Procurement Best Practices 1

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Procurement Best Practices

Trainer: Janet S. Johnson, CPA, CMA, Senior Manager

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Agenda

Policies and Regulations (OMB Circulars)• Written Procedures

• Procurement Methods, including discussion of:– Competition Requirements

– Price and Cost Comparisons

Procedures and Best Practices• Purchasing Limits and Approvals

• Use of Purchase Orders

• Use of Credit Cards

• Accounts Payable Management

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Goals

Share “best practices” policies and procedures:• Discuss efficient processes that comply with

federal regulations

• Provide tips for streamlining processes, including practical ideas and examples

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Why Look at Procurement?

• Procurement policies and procedures touch all aspects of an organization

• Federal regulations on procurement are lengthy and complex

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Definition

Procurement:• The acquisition of goods and services to be

used internally by the organization or to carry out a grant or contract-funded project

• The procurement process includes the decisionto purchase as well as the process to complete the purchase

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Procurement Regulations

References:• NPOs:

– OMB Circular 2 CFR Sec. 215.40-48 (A-110)

• Units of Government: – OMB Common Rule__.36

(Included with your materials)

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Procurement Regulations

Grants from other funding sources may have different or additional requirements

• Read your contracts.

• Know the rules you are subject to!

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“Top Ten” Goals of Any Procurement Process

1. The process should be “transparent”

2. The process should comply with all of the appropriate regulations

3. The process should ensure free and open competition

4. The process should avoid conflict of interest

5. The process should produce the most appropriate procurement in terms of price and other considerations

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“Top Ten” Goals of Any Procurement Process

6. The process should be well organized, understandable, and easy to manage

7. The process should be in writing

8. The process should be well documented and continuously updated

9. The process should be managed and monitored by appropriate personnel

10. The process should be designed to support superior service and performance for the benefit of the clients and program objectives

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Procurement Best Practices 6

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Written Procedures

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Requirements

You must have the following in writing:• Code of Conduct (2 CFR 215.42 or

CR__.36(b)(3))

• Procurement Procedures (2 CFR 215.44)

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Written Procedures

Goals:• Communicate to the funding sources how you

are implementing their requirements

• Communicate management’s policies to staff

• Promote standard practices

• Document internal controls

• Provide a procurement training guide

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Code of Conduct

“No employee, officer or agent shall participate in the selection, award or administration of a contract supported by Federal funds if a real or apparent conflict of interest would be involved”

2 CFR 215.44, CR_.36(b)(3)

Consider the 6:00 news!

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Conflict of Interest

“Conflict” means a financial or other interest by:• Employees, officers or agents (includes Board

members)

• Members of their immediate families, partners, or employers

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Conflict of Interest

• Employees, officers, or agents (includes Board members) may not accept gratuities, favors, or anything of monetary value

• Written policies may allow gifts of nominal value (must be defined)

• Written policies must include disciplinary actions for violations

• Refer to HHS Grants Policy Statement for more guidance (Section II, pg. 7)

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Standards of Conduct for Recipient Employees

• Safeguards to prevent using position for private financial gain (including family and business title) or appearance of

• Written standards of conduct

• Cover, at minimum, expected conduct in regards to– financial interests

– gifts

– gratuities and favors

– nepotism

– political participation

– briberySource: HHS GPS

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Standards of Conduct for Recipient Employees

• Other areas to cover– Conditions under which outside activities,

relationships, or financial interests are proper or improper

– Advance notification to a responsible organization official

– Specify the nature of penalties

• Not required to be approved by HHS

• Make available to officers, employees, consultants, governing board members

Source: HHS GPS

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Code of Conduct

Best Practices: • Employees and Board members sign

statements annually agreeing to follow the Code

• Board members review vendor list annually to ensure they are aware of any potential conflicts

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Fraud, Waste & Abuse

Includes but is not limited to:• Embezzlement, misuse, or misappropriation of

grant funds or property

• False statements

– From HHS, Grants Policy Statement, I-7

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Fraud, Waste & Abuse

Two types of fraud:• Misappropriation of assets (theft)

• Fraudulent financial reporting

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Fraud, Waste & Abuse

Conditions that are present for fraud to occur:• Incentives/Pressure

• Opportunity

• Attitude/Rationalization

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Fraud, Waste & Abuse

EXAMPLE:Misappropriation of funds – Theft

• Incentive/Pressure– Adverse relationship between agency and

employees; financial needs of employees

• Opportunity– Few controls; access to bank accounts

• Attitudes/Rationalization– Disregard for monitoring and controls

– Management doesn’t care

– Others do it

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Fraud, Waste & Abuse

EXAMPLE:Fraudulent Financial Reporting

• Incentive/Pressure– Inability to find participants; potential loss of funds;

overspending

• Opportunity– Inadequate monitoring of controls

• Attitudes/Rationalization– Disregard for regulations and other authorities

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Written Procedures

Include sections that address the procurement regulations:

• Code of Conduct

• Competition

• Procurement procedures

• Cost and price analysis

• Procurement records

• Contract administration

• Contract provisions

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Written Procedures

Sec. 2 CFR 215. 44, examples of required procedures:

• Avoid purchasing unnecessary items (a)(1); CR__.36(b)(4)

• Lease/purchase option analysis, where appropriate (a)(2)

• Acceptance, to the extent practical, of goods dimensioned in the metric system of measurement (a)(3)(v)

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Written Procedures

Sec. 2 CFR 215. 44, examples of required procedures: (cont.)

• Preference, to the extent practical, for products and services that conserve natural resources, protect the environment and are energy efficient (a)(3)(vi); CR__.36(i)(12)(13)

• Positive efforts to use minority, small business and women-owned businesses (b)(1- 5); CR__.36(e)

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Written Procedures

Sec. 2 CFR 215. 44, examples of required procedures: (cont.)

• Will not use “cost plus a percentage of cost” costing method (3)(c); CR__.36(f)(4)

• Vendor certifies in writing that it has not been suspended or debarred from doing business with any Federal agency (3)(d)– www.sam.gov, Excluded Parties List website

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Written Procedures

Procedures should be clear and simple so staff knows what to do.

Include forms – Examples:• Purchase orders

• Request for Proposal (RFP) template and checklists

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Procurement Methods

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Methods of Procurement

1. Small Purchase Procedures

2. Sealed Bid

3. Competitive Proposals

4. Noncompetitive Proposals (Sole Source)

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Procurement Methods per Regulations

1. $100,000 or more– Sealed bids– Competitive proposals (RFP)

2. Less than $100,000– Small purchase procedures – for procurement of

less than the threshold fixed at 41 USC 403 (11)• The small purchase threshold was raised to $150,000

in 2011 but most agencies have not written this into their regulations

– Also known as Simplified Acquisition Threshold

3. Sole Source Procurement– Last resort

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Ground Rules

Competition is required“All procurement transactions shall be conducted in a manner to provide, to the maximum extent practical, open and free competition.”

2 CFR Sec. 215.43

CR__.36(c)

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Ground Rules

Price or Cost Analysis is Required“Some form of cost or price analysis shall be made and documented in the procurement files in connection with every procurement action.”

2 CFR Sec. 215.45

CR__.36(f)

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Cost or Price Analysis

• Cost analysis – review and evaluate each element of cost to determine reasonableness, allocability and allowability

• Price analysis – compare prices of similar goods/services to evaluate price to be paid

• In practice, cost analysis is less common, so price analysis is usually performed

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Procurement Methods

Sealed Bids:• Request for bid must exactly describe the

goods/service– Complete, formal, and detailed specification of

goods or services

• Awarded to the lowest bidder who meets bid criteria– Decision is based solely on price– Other factors are not evaluated

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Procurement Methods – Sealed Bids

The following conditions should be present: DOE 10 CFR 600.236(c)(2)

• Complete, adequate and realistic specifications

• Two or more responsible bidders

• Firm fixed priced contract

• Selection made principally on the basis of price

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Sealed Bids

Use sealed bids when:• The award will be made on the basis of price

and other priced-related factors, and

• It is not necessary to conduct discussions with the responding offerors about their bids

From 48 CFR Part 6.401, Federal Acquisition Regulations

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Sealed Bids

Best Practice:• Use sealed bids only when you can very clearly

define what you want– Good decisions are often based on more factors

than price

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Competitive Proposals

Request for Proposals: Designed for free and open competition

• Publicized with specifications and evaluation factors

• Solicited from a sufficient number of qualified sources

• Awarded based on “price and other evaluation factors”

A cost or price analysis is required, as well as rating of other factors.

Note: Per GPS, RFPs must include the source of funds and percentage of federal funds (II-24).

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Requests for Proposal

Best Practices:• Identify the needs to be met and ask proposers

how their product/service will meet those needs– The best solution may be something you haven’t

thought of

• Include grievance procedures– Require written appeals of decisions

– Include who to contact and the deadline for appeals

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Requests for Proposal

Best Practices: (cont.)• Determine how proposers will be scored before

the RFP is issued– Significant factors:

• Expertise and knowledge of your industry

• Demonstrated experience

• Methodology for accomplishing goals of project

• Ability to meet timelines

• Minority, small, women-owned business

• Cost

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Example of Evaluation Grid

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Example Evaluation Grid

Auditor RFPPoint Range

Experience:

Prior experience auditing (type of entity) 0 5

Prior experience auditing similar programs funded by (state) 0 5

Prior experience auditing funded by (other funding sources) 0 5

Prior experience auditing nonprofit organizations 0 5

Prior experience designing and/or installing accounting systems in grant-funded organizations 0 5

Total 0 30

Organization, size and structure of Offeror's firm

Adequate size of firm 0 5

Minority/women-owned, small business 0 5

Total 0 10

Qualifications of staff

Audit team makeup 0 10

Overall supervision to be exercized 0 5

Prior experience of individual audit team members 0 10

Total 0 25

Understanding of work to be performed

Adequate coverage 0 10

Realistic time estimates of each audit step 0 5

Total 0 15

Price 0 20

Total 0 100

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Requests for Proposal

Best Practices:• Document procurement decisions

• Maintain a file that includes – Scoring grids– List of people who participated in the decision– Contract with vendor– If you keep copies of proposals/bids not selected,

consider scanning

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Procurement Methods

Simplified Acquisition Procedures:• Procurements under the small purchase

threshold ($100,000), or

• Below your organization’s threshold for sealed bids or RFPs

• Informal phone or oral quotes, at least two:– A cost or price analysis is required – The process should ensure open and free

competition

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Price Analysis

OMB has explained this requirement by providing for:

“…considerable latitude in determining the appropriate form of the cost or price analysis, depending on the nature and size of the procurement.”

Therefore, organizations are encouraged to implement efficient and reasonable comparison procedures.

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Price Analysis

Best Practice:• Price analysis for routine supplies may be

performed at the beginning of the year to identify vendor(s) to be used for the entire year

• Price such items in total, not by individual item

• Ask for discounts for annual purchasing agreements

• Develop a list of qualified vendors

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Price & Competition

Document…Document…Document!Maintain a procurement file that records:

• Price comparisons

• Who was contacted

• How decision was made

Remember: The process should be transparent!

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Procurement Methods

Noncompetitive Proposals:• Also known as Sole Source

• This is the method of last resort

• It doesn’t meet the competition requirement

• But a price analysis is still required

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Sole Source Procurements

When can you use this method?• Solicitation infeasible using a method that

ensures competition (e.g. small purchase procedures, RFP, or sealed bid), and one of the following applies:– Item available from only one source

– Public emergency

– The awarding agency approves, or

– Competition deemed inadequate (insufficient bidders)

— Common Rules_.36(d)(4)

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Sole Source Procurements

• A cost or price analysis is required

• Approval from awarding agency may be required

• Documentation is critical – The need to do a sole sourced procurement and the methods used must be transparent

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From Policies to Process

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Process Topics

Procedures:• Purchasing Limits and Approvals

• Use of Purchase Orders

• Use of Credit Cards

• Accounts Payable Management

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Limits and Approvals

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Procurement Decisions

Review and approval for:• Allowable

• Necessary for the program

• In the budget

Who should make these determinations?

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Approvals

Best Practices:• Define levels of spending

• Define the process to ensure competition and price analysis for each level

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Small Head Start ( < $2,000,000)

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Amount of Purchase Required Approvals Process

Category 1: < $100 Classroom Teacher Price comparisons required; can be done annually

Category 2: $101 ≤ $500

Department Manager 2 oral bids

Category 3: $501 ≤ $10,000

Department ManagerExecutive Director

3 oral or written bids

Category 4: > $10,000 Department ManagerExecutive DirectorBoard of Directors

3 written bids or proposals

EXAMPLE

What authorization limits will work in your organization?

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Large NPO ( > $125,000,000)

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Amount of Purchase

Approvals Solicitation Process

Documentation of Decision

≤ $500 • Project Director • At the discretion of the project director

• Invoice/receipt

$501 ≤ $5,000 • Project Director • Select pre-qualified vendor or

• 2 oral bids

• Memo describing oral bids or

• Procurement checklist

• Receipt/invoice

$5,001 ≤ $25,000

• Project Director and

• Div. Vice-President

• Select pre-qualified vendor or

• RFP process

• Proposals and evaluations or

• Purchase order

• Procurement checklist

$25,001 ≤ $100,000

• Project Director,

• Div. Vice-President and

• Fiscal Office

• Select pre-qualified vendor or

• RFP process

• Proposals & evaluations or

• Purchase order

• Procurement checklist

> $100,000 • Project Director,

• Div. Vice-President ,

• Fiscal Office and

• Treasurer (or designee)

• Select pre-qualified vendor or

• RFP process

• Proposals & evaluations or

• Purchase order

• Procurement checklist

EXAMPLE

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“Category 1” Spending

• Predetermined, budgeted amount of money is to be spent at a program director’s discretion

• Expenditures must be allowable and necessary for the program

• Evidence of price analysis is required (e.g. phone quotes, catalogue prices)

• Receipts required, but no additional procurement documentation is needed

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Limits & Approvals

Best Practices:• Establish a level of “category 1” spending

– Budget it

– Set ground rules for its use

– Small, routine purchases should be simple and quick processes

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Limits & Approvals

Best Practices: (cont.)• Staff responsible for managing budgets should

approve expenditures– They are in the best position to determine if the

purchase is reasonable and necessary

• Set levels for approvals that are appropriate for the size of your organization and your corporate culture

• Unless the organization is very small, the Executive Director and/or the Finance Director should not need to approve all purchases!

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Purchase Orders

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Purchase Orders

Why use purchase orders?• To authorize purchases for vendors

• To control expenses

• To document approval

• To provide correct coding

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Purchase Orders

Purchase Orders allow a department manager to determine if a proposed purchase is:

• Reasonable

• Necessary

• In the budget

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Purchase Orders

Best Practices:• Don’t require purchase orders for “category 1”

spending (defeats the purpose!)

• Use purchase orders only if your system can process them quickly, and

• Provide useful reports on planned purchases, that is, encumbrances

• If you use encumbrances, track them in your accounting system rather than on a spreadsheet

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Encumbrance Report

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Contract Management

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Contracts

• Establish organization policies for contracts– In general, when a vendor provides services rather

than goods, a contract is required.

• Get legal advice if questions

• Be consistent – follow your policies

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Contract Management

Best Practices:Develop a contract management process

• Who is responsible for ensuring contracts are carried out successfully?

• What is the monitoring process? – Example: How do you monitor a Weatherization

subcontractor?

• Who signs off on payments?

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Credit Cards

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Credit Cards

Credit card options:1. No corporate credit cards

– Require employees to use their own cards and promptly reimburse them

2. Corporate-owned credit cards

3. Procurement cards (P-Cards)

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Credit Cards

Best Practices:• Keep corporate credit cards locked up and

checked out when needed

• Have a policy on personal charges– Credit card privileges revoked if any occur

• Credit card slips may not be adequate documentation of expenses; require original receipts (restaurant bills, etc.)

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Credit Cards

Best Practices: (cont.)• Send monthly statement, unopened, to the

Board Treasurer for review or

• Set up online review of credit card statements for the Board Treasurer, the Executive Director, and the Finance Director

Recognize and control the risk!

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Procurement Cards

The next generation of credit cards:• Issued by major credit card companies (VISA,

American Express, MasterCard)

• Cards can be designated for:– Single person or department– Specific vendors– Spending limits

• Online services facilitate electronic approvals and processing

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Procurement Cards

The next generation of credit cards:• Online reports track and reconcile activity

– Able to track who is buying, what they are buying, and where they are buying it

• Can be linked to Accounts Payable (similar to a debit card)

• Often provide significant discounts

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Credit Cards – A Final Caution

Don’t let credit card use circumvent your procurement

policies!

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Accounts Payable

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Accounts Payable

Establish responsibilities:• Who is responsible for accurate coding of

invoices?

• Who is responsible for checking math accuracy?

• Who authorizes payment of invoices?

Define responsibilities for the:• Accounts Payable staff

• Program staff

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Accounts Payable Internal Controls

Require original invoices: • Don’t accept copies but what is a copy?

– E-mailed invoices – procedure to identify “original”

• Never pay from statements

Match with supporting documentation:• Receiving report

• Purchase order

• Vendor bid/proposal

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Accounts Payable Internal Controls

Invoice review:• Mathematical accuracy

• Description of goods or services

• Quantities and prices

• Vendor information

Cancel the invoice when it’s paid.

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Accounts Payable Internal Controls

• Obtain a Form W-9 from new vendors prior to paying them

• Require a vendor street address, not just a post office box number

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Accounts Payable

Best Practices:• Record payables on the accrual basis (when

the debt is incurred)

• Disburse the cash when payment is due

• Then, you can plan cash flow and

• Have timely information for monitoring expenditures

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Accounts Payable

Best Practices: (cont.)• Establish a processing schedule

– Establish a regular schedule for entering and paying invoices

– This helps the accounting staff plan their work and

– Helps the program staff know when information will be available and when payments will be made

– Reduces the number of on-demand checks

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Check-Writing Internal Controls

• No pre-signed checks

• Require 2 signatures (real signatures) for checks over a certain amount– No signature stamps!

• Check signers should really review the checks and supporting documentation

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Check-Writing Internal Controls

Computer-signed checks:• Authorized check signer reviews and approves

the check register

• Authorized check signer controls access to the check-signing medium

The Finance Director should not be a check signer.

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Purchasing and Disbursements Internal Control Grid

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Duty A B C D E

Inputs data into vendor master file

Obtains Form W-9 from new vendors

Initiates purchases

Authorizes purchases

Prepares purchase order/requisition

Prepares request for proposal

Administers collection of proposals

Evaluates proposals

Selects vendor

Receives vendor invoice

Approves vendor invoice

Assigns general ledger coding

Inputs invoice into A/P system

Selects A/P to be paid

Runs A/P checks

Reviews checks

Signs checks

Mails checks

Maintains custody of unused checks

Reconciles A/P to general ledger

Performs bank reconciliation

Review cancelled checks

Reviews bank reconciliations

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Positive Pay

Positive Pay requires the bank to verify correct checks before paying them:

• Send a file to the bank with:– Payee name, check date, and amount

• Bank won’t pay unless all information in the file agrees with the check

• Protects against fraudulent payments and fraud by payees

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Summary

• Know the requirements

• Maintain updated, written policies and procedures

• Use the most appropriate procurement method

• Document procurement methods and decisions

• Keep the process transparent

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Summary

• Use purchase orders for control and approval

• Set appropriate spending limits

• Plan for some discretionary spending

• Control the use of credit cards

• Plan and manage accounts payable processing

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Final Advice

Questions to ask about your procurement policies and procedures:

1. Do they make sense?

2. Do they work for you?

3. What about the 6:00 news?

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Materials/Disclaimer

• Procurement Best Practices PowerPoint*

• Additional References– CFR Sec. 21.40-.48 (A-110)– Common Rules Sec._.36 Procurement– Procurement Flowchart

– Encumbrance Report

• Technical Information

* Please note that these materials are incomplete without the accompanying oral comments by Janet S. Johnson of Wipfli LLP. These materials are informational and educational in nature and represent the

speaker’s own views.

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