2024-002 The Town did not have adequate internal controls and did not comply with federal wage rate requirements. Assistance Listing Number and Title: 14.218 Community Development Block Grants/Entitlement Grants Federal Grantor Name: U.S. Department of Housing and Urban Development (HUD) Federal Award/Contract Number: N/A Pass-through Entity Name: Snohomish County Pass-through Award/Contract Number: Various Known Questioned Cost Amount: $0 Prior Year Audit Finding: N/A Background The primary objective of the Community Development Block Grants/Entitlement Grants (CDBG) program is to help provide decent and affordable housing, particularly for people with moderate, low and very low incomes. Funds also help recipients implement strategies for achieving an adequate supply of decent housing and providing suitable living environments and expanded economic opportunities for people with low incomes. The Town was a subrecipient of CDBG funding from Snohomish County and spent $938,377 in program funds during 2024. Federal regulations require recipients to establish and maintain effective internal controls that ensure compliance with program requirements. These controls include understanding program requirements and monitoring the effectiveness of established controls. Under federal wage rate requirements, also known as the Davis-Bacon Act, contractors and subcontractors that work on projects financed with more than $2,000 of federal funds must pay laborers and mechanics wage rates that the U.S. Department of Labor considers similar to what local workers have been paid for similar projects. For construction contracts subject to these wage rate requirements, the Town must include a provision that the contractors and subcontractors must comply with those requirements and the Department of Labor’s regulations. This includes a requirement that the contractors and its subcontractors must submit certified payroll reports to the Town weekly, for each week that laborers performed contract work. These reports must include a copy of the payroll and a signed statement of compliance. The Town may use a contracted project manager to collect certified payroll reports from contractors and subcontractors, but ultimately, it is the Town’s responsibility to comply with these requirements and maintain documentation demonstrating compliance. Description of Condition During the 2024 fiscal year, the Town spent $905,074 for payments to one contractor and two subcontractors for water infrastructure improvement projects in a primarily residential area of the Town within a designated census tract. The project included replacing aging water mains, fire hydrants, service hookups, and leaded meters and fittings to improve water quality, safety and fire protection. Our audit found the Town did not have adequate internal controls for ensuring compliance with federal wage rate requirements. Specifically, the Town did not collect, or ensure a project manager collected, weekly certified payroll reports from the contractor and their subcontractors to confirm they paid laborers proper prevailing wages. We consider this deficiency in internal controls to be a material weakness that led to material noncompliance. Cause of Condition Town management believed that certified payroll collection and review were still the responsibility of the County, as was the case in prior years. However, the fiscal year 2024 contract shifted this responsibility to the Town, which management did not clearly understand. As a result, neither the Town nor its engineering firm collected certified payrolls during the audit period. Effect of Condition Without adequate internal controls to ensure it collects all weekly certified payroll reports, the Town cannot demonstrate it complied with federal wage rate requirements. The Town could also be liable for paying any additional wages if the contractor and subcontractors did not pay prevailing wage rates to laborers working on the contract. The Town did not collect all 44 weekly certified payroll reports for the contractor and their subcontractors. During the audit, the Town subsequently collected all weekly certified payrolls. Recommendation We recommend the Town strengthen internal controls to ensure compliance with federal wage rate requirements. This should include obtaining the federal certified payroll reports, as well as implementing effective monitoring processes to collect and review all weekly certified payroll reports from contractors and subcontractors. Town’s Response The Town will provide additional training for all employees involved. Auditor’s Remarks We thank the Town for its cooperation and assistance during the audit and acknowledge its commitment to resolve this finding. We will review the corrective action taken during our next audit. Applicable Laws and Regulations Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance), section 516, Audit findings, establishes reporting requirements for audit findings. Title 2 CFR Part 200, Uniform Guidance, section 303 Internal controls, describes the requirements for auditees to maintain internal controls over federal programs and comply with federal program requirements. The American Institute of Certified Public Accountants defines significant deficiencies and material weaknesses in its Codification of Statements on Auditing Standards, section 935, Compliance Audits, paragraph 11. Title 29 CFR, Section 3.3 – Weekly statement with respect to payment of wages, and Section 3.4 – Submission of weekly statements and the preservation and inspection of weekly payroll records, establishes requirements for contractor or subcontractor submission of weekly certified payroll reports. Title 29 CFR, Section 5.5 – Contract provisions and related matters establishes the requirements for the contracting officer to insert in full in any contract in excess of $2,000 which is entered into for the actual construction, alteration and/or repair, including painting and decorating, of a public building or public work, or building or work financed in whole or in part with federal funds the clauses listed, which includes but is not limited to the minimum wages to be paid and payrolls and basic records to be maintained (submission of weekly certified payrolls).