Report 2002-108 Summary - December 2002

Department of General Services:

Certain Units Can Do More to Ensure That Client Fees Are Reasonable and Fair

HIGHLIGHTS

We found that certain units within the Department of General Services (General Services) often missed their estimates of project fees charged to client departments by more than 20 percent. These units, which are within General Services' Real Estate Services and Telecommunications divisions, could improve the accuracy of their estimates by more consistently employing the following best practices:

  • Document how estimates are calculated.

  • Ensure the review and approval of estimates.

  • Use multiple estimating approaches-along with historical data-to validate estimates.

  • Evaluate estimates on completed projects.
Further, we found that certain units could more accurately prepare and report cost data that General Services' management uses to decide on hourly rates. Finally, the Office of Public Safety Radio Services needs to improve its billing practices.

RESULTS IN BRIEF

As a provider of important and often-mandated services to other state departments, the Department of General Services (General Services) must ensure that the fees it charges to client departments are reasonable and fair. We found that certain units within the Real Estate Services Division (Real Estate Services) along with the Office of Public Safety Radio Services (Radio Services) can improve their processes and controls for preparing project cost estimates, developing hourly billing rates, and invoicing client departments. Improving these areas should lead to more reliable and accurate project fees and improve client satisfaction with General Services.

The units we reviewed-which provide services for managing capital outlay and telecommunications projects-generated approximately three-quarters of General Services' project management fees in fiscal year 2001-02. Other units within General Services also charge fees based on the cost of staff to provide services such as contract review, accounting assistance, and administrative hearings. It is important that General Services uses good estimating techniques and tools because the fees we reviewed are based upon estimates rather than on the actual hours and approved billing rates-and because General Services needs to recover the cost of providing services. Our review of the project fees charged on five projects from Real Estate Services and five projects from Radio Services reveals that both could improve their fee estimate processes by following time-tested and reputable best practices more consistently. For example, best practices dictate that fee estimates are monitored adequately for accuracy and documented to show how they are calculated. We could not always evaluate whether fees were fair or reasonable because some project files did not contain support for how the units estimated their fees. In addition, evidence of supervisory review of estimates and client approval of fees were sometimes missing. The absence of client department approval of fee estimates for two projects may result in Radio Services absorbing approximately $93,000 to resolve a dispute with the client department. Best practices also prescribe that General Services should use a historical database of completed projects to help generate reliable project estimates. Another best practice to refine an entity's estimating process is to evaluate a completed project to analyze why estimates differed from actual project costs. General Services' managers told us that it plans to conduct these types of activities, but its progress has been minimal. Implementing these best practices is not without a cost; however, they are best practices due to a general belief that the long-term benefits outweigh the costs. Further, for many services they provide, Real Estate Services and Radio Services have no competition because state law requires departments to use their services unless General Services approves the use of an outside vendor. To their credit, we did find that Real Estate Services and Radio Services follow some best practices. Most notably, both clearly documented the scope for the 10 projects we reviewed. Although actual costs are expected to vary somewhat from estimates, our review of project estimates and line item estimates revealed that many estimates varied from the costs by 20 percent or more. The significant variances we found further support the need for Real Estate Services and Radio Services to follow best practices when estimating fees.

Although General Services' process for developing the hourly rates of staff-which are the basis of many fee estimates-appears reasonable, it can improve the accuracy of a report that management uses to decide on the hourly rates. Units that provide services-with the assistance of General Services' Office of Fiscal Services (Fiscal Services)-provide management a report to allow it to make the decisions on hourly rates. The report recommends hourly rates for each type of service and is designed to include the at-cost rate for each service, which is calculated by dividing projected costs by the projected billable hours. The Project Management Branch within Real Estate Services appropriately developed its hourly rates, but Radio Services' staff made $10.2 million in arbitrary or unsupported adjustments, such as shifting costs between units when calculating its at-cost rate. In addition, Fiscal Services allocated its overhead-which amounted to $7.6 million for fiscal year 2001-02-to units based partly on the units' ability to absorb the costs rather than on actual services provided. Although some of these adjustments may be justified, staff told us that some of the adjustments were made to achieve hourly rates similar to the prior-year rates. This preliminary "leveling" process distorts the picture that management sees when making rate decisions, and may lead to setting rates inappropriate to recover actual unit costs. In addition, some adjustments cause other units within General Services to shoulder more than their fair share of costs.

Moreover, we could not determine whether the consulting fees that Radio Services charges to its clients were reasonable and fair because of weaknesses in its cost accounting system. Finally, Radio Services does not review for errors in billings before they are sent to departments; in one instance, this oversight resulted in an under billing of $126,000.

RECOMMENDATIONS

To help ensure that the fees charged client departments are reasonable and fair, we recommend that General Services' units follow best practices such as:

  • Adopting and following a procedure to thoroughly document assumptions used in creating project estimates.

  • Documenting evidence of supervisory and client review and approval.

  • Conducting evaluations at the end of each major project.

  • Developing a historical database of completed projects and using the database to provide support for future estimated project costs.

Further, to ensure that decisions on hourly rates are based on actual costs, General Services' management should receive reports without arbitrary adjustments to at-cost rates. It also should address the weaknesses in the cost accounting system of Radio Services.

AGENCY COMMENTS

General Services generally concurs with the findings, conclusions, and recommendations of the report and states that it will take appropriate actions to address the recommendations.


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