10.2 Audits (7/99)
10.3 Record Retention (4/05)
10.1 CLOSEOUT PROCEDURES
49 CFR Part 18.50, Closeout, addresses the requirements that grantees must adhere to in the closeout of their grants. In order to comply with these requirements, grantees will have to obtain the required information, reports, final invoices, and other documentation as appropriate from their third party contractors as part of the contract closeout process. The closeout information required by FTA from grantees pertains to the following:
(1) Final performance or progress report.
(2) Financial Status Report.
(3) Final request for payment.
(4) Invention disclosure (if applicable).
(5) Federally-owned property report (does not include property obtained with grant funds).
A completed contract is one that is both physically and administratively complete. A contract is physically complete only after all deliverable items and services called for under the contract have been delivered and accepted by the grantee. These deliverable items include such things as reports, spare parts, warranty documents, and proof of insurance (where required by the contract terms). These deliverable items may or may not have been priced as discrete pay items in the contract, but they are required deliverables, and the contract is not physically complete until all deliverables are made. A contract is administratively complete when all payments have been made and all administrative actions accomplished. The steps that must be completed to close out a contract will depend upon the type and/or nature of the contract.
Routine commodity procurements - The closeout of routine purchase orders and contracts for commodities and other commercial products is usually a straightforward and uncomplicated process. The procurement person responsible for closeout will need to ensure that his end item user has inspected and accepted the deliverable items as being in conformance with the purchase order/contract specifications. An inspection/acceptance form should be in the file attesting to the contractor's delivery of all contract end items, including any descriptive literature or warranty documentation. There must also be documentation attesting to final payment by the accounts payable department.
Non-routine contracts for services, construction, rolling stock, etc. - Contracts for personal services, complex equipment, construction, and other one-of-kind items will require a number of steps to effect an administrative closeout. Major elements of the closeout process, and related documentation, might include:
a) Resolution of all contract changes, claims, and final quantities delivered.
b) Determination/recovery of liquidated damages.
c) Review of the insurance claim file by counsel/insurance specialist to determine if funds need to be withheld from final payment to cover unsettled claims against the contractor.
d) Settlement of all subcontracts by prime contractor.
e) Performance of all inspections (and acceptance tests if any) by the grantee's project management office, with appropriate documentation.
f) Conduct of a cost audit for cost-reimbursement contracts and resolution of questioned costs, if any.
g) Generation of a Contractor Performance Report. See Best Practices below.
h) The submittal of all required documentation by the Contractor, including such items as:
- Final reports
- Final payroll records and wage rate certifications
- Spare parts list
- Manufacturer's Warranties and Guarantees
- Final corrected shop drawings
- Operation and maintenance manuals
- Catalogues and brochures
- Invention disclosure (if applicable)
- Federally-owned property report (if there was Government-furnished property)
- Resolution of final quantities (construction contracts)
- Final invoice
- Consent of Surety to release final payment to Contractor
- Contractor's Affidavit of Release of Liens
- Contractor's General Release (releasing the grantee from any further liabilities/claims under the contract)
- Maintenance Bond (if required)
i) Conduct a Post-delivery Audit for rolling stock contracts as required by 49 CFR Part 663 - Pre-award and Post delivery Audits of Rolling Stock Purchases.
Federal closeout procedures - Should the grantee wish to review the contract closeout procedures used by the Federal Government for its contracts, they may be found in FAR Part 4.804, Closeout of contract files. FAR Part 42.15, Contractor Performance Information, discusses the preparation of Contractor Performance Reports. These procedures are not binding on grantees, and are included here for information purposes only.
Establishing That a Contract Is Completed - It is generally the responsibility of the Project Manager (PM) to establish that the work under a contract has been completed and the contract is ready for closeout. When the PM determines that the work is complete, the PM should prepare a checklist showing all the contract deliverables and submittals, and indicating on the checklist that all submittals and deliverables have been reviewed, inspected and accepted. The PM should notify the contract administrator by memorandum that the contract is complete and all required deliverables have been inspected and accepted.
Contract Closeout Checklist - The PM or contract administrator should have a contract closeout checklist, listing all the administrative steps required to close out a contract. The checklist is an extremely useful tool for the contract administrator or project manager who is responsible for contract closeout. Given the different requirements for the various contracting situations, grantees may wish to have different checklists for different types of contracts; e.g., commodities, services, construction, cost-type contracts, etc. An example of a contract closeout checklist used by MARTA for construction contracts is shown in Appendix B.14.
Contractor Performance Report - Documentation of a contractor's performance for future source selection decisions is an option that grantees should consider for certain types of procurements such as professional services, complex equipment, construction, etc. These performance reports can be an important reference point for future source-selection decisions. See BPPM Section 5.1, Responsibility of Contractor. If the grantee chooses to document a contractor's performance, input to the report should be received from the technical office, contracting office, disadvantaged business office (if contract contained DBE requirements) and end users of the product or service (if appropriate). Contractors should be furnished with the report and given an opportunity to submit comments, rebutting statements or additional information. The Contractor's comments should be retained in the report file. It would be advisable to have a review level above the grantee Procurement Officer to consider disagreements between the parties regarding the evaluation. However, final decision on the content of the report must rest with the grantee. Copies of the final evaluation should be furnished to the Contractor. Grantees should have a time limit on the retention of these reports.1
Review by legal counsel - For procurements involving services, construction, and larger dollar value equipment purchases, grantees may wish to have their legal counsel review the closeout file to ensure the adequacy of the contractor's legal documents, including the contractor's general release, insurance certificates, surety's release, maintenance bonds, etc.
Proof of insurance coverage - For all contracts requiring the Contractor to maintain insurance for its products or services (e.g., professional liability or product liability insurance), the contract administrator should obtain proof of insurance from the Contractor as part of the closeout process. This documentation should be submitted to the grantee's Insurance Department for approval prior to final payment of the Contractor. The Insurance Department will be required to maintain these documents as "active" files until such time as the insurance requirement ceases under the terms and conditions of the contract; i.e., these insurance terms will continue past (survive) the final contract payment.
Final payment - The contract administrator (CA) must be sure that all administrative steps have been accomplished prior to final payment. Contract administrators should make use of a contract closeout checklist to the extent that the Program Manager's checklist does not cover everything in the closeout process (e.g., the contract administrator may have certain areas of concern not assigned to the Program Manager). The CA must ensure that all required inspections have been performed by the technical program office, and a memorandum has been received from the project manager certifying to the satisfactory completion of the contract, which includes all required documentation from the Contractor, before they authorize final payment or the release of any funds being retained under the contract. Contract administrators need to pay careful attention to those types of documents that are notoriously problematic, such as warranties. In fact, grantees may wish to consider making these warranty documents a pay item in their contracts when the contract pay items are being established, so that the Contractor will be motivated to deliver the documents in a timely manner, and there will be no dispute as to the proper amount that should be paid for these items.
Contractor's General Release - As part of the contract closeout process, the contract administrator must send the Contractor a closeout letter that includes the Contractor's "general release." This document must be a standard statement prepared by the grantee's legal counsel for use on all of the grantee's contracts. The release will say that for the payment of a sum certain, which is the final contract amount agreed to by both parties, the Contractor releases the grantee from any and all claims of every kind arising directly or indirectly out of the contract. The release may also contain a certification that the contractor has paid its subcontractors and suppliers for all their labor, materials, services, etc. furnished under the contract. The release is to be signed by a corporate official authorized to bind the Contractor. The general release is important to obtain prior to final payment because it assures the grantee that there will be no further claims from the Contractor once the final payment has been made. The grantee should have the release reviewed by its legal counsel if the Contractor makes any changes to the grantee's standard release language that was sent to the Contractor for signature. Of course it will be necessary for the grantee and the Contractor to have resolved all open issues of a financial nature prior to the execution of the release (change orders, claims, liquidated damages, etc.), and this resolution of all outstanding claims is an important step in the contract closeout process.
Retainage and the problem of contractors who quit work - Occasionally a construction contractor may "walk away" from a project that is almost complete, refusing to sign a general release and forgoing final payment. This situation may occur when the contractor lacks sufficient financial incentive to complete the contract; e.g., if the "punch list" is large and there is very little money left in retainage, the contractor may profit by refusing to correct the punch list items and leave the retainage with the grantee. Or the contractor may have been awarded another contract which requires the reassignment of his personnel to another job. Whatever the reason, the grantee should anticipate this possibility by carefully estimating the amount of retainage in such a way that it represents twice the amount of the punch list work and undelivered items (manuals, drawings, spare parts, etc.). For example, MARTA's procedures (which are spelled out in the contract provisions) call for the retainage of at least 5% of the total contract value as the work progresses (10% if there are problems observed with the work). At the point of final inspection and punch list preparation, the resident engineer estimates the value of the punch list items and the undelivered items such as spares, manuals, warranties, etc., and then MARTA pays out the retainage minus twice the value of all the unfinished work. By establishing the retainage in this way, the contractor is motivated to complete the contract, because the contractor will actually receive twice the amount of money that it takes to finish the work. In other words, the contractor is given a strong incentive to complete the contract. When all else fails, the grantee should definitely involve the surety in the issue of unfinished work (even if the amount of work is relatively small) because the contractor's relationship with its surety is a vital one for its future business. If the contractor loses the confidence of its surety, it is effectively foreclosing on its ability to bid on future work requiring performance bonds.
Warranty and Guarantee Register - The contract specifications may require that individual warranties or guarantees be furnished for various installed equipment or building systems. For each completed contract requiring warranties, the contract administrator should develop a Warranty and Guarantee Register, which is a status form listing:
- each individual item of equipment and system for which a warranty or guarantee is specified (roofing, doors, sealants, etc.);
- the pertinent section in the contract specification;
- the name of the company providing the warranty;
- the expiration date of the warranty; and
- the address of the providing company
An example of a Warranty and Guarantee Register, used by MARTA, can be found in Appendix B.13. The Warranty and Guarantee Register will enable the grantee to monitor upcoming warranty expirations so that the equipment or building system can be inspected before the expiration date, and corrective actions taken by the Contractor if required.
FTA's Grant Management Guidelines Circular 5010.1C, dated October 1, 1998, Chapter III-7, Third Party Contract Audits, provides guidance to grantees concerning those third party contract audits.
FTA's Grant Management Guidelines do not establish a contract value/dollar threshold requirement for conducting contract audits. Grantees must use their own discretion as to the nature and extent of third party contract audits. However, the FTA Guidelines mention certain types of contracts that usually include provisional overhead (burden) and General Administrative (G&A) rates. These provisional, or interim, rates need to be verified by audit for the applicable contract periods. The types of contracts that typically may be structured as cost-reimbursement contracts requiring final cost audits would include consultant, engineering or service contracts.
Contract audits may also be requested by FTA to verify that grantee payments to the contractor are consistent with the terms of the contract. In addition, audit of a third party contract may be recommended by the firm conducting the grantee's single annual audit. 2
Third party contract audits must be conducted by auditors who are independent from the third party contractor. Many grantees assign the contract audit function to their own auditors or financial management personnel. However, some grantees do not have the personnel resources within their own organization to perform this function. There are two sources for audit services that are available to grantees: independent accounting firms and contract auditors from agencies of the Federal Government. Private accounting firms can usually respond more rapidly to the grantee's request for audit, but in some cases the Federal Government maintains a continuing audit function at contractor locations, and these auditors can be used for third party contract audits. In contracting for private firms to provide audit services, grantees should follow standard contracting procedures for third party contracts. Requests for Federal audit assistance should be directed to FTA.
When audits result in questioned costs, and the grantee is thus required to resolve the questioned costs through negotiation with the Contractor, the results of the negotiation should be documented in a Summary of Negotiations memorandum which must be placed in the contract file. This memorandum must explain how the final contract costs were arrived at. The cost of performing an audit of a third party contract can be charged to the grant.
10.3 RECORD RETENTION
The FTA Master Agreement (MA) deals with grantee and subgrantee record retention requirements in Section 8. Grantees are “recipients” and subgrantees are “subrecipients.” The MA requires recipients and subrecipients to maintain their records for at least three years following completion of the project. These rules do not pertain to third-party contractors since the latter are not “recipients” or “subrecipients.” 3
The requirements pertaining to third-party contractors are set forth in the Common Grant Rule (49 CFR 18.36). Grantees are required to include a clause in their contracts whereby contractors agree to maintain records for inspection by the grantee, FTA, Comptroller General, etc. for three years after final payment is made by the grantee and all other matters are closed. 4 This three-year period begins, not with completion of the contract work, but with final payment, which may be considerably longer than three years after work completion. This will especially be true with cost-type contracts that require a final audit before final payment can be made. In these cases the three-year retention period does not begin until the audit is completed and final payment is made. The BPPM includes suggested clause language for third-party contracts in Appendix A.1, Clause #11 – Access to Records and Reports. Grantees should develop their clause language so it complies with the common grant rule language that contractors must retain records for three years "after final payment is made by the grantee and all other matters are closed.” The grantee may wish to ensure that such records are readily accessible.
1 - The Federal policy is to retain these reports for not more than three years [FAR Part 42.1503 (e)]
3 - These terms are defined in the MA, Section 1.m and 1.p. Grantees must ensure their contract terms and procurement policies clearly require record retention for three years after the final contract payment is made and not after completion of work.