Audit of Contracting

Canadian Environmental Assessment Agency
January 2005

Executive Summary

In the fall of 2003, the Canadian Environmental Assessment Agency (CEAA) conducted a risk assessment that was used to develop a three-year internal audit plan. One of the areas identified was the contracting function to ensure that the Agency is receiving good value for money spent and that the contracting function is in compliance with Government Contract Regulations.

A list of contracts that was downloaded from Environment Canada's Integrated Finance and Material Management system (MERLIN) indicated that CEAA entered into service contracts totaling $1,005,543.17 and goods contracts totaling $143,432.46 during the period April 1, 2002 to March 31, 2003 and entered into service contracts totaling $1,393,169.73 and goods contracts totaling $63,492.59 during the period April 1, 2003 to March 31, 2004.

A sample was selected of thirty-five service contracts representing 40% of the service contracts issued and six goods contracts representing 52% of the goods contracts issued during the period April 1, 2002 to March 31, 2004. This sample represented a cross-section of the departmental contracting activity.

During the course of the audit it was concluded that:

  • The management control framework for the Agency's contracting function needs to be strengthened,
  • The contracting function is decentralized and a high-level review mechanism does not exist,
  • There is no mechanism in place to ensure that there is consistency in the contracting activities across the sectors of the Agency,
  • There is no effective method of ensuring that there is compliance with the Government Contract Regulations,
  • Improvements need to be made in contracting processes such as contract planning, advertising the intention to award sole source contracts, avoiding contract splitting and employer/employee relationships and control over deliverables,
  • Performance evaluations are not prepared at the end of the contracts, and
  • Documentation on the contract files needs to be improved.

Recommendations are made to strengthen the management control framework to ensure increased compliance with legislation, regulations, policies and procedures and increased effectiveness and efficiency in the contracting activities to provide value for money and ensure financial integrity.

Recommendations are also made to improve contracting processes and the documentation of those processes.

A. Introduction

In the fall of 2003, the Canadian Environmental Assessment Agency (CEAA) conducted a risk assessment that was used to develop a three-year internal audit plan. One of the areas identified was the contracting function to ensure that the Agency is receiving good value for money spent and that the contracting function is in compliance with Government Contract Regulations.

B. Objectives

The audit is to provide the Agency with assurance on the soundness of its contracting processes, to determine where the department is most exposed to risk, and to identify the appropriate mitigating strategies where necessary. More specifically, the audit is to determine whether the following objectives are met:

  • the management control framework for the Agency procurement function ensures compliance with Government Contract Regulations and that the Departmental processes and practices are effective, efficient, provide value for money and ensure financial integrity.
  • the procurement activities undertaken by managers with contracting delegated authorities throughout the Agency are in accordance with appropriate legislation, regulations, policies, directives and guidelines.

C. Scope and Methodology

The audit covered the period from April 1, 2002 to March 31, 2004 and examined the Agency contracting processes to procure goods and services for Headquarters and the Regions.

The scope included an examination of:

  • contracting responsibilities in the Sectors;
  • contracts issued on a sole source basis and through a competitive process including consulting and professional services contracts.

Using a list of contracts that was downloaded from Environment Canada's Integrated Finance and Material Management system (MERLIN), a sample of service and goods contracts was selected for examination. A sample included thirty-five service contracts representing 40% of the service contracts issued and six goods contracts representing 52% of the goods contracts issued during the period April 1, 2002 to March 31, 2004. The sample represented a cross-section of the departmental contracting activity.

The work conducted during the audit included:

  • reviewing the contracting Web sites of Environment Canada, Treasury Board Secretariat, Public Works and Government Services Canada and MERX,
  • developing an audit program,
  • developing an interview guide,
  • interviewing the Director, Communications; Director, Regional Liaison and Guidance; Acting-Director, Policy Analysis; Senior Officer, Finance and Administration; Acting Chief of Procurement and Contracting at Environment Canada; and the former Finance and Administrative officer,
  • discussing files with four program analysts at CEAA and two financial officers at Environment Canada, and
  • reviewing a sample of forty-one files at CEAA and related files at Environment Canada's NCR Accounting Office and Procurement and Contracting Office.

D. Context

The Financial Administration Act and the Public Works and Government Services Act provide the legislative authority to contract. Policies and procedures for contracting in the federal government are established through the Treasury Board Secretariat's (TBS) Contracting Policy and Government Contracting Regulations, TBS Contract Directives and national and international trade agreements.

The MERLIN report indicated that CEAA entered into service contracts totaling $1,005,543.17 and goods contracts totaling $143,432.46 during the period April 1, 2002 to March 31, 2003 and entered into service contracts totaling $1,393,169.73 and goods contracts totaling $63,492.59 during the period April 1, 2003 to March 31, 2004.

E. Findings and Recommendations

1. Management Framework

Paragraph 5.1.1 of the Treasury Board Contracting Policy states "it is the responsibility of departments and agencies to ensure that adequate control frameworks for due diligence and effective stewardship of public funds are in place and working".

CEAA is responsible for implementing a management framework that will ensure that there is compliance with the Financial Administration Act, the Government Contracting Regulations, the Treasury Board Contracting Policy, and Environment Canada and Agency policies and procedures. The management framework should establish and communicate contracting policies and procedures, establish and communicate responsibilities for all parties involved in the contracting process and provide managers and staff with the appropriate training and management tools. It should also ensure that contracting activity is open and transparent.

The CEAA management framework over contracting can be strengthened in a number of ways to ensure increased compliance with legislation, regulations and policies, increased effectiveness and efficiency in the contracting activities and value for money.

(a) Contracting Review Process

It is recommended that a review mechanism be developed that will use a risk-based approach to reviewing contracting. It should review contracting activity to ensure compliance with legislation, regulations, and administrative, contractual and financial policies. It should ensure that the proposed contracts are in accordance with Agency objectives and that the necessary funding is available. It should also ensure that effective reporting is in place. Copies of its reports should be made available to the President.

Service contracts are used by various sectors within the Agency to meet unexpected fluctuations in workload, acquire special expertise not available in-house and sometimes replace staff during temporary absences. Goods contracts are used to acquire goods that are needed to allow the Agency to deliver its services. The manager of each responsibility centre has been delegated authority to manage financial resources and to exercise spending authority against the responsibility centre's budget. At CEAA the contracting activity is decentralized. The contracts are developed for each responsibility centre and approved by the manager and there is no higher-level review or approval required for the contracts. The Agency does not have an integrated contracting system that promotes consistency in contracting activities. An effective corporate oversight mechanism over the contracting process is needed.

The review mechanism should review and challenge, as a minimum, all contracts greater than $25,000, sole source contracts in the amount of $10,000 or more, amendments to sole-source contracts that would result in the total amount exceeding $25,000 and any amendments that result in an increase of 50% or more of the original amount.

The Treasury Board Contracting Policy encourages the establishment and maintenance of formal challenge mechanisms with records of decisions being available for subsequent audits or evaluations and summaries of the proceedings being provided regularly to the deputy head.

(b) Documentation of Policies and Procedures

It is recommended that contracting policies and procedures be documented.

The Agency does not have its contracting policies and procedures adequately documented. Contracting policies and procedures should be documented either in a manual of policies and procedures or on the CEAA intranet. All the requirements that need to be followed in carrying out contracting responsibilities should be available in this manual or on the intranet site. This would include The Government Contracting Regulations, the Treasury Board Contracting Policy and related material, policy and guidance developed by Environment Canada, relevant Public Works and Government Services Canada material and any material issued by CEAA. This documentation should include either copies of the documents or links to the sites on the Internet where this information can be obtained.

The absence of documented policies and procedures increases the risk of violations of contracting legislation, regulations and policies. The documentation of contracting policy would assist managers and staff in carrying out their responsibilities. Having these policies and procedures in one place and available to all contracting staff and managers would increase the efficiency and effectiveness of the contracting process. This documentation would also serve as a useful training tool.

(c) Training

It is recommended that a training plan be developed to ensure that managers and staff are provided with the appropriate level of training on the contracting process to support compliance of contracting activities with the relevant policies.

During the period under review some staff members and managers attended courses provided by Environment Canada and Training and Development Canada. However, there was not an organized approach to the provision of training and training was provided on an ad-hoc basis. As a result of lack of familiarity with the requirements, many individuals involved in the contracting process obtained information and advice on contracting from the Senior Officer, Finance and Administration and from the finance and administration officer. Reliance on the finance staff should not be a substitute for proper training. Undue reliance on the finance personnel can lead to inefficiencies in the performance of contracting responsibilities.

An inventory of courses should be made available so that all managers and staff are aware of the available courses. Courses should be required of new staff with contracting responsibilities, new managers who have received delegated contracting authorities and individuals who have demonstrated a lack of knowledge relating to their contracting responsibilities. The courses should include training on the application of the rules on intellectual property to deal with the uncertainty and confusion that appear to accompany this policy.

(d) Monitoring

It is recommended that performance on contracts be monitored and regular reports provided to senior management. These reports should be made available to the review mechanism that is established for its review.

During the period under audit no formal monitoring process existed. Any monitoring that occurred was done on an informal and ad-hoc basis.

Contract performance should be monitored on an on-going basis to provide timely feedback on compliance to the managers. Monitoring ensures the deliverables are received and that they are in accordance with those outlined in the contract. It also ensures that the work is progressing according to the timetable and budget included in the contract. Monitoring minimizes the possibility of cost overruns and receiving the deliverables after the agreed date.

(e) Performance Evaluation

It is recommended that the performance of the contractor be evaluated and the evaluation report provided to the contractor.

There was only one file that contained evidence to indicate that performance evaluations were conducted at the completion of the contract. These evaluations provide the Agency with information that is helpful in determining whether a contractor should be engaged on subsequent contracts.

The Treasury Board Contracting Policy states "The analysis necessary to achieve best value should not be confined to the actual procurement process; it should begin in the planning and appraisal of alternatives and continue through the definition of requirements which would include assessment and award criteria, evaluation of sources, selection of contractor, preparation, negotiation, execution and award of contract, contract administration and post-contract evaluation."

Paragraph 16.11.8 requires the contracting authority to evaluate the work performed by the consultant or professional. Paragraph 16.11.9 requires that the performance critique be provided to the consultant or professional and that he be allowed to respond for the record. Paragraph 16.11.9 also provides guidance on the contents of the evaluation reports.

(f) Documentation on Contract Files

It is recommended that contract files be established that provide a complete audit trail including details on such items as options, decisions, approvals, amendments and an identification of the officials involved. Responsibility for maintaining an official contract file should be established. A standard file checklist should be developed to ensure that the files are adequately and consistently documented. Guidance addressing the documentation deficiencies should be provided to all contracting staff.

The contract files that were kept during the period under audit were not established in a way that provides a complete audit trail. Since the responsibilities for contracting are split among various sectors the documentation is found in various locations, i.e., in the CEAA finance files, Environment Canada's NCR Accounting files, Environment Canada's Procurement and Contracting files and in the personnel files of the contracting staff in the sectors. (Details on the inadequacy of the files are provided in Section E. 2 Departmental Processes for Contracting for Services.) Inappropriately documented files cannot provide assurance that the contracting activities are carried out in accordance with the contracting policy. Such files also decrease the ability of the organization to effectively monitor the contracting activities.

One of the risks involved with inadequate documentation is that it cannot be adequately demonstrated that best value has been obtained and that open access and transparency has been attained.

Paragraph 12.3.1 of the Treasury Board Contracting Policy requires that procurement files be "established and structured to facilitate management oversight with a complete audit trail that contains contracting details related to relevant communications and decisions including the identification of involved officials and contracting approval authorities".

(g) Templates and Checklists

It is recommended that templates and checklists be developed to address what is required in a statement of work, evaluation criteria, intellectual property clauses, avoiding employer/employee relationships and sole-source justification.

Templates and checklists were not used to any extent during the period audited. These tools would provide assistance to contracting staff and managers in performing their contracting responsibilities and contribute to consistency in the performance of their duties. In order to make these tools available to all contracting staff and managers they should be included in the manual of policies and procedures or posted on the intranet.

2 Departmental Processes for Contracting for Services

A sample of files relating to thirty-five service contract was selected for review. The value of the contracts included in the sample totaled $960,039 and were awarded over the period April 1, 2002 to March 1, 2004. The sample included twenty-one contracts that were sole-sourced, five that were issued competitively and nine that were Call-Ups Against a Standing Offer. The review indicated a number of areas where there is a need for the contracting staff and managers to make improvements in complying with policy requirements and maintaining documentation in files.

(a) Contract Planning

It is recommended that:

  1. contract planning, to the extent possible, be integrated with the agency's planning process including the development of the annual work plan, and
  2. there be references in the file as to whether the requirement was included in the annual work plan.

When contract planning is integrated with overall agency planning there is a greater possibility that the best contractors will be selected at the lowest cost and that the project will be managed more effectively and economically.

Of the thirty-five contracts reviewed only eighteen were specifically included in the annual work plans for the period. No references were made in the files as to whether the contracts had been included in the work plans.

(b) Contract Screening

It is recommended that:

  1. there be documentation on file of the need to contract and evidence that an analysis was conducted to determine whether the need could be met with internal resources, and
  2. a signed and dated Statement of Work be included in each contract file.

This is the stage in the process when it is decided that a service is required and that contracting is the most efficient and economical way of meeting that requirement. The screening of requests for contracts can result in obtaining better value from the contractor and eliminating some inappropriate requests.

Only five of the thirty-five service contract files reviewed contained documentation of the need to contract and only six files contained evidence that any analysis had been conducted of whether the need could be met with internal resources.

When these steps are not completed, it increases the risk that contracts are awarded for services that are not necessary and that available financial resources are not used with due regard to economy.

Nine of the thirty-five service contract files reviewed were Call-Ups Against a Standing Offer. Twenty-two of the remaining twenty-six files contained a Statement of Work (SOW). However, only five of these files contained a signed and dated SOW. One file contained an unsigned SOW. One file contained a signed but undated SOW. In fifteen of these twenty-two files there was not a separate signed and dated SOW but the SOW was attached to the Requisition for Service Contract.

All files should include a signed and dated SOW to demonstrate that the SOW was approved by the program manager.

(c) Bidding Process

It is recommended that copies of MERX postings be included on the contract files.

An opportunity to bid was advertised on MERX for four contracts. Contract award notices were posted for only three of the contracts. Only one MERX opportunity notice was on file. No award notices were on file.

The details of bids solicited, the Request for Proposal from the successful bidder and notification letters to the bidders were included in only three of the five competitively awarded contract files. Only two of the files included evidence that the solicitation document contained assessment and award criteria.

(d) Sole Source Contracts

It is recommended that:

  1. sole source contracts be advertised, whenever possible, by way of Advance Contract Award Notices (ACAN) in order to increase the transparency of the non-competitive contract process,
  2. a copy of the ACAN be included in the contract file,
  3. in those situations where it is not possible to advertise the intention to award a contract through an ACAN, the manager should document on the contract file the reasons for not using an ACAN.

The Government Contracting Regulations requires contracting authorities to solicit bids before entering into a contract. However, Section 6 of the Government Contracting Regulations provides exceptions to the requirement to solicit bids when the need is one of pressing emergency, the estimated expenditure does not exceed $25,000, the nature of the work is such that it would not be in the public interest to solicit bids, or only one person or firm is capable of performing the contract.

The Treasury Board Contracting Policy encourages contracting authorities to advertise their intention to award a contract to a particular contractor through an ACAN. This mechanism allows other contractors to challenge this intention.

None of the twenty-two contracts were advertised by the use of ACANs.

ACANs provide potential contractors an opportunity to challenge the awarding of sole-source contracts and their use would make the agency's sole source process more transparent. The uses of ACANs would open-up the process and make it more competitive.

There may be situations where it is not possible, e.g., because of time constraints, to advertise the intention to award a contract through an ACAN. When it is not possible to use an ACAN, the manager should document on the contract file the reasons for not advertising through an ACAN.

All twenty-two sole source contracts met one of the exceptions from soliciting competitive bids. Justification for sole sourcing was documented in only twenty of the files. Three of the sole source contracts in the sample exceeded $25,000. Justification for sole-sourcing was documented on these files. Two of the contracts having an initial value less than $25,000 were amended to exceed $25,000.

(e) Contracts

It is recommended that a certification of the contractor's best rate be obtained and included in the contract file.

The competitive bidding process provides some assurance that the contracting authority is obtaining best value for its money. When a non-competitive process is used it is important that other steps be taken to ensure that best value is obtained. One of these steps is for the manager to ascertain the current market rate for the services of a similarly qualified individual or firm and to use this information when negotiating with the contractor. In addition, the contracting authority should obtain from the contractor a certification that he is giving the agency his best rate.

None of the twenty-two files contained evidence that the manager had knowledge of the current market rate for the services of similarly qualified individuals or firms. None of the files contained a written certification from the contractor that he was providing the best rate. None of the files contained evidence that the contractor's proposal was critically assessed in terms of estimated time and cost.

(f) Employer/Employee Relationships

It is recommended that:

  1. the criteria for determining employer/employee relationships published by the Canada Revenue Agency be included in the manual of policies and procedures or on the CEAA intranet. These criteria should be reviewed and an analysis conducted before each professional services contract is entered into, and
  2. documentation of the analysis be included in the contract file.

The Treasury Board Contracting Policy requires contracting authorities to ensure that an employer/employee relationship not result when contracting for the services of individuals in accordance with criteria established by the Canada Revenue Agency and pertinent court rulings.

Two of the four largest contracts in the sample were awarded to one individual. These contracts were for the periods September 23, 2002 to March 31, 2003 and from June 9, 2003 to March 31, 2005. It is doubtful whether the contractor would be deemed not to be an employee by the application of the criteria of the Canada Revenue Agency.

(g) Contract Splitting

It is recommended that:

  1. contracts of a similar nature with similar deliverables be identified and monitored in order to mitigate against contract splitting, and
  2. an analysis showing that contract splitting has not occurred be included in the contract file.

There were seven contractors in the sample that had more than one contract with similar deliverables during the period under audit. This gives the appearance of contract splitting. There was no evidence on file to demonstrate that an analysis had been done to determine whether contract splitting had occurred.

The Treasury Board Contracting Policy states that contracting authorities must not split contracts or contract amendments in order to avoid obtaining either the approval required by statute, the Treasury Board contracting policy or appropriate management approval with in the agency.

(h) Deliverables

It is recommended that:

  1. controls over deliverables be increased, and
  2. evidence that the deliverables have been received in accordance with the terms of the contract be included in the contract file.

A request was made for documented evidence that deliverables were received on twenty-eight of the service contracts. Documentation was received to indicate that deliverables were provided for twenty-five of the contracts. There was incomplete documentation to indicate that all the deliverables were received on three contracts.

In most cases, obtaining the deliverables was not an easy or straightforward exercise. It was obvious that the deliverables were not included in most contract files. Often the staff in the centres where the contracts were originated looked in the finance files for copies of the deliverables. In some cases, the staff had to contact the contractor to obtain evidence of the deliverables.

The absence of documented evidence that deliverables were received raises questions about the ability of the manager to provide certification under Section 34 of the Financial Administration Act that the services were performed in accordance with the provisions of the contract.

In the case of two contracts, payment of the invoice was made before the deliverables were received. The deliverables were to be provided late in the fiscal year. It was explained that based on experience with the contractors the decision was made to pay the invoices so that they could be charged to the appropriate fiscal period.

(i) Financial Controls

Contract files were examined to ensure that they included signed and dated contracts, the contracts were signed as soon as possible after the effective date, there was no billed work before invoicing, financial coding was recorded, invoices match the contract terms, section 32 - authorization to spend, section 33 - authority to pay and section 34 - acceptance of deliverable - were appropriately signed and the approvals for section 33 and 34 were not the same.

The following examples of non-compliance were found.

  • There was no copy of the signed and dated contract in two of the files.
  • One contract on file was incomplete in that it did not contain an appendix that was referred to in the body of the contract. This appendix provided details of the deliverables. As a result, it was not possible for contracting staff to determine whether the deliverables were provided as agreed.
  • In four of the files there were thirty-one to fifty-seven days between the effective date of the contract and the date of signature by the agency representative.
  • In five of the files there was evidence that work had commenced before the contract was signed. In two of these files there was a written explanation by the program manager of the reasons that this situation occurred.
  • In three of the files the invoices did not match the contract terms. In one case the contract terms were expressed by deliverable but the invoice charged by word for the translation of documents. Only one of two invoices was included in one file.
  • The section 32 certificate was signed for all Requisitions For Service Contracts. However, four of the thirty-five were not dated.
  • Invoices in five of the files were not appropriately approved under Section 34 of the Financial Administration Act. Two invoices were signed by an individual who did not have signing authority for the cost centre to which the invoice was charged, three invoices were signed by an individual who did not have authority to sign on the date that they were signed, one invoice was not signed and another was signed but not dated.
  • It was difficult to verify the Section 33 approvals since they were given electronically in the finance office at Environment Canada. Since the Section 34 approvals were given by managers at CEAA it is reasonable to assume that the approvals were given independently.

3. Goods Contracts

A sample of six goods contracts was selected with a total value of $107,261.66 that represents 52 % of the total population of goods contracts entered into during the period April 1, 2002 to March 31, 2004.

Included in the files for these contracts was a copy of the Call-Up Against a Standing Offer, a Requisition for Supplies or Services and the invoices. An authorized official signed the Section 32 in each case. An authorized official signed the Section 34 in all but one case. No issues were raised with the Goods Contracts that have not already been identified under Section E. (2) dealing with Service Contracts.

F. Conclusion

The management control framework for the Agency's contracting function needs to be strengthened. The contracting function is decentralized and a high-level review mechanism does not exist. There is no mechanism in place to ensure that there is consistency in the contracting activities across the sectors of the Agency. There is no effective method of ensuring that there is compliance with the Government Contract Regulations. Improvements need to be made in contracting processes such as contract planning, advertising the intention to award sole source contracts, avoiding contract splitting and employer/employee relationships and control over deliverables. Performance evaluations are not prepared at the end of the contracts. The documentation of the contracting process needs to be improved.

In order to improve contracting processes and the documentation of those processes and in order to strengthen the management control framework to ensure increased compliance with legislation, regulations, policies and procedures and increased effectiveness and efficiency in the contracting activities to provide value for money and ensure financial integrity it is recommended that:

  1. A review mechanism be developed that will use a risk-based approach to reviewing contracting. It should review contracting activity to ensure compliance with legislation, regulations, and administrative, contractual and financial policies. It should ensure that the proposed contracts are in accordance with Agency objectives and that they are funded. It should also ensure that effective reporting is in place. Copies of its reports should be made available to the President,
  2. Contracting policies and procedures be documented,
  3. A training plan be developed to ensure that managers and staff are provided with the appropriate level of training on the contracting process to support compliance of contracting activities with the relevant policies,
  4. Performance on contracts be monitored and regular reports provided to senior management. These reports should be made available to the review mechanism that is established for its review,
  5. The performance of the contractor be evaluated and the evaluation report provided to the contractor,
  6. Contract files be established that provide a complete audit trail including details on such items as options, decisions, approvals, amendments and an identification of the officials involved. Responsibility for maintaining an official contract file should be established. A standard file checklist should be developed to ensure that the files are adequately and consistently documented. Guidance addressing the documentation deficiencies should be provided to all contracting staff.
  7. The documentation deficiencies outlined in Section E. (2) Departmental Processes for Contracting for Services should be addressed, including:
    • references in the file as to whether the requirement was included in the annual work plan,
    • need to contract and evidence that an analysis was conducted to determine whether the need could be met with internal resources,
    • signed and dated Statement of Work,
    • copies for MERX postings for competitive contracts,
    • copies of ACANs for non-competitive contracts (or when it is not possible to use an ACAN, documentation of the reasons that an ACAN cannot be used),
    • contractor certification of best rate,
    • analysis showing that employer/employee relationship was not created,
    • an analysis showing that contract splitting had not occurred, and
    • evidence that the deliverables were received in accordance with the terms of the contract.
  8. Templates and checklists be developed to address what is required in a statement of work, evaluation criteria, intellectual property clauses, avoiding employer/employee relationships and sole-source justification,
  9. Contract planning, to the extent possible, be integrated with the agency's planning process including the development of the annual work plan,
  10. Sole source contracts be advertised by way of Advance Contract Award Notices in order to increase the transparency of the non-competitive contract process,
  11. A certification of the contractor's best rate should be obtained,
  12. The criteria for determining employer/employee relationships published by the Canada Revenue Agency should be included in the manual of policies and procedures or on the CEAA intranet. These criteria should be reviewed and an analysis conducted before each professional services contract is entered into and documentation of the analysis included in the file,
  13. Contracts of a similar nature with similar deliverables be identified and monitored in order to mitigate against contract splitting, and
  14. Controls over deliverables be increased.