Key points and summary

              Contract Administration at Selected
       Health and Human Services Agencies -- Phase Three  
  
                       Report # 96-047  
  
Overall Conclusion:  
  
Current contract administration practices at the Department of
Human Services, Department of Protective and Regulatory Services,
Department of Health, and Department of Mental Health and Mental
Retardation do not consistently ensure that contractors use public
funds prudently and in a manner which provides the most benefits to
the citizens of Texas.  Weaknesses in contract provisions,
rate-setting methodologies, contract budget determination
procedures, contractor selection processes, and agency oversight of 
contractors all increase the risk that public funds will be spent
inappropriately.  We identified over $2.7 million in questionable
expenditures for 18 of the 20 contractors reviewed who provide
services for these four agencies. The questionable expenditures
included expenditures which were not reasonable and customary for
the operations of the programs, such as:

*    excessive payments to related parties for management and
     consulting services,
*    purchase of land and blueprints for a $5,000,000 church
     complex,
*    purchasing a provider's program director's home for $417,000,
*    purchasing and improving a home used for the executive
     director's office for nearly $200,000,
*    fund-raising cost which exceeded fund-raising proceeds,
*    excessive travel expenditures.   
  
Key Facts And Findings:  
  
Service providers paid a unit rate are not held accountable for how
they spend public funds. In total, 18 of the 20 providers reviewed
had at least one unit-rate contract. Unit-rate contracts are
structured such that once the contractor is paid the fixed rate for
each unit of service delivered, there are no restrictions over the
use of funds.  As a result, the $2.3 million identified in  
questionable expenditures are not violations of current contract
provisions or agency regulations.  
  
Although provisions in cost-reimbursement contracts generally hold 
contractors accountable for how they spend public funds, most
programs do not have an effective process for determining the
reasonableness of cost reimbursement budgets. Inappropriate or
inefficient uses of public funds were not consistently detected by
the funding agencies during contractor audits.  Thirteen of the 20
providers reviewed had at least one cost reimbursement contract,
and we identified $460,947 in questionable expenditures at these
providers.  
  
In some instances, contractors receive compensation which exceeds
the cost of providing services, as evidenced by expenditures which
are inappropriate, excessive, or do not directly benefit the
program.  As a result, we concluded that the processes used to
establish rates and contract budgets do not provide adequate
assurance that the State is paying a fair and reasonable price for
the services.
  
Overall, there is a lack of central guidance or oversight of
contract administration efforts, resulting in duplication of effort
and a piecemeal approach on a statewide basis. Although multiple
state agencies use the same contractor, agency regulations are
inconsistent, and there is no coordination or communication among
agencies regarding the contractors' performance.   

For a copy of the entire report, contact: 

OFFICE OF STATE AUDITOR
TWO COMMODORE PLAZA
206 EAST NINTH STREET, SUITE 1900
AUSTIN, TEXAS 78701
PHONE: 512-479-4700
FAX: 512-479-4884
E-MAIL: [email protected]