Audit Division
Audit Summary

Department of Transportation
Report LA96-31

Results in Brief

Improvements in the Department's management control system are necessary to ensure consultant agreements are properly solicited, awarded, and managed. The Department did not always perform or clearly document key aspects of the contracting process for $16.9 million of the agreements we examined. Our audit disclosed the Department's decentralized control system promoted inconsistent and noncompliant practices throughout the agreement process.

The Department's expenditures for consultant agreements have increased significantly, amounting to more than $56 million in fiscal years 1993-1995. At these levels of expenditures, it is critical that consultant agreements are managed in an efficient, economic, and consistent manner. To this end, management has committed to restructuring the agreement process. Significant changes will include the revision of existing policies, the development of detailed procedures, and the centralization of agreement processing responsibility. When implemented, these measures should mitigate many issues addressed in our report. However, sustained management attention is critical to the implementation of these proposed changes.

Principal Findings

1. The Department frequently issued requests for proposals (RFP's) that did not fully disclose all evaluation factors nor their relative importance to the consultant selection process. We examined 15 agreements totaling $8.2 million that did not include complete evaluation criteria in the RFP. Therefore, consultants may not provide a complete summary of their capabilities and qualifications. Consequently, a comprehensive solicitation process may not result. (page 10)

2. The Department needs to improve and better document its efforts to use disadvantaged business enterprises (DBE's) as a source for consultant services. Without improvements, DBE's may not receive an appropriate share of Department business. (page 11)

3. Audits were not always conducted prior to cost negotiations for consultant services. We noted nine agreements totaling $8.2 million negotiated without an audit. The Department conducts pre-negotiation audits to assess the capability of the consultant's accounting system to accurately capture costs and to verify the legitimacy of the overhead rate. Without a pre-negotiation audit, the Department has no assurance that payments for services are proper. (page 14)

4. Detailed cost estimates were not always prepared prior to negotiating and executing agreements. We reviewed 14 agreements totaling $7.8 million that did not have detailed cost estimates covering all phases of the project. The Department used the consultant's original estimate as the agreement fee in eight instances totaling $3.3 million. Cost estimates are critical to meaningful costs negotiations. Without them, excessive costs or unexpected problems could result. (page 15)

5. The Department used inconsistent retention methods for engineering and design agreements. During the audit period, the Department established a new retention policy that limited payments to 90% of the agreement total until the consultant's work is accepted. We noted 10 agreements subsequent to this policy that did not contain this retention clause. (page 16)

6. NRS 284.173(6) requires contracts with independent contractors to be submitted to the State Board of Examiners. However, based on an interoffice memorandum prepared by an assigned counsel for the Department of Transportation, the Department does not submit any contracts to the Board of Examiners. We obtained a legal opinion from the Legislative Counsel indicating certain contracts should be submitted to the Board of Examiners. (page 19)

Department of Transportation

Auditor's Comments on Agency Response

The Department of Transportation, in its response, does not agree with one of our findings and recommendations. The following identifies that section of the report where the Department has taken exception to our position. We have provided our comments on the issues raised in the Department's response to assure the reader that we believe the finding and recommendation as stated in the report are appropriate.

The Department disagreed with the finding on page 19 that it did not submit certain contracts to the State Board of Examiners for review and approval as required by NRS 284.173(6). The Department stated that it has never been its practice to submit contracts for services of independent contractors to the Board of Examiners for approval. To support its position, the Department requested an opinion from the State's Attorney General who responded with Opinion Number 96-31, dated November 4, 1996. This opinion concludes the Department has authority to enter into independent service contracts and is not required to submit them to the State Board of Examiners for approval. (see page 32) The Department indicates on page 33 that it will forward contracts for administrative-type services to the Board of Examiners in the future. However, the Department rejected our recommendation that it submit nonconstruction related contracts to the Board of Examiners for approval or seek a legislative exemption. (see page 34)

Legislative Auditor's Comments

As stated on page 19, our finding was based on a legal opinion from the Legislative Counsel that indicates the Department is required to submit certain contracts to the Board of Examiners. (See Appendix B for LCB legal opinion.) We discussed the Department's response and the Attorney General's legal opinion with the Legislative Counsel. According to the Legislative Counsel, the provisions of NRS 284.173 require the filing and approval of all contracts executed by the Department of Transportation for the services of a person as an independent contractor other than for work of construction or reconstruction of highways. Therefore, we believe our finding as stated is correct. Furthermore, we believe our recommendation that the Department submit nonconstruction related contracts to the Board of Examiners for approval or seek a legislative exemption, is appropriate.