Report 96015 Summary - July 1997

State Contracting: Improvements Are Still Needed To Ensure the Effective Use of Public Resources

Results in Brief

In this and previous audits, we have found deficiencies in contracts between state departments and their contractors because the departments' management of contracts and interagency agreements, current laws related to public contracting, and the State's existing system for overseeing contracts have failed to prevent their recurrence.

We found that state departments we reviewed did not always protect the public interest by adequately planning and managing contracts. For example, in planning to obtain services, some departments restricted rather than fostered competition. Further, departments did not adequately monitor contractor performance and evaluate the services received. In addition, departments paid contractors without ensuring that invoices were adequately supported or that services were consistent with the terms of the contract. If departments do not adequately plan and monitor their contracts, they cannot ensure that state resources are used efficiently and effectively.

We also found that a state department has misused interagency agreements with the California State University (CSU), to avoid competitive bidding. For such agreements, existing laws related to public contracting as well as state policies do not require departments to solicit competitive bids. Rather, these agreements allow state entities to take advantage of each others expert services. However, the California Department of Education did not use the public employees to perform the contract services; instead, the department, in effect, used the interagency agreements to enter into sole-source contracts with private parties. In doing so, the department has avoided competitive bidding and added unnecessary costs to the contracting process.

The Department of General Services (DGS), and individual departments we reviewed, share responsibility for ensuring that the State's contracting program is effective. Master agreements represent one effective method for obtaining needed services and their use can lower prices for services and reduce administrative costs. However, the State has not established a centralized approach that ensures master agreements are used when warranted. As a result, the State may be missing opportunities to take advantage of its collective buying power.

Our review of 46 contracts at five state departments revealed the following specific concerns:

· The Department of Developmental Services restricted competition to a sole contractor.

· Two departments awarded contracts without sufficient funding for their completion. Although in both instances the departments subsequently provided the necessary funding, they risked receiving incomplete products, or no products at all, if additional funding had not been approved.

· Some departments' planning and management of contracts did not always protect the public interest. For example, departments entered into contracts that did not specify the departments' requirements for the contractors. Without such detail, neither the departments nor the contractors knew what was to be delivered for the contracted price.

· We found instances in which the California Department of Education misused interagency agreements to contract with private parties. Although the department initially contracted with CSU, the campuses invoiced expenditures for subcontractors who performed the actual services. The department should have used the competitive bidding process to contract directly with the private parties to avoid paying additional administrative costs.

· At the California Department of Education, an inadequate separation of duties permitted employees to both authorize contract expenditures and then serve as contract monitors to review and approve invoices for the same expenditures.

· Finally, the State may not obtain the best prices for services because it has not centralized negotiations for master agreements nor information regarding available master agreements. Moreover, departments were frustrated because the procedures for obtaining service from a master service contractor varied considerably depending on the type of service.


To use state funds as economically as possible and improve the State's contracting process, state departments we reviewed should plan contracts to include all the elements necessary to monitor contractor performance and to evaluate the services received. Specifically, departments should:

· Exercise care in preparing requests for proposals and estimating the cost of needed services to ensure that competitive processes are fair and attract a good selection of qualified bidders;

· Include sufficiently defined payment provisions and clearly defined deliverables in their contracts to ensure that payments are for actual services rendered;

· Obtain sufficient funding to complete all contract objectives before entering into contracts;

· Ensure that contractors stay within the budget specified in contracts;

· Require that invoices be properly approved, adequately supported, and consistent with contract terms before paying their contractors;

· Avoid unnecessary costs by contracting directly with private parties when appropriate rather than using interagency agreements to circumvent competitive bidding; and

· Monitor compliance with the State's policy prohibiting state employees from accepting responsibilities with other organizations incompatible with their assigned departmental responsibilities.

Further, the California Legislature should adopt new legislation that would prohibit departments from misusing interagency agreements by obtaining contract services from private consultants without participating in the competitive process. Finally, the DGS should:

· Identify the appropriate use of master agreements through its Office of Legal Services. As part of the responsibility for their own contracting program, departments should also determine whether master agreements would better serve their needs and the State's interests;

· Maintain a complete listing of master agreements and ensure its availability to appropriate personnel at all state agencies; and

· Adopt simple, uniform procedures that would encourage the use of master agreements and minimize the burden that multiple procedures presently impose.

Agency Comments

With the exception of the Department of Developmental Services (DDS), the departments generally agreed with our findings and recommendations. The DDS took exception to concerns we raised related to the planning and monitoring of a $3.3 million contract for workers' compensation cost-containment.