Best Practices and What’s New with Procurement Compliance
The focal point of the presentation was new procurement requirements for organizations receiving federal grants. Explanation of the standards anchored a broader discussion of best practices for procurement.
The Uniform Guidance (“UG”) containing procurement and contract standards is under Title 2 of the U.S. Code of Federal Regulations (CFR), Part 200: “Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards.” (See Subpart D and Appendix II)
See also: Federal Register – notice regarding the final guidance, 12/26/13
The UG sets forth revised guidelines for the procurement of goods, services, and property using federal funds. The standards apply only to direct expense charged to federal awards, not to procurements allocated to a grant as part of indirect costs. The revision primarily affects grantees that are subject to A-110, namely, educational institutions and nonprofits.
One change is semantic: Under the new guidance, “must” signifies a requirement, whereas “should” (which formerly marked a requirement) now indicates a recommendation.
Major provisions and changes were highlighted:
- New provision covering conflicts of interest with parent, affiliate or subsidiary organizations
- Requirement for more detailed record-keeping around procurement (which may be construed as a nudge toward digital records; doing this on paper will likely prove onerous)
- Focus on adequate competition for contracts
- A new framework for cost and price evaluation, and new thresholds for mandated methods of procurement
- Provisions for small and minority-owned businesses
- Standards for contracts involving pass-through entities
Grantees were given a two-year grace period to implement the guidance on procurement, and the expiration of the grace period depends on your fiscal year. For December 31 year-ends, the grace period ended 12/31/16, and the standards should have been implemented by 1/1/17. If you have a June 30 fiscal year end, you need to implement the standards fully by 7/1/17. If you relied on the grace period, you should have documentation on file that your policy-making body (e.g., your board) elected to do so – it does not need to be submitted, just recorded.
If you receive federal grants, your written policy must comply with the guidance as of the deadline, and from that point on, you need to document compliance with your policy.
When procuring property or services with federal funds, states must follow the same policies they use for procurement with non-federal funds. Nonprofits using federal funds – including those receiving federal funds through the state – need to adhere to the new UG.
Under the new standards, there is an emphasis on adopting well-documented procedures that conform to the guidance, and maintaining oversight to ensure actual compliance with contracts and purchase orders. As part of an overall orientation toward cost containment, the guidance mandates avoidance of superfluous or redundant purchases. In addition, the conflict of interest provisions were strengthened and extended to related organizations, and the standards mandate disciplinary action when procurement standards are flouted or neglected.
The standards encourage the use of federal surplus property in place of new purchases. Also, grant recipients are asked to make use of value engineering clauses in major construction projects. Time and material contracts are acceptable only if other types of contracts are not suitable, and if used, require closer oversight. The overarching theme is cost containment.
The new standards reflect an effort to eliminate favoritism, and to ensure full and open competition. For example, if a contractor is involved in drafting standards or specifications for a contract, they are barred from competing for that contract. In general, organizations need to keep detailed records of the procurement process, including why a method was chosen, what drove particular decisions, and how costs were negotiated. Practices that unnecessarily restrict competition are to be avoided. Geographical preferences cannot be applied, except where mandated by federal standards, such as with architects and engineers who need local expertise. If you use prequalified lists of vendors or suppliers, the lists should include enough options to ensure competition, and should be reviewed regularly.
As a general rule, the scale of procurement dictates the method used. Note that the threshold applies to the aggregate amount directly allocated to a federal contract, and excludes charges from the contractor or supplier that do not involve federal funding.
- Micro-purchases (under $3K, in the aggregate)
- Should be distributed equitably among qualified suppliers, to the extent practical
- If the price is reasonable, these purchases do not require competitive quotes
- Cost analysis not required
- Small purchases ($3K-$150K)
- Must document that quotations were gotten from an “adequate number” of sources, which should be defined by your policy
- Methods of obtaining quotes should be spelled out in your policy
- Cost analysis not required
- Sealed bids (over $150K)
- Request for bids must be publicly advertised; must define deliverables; and must indicate when and where the bids will be opened.
- Lowest responsible bidder wins fixed-price contract
- Sealed bids are the preferred method for construction projects
- Competitive proposals (over $150K)
- RFPs must be publicized; must spell out all evaluation criteria; and must be submitted to an “adequate” number of sources, as defined in your policy.
- Method of technical evaluation and selection must be recorded before process starts
- Must be more than one source
- Contract is awarded to proposal that is evaluated most advantageous; factors other than cost and price can be considered
- Can be either fixed price or cost-reimbursement
- Competitive proposals are used only when sealed bids are not appropriate
- Noncompetitive proposals (sole source), regardless of size, must meet at least one of these conditions:
- The product or service is only available from one source
- A public exigency or emergency does not allow a competitive process
- The federal department has approved a written request for a noncompetitive proposal
- After multiple sources are solicited, competition is judged inadequate
There is more flexibility for purchases below the “Simplified Acquisition Threshold” of $150K. Above that level, you must record a cost or price analysis for every procurement, including modification. In the case of single bid contracts, you must negotiate profit as part of the price. Cost estimates must be reasonable, and are permitted only if allowed under the UG Cost Principle (Subpart E). Cost plus percentage and percentage of construction cost methods are not allowed.
Nonprofits must take affirmative steps to use small and minority businesses (SMB), women’s business enterprises (WBE), and labor surplus area firms.
- Solicit qualified SMB and WBE whenever possible, and include them on any standing lists
- Break requirements into smaller packages, to create more opportunities for participation
- Set project schedules to encourage SMB and WBE participation
- Tap agencies (e.g., SBA) that promote SMB and WBE businesses
- Require the prime contractor to adopt these steps when subcontracting
Where pass-through entities are involved, the nonprofit must make technical specifications and procurement documents available to both the federal agency and the pass-through entity. If either the federal agency or the pass-through entity decides that your procurement system complies with the UG, your organization is exempt from pre-procurement review.
Best practices for procurement:
- Familiarize yourself with the procurement requirements contained in:
- Understand all contracts – not just federal – for your programs
- Place procurement in the context of your organization’s culture and experience
- Review and revise your policies in the context of the requirements flowing from all of your contracts
- Clearly define roles and responsibilities in policy and practice
- Train staff on the parts of the procurement process that they are involved in
- After an implementation period, evaluate the effectiveness of your procedures
- Ensure that your procurement policy covers all requirements discussed in this presentation in addition to other issues, such as evaluation, disputes, and claims. Some of the key policies and procedures in the context of federal standards are:
- Conflict of Interest (§ 200.112)
- Mandatory Disclosures (§ 200.113)
- Financial Management (§ 200.302)
- Internal Controls (§ 200.303)
- Procurement Standards (§ 200.117)
- Sub-recipient Monitoring (§ 200.331)
- Personnel Compensation (§ 200.430)
- Put a working system in place for documenting compliance with your procurement policy
Other resources provided at the presentation: Links to procurement resources, links to federal agency-specific requirements.
Carla McCall is co-managing partner of AAFCPAs and specializes in providing assurance, tax, and business consulting services to sophisticated nonprofit organizations and closely-held companies. Carla’s diverse client base includes health care, arts and cultural, affordable housing, manufacturing and distribution. Carla advises her clients in the specialty areas of revenue recognition, stock option plans, and government contract compliance. She has extensive experience with federal, state and other regulatory compliance requirements of nonprofit organizations.
Hui-Ting is a manager at AAFCPAs and has audit and tax experience with various types of nonprofit organizations, including community development corporations and their development projects with HUD and MHFA requirements, nursing homes, health centers, educational institutions, and social services and behavioral health agencies. She also provides audits in accordance with Uniform Guidance/Single Audit and Government Auditing Standards.