Section 3: Controlling Consultant Expense Reimbursements and Fees

· Contractors periodically submit invoices to the Airfield Development Bureau for payment of services provided and reimbursement of expenses incurred. The Project Manager assigned to monitor a particular contract reviews the invoice in detail and, if necessary, amends the amounts approved for payment because of disallowed items, mathematical errors, or for other reasons. A higher-level staff person also reviews the invoice and certifies that the invoice has been reviewed and is correct and that all of the required supporting documentation has been provided and that the terms of the contract have been met with regard to the invoice.

· Our review of selected contract files revealed that in some instances payments were made for services that were not supported by a timesheet or similar documentation of work performed and consultant hours billed. For example, one consultant billed 395 hours on a single invoice without a timesheet for the period of July 20, 2002, through October 25, 2002, although authorized funding for the contract had been completely expended in July of 2002 and a contract modification was not enacted until October of 2002. Also, expense reimbursement claims were paid for items that, because of their unusual nature or cost, should have included an explanatory note in the invoice file, but did not. For example, one consultant billed $47.65 for lunch and $135.31 for dinner in the same day, another consultant billed $484.48 for a one-night stay at the Savoy Hotel in San Francisco, another consultant billed $799.55 at the Bacchanal Restaurant in South San Francisco without an explanation for the high cost, and another consultant billed for reimbursement of $1,039 for "Asia Trip Gifts" in conjunction with a consultant's trip

· The Airfield Development Bureau's Finance Manager informed the auditors that the Bureau does not have a written policy covering the approval of contractor expenses. However, the Airport does have a Travel and Training Guidelines manual for controlling employee travel and training costs. Included in the manual are restrictions on air travel, published maximum per diem rates for lodging, meals, and incidental expenses, and other provisions. The Airport should development a similar manual for controlling contract expenses.

· The Airport can obtain its contractual services more economically by improving controls over consultant travel, training, and other expenses including establishing a consistent set of policies for controlling contractor costs and preventing potential abuse of contractor billing practices.

Consultant Expense Control -- General

Expenses incurred for travel, meals, lodging, local transportation, conferences, and incidental items are common to consultant services, particularly when the services provided are of a research and development as opposed to a construction or manufacturing nature.

Contractors periodically submit invoices to the Airfield Development Bureau for payment of services provided and reimbursement of expenses incurred. The Project Manager assigned to monitor a particular contract reviews the invoice in detail and, if necessary, amends the amounts approved for payment because of disallowed items, mathematical errors, or for other reasons. A higher-level staff person also reviews the invoice and certifies that the invoice has been reviewed and is correct and that all of the required supporting documentation has been provided and that the terms of the contract have been met with regard to the invoice.

Procedures for controlling contractual expenses are well-developed within government agencies and also within the private sector for controlling expenses incurred among joint venture partners and for controlling expenses incurred by subcontractors. Such procedures often include per-diem and travel limitations, use of a specific vendor for scheduling travel, use of qualified vendors, expense documentation requirements, and multiple invoice reviews and sign-offs.

The Federal Government controls costs for contractors through its Federal Acquisition Regulation (FAR) No. 31.205-46, Travel Costs, and other governmental entities either have their own policies and procedures to control such expenditures or incorporate the FAR provision by reference. According to the Airfield Development Bureau's Finance Manager, the Airport does not have written procedures for controlling expenses incurred for contractual services, although such expenses are significant.

However, the Airport does have a Travel and Training Guidelines manual for controlling employee travel and training costs. Included in the travel and training manual are coach-fare only and other restrictions on air travel, published maximum per diem rates for lodging, meals, and incidental expenses, and other provisions including a proviso that reimbursement above maximum allowable rates requires special authorization in advance from the City Controller. Relevant provisions in the Travel and Training Guidelines manual could be applied to controlling contractor expenses, along with other controls to cover expense categories not included in the manual.

Review of Contract Files

In order to determine whether the Airfield Development Bureau has been exercising appropriate controls over reimbursement of contractors' expenses, the Budget Analyst reviewed a sample of contract files maintained by the Bureau.

Our review of those contract files revealed that the general practice of requiring both the Airfield Development Bureau Project Manager assigned to monitor a contract and a higher-level manager to sign-off on contractor invoices was performed.

However, our review of the contract files also revealed that claims for services were sometimes approved without supporting timesheets or other documentation of work performed and hours billed and that some travel, meal, lodging, and incidental expenses were approved although, because of the seemingly extraordinary nature of amount of the particular expense, an explanatory note should have been included in the contract file. Further, our review also revealed that the controls on travel, meals, lodging, and other expenses included in the Travel and Training Guidelines manual for controlling employee travel and training costs were not applied to consultants.

We have placed the various questionable invoices and contract file items into the categories shown below.

1) An unusually large number of hours charged without a supporting timesheet within the invoice time period:

Example: 395 hours charged on a single invoice for covering period of July 20, 2002 through October 25, 2002, although authorized funding for the contract had been completely expended in July of 2002 and a contract modification was not enacted until October of 2002.

2) Insurance Reimbursements

Example: Reimbursement to a contractor in the amount of $362,793 for a Professional Liability Insurance which was not stipulated as a reimbursable cost under the contract and with no explanation in the file noting the reason the reimbursement was allowed. The Budget Analyst questions why such an insurance reimbursement requirement was granted as a reasonable cost.

3) Purchase of high cost computer equipment:

Example: $49,940 for three Dell workstations, at average cost of $16,646.67 per workstation with no explanation of necessity of this unusually high cost.

4) Unusually high airfare costs:

Examples: Roundtrip airfares between SFO and Washington D.C. costing $3,874.75 and $4,252, per trip

5) Unusually high lodging costs:

Examples: $549.60 one night stay at the St. Regis Hotel in Washington, D.C.; $484.48 one night stay at the Savoy Hotel in San Francisco; $228.94 hotel charge annotated with "No Show" meaning that the individual did not use the hotel that night.

6) High meal costs:

Examples: $799.55 charge at the Bachannal Restaurant in South San Francisco; $47.65 lunch and $135.31 dinner (same consultant, same day) both without explanation for the high cost.

7) Unusually high telephone bills:

Example: $4,686.60 for a one month period (one person)

8) Unusual billing basis for compensating services:

Examples: a) Increments of 6 minutes, "daily" rate, "monthly" rate, and a retainer of $10,000 per month all used by the same contractor;

b) Monthly fixed rate of $9,230.78 paid for 78 hours logged in one month and $9,230.78 paid for 174 hours logged in another month.

9) Meals paid for Airport staff by consultants without the approvals required of Airport Management concerning consultant hosting Airport staff responsible for managing the contract:

Examples: $154 for lunch at Kincaid's in Burlingame; $474 for dinner at Kuleto's in Burlingame

10) Invoices approved for services without timesheets or other documentation of hours worked or services performed.

11) Reimbursement for gifts purchased for foreign dignitaries for a trip to Asia by consultants.

Example: $1,093.20 charged to Coach

12) Waiver of professional liability and automobile insurance requirements without the approval of the City's Risk Manager, who has verified that the Risk Manager must approve all such waivers:

Examples: Two Luster/GKO seconded subconsultants

Insurance Waivers

In some instances, an Airfield Development Bureau manager would modify the insurance requirements required for individual subcontractors, without the approval of the City's Risk Manager, as cited below:

Section 17 of the Agreement with DMC Airfield Engineers, Insurance, is modified to add the following new paragraph:

17.i Consultant is not required to include coverage in its insurance policies for individual subconsultants identified in Task Orders under the Additional Services Budget, nor shall the consultant require the above insurance requirements of the individual subconsultants identified by Task Order under the Additional Services Budget. Consultant shall have no liability to City or to any third party and shall have no obligation to indemnify and hold City harmless for services performed by individuals or subconsultants who are under direction of City. However, Consultant shall remain liable to City and third parties for the actions of the aforementioned individuals and subconsultants for their activities performed under the direction of the Consultant.

At the request of the Budget Analyst, the City's Risk Manager has reviewed the contract and contract modifications of an agreement that included a contract waiver and has made the following statement:

Insurance related issues on City contracts are forwarded to Risk Management for our review and recommendation. Based on the information your office provided for the insurance waiver Mr. Tom Kardos approved for San Francisco International Airport Master Plan Program Contract 1010.CM, the insurance waiver was approved without the proper recommendation of our office or Airport's legal counsel.

Based on the City Risk Manager's report, the Budget Analyst recommends that all contract waivers or modifications regarding insurance or other risk management issues be submitted to the Risk Manager for review, prior to being implemented.

Conclusions

Contractors periodically submit invoices to the Airfield Development Bureau for payment of services provided and reimbursement of expenses incurred. The Project Manager assigned to monitor a particular contract reviews the invoice in detail and, if necessary, amends the amounts approved for payment because of disallowed items, mathematical errors, or for other reasons. A higher-level staff person also reviews the invoice and certifies that the invoice has been reviewed and is correct and that all of the required supporting documentation has been provided and that the terms of the contract have been met with regard to the invoice.

Our review of selected contract files revealed that in some instances payments were made for services that were not supported by a timesheet or similar documentation of work performed and consultant hours billed. Also, expense reimbursement claims were paid for items that because of their unusual nature or cost should have included receipts, documentation and an explanatory note in the invoice file, but did not. For example, invoices were approved that included unusually high costs for airfare, lodging, and meals, gifts for foreign dignitaries, and large office equipment expenditures.

The Airfield Development Bureau's Finance Manager informed the auditors that the Bureau does not have a written policy covering the approval of contractor expenses. However, the Airport does have a Travel and Training Guidelines manual for controlling employee travel and training costs. Included in the manual are restrictions on air travel, published maximum per diem rates for lodging, meals, and incidental expenses, and other provisions. The Airport should development a like manual for controlling contract expenses.

Based on the City Risk Manager's report, all contract waivers or modifications regarding insurance or other risk management issues be submitted to the Risk Manager for review, prior to being implemented.

The Airport can obtain its contractual services more economically by improving controls over consultant travel, training, and other expenses.

Recommendations

The Airport Director should:

3.1 Ensure that any proposed changes or waivers to the City's risk management policies are approved by the City's Risk Manager prior to implementing such changes or waivers.

3.2 Establish and implement policies for controlling the approval of contractor claims for travel, lodging, meals, and incidental expense reimbursement, and the documentation required for professional services payments.

The Director of Airport Development should:

3.3 Emphasize to the Runway Reconfiguration Program Contract Managers the importance of thorough invoice reviews and obtaining appropriate documentation.

3.4 Improve the controls over the quality of invoice reviews by instituting consistent secondary reviews by higher-level managers and occasional thorough secondary reviews by highly experienced contracting staff.

Costs and Benefits

There would be no new direct costs incurred by the Airfield Development Bureau in implementing these recommendations. The benefits would include establishing a consistent set of policies for controlling contractor costs and preventing potential abuse of contractor billing practices.