Report 2015-117 Recommendation 7 Responses

Report 2015-117: California Department of General Services' Real Estate Services Division: To Better Serve Its Client Agencies, It Needs to Track and Analyze Project Data and Improve Its Management Practices (Release Date: March 2016)

Recommendation #7 To: General Services, Department of

To ensure that client agencies are paying equitable rates, by December 2016 General Services should develop and implement a strategy for allocating its administrative costs equally among all the projects it completes for client agencies, including those portions outsourced to private firms.

Annual Follow-Up Agency Response From October 2020

As previously reported, in 2016 PMDB reviewed the amount of overhead related to contracts. Specifically, the costs for OBAS (contracts), OLS (legal), OFS (accounting), RESD Executive (review/signature). The associated costs were sequestered from the hourly rate and are charged via a percentage fee (1%, capped at $1 million for large projects). This fee is charged against contracted amounts and is not applied when there are no contracts (which is incredibly rare - almost every project involves some amount of contracted services). DGS believes that it has materially implemented the recommendation.

California State Auditor's Assessment of Annual Follow-Up Status: Will Not Implement

Annual Follow-Up Agency Response From October 2019

As previously reported, in 2016 PMDB reviewed the amount of overhead related to contracts. Specifically, the costs for OBAS (contracts), OLS (legal), OFS (accounting), RESD Executive (review/signature). The associated costs were sequestered from the hourly rate and are charged via a percentage fee (1%, capped at $1 million for large projects). This fee is charged against contracted amounts, and is not applied when there are no contracts (which is incredibly rare - almost every project involves some amount of contracted services). DGS believes that it has materially implemented the recommendation.

California State Auditor's Assessment of Annual Follow-Up Status: Partially Implemented

General Services did not provide any new documentation or information regarding its implementation of this recommendation. In its previous response, General Services provided a spreadsheet displaying how it arrived at a 1 percent contract administration fee for external contracts entered into for projects; however, it has not yet conducted an analysis demonstrating that, by charging this fee, administrative costs are now equitably distributed among all of the projects it completes for client agencies, including those portions outsourced to private firms. Until such an analysis is completed, we will continue to assess this recommendation as partially implemented.

Annual Follow-Up Agency Response From October 2018

As previously reported, in 2016 PMDB reviewed the amount of overhead related to contracts. Specifically, the costs for OBAS (contracts), OLS (legal), OFS (accounting), RESD Executive (review/signature). The associated costs were sequestered from the hourly rate and are charged via a percentage fee (1%, capped at $1 million for large projects). This fee is charged against contracted amounts, and is not applied when there are no contracts (which is incredibly rare - almost every project involves some amount of contracted services).

California State Auditor's Assessment of Annual Follow-Up Status: Partially Implemented

As reported in our previous assessment of the status of this recommendation, although DGS provided us with further explanation regarding how it arrived at the 1 percent contract administration fee, it did not provide us with an analysis demonstrating that, by charging this fee, administrative costs are now equitably distributed among all of the projects it completes for client agencies, including those portions outsourced to private firms. Until such an analysis is completed, we will continue to assess this recommendation as partially implemented.

Annual Follow-Up Agency Response From November 2017

Beginning in FY 16-17, RESD's Project Management and Development Branch (PMDB) will charge a 1 percent Contract Administration Fee for all external contracts entered into for projects. In brief, to arrive at the 1 percent fee, PMDB identified the total amount paid to support those programs within DGS that work on PMDB contracts such as legal review and contract services. PMDB then estimated the percent of the services that directly supports its contracts to arrive at a contract administration cost to recover. Using historical averages, recent trends, and estimates for current year work, PMDB then estimated the total amount of externally contracted services the branch will likely enter into during the fiscal year.

In PMDB's evaluation of this methodology, by implementing the fee, the portion of PMDB's overhead fees specifically related to contracting out have been separated from its rate and applied only to those projects where consultants are utilized. Because of this separation, clients whose projects are designed in-house by DGS are not charged at all for overhead related to contracting for design services. The contracting overhead for the construction portion of the work, special consultants retained, CEQA, hazardous materials testing/abatement, etc. would still be charged to the project. Because the remaining administrative charges, such as non-billable management time, are included in PMDB's hourly rate, larger projects where more support is needed bear more of the overall cost burden than would smaller projects. PMDB's assessment of recently fee'd projects is that this structure is entirely equitable and level sets administrative fees across projects.

California State Auditor's Assessment of Annual Follow-Up Status: Partially Implemented

Although DGS provided us with further explanation regarding how it arrived at the 1 percent contract administration fee, it did not provide us with an analysis demonstrating that, by charging this fee, administrative costs are now equitably distributed among all of the projects it completes for client agencies, including those portions outsourced to private firms. Until such an analysis is completed, we will continue to assess this recommendation as partially implemented.

1-Year Agency Response

Beginning in FY 16-17, RESD's Project Management and Development Branch (PMDB) will charge a 1 percent Contract Administration Fee for all external contracts entered into for projects. In brief, to arrive at the 1 percent fee, PMDB identified the total amount paid to support those programs within DGS that work on PMDB contracts such as legal review and contract services. PMDB then estimated the percent of the services that directly supports its contracts to arrive at a contract administration cost to recover. Using historical averages, recent trends, and estimates for current year work, PMDB then estimated the total amount of externally contracted services the branch will likely enter into during the fiscal year.

In PMDB's evaluation of this methodology, by implementing the fee, the portion of PMDB's overhead fees specifically related to contracting out have been separated from its rate and applied only to those projects where consultants are utilized. Because of this separation, clients whose projects are designed in-house by DGS are not charged at all for overhead related to contracting for design services. The contracting overhead for the construction portion of the work, special consultants retained, CEQA, hazardous materials testing/abatement, etc. would still be charged to the project. Because the remaining administrative charges, such as non-billable management time, are included in PMDB's hourly rate, larger projects where more support is needed bear more of the overall cost burden than would smaller projects. PMDB's assessment is that this structure is entirely equitable.

California State Auditor's Assessment of 1-Year Status: Partially Implemented

Although General Services provided a spreadsheet displaying how it arrived at a 1 percent contract administration fee for external contracts entered into for projects, it has not yet conducted an analysis demonstrating that, by charging this fee, administrative costs are now equitably distributed among all of the projects it completes for client agencies, including those portions outsourced to private firms. Until such an analysis is completed, we will continue to assess this recommendation as partially implemented.

6-Month Agency Response

Beginning in FY 16-17, RESD's Project Management and Development Branch (PMDB) will charge a 1 percent Contract Administration Fee for all external contracts entered into for projects. In brief, to arrive at the 1 percent fee, PMDB identified the total amount paid to support those programs within DGS that work on PMDB contracts such as legal review and contract services. PMDB then estimated the percent of the services that directly supports its contracts to arrive at a contract administration cost to recover. Using historical averages, recent trends, and estimates for current year work, PMDB then estimated the total amount of externally contracted services the branch will likely enter into during the fiscal year.

California State Auditor's Assessment of 6-Month Status: Partially Implemented

Although General Services provided a spreadsheet displaying how it arrived at a 1 percent contract administration fee for external contracts entered into for projects, it has not yet conducted an analysis demonstrating that, by charging this fee, administrative costs are now equitably distributed among all of the projects it completes for client agencies, including those portions outsourced to private firms. Until such an analysis is completed, we will continue to assess this recommendation as partially implemented.

60-Day Agency Response

By December 2016, DGS will complete an analysis of the effect of allocating administrative costs to RESD's architectural and engineering and construction contracts. The results of that analysis will, in part, inform any strategy or decision related to administrative costs.

California State Auditor's Assessment of 60-Day Status: Pending

All Recommendations in 2015-117

Agency responses received are posted verbatim.