to the operations of certain departments, it needs to establish specific criteria and develop a formal process that departments must follow to justify their requests. More importantly, General Services would need to seek a change in the current contracting and procurement laws to allow for other exemptions. A FAILURE TO ADEQUATELY JUSTIFY SOLE-SOURCE AND EMERGENCY PURCHASES MAY RESULT IN QUESTIONS ABOUT THE VALIDITY OF THE CONTRACTS The authority of a state department to enter a contract is limited by statute, and any contract established by a state department must be formed in the manner prescribed by statute. If a contract is established without competition and fails to satisfy 5566 California State Auditor Report 2002-112 California State Auditor Report 2002-112 5577 the statutory requirements for either a sole-source contract or an emergency purchase, a court might conclude that it is not enforceable as a valid contract. Although this report does not attempt to determine whether any particular contract is invalid, it is important to understand that the consequence of an invalid sole-source contract or emergency purchase is that a court may set it aside as void and unenforceable. To maintain the integrity of the public contracting system and to avoid unnecessary litigation, it is imperative that state departments and General Services rigorously apply the requirements that must be met to validly establish sole-source contracts and emergency purchases. RECOMMENDATIONS To comply with statutes governing the use of noncompetitively bid contracts—that is, sole-source contracts and emergency pur- chases—state departments should take the following actions: • Require that their legal counsel review all sole-source contracts and emergency purchases for compliance with statutory require- ments before submitting them to General Services for approval. • Implement adequate contracting and procurement procedures to ensure that sufficient time exists to properly plan for the acquisition of goods and services. To guide state departments in the statutory use of noncompeti- tively bid contracts, General Services should take the following actions: • Clarify the distinction between an emergency purchase and a sole-source contract and develop a form that clearly lays out what information is required to justify each type of noncompetitively bid purchase. • Require its Office of Legal Services to review all sole-source contract requests above a certain price threshold. • Implement review procedures for sole-source contracts and emergency purchase orders that ensure that departments have complied with all applicable laws and regulations, and require departments to submit documentation that demonstrates compliance. • Reject all sole-source and emergency purchase requests that fail to meet statutory requirements. 5566 California State Auditor Report 2002-112 California State Auditor Report 2002-112 5577 • Seek a change in the current contracting and procurement laws if it wants to continue to exempt purchases from competitive bidding because of the special or unique circumstances of departments. n 5588 California State Auditor Report 2002-112 California State Auditor Report 2002-112 5599 CHAPTER 4 General Services Needs to Strengthen Its Oversight of State Purchasing Activities CHAPTER SUMMARY The Department of General Services (General Services) has provided weak oversight and administration of the California Multiple Award Schedules (CMAS) program. As the State’s contracting and procurement oversight department, General Services is responsible for establishing policies and pro- cedures for the CMAS program, approving CMAS contracts, and performing audits of CMAS transactions and vendors. However, we found that General Services does not adequately monitor state departments’ use of CMAS vendors. Also, General Services’ Procurement Division, which is responsible for auditing state departments for compliance with contracting and procurement requirements, is not performing the audits required by state law. Further, General Services does not sufficiently review CMAS vendors to ensure that they comply with the terms of their contracts with the State. Perhaps more importantly, General Services does not always make sure that other state and local government contracts on which CMAS contracts are based are, in fact, awarded and amended on a competitive basis. As a result, the State may be paying more than it should for the goods and services it purchases. Finally, General Services does not consistently obtain and maintain accurate data on departments’ CMAS purchases. Consequently, it is sometimes charging other state departments more than it should for administrative fees. INSUFFICIENT AUDITS AND REVIEWS WEAKEN GENERAL SERVICES’ ABILITY TO MONITOR DEPARTMENTAL PURCHASING PRACTICES Although state departments annually purchase goods and services worth billions of dollars, General Services does not consistently review departments for compliance with contracting and procurement requirements, thereby 5588 California State Auditor Report 2002-112 California State Auditor Report 2002-112 5599 perpetuating the misuses described earlier in the report. The procedures General Services has established for audits and reviews adequately address the critical areas of contracting and procurement, but the frequency of those procedures does not meet statutory requirements or General Services’ own guidelines. By law, General Services is required to annually review the purchasing activity of departments that have been granted purchasing authority and audit those departments every three years. However, according to records provided by General Services, it has completed only 60 percent of the required reviews since fiscal year 1999–2000. Moreover, General Services’ own policies require audits of departments’ purchasing activities that are not being performed as often as needed. Two divisions within General Services—the Procurement Division and Audit Services—perform contract and procurement reviews and audits. To fulfill the requirement for conducting audits every three years, the Acquisition Quality Assurance and Delegation Resource Programs (Acquisition Quality Assurance Programs) in the Procurement Division conducts reviews of departments that have been delegated purchasing authority from General Services. Generally, the reviews address all areas of purchasing, including master service agreements, sole-source General Services has contracts, CMAS contracts, and state credit card transactions. conducted only 105 of General Services does not have statutory authority to review 174 required reviews since information technology (IT) purchases as a part of these reviews. fiscal year 1999–2000, The reviews include procedures sufficient to determine whether and less than one-half departments are complying with most purchasing requirements. of these were completed However, the reviews are not being performed as often as on time. required. Records provided by the Acquisition Quality Assurance Programs show that between July 1999 and January 2003 the Procurement Division had completed only 105 of 174 required reviews. Moreover, less than one-half of the 105 reviews were completed within the required three years. The manager of the Acquisition Quality Assurance Programs stated that, until recently, the Procurement Division had only three staff performing the reviews, which was not enough to meet the statutory requirement. Audit Services has the responsibility, established by General Services’ audit charter, to perform comprehensive audits of state departments that have been delegated the responsibility of performing specific functions, including purchasing. Normally, Audit Services conducts the audits under the purview of General Services. Although not as comprehensive as the Procurement Division’s reviews, Audit Services’ audits do 6600 California State Auditor Report 2002-112 California State Auditor Report 2002-112 6611 examine CMAS purchases as well as sole-source contracts and emergency purchases. However, Audit Services has completed only 19 audits of the 40 departments it includes in its audit rotation since July 1998. The lack of frequent and consistent oversight and monitoring of purchasing transactions at state departments likely contributed to the concerns we identified during our review of CMAS purchases, sole-source contracts, and emergency purchases. For example, despite procedures that appear sufficient to determine whether a sole-source contract or emergency purchase is appropriate, the audits probably do not identify systemic misuses of either procurement tool because of their infrequent occurrence. Therefore, as previously discussed in Chapter 3, General Services needs to perform a more thorough review of sole-source contracts and emergency purchases before they are approved. Moreover, increasing the frequency of all audits and reviews may give departments a greater incentive to adhere to contracting and procurement requirements. MORE FREQUENT REVIEWS OF CMAS VENDORS WOULD HELP GENERAL SERVICES TRACK CONTRACT COMPLIANCE General Services periodically performs reviews of CMAS vendors to ensure compliance with contract requirements. Among other things, the reviews determine whether the CMAS contract included the goods and services purchased and whether the purchasing department paid the correct price. The review process adequately addresses key areas of contract compliance; however, General Services does not conduct a sufficient number of reviews. With thousands of vendors on the CMAS list, it is not reasonable for General Services to review them all. Therefore, General Although General Services appropriately targets vendors with the highest dollar Services reports 2,300 sales. Nonetheless, of the 2,300 active CMAS vendors reported active CMAS vendors by General Services as of August 2002, it had reviewed only as of August 2002, it 29 from July 1998 through September 2002. As a result, vendors had performed contract may not be adhering to the maximum price for goods and compliance reviews for services under the terms of their CMAS contracts or may be only 29 from July 1998 selling goods and services that are not in their approved CMAS through September 2002. contracts—activities cited by General Services during four of the five reviews we looked at. Additionally, according to information included in the General Services’ CMAS Supplier Compliance Review procedures for fiscal years 2000–01 through 2002–03, 6600 California State Auditor Report 2002-112 California State Auditor Report 2002-112 6611 limited staffing has prevented and will continue to prevent follow-up reviews of CMAS vendors to ensure that previously identified weaknesses have been corrected. GENERAL SERVICES NEEDS TO IMPROVE ITS PROCESS FOR ADDING NEW VENDORS AND PRODUCTS TO THE CMAS LIST General Services consistently followed its established procedures for adding new vendors and products to its CMAS list, but the procedures are weak. Because it adds vendors to the CMAS list based on the vetting procedures performed by other government entities that have multiple-award contracts, General Services needs to determine that those contracts were established in accordance with the goals of the CMAS program. General Services can be reasonably assured that contracts with vendors in the federal multiple-award schedules (FMAS) Until General Services program, developed by the federal General Services strengthens its review of Administration (GSA), have been awarded through a how CMAS base contracts competitive bidding process that considers price. However, are awarded and because contracts between other government entities and amended, departments their vendors may not have been awarded under scrutiny equal using the CMAS program to that of the federal government, General Services should cannot be sure the review them more carefully. In addition, General Services needs contracts represent good greater assurance that amendments to multiple-award contracts value for the State. between other government entities and vendors are adequately reviewed and approved by the awarding entity. Without such measures, departments using the CMAS program cannot be sure that product prices listed by the CMAS program represent good value and are a good starting point for negotiation. General Services Has Established Procedures for Adding New Vendors and Products to the CMAS Program As described in the Introduction, a primary intended benefit of the CMAS program is that the State can purchase goods at competitively assessed prices without incurring the costs involved in the competitive procurement process. General Services allows contracts between other public entities and multiple-award vendors to serve as the basis for state CMAS contracts. Such contracts are called base contracts. In other words, rather than awarding its own base contract under the CMAS program, General Services requires a vendor to submit a written offer of products, services, and prices that reside on an 6622 California State Auditor Report 2002-112 California State Auditor Report 2002-112 6633 existing federal or other government entity’s multiple-award contract. However, the vendor also must agree to CMAS terms and conditions and provide certain categories of information, such as company size, contractor licenses, and proof of registration with the secretary of state, if applicable. Because CMAS contracts are based on multiple-award sched- ules established by other government entities, neither General Because CMAS contracts Services nor a vendor can update product offerings on a CMAS are based on the contract unless the base contract has first been updated. Other multiple-award schedules requirements vary depending on the type of base contract. The of other government four types of base contracts and the requirements associated entities, neither General with each type are as follows: Services nor a vendor can update CMAS product • Applicant holds an FMAS contract (Category 1). The applicant offerings until the base must submit a copy of its FMAS contract. If the base FMAS contract is updated. contract is updated (for example, prices change or products or services are added), no amendment to the CMAS contract gen- erally is necessary, and the vendor generally is not required to notify General Services of the schedule change. • Applicant piggybacks off another vendor’s FMAS contract (Category 2). The applicant must submit a copy of the other vendor’s FMAS contract off which it intends to piggyback and designate which products and/or services on the schedule it intends to offer. For consulting services, the applicant must also submit customer references to substantiate qualifications. To resell products, the applicant must submit written autho- rization from the manufacturer, distributor, or GSA schedule owner. For maintenance and repair services, the applicant must submit written authorization from the manufacturer. As in Category 1, changes to the GSA base contract are not reported to the CMAS program, and an amendment to the CMAS contract is not required unless an entirely new product or service is added to the schedule for which the piggyback applicant would like to qualify. The piggyback applicant must then submit the necessary reference and authorization forms. • Applicant holds a non-GSA multiple-award contract (Category 3). The applicant must submit the solicitation document, such as a request for proposal, used by the non-GSA entity to request a bid from vendors. The solicitation document must state that a price comparison will be part of the evaluation criteria in determining which vendors will be accepted. In addition, General Services requires the applicant vendor to submit the response it sent to the non-GSA entity and the resulting contract, which must contain evidence of multiple awards. 6622 California State Auditor Report 2002-112 California State Auditor Report 2002-112 6633 If a vendor wants to make any change to a CMAS contract based on a non-GSA contract, it must request an amendment to the CMAS contract. The vendor must send copies of its changed product pages and show that the entity that awarded the base contract approved the changes. General Services then issues an amendment to the CMAS contract that would either add new product lines or replace the pricing for particular products lines. • Applicant piggybacks off another vendor’s non-GSA contract (Category 4). The applicant must submit the same authorizations and customer references as would a Category 2 applicant. The applicant must also submit the same solicitation document, response, and contract and is under the same amendment procedures as a Category 3 applicant. Despite Following Its Established Procedures for Awarding CMAS Contracts, General Services Cannot Verify That Base Contracts and Amendments Were Competitively Awarded To determine if General Services follows its procedures for awarding CMAS contracts, we reviewed documentation for a sample of seven CMAS contracts. We did not look at Category 1 CMAS contracts because, beyond the written offer, company information, and acceptance of CMAS terms and conditions, only copies of the FMAS contracts are required. For each of the seven contracts we tested, General Services obtained the nec- essary information from the applicant vendors. However, we noted that the files did not contain documentation that General Services independently verified the information provided by the vendors. Additionally, General Services does not have writ- ten procedures requiring its staff to do so. As described later, the failure to independently verify a vendor’s information can result in the State making a purchase without any assurance that it is obtaining the best possible price. During our review of the Web portal, we noted a relatively large volume of purchases of both goods and services from one CMAS vendor—the StateStore Incorporated (StateStore).5 In fact, the StateStore had four separate CMAS contracts, two of which were part of the sample we reviewed. The StateStore is a private reseller specializing in the state government IT market. According to General Services’ records, between January 2000 and June 2002, the State made more than 900 purchases totaling 5 The StateStore is a separate entity from CAL-Store, formerly known as the California State Computer Store, which is the name of a master purchase agreement. 6644 California State Auditor Report 2002-112 California State Auditor Report 2002-112 6655 approximately $32 million from the StateStore. The StateStore’s CMAS contract that was used to make purchases for the Web portal is based on a multiple-award contract that was originally established between the StateStore and the Merced County Fast Open Contracts Utilization Services (FOCUS) program. According to General Services, CMAS vendors use FOCUS contracts as the bases for CMAS contracts more frequently than any other non- FMAS entity’s contracts. Consequently, we deemed it appropriate to review the FOCUS program more closely. Merced County started the FOCUS program in 1997 as a way to establish multiple-award contracts for information technology goods and services. Merced County allows other government entities to use its preestablished contracts as a basis for procurement. Like the CMAS program, the FOCUS program allows government entities to avoid the time and cost of a lengthy proposal process by purchasing from contracts that have already been competitively assessed. However, unlike the CMAS program, FOCUS vendors are required to pay Merced County a percentage of the revenue generated by the contract. These vendors pay the fee when other governments, including the State, use a FOCUS contract as a basis for their own multiple- award schedules. Consequently, it is in the best interest of Merced County to amend its FOCUS contracts to accommodate the needs of other governments. In our review, we found the following four conditions: • Because the FOCUS program charges vendors a fee based on the purchase price for sales to entities outside its jurisdic- tional boundaries, the cost of goods and services available through the FOCUS program contracts may not be the lowest available. • Merced County did not enforce its requirements for FOCUS vendors. Although the StateStore bid submitted to the FOCUS program did not comply with all the requirements of the request for proposal, Merced County’s FOCUS granted it a multiple-award contract. • The StateStore was able to amend its FOCUS contract numerous times, adding many new product lines, without Merced County staff consistently comparing them to those of competitors. 6644 California State Auditor Report 2002-112 California State Auditor Report 2002-112 6655 • General Services does not review the policies and procedures of entities awarding base contracts; therefore, it had not reviewed the process used by Merced County to award the FOCUS program’s StateStore contract. Because of these four conditions, departments using the StateStore’s CMAS contract could pay too much for goods and services bought under the contract. Moreover, because General Services does not have an adequate process to ensure that non-GSA entities properly award and amend their multiple- award contracts, departments have little assurance that CMAS prices listed on these types of contracts represent a good value or a strategic starting point for negotiations. Merced County’s Practice of Charging FOCUS Vendors a Fee Based on Contract Sales May Lessen Its Ability to Obtain the Lowest Prices As stated previously, the Merced County FOCUS program collects a percentage fee from FOCUS contract holders based on the total amount purchased on the contract. Simply put, every time a government entity, including the State, purchases goods and services from a vendor’s FOCUS contract, the vendor is required to pay a percentage of the purchase price to Merced County. The percentage charged to the StateStore ranged from 0.25 percent to 1 percent, depending on sales volume. Given the requirement to pay FOCUS a percentage of their proceeds, vendors may opt to offer smaller discounts on goods and services available through their FOCUS contracts. The fact that the FOCUS program’s policies and procedures state that “pricing will generally be viewed from a ‘what the market will bear’ philosophy,” only increases the concern that FOCUS prices may not be the best available. Moreover, General Services gives assurances to departments that the prices listed by the CMAS program have already been competitively assessed and thus are reasonable. This implies that an independent party has compared the prices against competition and found them reasonable. However, a FOCUS program official stated that Merced County allows vendors to price according to their own view of the competition for services such as consulting, engineering, and support that are difficult to assess against others. 6666 California State Auditor Report 2002-112 California State Auditor Report 2002-112 6677 General Services Did Not Confirm That the FOCUS Program Followed the Requirements for Vendors Specified in the Request for Proposal In August 2000, General Services added the StateStore to the CMAS list based on a FOCUS contract granted to the StateStore in May 2000. In the request for proposal that Merced County issued and to which the StateStore responded, Merced County told applicants that they must meet the following requirements: • Demonstrate that the prices of products and services offered in the submitted bid represent the most competitive pricing given to state and local government entities. • Offer only prices that reflect an across-the-board percentage dis- count (or cost-plus-percentage markup) for every item submitted. • Specify the percentage discount being offered. Despite this language, the StateStore submitted a bid to Merced County that did not contain evidence that the prices offered were the most competitive prices given to state and local General Services did governments, although the StateStore stated in the bid that it not question inconsistencies would offer products at the most competitive prices available. between Merced County’s Additionally, the StateStore did not commit to a percentage request for proposal discount or a percentage over cost for four of the seven product and the StateStore’s lines listed in the submitted bid. For three of the product lines, submitted bid. the StateStore did not list prices. For the fourth product line, Broadbase Software, the submitted bid contained “TBD” (to be determined) for the price of consulting services rather than a definitive commitment to a particular hourly or daily rate. Despite these flaws, Merced County granted the StateStore a FOCUS contract without any changes to the bid. For its part, General Services apparently removed the TBD line completely before granting the StateStore a CMAS contract, but documentation does not suggest that General Services questioned the other inconsistencies between Merced County’s request for proposal and the submitted bid. General Services procedures for adding vendors to the CMAS list only require its staff to review the request for proposal for evidence that price is part of the evaluation criteria and does not compel the analyst to compare the request to what was actually submitted. The inconsistencies between the request for proposal and the submitted bid should have caused General Services to question Merced County’s bid assessment processes. 6666 California State Auditor Report 2002-112 California State Auditor Report 2002-112 6677 The FOCUS Program Did Not Assess Contract Amendments for Competitiveness Between August 2000 and March 2002, the StateStore amended its FOCUS contract 20 times, adding new product lines and updating prices for existing lines. State officials requested most of the FOCUS contract amendments so that the StateStore’s CMAS contract could likewise be amended, thereby enabling the State to purchase specific goods and services for the Web portal. To include a product or price update in its CMAS contract, the StateStore had to apply for a CMAS amendment. The premise The StateStore amended behind the CMAS amendment process is that all base contracts its FOCUS contract and any subsequent amendments have been competitively 20 times between assessed. At least in the case of the Merced County FOCUS pro- August 2000 and gram, competitive assessment did not occur. March 2002. State officials requested most In the FOCUS program’s policies and procedures, Merced of these amendments County admits it only checks random items in contract updates so that the StateStore’s and that updates are subject to the same “what the market will CMAS contract could bear” pricing philosophy previously mentioned. We also found likewise be amended, that, although a price update for the StateStore often included thereby enabling the many products and prices, Merced County officials usually State to purchase specific approved the updates within two business days. On six occa- goods and services for sions, Merced County approved the updates on the same day the the Web portal. StateStore requested them, and for one of these six requests, Merced County updated the StateStore contract with four new product lines in a little more than an hour. Only one person, the FOCUS program manager, approved the six updates. Con- sequently, we do not believe that Merced County adequately compared the prices of the newly added product lines or new prices of existing products to prices of competing product lines. Without Policies and Procedures to Review the Practices of Entities That Award Base Contracts, General Services Cannot Maintain the Integrity of CMAS Contracts General Services’ practices for awarding CMAS contracts do not include any type of review of the procedures of entities that award base contracts. The only criteria for a base contract is that evidence exists that price was part of the evaluation criteria of a base contract’s request for proposal and that the contract is of a multiple-award nature. Because the Merced County FOCUS contract and proposal request met these criteria, the StateStore was able to use it as a base contract for its CMAS contract without any review by General Services to make sure that Merced County had competitively assessed the contract and its subsequent amendments. In fact, we found 6688 California State Auditor Report 2002-112 California State Auditor Report 2002-112 6699 significant discrepancies between the request for proposal and the StateStore’s response to it as well as several aspects of FOCUS program policy and procedures that are inconsistent with the goals of the CMAS program. Because Merced County is not required to comply with laws governing the awarding of state contracts, we are not questioning its contracting or procurement processes. However, General Services has a responsibility to employ sufficient measures to ensure that the State’s interests are protected. Therefore, General Services should perform a more diligent review of the processes used by other state and local government entities when evaluating multiple-award contract proposals. Such a review of Merced County might not have exposed all the weaknesses associated with the FOCUS contract, but without any review whatsoever, General Services has no chance of identifying entities whose motivations and policies do not match CMAS goals. INACCURATE DATA CAUSED GENERAL SERVICES TO SOMETIMES OVERCHARGE DEPARTMENTS USING THE CMAS PROGRAM The fees General Services charges state departments for administering the CMAS program are sometimes excessive because of errors in the information system used to record CMAS purchases. During the period we reviewed, General Services charged departments an administrative fee of 1.21 percent of each CMAS purchase. Purchases from small- business vendors are exempt. With this fee, General Services oversees the CMAS program and provides workshops and guidance for state departments and vendors. To determine and record the fees, General Services uses its Procurement Information Network (PIN)—an information system containing data on CMAS and other purchasing transactions. According to General Services, its Procurement Division enters data on 1,200 to 1,500 CMAS orders per day into its PIN system. We reviewed 90 CMAS purchases at nine departments and found 24 instances in which General Services had either entered the incorrect amount in the PIN system or had no record of the transaction. According to General Services’ CMAS procedures, departments are responsible for submitting CMAS purchase orders to General Services. Therefore, it is possible that missing records were the result of departments failing to submit the required information to General Services. Duplicate entries occurred when departments 6688 California State Auditor Report 2002-112 California State Auditor Report 2002-112 6699 submitted amended purchase orders to General Services, which subsequently recorded the amended amount without deleting or updating the original entry. Among other things, General Services uses its PIN system to charge departments an administrative fee for purchasing General Services goods and services from CMAS vendors. When we reviewed overcharged departments 10 incorrectly recorded transactions, we found that General $219,000 for CMAS Services had overcharged departments by more than $219,000. purchases because For example, the Department of Consumer Affairs (Consumer of inaccurate data in Affairs) made a purchase totaling $6,300 from a CMAS vendor. its PIN system. However, General Services erroneously recorded the amount as $6.3 million and charged Consumer Affairs more than $77,000 instead of the correct $77 fee. In another instance, General Services recorded an $8.6 million purchase by the Health and Human Services Data Center twice, resulting in an overcharge of more than $104,000. General Services charges departments electronically and later sends billing information to the departments. Neither Consumer Affairs nor the Health and Human Services Data Center reviewed General Services’ billings for accuracy and therefore did not challenge the inflated fees. In fact, most of the nine departments we reviewed indicated that they do not reconcile the billing information received from General Services to their CMAS purchase orders. Although General Services is responsible for recording CMAS purchases correctly in its PIN system so it can charge departments the correct administrative fees, departments should assume some responsibility for ensuring correct payments by reconciling their accounts and notifying General Services when they are charged incorrect amounts to obtain credit when appropriate. In addition, departments should submit copies of all CMAS purchase orders to General Services’ Procurement Division so it has a complete record of purchasing activity and can charge departments the appropriate administrative fees. RECOMMENDATIONS To improve its administration of the CMAS program, General Services should take the following actions: • Increase the frequency of its reviews of CMAS vendors. Additionally, before accepting any contracts as base contracts, General Services should make certain that processes established by other government entities for awarding and amending multiple-award contracts are in accordance with CMAS goals. 7700 California State Auditor Report 2002-112 California State Auditor Report 2002-112 7711 • As discussed further in Chapter 5, General Services should implement the recommendations made by the Governor’s Task Force on Contracting and Procurement Review. In the short term, General Services should focus on the following: Consider reducing or eliminating the delegated purchasing u authority of departments that fail to comply with contract- ing and procurement requirements. Consult with departments to determine what can be done u to facilitate monthly reconciliation of CMAS purchasing and billing activities. n 7700 California State Auditor Report 2002-112 California State Auditor Report 2002-112 7711 Blank page inserted for reproduction purposes only. 7722 California State Auditor Report 2002-112 California State Auditor Report 2002-112 7733 CHAPTER 5 Recommendations of the Governor’s Task Force on Contracting and Procurement Review Should Improve Controls on Contracting and Procurement CHAPTER SUMMARY In August 2002, the Governor’s Task Force on Contracting and Procurement Review (task force) recommended purchasing reforms, completing its directive from the governor’s Executive Order issued on May 20, 2002. The recommendations call for comprehensive changes in the State’s contracting and procurement procedures, including the use of sole-source contracts and the California Multiple Awards Schedules (CMAS) program. Prompted by the controversy surrounding the Oracle enterprise licensing agreement, among other things, the governor asked the task force to review the State’s contracting and procurement procedures and recommend the necessary statutory, regulatory, or administrative changes to “ensure that open and competitive bidding is utilized to the greatest extent possible” by state departments. In general, we believe the task force’s recommended changes, if properly implemented, should address many of the weaknesses in the CMAS program and noncompetitive bidding procedures we identify in this report. However, we believe that additional steps should be implemented based on the results of our audit, surveys of nine state departments, and review of practices used by other government entities. The most immediate changes recommended by the task force reinforce interim guidelines created and implemented by the Department of General Services (General Services) under the Executive Order that would require departments to obtain three price quotes before making a CMAS purchase and prohibit the use of CMAS contracts for information technology (IT) projects costing more than $5 million, unless such a purchase is approved as part of 7722 California State Auditor Report 2002-112 California State Auditor Report 2002-112 7733 a feasibility study report.6 Other recommendations focus on General Services’ need to increase the frequency of its contract audits and legal reviews, develop a contracting and procurement certifi cation and training program, and begin implementation of a long-range plan for a new data integration system. ALTHOUGH TASK FORCE RECOMMENDATIONS ADDRESS MOST WEAKNESSES, SOME Key Task Force Recommendations CANNOT BE IMPLEMENTED IMMEDIATELY, To departments: AND OTHERS ARE NEEDED • Must solicit and obtain at least three price In August 2002, the task force made 20 recommen- quotes, including at least one from a small dations designed to improve the contracting and business when making a CMAS purchase. procurement processes of the State. The recommen- To General Services: dations focus on the use of the CMAS program and • Develop standards and criteria for potential noncompetitively bid contracts and on establishing CMAS vendors that are not part of the contracting and procurement standards for state federal multiple-award schedules program. departments and General Services—the State’s • Adopt a policy prohibiting departments contracting and procurement oversight depart- from using CMAS or master agreements ment. For example, the task force recommended for large IT projects unless approved as part of feasibility study reports. that departments be required to solicit and obtain three price quotes before placing an order with a • Perform random audits and compliance reviews of departments’ contracting and CMAS vendor, similar to the interim contracting procurement transactions. guidelines issued by General Services during the task • Develop a uniform set of policies, force’s review period. Before establishing the interim procedures, and processes for contracting guidelines, General Services only recommended that and procurement activities. departments compare CMAS contract prices. • Develop and deliver a comprehensive training and certifi cation program for state Further, the task force advised General Services to contracting and procurement offi cials. prohibit the use of CMAS contracts, as well as any • Implement a comprehensive electronic other contracting method in the Master Agreement procurement system for all state contract and procurement transactions. Program,7 for large-scale IT projects unless such an acquisition is approved as part of a feasibility • Ensure legal review of all high-risk study report. The task force also recommended transactions, including large IT projects. that General Services perform random audits • Involve stakeholders in continuous or reviews of departments’ purchasing practices improvement of contracting and procurement processes. for compliance with requirements and develop protocols for departments to conduct internal reviews and report their results to General Services. 6 A feasibility study report gives the business and technical reasons to justify investing state resources in an IT project, why the proposed project is needed, the means for ensuring its success, and a comprehensive analysis of its benefits and costs. Feasibility study reports must be approved by the Department of Finance. 7 The Master Agreement Program includes master rental agreements, master purchase agreements, master service agreements, statewide commodity contracts, state price schedules, and Western States Contracting Alliance contracts. 7744 California State Auditor Report 2002-112 California State Auditor Report 2002-112 7755 Although state law and General Services’ own policies currently require it to perform limited reviews and audits of state departments’ purchasing practices, as previously discussed in Chapter 4, we found the reviews and audits were infrequent. The manager of General Services’ Acquisition Quality Assurance and Delegation Resource Programs (Acquisition Quality Assurance Programs) told us she was recently able to hire the additional staff needed to complete the required reviews in a timely manner. The task force recognizes, and we concur, that budgetary and other constraints make it impractical to implement some of the recommendations in the short term. For instance, the task force recommended that General Services develop a comprehensive training and certification program for state purchasing personnel. However, the success of such a program depends on a variety of issues being addressed, including what types and sources of the training are available and who within the State needs the training. The task force also views the implementation of a comprehensive electronic procurement system as a long- term project. Although many aspects of the proposed system, including online training and electronic routing of contract and procurement documents, may be too costly given the State’s current fiscal crisis, many improvements could be made to General Services’ current IT system. A comprehensive list of the recommendations approved by the task force is shown in Appendix B. Based on the results of our review of nine departments and General Services, we believe the recommendations shown in the text box on page 74 are the most critical. Moreover, we recommend that General Services take, and the Legislature consider, additional steps not addressed by the task force to further improve the State’s contracting pro- curement procedures, as noted at the end of this chapter. Departments Must Compare Prices Among CMAS Vendors A CMAS contract can be an appropriate tool for obtaining goods Prior to a May 2002 and services in an effective and streamlined manner. However, Executive Order, because of the way they were previously used by departments, departments’ use of CMAS contracts did not always guarantee that the State received CMAS did not always the best value for taxpayers’ dollars. As discussed in Chapter 1, guarantee that the State before General Services issued its interim guidelines as a result received the best value for of the May 2002 Executive Order, departments did not always the taxpayers’ dollar. compare prices when purchasing goods and services from CMAS vendors. Some state purchasing personnel have the impression that the published or quoted CMAS prices represented the 7744 California State Auditor Report 2002-112 California State Auditor Report 2002-112 7755 best prices available to the State because the vendors had been awarded contracts based on a competitive process. Although General Services does foster that perception in its guidelines to departments, there is little evidence that the prices and products of CMAS vendors have been compared to each other. In fact, CMAS prices, which are preestablished in federal or other government entity contracts, are merely ceiling prices that a vendor cannot exceed. When government entities competitively assess vendor prices, they are only trying to determine if prices are fair and reasonable, not what is the “best price.” It is possible, however, to receive significant savings through price comparisons and negotiations. Therefore, we believe implementation of the task force’s recommendation is necessary to ensure that the State receives the best value for goods and services purchased through CMAS contracts. In August 1999, the Bureau of State Audits (bureau) recom- mended that departments comparison shop by obtaining three price quotes from competing CMAS vendors for all purchases that exceed a certain dollar threshold. However, General Services did not implement our recommendation until May 2002, in response to the Executive Order calling for con- tracting and procurement reforms. The task force subsequently reinforced the bureau’s position when it included the new policy in its recommendations. Although we found that departments are generally complying with the new requirements, we believe A standard form for that the Legislature should consider revising existing CMAS departments to use to statutes to include language that requires departments to document obtaining three obtain at least three price quotes before making CMAS pur- price quotes from vendors chases to ensure that departments rigorously implement the would allow General task force recommendation. Services’ audit staff to assess departments’ We also noted that there is no standard form for departments compliance with revised to use consistently to document their efforts in obtaining three CMAS requirements. price quotes from vendors. Therefore, we suggest that General Services develop such a form, which each department should also use to document its basis for determining best value when cost is not the determining factor in a purchase. A standard form would help ensure that departments have sufficiently documented both their solicitation efforts and their best value determination, when applicable. Further, the form would allow General Services’ audit staff to assess whether departments were complying with the revised CMAS requirements and could be used on a random basis by the audit staff to confirm with vendors that departments were obtaining price quotes. 7766 California State Auditor Report 2002-112 California State Auditor Report 2002-112 7777 Despite the fact that CMAS contract prices represent only ceiling prices that vendors cannot exceed, General Services only encourages departments to negotiate lower prices. The federal multiple-awards schedule (FMAS) program uses one device to ensure that agencies obtain volume discounts. Specifically, under the FMAS program, a maximum quantity per order is included on every vendor’s price list. This threshold serves as a trigger point for an agency to seek additional price reductions if the agency is ordering more than the threshold amount. To promote increased negotiation efforts by departments, we think General Services should consider adopting maximum order quantities into its CMAS price list. For CMAS contracts based on FMAS contracts, the threshold levels could be adopted from the FMAS contracts. For CMAS contracts based on non-FMAS contracts, maximum order levels should be established. While the CMAS contractor would not be obligated to offer additional discounts from the contracted price, the threshold would provide a useful tool to prompt departments to seek larger discounts or additional quotes from other CMAS vendors. Acquisitions of Large IT Projects Using CMAS Contracts and Master Agreements Should Be Prohibited Unless Approved in Advance The CMAS program, although created to enhance the effectiveness and efficiency of the overall procurement process, was intended mainly to leverage the State’s buying power for routinely purchased services and commercial “off-the-shelf” items that met a distinct need for a specified product or service. Conversely, IT system integration projects are by nature large, complex, long-term undertakings that operate under an entirely different set of requirements and processes. The task force stated that CMAS contracts and master service agreements (MSAs) were never designed to be used for such projects and acknowledged The task force that stringing together a series of CMAS contracts or MSAs recommended that to implement a large IT system circumvents the controls and General Services adopt oversight built into the acquisition process for such systems. a policy to prohibit the use of CMAS contracts or Based on its assessment of the capabilities of the CMAS program MSAs for large IT system and MSAs, the task force recommended that General Services integration projects. adopt a policy that, except under certain circumstances, prohibits the use of CMAS contracts or MSAs to acquire large IT system integration projects. This recommendation seems warranted, given the complete lack of adherence to requirements for and controls over large IT projects and the CMAS program as described in Chapter 2. 7766 California State Auditor Report 2002-112 California State Auditor Report 2002-112 7777 Inadequate Procedures for Reviewing the Processes Other Government Entities Use to Award and Amend Base Contracts Promotes Departmental Misuse of CMAS Contracts Without strict criteria for awarding and amending CMAS contracts to vendors that do not hold FMAS contracts, General Services cannot completely eliminate misuses of CMAS contracts. Specifically, General Services currently does not ensure that base contract prices have been subjected to a competitive evaluation process when awarding contracts to vendors that do not have FMAS contracts—that is, vendors that either have contracts with other state or local governments or are piggybacking off other vendors’ contracts. In its recommendations of August 2002, the task force addressed the problems surrounding CMAS piggyback contracts, in which vendors agree to provide the same products or services at the same or lower prices as vendors that hold base contracts under other public entities’ multiple-award schedules programs. According to General Services, about 87 percent of CMAS contracts are piggyback contracts. The task force noted that General Services needs to establish specific criteria or standards to qualify piggybacking vendors, as it does for vendors with base contracts with other government entities. In theory, vendors holding base contracts have had to meet business and responsibility requirements to obtain their CMAS contracts. The only requirement General Services cur- rently places on piggybacking vendors is that they must agree to the product and pricing stipulations of the vendors holding the base contracts. Although the task force did not suggest that General Services revise its procedure for awarding contracts to vendors based General Services needs to on contracts they hold with other government entities, we strengthen its procedures believe the process has weaknesses. As previously discussed in for reviewing processes Chapter 4, we found that General Services often awards CMAS used by other state and contracts without adequately evaluating the competitive- local governments when pricing processes that other state and local governments use to awarding and amending award base contracts. Therefore, the State lacks assurance that base contracts. the prices reflected in these contracts are fair and reasonable. Likewise, General Services does not review the process that other state and local governments use to approve amendments to their contracts, leaving the State, again, with little assurance that the corresponding CMAS amendments have been competitively 7788 California State Auditor Report 2002-112 California State Auditor Report 2002-112 7799 assessed. Further, state departments can use the amendment process to obtain specific products and services by directing preselected vendors to amend their base contracts. The StateStore Incorporated’s (StateStore) CMAS contract demonstrates how the lack of strict guidelines for making con- tract amendments enables state departments to abuse CMAS contracts.8 Among the goods and services purchased from the StateStore for the Web portal, only those provided by Broadbase Software were included in the StateStore’s initial May 2000 base contract. At the request of the State, either directly or indirectly, the StateStore added other products and services, including those offered by Broadvision, Interwoven, and Verity Software, in September and October 2000 to its base contract. After each base contract amendment, the StateStore added the products to its CMAS contract by applying for and obtaining a CMAS contract supplement from General Services. General Services amended the StateStore’s CMAS contract 13 times between August 2000 and April 2002 to update price lists and add com- puter software products, maintenance, and consulting services. Although we agree with the task force recommendation that General Services should develop specific criteria for awarding piggyback contracts, we also believe that General Services should strengthen its procedures for reviewing the process used by other government entities when awarding and amending base contracts. General Services Plans to Increase the Frequency of Its Procurement Reviews and Audits The task force recommended that General Services perform random audits or compliance reviews of the purchasing activities of state departments that have been granted procurement authority by General Services. Currently, General Services is required by law to review state departments’ contracting and procurement transactions once every three years. However, considering the large volume of contracting and procurement transactions, the task force concluded that once every three years is not often enough to mitigate problematic practices before they escalate and recommended that audits and compliance reviews be done more frequently. As previously discussed in Chapter 4, between July 1999 and January 2003, General Services performed only 105 of the 174 required reviews. According to the manager of the Acquisition 8 The StateStore is a separate entity from CAL-Store, formerly known as the California State Computer Store, which is the name of a master purchase agreement. 7788 California State Auditor Report 2002-112 California State Auditor Report 2002-112 7799 Quality Assurance Programs, limited staffing prevented General Services from completing the required reviews, but the eight additional staff recently hired should help solve this problem. The task force also recommended that General Services establish protocols for all departments with internal auditors to conduct their own contracting and procurement audits and report the results to General Services (many large departments already perform such audits). In addition, all state departments are required to certify the adequacy of their internal administrative General Services and accounting controls every two years. The Department of should work with Finance (Finance) issues a guide to assist in evaluating these Finance and department controls. To implement the task force’s recommendation, we internal auditors believe General Services should work with Finance to revise to improve reviews the guidelines for the required internal audits to include of contracting and specific procedures for reviewing sole-source contracts and procurement practices. CMAS purchases. The biennial schedule of the internal audits would help ensure that departments conduct a contract and procurement review more frequently than is currently done by General Services. Further, General Services could limit its audits and reviews of some departments to an evaluation of the adequacy of the departments’ most recent internal audits. Potential Vendors Find It Difficult to Learn What Requirements Apply to Particular Contracting Situations Unlike other administrative departments, General Services establishes and maintains its own policies and procedures on state contracting and procurement practices. Although the public has access to the various documents defining these policies and procedures, finding specific information can be difficult. Consequently, General Services is limiting the vendors’ ability to ensure that their contracts adhere to current rules and regulations. Generally, administrative agencies such as General Services adopt formal rules and regulations using the procedures set out in the Administrative Procedure Act. The process allows the public to review and comment on proposed regulations. The proposed regulations are subsequently published, are made available to the public, and have the same force and effect as law. 8800 California State Auditor Report 2002-112 California State Auditor Report 2002-112 8811 General Services is not required to follow this formal process to adopt the policies and procedures it uses to administer the State’s public contracting system. Instead, General Services has developed the State Contracting Manual, the State Administra- tive Manual, and the California Acquisitions Manual using an informal process that is not subject to public scrutiny. General Services also prepares Management Memos and Bulletins (memos) that supplement or, in some cases, supplant the policies and procedures defined in the three manuals. These memos, as well as the full text of the manuals, are available on the Web site maintained by General Services. In addition, the public contracting arena has a long history of Executive To determine the current Orders, issued by the governor, that often override policies and procedures that apply to procedures developed by General Services. To determine the any given contracting current procedures that apply to any given contracting situation, situation, a potential a potential vendor must navigate a complex maze of memos vendor must navigate a and other materials. The difficulty of this task can limit vendors’ complex maze of memos, ability to ensure that their contracts conform to current rules Executive Orders, and and regulations and may prevent some vendors from even three manuals developed attempting the task. by General Services. As the department charged with overseeing the State’s public contracting system, General Services has an obligation to provide state departments and vendors with a clear, consistent system of requirements for public contracting. We strongly concur with the task force’s recommendation that General Services develop a uniform set of policies, procedures, and processes for contracting and procurement activities that the public can easily access. A Comprehensive Training and Certification Program Would Emphasize Best Value in Purchasing During meetings with General Services and the task force, most state departments expressed the need for enhanced training and professional development for contracting and procurement personnel. Six respondents to our survey of nine departments also stated that more training was needed, especially for the more specialized aspects of procurement such as IT acquisi- tion. The task force acknowledged that General Services offers a number of contracting and procurement courses and believes that these classes could form the basis for the development of a comprehensive program. However, we attended one of General Services’ CMAS classes and, although it provided an overview of the CMAS program, it did not provide sufficient detail for 8800 California State Auditor Report 2002-112 California State Auditor Report 2002-112 8811 departmental purchasing personnel to use the CMAS program effectively, especially for those purchases that are generally not routine for a department, such as software and personal services. To train departmental purchasing personnel more effectively, we believe General Services needs to develop classes that provide comprehensive coverage of sole-source contracts, emergency purchases, and CMAS contracts, and departments need to ensure that affected personnel attend the classes periodically. The task force agreed that there is an urgent need for General Services to develop and deliver targeted training to contracting and procurement personnel on how to deal with some of the complex realities of the contracting process, including the CMAS program, and to ensure that those personnel are aware of the regulations and policy requirements regarding ethics violations and confl icts of interest. The federal Department of Defense has a center dedicated to improving the professionalism of the acquisition workforce, and the center plays a signifi cant part in providing procurement and contracting personnel the opportunity to become certifi ed. In addition, several states, Classes on Contract Management and including Virginia and Texas, have developed Administration That General Services training programs for contracting and Could Include in a Training Program procurement personnel that lead to professional certifi cation. General Services may be able to • Overview of contracting obtain information from these entities that • Project and contract management would assist it in developing training programs. • Basic principles of contract law Appendix A provides information on the characteristics of other government entities’ • Legal contracting authority multiple-award schedules programs. • Acquisition strategy and planning • Source selection strategy Likewise, the task force recommended that General Services develop and deliver a comprehensive • Elements of the solicitation process training and certification program for state • Solicitation design, development, and contracting and procurement offi cials. The task proposal evaluation process force also recommended that General Services • Contract negotiation and approval optimize state resources by using existing programs as appropriate. For example, a nonprofi t center • Source selection criteria (center) at one California State University (CSU) • Request for proposal campus may already have many of the components • Negotiations that could be useful for state department training. The center’s partnership with Los Angeles County • Introduction to cost and price analysis in 1999 allowed that county to offer programs for • Innovative contracting its managers at all fi ve CSU campuses in greater Los Angeles. Collaboration between the center and 8822 California State Auditor Report 2002-112 California State Auditor Report 2002-112 8833 General Services might be the best means of using the existing infrastructures of both systems to provide training quickly to contracting and procurement officials in many areas of the State. In addition to training state purchasing personnel, General Services should also consider holding periodic information sessions with CMAS vendors, given the responsibilities that they have. While General Services has occasionally conducted vendor seminars in the past, these were done on request and were geared more toward marketing the CMAS program than on providing a foundation for working effectively with state depart- ments. Although General Services provides each CMAS vendor with both a vendor information packet and online resources, most of the nine departments we surveyed indicated they had experienced problems working with CMAS vendors. Typically, the problems centered on departments’ efforts to obtain CMAS contract information, which vendors are required to provide. During our review of other states’ practices, we found that Texas and Washington require their vendors to have training specific to their respective multiple-award schedules programs before they award contracts. Although requiring formal training may not be practical given the size and diversity of the State’s vendor population, providing periodic seminars on a consistent basis for vendors and state department representatives should assist in clarifying the roles and responsibilities of each. The task force views the implementation of a comprehensive training and certification program for state purchasing personnel The task force views the as a long-term project. We agree that the State’s current implementation of a budgetary problems and the time involved in developing an comprehensive training effective program make rapid implementation of all aspects of and certification program this recommendation impractical. However, we believe that for purchasing personnel General Services should immediately evaluate the curriculum as a long-term project. for its existing training classes and vendor seminars and consider implementing some short-term changes until a more comprehensive program can be developed. The need for more immediate, consistent training is especially important given the changes in the State’s contracting and procurement processes recently implemented by General Services. Moreover, according to General Services, more than $7 billion was spent on goods, services, and IT systems in fiscal year 2000–01. Therefore, it is crucial that state employees have the tools necessary to make wise purchasing decisions. 8822 California State Auditor Report 2002-112 California State Auditor Report 2002-112 8833 A New Data Integration System Is a Long-Term Goal, but General Services Can Address Some IT Issues Immediately General Services and the task force acknowledge that the State currently does not have the tools necessary to provide usable, accurate information on the State’s contracting and procure- ment transactions. For example, the task force reported that General Services cannot determine with any certainty how much state departments spend each year on contracting and procurement. Moreover, according to General Services, it can often take weeks to compile requested data, and even then its reliability is suspect. The task force recommended developing and implementing new IT systems to solve these problems, but rather than relying on such long-term projects, General Services can make some immediate changes to its current system. During our testing at the departments, we confirmed that the IT system General Services uses to record data on CMAS Numerous errors in transactions contains erroneous information. Specifically, its current IT system as previously described in Chapter 4, we found numerous for recording CMAS instances in which General Services incorrectly entered CMAS purchases illustrate data from departments into its database, including duplicate the need to implement entries and inaccurate amounts for purchase orders. General a new system for Services summarized its IT problems by stating that there is no tracking and reporting single system that captures and tracks the data for individual CMAS transactions. contracting and procurement transactions that could be used to leverage the State’s buying power more effectively, to streamline processing, or simply to provide ready responses to inquiries on particular issues or actions. In response to General Services’ analysis of these IT issues, the task force recommended that General Services implement two new systems: (1) an integrated system that would capture and track transactions executed by state agencies and (2) a comprehensive IT system for all state contracting and procurement transactions that would give the public access to contracting and procurement opportunities and would give the public and departments access to online product and pricing comparisons and electronic bidding. Because this kind of major overhaul of General Services’ IT system would be costly and time-consuming, it is not immediately feasible given the State’s current financial problems. The task force also proposed an interim solution that is less costly and focuses on improving the accuracy and availability of contracting and procurement data. However, this short-term recommendation generally restates the need to track data that 8844 California State Auditor Report 2002-112 California State Auditor Report 2002-112 8855 General Services already captures, such as contract and purchase order dates and amounts, vendor names, and procurement methods. Given the problems we identified with General Services’ current method for capturing the data, we believe it is important to focus on efforts to ensure the data’s accuracy. One possible solution would be for General Services to work with departments to establish a process to reconcile their purchasing information with invoices and reports prepared by General Services. Such reconciliation would allow departments to report and correct errors to General Services, thereby preventing incorrect billings and increasing the reliability of purchasing data. In addition, we believe General Services should issue instructions to all state departments reinforcing the importance of reporting all contracting and procurement transactions. Finally, to increase departments’ ability to access online information about the CMAS program, we believe General Services should explore the possibility of including copies of vendor contracts on its Web site. The vendor information General Services currently provides on its Web site is limited. For example, only 12 categories exist for information on goods and services available from each CMAS vendor. Consequently, the Web site does not list all goods and services available under a particular CMAS contract and often lists only generic product descriptions—copiers and software, for example. The majority of the departments we visited stated that if vendor contract and catalog pricing information were available on the CMAS Web site, it would improve their ability to determine which products and services were covered under CMAS contracts—something departments were not consistently doing—and expedite the process of comparing prices. All departments we surveyed noted that vendors are unreliable about providing product and pricing information or do not send requested copies of CMAS contracts. Online access to vendor contracts would help eliminate the possibility of vendors providing product and pricing information to departments that is not consistent with their CMAS contracts, a problem we found in our review of CMAS purchases. If General Services controlled the vendor information by including it on its Web site, departments would be less likely to purchase goods and services that were not included in approved CMAS contracts. 8844 California State Auditor Report 2002-112 California State Auditor Report 2002-112 8855 Given the diffi culties departments experience in obtaining vendor contract and pricing catalog information, General Services should identify the available options and associated costs to determine whether it is cost benefi cial to incorporate this information in its Web site. Thorough Legal Review of High-Risk IT Contracts Is a Priority As evidenced by the recent controversy surrounding the State’s contract with Oracle, it is essential that General Services give high-risk contracts more thorough legal scrutiny. This is especially true with IT contracts, which are generally more complex than other contracts. According to offi cials Transactions That General Services at General Services, its Offi ce of Legal Services (Legal Identifi es as High Risk and in Services) reviews about 5,000 service contracts each Need of Legal Review year. However, Legal Services has little involvement in reviewing IT contracts. Rather, General Services’ • Large IT system integration projects Procurement Division is responsible for review and • Projects that involve public safety approval of all IT contracts. • Projects that may involve confl icts of interest Because of the inherent complexities of large • Complex projects IT contracts, the task force recommended that General Services ensure these and other high-risk • Hazardous activities contracts receive suffi cient review by Legal Services. • IT contracts worth more than a specifi ed Similarly, in our April 2002 report on the Oracle dollar amount enterprise licensing agreement, we recommended • Contracts with federal matching funds that the Legislature consider requiring General Services to conduct a legal review of any IT contract valued at more than a specifi ed dollar amount. We also recommended that General Services assemble a negotiating team with the necessary expertise to protect the State’s interest before negotiating and entering future complex contracts. Similarly, the task force suggested that, for more complex contracts, it might be prudent to include Legal Services in the entire acquisition process, including planning, document preparation, and negotiation. The task force recognizes that General Services’ legal resources are limited. Therefore, it recommended that the allocation of legal resources be based on a consideration of various factors, including risk, complexity, and price. The task force also suggested that General Services consider delegating the legal review, if appropriate, to state departments that have in-house counsel trained in contract law. We agree that delegating this responsibility in some situations may be appropriate. Ultimately, however, General Services 8866 California State Auditor Report 2002-112 California State Auditor Report 2002-112 8877 should be held accountable for high-risk transactions. Therefore, we believe Legal Services should perform the final review of all contracts General Services is required by law to review. Establishing a Stakeholder Advisory Council Should Facilitate Agreement Between the State and Private Industry on Contract Terms The task force identified the importance of the State reaching agreement with private industry on a set of contract terms and conditions that protects the State’s interest while preserving a competitive marketplace. Industry representatives have commented that the State’s contract terms may be unduly restrictive when compared with federal and commercial standards and may also be restricting competition. In response, the task force recommended that General Services confer with industry representatives to improve the model contract provisions. These deliberations should include a consideration of best practices used by other public and private sector organizations. The task force further suggested that General Services continue its efforts to facilitate industry and state stakeholder participation in the continuous improvement of the general contracting and procurement processes. Currently, General Services’ Small Business Council—a collaborative effort General Services should between state officials, private businesses, and local officials— ensure that state addresses policy and procedural issues. Additionally, General purchasing personnel are Services’ State Contracting Advisory Network—a group of state adequately represented in contracting officials that meets quarterly to discuss pertinent its efforts to improve the contracting issues—acts as a mechanism to disseminate State’s contracting and information about contracting policies and procedures. However procurement process. successful these efforts may be, several of the departments we surveyed expressed the need for increased communication between their purchasing personnel and General Services. Therefore, we believe General Services should ensure that state purchasing personnel are adequately represented in its efforts to improve the contracting and procurement process and that information be effectively disseminated to state departments. Further, General Services should facilitate periodic meetings among state departments to discuss various procurement issues and exchange ideas and solutions with other departments. 8866 California State Auditor Report 2002-112 California State Auditor Report 2002-112 8877 The task force recommended that after 12 months, General Services evaluate the effectiveness of its efforts to implement all the task force’s short-term recommendations and prepare a report to the governor on the status of those efforts. We agree with this recommendation. RECOMMENDATIONS To emphasize the need for departments to obtain the best prices when using the CMAS program, the Legislature should consider revising existing CMAS statutes to include language that requires departments to obtain at least three price quotes before making CMAS purchases. It should also consider amending the law to specifically require General Services to review state departments’ IT purchases every three years as it now is required to review non-IT purchases. To further improve the State’s contracting and procurement pro- cesses, General Services should continue its efforts to implement the reforms recommended by the task force. Additionally, General Services should take the following actions: • Develop a standard form that departments must complete to document their quotes from CMAS vendors. The form should also be used to document each department’s basis for determining best value when cost is not the determining factor in the purchase. • Consider adopting maximum order-quantity levels that would prompt departments to seek additional discounts from CMAS vendors. • Strengthen its procedures for reviewing the processes used by government entities awarding base contracts. • Facilitate meetings with Finance and departmental internal auditors to revise existing audit procedures to include CMAS and noncompetitively bid contracts. General Services should also consider limiting its audits and reviews of some depart- ments to an evaluation of the adequacy of the departments’ most recent internal reviews. • Develop training classes that provide comprehensive coverage of noncompetitively bid contracts and CMAS purchasing and require mandatory attendance by all state purchasing person- nel. General Services should also evaluate the curriculum for 8888 California State Auditor Report 2002-112 California State Auditor Report 2002-112 8899 its existing training classes and vendor seminars and consider implementing short-term changes until a more comprehen- sive program can be developed. • Work with departments to establish a process for consistently reconciling their purchasing information with invoices and reports prepared by General Services. General Services should also issue instructions to state departments reinforcing the importance of reporting all contracting and procurement transactions. • Explore the possibility of including copies of all vendor con- tracts on the CMAS Web site. • Require Legal Services to perform a final review of all high- risk contracts. • Ensure that all state purchasing personnel are represented in its efforts to improve the contracting and procurement processes and that information is effectively disseminated to state departments. General Services should also facilitate periodic meetings with state departments to discuss various procurement issues and exchange ideas and solutions with other departments. We conducted this review under the authority vested in the California State Auditor by Section 8543 et seq. of the California Government Code and according to generally accepted government auditing standards. We limited our review to those areas specified in the audit scope section of this report. Respectfully submitted, ELAINE M. HOWLE State Auditor Date: March 26, 2003 Staff: Ann K. Campbell, Audit Principal Steven A. Cummins, CPA Susie Lackie, CPA Benjamin M. Belnap Dominic Nadarski 8888 California State Auditor Report 2002-112 California State Auditor Report 2002-112 8899 Blank page inserted for reproduction purposes only. 9900 California State Auditor Report 2002-112 California State Auditor Report 2002-112 9911 APPENDIX A Comparison of Selected Multiple- Award Schedules Programs From Other Government Entities From our review of 18 states that we believed might have multiple-award schedules programs as a contracting and procurement option, we selected four that offered such programs to procurement staff for at least some purchases. For example, Washington uses its multiple-award schedules program only for personal services purchases, and Texas does not use its program for purchasing information technology goods. We then selected some elements of the California Multiple Award Schedules (CMAS) program that the Governor’s Task Force on Contracting and Procurement Review (task force) had addressed and compared them with the programs in other states. We included the federal multiple-award schedules (FMAS) program because some states base their multiple-award contracts on FMAS contracts. In addition, we included the Merced County Fast Open Contracts Utilization Services (FOCUS) program in our comparison because it is the most frequently used provider of non-FMAS base contracts by vendors seeking to obtain CMAS contracts. Table A.1 on the following pages show the results of our comparisons. In general, among the states and other nonfederal government entities, we found only Texas has a multiple-award schedules program comparable to the CMAS program. In fact, the Texas program has more stringent requirements than does the California program for some elements, such as required procurement certification for its contracting personnel and increased online capabilities. 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snoissucsiD :ecruoS Blank page inserted for reproduction purposes only. 9944 California State Auditor Report 2002-112 California State Auditor Report 2002-112 9955 APPENDIX B Recommendations From the August 2002 Governor’s Task Force on Contracting and Procurement Review In May 2002, the governor issued an Executive Order creating the Governor’s Task Force on Contracting and Procurement Review (task force) to examine the State’s contracting and procurement procedures and recommend any statutory, regulatory, or administrative changes necessary to ensure that departments use open and competitive bidding to the greatest extent possible in awarding state contracts. In addition, the governor asked the task force to recommend any statutory or regulatory changes to ensure adequate oversight of the procurement processes by state agencies and departments. The task force completed its directive from the governor in August 2002, recommending purchasing reforms, subsequently approved by the governor, that call for significant changes in the State’s contracting and procurement procedures. Table B.1 on the following pages list the task force recommenda- tions as well as the approach the Department of General Services (General Services) has indicated it will use to implement the recommendations and its timeline for doing so. 9944 California State Auditor Report 2002-112 California State Auditor Report 2002-112 9955 TABLE B.1 Approach and Implementation Status as of Task Force Recommendation February 14, 2003 1. General Services shall broaden the scope of the General Services issued a memo to all departments on Quality Assurance Program so that state agencies January 31, 2003, announcing the inclusion of leveraged procurement conducting any state procurement are required to instruments such as the CMAS program, master service agreements, do so under authority granted by General Services, Statewide Commodity Contracts, and State Price Schedules in its including orders placed with contractors holding Quality Assurance Program. To fully implement this recommendation, leveraged procurement instruments established by General Services is developing training modules on leveraged General Services such as the California Multiple procurements that will be included in the General Services’ Training Award Schedules (CMAS) program and master and Certification Program for Procurement Professionals (see agreements. Recommendation 8). Standards and assessment tools are being developed (see Recommendation 6) and these will be used in conjunction with regular compliance reviews to establish purchasing authority dollar levels commensurate with criteria established for compliance. General Services is also revising its Purchasing Authority Manual to include chapters regarding use of leveraged procurement instruments, which will contain instructions on conducting leveraged procurements for state agencies. 2. General Services shall adopt a policy that General Services met with the Department of Finance to develop criteria prohibits the acquisition of large-scale information to be used to redefine “large-scale system integration” projects. This technology (IT) system integration projects criteria is being incorporated into a Management Memo that has a through the use of CMAS or master agreement target release date of late February 2003. The acquisition process will orders, unless otherwise approved as a part of a actually be approved via the Information Technology Procurement Plan, feasibility study report. which will be reflected in the Management Memo. 3. Specifically, with respect to the CMAS program, Management Memo 02-19 established the policy. CMAS program state agencies shall be required to follow the materials are currently being updated to reflect the requirements Management Memo 02-19 requirements of the Management Memo. The update will be disseminated via to continue to solicit and obtain three price General Services’ Procurement Division’s Web page in mid-March 2003. quotations, including at least one certified small business CMAS contractor, before placing an order. In addition, no single order should exceed $500,000. 4. General Services shall develop written standards Vendors Without Base Agreements: and criteria that will apply to any CMAS General Services has written standards and criteria that apply to any agreements established with vendors that do not CMAS agreements established for vendors that do not hold federal GSA hold federal General Services Administration (GSA) agreements, or nonfederal multiple award agreements. supply schedules. Nonfederal-Based Agreements: General Services revised its written standards and criteria for CMAS agreements that are based on nonfederal GSA supply schedules to: • Allow negotiated products, services, and prices only if the federal government approves them. • Require that the award of the nonfederal GSA supply schedule be based on minimum product and/or service requirements. Evidence of multiple award and competitive bid or cost-compared pricing will continue to be required. In addition, General Services has, among other things, initiated a partnership with the vendor community (Information Technology Association of America) to formulate additional CMAS reforms. 9966 California State Auditor Report 2002-112 California State Auditor Report 2002-112 9977 Approach and Implementation Status as of Task Force Recommendation February 14, 2003 5. General Services shall perform random audits or To implement this recommendation, General Services doubled the compliance reviews of state agencies’ contracting number of staff dedicated to performing compliance reviews and and procurement transactions executed under overhauled the database of agencies to be reviewed to include those authority granted by General Services, including that have been purchasing without delegation* using leveraged services contracts. General Services should also procurement instruments (Recommendation 1). Additionally, General establish protocols to enable state agencies that Services refined its compliance criteria and developed templates for have internal auditors to conduct audits and report the compliance review reports. New review staff have been immersed the results to General Services. in intensive training and will begin on-site training at a state agency in February 2003. The on-site training will cover both goods and IT acquisitions. With the addition of the leveraged procurements into the purchasing authority program, staff will develop review criteria and increase review accountability and reporting to cover these issues. The purchasing authority and quality assurance manager is working with General Services’ external auditors to define protocols for agencies’ internal auditors and to define the requirements for review of non-IT services contracts. 6. General Services shall establish consistent General Services is addressing the recommendation as part of its standards tied to dollar thresholds that must be revision of the Purchasing Authority Manual. The revised manual will met for a state agency to be granted higher levels include a revised request for purchasing authority form that will include of procurement authority. These standards should the standards. The first segment of the revised manual is scheduled for take into consideration training, certification, release June 30, 2003. Implementation of this recommendation will demonstration of competency, and demonstrated interface with Recommendations 8 and 19. capability to conduct self-audit or assessment through various means. 7. General Services shall develop a uniform set of General Services recognizes that the laws and rules governing policies, procedures, and processes to apply to all state acquisitions may be inconsistent and ambiguous. The current state contracts and procurements to ensure that organizational structure of the contracting and procurement functions the outcomes are consistent and fair, and foster may lead to inefficiencies or duplication of effort. To clarify the competition. As a part of the recommendation, current method for conducting the acquisition of goods and services General Services should undertake an initiative and improve its current methodologies, General Services is in the to align the laws governing contracting and process of retaining a consulting firm to assist in implementing this procurement of goods, services, and IT, including recommendation. The request for proposal has been issued, proposals the award-protest processes. have been received, and proposal evaluations are now underway. It is anticipated that a contract will be awarded in late February 2003. The selected contractor is to perform a substantial review of the statutes, codes, and regulations relating to state acquisitions; federal requirements imposed on the State; and the State Administrative Manual, the California Acquisition Manual, the State Contracting Manual, and other relevant documents. The selected contractor will also make recommendations to simplify and promote uniformity among all state procurement and contracting approaches. In addition, the contractor will examine the organizational structure for policy development and implementation and provide recommendations for improvements. The contractor will also conduct an assessment of the internal structure and responsibilities for review and approval of individual contracting and procurement actions, and make recommendations to improve the procedures. General Services expects work on the contract to be completed by the end of July 2003. continued on the next page * Purchasing delegation is the authority to procure goods or IT goods and services with a value over $100. General Services’ Procurement Division makes these delegations to state departments that have demonstrated the capability to make purchases that adhere to state statute and policy. The Procurement Division monitors the delegation holders’ purchasing program through purchasing program compliance and quality review. 9966 California State Auditor Report 2002-112 California State Auditor Report 2002-112 9977 Approach and Implementation Status as of Task Force Recommendation February 14, 2003 8. General Services shall develop and deliver a The first step in developing a comprehensive training program is to assess comprehensive training and certification program the needs of those to be trained. To do this, General Services entered into an for state contracting and procurement officials. interagency agreement with the Center for Management and Organization Signature authority of individuals at state Development, California State University, Northridge (CSUN) to (a) identify agencies should be linked to the level of training, the knowledge, skills, and abilities (i.e., competencies) required by experience, and proficiency achieved, as should individuals with procurement and contracting responsibilities, (b) conduct the procurement authority of each state agency. a needs assessment based on these competencies, and (c) recommend a comprehensive training program designed to enhance individual competencies. The training program would ultimately link successful completion of the program (including passing tests) to certification and to granting agency purchasing authority. To identify the knowledge, skills, and abilities comprising the procurement official’s job, two focus groups were established from among the “best” at their jobs and represented agencies throughout the State. Using the results of the focus groups, a questionnaire was designed and made available online via the Internet and also mailed to these individuals. The results provide invaluable insight into the specific training needs of the group. It is significant to note that managers and journey-level procurement officers agreed strongly on the training needs of those working in the procurement field. Respondents indicated that procurement staff at all levels need foundation training in areas such as the emergency acquisition process, noncompetitive acquisitions, and file documentation. Based on the findings of the task force and the survey results, General Services will be phasing in a series of courses in state acquisitions over the next six months. The first classes offered will be Acquisition Ethics and Leveraged Procurements in April 2003. General Services is developing a basic program that will lead to a certificate for procurement and contracting personnel. A certification will be linked to an agency’s purchasing authority. General Services expects to offer the first course in this series at the beginning of fiscal year 2003–04. In addition, General Services is: • Categorizing the survey findings for additional programs at the intermediate and advanced levels. It will identify specialized topics, based on the survey findings, for career development workshops. • Discussing with legal staff an appropriate means of delivering training on high-risk contracts. • Exploring the possibility of providing selected programs online. • Discussing with both the Department of Personnel Administration (DPA) and the CSUN (a) the best means for registering and tracking participants, (b) techniques for evaluation and testing, and (c) the award of professional development certificates. 9. General Services shall adopt clear standards of California Government Code, sections 19572 et. seq. and 19990 specify conduct for contracting and procurement officials. the current statutory grounds for discipline in the state civil service system. Violations of the standards should be subject to Though these particular sections may encompass some of the commonly disciplinary action. occurring defalcations involved in state contracting abuses, it is their initial assessment that a code of conduct is needed to set more specific criteria and standards for those involved in state contracting. This will provide a firm basis for discipline under the more general statutory sections and will also provide clear warning regarding prohibited activities for both civil servants and exempt employees. Because of the many required procedures involved in civil service discipline (e.g., progressive discipline), stakeholders (DPA and unions) need to be involved in development of procurement conduct standards. Meeting with these parties was to begin the second week in February 2003. These ethical standards will be part of the core curriculum in the contracting training to be conducted by General Services. General Services has begun the process of collecting standards of conduct from other jurisdictions. The completion date for this activity should be June 2003. 9988 California State Auditor Report 2002-112 California State Auditor Report 2002-112 9999 Approach and Implementation Status as of Task Force Recommendation February 14, 2003 10. General Services shall adopt clear standards General Services is currently evaluating best practices by researching of conduct for vendors that do business with the federal government and other states. It will then evaluate current the State. Violators of the standards should be statutes and regulations to see where gaps exist and changes need to be subject to suspension or debarment. made, determine if the appeal process can be used in the administrative process, establish criteria for authority and process, and establish criteria for standards of conduct. General Services characterized the implementation of this recommendation as long term. 11. General Services shall meet with industry General Services implemented the first phase of this recommendation representatives and state stakeholders to develop in January 2003 when it posted new model contract language on the model contract terms and conditions that will Procurement Division Web site. A letter signed by the department director protect the State’s interests and mitigate risk for will go out soon, requiring agencies to use the new provisions in all bids all parties. and disallowing modifications without prior approval from General Services. General Services met with the Information Technology Association of America, an organization of IT industry representatives, and with both state and private counsel. As a result, General Services made significant revisions to the IT General Provisions and IT purchasing modules now posted on the Procurement Division Web site. IT General Provisions and non-IT Commodities General Provisions were separated into two documents. The IT General Provisions were modified as follows: • The Limitation of Liability clause was revised to limit a contractor’s liability to two times the purchase price, and the purchase price was defined. • The Indemnification clause was changed to require the State to notify the contractor of any claim and to give the contractor control over the defense of any action on a claim, subject to certain conditions. • The Rights in Data clause was modified to give the State “Government Purpose Rights” to any work product prepared by the contractor. The contractor retains property rights. • The Patent, Copyright, and Trade Secret Indemnity clause was changed to clarify the language. These changes to the IT General Provisions bring the State’s contract language more in line with industry standards and with what other states are doing. It is expected that the revisions will result in more businesses bidding on contracts and ultimately lower costs to the State for IT projects. 12. General Services shall facilitate industry and General Services’ Procurement Division recognizes that customer input state stakeholder participation in continuous is vital to the successful implementation and continuous improvement improvement of contracting and procurement of procurement and contracting processes. In implementing this processes through the establishment of advisory recommendation, General Services has established working advisory councils. groups comprising industry and state stakeholders. For industry stakeholder participation, several supplier participants were selected based on recommendations from the Procurement Division’s acquisition management team and the supplier community. The industry working group will provide guidance and expertise on many of the reform initiatives while providing their perspective on state government contracting practices used to obtain an array of goods and services. For state stakeholder participation, existing focus groups established by other initiatives, as well as the General Services’ Partnership Council, have been called upon to provide input on procurement and contracting processes. The state working group is composed of top-level executives from throughout state government. These executives will lend their expertise to the Procurement Division in several areas. Both groups are being asked to act as sounding boards as General Services brings forward major issues relating to procurement reform recommendations. Their input will be collected and disseminated to various management teams to resolve issues and assist in implementation. These working groups will be available on an ongoing basis to provide their input on issues as they arise. continued on the next page 9988 California State Auditor Report 2002-112 California State Auditor Report 2002-112 9999 Approach and Implementation Status as of Task Force Recommendation February 14, 2003 13. General Services shall implement an integrated The first phase in implementing this recommendation was completed system for tracking contracts and procurements when General Services launched a pilot contract and procurement for goods and services executed by state registration system with eight state agencies in December 2002. The agencies. system captures data such as agency name, contract type, amount, term, and amendment information. This system was to be implemented on February 18, 2003. General Services will then begin working on the tracking component of the project. This Internet-based system will capture detailed information on contracts and procurements and will provide General Services’ management with data it needs to oversee the statewide contract and procurement functions. 14. General Services shall implement a General Services established the successful CAL-Buy Phase I project and is comprehensive electronic procurement currently developing the requirements for Phase II of the eProcurement (eProcurement) system for all state contract initiative. The CAL-Buy Phase I eProcurement system, which was and procurement transactions, to include the implemented in March 2001, currently automates purchasing from following: over 250 statewide commodity contracts by over 300 buyers in five state agencies (General Services, Corrections, Transportation, Highway • Public access to contracting and procurement Patrol, and Youth Authority), and seven local governments. CAL-Buy opportunities, as well as historical information. successfully reduced the procurement cycle time, saving the State both • Links to online policies and procedures and time and money. CAL-Buy implemented several features for increased decision support system, and online training. accountability, including automated workflow for approval of orders based on dollar thresholds, enforcement of contract expiration dates, • Product and pricing comparisons. and a detailed audit trail of all activity related to purchases. CAL-Buy made ordering from certified small businesses just as easy as from large • Rules-based approval routing so that no ones, and approximately 46 percent of the $38 million spent to date has transaction can be issued without appropriate been awarded to small businesses. While CAL-Buy is in maintenance and approvals. operations mode, General Services is analyzing the options for moving • Reverse auctions, in which the requirement is forward with Phase II and this procurement reform recommendation. It advertised and bids are placed online. The prices is General Services’ intention that Phase II will include automating more can be seen but the vendors names remain contracts such as the CMAS program and master service agreements and confidential until the bidding (auction) is closed. adding functionality for contract management and one-time buys. In response to the fiscal challenges currently facing the State, it is prudent • Data capture for all transactions, and generation to first implement eProcurement within General Services, and later as of required reports, eliminating redundant a roll out to other state agencies. By starting with General Services, the reporting wherever possible. eProcurement system will be fully tested, features utilized and enhanced, and risk minimized prior to moving out to the rest of state government. This approach will help to maximize the success of eProcurement and fully address the requirements within this reform recommendation. 110000 California State Auditor Report 2002-112 California State Auditor Report 2002-112 110011 Approach and Implementation Status as of Task Force Recommendation February 14, 2003 15. General Services shall ensure active legal Managers from General Services’ Office of Legal Services (Legal Services) participation in all high-risk contracting or and the Procurement Division have established an implementation team procurement transactions. At a minimum, to work out the process-related details involved in providing expanded the following types of transactions should be legal services for assistance in the development and review of IT and identified as high risk: commodity contracts, especially those identified as high risk. This involves the identification of roles and responsibilities, a roll-out plan for • All large-scale IT system integration projects. state agencies, and identifying opportunities to optimize contracting • Transactions in which there is a history of protest and control processes. Legal Services has dedicated additional staff for or litigation for this or like contracts. expanded legal services and has formed an IT team to provide in-depth analysis of contracts and contract-related issues. In addition, it has • Public safety. established regular office hours in the Procurement Division in order to be more accessible to Procurement Division staff. Delegation of review • Acquisition of unique or specially manufactured policy development is pending a determination of contract proficiency goods or services. levels in other departmental legal staffs. • Complex projects. • Proposed deviations from standard processes or terms and conditions (e.g., advance payments, modification to warranty, indemnity, or liability language, etc.). • High-profile transactions. • Potential conflicts of interest. • Hazardous activity. • Federal matching funds. • Goods and IT goods contracts over $500,000, IT services contracts over $200,000, and non-IT services contracts over $50,000. 16. General Services shall develop and deliver training For the initial phase of this recommendation, General Services has to state agencies on conducting an initial, high-risk developed a list of high-risk transactions that require review and review of contract and procurement transactions, approval by General Services’ legal staff. Included in this list are using criteria established by General Services. State contracts for goods over $500,000, IT services over $200,000, and agencies shall forward to General Services for review combination contracts of IT goods and services over $200,000. These and approval contracts that meet any of the high- are categories of contracts that have not been subject to legal review risk criteria. in the past. General Services is preparing a Management Memo to announce this policy. Training in high-risk contracts will be covered in General Services’ Training and Certification Program for procurement professionals (Recommendation 8). Delegation of high-risk contract review to client agencies will be considered after General Services has had an opportunity to evaluate these contracts and determine which are appropriate for delegation. 17. General Services shall develop electronically The completion of Recommendation 11 was the first step in the based model contract templates with standard implementation of this recommendation. To improve the model terms and conditions for use by state agencies to contract provisions, General Services’ staff met with the Information expedite review processes for low-risk contracts. Technology Association of America, an industry group, and agreed on the new model contract provisions that were posted on General Services’ Web site in January 2003. Completion of that task provides one part of the foundation legal work necessary for the development of the model contract templates needed for this recommendation. General Services will continue to review and revise model contract language in preparation for the development of model contract templates. continued on the next page 110000 California State Auditor Report 2002-112 California State Auditor Report 2002-112 110011 Approach and Implementation Status as of Task Force Recommendation February 14, 2003 18. General Services shall require each state agency to In mid-November, General Services sent a memo to department designate official(s) responsible for all contracting directors and agency secretaries requesting their cooperation in and procurement within the state agency. identifying a procurement and contracting officer. General Services completed a roster of procurement and contracting officers on January 31, 2003. 19. General Services shall authorize individual General Services researched current requirements relating to contract signature authority for contracting and signature authority in California statutes and surveyed state agencies procurement officials, based on position held, for procedures currently in effect. They also contacted other states experience, training, and certification. to determine current methodologies for granting contract signature authority. General Services also surveyed other states and the federal government for best practice approaches. Policy is being developed that will interface with Recommendations 6 and 8. 20. After six months, and again after 12 months, General Services characterized the implementation of General Services shall evaluate the effectiveness Recommendations 1, 2, 3, 4, 5, 11, 12, 13, 15, 16, 18, and 19 as short of its efforts to implement all short-term term and included the evaluation of its effectiveness in implementing recommendations and prepare a report to the the recommendations in its six-month report to the governor on governor on the status of those efforts. February 14, 2003. Sources: Recommendations: Executive Summary, The Governor’s Task Force on Contracting and Procurement Review Report, August 2002. Approach and Implementation Status: Department of General Services’ Report to the Governor on the Implementation of the Recommendations of the Task Force on Contracting and Procurement Review, February 14, 2003. 110022 California State Auditor Report 2002-112 California State Auditor Report 2002-112 110033 APPENDIX C History of Maximum Purchase Limits for the California Multiple Award Schedules Program Table C.1 on the following page shows the dollar thresh- olds and general guidelines for purchases departments made using the California Multiple Award Schedules (CMAS) program established by the governor’s May 20, 2002, Executive Order on contracting practices as well as the thresholds and guidelines established before and after the order. The dollar limits for information technology (IT) goods and services and non-IT services were lowered by the Executive Order but went back to their previous levels during the interim period between May and August 2002, when the Governor’s Task Force on Contracting and Procurement Review made its recommendations. The most significant changes to CMAS purchasing practices during this interim period were stricter requirements for departmental use of the CMAS program and increased departmental oversight of CMAS purchases. Since August 20, thresholds have remained constant, but restrictions on exemptions have increased. Specifically, General Services no longer allows departments to use CMAS contracts for any purchases that exceed the dollar thresholds. By eliminating exemptions to the CMAS dollar thresholds, General Services compels departments to use alternative procurement methods, greatly reducing the risk that the CMAS program is used inappropriately. 110022 California State Auditor Report 2002-112 California State Auditor Report 2002-112 110033 TABLE C.1 History of CMAS Maximum Purchase Limits Date IT Goods and Services Non-IT Goods Non-IT Services Pre-Executive Order Before February 2001 $500,000 $100,000 Not Allowed February 2001 through 500,000 100,000 $250,000 May 19, 2002 Exemptions to limits had to be approved by requesting department director and General Services. After February 2001 change, purchases of non-IT services greater than $35,000 required General Services’ approval. Until January 2002, comparing contracts and offers was strongly encouraged but not required. Beginning in January 2002, guidance was ambiguous about whether comparing contracts and offers was required. Executive Order and Interim Guidelines May 20, 2002, Executive Order $100,000 $100,000 $100,000 Any purchase over $100,000 must be competitively bid, with some exceptions. May 28 through August 19, 2002, interim guidelines 500,000 100,000 250,000 No exemptions allowed. Purchases of non-IT services over $35,000 had to be approved by General Services. Some additional requirements implemented for purchases between $100,000 and the $250,000 and $500,000 maximums. Three price quotes required with some exceptions. Post-Executive Order and Formal Guidelines August 20, 2002, to present $500,000 $100,000 $250,000 Three price quotes required with some exceptions. August 20, 2002, through No exemptions allowed. Purchases of IT goods and services exceeding $250,000 had to be January 20, 2003 approved by department director or the next highest ranking official. Purchases of non-IT services exceeding $50,000 must be approved by General Services. January 21, 2003, to present No exemptions allowed. Purchases of IT goods and services exceeding $250,000 must also be approved by the agency secretary. Purchases of non-IT services exceeding $50,000 must be approved by General Services. 110044 California State Auditor Report 2002-112 California State Auditor Report 2002-112 110055 Agency’s comments provided as text only. State and Consumer Services Agency 915 Capitol Mall, Suite 200 Sacramento, CA 95814 March 17, 2003 Elaine M. Howle, State Auditor Bureau of State Audits 555 Capitol Mall, Suite 300 Sacramento, California 95814 Dear Ms. Howle: RE: STATEWIDE PROCUREMENT PRACTICES: PROPOSED REFORMS SHOULD HELP SAFEGUARD STATE RESOURCES, BUT THE POTENTIAL FOR MISUSE REMAINS We have reviewed the draft report entitled “Statewide Procurement Practices: Proposed Reform Should Help Safeguard State Resources, But the Potential for Misuse Remains,” and offer the fol- lowing comments. The thrust of your report findings is consistent with the conclusions of the Governor’s Task Force on Contracting and Procurement Review. Efforts to implement the recommendations of the task force and to reform the system are underway. As noted in your report, the Governor’s May 20, 2002, executive order immediately resulted in departmental compliance with Department of General Services (DGS) requirements for obtaining best value. The 92% compliance rate contained in your report reflects a tremendous improvement. By further strengthening controls, we expect full compli- ance by all state agencies. For nearly a year now, DGS has devoted maximum effort to addressing the kinds of concerns that are highlighted in this report. These efforts include: • Issuing Management Memos beginning last May that provide stringent guidelines for agen- cies to obtain goods and services through California Multiple Award Schedule (CMAS), master services agreements, and non-competitively bid contract acquisitions methods; • Staffing the Governor’s Task Force on Contracting and Procurement Review and developing recommendations to improve accountability and adherence to requirements and procedures; • Providing training to more than 800 individuals representing more than 100 state agencies on the Governor’s Executive Order and the Management Memos; • Requiring legal review of all “high risk” contracts, including complex information technology projects, mission critical programs, and issues related to public health and safety; 110044 California State Auditor Report 2002-112 California State Auditor Report 2002-112 110055 • Surveying approximately 4,000 procurement and contracting officials to assess needs and developing comprehensive training programs to meet those needs; • Launching an internet-based pilot contract and procurement registration system that will one day help the state to track all major contracting activity; and • Bringing leveraged procurement instruments, such as CMAS, statewide commodity con- tracts, master agreements, and state price schedules under the DGS Procurement Division’s Quality Assurance Program. We take the concerns and deficiencies identified in your comprehensive audit extremely seriously and have been working hard to improve the procurement process. Indeed, your report recognizes our significant progress. I have directed DGS to implement your recommendations with all deliber- ate speed. The aggressive procurement reform efforts that have been and are currently underway, combined with the recommendations in this report, should help to prevent similar problems from arising in the future and ensure that state procurement is characterized by the highest level of accountability, competitiveness, planning, and training. We are committed to working with BSA and the Legislature to ensure that appropriate reforms are implemented fully and that the crucial lessons of this important audit are understood by all state agencies and departments now and in the future. Enclosed is the response prepared by the Department of General Services. Sincerely, (Signed by: Aileen Adams) Aileen Adams Secretary Enclosures 110066 California State Auditor Report 2002-112 California State Auditor Report 2002-112 110077 Department of General Services Date: March 14, 2003 File No.: 2002-112 To: Aileen Adams, Secretary State and Consumer Services Agency 915 Capitol Mall, Room 200 Sacramento, CA 95814 From: Department of General Services Executive Office Subject: RESPONSE TO BUREAU OF STATE AUDITS’ REPORT NO. 2002-112– “STATEWIDE PROCUREMENT PRACTICES: PROPOSED REFORMS SHOULD HELP SAFEGUARD STATE RESOURCES, BUT THE POTENTIAL FOR MISUSE REMAINS” Thank you for the opportunity to respond to the Bureau of State Audits’ (BSA) Report No. 2002-112 which addresses recommendations to the Department of General Services (DGS). The following response addresses each of the recommendations. OVERVIEW OF THE REPORT The DGS has reviewed the findings, conclusions and recommendations presented in Report No. 2002-112. The DGS will take appropriate actions to address the recommendations. Overall, the DGS is pleased that the BSA concluded that the proposed changes of the Governor’s Task Force on Contracting and Procurement Review (Task Force) should address most of the weaknesses identified during the audit. In fact, if properly implemented, the BSA determined that the changes would place stricter requirements on the use of leveraged contracts by California departments than those required by several other states and the federal government. The DGS is also pleased that, although still too early to provide a complete assessment, the BSA found that departments were initially operating in compliance with the new requirements governing the comparison of prices and documentation of best value efforts when using the California Multiple Award Schedules (CMAS) acquisition program. In fact, as discussed in Chapter 1 of the report, the BSA found a significant degree of compliance even though the transactions reviewed during the audit occurred within a few months of the Governor’s May 2002 issuance of an Executive Order that placed additional restrictions on the use of CMAS and the DGS’ issuance of interim guidelines governing those procurements. For example, within the nine sampled departments, the BSA found that price quotes were not obtained in only 2 of 25 instances after the date of the new requirements. Over the last year, the Governor has taken a number of significant actions to ensure that the state’s contracting and procurement programs are conducted in both an efficient manner and through the use of procedures that assure the highest integrity. These actions included the issuance of 110066 California State Auditor Report 2002-112 California State Auditor Report 2002-112 110077 Aileen Adams -2- March 14, 2003 Executive Order D-55-02, dated May 20, 2002. This order required that a comprehensive review of current state processes be undertaken to identify necessary safeguards and areas for improvement with procurements awarded without competitive bidding or through the use of a CMAS contract or a master service agreement. The review was conducted by the three members of the previously discussed Task Force: Department of Developmental Services Director Cliff Allenby, Los Angeles County Chief Administrative Officer David Janssen, and Chief Deputy Director of Finance Annette Porini. The Task Force was directed to review the state’s contracting and procurement procedures and recommend any statutory, regulatory or administrative changes necessary to ensure that open and competitive bidding is utilized to the greatest extent possible in awarding state contracts. The BSA’s positive findings related to the proposed changes in the procurement function reflect favorably on the activities of the Task Force and the expertise of the DGS’ staff in identifying, recom- mending and implementing changes to the state’s contracting and procurement processes. DGS Procurement Division (PD) and Office of Legal Services (OLS) personnel served as the primary staff to the Task Force and, after obtaining stakeholder input from numerous outreach activities, developed most of the recommendations that were ultimately adapted for implementation. Cur- rently, the DGS has a lead assigned to each of the Task Force’s 19 recommendations who is actively working with individual teams of 10 to 15 members to implement the proposed actions. To date, DGS’ procurement and legal staff have spent over 13,000 hours on the state’s procurement reform efforts. The DGS has taken or is taking numerous significant actions as part of the state’s procurement reform efforts. These actions include the: • Implementing of an outreach and education program that has included a series of customer forums to ensure that state agencies are fully aware of the state’s new procurement require- ments. These forums have been attended by more than 800 individuals representing over 100 state agencies since they began in June 2002. • Implementing of an Internet-based Contract Registration System whereby state agencies will be required to report all purchases over $5,000. This system will capture detailed information on contracts and procurements and provide DGS’ management with the data it needs to over- see the state’s contracting and procurement functions. The first phase of the project began in December 2002 as a pilot at eight state agencies. The system went live at those agencies in mid-February and is planned for statewide implementation in July 2003. • In conjunction with the California State University Northridge’s Center for Management and Organization Development, conducting of an extensive survey of individuals involved in state purchasing activities. Based on the data obtained from the survey, the DGS is phasing-in a series of new state acquisition courses over the next six months. The first classes are planned to be offered in April 2003 and will deal with acquisition ethics and leveraged procurements. Ultimately, a course curriculum will be offered that, upon completion, will result in a certification being earned by a student. Subsequently, the signature authority of individuals at departments will be linked to the level of training, experience and proficiency achieved. The contracting and purchasing authority granted to each department will also be tied to these same criteria. The DGS expects to offer the first course in the certification series at the beginning of the 2003/04 fiscal year. 110088 California State Auditor Report 2002-112 California State Auditor Report 2002-112 110099 Aileen Adams -3- March 14, 2003 • Directing of state agencies to increase competition and accountability through a number of new mandates including a requirement for the solicitation of three bids, enforcement of a $500,000 limit on all CMAS transactions, and Agency sign-off requirements on orders exceeding $250,000. Even before the issuance of the Task Force’s report, the DGS had issued a manage- ment memo to state agencies placing more stringent requirements on the use of CMAS, master agreements (MA), and non-competitively bid contracts. • Implementing of a process that requires the completion of a non-competitively bid (NCB) contract justification form for non-competitive information technology (IT) and non-IT goods and services acquisitions of $5,000 or more. The form requires the approval of the depart- ment director and Agency Secretary or immediate next ranking official and, depending on dollar amount, the DGS and Department of Finance directors or designees. The NCB form requires thorough explanations to be provided on why the good or service requested is restricted to one supplier and how the proposed price was determined to be fair and reasonable. • Revising of policies to provide that state agencies not be allowed to use CMAS contracts, MAs, and other contracts that leverage the state’s buying power without first being granted purchas- ing authority from the DGS. • Developing of a new contract and procurement review process whereby state agencies doing high risk procurements undergo an assessment review at the early stages of the contracting process. The DGS will determine if a contract needs developmental support, technical support, and/or legal support and will assure that the type of review received is appropriate for the risk involved. • Increasing of the number of staff dedicated to performing compliance reviews of state agencies procurement activities. • In conjunction with industry representatives, negotiating of new model contract provisions for IT acquisitions that are more in line with commercial standards while still protecting the state’s interests. • Developing and maintaining of a roster of state procurement and contracting officers. These individuals have been designated by their department director or agency head as responsible for all contracting and procurement activity in their agency. In summary, the BSA concludes that departments have often ignored DGS requirements, that the DGS contributed to this situation through weaknesses in its oversight and administration activities, and that the Task Force’s proposed changes should address most of the system weaknesses noted during the audit. Further, in Chapter 5 of the report, the BSA recommends a number of additional steps that the DGS should take to further improve the state’s contracting and procurement pro- cesses. The suggested actions will be referred to the previously discussed action teams for full consideration. As noted by the BSA, each state department is ultimately responsible and accountable for its own contracting program. This includes ensuring the necessity of the goods and services, securing appropriate funding, complying with laws and policies, writing the contract in a manner that protects the state’s interests, and obtaining required approvals. To assist state departments in complying 110088 California State Auditor Report 2002-112 California State Auditor Report 2002-112 110099 Aileen Adams -4- March 14, 2003 with their responsibilities and to accomplish its oversight responsibilities, over the years, the DGS has implemented numerous administrative control activities. In administering its oversight responsibility, the DGS is continually striving to balance the appro- priate level of control and oversight to ensure the quality and openness of the state’s acquisition process with the need for departments to have effective and efficient methods of procuring goods and services. The necessity of obtaining an appropriate balance of control and oversight without unnecessarily restricting the acquisition process is particularly important during the State’s current fiscal crisis. The effective and efficient use of the acquisition systems, CMAS and MAs, referenced in the BSA’s report and included in the Task Force’s report represent two primary tools that are used by state and local governments to reduce operating costs in their contracting and procure- ment processes. In the last ten years, a number of actions have been taken that have resulted in more acquisi- tions being performed directly by departments and not by the DGS. Of primary note is the CMAS program, which was created through legislation enacted in 1993 and was a primary focus of the BSA’s audit. This program has the effect of delegating the acquisition of goods and services to staff employed at individual state departments. This function was previously performed directly by DGS’ professional procurement staff. The creation of the CMAS program is extensively discussed in the Background section of the BSA’s report and will not be repeated in this response. However, in brief, the CMAS program was cre- ated to provide an acquisition method that would be more value-driven than process-driven. This acquisition method allows a significantly less complex and costly acquisition process to be used to procure goods and services which results in substantial savings to state and local government enti- ties when compared to the costs of using formal competitive bidding procedures. While the DGS has oversight responsibility for the CMAS program and has implemented and is continuing to implement numerous administrative controls governing its operations, each state and local government entity is ultimately responsible and accountable for its own acquisitions under the program. This placement of responsibility is a key ingredient in ensuring that the procurement pro- cess is streamlined to remove repetitive, resource intensive, costly and time consuming processes. As part of its ongoing efforts within the framework of procurement reform, the DGS is taking addi- tional significant actions to improve controls within the CMAS program. Most notably, as part of the state’s procurement reform effort, the DGS now requires state departments to solicit a minimum of three offers prior to purchasing from a CMAS supplier. However, it should be noted that to-date the CMAS program has been very successful in meeting customer needs. Since the roll-out of the program in May 1994, total CMAS purchases have grown from $84 million in the 1994/95 fiscal year to a high of $948 million in the 2000/01 fiscal year, including $362 million in local government pur- chases. Further, the CMAS program has been very successful in ensuring that small businesses are given opportunities to participate within the procurement process. The use of small businesses has grown to $124 million or 21% of CMAS procurements within the last fiscal year. The DGS also continually receives positive comments from its state, local and legislative customers that the CMAS program is a useful and valuable tool for making prompt value-effective acquisitions. 111100 California State Auditor Report 2002-112 California State Auditor Report 2002-112 111111 Aileen Adams -5- March 14, 2003 In various chapters of the BSA’s report, concerns are expressed related to the state’s Web portal project and DGS’ role related to that project. This type of large-scale information technology system integration project will be more tightly controlled and administered under current state procurement policies and procedures. Further, as noted in the report, effective December 1, 2002, the responsi- bility for providing management, maintenance, and support of this project was transferred from the DGS to the Stephen P. Teale Data Center. The following response only addresses the recommendations that are addressed to the DGS. The DGS appreciates the in-depth audit performed by the BSA and is fully committed to promptly and completely addressing the issues identified in the audit report. In general, the actions recom- mended by the BSA have merit and will be promptly addressed. RECOMMENDATIONS CHAPTER 2 RECOMMENDATION # 1: To ensure that the State has not paid for goods or services twice, General Services should review past payments to Deloitte Consulting and the StateStore by General Services, the Health and Human Services Data Center, and the Teale Data Center. If duplicate payments were made, General Services should recover them. DGS RESPONSE # 1: As noted in the report, the BSA has performed extensive work in identifying the costs incurred for the Web portal project. The DGS is consulting with the BSA to identify any transactions that may indicate that a duplicate payment has been made. Any questionable transactions will be researched and, if found, duplicate payments recovered. CHAPTER 3 RECOMMENDATION # 1: To ensure that state departments comply with statutes governing the use of noncompetitively bid contracts–sole- source contracts and emergency purchases–the State should take the following actions: • General Services should clarify the distinction between an emergency purchase and a sole-source contract. General Services should also provide guidance to departments and develop a form that clearly lays out what information is required to justify each type of noncompetitive purchase. • General Services’ Office of Legal Services should review all sole-source contract requests above a certain threshold. 111100 California State Auditor Report 2002-112 California State Auditor Report 2002-112 111111 Aileen Adams -6- March 14, 2003 • General Services should implement review procedures for sole-source contracts and emergency purchase orders that ensure that departments have complied with all applicable laws and regulations and require departments to submit documentation that demonstrates compliance. General Services should reject all sole-source and emergency purchase requests that fail to meet statutory requirements. • If General Services wants to continue to exempt purchases from competitive bidding because of the special or unique circumstances of departments, it should seek a change in the current contracting and procurement laws. DGS RESPONSE # 1: For the first issue pertaining to clarifying the distinction between an emergency purchase and a sole source contract, the DGS will meet with its customers to identify areas of confusion and take appropriate action to address any issues that are identified through training and the issuance of informational bulletins. The DGS will also review its existing non-competitively bid contract justifica- tion form to ensure that it clearly identifies what information is required to justify the various types of non-competitive procurements. As to the issue of legal review of non-competitively bid contracts, the DGS has implemented poli- cies and procedures that provide for its OLS to review all non-competitively bid contract requests that exceed $250,000. The DGS has determined that these requests are of a high-risk nature that require legal participation. The third proposed action related to review procedures for non-competitively bid contracts repre- sents existing DGS policy and practice. However, the DGS will review its procedures to ensure that departments are being required to submit, and the DGS maintain, complete documentation that discloses compliance with all applicable rules and regulations. As to the last recommended action, as part of its procurement reform efforts, the DGS will review the need for additional exemption authority related to competitive bidding. CHAPTER 4 RECOMMENDATION # 1: To improve its administration of the CMAS program, General Services should take the following actions: • Increase the frequency of its reviews of CMAS vendors. Additionally, before accepting any contracts as base contracts, General Services should make certain that processes established by other government entities for awarding and amending multiple-award contracts are in accordance with CMAS goals. 111122 California State Auditor Report 2002-112 California State Auditor Report 2002-112 111133 Aileen Adams -7- March 14, 2003 • As discussed further in Chapter 5, General Services should implement the recommendations made by the Governor’s Task Force on Contracting and Procurement Review. In the short term, General Services should focus on the following: 1. Consider reducing or eliminating the delegated purchasing authority of departments that fail to comply with contracting and procurement requirements. 2. Consult with departments to determine what can be done to facilitate monthly reconciliation of CMAS purchasing and billing activities. DGS RESPONSE # 1: The first action related to increasing the frequency of vendor reviews is a priority of the DGS. How- ever, the state’s current fiscal situation limits the department’s ability to obtain and assign additional resources to this activity. In the interim, the PD is continuing to streamline processes and proce- dures to enable the conduct of more efficient and effective oversight activities, including the perfor- mance of more frequent CMAS vendor reviews. For the second issue, the PD’s CMAS Unit will focus additional efforts on obtaining further assur- ance that processes used by other government entities to execute contracts are in accordance with CMAS goals. To date, the CMAS Unit has developed written policies and procedures that more clearly address this activity. For the issue related to delegated authority reductions or eliminations, the DGS is currently imple- menting Recommendation # 1 of the Task Force’s report that requires a broadening of the scope of the delegation program to include CMAS transactions. In fact, in a January 31, 2003 memoran- dum, state departments were notified that the use of PD contracts, including CMAS agreements, is now included under the purchasing authority granted to agencies by the DGS. Further, the DGS is developing standards, procedures, requirements and guidelines for departments to request a CMAS delegation as well as what is expected in order for that delegation to be maintained. Compli- ance with requirements and guidelines is a major part of maintaining approved purchase authority. If the standards are not met, purchase authority will be reduced or eliminated. As to the recommendation pertaining to the reconciliation of purchasing and billing activities, the implementation of a mandatory statewide electronic procurement system would enable the DGS to capture actual agency purchasing activity in real time, and is the ultimate solution to the depart- ment’s billing challenges. The existing billing process is a labor-intensive activity that, on occasion, results in erroneous charges. Since each customer agency has the internal accounting control responsibility to review and approve their invoices, the current billing system primarily relies on the agencies to notify the PD of incorrect invoiced amounts. This does occur and corrections are made when appropriate. 111122 California State Auditor Report 2002-112 California State Auditor Report 2002-112 111133 Aileen Adams -8- March 14, 2003 The importance of a new information system is recognized by the DGS, and was articulated in the Task Force recommendations proposed by the department. However, implementation of such a complex system is costly and not feasible in the current fiscal environment. Therefore, the PD relies on agencies’ timely submittal of purchase order copies to key into its Procurement Information Network system and generate invoices. As an interim corrective measure, the DGS will prepare a communication to its customer agencies advising them of the importance of regularly reconciling their purchasing information with invoices and reinforcing the need for agencies to report all con- tracting and procurement transactions. CHAPTER 5 RECOMMENDATION # 1: To further improve the State’s contracting and procurement processes, General Services should continue its efforts to implement the reforms recommended by the Governor’s Task Force on Contracting and Procurement Review. Additionally, General Services should take the following actions: • Develop a standard form that departments must complete to document their quotes from CMAS vendors. The form should also be used to document each department’s basis for determining best value when cost is not the determining factor in the purchase. • Consider adopting maximum order-quantity levels that would prompt departments to seek additional discounts from CMAS vendors. • Strengthen its procedures for reviewing the processes used by government entities awarding base contracts. • Facilitate meetings with the Department of Finance and departmental internal auditors to revise existing audit procedures to include CMAS and noncompetitively bid contracts. General Services should also consider limiting its audits and reviews of some departments to an evaluation of the adequacy of the department’s most recent internal review. • Develop training classes that provide comprehensive coverage of noncompetitively bid contracts and CMAS purchasing and require mandatory attendance by all state purchasing personnel. General Services should also evaluate the curriculum for its existing training classes and vendor seminars and consider implementing short-term changes to bridge the gap until a more comprehensive 111144 California State Auditor Report 2002-112 California State Auditor Report 2002-112 111155 Aileen Adams -9- March 14, 2003 program can be developed. • Work with departments to establish a process that ensures departments reconcile their purchasing information with invoices and reports prepared by General Services. General Services should also issue instructions to state departments reinforcing the importance of reporting all contracting and procurement transactions. • Explore the possibility of including copies of all vendor contracts on the CMAS Web site. • Require its Office of Legal Services to perform a final review of all contracts that General Services is required by law to review. • Ensure that all state purchasing personnel are represented in its efforts to improve the contracting and procurement processes and that information is effectively disseminated to state departments. General Services should also facilitate periodic meetings with state departments to discuss various procurement issues and exchange ideas and solutions with other departments. DGS RESPONSE # 1: The DGS is committed to fully addressing the recommendations contained in the Task Force’s report and has assigned significant resources to that activity. The following information is provided for each of the additional actions recommended above. • Documentation of Quotes – the DGS has begun developing a form for use in documenting both quotes received by departments from CMAS vendors and the basis for a best value determina- tion. To date, the PD has obtained examples of forms used by various state departments to use as a guide in developing the form. When finalized, the form will be included in the DGS’ Pur- chase Authority Manual chapter on the use of CMAS contracts. • Maximum Order-Quantity Levels – the DGS will study the feasibility and benefits of adopting maximum order-quantity levels within the CMAS program. • Review of Processes in Awarding Base Contracts – see our previous response to Recommen- dation # 1 of Chapter 4. The PD is focusing additional efforts on the processes used by govern- ment entities to award base contracts. • Facilitate Meetings Related to Audit Procedures – The DGS’ Office of Audit Services will take the lead in facilitating a meeting with the Department of Finance to discuss the feasibility of revising existing audit procedures used in performing internal control reviews to provide addi- 111144 California State Auditor Report 2002-112 California State Auditor Report 2002-112 111155 Aileen Adams -10- March 14, 2003 tional coverage of CMAS and non-competitively bid contract transactions. Further, the DGS’ audit and review staff will limit its activities in an individual department if the work performed by that department’s internal audit unit sufficiently addresses areas under the purview of the DGS. • Development of Training Courses – as discussed in the Overview section of this response, in conjunction with the California State University Northridge’s Center for Management and Organization Development, the DGS conducted an extensive survey of individuals involved in state purchasing activities. Based on this new data, the DGS is phasing-in a series of new state acquisition courses. These courses will be phased in over the next six months. The first classes are planned to be offered in April 2003 and will deal with acquisition ethics and lever- aged procurements. Ultimately, it is foreseen that a course curriculum will be offered that, upon completion, will result in a certification being earned by a student. Subsequently, the signature authority of individuals at departments will be linked to the level of training, experience and proficiency achieved. The contracting and purchasing authority granted to each department will also be impacted by these same criteria. • Reconciliation and Billing Process – see our previous response to Recommendation # 1 of Chapter 4. The DGS is taking appropriate actions to address the actions contained in this rec- ommendation. • Copies of Vendor Contracts on the Web – while the DGS web site does provide a search tool by which customers can identify CMAS contracts by the categories of goods or services pro- vided, customers are unable to access line item detail on-line. Implementing a detailed catalog containing CMAS goods and services requires implementation of a comprehensive electronic procurement system. A robust software and hardware solution will be required to support the CMAS program which has over 2,000 active contracts and more than 1,500 suppliers. The importance of this system is recognized by the DGS, and was articulated in the Task Force’s recommendations proposed by the department. • Office of Legal Services Contract Reviews – the OLS has recently augmented its staff and has established an integrated process with the PD to ensure that all high risk procurements are evaluated through a process that assesses the need for early legal intervention during the contract development process. In addition, all high risk contracts requiring DGS approval will undergo a legal review. • State Purchasing Personnel Involvement in Procurement Reform – the DGS agrees that cus- tomer involvement is critical to the success of efforts to improve the contracting and procure- ment process. Client departments have actively participated in the development of the train- ing and certification program (Task Force Recommendation # 8) and the contract registration system (Task Force Recommendation # 13). Further, the DGS solicits customer input through the DGS Partnership Council, which meets quarterly and includes representatives from 20 major state departments. In addition, the PD, at a minimum, conducts quarterly customer forums to dialogue with its customers on the state’s procurement reform efforts and the OLS hosts monthly meetings of the State Contracting Advisory Network (SCAN). SCAN group is made up of state agency 111166 California State Auditor Report 2002-112 California State Auditor Report 2002-112 111177 Aileen Adams -11- March 14, 2003 contracting officials involved in service contracting. It serves as a forum for obtaining input from state agencies on better contracting practices and also as a communication link for new laws or policies. CONCLUSION The DGS is firmly committed to effectively and efficiently controlling the state’s procurement pro- cess. As part of its continuing efforts to improve this process, the DGS will take appropriate actions to address the issues presented in the report. If you need further information or assistance on this issue, please call me at 376-5012. (Signed by: Clothilde V. Hewlett) Clothilde V. Hewlett, Interim Director Department of General Services 111166 California State Auditor Report 2002-112 California State Auditor Report 2002-112 111177 Blank page inserted for reproduction purposes only. 111188 California State Auditor Report 2002-112 California State Auditor Report 2002-112 111199 Agency’s comments provided as text only. Business, Transportation and Housing Agency 980 9th Street, Suite 2450 Sacramento, CA 95814-2719 March 14, 2003 Elaine M. Howle State Auditor Bureau of State Audits 555 Capitol Mall, Suite 300 Sacramento, CA 95814 Dear Ms. Howle: Attached is the Stephen P. Teale Data Center’s (Teale) response to your draft report, Statewide Procurement Practices: Proposed Reforms Should Help Safeguard State Resources, But the Potential for Misuse Remains (#2002-112). Although the majority of the report was redacted to limit our review primarily to language concerning the state Web portal project, we appreciate the efforts your staff made to provide the necessary context for these areas in discussions with my staff. We are also pleased that your report recognized the state Web portal as an award- winning, valuable tool, and that you credited Teale with entering a Web portal maintenance contract that achieved cost savings and used state resources advantageously. Further, Teale’s standard operating practices already include each of the recommendations you made related to the future management, maintenance and support for the Web portal project. I appreciate the opportunity to respond to your audit report. If you need additional information, please do not hesitate to contact me, or Michael Tritz, Chief of the Office of Internal Audits within the Business, Transportation and Housing Agency, at (916) 324-7517. Sincerely, (Signed by: Michael R. Tritz for) MARIA CONTRERAS-SWEET Secretary Attachment 111188 California State Auditor Report 2002-112 California State Auditor Report 2002-112 111199 Office of the Director Stephen P. Teale Data Center P.O. Box 1810 Rancho Cordova, CA 95741-1810 March 12, 2003 Ms. Maria Contreras-Sweet, Secretary Business, Transportation & Housing Agency 980 9th Street, Suite 2450 Sacramento, CA 95814-2719 Dear Secretary Contreras-Sweet: This memorandum presents the Stephen P. Teale Data Center’s responses to the Bureau of State Audit’s report titled “Statewide Procurement Practices: Proposed Reforms Should Help Safeguard State Resources, But the Potential for Misuse Remains.” BSA Finding (Page 19) – Similarly, on three occasions the Teale Data Center purchased goods and service totaling $509,000 from the State Store that were not covered under the vendor’s CMAS contract. In one instance, the Teale Data Center purchased software licenses from Broadvision – another subcontractor included in the State Store’s CMAS con- tract – for $400,000, but the specific type of license was not covered by the existing CMAS contract. Teale Response CMAS contracts were viewed electronically at the time of these procurements. Teale acknowledges the possibility of human error. However, that possibility no longer exists, as Teale’s current process requires that a hardcopy of the CMAS price list be reviewed by management staff prior to procure- ment approval. Additionally, the hardcopy price list is retained in the procurement file. This new process will prevent future occurrences of this type. BSA Recommendations (Page 41) - In the September 2002 special project report, General Services transferred responsibility for providing management, maintenance, and support for the Web portal project to Teale Data Center. With that responsibility, the Teale Data Center should take the following actions to ensure that the State’s investment in the Web portal is a prudent use of taxpayer resources: Recommendation #1 Continue to use competitive processes for purchasing goods and services for the project. 112200 California State Auditor Report 2002-112 California State Auditor Report 2002-112 112211 Maria Contreras-Sweet Page 2 March 12, 2003 Teale Response Teale will continue to competitively procure goods and services. Teale has historically strived to obtain the best possible value at the lowest possible price through the bid process. This practice benefits both Teale and Teale customers due to the resulting cost savings. Recommendation #2 Monitor project expenses by recording estimated costs when contracts and purchase orders are initiated and actual costs when they are paid. Teale Response Teale will continue to closely monitor project expenditures. Our procurement process requires an internal analysis and approval of estimated costs prior to the initiation of the bidding process. Our internal procedure requires that if the resulting procurement activity exceeds the original estimated cost, an internal approval is again required. Additionally, Teale’s Administration-Finance Division monitors expenses. Recommendation #3 Submit special project reports (SPR) to Finance and the LAO when required and ensure that reported costs accurately reflect actual expenditures and commitments to date. Teale Response Teale will continue its standard practice of submitting SPRs when required to accurately report all costs to the Department of Finance and the Legislative Analyst Office. Recommendation #4 Ensure that special project reports contain estimates for at least the same number of years that earlier reports covered so that reviewers can easily identify changes in the overall projected cost. Teale Response It is Teale’s standard practice to present consistent and accurate information based on the specific requirements for the requested format. If you need any additional information, please contact me or Debra Gonzales at 464-4510. Sincerely, (Signed by: Carlos Ramos) CARLOS RAMOS Director 112200 California State Auditor Report 2002-112 California State Auditor Report 2002-112 112211 cc: Members of the Legislature Office of the Lieutenant Governor Milton Marks Commission on California State Government Organization and Economy Department of Finance Attorney General State Controller State Treasurer Legislative Analyst Senate Office of Research California Research Bureau Capitol Press 112222 California State Auditor Report 2002-112