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Report Number: 2016-124

Abbreviations

Department of General Services and California Department of Technology
Neither Entity Has Provided the Oversight Necessary to Ensure That State Agencies Consistently Use the Competitive Bidding Process

Responses to the Audit

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General Services

May 26, 2017

Elaine M. Howle, State Auditor
California State Auditor
621 Capitol Mall, Suite 1200
Sacramento, CA 95814

Re: CALIFORNIA STATE AUDITOR’S REPORT NO. 2016-124

Pursuant to the above audit report, enclosed are the Department of General Services’ comments pertaining to the results of the audit.

The Government Operations Agency would like to thank the state auditor for its comprehensive review. The results provide us with the opportunity to better serve our clients and protect the public.

Sincerely,

Marybel Batjer, Secretary
Government Operations Agency

Enc




Date: May 26, 2017

To: Marybel Batjer, Secretary
Government Operations Agency
915 Capitol Mall, Suite 200
Sacramento, CA 95814

From: Daniel C. Kim, Director
Department of General Services

Subject: RESPONSE TO CALIFORNIA STATE AUDITOR’S REPORT NO. 2016-124

Thank you for the opportunity to respond to the California State Auditor’s (state auditor) Report No. 2016-124, Department of General Services has not provided the oversight necessary to ensure that state agencies consistently use the competitive bidding process, which addresses recommendations to the Department of General Services (DGS) resulting from its audit. The following response addresses each of the recommendations.

OVERVIEW OF THE REPORT

DGS has reviewed the findings, conclusions and recommendations presented in Report No. 2016-124, and agrees with the state auditor’s recommendations.

2
1

In summary, the state auditor identified a number of opportunities for improvement in DGS’ non-competitively bid contracts process and oversight role. DGS plans to implement the state auditor’s recommendations, which are as follows: (1) improving data accuracy across the various state procurement systems, (2) implementing a central tracking system of corrective action plans, (3) performing improved data analysis to identify non-competitively bid contract trends, (4) enhancing non-competitively bid contracts processing guidance for agencies, and (5) implementing an escalation process for agencies with recurring non-competitively bid contracts.

As of January 2016, DGS’ Procurement Division (PD) implemented several changes that enhance DGS’ oversight of the non-competitive bid contracting process, and require state agencies to follow strict policies when seeking approval of a non-competitive bid justification. In moving forward, DGS will focus its efforts on monitoring data reporting accuracy and reporting compliance, tracking corrective action plans (CAP), conducting better trend analyses, and providing greater transparency into the acquisition methods used throughout the state. The state auditor’s findings and recommendations will assist DGS in meeting its goal to continually improve the process for non-competitive contract awards under DGS’ authority.

Currently, DGS is in the process of enhancing the non-competitive bid justification analysis by incorporating additional criteria to justify the non-competitive nature and cost reasonableness of each request.

Further, DGS is working on a website that will provide greater transparency to the Legislature, agencies, and the public by providing information regarding non-competitive requests and the enforcement mechanism that is applied when departments are out of compliance with SCM policy. Some enforcement examples include, but are not limited to, escalating the NCB to a department director or Agency Secretary for discussion, or if the NCB is a result of poor contract management, require a Corrective Action Plan (CAP).

DGS will continue to seek every opportunity to improve its oversight of the state’s procurement processes and provide enhanced guidance to agencies.

CHAPTER 1: RECOMMENDATIONS

As a result of its weak oversight, General Services lacks complete and accurate information about the state’s contracts:

RECOMMENDATION # 1: Immediately ensure that agencies enter accurate and
complete contract information into FI$Cal. For example,
General Services should select a sample of contracts from
such agencies and verify the accuracy and completeness
of the related entries in FI$Cal.

DGS RESPONSE # 1:

DGS agrees with the recommendation. The Financial Information System for California (FI$Cal) is a new State of California department that is responsible for operating, maintaining, and implementing changes to the FI$Cal system. FI$Cal enables the state to combine accounting, budgeting, cash management and procurement operations into a single financial management system. DGS continually strives to assist agencies with providing accurate and complete contract information for FI$Cal State Contract and Procurement Registration System (SCPRS). As of January 2016, DGS began aiding agencies with transitioning to FI$Cal SCPRS. DGS is providing training to agencies, and is monitoring entries for reporting accuracy, backlog reporting, and adoption compliance. DGS is currently developing guidelines for reporting accurate information and is posting adoption data on the DGS website. Further, DGS has developed a new Purchasing Authority (PA) Accreditation process, which it currently is piloting with several agencies. As a part of the PA Accreditation process, DGS’ Purchasing Authority Unit and the Office of Audit Services plan to review a sample of agencies’ contract files and FI$Cal SCPRS data to verify their accuracy and completeness.

RECOMMENDATION # 2: Within 90 days, modify FI$Cal to include a standard
amendment indicator to identify an item as an amendment,
including the amendment number with respect to the
contract, that agencies can use regardless of whether they
make their procurements using FI$Cal. This indicator
should ensure that General Services can reliably analyze
and report on the number, value, and types of exemptions
from competitive bidding of the State’s contract
amendments. General Services should notify all agencies
of this change and ensure the notification provides
appropriate guidance for the use of the amendment indicator.

DGS RESPONSE # 2:

DGS agrees with the recommendation. As of May 2017, DGS submitted a request to change the amendment indicator in FI$Cal SCPRS. DGS is currently working with FI$Cal to finalize the application design updates and implementation schedule. DGS will work with FI$Cal to prioritize this change request as expediently as possible. DGS will notify all agencies and provide guidance on the use of the indicator once this change request is successfully implemented.

RECOMMENDATION # 3: Within 90 days, create plans for regularly performing
statewide analyses to identify potential abuse or overuse
of noncompetitive contracts. These analyses should
include, but not be limited to, calculating the proportional
value of the state’s competitive and noncompetitive
contracts and amendments, examining trends in agencies’
use of noncompetitive contracts and amendments, and
identifying unusual patterns among vendors receiving
state contracts through noncompetitive means.

DGS RESPONSE # 3:

DGS agrees with the recommendation. DGS will, within 90 days, establish procedures to perform analyses of statewide non-competitive contracting under DGS’ oversight on a regular basis. This will assist DGS to perform its oversight function, including determining whether process changes should be undertaken and/or additional training and guidance should be provided to agencies.

CHAPTER 2: RECOMMENDATIONS

General Services has not always ensured that agencies competitively bid contracts when appropriate:

RECOMMENDATION # 4: To clarify the allowable reasons for using noncompetitive
requests and to ensure that agencies understand these
reasons, General Services should enhance the criteria in
the State Contracting Manual within 180 days to include
examples of appropriate and inappropriate circumstances
that could justify a noncompetitive request. In particular, it
should clearly reiterate that poor contract planning is not a
sufficient justification for a noncompetitive request for all
acquisition types. Further, General Services should
develop specific criteria for what constitutes an
appropriate noncompetitive request for non-IT services
acquisitions. General Services should notify all agencies
of the clarifications in the State Contracting Manual and
should reiterate that all noncompetitive requests must
meet the enhanced criteria.

DGS RESPONSE # 4:

DGS agrees with the recommendation. Within 180 days, DGS will develop updates for the State Contracting Manual (SCM) Volumes 1, 2, 3 and SCM FI$Cal to provide enhanced guidance regarding requests submitted through the Non-Competitive Bid Contract Justification request form. In addition, DGS will notify all agencies of these enhanced guidelines to better guide them through the process.

RECOMMENDATION # 5: To ensure that the State receives the best value for its
contracts, General Services should immediately begin
performing the following:

•   For contracts that are exempt from competition by
policy or statute, including noncompetitive requests
for contracts, General Services should require
agencies to justify that price is fair and reasonable.
This should include a current price analysis
pointing to competitive pricing from another
contract, such as a statewide agreement, or
comparing other available vendors; or another valid
price analysis with objective evidence.

•   For noncompetitive requests, General Services
should require agencies to quantify and
substantiate their cost saving or averted costs.

DGS RESPONSE # 5:

DGS agrees with the recommendation. DGS will commit to evaluating this policy recommendation by first assessing those contracting methods where additional justification of a fair and reasonable price would be most effective. In addition, DGS will continue to require agencies to submit current cost justifications from available vendors when feasible. DGS will take this opportunity to remind agencies of this requirement. Further, DGS will update the NCB Contract Justification request form to reflect that agencies must, in addition to providing a description of the cost savings/cost avoided, quantify and substantiate their cost savings or averted costs when feasible.

RECOMMENDATION # 6: To ensure that it holds agencies accountable for the
implementation of the corrective action plans that they
submit with noncompetitive requests, General Services
should immediately begin tracking all outstanding plans
and following up to ensure that agencies complete them.
For example, General Services should require an agency
to include key dates in its corrective action plan that the
agency plans to meet to conduct a competitive
procurement and report its progress to General Services.
Further, General Services should inquire about the steps
that agencies have taken before the contract expiration
dates in their most recent noncompetitive requests.

DGS RESPONSE # 6:

The paragraph below is also noted in our second comment.

DGS agrees with the recommendation. DGS is now tracking all corrective action plans, which includes, among other things, obtaining key action dates to assist agencies in their own procurement planning.

RECOMMENDATION # 7: To ensure that it consistently and appropriately
responds when agencies fail to justify their
noncompetitive requests, plan sufficiently to avoid the
noncompetitive process, or follow their corrective
action plans, General Services should create an
escalation process within 90 days that outlines the
order and severity of enforcement mechanisms it will
use. The mechanisms it applies should escalate
according to the number or severity of offenses it
identifies. For example, General Services could begin
by sending a warning letter to high-level agency
executives, followed by reducing or revoking an
agency’s purchasing threshold for specific types of
acquisitions—for example, IT services—and finally by
reducing or revoking an agency’s purchasing
threshold for all acquisition types in scenarios of
repetitive noncompliance.

DGS RESPONSE # 7:

DGS agrees with the recommendation. Within 90 days, DGS will develop an escalation process outlining the order and severity of enforcement tools to be used. This escalation process will include, among other things, notifications to the director of the state agency, and if necessary, the agency secretary of that state agency. After exhausting the escalation process, DGS may consider reducing or revoking an agency’s purchasing authority.

CONCLUSION

DGS is firmly committed to ensuring competitive procurements and contracting that promotes and provides for open and fair competition, while providing flexible procurement solutions for the needs of state agencies. As part of its continuing efforts to improve those processes, DGS will take appropriate actions to address the issues presented in the report.

If you need further information or assistance on this issue, please contact me at (916) 376-5012.

Daniel C. Kim
Director






Comments

CALIFORNIA STATE AUDITOR’S COMMENTS ON THE
RESPONSE FROM GENERAL SERVICES

To provide clarity and perspective, we are commenting on General Services’ response to our audit. The numbers below corresponds to the numbers we have placed in the margin of General Services’ response.

1

To clarify, our finding relates to ensuring the accuracy and completeness of FI$Cal, the current source of statewide contract data, rather than the various state procurement systems.

2

To clarify, in addition to tracking all outstanding corrective action plans, we recommend that General Services begin following up to ensure that agencies complete them.




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Technology

May 24, 2017

Elaine M. Howle, State Auditor
California State Auditor
621 Capitol Mall, Suite 1200
Sacramento, CA 95814

Re: CALIFORNIA STATE AUDITOR’S REPORT NO. 2016-124

Pursuant to the above audit report, enclosed are the Department of Technology’s comments pertaining to the results of the audit.

The Government Operations Agency would like to thank the state auditor for its comprehensive review. The results provide us with the opportunity to better serve our clients and protect the public.

Sincerely,

Marybel Batjer, Secretary
Government Operations Agency

Enc






To: Marybel Batjer, Secretary Date: May 23, 2017
Government Operations Agency

From: Amy Tong, Director
California Department of Technology

Subject: RESPONSE TO CALIFORNIA STATE AUDITOR’S DRAFT REPORT NO. 2016-124

We are providing for your review the California Department of Technology’s (CDT) written response to the redacted copy of the California State Auditor’s draft Report No. 2016-124 concerning non-competitive contract awards. The following responses address the California State Auditor’s recommendations pertaining to CDT’s operations.

OVERVIEW OF AUDIT REPORT

As identified in Table 1 of the audit report, there are several categories of contracts entered into by the State that by statute or policy are exempt from the State’s competitive bidding requirement. One of the categories exempted by state law is “the acquisition of goods or services restricted to one vendor or where immediate acquisition is necessary for the protection of public health, welfare or safety.” (Pub. Contract Code, § 10348, State Contracting Manual Volumes 2 and 3, section 5.10.)

1

The CDT agrees with all four audit recommendations, the last three of which focus specifically on agencies’ use of the non-competitive request process (the first recommendation focuses more broadly on future trend analysis by CDT of agencies’ use of all types of non-competitive IT contracts, not just those approved through non-competitive requests). The CDT believes that the recommendations will strengthen CDT’s oversight of information technology and telecommunication procurements, especially those acquired through the non-competitive request process. The CDT also concurs with the finding that state agencies need to plan better when their existing contracts are nearing their expiration dates, and to seek timely CDT assistance so that subsequent services can be acquired through the competitive bid process.

Since 2013, almost all original contracts for IT reportable projects were competitively bid or acquired through the Department of General Services’ leveraged procurement agreements, such as the California Multiple Award Schedule (CMAS), including the original contracts for the four state departments’ projects specifically mentioned in Tables 5 and 6 in the audit report. The CDT would like to note that the vast majority of its approval of non-competitive requests were for contract amendments.

RECOMMENDATIONS

RECOMMENDATION #1: To improve its oversight over the State’s non-competitive contracting related to reportable IT projects, Technology should create plans within 90 days for regularly performing analyses of Fi$Cal data to identify potential abuse or overuse of non-competitive contracts. These analyses should include, but not limited to, calculating the proportion value of the State’s competitive and non-competitive contracts and amendments, examining trends in agencies’ use of non-competitive contracts and amendments, and identifying unusual patterns among vendors receiving state contracts through non-competitive means.

California Department of Technology’s Response #1:

The CDT agrees with this recommendation.

To align with industry best practice, within ninety (90) days, the CDT will create plans to track agency overall usage of non-competitive contracts, with an emphasis on establishing agency accountability for submitting valid non-competitive requests in adequate time for CDT’s review, and subsequent approval or denial. Such plans will also be utilized to perform statewide trend analysis to identify potential abuse or misuse of the non-competitive process. This includes determining if an agency appears to be favoring the non-competitive process with means to achieve an agency contract objective, as opposed to a competitive procurement. The CDT will determine the appropriate approach to data collection to support the analyses, including validating the availability and accessibility of FI$Cal data. If the data necessary to create such analytics does not reside completely within Fi$Cal, the CDT may need to research other options to collect the required data in question.

RECOMMENDATION #2: To ensure that the State receives the best value for its non-competitive request, Technology should immediately begin to require that agencies justify that price is fair and reasonable. This should include a current price analysis pointing to competitive pricing from another contract, such as a statewide agreement, or comparing other available vendors; or another valid price analysis with objective evidence. Further Technology should require agencies to quantify and substantiate their cost savings or averted costs.

California Department of Technology’s Response #2:

The CDT agrees with this recommendation.

The CDT will ensure that it requires agencies to document cost justifications from other available vendors, as well as, if the circumstances warrant, point to competitive pricing from other contracts, i.e. Master Services Agreements or CMAS, and/or validation against a reputable price index, such as the Producer Price Index. Furthermore, the CDT will also ensure that it performs and documents an independent validation of submitted cost justifications to confirm the State is receiving the best value, as well as a fair and reasonable cost.

RECOMMENDATION #3: To ensure that it holds agencies accountable for the implementation of the corrective action plans that they submit with non-competitive requests, Technology should immediately begin tracking all outstanding plans and follow-up to ensure agencies complete them. For example, Technology should require that an agency include key dates in its corrective action pan that the agency plans to meet to conduct a competitive procurement and report its progress to Technology. Further, Technology should inquire about the steps that agencies have taken before the contract expiration in their most non-competitive requests.

California Department of Technology’s Response #3:

The CDT agrees with this recommendation.

CDT staff will track and monitor each agency’s corrective action plan (CAP) to ensure agencies are adhering to their corrective steps within the CAP timelines. The CDT will also develop written procedures that require the non-competitive request approval letter to summarize an agency’s CAP; including items such as the key action dates to reduce the risk for a subsequent non-competitive request. Additionally, the non-competitive request approval letter will require agencies to report the status of such actions to the CDT, which includes the agencies’ steps being taken before the contract expires.

RECOMMENDATION #4: To ensure agencies do not repeatedly submit inappropriate non-competitive requests after receiving a warning, Technology should track and follow up on instances in which it has issued a warning letter. Further, when appropriate, Technology should follow through with the consequences it includes in its warning letters.

California Department of Technology’s Response #4:

The CDT agrees with this recommendation.

The CDT will track such warning letters and escalate such risks within the agencies to hold the agencies accountable for their CAPs. If appropriate, CDT will also follow through with the consequences contained in its warning letters.

The CDT is committed to implementing the California State Auditor’s recommendations and improving the successful delivery of information technology projects at a fair and competitive price for the State of California.

If you have any questions about this report, please contact Randy Fong, Internal Audit Manager, at (916) 403-9636.




Comment

CALIFORNIA STATE AUDITOR’S COMMENT ON THE RESPONSE FROM TECHNOLOGY

To provide clarity and perspective, we are commenting on Technology’s response to our audit. The number below corresponds to the number we have placed in the margin of Technology’s response.

1

Although we agree that state agencies need to better plan, we found instances when Technology did not follow up to ensure that agencies took the steps necessary to avoid future noncompetitive requests, as stated here and in Table 7. Therefore, we recommend that Technology hold agencies accountable for implementing corrective action plans by tracking outstanding plans and following up to ensure agencies complete them.




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