Report 2000-001.4 Summary - November 2000

State of California:

Unnecessary Administrative Fees Increase the State's Cost of Contracting With California State Universities

RESULTS IN BRIEF

State departments (departments) contract for billions of dollars of services every year. To obtain needed services, departments do not always look to the private sector to identify contractors; sometimes they contract with entities in the California State University (CSU) system for the expertise of the faculty, staff, and students at the various CSU institutions. From July 1998 to February 2000, state departments had contracts worth $143 million with the CSU system. We reviewed a sample of 183 contracts worth $93 million and found CSU faculty and students appropriately performed the majority of the work. Furthermore, when the university needed to hire subcontractors for some portion of the work, the subcontractors were properly selected through a competitive bid process, if bidding was required.

While the contracts with CSU entities appear appropriate, we did find that some state departments have unnecessarily paid or agreed to pay the university system $3 million in fees to administer these contracts. This is occurring for several reasons. Rather than contracting directly with the CSU foundation to provide the needed services, some departments contract with the Board of Trustees of the California State University (board), which acts as an intermediary. Based on the terms of existing agreements, state departments will pay the board about $1.5 million for this limited service.

Another factor contributing to higher fees is that some departments negotiate rates for administrative fees without sufficient knowledge of the cost the CSU campuses actually incur for administrative activities. This leaves the departments ill-equipped to bargain for more competitive rates. In our sample of 183 contracts, fees generally ranged from 8 percent to 25 percent of the contracts' direct costs and covered expenses for administrative support as well as for managing personnel, finances, and facilities. The average administrative fee for the contracts reviewed was 15 percent of total direct costs. However, state departments often paid more than 15 percent. Taking into account only those 36 contracts not brokered by the board in which the administrative fee exceeded 15 percent, the State could have saved $1.4 million had the contracting department negotiated the average 15 percent fee.

In other situations, departments pay more in fees because CSU campuses hire subcontractors and purchase goods for them, although the departments could procure these services and goods more cheaply themselves or seek to avoid the amount of administrative fees tacked on to the cost of these items. We identified eight contracts in which campuses entered into large subcontracts for printing services and training materials that the departments could easily have procured themselves-and saved the State $102,000 in administrative fees. Since contracts between state departments and CSU entities are exempt from competitive bidding, it is important for department managers to adequately understand and carefully scrutinize all contract costs to determine that charges are reasonable and necessary.

RECOMMENDATIONS

To ensure they are receiving the best value when contracting with the CSU system, state departments should limit administrative fees by these actions:

  • Avoid contracts using fiscal intermediaries, such as the board, that add little value.

  • Negotiate rates for administrative fees based on a fuller understanding of the actual costs comprising the rate.

  • Contract directly with third parties for goods and services when it is more cost-effective, or avoid payment of the administrative fees tacked on to the cost of goods and services state departments could procure at reduced costs on their own.
AGENCY COMMENTS

The agencies that responded to our report generally agreed with our findings and recommendations. The Business, Transportation and Housing Agency and the Department of Transportation indicated some comments regarding why they pay higher rates for administrative fees in federally funded contracts with the CSU system than they do in similar state funded contracts.


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