M E M O R A N D U M

TO: Board of Commissioners

FROM: Kim Justice, Auditor

SUBJECT: Special Report on Purchase of Fiber Optic Cable on Personal Services Contract 130-880

I have completed my review of the fiber optic cable purchase invoiced on May 30, 2001 by SSR Engineers. This audit was conducted to determine the circumstances that have led to a non-bid purchase of 180,000 feet of 48 strand fiber optic cable through a professional services contract. This payment has not been made pending this audit and legal review.

The purchase through SSR Engineers was a deliberate violation of RCW 54.04 and District Resolutions by the District's Management. District Management felt that the only way to meet construction deadlines related to fiber were to obtain needed materials whenever located. After the fiber was located and a commitment was made to purchase the cable, quotes or bids were obtained to meet any applicable requirements.

The District's Management had committed to purchase 200,000 feet of 48 strand ADSS cable from Paramount Communications. Contract 170-617 was let for bids. A bid was received from another vendor at a lower price. The other vendor had not signed the bid bond allowing the bid to be rejected. Paramount had increased the price on the bid, causing the price to exceed the Engineer's estimate by more than 15%. The District canceled the bid, determining that the fiber was no longer needed, then proceeded to purchase 18,000 feet throught the Engineering Contract 130-880 with SSR Engineers. The detailed events leading to this purchase are attached.

RCW 54.04.70 requires all materials in excess of $5,000 to be by contract. RCW 54.04.080 requires all contract for materials to be competitively bid.

Resolution 5853 grants the Manager the authority to enter into contracts, however, this authority comes with limitations that requires the Manager to stay within applicable laws.

Resolution 6870 limits the authority of the Manager to purchases of like items under $35,000.

Resolution 6994 grants the Manager the authority to execute a change order to a professional services contract for $100,000 or less. The following boundaries in the resolution were violated on change order 3 to Contract 130-880.

1. That the change order is within the original scope, incidental to the original contract, and will not violate the competitive bid laws.

2. That any additional work authorized does not alter the essential purpose of the original contract or consitute a new undertaking.

3. That an analysis has been made determining that the change order price is fair and reasonable and that it and all cumulative change orders will not exceed the District's authorized budget for the project.

4. That all such change orders are verbally reported to the Manager and a copy of the signed change order forwarded to the Manager and Commission for reporting/informational purposes as soon as possible.

The unauthorized purchase, and the subsequent events to attempt to cover up the purchase, resulted in a significantly higher price for the cable and the risk of legal action from both the unsuccessful bidder and the Engineering firm who assisted the District's management in covering up this bid violation.

I am unable to certify invoice 1236 for payment. The procurement was not in compliance with State Law and District Resolutions.

I recommend that the Commission deny payment on invoice 1236.

District Management committed to deadlines for partial construction of the fiber optic network. Materials needed were not on hand nor readily available to accomplish these tasks. When the District's Management became aware of needed materials that were available or soon would be, they committed to purchase these materials, no matter what the cost. The District's Management was concerned that someone else would purchase the materials if they did not make the commitment.

The details of the transaction, amount, type and delivery information were provided to the Purchasing Agent. The Purchasing Agent would then obtain quotes or begin the bid process depending on the value of the materials and the delivery schedule.

There are indications in the purchasing files that this occurred with any vendor who could obtain the needed types and sizes of fiber optic cable. The Paramount cable discussed below is a typical scenario that has occurred in order to obtain the necessary cable to meet the self imposed deadlines for construction.

The District received a list of various cable quantities, sizes and types with availability dates. There were three 48 strand items on the list:

1. 12,000 feet of duct cable immediately available at $2.29 identified as "Sold GCPUD". Our purchasing department noted "issued on a P.O."

2. 80,000 feet of duct cable available February 28 at $2.19 identified as "Sold GCPUD". Our purchasing department noted "contract 170-616".

3. 200,000 feet of ADSS cable available April and May at $3.38. Our purchasing department noted "Need contract" and "170-___ Need contract for."

There was another note on a larger size of cable to "talk to Steve".

This list was attached to PO 2729, dated February 15, 2001. This was used to document the quote for the awarded vendor Paramount at $2.29. Wesco and Communications Supply Company could not meet the delivery dates. The order was received by the warehouse on February 15, 2001.

On March 7, 2001 bids for Contracts 170-616 and 170-617 were opened.

Contract 170-616 was for 80,000 feet of 48 strand duct cable with delivery by March 31, 2001. There were four bids received, two could not meet the delivery date and two exceeded the engineer's estimate by more than 15%. Paramount's bid was $2.35 (16 cents over the list price above), the estimate was $1.95. The highest bid that could have been accepted was $2.24 (5 cents over the list price of $2.19). All bids were rejected, a new bid call done, the Engineer's estimate was increased to $2.10 (allowing acceptance to $2.42), Paramount was awarded the contract at $2.35.

Contract 170-617 was for 200,000 feet of 48 strand ADSS cable with delivery within 30 days of contract award. There were three bids received, one could not meet the delivery requirement, Communications Supply was missing a signature on the bid bond and Paramount exceeeded the Engineer's estimate by more that 15%. Paramount's bid was $3.44 (6 cents over the list price above), the estimate was $2.98. The highest bid that could have been accepted was $3.43 (5 cents over the list price of $3.38). All bids were rejected. The Memo from Steve Sutton, Fiber Construction Manager, documented the rejection for the file, "Do to a reduction in the number of HUB's to be constructed during the year 2001 none of the cable was called for a rebid." I have not been able to find if or when this went to the commission.

However, if another bid was done on 170-617, Communications Supply would have certainly corrected the missing signature. Communications Supply had bid $2.41, $206,000 less than Paramount.

On April 23, 2001, the Commission approved the rejection and re-bid of 170-616. In addition, they approved Change Order No. 2 to the SSR Engineer's contract (130-880) for engineering costs related to Non Utility Generation.

On April 26, 2001, Doug Hein signed Change Order 2 (above) and Change Order 3. Change Order 3 states:

The following potential engineering project is hereby added to Appendix A:

Research and procurement of fiber optic materials for transmission and substation engineering projects.

There were no changes to the time of completion or price, the change was not reviewed by the Attorney or Commission. Both change orders were sent to SSR Engineers on April 27 and returned on May 1.

In June, an invoice was received for professional services March 25, 2001 - May 19, 2001 for Frenchman Hills Fiber.