Project Team

Ross Tate City Auditor

Barbara Coppage Deputy City Auditor

Ryan Richelson Internal Auditor

Project Number

1190023

This report can be made available in alternate format upon request.

Public Works Department Fleet Procurement and Monitoring

December 24, 2019

Report Highlights Fleet Purchases

In general, purchases of vehicles and other fleet equipment were procured in accordance with policy. Controls should be strengthened to ensure that: contract links are consistently used, cooperative agreements are properly obtained, and that contract pricing and individual line items are correctly entered into the City’s procurement system. Auto Parts

Selected contracts and purchase orders for auto parts were not properly processed in the City’s procurement system. Internal controls did not prevent vendor payments of approximately $26,000 for auto parts not recorded as “received” in Public Works’ tracking system.

City Auditor Department 140 N. 3rd Avenue, Phoenix, AZ 85003 602-262-6641 (TTY use 7-1-1)

Mission Statement

To improve the quality

of life in Phoenix

through efficient

delivery of outstanding

public services.

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City Auditor Department

Executive Summary Purpose Our purpose was to determine if the Public Works Department procured fleet equipment and auto parts per policy. Background Public Works Department’s Fleet Services Division, Fleet Control Section, is responsible for the acquisition and make-ready of City-owned vehicles and fleet equipment. Staff use the M5 maintenance software (M5) to track fleet acquisition, maintenance, and disposal of City-owned vehicles and equipment. Staff use the City’s Supplier Relationship Management (SRM) application to procure vehicles and equipment, and authorize payment. Fleet Services Division’s Auto Stores Section is responsible for ordering and maintaining inventory of auto parts used to support City-owned vehicles and equipment. Staff use M5 to procure and track auto parts. M5 interfaces with SRM to order, receive, and pay for the inventory. Procurement standards are outlined in Phoenix City Code, Chapter 43 – Procurement, and Administrative Regulation (A.R) 3.10 – General Procurement Procedures. The standards define procurement thresholds, staff responsibilities, and system requirements. The fiscal year (FY) 2017/18 budget for vehicle and fleet equipment was approximately $52 million. Actual equipment acquisitions totaled $24 million, and vehicle part expenditures were approximately $9 million. Results in Brief In general, purchases of vehicles and other fleet equipment were procured in accordance with policy. Controls should be strengthened to ensure that: contract links are consistently used, cooperative agreements are properly obtained, and that contract pricing and individual line items are correctly entered into SRM.

Fleet vehicle and equipment purchases were made at informal and formal procurement thresholds, based on the dollar amount spent. For either procurement, the contract or purchase order must be entered in SRM for receipt and payment. For the sample tested, contracts and purchase orders were procured and approved per policy. We identified weaknesses in SRM associated with missing or incorrect pricing, missing supply numbers, inaccurate item descriptions, and missing links between purchase orders and contracts. Other pricing fluctuations were found for equipment

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City Auditor Department

add-ons and vendor discounts. We also identified several cooperative agreements that were obtained by Public Works’ staff instead of Finance-Central Procurement staff. Selected contracts, and purchase orders for auto parts, were not properly processed in SRM. Failure to enter line-item pricing, or to correctly link to existing contracts, can result in over- or under-payment of invoices, or inaccurate contractual totals.

Per policy, contracts in SRM should be listed by line item, including correct supply numbers and pricing, and should have an authorized date range and contract amount. Purchase orders are also required to be linked to contracts in SRM. This ensures that invoices are paid at contracted rates, and overall expenditure totals are within the authorized contract amounts. Our review of three contracts, eight purchase orders, and their associated invoices for auto parts found the following:

None of the three contracts was listed in SRM by line-item pricing.

Three purchase orders were not linked to existing contracts. Goods receipts were properly addressed in M5 for 62% of tested items. Internal controls did not prevent vendor payments of approximately $26,000 for auto parts not recorded as “received” in M5.

Per Public Works’ procedures, staff are supposed to verify that goods are marked “received” in M5 before processing the purchase order in SRM. We found 138 purchase orders listed “on order” in M5 of which 53 (38%) had been paid per SRM. This resulted in invoices totaling approximately $26,000 that were paid for parts not recorded in M5 as “received.”

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Department Responses to Recommendations

Rec. #1.1: Ensure contracts are entered properly in SRM, including correct/updated pricing, and manufacturer or supply numbers, prior to processing invoices.

Response: Public Works procurement officers will ensure that all awarded requirements contracts are entered, in their entirety, in SRM, and maintained throughout the life of the contract.

Target Date:

02/28/2020

Rec. #1.2: Ensure a process is in place that assures free text line items are not used in lieu of updating contract pricing for fleet purchases.

Response: Public Works procurement officers will work with Fleet Services Fleet Control team members to ensure that all base model fleet/equipment items are shopped via the internal catalog in SRM. Public Works procurement officers in collaboration with the Finance ERP team to upload accessory pricing in the internal catalog to eliminate free text line items.

Target Date: 03/20/2020

Rec. #1.3: Stop the use of other agency agreements without first working with Finance-Central Procurement to create and utilize cooperative agreements with linking agreements as required by A.R. 3.10.

Response: As of April 2019, Public Works procurement officers have stopped using other agency agreements for one-time purchases without collaborating with Central Procurement. Public Works procurement officers will continue to ensure that all cooperative contracts are completed by Central Procurement via a linking agreement prior to allowing any purchases to be issued against the contract.

Target Date: 02/14/2020

Rec. #1.4: Ensure procurement staff are trained to obtain three bids for all informal purchases when there is neither an existing contract nor a cooperative agreement with a linking agreement as required by A.R. 3.10.

Response: Public Works procurement officers will follow the existing Central Procurement SOPs for informal procurements.

Target Date: 02/14/2020

Rec. #1.5: Ensure all formal and contracted purchases are linked to contracts or cooperative agreements in SRM.

Response: Public Works procurement officers will build in internal controls to ensure that all formal, informal, and cooperative requirement contracts are in SRM prior to allowing any procurement activity to begin.

Target Date: 02/28/2020

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Rec. #2.1: Enter auto parts contracts in M5 or SRM by line item and line-item pricing.

Response: Public Works will conduct discussions with PW IT, PW Procurement and Finance ERP to explore system enhancements for entering auto parts contracts in M5 or SRM by line item and line item pricing.

Target Date: 12/31/2020

Explanation, Target Date > 90 Days: The end result must take into consideration the technical aspects of the two systems M5 & SRM, the operational needs for Fleet Services, the procurement requirements and the processing requirements in ERP.

Rec. #2.2: Establish and implement a process to ensure goods are received in M5 prior to authorizing payment in SRM.

Response: Public Works will develop standard operating procedure for processing purchase order quantities in M5.

Target Date: 02/28/2020

Rec. #2.3: Establish and implement a process to only enter a goods receipt for items that are received, and match the specific item ordered.

Response Public Works will develop a standard operating procedure on processing goods receipts in SRM to include checking M5 for order status and quantities.

Target Date: 02/14/2020

Rec. #2.4: Work with Finance Department staff to ensure all historical vendor credits are processed.

Response: Public Works will create and maintain a standard operating procedure for when and how to process vendor credits in M5 to ensure that inventory levels remain accurate. In addition, Public Works will coordinate will the Finance Department to assist with processing credits over a year old.

Target Date: 03/20/2020

Rec. #2.5: Ensure a process is in place that assures free text line items are not used in lieu of updating contract pricing for auto parts purchases.

Response: Public Works will work with key stakeholders to explore opportunities to enhance the interface between SRM and M5 to identify system enhancements to minimize the use of free text for auto parts purchases.

Target Date: 12/31/2020

Explanation, Target Date > 90 Days: This is currently a M5 system limitation that will require additional programing, coordination between the City and multiple software vendors.

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1 – Fleet Purchases Background The Fleet Control Section (Fleet) is responsible for acquiring and maintaining City-owned vehicles and fleet equipment. This includes, but is not limited to, light and medium duty vehicles, emergency service vehicles, refuse vehicles, and off-road equipment. Staff use the M5 application to track fleet purchases, maintenance costs, and maintenance history. Procurement standards are outlined in Phoenix City Code, Chapter 43 – Procurement, and Administrative Regulation (A.R) 3.10 – General Procurement Procedures. A.R. 3.10 requirements include the following:

Defines SRM as the official electronic system for procurement activities related to goods and services;

Defines procurement dollar thresholds, as outlined in the table to the right;

Defines procurement responsibilities for department and Finance-Central Procurement staff; and

Defines responsibilities for the creation and/or adoption of Cooperative Agreements as the sole responsibility of the Finance-Central Procurement section.

During FY 2017/18, staff generated purchase orders worth approximately $24.5 million for fleet purchases. Formal procurements totaled $22.9 million, and small dollar and informal purchases totaled $1.6 million. We selected a sample of contracts, purchase orders, invoices, and SRM data, to determine if Public Works’ staff complied with selected sections of A.R. 3.10, and the SRM procure-to-pay standard process.

Results Based on the sample selected, invoiced items for vehicles and fleet equipment were generally supported by an existing contract. Controls can be strengthened to ensure contract line items (e.g., pricing and supply numbers) are updated in SRM, and use of free text line items are limited to appropriate purchases.

During FY 2017/18, the City expended approximately $23 million for fleet purchases selected by formal procurement thresholds. We selected four of 31 fleet contracts to determine if they were entered in SRM correctly, and if a sample of their corresponding purchase orders and invoices matched contracted prices.

Procurement Thresholds

Procurement Type

Amount Approval

Petty Cash Up to $100 Assigned Department

Staff

Small Dollar Purchase

$101 - $8,600

Assigned Department

Staff

Informal Procurement

$8,601 - $99,999

Department Director

Formal Procurement

$100,000 and Above

City Council

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Contracts

All reviewed contracts were entered in SRM by line item as required. However, line items were not always correct due to outdated pricing or the use of “free text.” Free text line items allow staff to procure products that are not specifically identified or priced within the contract, such as custom manufacturing. However, it can also be used to circumvent SRM internal controls that compare the order price to the contract price. Purchase Orders

We tested five purchase orders, totaling $909,887, associated with the contracts noted above. Although all five purchase orders were entered in SRM by line item per policy, discrepancies were identified as products were linked to line items that were inconsistent with the contract or pricing. Results included the following:

One purchase order had two add-ons that did not have pricing in the SRM contract. Per Fleet staff, pricing fluctuates for add-ons and is based on vendor quotes. This appeared reasonable.

One purchase order was $22,325 lower than the contract price. Per Fleet staff, the contractor may grant discounts to the City. Discount variances are allowed but should be documented by linking the discounted purchase order to current SRM pricing.

Three purchase orders did not agree to either SRM or the contract. Per Fleet staff, these purchases were made during the contract transition from the Finance Department to Public Works, and it was unclear if contract pricing was updated prior to the purchase date. The internal catalog has since been updated to match current pricing.

Invoices

We selected five invoices from the previously reviewed purchase orders and found that three of the invoices noted the correct manufacturer or supply part number used to match contract pricing. The other two invoices had descriptions that did not match the contract. It is likely that the discrepancies were due to outdated contract information. The small purchases and informal procurements we selected for testing were approved per policy. Controls should be strengthened to ensure procurement requirements related to cooperative agreements and contract links are followed.

During FY 2017/18, $1.5 million was paid to vendors for small dollar or informal fleet procurements. We tested 16 purchase orders (100%) to determine if procurements were approved and processed per policy. Purchase Orders less than $8,600

Three of 16 purchase orders were less than $8,600 and did not require City Council approval. No further testing was performed.

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Purchase Orders greater than $8,600 but less than $99,999

Eleven of 16 purchase orders were informal procurements and approved by City Council as required by A.R. 3.10. Two of the 11 purchase orders were attained per policy; however, the following purchasing practices were not compliant with A.R. 3.10.

Four purchase orders, associated with three cooperative agreements, were created by Public Works’ staff. According to A.R. 3.10, only Finance-Central Procurement staff is authorized to create and maintain cooperative agreements.

o None of these purchase orders were linked to a contract within SRM. Contracts are required to be linked in SRM to ensure the authorized amount is not exceeded.

Four purchase orders were processed with an authorized determination memo to utilize a state contract. Staff used the state contract pricing to justify the reasonableness of the price. The three-bid minimum was not met as the linking agreement was not established per policy. Per the Law Department, this is unallowable.

One purchase order had a contract created, but that contract was not entered in SRM.

Purchase Orders greater than $100,000

Two of 16 purchase orders were greater than $100,000 ($996,300 and $108,455). Although both purchase orders were processed with an authorized Determination Memo – Special Circumstances Without Competition and approved by City Council, neither purchase was entered as a contract in SRM per policy, as a purchase order was created in lieu of a contract. Recommendations 1.1 Ensure contracts are entered properly in SRM, including correct/updated pricing,

and manufacturer or supply numbers, prior to processing invoices.

1.2 Ensure a process is in place that assures free text line items are not used in lieu of updating contract pricing for fleet purchases.

1.3 Stop the use of other agency agreements without first working with Finance-Central

Procurement to create and utilize cooperative agreements with linking agreements as required by A.R. 3.10.

1.4 Ensure procurement staff are trained to obtain three bids for all informal purchases

when there is neither an existing contract nor a cooperative agreement with a linking agreement as required by A.R. 3.10.

1.5 Ensure all formal and contracted purchases are linked to contracts or cooperative

agreements in SRM.

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2 – Auto Parts Background City-owned vehicles and other fleet equipment are serviced and maintained at multiple service centers. The service centers include Fire Operations, Glenrosa, North and South Shops, Okemah, Police Southern Command and Substations, Salt River, and Union Hills. Staff use the M5 application to record and retain records for vehicle maintenance and used auto parts. Auto Stores staff are responsible for ordering auto and equipment parts needed for maintenance. Part purchases are regulated by Phoenix City Code, Chapter 43 – Procurement, and A.R 3.10 – General Procurement Procedures, similar to the purchases of fleet and other equipment. Parts can be ordered from existing inventory or directly from a vendor (either by contract or informal procurement). Auto part expenditures during FY 2017/18 were approximately $9.1 million. We selected a sample of contracts, purchase orders, invoices, and SRM data, to determine if Public Works complied with selected sections of A.R. 3.10. Since the M5 application interfaces with SRM, we also reviewed the process to document how goods were received. Results Adequate controls are not in place to ensure that parts are received in M5 prior to authorizing payment. This can result in inventory discrepancies, and payments for items not yet received or requested.

Per Public Works’ procedures, Auto Stores staff receives ordered inventory and enters the quantity received in M5. Field Support Services and select Auto Stores staff are to verify that M5 has been updated prior to processing the payment in SRM. We identified invoices paid between January 1, 2019 and May 31, 2019, and compared them to M5’s “ordered” status to determine if goods receipts were updated in M5 per policy. Of 138 M5 purchase orders noted “ordered”, 53 purchase orders (38%) totaling $26,424 had already been paid. According to Auto Stores staff, this may have occurred if an incorrect item was received, or parts were delivered without a noted price and quantity. These reasons would indicate that the items should have been returned to the vendor. Goods receipts should only document the acceptance and authorize payments when ordered items have been received. Several reviewed auto parts contracts and purchase orders were not properly processed in SRM. Failure to enter line-item pricing or correctly linking to existing contracts can result in over- or under-payment of invoices, or inaccurate contractual totals.

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Per policy, contracts in SRM should be listed by line item, including correct supply numbers and pricing, as well as have an authorized date range and contract amount. Purchase orders are also required to be linked to contracts in SRM. This ensures that invoices are paid at contracted rates, and overall expenditure totals are within the authorized contract amounts. There were 244 fleet contracts in SRM during our testing period. We reviewed contracts, purchase orders, and invoices, to determine if procurements were processed per policy. Our findings were as follows. Contracts

According to SRM, all expenditures were within the authorized contract amounts. Per Auto Stores and Field Support Services staff, contract line-item pricing is not entered in SRM or M5. We reviewed two contracts in SRM and verified that line-item pricing was not entered for one contract. For that contract, a free text line item was used. Free text line items allow staff to procure products that are not specifically identified or priced within the contract, such as custom manufacturing. However, it can also be used to circumvent SRM internal controls that compare the order price to the contract price. Purchase Orders and Invoices

When a parts purchase order is created in M5, an interface automatically generates a purchase order in SRM. SRM does not pull detailed pricing from the contract but extracts pricing from M5 based on the average historical price. This average price is rarely accurate and requires a manual verification to ensure invoiced pricing matches the contract agreed-upon price. We selected a sample of eight purchase orders and their associated invoices to verify that invoiced prices agreed to contractual terms. We found the following:

2 purchase orders/invoices were properly processed.

2 purchase orders/invoices did not match the contract price.

4 purchase orders/invoices were not linked to existing contracts.

o Linking to a contract helps ensure that contracts are not overspent, and provides staff with the ability to verify prices.

Vendor credits were not processed timely. Steps should be taken to correct the backlog and ensure a process is in place for future returns.

When Auto Stores receives an extra or incorrect part, that part is shipped back to the vendor. The vendor should adjust the invoice and remove the associated costs. According to Auto Parts staff, prior to and during the initial stages of SRM implementation, no established procedure to process vendor credits existed. As a result, vendor credits were not processed timely and a backlog was created. As of August 2019, some vendor credits from FY 2013/14 through FY 2017/18 have not been processed. During our audit, staff met with the Finance Department regarding these outstanding credits, and they are willing to assist in processing all historical credits.

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Recommendations 2.1 Enter auto parts contracts in M5 or SRM by line item and line-item pricing. 2.2 Establish and implement a process to ensure goods are received in M5 prior to

authorizing payment in SRM. 2.3 Establish and implement a process to only enter a goods receipt for items that are

received, and match the specific item ordered. 2.4 Work with Finance Department staff to ensure all historical vendor credits are

processed. 2.5 Ensure a process is in place that assures free text line items are not used in lieu of

updating contract pricing for auto parts purchases.

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Scope, Methods, and Standards Scope We reviewed the Fleet Services Division’s controls over purchasing of fleet vehicles and auto parts from July 2017 through May 2019. Methods We used the following methods to complete this audit:

Interviewed Fleet Services Division staff

Interviewed Finance Department staff

Reviewed SRM purchase orders

Compared M5 and SAP purchase orders

Observed Fleet staff receive parts ordered in M5

Reviewed SRM contract utilization and shopping cart reports

Reviewed purchase orders and related contracts

Reviewed vendor quotes and related invoices

Reviewed goods receipts and approval for sample purchase orders Unless otherwise stated in the report, all sampling in this audit was conducted using a judgmental methodology to maximize efficiency based on auditor knowledge of the population being tested. As such, sample results cannot be extrapolated to the entire population and are limited to a discussion of only those items reviewed. Standards We conducted this performance audit in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the performance audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives.