Archived – Audit of Sole-Source Contracts Related to the Salmonid Enhancement Program (SEP)

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Project Number 6B092
Final Audit Report
September 25, 2009

Table of Contents

List of Acronyms
1.0 Executive Summary
1.1 Authority for the Audit
1.2 Introduction
1.3 Objectives and Scope
1.4 Statement of Assurance
1.5 Summary of Observations and Recommendations
2.0 Introduction
2.1 Background
2.2 Objectives and Scope
3.0 Observations and Recommendations
3.1 Contracts Used for the Salmonid Enhancement Program
3.2 Sole-Source Justification
3.3 Contract Management 
4.0 Management Response and Action Plan
4.1 Management Response
4.2 Management Action Plan

List of Acronyms

TB - Treasury Board
DFO - Fisheries and Oceans
WTO - World Trade Organization
ACAN - Advanced Contract Award Notice
SEP - Salmonid Enhancement Program
GCR - Government Contracting Regulations

1.0 Executive Summary

1.1 Authority for the Audit

An audit of sole-source contracts related to the Salmonid Enhancement Program (SEP) was identified in the 2008-2009 Departmental Risk-Based Audit Plan.

1.2 Introduction

SEP was created in 1977, with the objective of restoring stocks of salmon to their historic levels of abundance by means of artificial spawning and incubation hatchery systems, construction and rehabilitation of spawning channels, lake enrichment and freshwater habitat improvement.

In recognition of the unique Canadian nature of SEP, the Program uses sole-source contracting authority to acquire services from volunteer organizations, Aboriginal Bands and non-profit community organizations. [cabinet confidence]

The renewal of the authority for these exceptional contracting limits expires in August 2009.  The renewal is conditional upon a formal audit of sole-source contracts awarded in 2006.

1.3 Objectives and Scope

The objectives of the audit were:

  1. [Cabinet confidence]
  2. To determine whether the justification for awarding sole-source contracts complied with Government Contract Regulation (GCR) exceptions for non-competitive contracting, including the requirement to document the justification for awarding the contract without competition to a particular supplier.

Contracting for SEP is administered in the Pacific Regional Office, therefore, the audit work was conducted in the Region and involved both contracting and program staff. Twenty-four sole-source contracts over $30,000 coded with the SEP Business Line, and let by DFO, were identified as being awarded in the 2006-2007 fiscal year. Twenty-two SEP files were selected for audit.

The Audit of Sole-Source Contracts Related to the SEP was performed simultaneously with the Follow-up Audit of Contracting. Observations from the Follow-up Audit that were based on SEP-related contracts are considered relevant to this audit.

1.4 Statement of Assurance

In our opinion, sufficient and appropriate procedures were completed and sufficient evidence was gathered to support the conclusions contained in this report. 

1.5 Summary of Observations and Recommendations

The audit found that in the 22 contract files examined, the contracts clearly documented that the activities to be undertaken by the vendor related to the four SEP initiatives [Cabinet confidence].

We found that although the contracts were for the purposes of the SEP initiative, they did not provide sufficient justification for having been awarded non-competitively as required by the GCR.  Nine of the 22 contract files examined did not provide an explanation as to why the contracted services were awarded in a non-competitive manner.  Ten of the 22 files examined did not explain why the particular vendor was awarded the contract.

Other observations relate to the management of program contracts.  The Department has undertaken non-competitive contracting in support of SEP activities consistent with the wording of the approved TB non-competitive authority, which was in effect from 1997 through 2007.  TB extended this exemption for non-competitive contracting for SEP from August 2007 to August 2009.  All SEP contracts are subject to the GCR and the applicable Trade Agreements, and are therefore required to be awarded on a competitive basis, or pursuant to one of the enumerated exceptions in section 6 of the GCR.  To the extent that the Treasury Board Authority may have been viewed as a blanket exception to these competitive requirements for any SEP contract, such a view would appear to be a misunderstanding relating to the intent of the Authority.  DFO is still required to examine each SEP contract, on a case by case basis, to determine whether a particular contract falls within the defined exceptions. 

We noted that the exemption wording in the original 1997 TB authority did not specifically identify requirements for posting Advanced Contract Award Notices (ACANs).  The TB extension approved in June 2007, however, states that the departmental practice is to post SEP contracts over $261,300 as ACANs in compliance with trade agreements.

We observed that:

  • Of the three SEP files examined within the audit period that exceeded $261,300, none were posted as ACANs.
  • Our concurrent Follow-up Audit of Contracting for the period November 2007 through May 2008 included an SEP contract of $320,000 that was also not posted as an ACAN.
  • Interviews with Regional Contracting personnel revealed that non-competitive SEP contracts over $261,300 were not posted as ACANs because the Region’s interpretation of the TB non-competitive authority was that this was not required, since ACAN, being a competitive tendering process, would conflict with the intent of the special SEP non-competitive authority.

In summary, we conclude that sole-source contracts applied to the SEP were awarded [Cabinet confidence] However, the practice of posting contract award notices was not observed. Also, justifications for awarding sole-source contracts were not sufficiently documented in compliance with regulations for non-competitive contracting. Therefore, it is recommended that:

  1. The Regional Director of Finance and Administration should ensure that regional management, program and contracting officers be formally updated on the scope and limitations for SEP contracting;
  2. The Director General of Finance and Administration should ensure that SEP scope and limitations for contracting be clearly and readily accessible to all parties (e.g., fully and clearly post on the Finance and Administration Website);
  3. The Director General of Finance and Administration, in conjunction with the Regional Director of Finance and Administration, should ensure that the justification for awarding SEP contracts without competition and the selection of the vendor be clearly documented in each contract file, and include the location of the operation, the pertinent history of the vendor, and other relevant evidence that supports the Department’s assertions [Cabinet confidence]; and
  4. The Regional Director of Finance and Administration should ensure that all non-competitive contracting undertaken by the Pacific Region using the special SEP authority be consistent with all requirements of the GCR and all Trade Agreements to which Canada is a party.

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2.0 Introduction

2.1 Background

The SEP was created in 1977. The objective of the Program is to help restore stocks of salmon to their historic levels of abundance by means of artificial spawning and incubation hatchery systems, construction and rehabilitation of spawning channels, lake enrichment and freshwater habitat improvement. It is aimed at enhancing and rebuilding salmon stocks, restoring and improving fish habitat in British Columbia and the Yukon, and improving self-reliance, independence and the social and economic stability of Aboriginal peoples and local communities.

SEP has an annual operating budget of $25.7 million in O&M and salary; the community sole-source contracting portion is approximately $4 million.

In recognition of the unique Canadian nature of SEP, the Program uses the sole-source contract authority to acquire services from volunteer organizations, Aboriginal Bands and non-profit community organizations. In 1997 the Treasury Board granted to DFO the authority to enter into non-competitive contracts connected with the SEP, up to a maximum value of $1,000,000. [Cabinet confidence].

Pursuant to the Treasury Board Contracting Directive, Departments require Treasury Board approval in order to enter into contracts that exceed various monetary thresholds. The effect of the Treasury Board Authority is to raise this threshold to $1,000,000 (from $100,000) for non-competitive contracts related to the SEP. [Cabinet confidence]

As of June 2007, the program was managing 26 sole-source contracts, 14 of which were with Aboriginal organizations and the balance going to non-profit community organizations.
A condition in the renewal of the Minister’s authority was that an audit be undertaken of SEP sole-source contracts awarded in 2006-2007, to determine if these contracts comply with the GCR exceptions for non-competition. The Departmental Risk-Based Audit Plan thereby identified the requirement for an audit of sole-source contracts related to SEP, as well as a follow-up audit of contracting to be carried out in fiscal year 2008-09. These two audits were conducted concurrently.

2.2 Objectives and Scope

The objectives of the audit were:

  1. [Cabinet confidence]; and
  2. To determine whether the justification for awarding sole-source contracts complied with GCR exceptions for non-competitive contracting, including the requirement to document the rationale for awarding the contract without competition to a particular supplier.

Contracting for SEP is administered in the Pacific Regional Office, therefore, the audit work was conducted in the Region and involved both contracting and program staff. Twenty-four sole-source contracts over $30,000 coded with the SEP Business Line, and let by DFO, were identified as being awarded in the 2006-2007 fiscal year. Twenty-two SEP files were selected for audit.

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3.0 Observations and Recommendations

3.1 Contracts Used for the Salmonid Enhancement Program

The audit found that in the 22 contract files examined, the contracts clearly documented that the activities to be undertaken by the vendor related to the four initiatives [Cabinet confidence].

Recommendations:

None.

3.2 Sole-Source Justification

With the renewal of exceptional contracting limits for SEP, DFO Canada was provided the authority to continue entering into non-competitive service contracts for delivering the SEP, providing contracts do not exceed $1,000,000. [Cabinet confidence], the Department must still comply with regulations requiring fully justified explanations, in contract files, for both sole-sourcing and for vendor selection.

GCR and TB Contracting Policy provide four exceptions to the requirement for competitive contracting: the need is a pressing emergency; value of less than $25K; nature of the work would not be in the public interest to solicit bids; only one person is capable of performing the work. [Cabinet confidence]. Also, TB Contracting Policy requires that when the contracting authority awards a sole-source contract, the decision should be recorded together with the justification[1]. As a result, SEP contract files that apply the exceptional contracting limits need to clearly and unambiguously document the justification for (1) sole-sourcing, for (2) contractor selection, and need to ensure the justifications are (3) consistent with one of the four exceptions for competitive contracting.

The December 2006 Audit of Contracting conducted by the Internal Audit Directorate found, in general, that documentation to support the rationale for sole-source contracting and the rationale for selecting a particular vendor was insufficient.

During the Follow-up Audit of Contracting in the Pacific Region, we observed that the Pacific Region has begun implementing compliance practices that were identified in the Management Action Plan from the Audit of Contracting, which requires that justification for exceptional contracting be documented in contract files.  These explanations, when provided, were recorded on various forms, including “Request for Contract Services” (FP-1448) and “Contract Work Situation Report” (FP-1449).

Under the SEP contracting audit, our review of SEP-related contracts over $30,000 from fiscal year 2006-07 identified inconsistencies in the extent sole-source justifications were documented in the contract files.   We found that although the contracts were for the purposes of the SEP initiative, they did not provide sufficient justification for having been awarded non-competitively as required by the GCR.  Nine of the 22 contract files examined did not provide an explanation as to why the contracted services were awarded in a non-competitive manner.  Ten of the 22 files examined did not explain why the particular vendor was awarded the contract.

Documentation in contract files to support explanations for having awarded the contracts without competition to a particular vendor was also found to be insufficient.  For example, where the assertion that the salmonid enhancement operations need to take place at a specific geographic location is made, such as First Nations’ land or municipal property, the audit would have expected to see reliable evidence to demonstrate these critical assertions such as maps showing the operations inside the specific boundaries or native band charters demonstrating that a particular vendor had specific authority to operate in the area where the work is to take place.

We conclude that the justification for awarding sole-source contracts under GCR exceptions for non-competitive contracting, including the justification for awarding the contract without competition to a particular supplier, was not sufficiently documented.

Recommendation:

1. The Regional Director of Finance and Administration should ensure that regional management, program and contracting officers be formally updated on the scope and limitations for SEP contracting.

3.3 Contract Management

While the TB authority provides the Department the right to enter into limited non-competitive services contracts for the purposes of the SEP, due consideration must be applied to the GCR and Trade Agreements as they apply to contracting. The sole effect of the TB Authority is to authorize the Department to enter into non-competitive contracts with a value of up to $1,000,000, without seeking further TB approval, where such an award is appropriate and permitted.

All contracts entered into by DFO, including any SEP contracts, are subject to the GCR. Section 5 of the GCR requires that bids be solicited prior to entering into any contract, unless the contract in question falls within one of the four defined exceptions set out in section 6. [Cabinet confidence], DFO must first establish that the proposed contract complies with the requirements of one of the exceptions in section 6.

The applicability of the exemptions to the competitive requirements is unique to the individual contracts and should not be applied to the program as a whole. The current practice is to consider the competitive requirements on a global, program wide basis, as opposed to examining each contract on a case by case basis. It would be preferable if the decision of whether to invoke one of the exceptions was made based on an examination of the facts and circumstances of each contract individually.

The 1997 TB authority for SEP contracting exceptions, in effect during the audit period, did not explicitly require the posting of ACANs for contracts that exceeded the World Trade Organization (WTO) sole-sourcing threshold of $261,300. [Cabinet confidence] For SEP contracts exceeding this threshold, a justifiable case for sole-sourcing is made and the contract is posted as an Advanced Contract Award Notice." While this expectation regarding international trade agreements was made explicit by TB just subsequent to the audit period, it is in line with overall departmental contracting practices in place during the audit period.

Our examination of SEP files found that three of 22 SEP contracts had contract values exceeding $261,300 but were not posted as ACANs. Our concurrent Follow-up Audit of Contracting for the period November 2007 through May 2008 included an additional SEP contract of $320,000 that had also not been posted as an ACAN.

Interviews with contracting personnel involved in awarding these contracts, as well as the current Program Management for SEP, indicated that they did not believe that the TB authority for the SEP program included the obligation to post ACANs when international trade agreement limits for sole-source contracts were exceeded. Because the ACAN process opens the door to competitive tendering, they understood that posting such advanced contract notices via this mechanism would conflict with the intent of the special SEP non-competitive authority.

The requirement that contracts be awarded on a competitive basis does not necessarily require a full-scale Request For Proposal process; rather, the obligation to conduct a competitive process can be satisfied by the issuing of an ACAN, setting out the Department’s intention to award a contract to a named supplier, and inviting other potential suppliers to submit a statement of capabilities. This effectively allows the Department to satisfy itself that there is no other interested party that is legally or technically capable of performing the work, so that it can then proceed to award the contract to the party named in the ACAN, and is preferable to invoking any of the GCR exceptions.

Alternatively the Department may wish to consider identifying specific contracts or a class of contracts where competition may not be in the public interest. The Department could then approach Treasury Board seeking an exemption from the competitive requirements for those identified contracts. By proceeding in this manner, DFO can avoid the risk of legal challenges to its invocation of the GCR exceptions.

A failure on the part of the Department to comply with the terms of the GCR, or of the trade agreements, may give rise to a legal challenge either in the courts or through the Canadian International Trade Tribunal.

Recommendations:

2. The Director General of Finance and Administration should ensure that SEP scope and limitations for contracting be clearly and readily accessible to all parties (e.g., fully and clearly post on the Finance and Administration Website);

3. The Director General of Finance and Administration, in conjunction with the Regional Director of Finance and Administration, should ensure that the justification for awarding SEP contracts without competition and the selection of the vendor be clearly documented in each contract file, and include the location of the operation, the pertinent history of the vendor, and other relevant evidence that supports the Department’s assertions [Cabinet confidence]; and

4. The Regional Director of Finance and Administration should ensure that all non-competitive contracting undertaken by the Pacific Region using the special SEP authority be consistent with all requirements of the GCR and all Trade Agreements to which Canada is a party.

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4.0 Management Response and Action Plan

4.1 Management Response

Background

In 1997 TB granted the DFO the authority to enter into non-competitive contracts up to $1M to support the delivery of fish hatchery services under the Community Economic Development Program (CEDP) SEP.

Many of the CEDP SEP facilities are sited on privately held land or land subject to local aboriginal claim of title. To compete CEDP SEP contracts, or to post these contracts as ACAN, (which can lead to a competitive open tender if successfully challenged), for CEDP facilities managed on these private/aboriginal sites would be to invite serious damage to the trust relationships that have been built over the past 30 years with aboriginal groups and local community enhancement associations. There could also be a fundamental issue of physical access to the project sites by a new contractor if the current organizations are not awarded contracts, particularly those on reserve land.

The challenge risk associated with the non-competitive award of these contracts is deemed to be low, given the case for exemption under the CGR section 6 c). Finally, it should be noted that in the roughly 30 years that these contracts have been awarded non-competitively, the department has experienced no challenges or complaints.

File Documentation

The Internal Audit Directorate report noted file documentation deficiencies in the 2006 sample drawn for this audit. Since 2006 the region has undertaken steps to improve the quality of contract documentation, and will incorporate a GCR assessment and trade agreement compliance checklist in each contract file where the special authority will be exercised. File documentation will also now include information on the site the facility is located on, i.e. whether it is land subject to aboriginal claim, privately held, or Crown owned. The region will ensure that all CEDP SEP contractual arrangements are assessed individually on their merits and unique circumstances wherever exercise of the special TB non-competitive authority is being considered.

International Trade Agreement Requirements

Fish and hatchery service type procurements are specifically exempted from the competitive tendering and posting requirements normally necessary under international trade agreements. It should be noted that the Region has obtained a written opinion of this exemption from the Department of Foreign Affairs and International Trade (DFAIT). DFAIT is responsible for the administration and interpretation of Trade Agreements to which Canada is a party, including the WTO. Given this advice the Pacific Region is of the opinion that, the WTO requirement to post contracts as ACAN at $261K, (the WTO threshold), does not apply to contracts let under the CEDP SEP.

The region has obtained official written confirmation from DFAIT, of the May 1, 2009 opinion provided by DFAIT's Deputy Director of Investment Trade Policy via e-mail that the department is exempt from international trade agreement competition requirements for Fish and Hatchery Services. The Region would be prepared to post if there is a view by the audit committee that this would be a prudent action.

Government Contracting Regulations

The audit report notes that the special $1M CEDP SEP non-competitive contracting authority does not exempt the Region from adhering to the requirements under the GCRs re: specifically identifying exceptions to competition under GCR section 6.

The Region does not dispute that the GCRs apply to procurements undertaken using the SEP special authority. The Region has developed a case for using GCR section 6 c) – “Not in the Public Interest” as the appropriate exception to competitive posting requirements for CEDP SEP contracting. For reference, the substance of the case for the use of 6 c) is summarized in the table below:

Government Contracting Regulations Section 6 c) “Not in the Public Interest” Relevance to Pacific Region Salmonid Enhancement Community Economic Development Program
Alleviation of Canadian socio-economic disparity CEDP SEP non-competitive contracting addresses 1) historical economic disparities between aboriginal peoples versus other Canadians in BC, and 2) the relative underperformance of the economies in many of the small communities in which CEDP SEP contracts are let.
Conservation of a strategic source of supply that is deemed essential to sustain a critical industrial capacity for future government requirements CEDP SEP contracted hatcheries ensure the stable supply of fish essential to maintaining current and future opportunities for the commercial, recreational and aboriginal user access that is the management responsibility of the Minister of DFO to provide on behalf of the Government of Canada
Any negative impacts to the department's operations if this requirement is competed, assuming competition is a viable option Allowing non-resident contractors to deliver services on a site controlled by a specific aboriginal group might lead to   interruption of DFO service delivery and serious damage to both the trust relationship between Canada and the specific aboriginal community, and to Canada's broader credibility re: being committed to dealing respectfully and fairly with aboriginal peoples.  Further, by their nature hatchery operations require constant attention and continuity, consequently a change in contract holder poses a risk of fish mortality at the facility.  These collectively represent significant negative impacts to the department's operations. 

4.2 Management Action Plan


Recommendations Management Action Plan Status Report Update
Actions Completed Actions Outstanding Target Date
1. The Regional Director of Finance and Administration should ensure that regional management, program and contracting officers be formally updated on the scope and limitations for SEP contracting;   Program and contracting officers will be updated on the scope and limitations for SEP contracting [Cabinet confidence].   A package is being prepared outlining scope and limitations for SEP contracting. September 30, 2009
2. The Director General of Finance and Administration should ensure that SEP scope and limitations for contracting be clearly and readily accessible to all parties (e.g., fully and clearly post on the Finance and Administration Website);   The Manager, Corporate Material Management Division, shall review and ensure accessibility and visibility of contracting policies governing SEP. This authority is really specific to Pacific Region. As we are in the process of updating F&A 101, to be our contracting policy document, we can incorporate some information there. SEP is already referenced there but a link will be included to the Pacific Region intranet site for the checklist discussed under 3 below. After decisions regarding new SEP authorities are taken, F&A will complete the updating of F&A 101 and incorporate a link to SEP special contracting requirements. Fall 2009
3. The Director General of Finance and Administration, in conjunction with the Regional Director of Finance and Administration, should ensure that the justification for awarding SEP contracts without competition and the selection of the vendor be clearly documented in each contract file, and include the location of the operation, the pertinent history of the vendor, and other relevant evidence that supports the Department’s assertions [Cabinet confidence].   The Manager, Corporate Material Management Division, is to review current DFO policies and guidelines to ensure compliance with SEP on the award of non-competitive contracts. The Pacific Region in cooperation with Corporate Materiel Management developed and published on July 28, 2009 a comprehensive checklist of file documentation and analysis required to be completed for any non-competitive procurement pursuant to the SEP >$25K.
Such checklist is completed by the SEP Program Manager, and reviewed and approved by the Regional Chief of Contracting.
Nil. April 30, 2009
4. The Regional Director of Finance and Administration should ensure that all non-competitive contracting undertaken by the Pacific Region using the special SEP authority be consistent with all requirements of the Government Contracting Regulations and all Trade Agreements to which Canada is a party.  

The Regional Director of Finance will establish the necessary internal processes in Pacific Region to ensure that Government Contracting Regulations and Trade Agreement are complied with and respected, and proper file documentation/audit trails are maintained.

The Regional Director of Finance has hired a consultant to perform an independent analysis re: GCR section 6 c) as being an appropriate exemption for CEDP SEP contracting activities.

Independent analysis complete that supports Region’s assertions.

A package is being prepared outlining internal processes.

A checklist for contracting and file documentation is being developed to ensure compliance.

Bulletin will be prepared to improve communications.

September 30, 2009

1. TB Contracting Policy 10.7.30