“Production, Paperwork and Contractor Make-Work”

MHARRMHARR, its fair to say, has been a consistent critic of a HUD manufactured housing program enforcement system that is overly dependent on paid contractors, and a contracting system that – in addition to being fundamentally non-competitive over its entire history — improperly allows contractors to perform inherently governmental functions and, worst of all, incentivizes contractors to find fault with the homes, plants and offices that they “audit.” While all this is bad enough, HUD, since 2010, has made matters far worse with its unilateral program of expanded in-plant regulation, which changed the entire focus and nature of that regulation.  From the very start, MHARR (alone) went on record objecting to this change as not only being in violation of the Manufactured Housing Improvement Act of 2000, but also a make-work sop for the entrenched program monitoring contractor. And now there is specific data — ironically from the contractor itself — which confirms the fundamental “make-work” character of this program.

To start, let’s review the known – and indisputable – facts. Between 1998 and 2015, the production of HUD Code manufactured homes fell from 374,143 to 70,544 homes per year, a contraction of approximately 81 percent. Records of HUD’s contract spending before 2005 are not readily available, though, so we’ll focus on the period between 2005 and 2015.  During that ten-year period, HUD Code production fell from 146,881 homes in 2005, to – again – 70,544 homes in 2015, or a contraction of just under 52 percent.  Now, one would think, during an extended period of declining production covering multiple contract terms, that the amounts budgeted (and paid) for contract “monitoring” services (as defined in the 2000 reform law) would have declined, roughly in proportion to the decline in production (adjusted for inflation). 

But that did not happen.  Budget justifications submitted by HUD to Congress each year between Fiscal Year (FY) 2005 and FY 2017, show that budgeted payments to the program monitoring contractor remained effectively constant until FY 2010.  In FY 2011, however, budgeted contractor funding increased and, since that time, has increased by a factor of 62 percent, from $3,200,000 to now $5,200,000 in the HUD FY 2017 program budget request. So even though industry production, in total annual numbers, has fallen significantly since FY 2005, with corresponding decreases in the number of manufacturers, production facilities and retailers, funding for the program monitoring contract has been heading significantly higher. Meanwhile, since 2005, the cumulative rate of inflation has been 23.2 percent. Even adjusted for inflation, therefore, budgeted payments to the monitoring contractor, since 2005, have grown by nearly 40 percent in real dollars.  So, the obvious question, is “why?”

In 2008, with HUD Code production in freefall, the HUD program (through its then-Administrator) approached the Manufactured Housing Consensus Committee (MHCC) with proposed changes to the in-plant regulatory system, including, among other things, the role of Primary Inspection Agencies (PIAs), the nature of the “inspections” and corresponding reports provided by PIAs, and the “monitoring” of those activities by HUD, though the program’s one – and only – “monitoring” contractor.  After fully debating this series of disconnected and disjointed HUD proposals, the Committee ultimately determined that it could not reach the consensus required by the 2000 reform law.  And the matter should have ended there, but did not.

Contemporaneously with the de facto rejection of these proposals by the MHCC, the HUD program, without further consultation with the MHCC, began to develop and — by March 2010 – implement, the paper blizzard of “Standard Operating Procedures,” “guidelines,” “field guidance,” flow charts and other pseudo-regulatory mandates that changed the fundamental focus of the in-plant regulatory system to the review (and modification) of manufacturer “quality control” systems. With this program of expanded in-plant regulation, came multiple new reports and paperwork by manufacturers, PIAs and the monitoring contractor, multiple reviews of those reports, multiple layers of meetings and “consultations” between manufacturers, PIAs and the contractor and, of course, new, additional and expanded “audits.” All of this change – without the benefit of actual rulemaking (as required by the 2000 law) — was touted by HUD (and others), at the time, as a money-saver.

But it has not worked out that way.  Once the program of expanded in-plant regulation went into effect in 2010, budgeted funding for the contractor – despite declining production, numbers of manufacturers, numbers of manufacturing plants and numbers of retailer locations – began to increase, and has increased at an accelerating rate ever since.

Naturally, in order to keep pace with these rising contract expenditures at a time of substantially-reduced industry production, and with a new $25 million five-year contract awarded to the contractor in 2013, HUD – in 2014 – raised the certification label fee for every new manufactured home by a record-setting 156 percent, claiming, incredulously, that despite significant, long-term industry production declines, the magnitude of its “responsibilities” remained “unchanged.”  Manufacturers, therefore, in addition to facing higher regulatory compliance costs resulting from increased paperwork, record-keeping, information tracking, reporting requirements, and audit pressures under this new system, also now pay more in label fees (together with their customers) to finance this unnecessary regulatory expansion (as shown by minimal referral levels in the federal and representative state dispute resolution systems established under the 2000 reform law).

While it has thus been obvious all along that this expanded in-plant regulation has been all about maintaining and increasing contractor billings, revenues and de facto authority in the face of a prolonged industry downturn, there is now direct evidence showing that this is little more than a “make-work” enterprise for the contractor, as MHARR has maintained.

At the June 2016 HUD-SAA-PIA meeting in Washington, D.C., the monitoring contractor presented a chart showing its top ten “audit findings” (from May 2015 to April 2016) in connection with: (1) the in-plant home production process itself, on the one hand; and (2) the “quality control” (i.e., paperwork) procedures required by HUD under its program of expanded in-plant regulation, on the other.  Of the top ten “production” issues found by the contractor, the most frequent rate of occurrence – 16.4% — involved “loose or missing fasteners in … vinyl siding” and “inadequate installation of vinyl siding trim around doors and windows,” not ideal, but not a life-safety issue either.  Of the remaining nine (alleged) “production-related” issues, six had occurrence rates below 10% and one of the top four – with an occurrence rate of 12.1% — involved “inadequate reporting of [Alternate Construction] homes” and/or “use of expired AC letters,” in reality a paperwork issue, not an actual construction error. 

By comparison, for the top ten “quality control” paperwork issues found by the contractor, the most frequent rate of occurrence was a whopping 52.3% for, among other things, the “improper use of terminology for initial determinations.” Analyzing the two charts, the top rate of occurrence of “quality control”/paperwork issues is nearly 220% greater than the top rate of occurrence for actual production issues, while the average rate of occurrence for “quality control” – i.e., paperwork issues – is 113% higher than the average rate of occurrence for actual “production”-related issues. 

Rather than a legitimate and bona fide inspection system, HUD’s program of expanded in-plant regulation is a “paper chase,” with high – and rising — costs in return for little or no corresponding consumer benefits.  This entire system, in which an entrenched 40-year contractor calls the shots and effectively dominates the federal program for its own benefit and interests, must end. The system needs to be revamped, from top to bottom, to ensure a competitive and legitimate bidding process and an end to the current de facto sole source contract. And that, in turn, will require an appointed, non-career program Administrator, consistent with the 2000 reform law.   In this regard, it’s time for industry members who have gone along and enabled the current indefensible system, to now join forces to pursue such necessary reforms.

In MHARR’s view, with a new administration taking office in Washington in 2017, the industry and consumers have an opportunity to seek real and necessary change in the HUD enforcement system to reduce unnecessary costs and regulatory burdens through fundamental contract reform, while preserving consumer protection and the bedrock quality and affordability of today’s manufactured housing.

MHARR is a Washington D.C.-based national trade association representing the views and interests of independent producers of federally-regulated manufactured housing.

By Mark Weiss, JD, president of the Manufactured Housing Association for Regulatory Reform, as printed in The Journal OCTOBER 2016, re-printed here with permission. 

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