Capital Development Program Audit Response: 7-9-13

7/28/2019 Capital Development Program Audit Response: 7-9-13

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Capital Development Program Audit Response

Board of Airport Commissioners Meeting

9 July 2013

Presented by:Roger A. Johnson, Deputy Executive Director


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Audit of LAWAs Capital Development Program

The audit was at the request of the City Controller and designed to evaluatethe efficiency and effectiveness of Los Angeles World Airports (LAWA)

processes for capital improvement projects, including constructionmanagement practices the audit was primarily focused on processes andpractices related to the LAX capital development program due to thesignificant program costs more than $3.6 billion currently underway.

Scope:

Harvey M. Rose Associates, LLCAudit of LAWA Capital Development ProgramExecutive SummaryJune 12, 2013


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Audit of LAWAs Capital Development Program

Overall, the report found that, while LAWA has succeeded in building aneffective capital development organization under substantial pressures,opportunities exist to enhance the transparency and accountability of theprocess and reduce financial risks to LAWA.

Summary of Results:

Harvey M. Rose Associates, LLCAudit of LAWA Capital Development ProgramExecutive SummaryJune 12, 2013


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Key Findings

Construction Manager at Risk (CMAR) Delivery Method

CMAR Contractual Relationship (Section 2)

Monitoring CMAR Change Management (Section 3)

CMAR Quality Assurance Monitoring (Section 4)

Program Management

Long Term Program Management Strategy (Section 7)

Value Engineering (Section 1)

Capital Improvement Process

Capital Decision Making Processes (Section 5)

Capital Improvement Plans and Budget (Section 6)

The audit report includes seven major findings that examine LAWAs capitaldevelopment activity. These findings are in the areas of:


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5

Construction Manager at Risk (CMAR)


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CMAR Schedule Benefit


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LAWA did not realize the full benefits of the Construction Manager at Risk(CMAR) delivery model. LAWA staff stated that they expected a largevolume of change orders on the Bradley West projects. However, the CMARContractor has stated that the volume of change orders was higher than

anticipated, contributing to cost escalation and impeding its ability to managethe project effectively.

LAWA disagrees with this finding.

The CMAR delivery model was selected to enable us to meet anaccelerated project schedule. LAWA would not have been able to meet

the accelerated schedule using any other delivery method.

The number of change orders on this project was not driven by theselection of the CMAR delivery method. LAWA anticipated a large volumeof change orders on this project due to the fact that we went out to bid withincomplete design in order to achieve an accelerated schedule.

Auditors General Finding:


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LAWA Response Cont.

The quote attributed to the CMAR that the number of change orders havebeen higher than expected and have contributed to cost escalation and

impeded their ability to manage the project effectively is self-serving anduntrue.



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9


Conduct a post-project assessment of the costs and benefits of the CMARmodel. Include a comparison of alternative models.

The decision to utilize the CMAR delivery method was based on a need tomeet an accelerated schedule, which was accomplished. LAWA disagreeswith this recommendation and does not plan on conducting a cost/benefitcomparison.

Evaluate the CMAR model, as implemented for the Bradley West Gates andCore projects, by reviewing the agreements and the incentive structure theyprovide.

LAWA agrees with this recommendation. LAWA has already implementedseveral changes in our contracts.

Auditors Recommendations:

2.1

2.2


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Develop formal criteria for choosing project delivery models on future capitalprojects and ensure that project management and other pertinent staff aremade aware of the strengths and weaknesses of all procurement modelsconsidered.

LAWA agrees with this recommendation. We believe the decision process touse the CMAR delivery method on the Bradley West project was sound. Weare working on a more formal project delivery decision process for all futureprojects.

LAWA continues to conduct training on the use of alternative delivery

methods for PMs and other staff supporting projects. The characteristics ofeach project delivery method will be incorporated into our formal PM Trainingprogram.


2.3


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A major benefit of the CMAR model is to shift risk. However, LAWA has notimplemented this model in the most effective manner. LAWA has not takensufficient action to ensure the CMAR Contractor effectively manages thechange order process.


The CMAR delivery method was selected to achieve an acceleratedschedule, not to transfer the risk.

LAWA does agree that the CMAR Contractor has not effectively

managed the change order process. LAWA chose to partner with theContractor rather than aggressively enforce the contract to achievethe objectives of the project.




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Review contract provisions in the Bradley West Construction Agreements, tostrengthen language and expectations of CMAR change management forfuture projects. Specific areas that could be strengthened include theexpectation of the CMAR role in the meriting review process, pricing

estimation for proposed change orders, and the acceptability of CCRrevisions that contain cost increases, but no changes in the scope of work.

LAWA agrees with this recommendation and has already changed thecontract language.

Follow through on formal communications to the CMAR management

regarding contractual provisions requiring the CMAR to submit CPCNs andCCRs within the timeframes stated in the agreement.

LAWA continues to follow through on formal communications related toContractor Potential Change Notice (CPCN) and Contractor Change Request(CCR) submittals. These communications occur on all construction contracts

regardless of the delivery model utilized.


3.1

3.2


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Formally communicate that unsupported estimates used as placeholders, as wellas CCR revisions that do not contain changes in scope, will not be accepted.

LAWA continues to clearly communicate to all contractors that unsupportedestimates for change orders are not acceptable. LAWA does not accept, norapprove CCRs where there have been no changes. We will continue to enforcethat policy.

Consider enhancing the monitoring of CMAR performance of changemanagement to include its ability to meet contract prescribed timelines for changesubmittals to reduce the risk of schedule impacts, that subcontractors will not be

paid in a timely manner, and to ensure the project may be closed out with anefficient and effective process.

LAWA believes that this recommendation will be met through the activitiesconducted under recommendation 3.1.


3.3

3.4


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Conduct a post-project analysis of the resources allocated to CMAR ChangeManagement by LAWA functions under the Bradley West project budgets todetermine whether they exceeded the mean or median amount spent, as apercentage of total costs, on this administrative function. Report results to the

Board of Airport Commissioners.The CMAR Contractor consistently failed to submit fully supportableContractor Change Requests (CCRs) on time, or with sufficientdocumentation to support the value of the change. As a result, LAWA hashad to utilize more change management staff than would normally berequired on a project. The number of staff used was appropriate given thecircumstances. According to the auditors own findings, these efforts have

saved the City in excess of $56 million on CCRs as of November 2012 andfacilitated timely payment to subcontractors for change order work.


3.5


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LAWA may be performing Quality Control (QC) functions assigned to theCMAR Contractor for which they are being compensated. LAWA may beincurring additional costs due to the duplication of efforts. LAWA inspectorsare not following all procedures for monitoring the performance of the CMAR

Contractor. These weaknesses may result in deficiencies in construction.LAWA disagrees with this finding.

The CMAR Contractor is performing a QC function. The Cityinspectors are acting as the Owners Representative ensuring that the

work is being performed in accordance with the contract. There is no

duplication of effort.

All work in place was inspected and signed off by LAWA inspectors.LAWA inspectors have logged over 50,000 inspection requests.

In addition, LAWA inspectors walk the job and sign off on all worksubmitted for payment. LAWA does not pay for defective work.




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Update and make readily available the LAWA Construction InspectionDivision Procedures Manual.

LAWA agrees that the procedures manual needs to be updated to reflectcurrent practices and is in process of doing so. The manual will be completed

by December 2013.

Direct inspector staff to follow procedures outlined in the LAWA ConstructionInspection Division Procedures Manual.

LAWA continues to do so.

Provide training to LAWA inspector staff on records and informationmanagement procedures to ensure that staff are knowledgeable aboutrequirements and equipped to comply with them.

LAWA agrees and will conduct refresher training as procedures evolve.

4.1


4.2

4.3


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Review processes and determine if procedures, notably those related to JobMemos and the issuance of Notices of Noncompliance, should be revised.

LAWA will do so.

Standardize and maintain LAWA-owned logs to track the full history ofdocument communications with a given contractor.

LAWA continues to do so.

Review the Request for Inspection processes and define the implementation

of Request For Inspections in institutional documents for standardization ofRequest For Inspections processes and procedures.

LAWA ADG will review the Inspection Request (IREQ) process forstandardization.


4.4

4.5

4.6


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LAWA has not developed a strategy to transition City staff into programmanagement and other roles that are currently held by consultants. The costof utilizing consultants is estimated to be approximately 15-20 percentgreater than City staff. Use of consultants is hindering City staff development.


LAWAs current staffing (136 employees) exceeds the number of staff

required to implement the projected $150 - $200 million per year ofcapital projects forecasted at the end of the current developmentprogram.

The City does not employ certain technical disciplines required toimplement capital projects.




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LAWA Response Cont.

The auditors evaluation of the cost of consultants compared to citystaff is flawed. Applying the same methodology to City and consultant

staff, using the Controllers overhead rate for City staff, the cost forconsultants is approximately 8.6% less than the cost for City staff.

The cost analysis does not take into account the long-term costs ofconverting consultants to City staff.

City staff are fully engaged in the development program.




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Direct staff to develop a long-term strategy for the use of consultants and LAWAstaff in program management and support roles, including the identification of theamount and types of baseline staffing that will be required on a long-term basis,and an estimate of the amount and types of consultant staffing that will be

required. The strategy should be based on a cost-benefit analysis that justifies theallocation of LAWA staff and consultants.

This analysis has already been completed.

Build upon and broaden its recent effort with the Airport Engineer classification toidentify any airport-specific job classifications that could be established by the

City and enable LAWA to recruit and retain appropriate capital development staff.Any such proposed classifications should be provided to the Department ofHuman Resources for review.

LAWA agrees and has already engaged Human Resources in this process.



7.1

7.2


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Direct the Human Resources Division to review existing job classifications forcapital development at the airport and conduct analysis to determine whetherthe addition of new airport-specific classifications is appropriate.

LAWA supports this recommendation.



7.3


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LAWA has not formalized a structured Value Engineering process. Someimportant elements exist, and efforts reportedly are being made to strengthenthe procedural foundation and approach.

LAWA agrees with this finding.

We are in the process of developing a more structured Value Engineeringprocess.




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Direct staff and request legal counsel to prepare an assessment of pastpractices on the LAWA development projects, to ensure that design reviewand cost engineering efforts can satisfactorily meet FAA expectationsregarding the use of structured Value Engineering.

This recommendation was included in the draft report when the audit findingsassumed potential violations of federal requirements. Since the report nolonger alleges violations of federal requirements, this recommendation is nolonger necessary.

Develop and establish policies and procedures that ensure that a structuredValue Engineering program is implemented at LAWA.

LAWA will develop a more formal, structured Value Engineering process.


1.1

1.2


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The Board has limited involvement in the review and prioritization of proposedprojects and is not involved in the general assessment and initial concepts orbudgets. The Board delegates these responsibilities to executive staff. Thisdynamic is partly driven by a perceived conflict of interest.

LAWA disagrees. Staff consistently informs the Board during ManagementReports and contract awards throughout the life of major projects. Duringplanning and environmental milestones, staff presents the Board with proposedconcepts, potential scope and cost estimates for Boards input. Examples are:

Bradley Program Midfield Satellite Concourse North Element Central Utility Plant New Face of the Central Terminal Area (CTA) Terminal 4 Connector


C


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Request a written legal opinion from the City Attorneys Office regarding any

potential conflict of interest related to the Boards duties and authorities

related to airport development and CEQA review.

Ifa conflict of interest is determined to be a factor by the City AttorneysOffice, develop a proposal to reassign the CEQA review responsibility fromthe Board to the City Planning Department or another entity within the City,thereby enabling the Board to conduct a more substantial level of review ofthe capital development program.

LAWA will seek further legal counsel and determination as recommended.


5.1

5.2

C it l D l t P A dit R


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Building on LAWAs current periodic open-call for projects practice, conducta comprehensive needs assessment of airport capital assets, including bothpotential development projects and facilities maintenance needs, based onthe results-oriented goals and objectives that flow from the organizations

mission.LAWA agrees. This effort was completed in October 2012 and the nextassessment will occur in Fall 2014. The needs were evaluated based onestablished criteria aligned with LAWAs mission andvision.


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Identified

NeedsCIP

CapitalBudgets

Periodic B oard Updates

ContractAwards

Auditors General Finding

LAWA has not developed a CIP or multi-year Capital Budget (CB) and the CBonly includes a high level summary of anticipated expenditures for each majorelement for the budget year. Estimates include broadly defined cost components,which can raise the total budget by as much as 52% over estimated construction

costs and could result in a greater commitment of funds.LAWA agrees, and a traditional five-year CIP was completed in June 2013.However, LAWA disagrees that budgets are overstated. Project estimates aredeveloped using industry standard metrics and refined along design milestones.



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Continue efforts to develop a multi-year capital plan that would be presented tothe Board of Airport Commissioners in public session. Present a five-yearcapital spending plan as part of the annual budget review process.

LAWA agrees and this was accomplished in June 2013.

Present a five-year capital spending plan as part of the annual budget reviewprocess.

This recommendation should be modified to reflect the presentation of a five-year capital spending plan rather than budget. LAWA agrees and this wasaccomplished in June 2013.

As part of the annual budget process, or as required by the needs of theorganization, seek Board approval of detailed, individual capital projectbudgets.

LAWA agrees. The Board is provided detailed total project costs andappropriates funds at the time a construction contract is awarded.


6.1

6.2

6.3



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Require all project budget packages to specifically identify allowances andother cost components for which the basis of the estimate cannot be reliablydetermined.

LAWA agrees, and these activities are being performed.

Review the analytical basis for estimating project soft costs andcontingencies and consider establishing variable standards based on projectscope.

LAWA agrees and procedures are in place for estimating project soft costs

and contingencies based on project scope, complexity, and other factors.



6.4

6.5



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Implement comprehensive and formalized policies, procedures andstandards for developing, implementing and monitoring capital projectbudgets.

LAWA agrees. LAWA currently has in place robust policies and procedures

for developing, implementing, and adjusting capital project budgetsthroughout the full life cycle of a project. LAWA will continue to refinemonitoring and reporting procedures.



6.6



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ADG Airports Development Group

CMAR Construction Manager at Risk

CCR Contractor Change Request

CPCN Contractor Potential Change Notice

QC Quality Control

IREQ Inspection Request

CEQA California Environmental Quality Act

CIP Capital Improvement Program

Audit Abbreviations

(in order of use)

Documents

Capital Development Program Audit Response: 7-9-13