Tuesday, October 2nd, 2012

New York IT Procurement – Round 2

Introduction & Health Warning

Please refer to our health warning in our earlier briefing paper. In this ‘episode’ we are expanding on another issue that warrants a ‘lessons learned’ review.

Poor DoITT Contract Management Contributes to Increased Contract Expenditures

The Audit Report comments that “DoITT did not reduce the maximum contract amount by amending the contract when it decided not to require HP to complete two original components of the contract. As a result DoITT paid significantly more than it originally budgeted for PSAC 1 ………. In addition, DoITT did not limit HP’s mark-up or require HP to pass any savings on to the City that it gained by having subcontractors perform work on this contract. The system integration contract did not include a provision that would limit the mark-ups HP would charge if it hired subcontractors. HP relied heavily on its subcontractors to fulfil the contracted services. Of 528 consultants who worked on this contract, 413 were hired by (sic) subcontractors to provide services to the City. Consequently, HP simply billed at the staked contract rates, which were significantly higher than the rates paid to the subcontractors ……..we compared the hourly rates HP paid to subcontractors to the stated contract rates that HP charged to the City and found that HP charged a mark-up ranging from 9 per cent to 195 per cent. The total amount of mark-up paid during the seven sampled months reviewed was $2,302,686, with an average mark-up rate of 54 per cent.”

This raises a number of issues for contract managers, including:

¾     Who is accountable for raising and issuing contract changes?

¾     Who establishes the extent of subcontracting at the tender stage?

¾     Who checks who are subcontractors and who are full time staff?

¾     Who is accountable for negotiating mark-ups?

A degree of reflexion is needed in some organisations regarding the training that is provided to contract managers and if they are empowered to make decisions, they have to deal with cost control and contract performance!

To be continued.