OIG Finds Waste in City’s Emergency Contracting Practices

OIG has published a report on the Chicago Department of Procurement’s (DPS) emergency contracting process. The report details how DPS awarded a series of emergency contracts from March 2010 through April 2011 contrary to its own internal emergency procurement policies. Specifically, DPS awarded a supplier ten separate unadvertised emergency contracts for concrete sewer pipes without adequately documented justification. According to OIG investigation, this practice cost the City approximately $467,000 more than the City’s later competitively bid contract and $201,000 more than if the City had kept the previous supply contract in place.

“While emergency contracting serves as an important practice for assuring uninterrupted operation of City government,” said Inspector General Joe Ferguson, “it should be pursued only when truly necessary, and in a manner that protects taxpayer dollars. OIG found significant that these emergency contracts needlessly wasted money, in ways that suggested the potential for waste in other emergency contracting processes. DPS has committed to addressing these issues, and OIG will continue to monitor the outcomes.”

In 2007, the City entered into a five-year supply contract with Azteca Supply Company to provide reinforced concrete sewer pipe and related items as needed by the Department of Water Management (DWM). In 2010, following a joint FBI-OIG investigation, Azteca, Azteca’s owner, and the owner’s husband were all indicted on federal fraud charges for allegedly engaging in a scheme to defraud the City and other governmental agencies by purporting to be a legitimate MBE/WBE materials supplies. In fact, Azteca was acting as a broker and pass-through for other vendors. DPS then began the debarment process, including the termination of Azteca’s contract with the City. To accommodate the City’s need for concrete sewer pipe, DWM and DPS initiated an emergency contract process, culminating in the City awarding ten emergency contracts between March 2010 and April 2011 to Elmhurst-Chicago Stone. In the meantime, DPS and DWM sought a new five-year supply contract. In April 2011, following a competitive bidding process, Welch Brothers, Inc. was awarded a five-year supply contract to provide DWM reinforced concrete sewer pipe and related products.

OIG analysis found that what cost the City $2,104,925 under the emergency contracts with Elmhurst could have been purchased for $1,637,502 under the new supply contract with Welch. Similarly, the same items could have been purchased for $1,903,731 under the previous supply contract with Azteca . DPS explained its actions in a memo to OIG noting that “DPS’s policy at the time of this indictment was to place interim restrictions upon any firm indicted for fraud against the City.” DPS reported that it “did not undertake a cost-benefit analysis when determining whether interim restrictions should have been placed upon Azteca,” explaining that “DPS believes that, except in extraordinary circumstances, engaging in a cost-benefit analysis with respect to the decision to place interim restrictions on a vendor indicted for defrauding the City would send a damaging message to the City’s residents and business community regarding the City’s expectations of honesty and fair dealing in its business partners.” DPS noted that it “does conduct cost benefit analyses upon the request of the user departments,” and cited a recent debarment in which a company was permitted to temporarily continue at the request of the user department to prevent the disruption of janitorial services. DPS largely did not contest three other related OIG findings:

  1. OIG concluded that DPS had a practice of automatically and immediately cancelling the contracts of indicted vendors, without consideration of the potential problems that might ensue. In fact, a significant number of emergency contracts in 2011 were the result of vendor debarment or contract cancellation. The Municipal Code and Debarment Rules afford the CPO important discretion in determining whether to terminate an ongoing contract based on the contract’s impact on the public health, safety, or welfare. But the investigation revealed that unless requested by the user department, DPS does not review whether interim restrictions or contract termination will necessitate an emergency procurement, which often results in higher costs to the City. OIG recommended that DPS take a more pro-active role in evaluating the potential negative consequences of a contract cancellation in order to eliminate or minimize the use and costs of emergency contracts.
  2. DPS authorized the emergency contracts without sufficient documentation supporting the need for an emergency contract. OIG recommended that DPS improve its paperwork and ensure that it receives sufficient documentation when emergency contracts are requested. 3) Once DPS decided to cancel the Azteca contract, it should not have taken nearly 11 months to reissue the new contract. At least some of the emergency contracts may have been avoided with due care and diligence by DPS in managing the procurement process.