In conjunction with our external audit of Innotion Enterprises, Inc. (Audit Report #2012-LA-1010), we reviewed termite inspection passthrough costs that it submitted to the U.S. Department of Housing and Urban Development (HUD) for payment as part of its real estate-owned (REO) Management and Marketing III (M&M III) program field service manager contract. We selected Innotion’s Las Vegas, NV, branch based on the size and scope of its contract with HUD. One of our objectives was to determine whether Innotion’s Las Vegas, NV, branch met administrative requirements concerning passthrough cost reasonableness.

We found that HUD paid for unnecessary administrative costs of Innotion’s subcontractor under HUD’s field service manager contract. This occurred due to the unclear definitions of actual and administrative costs in HUD’s contract with Innotion. Although the contract stated that Innotion could pay only the amount billed and not add its own administrative costs, it did not specifically disallow the payment of administrative costs incurred by a subcontractor, such as One Stop, that subcontracted Innotion’s work to other termite inspection contractors. As a result, 30 percent ($4,914) of the termite inspection costs paid by HUD in our sample were for the administrative costs of Innotion’s subcontractor. If HUD does not revise its field service manager contracts, it may continue to pay for unnecessary administrative costs for termite inspections and other passthrough costs submitted by its field service manager contractors.

We recommend that HUD’s Deputy Assistant Secretary for Single Family Housing ensure that HUD is paying fair and reasonable prices for passthrough expenses by ascertaining that field service managers are awarding subcontracts based on obtaining bids from qualified vendors that include, but are not limited to, the entities that actually perform the work. If this change had been implemented before our review, HUD could have put at least $4,914 to better use.