This is the fourth in a series of articles on red flags and this week's article focuses on contract management. Red flags may represent subtle or somewhat more obvious vignettes that "something is wrong with this picture" that can be sometimes overlooked by executive management or supervisors. Accordingly, an essential aspect of internal controls is to train appropriate staff to increase their awareness of and to be monitoring for various red flags that are relevant to various control areas.
Red flags associated with contract management include:
- Turnover of staff that have various roles related to functional areas where contractors are operating select programs, services or activities
- Indication that select principals or departmental supervisors have delegated their approval responsibilities for approving contractors’ invoices
- Lack of select principal’s or supervisor’s detailed review and approval of contractor’s itemization of services that are described in invoices
- Lack of a vendor’s itemization of services provided including date, times, location and services rendered
- Increases in vendor’s billings for services where increases do not align with increases in activities or services (or where suspension or discontinuation of select activities or services occurred)
- Vendors providing virtual or remote delivery of programs, services or activities that can only be appropriately and successfully delivered face-to-face
- Vendors billing for increases in services provided that do not align with increases in activities or services (or where suspension or discontinuation of select activities or services occurred)
- Vendors request change orders that exceed the relevant threshold for competitive procurement in law or local policy
- Vendor contracts are not sufficient descriptive to allow school officials to understand that invoiced amounts were actually earned, and billed amounts are accurate
- Contracts with vendors are not sufficient descriptive to allow school officials to understand contract performance is/was satisfactory in accordance with specifications in the request for bids/proposals/qualifications/quotes in addition to contract terms and specifications
- Vendor contracts contain evergreen clauses (provisions that would allow contract renewal for an indefinite period of time)
- Central administration does not have a record of how many contracts have been awarded and are still active
- Central administration does not have a record of how many and which contracts will under consideration for extension or will end in the next 12 months or more
- Central office does not have a record of employees’ names that are assigned specific contract management responsibilities
- Contract management responsibilities are not mentioned in select employees’ job descriptions
- Contract management responsibilities are not covered in select employees’ annual performance evaluation
- Contracts were awarded without a clear understanding or documentation of local, state or federal funding sources will cover vendors’ invoices
- Contracts were awarded without seeking prior approval, as required, from grantor agencies for specific items requiring line item preapproval, grant application amendment or grant budget amendment
- Contracts were awarded that would result in the currently legally obligated amount to exceed budget authorization by the board of trustees for the fiscal year and/or grantor agency for the fiscal year or grant project period
- There is not a yearly legal review of ongoing active contracts
- The district lacks a centralized physical filing location or electronic file location for awarded contracts
- The office, department or campus receiving contractors’ services does not keep vendor performance documentation and provide periodic information to central administration
- Office, departmental or campus questions about satisfactory vendor performance are not promptly reviewed with the district’s attorney-on-retainer
- Individuals are classified as both employees and as contractors during the same active employment period(s)
- District employees are awarded sole source vendor contracts connected to their entrepreneurial activities
- District employees have conflict of interest related to contract(s) they administer or manage
- District employee(s) receive gifts or items of value from contractors that could influence their discretion in adequately carrying out their roles and responsibilities in contract management
- Lack of school district policies related to employees' receiving gifts or items of value from contractors
- Lack of sufficient training in contract management processes and best practices to supervisors or managers that have contract management roles and responsibilities
- Central administration lacks complete files for awarded contracts that are consistently organized in files according to procurement category, including request for bid/proposal/qualifications/quote from awarded vendors, responsive vendor list, newspaper advertisement, vendor tabulation, regulatory required notices, conflict of interest questionnaire (if applicable), board action date, contract award date, federal EDGAR compliance verification and federal debarment verification
- Original contract files are not physically secured for security purposes
Any indications or observed red flags should be promptly evaluated and consideration be made for prompt follow-up or investigation. In most instances, red flags are signs that relevant manuals for practices, procedures, processes and key controls should be reviewed and modified, as needed, and staff should receive additional relevant training to improve their skills and expertise. Red flags should be covered during after-action reviews to evaluate strengths and opportunities for improvement. Invariably most red flags are more recognizable as 20/20 hindsight.
It’s important to note that red flags do not stand on their own as an indication that fraud has occurred. When should a school official refer a matter to law enforcement? In all instances, this should be done only after consultation with the district's attorney-on-retainer, which was covered in a prior article titled Internal Control Tip of Week - When Do You Refer a Matter.