^tate of jBeto Jersfej>

K I M GUADAGNO Lt. Governor

CHRIS CHRISTIE Governor

DEPARTMENT OF COMMUNITY AFFAIRS

SANDY RECOVERY DIVISION

101 SOUTH BROAD STREET PO Box 823

TRENTON, N J 08625-0823

RICHARD E . CONSTABLE, III Commissioner

March 7,2014

Ms. Cherie Pinac Hammerman & Gainer, Inc. 1010 Common Street - Suite 2600 New Orleans, LA 70112

Re: State Contract G-8043 ("Contract") with Hammerman & Gainer, Inc. ("HGI") Adjustments to Invoices for Performance Related Issues

Dear Ms. Pinac:

As you know, the December 6, 2013 letter agreement required the State to give HGI written notice of any reconciliations or adjustments to amounts invoiced by HGI. This letter is intended to address adjustments as a result of performance-related issues. While we have been as thorough as possible under the circumstances, the time constraints precluded a fully-inclusive analysis. To the extent that any issues or claims are not described herein, no waiver is intended thereby. Al l claims and rights are reserved.

The purpose of this Contract was for HGI to bring its expertise to bear on developing and implementing an appropriate IT system which could be used by the State to implement, among others, its Resettlement (RSP) and Housing Programs. For example, section 3.1.1 of the Request for Quotation (RFQ) required HGI to "design, develop and implement a hosted Housing Program - Centralized Management Information System ["HP-CMIS"] ... that shall be utilized [by DCA] to provide" coordination with contractors; interface with other systems and databases, the transmission of data and information through this system, ensure compatibility with construction management information systems, develop cloud-based software to perform various needs of the DCA and complete all necessary software development for the Housing Programs. See RFQ, section 3.1.1, Contractor Operational Requirements, at 13-14. To provide these IT services, HGI subcontracted with STR, Inc. (STR). HGI -through STR as its subcontractor - utilized a system called E-Grants to provide these services.

On its face, the E-Grants system appeared appropriate for the required tasks. The idea would be that applicants would file an application either online, in-person or via the telephone and all information would be entered into the E-Grants system {see HGl's proposal, "Program Intake," page 23). Subsequently, this data would be supplemented through a document management system which would allow for paper documents to be scamied into the database and attached to an applicant's file {see HGl's proposal, "Program Intake," page 25). E-grants "integrated portals" would be utilized to pass this data and specific files to the DCA and construction managers, as well as the Department of Environmental

Performance Issues

I. The Failure of HGl's IT System; HGl's Defaults Under Section 3.1.1

New Jersey is an Equal Opportunity Employer • Printed on Recycled paper and Recyclable

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Protection (DEP), for examination and review to determine eligibility and the construction needs of an applicant (see HGl's proposal, "Program Intake," page 23). j

The over-arching purpose of this IT system was to provide all the necessary IT capabilities and functions so that the DCA could implement its RSP program without delay (see RFQ, Section 3.1.1, page 12), as well as report and monitor the progress of implementation. HGl's IT system was key to the success of the RSP program. Prompt and effective delivery was essential to ensure the State could proceed with efforts to help homeowners rehabilitate and reconstruct homes damaged or destroyed by Superstorm Sandy. |

Unfortunately, the HP-CMlS system failed to provide the necessary capabilities and to function adequately. Initially, daily meetings and conference calls were held at DCA's Sandy Recovery Division (SRD) offices for HGI to report program performance. By the middle of July 2013, it became clear that program reporting and consistent data output was a problem. DCA repeatedly reported these deficiencies to HGI at these meetings and in calls to standardize and clean up data and reports. Numerous inconsistencies and data errors continued to occur in standard reports generated from E-Grants data (i.e., the daily dashboard presented to DCA management). In fact, many of the capabilities that STR was to develop, as required by the RFQ and confirmed by the HGI Bid Proposal, were never implemented. While not all capabilities may have been required from the moment of execution of the contract, each capability was required to be developed and "online" fi^om the time that DCA was ready for its use for its housing programs (see Task Order 2a, 3.1.2, Requirement 17 - "system of record").

Failure of the E-Grants system to provide a comprehensive applicant status as required led to undue reliance on "case notes" entered by DCA Compliance and Housing Recovery Center staff. As reliance on the case notes became the prevailing method DCA Compliance had available to it for applicant tracking and updating, critical loss of this information resulted in an applicant's status information being "lost" in the system, as noted by DCA Compliance for RRE0036478 and RSP0006671 diuing the internal appeal review process for these files.

The RFQ also required the HP-CMIS system utilized by HGI to interface with future systems and databases to be developed by the State and required that the Contractor be responsible for transmitting any data, information and/or documentation requested by the State. Due to a lack of data validation, data stmcture and standard reports, numerous inquiries from state and local officials and the general public concerning the status of the Resettlement and Reconstruction, Rehabilitation, Elevation & Mitigation (RREM) programs could not be answered via the IT system as required by RFP Section 3.1.1, Contractor Operational Requirement 1) b (page 13). Instead, a significant manual review of records by DCA staff was required to provide the requested information. This diverted staff and resources from program critical fiuictions and responsibilities.

The Action Plan, the RFQ, and HGl's proposal all made clear that HGI needed to bring IT and business process integration tools capable of delivering a comprehensive IT system to manage these Programs. This system would integrate the business processes and provide solutions, from application, service delivery to closeout to meet DCA's program delivery schedule. Among other things, the Contract required the IT system to meet the data and reporting needs required by the various users and constituents in a timely and reliable manner, and HGI explicitly represented that the HP-CMIS system would "have a rich reporting capability that will contain both standard reports and the ability to create ad-hoc queries. ... HP-CMIS will also have dashboard reports that can be accessed at any time by users..." (See HGI proposal, page 42). Instead of providing the type of flexible and dynamic system required by the

Ms. Cherie Pinac Hammerman & Gainer, Inc. March 7, 2014 Pages

Contract, HGI delivered a one-dimensional grant application software program accompanied by a lack of IT resources capable of meeting DCA's timelines and program requirements as set forth in the RFQ.

Additional examples of system failures abound, including but not limited to:

(a) HP-CMIS (E-Grants) could not accurately process eligibility determinations, duplication o f benefit (DOB) determinations and benefit calculations to allow DCA to issue RREM award letters or on any of the other programs included in the SSHIP scope. See RFQ, Section 3.1.3, Eligibility and Benefits Determination, Contractor Requirements, pages 18-19.

(b) HGI failed to timely build the requisite interfaces between SSHIP and RREM. Those interfaces would have allowed DCA to determine at what step a homeowner was in the rebuilding process once they received an award. As a result, DCA had no ability to review RREM or other SSHlP-related programs in progress. See RFQ, page 13, 1) d.

(c) As a result of the lack of functionality in the HP-CMIS (E-Grants), DCA Compliance and Housing Recovery and DEP staff could not access a full view of applicant data sets via a web portal, requiring cumbersome, time-consuming, and error prone file transfers and sharing. See RFQ, page 13, 1) e. j

(d) Downstream automated processes or workflows were not in place to service LRRP applicants and the applications themselves consisted of static content forms. See RFQ, page 13, 1) e.

(e) The DEP interface was significantly deficient. While initially, DEP sought to rely on HP-CMIS (E-Grants) to receive and maintain HMGP application data, deficiencies ultimately lead DEP to take over work that should have been done through E-Grants.

(f) E-Grants did not include the damaged property's municipality as a specific field so that applicants could not be sorted by municipality. DCA asked HGI to address this deficiency and attempted to clean up the data but issues remained.

The problems with the RREM Program illustrate the issues present in virtually every aspect of system. Among other problems, HGI never built the workflows as required in the RFQ and discussed in HGl's Bid proposal. Additionally, the E-Grants system was unable to allow for appropriate integration portals with the RREM contractors' IT systems. Requests for Estimated Cost of Repairs ("ECRs") were sent to the RREM contractors that were missing files, had the wrong attachments, including in some cases, attachments of other applicants. This was due to a lack of functionality to appropriately capture and store scanned documents otherwise known as unstructured data. Long delays occurred in delivering RREM Program Services to the applicants as a result of HP-CMIS systems failures. This necessitated many meetings with HGI, the RREM Program Managers and DCA staff to resolve these problems. More importantly, the failure of E-Grants to adequately collect, store, and use structure and unstructured data to support the DCA Programs caused delays - delays that harmed not just the State but members of the public who were coimting on these programs to rehabilitate or reconstruct their homes.

Ultimately, manual processes had to be implemented to replace processes that were never functional in E-Grants. HGI used staff to review the applications and the attached files, and DCA had to institute a team of staff to review flaws in the files being sent, correct them ( i f possible) and then

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manually move applicants from one point in the process to the next. Such staffing work-arounds led to delays and increased costs. |

Similar problems arose between HGI and the DEP. When files were retumed from RREM Managers pursuant to RFP Section 3.1.1, Contractor Operational Requirement 1) d. (page 13), HGl's IT system was required to electronically send appropriate files to the DEP for environmental reviews. HGl's IT system was incapable of attaching appropriate files and sending them to DEP without manual intervention and oversight. This caused undue delays and increased staffmg costs.

DCA final approval of a RREM applicant file is required prior to the grant signing meeting. Pursuant to RFP Section 3.1.2, Contractor Requirement 23 (page 16), the E-Grants system was supposed to allow DCA staff to review the electronic file. The lack of complete files in the system, whether caused by E-grants or the failure of HGI and its subcontractor staff to populate document fields, caused significant problems. Due to these failures, DCA had to utilize staff to manually review files in order to ensme that RREM applicants were moving ahead to the grant signing meetings. This manual process caused a slow-down in the RREM Program's ability to maintain a steady scheduling of grant signing meetings.

Based on these failures, DCA had to task substantial staff resources into the creation of an access-based SharePoint system to track critical workflow steps in the RREM process due to the lack of a centralized, automated IT system through HGI. This database proved to be necessary to correct integrity issues with existing data and to track a basic linear progression of applicants across IT systems. When DCA provided this gap solution to HGI to populate, HGI was incapable of populating the files with consistent data. Once again, DCA was left with a lack of confidence of the data populated by HGI necessitating the need again for a 100 percent QA/QC process.

As a result of these failures and deficiencies, HGI defaulted on its obligations under Section 3.1.1 of the Contract. (These deficiencies also constitute breaches under various other provisions of the Contract, including but not limited to Sections 3.1.3, 3.1.4 and 3.1.8). As a result of these breaches, DCA did not receive the benefit of the bargain. Moreover, it experienced undue delays in the operation of the RSP and RREM Housing Programs, to the detriment of the State and the homeowners who were the intended beneficiaries. These delays continued to require staff to attempt to fill the gap caused by the E-Grants system's inability to operate appropriately and effectively, resulting in additional costs incurred to run the R S P and R R E M programs. As such, any amounts due to HGI must be adjusted to reflect both HGl's defaults and the additional costs incurred by the State.

2. Problems with Program Intake: HGl's Defaults Under Section 3.1.2

Under Section 3.1.2 of the RFQ, HGI was responsible for Program Intake, including "the intake of Applicants for the Housing Programs, which includes developing an application process, assisting/interfacing with Applicants during the application process, and the timely and accurate referral of Applicant files to the Contractors of RREM and Small Rental [and] . . . validating that all information is accurate, complete and complies with SSHIP Program policies and procedures." (RFQ, page 15.) As was the case with the IT system, HGI failed to perform its obligations under the Contract.

The problems with the Resettlement Program illustrate the issues present in virtually every aspect of Program Intake. Pursuant to HGl's Bid response ("Management Overview, Tab 1," page 9), the intake portion of the Resettlement Program was to be accomplished by an on-line web-based application in E-Grants. Basic eligibility was determined with data feeds from FEMA to verify registration and the Full

Ms. Cherie Pinac Hammerman & Gainer, Inc. March 7,2014 Pages

Verified Loss (FVL) along with title searches to establish damage, ownership and other eligibility requirements. The processing of the submitted applications which began in earnest in July was impeded by the inability of the E-Grants system to accurately populate necessary fields in the review screens and the overall failure of HGI staff or subcontractors to input adequate documents to the applications. Some of these failures by HGI staff or subcontractors were caused by HGl's failure to adequately train staff in all aspects of Program Intake and application processing. Indeed, DCA was compelled to institute its own training sessions of HGI staff to overcome HGl's poor training techniques.

As an example, the HGl-IT system delivered Resettlement applications for payment processing by DCA with a 20 percent average failure rate. Many of these failures were related to a lack of adequate data or documentation in the E-grants system or the failure of HGl's QA/QC team to identify problems with the application prior to DCA review. These failures necessitated a 100 percent file review process by SRD Compliance Staff which continued throughout the term of the contract. A functioning system would only require a statistically significant verification sampling by the DCA. Further, as of August 28, the HGl-lT system had a substantial failure rate in the completeness of files transmitted to DEP necessary for DEP to begin environmental reviews under the RREM Program. It included missing files, illegible files, and mismatched files.

DCA also required access to the applications in the E-Grants system to verify that eligibility had been appropriately determined prior to the signing of Promissory Notes. Pursuant to the RFQ (page 13, #1) e and page 14, #5), this type of automated functionality was required but was not provided. Further, the SRD Compliance staff noted that, as of December 11, 2013, the calculation in the E-Grants award calculator was still incorrect. These errors and the lack of automated functionality called for in the RFQ (see pages 13-14), delayed and created backlogs in processing grants, grant awards, and payments due to the necessity to employ work-around systems, to meet Program demands.

For payment processing, prior to payment being submitted to Treasmy, a final DCA Review and approval was required by Section V l l I (Invoicing) of the Method of Operations. The applications were "batched" electronically in groups and made available for DCA review and processing. One-hundred percent review of the applications continued due to DCA's lack of faith in the E-Grants and/or HGl's QA/QC system utilized. Moreover due to the lack of stability in the E-Grants system, DCA Compliance staff noticed that diuing this review process, that applications would electronically be added or removed from the "batches" without warning. Further, review of the "batches" found errors with duplicate awards, improperly formatted download files for Treasury, incorrect addresses and misspelled towns and applicant names, due to lack of system validation. Additionally, "batches" would disappear from the system queue causing DCA to notify HGI that the batch had to be replaced. When the "batch" reappeared it could have a different set of applications requiring DCA to perform another full review of the applications.

Finally, one of the biggest problems with HGl's performance under the Contract was that DCA could not trust the developers or the data. HGl's failure to update its data was one cause but other problems existed. While HGI touted its "expertise" in previous disaster recovery efforts to the DCA, this "expertise" had not led to even adequate performance. Thus, while DCA originally thought it could rely upon HGI and HGl's experience/expertise, instead, it became incumbent on DCA to explain what was necessary and how to get to a required outcome. For example, based on HGl's past experience, it should have known the eligibility criteria for the Resettlement and RREM Programs (such as requiring the applicants to own the damaged home and the damaged home being the applicant's primary residence at the time of Superstorm Sandy); yet, HGl's RREM application failed to include a question regarding primary residence. As a result, DCA had to develop a manual process to determine primary residency.

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Moreover, RREM applicants, based on the questions asked in the application, would not have known that primary residency was required for RREM eligibility purposes.

As a result of these and other failures and deficiencies, HGI defaulted on its obligations imder Section 3.1.2 of the Contract. (These deficiencies also constitute breaches under various other provisions of the Contract, including but not limited to Sections 3.1.1, 3.1.3, 3.1.4, 3.1.8 and 3.1.10). As a result of these breaches, DCA did not receive the benefit of the bargain. Moreover, it experienced undue delays in the operation of the Resettlement and RREM Programs, to the detriment of the State and the homeowners who were the intended beneficiaries. The above-described failures lead DCA to move toward another IT system to address these problems. As a result, DCA has incurred significant cost increases related solely and directly to HGl's defaults. As such, any amounts due to HGI must be adjusted to reflect both HGl's defaults and the additional costs incurred by the State.

3. Problems with Processing Applications, Determining Eligibility & QA/QC: HGl's Defaults Under Sections 3.1. 3, 3.1.4, 3.1.8 & 3.1.10

Section 3.1.3 of the Contract required HGI to process applications and determine eligibility for the various programs. Under Section 3.1.4, HGI was responsible for, among other things, "full scale operation of the Incentive Program, [including but not limited to,] developing the processes for initial application processing, intake, determining eligibility determinations, appeals, operations, and disbursement, compliance and close-out for the Incentive Program as well as intake and determination of eligibility for the RREM and Small Rental Programs." That section also required HGI to validate that all information is "accurate, complete and complies with Program policies and procedures." Section 3.1.8 of the RFQ required HGI to handle quality assurance/quality control. Among other things, it required HGI to "perform routine quality checks of the operational areas to ensure that quality assurance is met." Section 3.1.10 of the Contract required HGI "[t]o perform case management, perform file reviews, reporting and dociunent management for compliance with program policies and procedures." HGl's performance imder these provisions was sorely lacking.

DCA and SRD originally expected to conduct a sample compliance review of HGI staffs QA/QC work. This sample was expected to be in the 15-20 percent range. After completing this sample review, SRD found unacceptably high levels of errors in eligibility determinations and unacceptable deficiencies in HGl's QA/QC. As a result, DCA was required to review, not just a sample, but 100percent of all files HGI determined to be eligible. Although the Contract placed responsibility for QA/QC squarely on HGI, DCA unexpectedly was required to take over many aspects of HGl's responsibilities. During the remaining term of the HGI Contract, DCA was unable to lower its compliance review percentage, because HGl's QA/QC review procedures never proved sufficiently reliable.

As a result of these failures and deficiencies, HGI defaulted on its obligations under Sections 3.1.3, 3.1.4, 3.1.8 and 3.1.10 of the Contract. As a result of these breaches, DCA did not receive the benefit of the bargain. Moreover, DCA experienced undue delays in the operation o f the housing programs (because it was required to review 100% of the files), to the detriment of the State and the homeowners who were the intended beneficiaries. These delays required DCA staff to spend inordinate amounts of time reviewing files (rather than the sample compliance review originally anticipated), resulting in additional costs incurred to mn the programs. As such, any amounts due to HGI must be adjusted to reflect both HGl's defaults and the additional costs incurred by the State.

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4. Problems with the Appeal Process: HGl's Defaults Under Section 3.1.9

Section 3.1.9 of the Contract {see RFQ, pages 23-24) required HGI to develop an appeal process. Further, in its Bid Proposal (page 37), HGI represented that E-Grants would handle the appeal process. In fact, it specifically listed "Qpen an Appeal in E-Grants" in the bulleted tasks - in effect, promising that E-Grants would provide an automated appeals process. In reality, the Appeal Process developed by HGI was totally manual and operated outside of E-Grants.

I With regard to "appeals" that were entered by applicants deemed ineligible for the Resettlement

Program, HGI was only able to provide summary information in spreadsheets to DCA to determine the extent of any applicant deficiency. This caused DCA to initiate a manual review process to make a determination whether to reverse the initial ruling or uphold the ineligible status of an applicant.

The E-Grants system, due to lack of functionality and reporting capabilities, was not able to identify that the applicant had applied to hoth RSP and RREM and was thus appealing ineligibility determinations in both Programs. This identification was necessary to make the process more efficient and eliminate duplicative efforts.

Once again, DCA compliance staff found HGl's appeal process to be deficient and incapable of supporting appropriate decisions. This required DCA staff to contact hundreds of applicants who had filed appeals to discuss their appeal or seek appropriate documents from them, in order to render a decision on the appeal. In fact, in the end, DCA overtumed the vast majority of the appeals that HGI initially had determined ineligible. As a result of the deficiencies in HGl's appeal process, DCA was forced to undertake an enormous review effort, requiring a huge number of DCA staff horns. Indeed, on September 5, 2013, I specifically advised Kathy Thrun of HGI via e-mail, that HGI was to cease any further QA/QC for appeals since DCA was conducting 100 percent of the appellate review and was overturning a significant number of these appeals.

As a result of these failures and deficiencies, HGI defaulted on its obligations under Section 3.1.9 of the Contract. (These deficiencies also constitute breaches under various other provisions of the Contract, including but not limited to Sections 3.1.1 and 3.1.8). As a result of these breaches, DCA did not receive the benefit of its bargain with HGI. To the contrary, DCA had to take over the appeal process, after it became clear that HGI was incapable of performing its obligations with anywhere near the accuracy required. Moreover, it experienced undue delays in the appeal process, to the detriment of the State and the homeowners who were the intended beneficiaries of the various housing programs. As such, any amounts due to HGI must be adjusted to reflect both HGl's defaults and the additional costs incurred by the State.

I

5. Problems with Case Management and the Document Management System: HGl's Defaults Under Sections 3.1.10 and 3.1.12

Under Section 3.1.10, HGI was responsible for case management, including "file review, reportmg and document management for compliance with covenant and Program policies and procedures." Section 3.1.12 of the Contract {see RFQ, pages 26-27) placed responsibility for document management and records retention on HGI. That Section provided, in part, that HGI was required "[t]o manage, store and retrieve physical documents and electronic images of all paper documents. Applicant-related e-mails, correspondence, training material, and policy and procedures associated with the Program along with information leading up to policy and procedures decisions. Documents and images must be stored in a secure environment for quick retrieval and in accordance with compliance and policies. The

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documents and images must be stored and archived according to Program, State and Federal guidelines for record retention." Needless to say, HGl's performance under these Sections was deficient; there were a significant number of issues with both case management and document management.

As noted previously, one significant problem with HGl's performance was the inability of the E -Grants system to have up-to-date information for each applicant. While documents were being scanned into the system and attached to a specific application, the system had significant flaws. The HGl-lT system and staff failed to use standardized and reliable document scanning and storage methods consistent with acceptable business practices and state policies providing data and record integrity, accountability, compliance with Federal and State Pll data protection, and successful program delivery. The failure to establish an appropriate automated system with document and data input controls as part of start-up has led to the following types of technology-based errors:

• The unstructured data in the attachments to applicant file often did not correspond to the structured applicant data and may not have been an applicant's information. In many instances, the data in the attached file had not been uploaded into the E-Grants database. For example, a document determining income verification would support Low-Moderate Income (LMl) status but the application in the database would indicate non-LMl status. Such problems are completely intolerable particularly when service of L M l applicants is a significant priority for the DCA Programs and, more importantly, is required by New Jersey's Action Plan. This had been repeatedly pointed out to HGI, and while clean-up efforts were purportedly undertaken, ongoing review of the files offered no indication that data quality had improved requiring 100 percent review of applicant files.

• Other flaws existed. For example, naming of some files attached to an applicant was foimd to be inappropriate. Thus, instead of a file being appropriately named "duplication of benefits", it may be named using the applicant's name, an HGI staff person's name or some other name. This inconsistency caused a reviewer to have to open every attached file in search of the necessary documents causing unnecessary problems and delays. This was due to the lack of naming conventions customarily found in IT applications that conform to current and customary business practices.

• Documents attached to electronic applicant files have repeatedly been found to be illegible or have other problems that have caused delays in eligibility determinations.

• Documents were simply omitted from electronic files. For example, approximately 20,000 letters to program applicants were not uploaded to E-Grants over the life cycle of the HGI contract. Some of these letters date back to July 8, 2013.

These kinds of problems not only caused undue delay; they required DCA and its contractors to spend an inordinate amount of time fixing these problems, thereby incurring additional costs. I f the HGI IT system and HGI staff adequately performed their roles, these deficiencies would not have existed.

As a result of these failures and deficiencies, HGI defaulted on its obligations under Sections 3.1.10 and 3.1.12 of the Contract. (These deficiencies also constitute breaches under various other provisions of the Contract, including but not limited to Sections 3.1.1 and 3.1.2). As a result of these breaches, DCA did not receive the benefit of its bargain with HGI. Not only did it experience undue delays and additional costs, but documentation was lost and/or misplaced as a result of HGl's poor document management - to the detriment of the State and the homeowners who were the intended

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beneficiaries. The State has hired additional staff and is still trying to resolve these problems. As such, any amounts due to HGI must be adjusted to reflect both HGl's defaults and the additional costs incurred by the State.

6. Problems with AFWA: HGFs Defaults Under Section 3.1.11

Section 3.1.11 of the Contract made HGI responsible for anti-fraud, waste and abuse (AFWA) review. That section specifically required HGI "[t]o perform management, file review, reporting and document management, and coordination with Fraud, Waste and Abuse Contractor." Four and a half months into the Contract (on September 24, 2013), members of HGl's AFWA team met with DCA Commissioner Constable and his staff. At this meeting, HGl's AFWA team could not articulate their role and responsibilities. With ample justification, DCA concluded that HGI was not fulfilling a needed anti-fraud and abuse role for DCA.

As a result of HGl's failure to fulfill its obligations for AFWA review, HGI defaulted on its obligations under Section 3.1.11 of the Contract. As a result of these breaches, DCA did not receive the benefit of its bargain with HGI. As such, any amoimts due to HGI must be adjusted to reflect both HGl's defaults and the additional costs incurred by the State.

Adjustments for Performance Issues & Damages Sustained by the State

1. Performance Guarantees Pursuant to RFQ §3.5 <& Exhibit 3

As required by HUD, the Contract included performance guarantees. Section 3.5 referred to Exhibit 3 "Performance Matrix and Guarantees," and provided "Contractor must supply the State with weekly reports in a form and manner acceptable to the State Contract Manager to monitor and measure contract Performance Guarantees as per Exhibit 3." See RFQ, pages 29-30.

Exhibit 3 listed the specific performance guarantees applicable to each section of the Contract. In relevant part. Exhibit 3 notes that HGI was required to "Establish operational MIS System for intake and eligibility processing within 30 days of constract [sic] signing to coincide with opening of program." I f HGI failed to meet this requirement, the performance guarantee would be triggered and payment due to HGI from the State would be reduced by " 1 % per day delay as per Section 3.1.1 price sheet."

The Contract went into effect on May 8, 2013. HGI failed to establish an operational MIS System within 30 days, i.e., by June 7, 2013. When Integrity Monitor Cohn Reznick reviewed the status of the Contract in July, 2013, it concluded that many of the functional elements of HGl's MIS System still did not exist. For example, RREM functionality did not exist and RREM contractors had no access to E-Grants applicant data (needed to review files, fields, scanned dociunents, and workflow processes). As noted by Cohn Reznick, as of July 23, 2013, HGI still had not implemented and timely tested many functional elements of the MIS System, as required by the Contract. As such, Cohn Reznick concluded that HGI failed to create an operational MIS system for intake and eligibility processing within 30 days.

DCA subsequently put HGI on notice that HGI had not met its obligation to provide an operational MIS System within 30 days and was subject to the imposition of fees under Section 3.5 and

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Exhibit 3. DCA met with HGI on August 5, 2013, and then sent a follow up letter on August 8, 2013, confirming the issues with the functionality of the MIS System. In that letter, DCA requested that HGI provide a Corrective Action Plan (CAP) by August 19, 2013. Although HGI did submit a CAP on August 19, 2013, the MIS System still was not operational by that date. Nor was the System operational a month later. By letter dated September 20, 2013, DCA confumed that HGI still had not delivered the operational MIS System as required by the Contract. DCA's letter noted that HGl's failure to deliver had forced DCA to create a manual parallel process to accomplish its program objectives and that DCA would be exploring altemative technology solutions. This was 105 days after the deadline specified in the Contract.

Accordingly, the Contract requires imposition of liquidated damages in the amount of " 1 % per day delay as per Section 3.1.1 price sheet." HGl's BAFO price sheet specified a price of $9,518,254.87 and Task Order 1 authorized work up to $9,509,139.67 for Section 3.1.1. One percent (1%) of that amount is $95,091.40. Multiplying that number by the 105-day delay results in liquidated damages of $9,984,597. To the extent that the State would be limited to the not-to-exceed price within the Contract, the liquidated damages would be capped at $9,509,139.67.

2. Actual Damages Resulting from HGFs Failure to Deliver Fully Operational IT System

As an altemative to performance guarantees, the State is entitled to recoup its actual damages, i.e., the cost of replacing the fully operational MIS System that HGI was obligated to deliver and never did. As a direct and proximate result of HGl's failure to deliver fully operational MIS System, DCA was forced to procure a new system that would operate and perform all of the functions that HGl's MIS System was supposed to perform. DCA did so at a cost of $11,124,055.20. DCA is entitled to recoup that amount from HGI.

3. Other Damages Sustained as a Result of HGFs Performance Issues

As a result of inadequate performance and other deficiencies, the State experienced undue delays and incurred increased costs. Some of HGl's performance problems arose due to the inadequate IT system used by HGI. But other problems also existed, notably, among others, HGl's failure to adequately perform program intake, QA/QC, staff training, address appeals and fulfill other responsibilities required by the Contract. In many instances, these serious deficiencies lead to increased costs being incurred by the State to fix or otherwise address them.

DCA cannot calculate the extent of the costs at this time, because many are ongoing as we continue to address some of these issues. For example, as a result of issues with the data HGI entered into E-Grants, DCA has incurred additional costs to clean-up the data. That process is ongoing.

Regardless, as a result of HGFs inadequate performance and other deficiencies, the amounts due under each Section of the Contract must be adjusted. As noted above, the State does not believe that HGI is entitled to any payment under Section 3.1.1. Similarly, HGl's performance under Sections 3.1.2 and 3.1.12 was so deficient, that the State does not believe HGI is entitled to any payment under those sections. For Sections 3.1.3 and 3.1.4, the State maintains that HGI is entitled to no more than 50% of the amount invoiced or the amoimt bid (whichever is less). For Sections 3.1.8, 3.1.9 and 3.1.10, respectively.

Ms. Cherie Pinac Hammerman & Gainer, Inc. March 7, 2014 Page 11

the State believes that HGI is entitled to no more than 30%, 10% and 70% of the amount invoiced or the amount bid (whichever is less). For Sections 3.1.5, 3.1.6, 3.1.7, 3.1.11 and 3.1.13, little or no work was done under these sections, so amounts to be paid wil l be de minimis.

Hoi^^ard J. McCoach State Contract Manager

cc: Robert Mintz, Esq. Paul Regan, AD, SRD Laura Shea, Deputy Director