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National Research Council Canada

Audit of Construction Contracts
Internal Audit, NRC January 2009

Audit of Construction Contracts

TABLE OF CONTENTS

1.0 2.0

Executive Summary ..................................................................... 1 Introduction .................................................................................. 6
2.1 2.2 Background and context ....................................................................... 6 About the audit ..................................................................................... 9

3.0

Audit Findings ............................................................................ 12
3.1 Audit Objective One: to provide assurance that NRC complies with the Government of Canada and NRC construction contracting policies and directives ........................................................................ 12 Objective Two: To assess the degree to which the recommendations and management action plans identified in the 2002 Internal Audit report Audit of Construction Contracting have been implemented. .... 24

3.2

4.0

Conclusion .................................................................................. 26

Appendix A: Audit Criteria and Detailed Findings ............. 29 Appendix B: 2002 Audit Recommendations and 2008 Follow-up Audit Findings ................................... 33 Appendix C: Overall Potential Ratings ................................... 37 Appendix D: Management Action Plan................................... 38 Appendix E: Glossary .................................................................... 41

January 2009 Internal Audit, National Research Council of Canada

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contracts greater than $25. Evaluation and Risk Management Committee on June 27. due to their unique nature and relatively lower overall expenditures. Under the plan. This involved examining practices in seven of NRC’s 32 institutes. January 2009 Internal Audit. However.000 and contracts less than $25.0 Executive Summary Background This audit report presents the findings of the National Research Council (NRC) of Canada’s Audit of Construction Contracts which includes a follow-up to the recommendations and management action plans identified in the 2002 Internal Audit report Audit of Construction Contracting. The first objective was to provide assurance that NRC complies with Government of Canada and NRC construction contracting policies and directives. 2007.Audit of Construction Contracts 1.000 are audited in alternate years given that the procedures are substantially different for these two broad categories. The decision to conduct this audit was approved by the President following the recommendation of the Audit. detailed audit procedures were performed on construction contracts undertaken in 2006-07 and 2007-08 in order to make this determination. National Research Council of Canada 1 . scope and methodology There were two audit objectives. It was determined that a sample of 20 construction contracts for each fiscal year for a total of 40 contracts selected on the basis of risk would be sufficiently robust to determine whether there are any systemic issues with respect to construction contracting. as part of the NRC 2007-2008 to 2009-2010 Risk-Based Internal Audit Plan. Audit objective. An NRC-wide approach was used for sampling which allowed for an examination of construction contracts that are managed by NRC’s Administrative Services and Property Management (ASPM) Branch as well as by the Regional Material Management Offices (RMMOs). branches and programs (IBPs). construction contracts are excluded from the annual compliance work and continue to be audited over a fiveyear audit cycle. This audit objective also allowed us to make observations with respect to the extent to which NRC contracting directives and policies correspond to the Treasury Board requirements as well as the adequacy of the procurement management control framework established by NRC for construction contracts. Expenditures for construction contracts were $17. As such.8 million in 20062007 and $20.5 million in 2007-08. The second audit objective was to assess the degree to which the recommendations and management action plans identified in the 2002 Internal Audit report Audit of Construction Contracting have been implemented.

Within the limitations of the audit procedures performed. against which we drew our observations. These areas include centralizing procurement procedural guidance into a single source document and performing data analytics of contract patterns and trends as part of more rigorous monitoring activities. The recommendations and management action plans identified in the 2002 Internal Audit report Audit of Construction Contracting that we followed-up on their implementation can be found in Appendix B. Policy on Investment Planning and Policy on the Management of Projects as well as the Financial Administration Act (FAA). The recommendation pertaining to the expansion of verification of delegated authorities (FAA Section 33) is in progress and management reports it is on track to be fully operational by March 2009. and the procedures used to meet the professional standards of the Institute of Internal Auditors. we found that NRC management has fully implemented seven of the eight recommendations made in of the 2002 Internal Audit report Audit of Construction Contracting. are primarily derived from the Treasury Board Policy Contracting Policy. assessments and conclusions. timing of budget commitments and work commencement. January 2009 Internal Audit. Finally.Audit of Construction Contracts The audit was conducted using a series of detailed audit criterion that addressed the audit objectives. Policy on Delegation of Authorities. The evidence was gathered in accordance with the Treasury Board Policy. we conclude that overall the application of Government of Canada and NRC construction contracting policies and directives is adequate in that most areas of practice / process are in compliance for construction contracts but there are some opportunities for improvement. These audit criteria. These areas for improvement include: sufficient documentation supporting non-competitive contract awards. In my professional judgment as Chief Audit Executive. management of contract amendments and security screenings of contractors who have access to protected information and assets. The conclusions were based on a comparison of the situations as they existed at the time against the audit criteria. National Research Council of Canada 2 . sufficient and appropriate audit procedures have been conducted and evidence gathered to support the accuracy of the conclusions reached and contained in this report. presented in Appendix A. Audit opinion and statement of assurance Within the limitations of the samples and the audit procedures performed. directives and standards on Internal Audit. we found that the procurement management control framework for construction contracting is adequate but some areas could be strengthened.

Problems noted in last year’s audit of contracts less than $25. including procurement processes and policies to mitigate procurement risks and to help ensure compliance with Government directives and policies. there are specific directives and policies that are related only to construction. timing of budget commitments and work commencement. Within the limitations of the audit procedures performed. however. one instance where Treasury Board approval was not obtained for a contract with cumulative amendments above the required Treasury Board threshold. Clarification of the procurement process provided by Administrative Services and Property Management Branch is currently done 1 See Appendix C for the list of potential overall ratings. Some areas for improvements were observed. information and communication and on-going monitoring. risk assessment.000 regarding FAA Section 32 and 34 approvals in accordance with NRC Financial Signing Authorities and in the earlier 2002 Audit of Construction Contracting are being addressed.Audit of Construction Contracts Conclusions and recommendations Within the limitations of the samples and the audit procedures performed. Construction contracts are essentially subject to the same management control framework as non-construction contracts. NRC has established a procurement management control framework. we found that the procurement management control framework for construction contracts is adequate but some areas could be strengthened. control activities. January 2009 Internal Audit. several instances where distinct services were repeatedly amended to existing contracts rather than issuing new contracts. Some IBPs informed us that they were not aware of the existence of some manuals. There is no single repository of guidance that consolidates all of the procurement policies and procedures to assist management and Procurement Officers in contracting. a complete absence of security screenings for construction workers who would have had access to protected assets and information prior to NRC’s new security directive put in place January 24. While we observed full compliance in many important areas. 2008 and several instances thereafter. we found: several instances of construction work was performed prior to contract award. Five key components of the procurement management control framework that were examined included the control environment. These areas for improvement include: sufficient documentation supporting non-competitive contract awards. Various manuals on the procurement process are available either in hard or electronic formats. management of contract amendments and security screenings of contractors who have access to protected information and assets. we conclude that overall the application of Government of Canada and NRC construction contracting policies and directives is adequate in that most areas of practice / process for construction contracts are in compliance but there are some opportunities for improvement 1 . National Research Council of Canada 3 .

Administrative Services and Property Management Branch should consolidate all procurement policies and procedures into a single source document which would be available on its Material Management web-site. Procurement Officers should advertise proposed sole source contract awards greater than $25. we found that NRC management has fully implemented seven of the eight recommendations made in of the 2002 Internal Audit report Audit of Construction Contracting.000 through an Advanced Contract Award Notice (ACAN). Other than NRC Internal Audit compliance audits currently undertaken.Audit of Construction Contracts through emails and training. 4. Data analytics should include. Consideration should be given to enhancing the guide where non-compliance was found to be an issue. timing of contract commitments and commencement of contract work. Recommendations 1. Except where patent or copyright requirements or where technical compatibility issues can be clearly documented and there is no doubt there is only one supplier. Finally. National Research Council of Canada 4 . The recommendation pertaining to the expansion of verification of delegated authorities (FAA Section 33) is in progress and management reports it is on track to be fully operational by March 2009. In the interim. security requirements and contract amendments. contract January 2009 Internal Audit. reference manuals that are currently available only in hard copies should be made available electronically and posted on the ASPM Material Management web-site. specifically with respect to sufficient documentation supporting non-competitive contract awards. Administrative Services and Property Management Branch should seek clarification from Treasury Board regarding what approvals are required when the cumulative value of amendments exceed $200. 3.000 for construction contracts using electronic bidding that have an original value less than $2 million. Administrative Services and Property Management Branch should undertake more rigorous monitoring activities to include a comprehensive quality assurance review of individual construction procurement files on a sampling basis and adopt data analytics to monitor contracting patterns and trends that indicate procurement activities that may not be in accordance with the Government of Canada and NRC policies and directives. but not limited to. there is no formal Quality Assurance Program performed by an independent unit of contracting activities or data analytics to identify high risk contracts and / or improper construction contracting practices. 2.

The detailed management action plans that address these recommendations can be found in Appendix D. Audit Manager 2 The NRC audit team was supplemented by a team of experienced auditors that were contracted to conduct the audit work. CIA.Audit of Construction Contracts amendments. _________________________________________ Jayne Hinchliff-Milne. CA. Chief Audit Executive NRC Audit Team Members 2 : Jean Paradis. January 2009 Internal Audit. contract splitting and non-purchase order transactions as well as leasehold improvements. CMA. National Research Council of Canada 5 .

The Treasury Board Policy on Investment Planning and the Policy on the Management of Projects provide directives that impact the planning. the Financial Administration Act (FAA). the Agreement on Internal Trade (AIT) and the World Trade Organization – Agreement on Government Procurement (WTA). NRC’s Management Control Framework for Construction Contracts Being the leading resource for science and technology development and commercialization. including but not limited to the Treasury Board Contracting Policy. There are no special contracting provisions resulting from NRC’s status as a departmental corporation. the North American Free Trade Agreement (NAFTA). NRC has 188 buildings of which two-thirds were built more than 30 years ago. NRC’s Long term Capital Plan 2006-2007 to 2010-2011 includes a Recapitalization Program with planned expenditures for existing buildings to address building reinvestment requirements. It is within the authority of each department to establish its own policies and guidelines as long as they continue to comply with the government established policies and guidelines. Under the plan. construction contracts are excluded from the annual compliance work and continue to be audited over a five-year audit cycle. The Plan also includes capital initiatives such as additions January 2009 Internal Audit. Several Government of Canada regulations and policies govern how NRC must contract construction contracts. Like other government departments. capital projects play an important role in NRC’s strategic plan. NRC has in place construction procurement and contracting policies that NRC employees must follow. management and contracting of large construction projects.000 are audited in alternate years given that the procedures are substantially different for these two broad categories. contracts greater than $25.000 and contracts less than $25. departments can define policies that are more restrictive than government policies but not the reverse. Government procurement is highly regulated and is based on a strong policy framework. Evaluation and Risk Management Committee on June 27. NRC’s President approved this audit of Construction Contracts as part of the NRC 2007-2008 to 2009-2010 Risk-Based Internal Audit Plan.0 Introduction 2.Audit of Construction Contracts 2. However. 2007. In other words. due to their unique nature and relatively lower overall expenditures. National Research Council of Canada 6 .1 Background and context Following the recommendation of the Audit.

974 Total $38.239 Percentage ($) Number of Contracts Percentage (#) Average Value ($) $7.8 million in 2006-2007 and $20.883 8% 71 12% $41. contracting authority has been delegated to procurement staff in ASPM Branch and in the RMMOs within specific thresholds. Both ASPM and RMMO Procurement Officers can contract directly with some suppliers through call-ups against standing offers. Value and Number of Construction Contracts April 1.821.908 13% 62 10% $77.738.000 for construction contracts but they as well as ASPM have a requirement to issue a Public Bid Notice when it’s above $60. National Research Council of Canada 7 .837. Standing offers are 3 There were no major fluctuations or differences between the two fiscal years. January 2009 Internal Audit. repairs.342. Expenditures for construction contracts were $17. renovations and restorations for all of NRC.000. 2008 3 Categories of Construction Contracts Contract Value ($) $2. The RMMOs have contracting authority that is limited to $60.508 72% 96 16% $289.773 Over $100.Audit of Construction Contracts and alterations to existing buildings and facilities to address new program requirements and acquisitions and / or construction of new facilities to support NRC’s current or future research activities.302 Less than $25.000 $2. In accordance with government policy and directives. ASPM Branch is responsible to provide functional direction and guidance on contracting architectural and engineering services. 2006 to March 31.000 and $100. NRC has full contracting authority for construction projects up to $6 million. Exhibit 1 Categories.944.3 million for both years as shown below in Exhibit 1.000 $4.000 7% 375 62% Between $25. construction.481 As shown in Exhibit 2 below. IBPs that require these services must contact the Construction Contracting Office to discuss their requirements and best approach to take for achieving them.5 million in 2007-2008 totaling $38.538 100% 604 100% $63.000 $27.477 Between $60.000 and $60.

000 and $100. National Research Council of Canada 8 .000 or greater must use the Standard Federal Government Construction Contract template as per the Treasury Board Contracting Policy as well as electronic bidding for construction contracts as required by the Agreement on Internal Trade. The Treasury Board Contracting Policy threshold allows the competitive process to be set aside for estimated contracting expenditures under $25.Audit of Construction Contracts agreements that have been pre-negotiated by PWGSC or by NRC Procurement Services for specialized services.000 and $6 million (Requirement to use Standard Federal Government Construction Contract Template and Public Bid Notice) Construction Contracts greater than $6 million (Requirement to issue a Public Bid Notice) • (NCR) • • January 2009 Internal Audit.000 • (NCR) • • • Call-ups against NRC or PWGSC Standing Offers ($ limits vary by standing offer) • (NCR) Construction Contracts less than $60. Construction Contracts valued at $100. The call-up limit varies for each standing offers in accordance with their terms.000 • (NCR) Construction Contracts between $60.000 (Requirement to issue a Public Bid Notice) Construction Contracts between $100.000. Exhibit 2 NRC Construction Contracting Authorities ASPM RMMO PWGSC Construction Contracts Less than $25.

3) a contract for demolition. renovation or restoration of a work. Scope The scope of the first audit objective consisted of NRC construction transactions that were undertaken in fiscal years 2006-2007 and 2007-2008. The second audit objective was to assess the degree to which the recommendations and management action plans identified in the 2002 Internal Audit report Audit of Construction Contracting have been implemented. Construction contracts. National Research Council of Canada 9 . The first objective was to perform detailed audit procedures on construction contracts undertaken in 2006-07 and 2007-08 in order to conclude whether NRC construction contracts comply with Government of Canada and NRC contracting policies and directives. Key issues and risks relating to construction procurement were considered to prioritize specific audit activities and to focus on areas of greatest importance. as defined by the Treasury Board Contracting Policy are contracts entered into for the construction. or 4) a contract for the hire of equipment to be used in or incidentally to the execution of any contract referred to in this definition. they are service contracts which have an opportunity for audit as part of the annual compliance audits on contracts less than $25. preparation or supervision of the construction. A risk-based approach was used to determine the audit objectives as well as the audit criteria. renovation or restoration of any work except a vessel and includes: 1) a contract for the supply and creation of a prefabricated structure. repair. repair. design. An NRC-wide approach was used for sampling which allowed for an examination of construction contracts that are managed by NRC’s Administrative Services and Property Management (ASPM) Branch as well as by the Regional Material Management Offices (RMMOs). architectural and engineering service contracts which pertain to the provision of services in respect of the planning.Audit of Construction Contracts 2. 2) a contract for dredging. Rather.2 About the audit Objectives There were two audit objectives. are not considered construction contracts. Accordingly. It was determined that a sample of 20 construction contracts for each fiscal year for a total of 40 contracts selected on the basis of risk would be sufficiently robust to determine whether there are any systemic issues with January 2009 Internal Audit.000 and contracts greater than $25.000 which are audited in alternate years. This audit objective also allowed us to make observations with respect to the extent to which NRC contracting directives and policies correspond to the Treasury Board requirements as well as the adequacy of the procurement management control framework established by NRC for construction contracts.

000 and $100. branches and programs (IBPs). 2008. National Research Council of Canada 10 . 2008. This involved examining practices in seven of NRC’s 32 institutes.000 Over $100. The first stage covering the transactions for fiscal year 2006-2007 took place from February 25 to March 31. The scope of the second audit objective consisted of determining the current implementation status with respect to eight recommendations identified in the 2002 Internal Audit report Audit of Construction Contracting and related action plan proposed by management as presented in Appendix B.000 and $60. Exhibit 3 2006-07 and 2007-08 Transactions Sampled by Category of Construction Contract and Region Categories of Construction Contracts Number of Contracts Reviewed NCR Outside NCR Less than $25. Those contracts selected for audit are shown below in Exhibit 3 by category of construction contract and region.000 Over $6 million Total 0 0 6 17 0 23 7 4 2 4 0 17 Approach and Methodology With respect to confirming construction contracts comply with Government of Canada and NRC policies and directives.Audit of Construction Contracts respect to construction contracting.000 Between $25.000 Between $60. The audit field work was conducted in two stages. The second phase covering fiscal year 2007-2008 took place from June 2 to July 31. a risk-based approach was used whereby 75 percent of the contracts selected were higher dollar value contracts valued over $60.000 and 25 percent from construction contracts administered by the regional IBPs January 2009 Internal Audit.

These audit criteria. Prior to finalizing the audit criteria. higher dollar value. These included managers and staff in Administrative Services and Property Management Branch. Data mining techniques were also employed to detect.000. among other things. and on-going monitoring. Information used to assess the adequacy of the procurement management control framework was obtained from. Policy on Delegation of Authorities. In order to determine the adequacy of the procurement management control framework. presented in Appendix A. procedures and practices. we compared NRC’s framework against defined criteria for five key components that can be found in the control models developed by the Canadian Institute of Chartered Accountants (CoCo – Criteria of Control) and by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) (Internal Control – Integrated Framework.Audit of Construction Contracts valued at less than $60.g. Within each category (over and below $60. Enterprise Risk Management – Integrated Framework). We reviewed relevant program documentation which included. The audit was conducted using a series of detailed audit criteria that addressed the audit objective. National Research Council of Canada 11 . information and communication. Interviews were conducted with key personnel in order to examine program processes. risk assessment. Treasury Board and NRC policies and guidelines visà-vis the detailed transactions recorded in the paper files and electronically in SIGMA–NRC’s integrated management information system (based on SAP) that is used to collect financial. These components included the control environment. RMMO Procurement Officers and IBP Budget Managers as well a review of available relevant documents. human resources.000). asset and real property information. are primarily derived from the Treasury Board Contracting Policy. January 2009 Internal Audit. risks for NRC as a whole as well as evidence of potential contract splitting. the individual contracts selected for audit were identified using a risk-based approach whereby 60 percent of the sample was selected from construction contracts with a higher probability of risk (e. survey questionnaires completed by ASPM Branch representatives. process control flowcharts were prepared and walkthroughs of several transactions for construction contracts were conducted to assess the areas of greatest risk. but was not limited to. payroll. among other things. Finance Branch and the five IBPs selected for audit. against which we drew our observations. assessments and conclusions.. Policy on Investment Planning and Policy on the Management of Projects as well as the Financial Administration Act (FAA). This resulted in seven IBPs being selected for audit ranging from 24 contracts administered by Administrative Services and Property Management Branch and 26 contracts from six IBPs ranging from two to four contracts each. control activities. more frequent amendments and / or non competitively awarded) and 40 percent of the sample was selected from contracts that were considered to have a lower probability of risk.

3. These areas include centralizing procurement procedural guidance into a single source document and 4 See Appendix C for the list of potential overall ratings. These areas for improvement include: • • • • • Sufficient documentation supporting non-competitive contract awards. January 2009 Internal Audit.1 Audit Objective One: to provide assurance that NRC complies with the Government of Canada and NRC construction contracting policies and directives Overall Conclusion Within the limitations of the samples and the audit procedures performed. We also found that the procurement management control framework for construction contracting is adequate but some areas could be strengthened. and Centralized procurement guidelines and monitoring. Management of contract amendments. we conclude that overall the application of the Government of Canada and NRC construction contracting policies and directives is adequate in that most areas of practice / process for construction contracts are in compliance but there are some opportunities for improvement 4 . Security screenings of contractors. National Research Council of Canada 12 . The recommendations made in the earlier audit are detailed in Appendix B.Audit of Construction Contracts With respect to the follow-up to the 2002 audit recommendations.0 Audit Findings 3. Timing of budget commitments and work commencement. Documents were examined in support of the implementation of the recommendations and interviews were conducted with managers as needed. a questionnaire was sent to ASPM and the Finance Branch to obtain their comments on the status of the action plans in respect to the recommendations noted in the 2002 Internal Audit report Audit of Construction Contracting.

requirements were defined prior to the bidding process and sufficient documentation on the competitive process was present (26 of 26 competitive contracts. The Standard Federal Government Construction Contract template was used for construction contracts greater than $100. • • • • • • 5 At the time of the audit. hence a completion certificate would not have been applicable. Findings The audit team noted a number of significant strengths with respect to compliance with government and NRC policies and directives for construction contracts. and 38 of 40 contracts (95 percent) for FAA 34).000 (24 of 24 contracts. These included very high compliance rates for the following: • Financial Administration Act Section 32 and 34 approvals were correctly obtained (39 of 40 contracts (98 percent ) for FAA 32. 100 percent). National Research Council of Canada 13 . There is evidence contracts received appropriate monitoring and evaluation of performance (39 of 39 5 contracts. For competitive contracts. 98 percent). 100 percent). January 2009 Internal Audit. one construction contract had not yet been completed.Audit of Construction Contracts performing data analytics of contract patterns and trends as part of more rigorous monitoring activities. 100 percent) contract amendments and 1 potential case found through data mining of all transactions for the seven IBPs examined). Project Completion Certificates and Contract Payment Certificates were completed prior to releasing holdbacks (16 of 16 contracts. and There is evidence construction services were provided in accordance with the contract (39 of 40 contracts. Detailed findings for the entire sample of transactions by audit criterion can be found in Appendix A. 100 percent).000 (14 of 14 contracts. 100 percent). There was no evidence of contract splitting (24 of 24. 100 percent) and public bid notices were issued for construction contracts over $60.

However. Last year’s Internal Audit report Limited Annual Assurance Compliance Audit Contracts under $25. Internal memos have been provided to personnel by ASPM Branch and Finance Branch stating the importance of FAA controls and detailing specific procedures. we found evidence that these issues are being addressed. makes use of these provisions by delegating this authority. and 33 approvals.Audit of Construction Contracts Appropriate FAA Section 32 and 34 approvals Key government controls for procuring. NRC’s delegation document. as well. • In accordance with the Treasury Board Policy on Delegation of Authorities. We also observed that responsibility centre managers as of June 2008 are required to provide their approval electronically for FAA Section 34 certifications that goods or services have been received and that January 2009 Internal Audit. among others. verifying and paying for purchases rest with FAA Section 32. and the price was as stated in the contract and that the person with delegated financial authority certifies (via signature) that the verification has been completed (Section 34). or rendered. We limited our expectations to verifying that in the absence of responsibility centre managers exercising their authority electronically in Sigma to some form of written communications from them such as an email or a signed purchase requisition or invoice. we expected to find that NRC has delegated spending authority to responsibility centre managers in relation to their budgetary responsibilities in order to ensure they have adequate authority and full responsibility for their decisions. The policy also makes provisions for the use of central staff to record commitments and confirm price and performance in conformance with Sections 32 and 34 of the FAA when this is more effective and economical or in support of the manager who has budgetary responsibility. supplied. At the time of the current audit. “Financial Signing Authorities”. and That no payment for a purchase be made unless it has been properly requisitioned and certified (Section 33). These three sections require the following: • • That funds be available and committed for the purchase (Section 32).000 and Acquisition Card Purchases for 2006-2007 transactions provided recommendations in regards to FAA Sections 32 and 34 certifications indicating that there needs to be a verifiable link to the actual “Budget Holder” with budgetary responsibilities. to Invoice Clerks. financial delegation training was provided to all staff who have budget responsibilities. National Research Council of Canada 14 . That verification of the purchase of goods or services had been performed. in our opinion this does not negate the necessity to have an adequate audit trail that can be traced back to the responsibility centre manager with budgetary responsibilities for these expenditures. 34.

000. Invoices greater than $25.. January 2009 Internal Audit. second paragraph normally identifies this as $100. engineering and other services required in respect of the planning. 7 The Treasury Board Contracting Policy Section 10.e. 6 The Treasury Board Contracting Policy allows for four exceptions to set aside the competitive process. 40 construction contracts were reviewed of which 33 were competitively awarded either through the MERX electronic bidding system or a limited tendering process (26).Audit of Construction Contracts invoices can be approved for payment.1. The actual distribution of sole sourced construction contracts for NRC in 2006-2007 and 2007-2008 was only eight percent. $40. 2. 6 In order to address areas of greatest risk. however. the estimated expenditure does not exceed $25. i. The remaining 7 contracts were sole sourced. we observed that only two of 40 invoices (5 percent) in two of seven IBPs examined were not certified by the delegated responsibility centre managers – both of which were approved solely by centralized invoice clerks in accordance with NRC directives. not subjected to a competitive process.b. Finance Branch in consultation with ASPM and Treasury Board will continue its ongoing review of processes for verifying internal practices pertaining to FAA Section 32 and 34 with due regard for associated risks. National Research Council of Canada 15 .000. the sample selected was deliberately skewed to ensure a higher representation of sole sourced construction contracts than normally incurred. They are: 1. for NRC this amount is $40. Only one purchase requisition was not verified by the delegated responsibility centre manager.000. Sufficient Documentation Supporting Non-Competitive Contract Awards During the course of the audit.2. where the contract is for the acquisition of architectural.000 7 . With respect to FAA Section 34. we observed that purchase requisitions were approved by delegated responsibility centre managers in accordance with NRC directives. The need is one of pressing emergency in which delay would be injurious to the public interest. by advertising the proposed award through Advance Contract Award Notices (2) or by using existing PWGSC or NRC Standing Offer Arrangements (5).000 have always required that responsibility centre managers certify FAA Section 34 by their signature. With respect to FAA Section 32.

or $100.Audit of Construction Contracts design. Of the seven contracts sampled that did not use a competitive process. Treasury Board approval (one) or had technology compatibility issues that were only available at the contracted firm (one). 3. however. there was no documentation on file to support that assumption. In these instances. repair. This exception is quite definitive and should only be used where patent or copyright requirements or technical compatibility factors and technological expertise suggest only one contractor exists. renovation or restoration of a work. the proposed contract is deemed to be competitive and may be awarded. engineering or other services required in respect of the planning. the contract authority is “encouraged whenever possible” to advertise the proposed award through an Advance Contract Award Notification (ACAN). the documentation on file sited that only one person was capable of performing the contract. the nature of the work is such that it would not be in the public interest to solicit bids. preparation or supervision of the construction. These sole sourced contracts had original values that were under $25. Justification for any use of the four exceptions to the bidding requirement must be fully documented. design. January 2009 Internal Audit. The policy and guidelines are clear that setting aside the competitive bidding process for this reason should not be used because a proposed contractor is the only one known to management. or 4. we found that one of seven (14 percent) contracts in one IBP provided a justification on file that was not supported by sufficient documentation that “only one person is capable of performing the contract. National Research Council of Canada 16 . preparation or supervision of an international development assistance program or project.000 (five).” It was approved by Treasury Board and therefore one can make a logical conclusion that appropriate justification was provided. Of those construction contracts that were sole sourced.000 where the contract is to be entered into by the member of the Queen’s Privy Council of Canada responsible for the Canadian International Development Agency and is for the acquisition of architectural. If no statement of capabilities meeting the requirements set out in the ACAN are received within 15 calendar days. only one person is capable of performing the contract.

records of commitments should be maintained. management will not have complete information to be able to confirm funds will be available when invoices for payment are received and that NRC will be legally obligated to pay. therefore. Procurement Officers should advertise proposed sole source contract awards greater than $25. that only one supplier exists.Audit of Construction Contracts Recommendation 1: Except where patent or copyright requirements or where technical compatibility issues can be clearly documented and there is no doubt there is only one supplier. Regardless. the rationale will be fully documented and include supporting documentation. an ACAN will be posted. Recommendations are made later in this report that pertain to both. National Research Council of Canada 17 . Problems with respect to the timing of budget commitments and work commencing before contracts are signed can be addressed by more comprehensive communications of guidelines as well as more rigorous monitoring regime with investigative capacity. resulted in the cancellation of a requirement due to insufficient funds. we did not find any instances where this occurred. If it cannot be fully documented. if a sole source cannot be clearly documented or where there is doubt that there is only one supplier. While we were not able to confirm this assertion. Management informed us this practice has rarely. Section 32 of the Financial Administration Act indicates that no contract should be entered into unless there is a sufficient unencumbered balance available. We were informed by ASPM Branch and observed that certain purchase requisitions for construction contracts were created at the time or a few days prior to the contract being issued. a Procurement Officer will post an ACAN. Furthermore. contracting activities took place prior to the commitments being recorded. Where there is no doubt. If several commitments are unrecorded.000 through an Advanced Contract Award Notice (ACAN). Timing of Budget Commitments and Contract Commencement We observed in three regional of seven IBPs examined where work for three of 40 contracts (seven percent) was performed prior to the contract being signed. if ever. NRC Management Response: Agreed. January 2009 Internal Audit. Construction contracts are rarely sole source as a result of patent or copyright requirements.

for the whole of NRC for both 2006-2007 and 2007-2008. 2006 with an initial value of $38. Most were increased significantly more than a 100 percent of their original value. renovation and minor construction work performed in the National Capital Region up to a value of $5. Eight contracts were January 2009 Internal Audit. Each was awarded using a standing offer arrangement that was awarded by NRC to a single company using a competitive process that was approved by Treasury Board for the maintenance. In addition to the 40 contracts examined in the seven IBPs. when the other deliverables are distinct from the first one. For construction contracts only. the compliance rates with Treasury Board and NRC policies and directives for amendments are high (ranging between 90 and 100 percent). The second contract. a new contract should be considered and its justification carefully documented. A good rule of thumb is that when amendments are above 50 percent of the original contract value. low-value payment process. then a new contract should be issued rather than an amendment. we employed data mining techniques used to examine amendments. While overall. National Research Council of Canada 18 . 2008. in our opinion. While this was done to streamline and reduce the costs of a high-volume. The other six IBPs included in our sample used amendments appropriately for the remaining 22 construction contract amendments selected for detailed examination.0 million annually. 2008 with an initial value of $5. Every effort should be made to avoid inadequate initial funding and that pre-planning and work definitions should be carefully developed. there are two exceptions – 2 of 24 amended contracts (eight percent) that were administered by ASPM. this process gives the appearance of contract amendments that are not consistent with the Treasury Board Contracting Policy that indicates that contracts should be properly administered to avoid unanticipated amendments.748 as of April 8. The standing offer agreement itself was treated as a contract which is contrary to PWGSC guidelines which state a “separate contract is formed each time a call up for the provision of goods and services is made against a Standing Offer.076. we found a total of 11 contracts in 2 of NRC’s 32 IBPs that had an original value less than $25. this does not mean that no contract may be amended above 50 percent of its original value if there is a good reason. was amended four times on the same day for a final value of $151. issued on March 31. was modified nine times over 8 days for a final value of $977.Audit of Construction Contracts Management of Contract Amendments The Treasury Board Contracting Policy indicates contracts should be properly administered to avoid unanticipated amendments except to change the scope of the initial work. Amending a contract for unforeseen circumstances or an amendment that is very small relative to the original work are acceptable reasons.201. However. contracts for distinct services were established. on a limited basis.” At the time the purchase orders had been put in place for each. One contract.000 which were amended on the same day or within 378 days. issued on August 18.628.

The Treasury Board Policy on Proactive Disclosure on Contracts Over $10. four of these were amended either the same day or the next day. the policy only required contracts with an initial value of $10. In accordance with Appendix C of the Treasury Board Contracting Policy. However.000 for contracts that are less than $2 million.000. This would have required 3 of 11 construction contracts (27 percent) to have received Treasury Board’s approval prior to making the amendments that cumulated over $200. Seven of the 11 construction contracts that were amended had an original value less than $10. Our analysis as noted above shows that amendments can within a very short timeframe increase over $10.000 may also have adverse reputational risks for NRC as it may give the appearance that IBPs are using amendments to avoid disclosing contracts. “NRC may enter into a competitive construction contract awarded through the electronic bidding process if the amount does not exceed $6. the disclosure of all contracts including amendments above $10.Audit of Construction Contracts amended in less than 35 days of the original contract. Finally we have concerns for public reporting requirements of contracts greater than $10. Revisions to the Treasury Board Policy are imminent which require as of September 1. it’s recognized that the Treasury Board Contracting Policy is not entirely clear in this matter.000 or more to be reported and not those amended above that amount. January 2009 Internal Audit.000.000 under the Treasury Board Policy on Proactive Disclosure on Contracts over $10. National Research Council of Canada 19 . we found that only one of these contracts has not been competitively awarded.000 is a recent government measure to ensure greater transparency of government contracts – an area of public controversy from time to time in regard to the manner in which they are awarded among other things.000.000 but they have not been publicly reported.654 to $977. The risk occurs that these contracts may appear to be deliberately under valued in order to circumvent the $25.000 in total. Many departments have therefore interpreted this as meaning that Treasury Board approval should be requested when the cumulative value of amendments exceed $200. Other concerns pertain to the authority NRC has to amend contracts that exceed $200.000 competitive threshold for competitive bidding.747. However. 2008.” Construction contracts less than $2 million must follow Schedule I of Appendix C of the policy which requires Treasury Board approval for amendments exceeding $200.000 with final values ranging from $38. At the time of the audit.000 and amend such contracts that are over $2. The non-disclosure of non-competitive contractual arrangements which accumulate significantly above $10.000. however.000 by up to 10 percent of the contract award.000.000. Schedule 1 of Appendix C of the policy does not provide contract value or amendment limits for construction contracts using electronic bidding.

As well. 2008. On January 24.Audit of Construction Contracts Recommendation 2: Administrative Services and Property Management Branch should seek clarification from Treasury Board regarding what approvals are required when the cumulative value of amendments exceed $200. the purchase requisition form was modified to include a security block which must be completed and signed in all instances as evidence that the security requirements have been explicitly considered. security screenings were considered necessary where construction workers would information and assets. Where a security requirement is identified. We will obtain clarification from the Treasury Board Secretariat by January 2009. a memorandum was sent to all NRC Directors General and IBP Finance Branch Officers providing guidance in regard to security requirements to those responsible for requisitioning contracts. NRC Management Response: Agreed. we noted that 4 of the 33 purchase requisitions requiring security screenings were dated after January 24. Specific instructions were provided to ensure that security requirements are addressed and risk mitigation procedures are established. Once the contract is awarded.000 for construction contracts using electronic bidding that have an original value less than $2 million. Despite the fact that construction work January 2009 Internal Audit. Ensuring Security Requirements Are Met The Treasury Board Contracting Policy requires that the provisions of the Government’s Security Policy be applied to procurement contracts which require individuals undergo personnel screening processes if their duties or tasks necessitate access to classified or protected information and assets. Project Authorities and Procurement Officers. National Research Council of Canada 20 . 2008. Procurement Officers are required to include the appropriate security clauses in bid solicitation and contract documentation. an SRCL with the names of the individuals are forwarded to the Security Office for security screening. However. All contracts that contain a security provision must be reviewed by the Procurement Officer and the Security Office. None of the 31 contracts (0 percent) reviewed in which security screenings of contractors should have been undertaken met these requirements. the Security Requirement Check List (SRCL) must be completed and sent with the purchase requisition to the Contracting Authority. For the purposes of this audit.

Clarification provided by ASPM Branch on the procurement process is currently done through emails and training. these included sufficient documentation supporting non-competitive contract awards.Audit of Construction Contracts for these four contracts took place inside NRC premises that have protected information and assets. (2) Procurement Reporting-User Guide for Data Entry.g. the security requirements were not completed in accordance with the new guidelines. Our survey questionnaire and interviews indicated that some RMNOs and managers are not aware of the existence of some manuals which could help to explain non-compliance. The Need for Centralized Procurement Guidelines and Monitoring We found certain directives in the Guide to NRC Procurement Process Guide that were not applied in a consistent manner.000 but later amended significantly with a day or two well above $10. Additional information is available in four other manuals: (1) Financial Management Manual. and security documentation) and on the ASPM Material Management web-site (e. centralized procedures document for the procurement process. templates.000 and other contract amendment irregularities. Assignment of contracting responsibility and procedural guidelines for contracting are detailed in the procurement guide which is available in electronic form on the ASPM Branch Material Management web-site.. Additional procurement information is also available to Procurement Officers on NRC’s common drive (e. There is no single. Electronic copies of the first two manuals are available although some sections of the Financial Management Manual are still in progress. timing of contract commitments and commencement of contract work. January 2009 Internal Audit. (3) Public Tenders Procedures. security requirements not applied. This document provides a procurement process map and includes information on the procurement process. roles and responsibilities from the creation of a purchase requisition to the payment of invoices. contracting limits. security requirements). information on contracting. and (4) Invited Tenders Procedures. Recommendations are made later in this report that pertain to both. National Research Council of Canada 21 . Problems with respect to security screenings can be addressed by more comprehensive communications of guidelines as well as a more rigorous monitoring regime with investigative capacity.g.. employeremployee relationships. checklists. contracts with initial values less than $10. The other two manuals are available in hard copy format only. As noted earlier in this report.000 that were not reported under Treasury Board Policy on Proactive Disclosure on Contracts Over $10.

such as the quarterly Contract Disclosure Reports. meetings and memos are used to communicate findings to Procurement Officers. NRC Management Response: Agreed. These techniques can be used to detect irregularities. security requirements and contract amendments. among others. January 2009 Internal Audit. Our interviews and survey questionnaires indicate that ASMP Branch officials monitor and review contracting activities and processes. Consistent with generally accepted management control frameworks that reflect best practices. reference manuals that are currently available only in hard copies should be made available electronically and posted on the ASPM Material Management web-site. In order to implement these recommendations. specifically with respect to sufficient documentation supporting non-competitive contract awards. Coordinate and respond to all audit enquiries and reports. and the Annual Procurement Activity Report. and Coordinate all Material Management reporting. consult NRC Legal Services as required and review the report of contracts over $10. Our Material Management Policy Manual currently exists in hard copy. identification of non-purchase order contracts and potentially inappropriate contract amendments. not in electronic format.000 to ensure appropriate disclosure.Audit of Construction Contracts Recommendation 3: Administrative Services and Property Management Branch should consolidate all procurement policies and procedures into a single source document which would be available on its Material Management web-site. Consideration should be given to enhancing the guide where non-compliance was found to be an issue. we will assign resources as required in order to: • • • • • • Prepare policy documents. with respect to contract splitting. we expected to see quality assurance review activities of individual construction contract files as well as data analytics techniques being employed to monitor NRC’s overall compliance with Government of Canada and NRC contracting policies and directives. Our Material Management documentation needs to be updated and maintained in a central repository. Update the Material Management Policy Manual. timing of contract commitments and commencement of contract work. Implement a quality assurance process. Monitor contracting activities. In the interim. National Research Council of Canada 22 . Briefing notes.

000 for which the competitive process was set aside. Discrepancies are followed up by Accounts Payable clerk with ASPM and IBPs as required.Audit of Construction Contracts We also confirmed that Finance Branch uses a risk-based approach in its review of invoices sent by ASPM Branch Invoice Clerks as part of the payment process. the general ledger codes are reviewed for reasonableness and FAA Section 34 approvals including signatures are verified. Other than compliance audits currently undertaken by NRC Internal Audit. Despite these strengths. Finance Branch began planning the implementation of a Monitoring Unit that once fully operational will increase its regular sampling of expenditures. they have not be disclosed under the Treasury Board Policy on Proactive Disclosure on Contracts Over $10. there is no formal.000 in 2006-07 and 2007-08. ASPM Branch Monitoring Division work is limited at this time to ensuring sole source justifications are on file for contracts greater than $25. Features are integrated into Sigma to identify high-risk transactions including sensitive accounts and high-dollar payments which are automatically blocked for further prescribed review procedures before being released for payment.000. We found that despite NRC directives that all contracts must be initiated with a purchase order. Recommendation 4: Administrative Services and Property Management Branch should undertake more rigorous monitoring activities to include a comprehensive quality assurance review of individual construction procurement files on a sampling basis and adopt data analytics to monitor contracting patterns and trends that indicate procurement activities that January 2009 Internal Audit. contract award and construction commencement dates and amendments. National Research Council of Canada 23 . For all transactions. inappropriate amendments or other irregularities. we noted two areas where on-going monitoring could be strengthened. independent quality assurance program of contracting activities or data analytics to identify high risk contracts and / or improper construction contracting practices. For example. during the course of our review. Our findings reveal that monitoring activities should be extended to include more rigorous verification of sole source awards. we noted that a significant number of leasehold improvements were being undertaken that did not have the benefit of ASPM Branch’s input or controls . In 2007-2008. Also of use would be to undertake data analytics for monitoring contract patterns and trends to aid in identifying high risk contracts and / or improper contracting practices such as potential contract splitting.two leases valued at $968. Due to the fact they did not use purchase order requisitions as required by NRC directives. security screening requirements. we undertook audit data mining techniques of non-purchase order transactions to identify potential construction contracts.

and Coordinate all Material Management reporting. such as the quarterly Contract Disclosure Reports. 3. Update the Material Management Policy Manual. the remaining recommendation is in the process of being implemented.2 Objective Two: To assess the degree to which the recommendations and management action plans identified in the 2002 Internal Audit report Audit of Construction Contracting have been implemented. Prepare policy documents. Findings In 2002 an audit was undertaken to examine selected financial and managerial elements of construction contracts undertaken between 1999 and 2001. We will respond to these recommendations with an appropriate level of monitoring based on a determination of the best approach. The audit January 2009 Internal Audit. contract amendments. NRC Management Response: Agreed. Data analytics should include. Monitor contracting activities. Coordinate and respond to all audit enquiries and reports. The objective is to download the following activities to facilitate the implementation of audit recommendations: • • • • • • • Determine the approach needed. and with consideration to the risk and available resources. Overall Conclusion We found that of the eight recommendations made in the 2002 Internal Audit report Audit of Construction Contracting. contract splitting and non-purchase order transactions as well as leasehold improvements. and the Annual Procurement Activity Report.Audit of Construction Contracts may not be in accordance with the Government of Canada and NRC policies and directives. Implement a quality assurance process. seven recommendations have been fully addressed. National Research Council of Canada 24 . but not limited to.

Audit of Construction Contracts included the examination of 32 construction contracts over $5.000 to determine the extent to which NRC construction projects complied with government contracting policies and key requirements. had to be relied upon to confirm implementation.5. • The audit’s recommendation that Finance Branch document its interpretation of FAA Section 34 responsibilities [recommendation 2. Based on our discussions with management and examination of supporting documents.17].8] and ASPM Branch and Finance Branch requirements assessments [recommendation 2.8]. we expected to find that all eight recommendations would have been implemented.4.2.7] was addressed in 2007 and the first half of 2008.3. the audit observed that construction contracting processes at NRC were well managed.9 and 2. NRC seek confirmation from the Treasury Board Secretariat where Finance Branch’s interpretation of FAA Section 34 requirements differs from accepted federal government practices in order to ensure its interpretation complies with government policy and requirements [recommendation 2.10]. Overall. Further details of actions and measures undertaken are presented in Appendix B.3]. we noted that recommendations pertaining to the five recommendations listed below were immediately addressed and implemented in 2003: • • • • Exceeded Treasury Board contract authorities [recommendations 2. Due to the amount of time that has passed. management assertion in part.2. Given the amount of time that has elapsed since the last audit 8 .5. Account verification procedures and controls [recommendation 2. National Research Council of Canada 25 . 8 January 2009 Internal Audit. With regard to the recommendation that Finance Branch expand its verification procedures performed under its delegated payment authority (FAA Section 33) such as to provide greater assurance of the effectiveness of Section 34 account verification Beginning with the NRC 2006-07 to 2008-09 Risk-Based Internal Audit Plan. However eight recommendations were noted including those to strengthen financial management controls. Problems regarding internal delegated authorities and amendments including their ratification [recommendation 2. controlled and documented.6. NRC has made a commitment to follow-up formally on all audit reports approximately two years following their completion depending upon the level of risk presented.

National Research Council of Canada 26 . Within the limitations of the audit procedures performed.0 Conclusion Within the limitations of the samples and the audit procedures performed. much effort has been undertaken recently to install a Monitoring Unit within the Branch. however. 2008 and several instances thereafter. Construction contracts are essentially subject to the same management control framework as non-construction contracts. These areas for improvement include: sufficient documentation supporting non-competitive contract awards.000 regarding FAA Section 32 and 34 approvals in accordance with NRC Financial Signing Authorities and in the earlier 2002 Audit of Construction Contracting are being addressed. a complete absence of security screenings for construction workers who would have had access to protected assets and information prior to NRC’s new security directive put in place January 24. January 2009 Internal Audit. we found: several instances of construction work was performed prior to contract award. While we observed full compliance in many important areas. Once the unit is fully staffed and operational (expected by March 2009).4.18].Audit of Construction Contracts controls and procedures [recommendation 2. management of contract amendments and security screenings of contractors who have access to protected information and assets. there are specific 9 See Appendix C for the list of potential overall ratings. current sampling procedures vis-à-vis associated risks will be revisited. we conclude that overall the application of Government of Canada and NRC construction contracting policies and directives is adequate in that most areas of the practices / processes in relation to construction contracting are in compliance but there are some opportunities for improvement 9 . NRC has established a procurement management control framework. Problems noted in last year’s audit of contracts less than $25. we found that the procurement management control framework for construction contracts is adequate but some areas could be strengthened. several instances where distinct services were repeatedly amended to existing contracts rather than issuing new contracts. including procurement processes and policies to mitigate procurement risks and to help ensure compliance with Government directives and policies. one instance where Treasury Board approval was not obtained for a contract with cumulative amendments above the required Treasury Board threshold. timing of budget commitments and work commencement. 4.

Except where patent or copyright requirements or where technical compatibility issues can be clearly documented and there is no doubt there is only one supplier. risk assessment. Recommendations 1. 3. Procurement Officers should advertise proposed sole source contract awards greater than $25. 2. Clarification of the procurement process provided by Administrative Services and Property Management Branch is currently done through emails and training. we found that NRC management has fully implemented seven of the eight recommendations made in of the 2002 Audit of Construction Contracting. specifically with respect to sufficient documentation supporting non-competitive contract awards. there is no formal Quality Assurance Program performed by an independent unit of contracting activities or data analytics to identify high risk contracts and / or improper construction contracting practices. Consideration should be given to enhancing the guide where non-compliance was found to be an issue. National Research Council of Canada 27 .000 through an Advanced Contract Award Notice (ACAN). The recommendation pertaining to the expansion of verification of delegated authorities (FAA Section 33) is in progress and management reports it is on track to be fully operational by March 2009. Other than NRC Internal Audit compliance audits currently undertaken. In the interim. Various manuals on the procurement process are available either in hard or electronic formats. reference manuals that are currently available only in hard copies should be made available electronically and posted on the ASPM Material Management web-site.Audit of Construction Contracts directives and policies that are related only to construction. Five key components of the procurement management control framework that were examined included the control environment. information and communication and on-going monitoring.000 for construction contracts using electronic bidding that have an original value less than $2 million. timing of contract commitments and January 2009 Internal Audit. There is no single repository of guidance that consolidates all of the procurement policies and procedures to assist management and Procurement Officers in contracting. Administrative Services and Property Management Branch should seek clarification from Treasury Board regarding what approvals are required when the cumulative value of amendments exceed $200. Administrative Services and Property Management Branch should consolidate all procurement policies and procedures into a single source document which would be available on its Material Management web-site. Finally. control activities. Some IBPs informed us that they were not aware of the existence of some manuals. Some areas for improvements were observed.

4. but not limited to. contract splitting and non-purchase order transactions as well as leasehold improvements. National Research Council of Canada 28 . contract amendments. January 2009 Internal Audit.Audit of Construction Contracts commencement of contract work. security requirements and contract amendments. The detailed management action plans that address these recommendations can be found in Appendix D. Administrative Services and Property Management Branch should undertake more rigorous monitoring activities to include a comprehensive quality assurance review of individual construction procurement files on a sampling basis and adopt data analytics to monitor contracting patterns and trends that indicate procurement activities that may not be in accordance with the Government of Canada and NRC policies and directives. Data analytics should include.

Audit of Construction Contracts Appendix A: Audit Criteria and Detailed Findings No. 100% (14/14) During the course of the audit 40 construction contracts were reviewed of which: 26 were awarded following the MERX electronic bidding system or a limited tendering process. and includes an estimate of the cost of the proposed contract (if possible). 2. 100% (26/26) 1 86% (6/7) 1. 100% (5/5) 5. five were awarded using existing NRC or PWGSC Standing Offer Arrangements. National Research Council of Canada 1 29 . 100% (2/2) 4. provides the reason the contract should be issued. two were awarded following an Advanced Contract Award Notification (ACAN) by NRC. Standard Federal Government Construction Contracts are used for all construction contracts greater than $100. identifies the proposed contractor. Call-ups against standing offers are within specified limits. 3.000. The ACAN defines the requirements or expected results of the contract. and seven were sole sourced. Justifications of non competitive contract awards are appropriately documented and substantiated. Audit Criterion Findings /Compliance Rate Audit Objective 1: To provide assurance that NRC complies with the Government of Canada and NRC construction contracting policies and directives. January 2009 Internal Audit. Requirements are defined prior to the bidding process on the MERX electronic bidding system or a limited tendering process.

000 or AIT. National Research Council of Canada 30 . 98% (39/40) January 2009 Internal Audit. i. There is no evidence of contract splitting. 100% (40/40) 10. 8.000.Audit of Construction Contracts No. 100% (24/24) 100% (24/24) Data mining Techniques revealed 1 potential case of contract splitting in the 7 IBPs examined.. The contract is signed in accordance with NRC Financial Signing Authorities for Contracting. NAFTA and WTA thresholds. Audit Criterion Findings /Compliance Rate 6. Construction work commences only after the contract or the purchase order has been signed. 0% (0/31) 9. 7. Public bid notices were issued for construction contracts bids over $60. contracts are awarded under the thresholds with amendments to increase the contracts over $25. FAA Section 32 certification is made by the responsibility centre manager with budget responsibilities.e. 93% (37/40) 11. Documented evidence is on file that NRC Security verified the security clearance of contractor(s).

100% (24/24) 15. Amendments are justified and in the best interest of the government and are for an actual change in the scope of work. January 2009 Internal Audit. no invoices had yet been received for one contract. 92% (22/24) 14. 3 2 At the time of the audit. Contract amendments are within the levels identified in Appendix C of the Treasury Board Contracting Policy. Audit Criterion Findings /Compliance Rate 12.g. 98% (39/40) Only 20 contracts of 24 required rectification by the contractor because amendments to standing offer call-ups do not require that contractors provide their signature. FAA Section 32 certification in accordance with NRC’s Financial Signing Authorities for Expenditure Initiation at the time of the audit. The contract amendment is ratified by the contractor. 100% (40/40) 13. 100% (39/39) 3 17.Audit of Construction Contracts No.. 90% (18/20) 2 16 There is evidence of appropriate monitoring and evaluation of contract performance. Documentation is in the file (e. progress report update and statutory declaration) to support that construction services were provided in accordance with the contract terms. National Research Council of Canada 31 .

FAA Section 34 certification is in accordance with NRC’s Financial Signing Authorities for Performance Certification at the time of the audit. 95% (38/40) 19. National Research Council of Canada 32 . FAA Section 34 certification by the responsibility centre manager with budget responsibilities. The Project Completion Certificate and Contract Payment Certificate are signed by ASPM Branch prior to releasing the holdbacks. 100% (40/40) 20.Audit of Construction Contracts No. Audit Criterion Findings /Compliance Rate 18. 100% (16/16) January 2009 Internal Audit.

3. Yes Implemented 2003 (Note: This recommendation was made with respect to contractors ratifying amendments. Yes Implemented 2003 Management informed us that meetings were held with senior Procurement Officers. the following actions were undertaken: • Training sessions / meetings were held with senior Procurement Officers to review the contracting process. 2. Senior Contracting Authorities began reviewing invoices to ensure appropriate approvals prior to payments and continue to do so. only one of the four contracts identified required NRC complete a formal submission.2. Yes Implemented 2003 Following verification with Treasury Board.2.10 We recommend also that the ASPM Branch review its contracting processes and controls in order to minimize possible oversights with respect to awarding contracts without the required TBS approvals.3 We recommend that ASPM reviews its current contracting procedures and practices with respect to the issues noted. the authorities were explained and discussed. and An Invoice Payment Checklist was developed and continues to be used. 2.Audit of Construction Contracts Appendix B: 2002 Audit Recommendations and 2008 Follow-up Audit Findings 2002 Audit Recommendations Audit Objective 2: Status of Recommendations 2008 Follow-up Audit Findings To assess the degree to which the recommendations and management action plans identified in the 2002 Audit of Construction Contracting have been implemented. National Research Council of Canada 33 . 2.9 We recommend that the NRC contracting authority – the Administrative Services and Property Management Branch (ASPM) – seek ratification from Treasury Board of the above noted contracts and contract amendments. According to management. Treasury Board approval was confirmed as having been received on May 15. (Note: This recommendation was made with respect to four contracts that were found to have exceeded NRC’s delegated authority). • • January 2009 Internal Audit. Exact dates were not provided as to when the meetings occurred. internal delegated authorities being exceeded and appropriate documentation to support amendments). 2003.

for January 2009 Internal Audit.000 for further review. verifying all terms and conditions of the contract have been met. invoice clerks perform account verification procedures including: matching and verifying the invoice to the purchase order or contract. applying applicable discounts and holdbacks. among other things. 2. prior to payments. in collaboration with ASPM Branch.Audit of Construction Contracts 2002 Audit Recommendations Status of Recommendations 2008 Follow-up Audit Findings Exact dates were not provided as to when these actions were put in place. There are also system blocks in Sigma which flag requests for payment over $50. however.17 We recommend that the Finance Branch. confirming the invoice was not previously paid. quantities and specifications in the contract. The goal of this assessment would be to help determine where and how existing procedures and controls should be strengthened. statistical sampling was implemented in 2002-2003 following the 2002 audit of construction contracts in order to verify FAA Section 32 and 34 at nine institutes. ASPM reorganized its Procurement Group to ensure a better segregation of duties. National Research Council of Canada 34 .4.4. In-Progress Full Implementation expected by March 2009 According to management. 2. Using a risk-based approach. the practice was discontinued in 2003-2004. such as to provide greater assurance of the effectiveness of section 34 account verification controls and procedures. Yes Implemented 2003 ASPM Based upon their assessment. High-risk transactions are identified for further review as outlined in written procedures. Finance Branch reviews invoices sent by the ASPM Branch Invoice Clerks as part of the payment process. it now reports to Invoice Payment Supervisors that were hired as evidenced by the ASPM organizational chart. ensuring costs conform to prices. performs a detailed assessment of the current system of account verification procedures and controls. Efforts to implement a Monitoring Division began in earnest in 2007-2008. and ensuring the invoice was approved by the appropriate FAA Section 34 delegated authority.18 We recommend that the Finance Branch expand its verification procedures performed under its delegated payment authority (FAA section 33). which will be responsible. As per the NRC Guide to Procurement Process.

7 We recommend that Finance Branch document its interpretation of section 34 responsibilities and requirements. New employees with financial signing authority are trained on an ongoing basis. Sampling has begun using an NRC-wide random sampling approach. National Research Council of Canada 35 . regular sampling of expenditures will be reviewed and the associated risk assessment process will be revisited.000 still require that “Budget Managers” certify FAA Section 34 by their signature.000. Sampling software has been purchased for these purposes. A full time Monitoring Officer was also assigned to the team in the summer 2007 as well as a Statistical Sampling Officer who was hired in fall 2007. January 2009 Internal Audit. All IBP’s have been visited by Finance Branch and offered training. “Budget Managers” are required to certify by their signature that funds are available and to commit funds under FAA Section 32.Audit of Construction Contracts 2002 Audit Recommendations Status of Recommendations 2008 Follow-up Audit Findings reviewing transactions on a statistical sampling basis. NRC management has indicated that once the Unit is fully staffed and operational. However. Yes Implemented 2007 A memorandum dated October 31. Invoices greater than $25. Mandatory financial delegation authorities training has been implemented for all Budget Managers and Budget Holders. Beginning June 2007. “Budget Managers” can electronically provide their FAA Section 34 certifications that goods or services have been received and that invoices can be approved for payment. and associated training completed.5. 2. for invoices less than $25. A competitive process to employ a Monitoring Division Director is currently in process. Approved policy and procedures pertaining to the exercise of delegated financial authorities should be communicated. 2007 was sent to all employees from NRC’s President informing them of the importance of compliance with the FAA. Starting in June 2008.

Status of Recommendations Yes December 2008 2008 Follow-up Audit Findings NRC Finance Branch obtained confirmation from the Financial Authorities and Regulations sector of the Office of the Comptroller General – Treasury Board Secretariat through discussions conducted in December 2008.. it should seek confirmation from the Treasury Board Secretariat (TBS) that its interpretation complies with government policy and requirements. Work commenced in 2002 to update policies and procedures. contracting. Continuous beginning 2002 January 2009 Internal Audit. For example.targeting the most contentious in the first year. National Research Council of Canada 36 . Both ASPM Branch and Finance Branch have stated commitments to continue their efforts in updating other reference documents as well as ensuring their respective policies are consistent and comprehensive. has committed to review all of its policies and procedures over the next three years (33% per year) . receipt and payment of goods and services along with a flow chart of the process) and “Terms and Conditions for Invited Tenders” were both updated in early 2002. documents “How to Request Goods and Services” (addressing requisitioning. e.Audit of Construction Contracts 2002 Audit Recommendations 2. Finance Branch.8 We recommend that ASPM and Finance branches perform a thorough assessment of policy and procedures requirements within their respective areas of responsibility. It has also committed to document and communicate best practices related to financial management and processes across all IBPs.6. 2.5.g. as part of its business plan. Desktop procedures for all aspects of the finance function have been established and are available through the On-Demand tool.8 Where Finance Branch’s interpretation of section 34 requirements differs from accepted federal government practices.

Adequate – most of the areas of practices / processes are in compliance with Government of Canada and NRC policies and directives pertaining to construction contracts but there are opportunities for improvement. January 2009 Internal Audit.Audit of Construction Contracts Appendix C: Overall Potential Ratings Management Attention Required – significant issues exist that require management’s attention. National Research Council of Canada 37 . No areas for improvement were identified. Needs Improvement – some areas of practices / processes are in compliance with Government of Canada and NRC policies and directives pertaining to construction contracts but many deficiencies exist. Strong – all areas of practices / processes are in compliance with Government of Canada and NRC policies and directives pertaining to construction contracts.

In the interim. Except where patent or copyright requirements or where technical compatibility issues can be clearly documented and there is no doubt there is only one supplier. commence staffing process in April 2009. not in electronic format. If it cannot be fully documented.Audit of Construction Contracts Appendix D: Management Action Plan Audit Recommendations Corrective Management Action Plan Expected Implementation Responsible NRC Contact Head. We will obtain clarification from the Treasury Board Secretariat. January 2009 Head. Administrative Services and Property Management Branch should consolidate all procurement policies and procedures into a single source document which would be available on its Material Management web-site. reference manuals that are January 2009 Agreed. Construction contracts are rarely sole source as a result of patent or copyright requirements. National Research Council of Canada . Our Material Management documentation needs to be updated and maintained in a central repository. In order to implement these recommendations. December 2008 2.000 through an Advanced Contract Award Notice (ACAN). Procurement Officers should advertise proposed sole source contract awards greater than $25. The Material Management Policy Manual currently exists in hard copy. a Procurement Officer will post an ACAN. if a sole source cannot be clearly documented or where there is doubt that there is only one supplier. the rationale will be fully documented and include supporting documentation. Services and Construction Contracting. we will assign resources as required in order Contingent on SEC approval of our staffing request per our Business Plan. Regardless.000 for construction contracts using electronic bidding that have an original value less than $2 million. Material Management. Administrative Services and Property Management 1. Manager. Services and Construction Contracting. have resource on-board by September 2009. Agreed. Administrative Services and Property Management Agreed. 3. an ACAN will be posted. Administrative Services and Property Management Branch should seek clarification from Treasury Board regarding what approvals are required when the cumulative value of amendments exceed $200. that only one supplier exists. Administrative Services and Property Management 38 Internal Audit. Where there is no doubt.

Consideration should be given to enhancing the guide where noncompliance was found to be an issue. and with consideration to the risk and available resources. specifically with respect to sufficient documentation supporting noncompetitive contract awards. Coordinate and respond to all audit enquiries and reports. and Coordinate all Material Management reporting. contract amendments. to: • • • • • • Prepare policy documents. We will respond to these recommendations with an appropriate level of monitoring based on a determination of the best approach. Administrative Services and Property Management January 2009 Internal Audit. security requirements and contract amendments. Prepare policy documents. Manager. Update MM policy manual. Material Management. such as the quarterly Contract Disclosure Reports. Monitor contracting activities. 4. Complete Material Management Policy Manual update and centralization of documents by September 2011. timing of contract commitments and commencement of contract work. Commence with implementation of Recommendations 3 and 4 in September 2009. and the Annual Procurement Activity Report. and Coordinate all Material Management Contingent on SEC approval of Commence with implementation of Recommendations 3 & 4 in September 2009. Coordinate and respond to all audit enquiries and reports. Administrative Services and Property Management Branch should undertake more rigorous monitoring activities to include a comprehensive quality assurance review of individual construction procurement files on a sampling basis and adopt data analytics to monitor contracting patterns and trends that indicate procurement activities that may not be in accordance with the Government of Canada and NRC policies and directives. The objective is to download the following activities to facilitate the implementation of audit recommendations: • • • • • • Determine the approach needed. Update the Material Management Policy Manual. Implement a quality assurance process. Monitor contracting activities.Audit of Construction Contracts Audit Recommendations Corrective Management Action Plan Expected Implementation Responsible NRC Contact currently available only in hard copies should be made available electronically and posted on the ASPM Material Management web-site. Agreed. National Research Council of Canada 39 . Implement a quality assurance process. Complete Material Management Policy Manual update and centralization of documents by September 2011. but not limited to. Data analytics should include. contract splitting and non-purchase order transactions as well as leasehold improvements.

such as the quarterly Contract Disclosure Reports. and the Annual Procurement Activity Report.Audit of Construction Contracts Audit Recommendations Corrective Management Action Plan Expected Implementation Responsible NRC Contact reporting. National Research Council of Canada 40 . January 2009 Internal Audit.

Audit of Construction Contracts Appendix E: Glossary List of Abbreviations ACAN – Advance Contract Award Notice AIT – Agreement on Internal trade ASPM – Administrative Services and Property Management (Branch) CA – Chartered Accountant CIA – Certified Internal Auditor CMA – Certified Management Accountant IBP – Institute. National Research Council of Canada 41 . NCR – National Capital Region NRC – National Research Council Canada NAFTA – North American Free Trade Agreement PWGSC – Public Works and Government Services Canada RMMO – Regional Material Management Offices SRCL – Security Requirement Check List WTA – World Trade Agreemen January 2009 Internal Audit. Branch or Program FAA – Financial Administration Act MERX – MERX is an Internet-based electronic tendering system that advertises government contracting opportunities to potential bidders across Canada.