Matthew Knight Arena - Project Audit - OregonLive.commedia.oregonlive.com/behindducksbeat/other/Arena Audit.pdf · public project. While MRC did identify some areas for improvement,

February 9, 2011

Matthew Knight Arena - Project Audit Oregon University System


MRC

Contents

1. Executive Summary .................................................................................................... 1

2. Project Overview ......................................................................................................... 7

3. Contract Assessment and Audit ................................................................................ 10

4. Hoffman Subcontractor Selection and Subcontracting Practices.............................. 42

5. University Outreach Measures .................................................................................. 48

6. Improvements and Best Practices............................................................................. 53

Appendix A: Audit Scope of Work 58

Appendix B: University Payments Reviewed 60

Appendix C: Alumni Center ASRs 61

Appendix D: Arena Fund Allocation Calculation 62


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1

Executive Summary

Introduction Marsh Risk Consulting (MRC) was engaged by the Oregon University System (OUS) to provide construction audit and control advisory services related to the construction of the Matthew Knight Arena (Arena or Project) at the University of Oregon (UO or the University). The audit was performed on behalf of the Oregon State Board of Higher Education and coordinated by the Internal Audit Division of the OUS with oversight provided by the Oregon Secretary of State Audits Division. OUS developed a comprehensive audit scope for the project. The full scope is provided as Appendix A of this report. Generally, the scope included an audit of the costs incurred by the University to design, develop, manage and construct the Arena. Unlike an audit of just project costs, OUS also required an in-depth review of the performance of project stakeholders (owner, owner’s representative, designer, and contractors). This performance audit was conducted through a comprehensive assessment of the numerous business practices employed by several entities. The basis of evaluation included an assessment of compliance with contract terms and governing statutes or relevant laws. OUS also required the audit to identify where industry best practices were employed, or could be implemented for future projects to improve results on public projects. The audit period mandated by OUS began when the Project was approved for public funding. MRC began field work in August 2010 and concluded in early November 2010. Project expenditures were evaluated based on cost incurred and committed to date at the time of field work testing. The audit competencies required by OUS and employed by MRC to perform the assessment included: forensic accounting and fraud examination expertise; construction management experience (including project management, scheduling, cost estimating and budgeting, change management, quality control, documentation, communications, etc); fluency with contract documents and project delivery methods; as well as proficiency working with educational and public entities engaged in large capital projects.


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Methodology In order to perform the audit of the Arena Project, several factors were considered in planning the review, including project level documentation and records, available accounting reports, report summaries, interviews with key personnel, and other information available as audit evidence. In addition, MRC developed an understanding of the Project and the roles of those involved in the project to plan MRC’s testing. MRC also conducted detailed interviews with personnel from the Development Manager (JMI, Development Manager, or Owner’s Representative), the Contractor (Hoffman), the Architect (Ellerbe), the University, the Developer (National Championship Properties or NCP), the University of Oregon Foundation (Foundation), and the Department of Justice for the State of Oregon to gain an understanding of the project scope, change order process, subcontracting procedures, reporting procedures, the invoice preparation, billing, review, approval and payment processes.

A detailed discussion of audit methodology is presented in the body of this report.

Summary of Findings In general, MRC found that the Matthew Knight Arena Project has been managed in accordance with the terms of its agreements. As a cost and performance audit, on a scale from Low to High risk, where the risks include material cost exceptions, significant control impairments, or substantial performance deficiencies relative to contract obligations, MRC concluded that the Arena Project has been a Low Risk endeavor for the University as of the close of MRC’s field work. At the close of audit field work, MRC had identified no significant quality issues related to the Project and found that the Project was both on-time and on-budget. In fact, the Project had experienced approximately $5.4 million in savings against the contract price. The University also negotiated contract provisions with Hoffman Construction that were favorable to the University with respect to savings; all savings revert back to the Owner (vs. contracts that include sharing provisions that split the savings between the owner and general contractor). MRC found that the success measurements of on-time and on-budget were attributable to those responsible for the development, construction and oversight of the project. MRC identified no material cost exceptions. MRC also found several examples where industry best practices were employed by various stakeholders. There were also several challenges overcome by the University and its project partners during development, as the Project changed from a private to publicly funded job. One of the most significant challenges was the contract reviews and modifications required prior to execution as a public project. While MRC did identify some areas for improvement, MRC concluded that the highly important goals of meeting a budget and schedule for a project with the complexities of the Arena was achieved as a result of effective planning, execution and


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communication among the University, Hoffman, JMI, Ellerbe and other divisions of the State. Some inconsistencies and questionable costs were identified through the course of the audit. MRC generally found that there was no significant financial impact from these findings although certain financial and management control weaknesses were noted. MRC’s recommendations for improvements in noted areas are discussed in the body of this report. The Arena is not representative of a typical University capital project; its profile changed from a privately developed project to a public project funded by a bond issue. As such, the University negotiated numerous obstacles to finalize the Project’s conversion. This renegotiation led to some gaps and ambiguities in contract terms, which led to a few findings of immaterial financial consequence. MRC investigated all areas set forth by OUS in the audit scope and has grouped the results of the audit into two categories: Findings and Conclusions. The report is organized by the company or entity subject to the audit, where Findings are presented first. MRC defines these groupings as follows:

• Findings: areas where MRC noted exceptions between contract terms and the execution, as well as areas where MRC recommends a review and improvement process be adopted by the University. In the event dollar values were associated with these Findings, and sufficient information was available, these amounts are presented.

• Conclusions: include the additional areas mandated in the audit scope, where both best practices and areas for improvement were noted by MRC. With respect to areas for improvement, MRC classified these as less significant than a Finding.

Any recommendations MRC developed regarding Findings and Conclusions are presented with each grouping. MRC has communicated its Findings and Conclusions with the University and OUS, and received a formal response from the University. The University’s Management Response to MRC’s findings and conclusions are presented in the body of this report. Findings Generally, MRC’s findings relate to language in the contract with the Development Manager related to billing, and its processes around billing. MRC also noted findings related to ambiguous contract language in Hoffman’s agreement related to contract price calculations. Finally, MRC includes findings related to the invoice review and approval process used by the University for the Project.

Development Manager

JMI’s contract did not state personnel billing rates, but mandated negotiation of these rates after Contract execution. MRC found that the billing rates were not formally negotiated. Further, despite contract provisions requiring adequate accounting of costs, the


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Development Manager did not employ a time tracking system or provide supporting documentation for hours charged by personnel. The University expanded by amendment its contract with the Development Manager to provide services related to the Parking Garage construction and two other projects. While the University expected the Development Manager’s staff would work on both projects, the Development Manager’s lack of time tracking and set billing rates created a control weakness, and the potential for overcharges. While the objective of an audit is to quantify exceptions, given the lack of reliable information related to time tracking, no data was available for MRC to assess any impacts. The Development Manager’s contract values for the Arena and Garage construction projects total approximately $6M.

MRC also notes that the University has a different position regarding its contract with JMI. Specifically, the University views its contract with JMI to be a lump sum for personnel expense. Under such an agreement, the amounts paid to JMI for its work on the Arena and other projects added by Addendum would be appropriate without a detail of time spent. Additionally, the use of a Lump Sum allowed for more predicable project budgeting and risk transfer for price escalation. These areas are discussed in the body of this report.

General Contractor

The primary finding regarding Hoffman is related to its contract and the late addition of the Warranty Fee provisions to the agreement. The addition of this Contract provision facilitated the completion of contract negotiations with Hoffman. However, MRC noted that the contract language was allowed for more than one interpretation regarding the application of the Warranty Fee, and MRC found that Hoffman’s interpretation was not consistent with all of the Contract terms. As a result, Hoffman’s GMP calculation incorrectly applied the Warranty Fee to Cost of the Work, which skewed its CM/GC fee proportionately. In addition, the Warranty Fee percentage was misapplied to a reduced Cost of Work in the GMP calculation, and incorrectly included as mark up on Contract Amendments increasing the GMP. Despite these interpretations, the net effect of the variance based on MRC’s recalculation was not material (less than $30,000, or 0.02%). University of Oregon

MRC’s findings relate to project controls employed by the University, including the University’s oversight of the Development Manager, and the payment approval process employed by the University.

Project controls are processes that are developed to manage construction cost, schedule, scope and quality. The Development Manager did not have formal, documented processes for project controls. MRC found that the absence of these formal processes lessened the accountability of project management decisions and actions (such as the basis for changes, progress updates on schedule or cost). Further, in the absence of formal protocols, such as a standard to define what is an acceptable interval for project reporting or a threshold for providing cost support for construction expenses, the actions are solely based on the subjectivity of the personnel employed. While MRC found that the Development Manager employed competent people, there remains room for improvement in certain areas of project oversight given the use of public funds. Ultimately, the importance of these methods becomes apparent when a project experiences significant


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changes or conflicts when schedule delays, defective work, or cost overruns develop. This did not occur on the Arena Project. Further, the areas noted are presented as mandated by the audit scope defined by OUS and MRC’s comments are presented for consideration regarding future improvements; there were no material cost exceptions identified for the Arena Project relative to these areas.

The University, Hoffman and the Development Manager also set a threshold that reduced the need for invoice documentation from the general contractor for any contract less than $50,000. This protocol was put in place to reduce the volume of documentation. MRC found this process reduced oversight and created a potential control risk; by creating a $50,000 limit, the parties created the opportunity for expenses to be paid without sufficient verification. Further, as a public project, a best practice would be to require all supporting documentation for a contractor or subcontractor’s costs. Implementing dollar value thresholds for invoice review is generally a common practice, however MRC found no evidence that the threshold set saved project administration expenses. MRC understands that the Development Manager spot-checked invoices that fell under this threshold with the contractor, as did the University; however MRC found no evidence to document that these reviews took place.

The University put in place significant controls regarding cost control for the project, which required customization in some areas of processing to accommodate the size and complexity of the Arena Project and its contracts. MRC noted several best practices in this regard. However, the payment approval process employed by the University did not adequately validate compliance with the contract terms of the Development Manager’s contract, where invoices were paid without adequate support and where billing rates were not questioned. MRC also found that the approval steps in the University’s payment process for Arena costs inadequately assumed reliance on others in the process, as evidenced by the payment of the Development Manager’s costs without questioning the absence of time detail or approved rates. However, MRC found no financial impact as a result. As previously noted, the University considers the Development Manager’s contract to be a Lump Sum price in the area that MRC concluded it was a reimbursable contract. As a Lump Sum price, the areas that MRC noted for improvement would be reduced.

Conclusions The audit revealed numerous best practices in the areas of gift-in-kind contributions and subcontractor selection. Immaterial variances due to accounting and documentation processing errors were noted during the course of the audit and discussed with the University and its partners. Additionally, procedural oversights resulting in immaterial control issues on the Arena Project were also identified and communicated to the University. MRC’s conclusions are discussed in the body of this report.

Conclusion OUS required a comprehensive review of the Arena Project. MRC reviewed 80% to 90% of key contract costs and found no material cost exceptions. MRC conducted more than 100 interviews of multiple parties involved in project. MRC reviewed all performance language of key stakeholder contracts and compared what was agreed to what was done. MRC


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examined business processes and considered the competencies of the companies and employees charged to execute Arena Project responsibilities. As a result, MRC presents a comprehensive discussion of areas done well, and areas for improvement. MRC respectfully submits these findings, with the context that the Arena construction project has been a successful endeavor for the University based on the UO’s goals for project success. Should new information be presented, MRC reserves its right to modify the comments in this report.

Management Response Summary – University of Oregon The University of Oregon acknowledges the work of Marsh (MRC) and its partners and staff and is pleased to note the conclusion that the Matthew Knight Arena project was completed on time and on budget and in accordance with the terms of the agreements governing its construction, resulting in a conclusion that the arena project has been a low risk endeavor for the university as of the close of the field work. The university is also pleased to note that Marsh identified no significant quality issues related to the project and recognized numerous best practices in the areas of gift-in-kind contributions and subcontractor selection. The university will continue with the best practices it applies as noted in the audit and will incorporate other best practice recommendations in future projects.


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2

Project Overview The Matthew Knight Arena will be a 397,825 square foot, 12,500 seat state-of-the art multi-purpose facility for the University of Oregon men’s basketball team and women’s basketball and volleyball teams, as well as other University and community events. In 2003, National Championship Properties, LLC (NCP) was founded as a fully-owned subsidiary of the UO Foundation to carry out the Arena Project. The idea was that NCP would develop and build the Project and then operate the Arena or donate the Arena to the UO. In late 2003 and the beginning of 2004, NCP contacted Hoffman Construction Company (Hoffman), Ellerbe Becket Architects (Ellerbe) and TVA Architects and started discussions about the development of an Arena. Between the end of 2004 and the beginning of 2006, NCP, the contractor and the architects were working on the financial model of the project as well as a preliminary design. It also became apparent that the chosen site, Howe Field, was inadequate, and the University began to pursue land acquisitions at the current site. In November 2007, it was determined that private development, construction and operation of an arena would not work. Under the Board Administrative Rule in effect at the time, in order to meet the completion date, the UO entered into an emergency contract with NCP for design and pre-construction of the Arena. This allowed NCP to proceed with the design and pre-construction activities, actions taken to avoid cost escalation and delays that could have jeopardized the Project. Since Ellerbe, TVA and Hoffman were involved from the inception of the Project, had unique project knowledge and had developed a collaborative relationship, the University decided that the continued involvement of these parties would lead to an on-time and on-budget project. Therefore, subsequent to its contract with the UO, NCP entered into pre-construction agreements with Hoffman and Ellerbe. In February 2008, the State Legislature approved $200 million of taxable fixed rate bonds for the development and construction of the Arena Project. In March 2008, UO engaged JMI as Development Manager. In June 2008, the State Board of Higher Education approved the Project.


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The UO broke ground on the Arena Project in February 2009. The planned completion date noted by MRC during field work was December 29, 2010. During and at the close of field work, the Project was on-time and on-budget.

OUS Audit

The Oregon University System (OUS) issued Request for Proposal # 2010-05 on May 21, 2010, which detailed the scope of work to be conducted for the Matthew Knight Arena Project Audit. After a competitive selection process that involved several responsive firms, OUS engaged Marsh Risk Consulting (MRC) to provide construction audit services for the University of Oregon’s Matthew Knight Arena (Arena or Project).

In accordance with the Request for Proposal, the audit services performed by MRC were focused on the following tasks:

• For the contracts used to design, manage and construct the Project:

o Determine whether the invoices are in accordance with the Contract documents

o Determine whether the change orders are appropriate and priced correctly

o Reconcile Project billings to payments made and recorded in the University financial system

o Identify potential cost exceptions, overcharges or duplicate payments

o Identify potential project control deficiencies and exposure to overcharges on future projects and identify areas of improvement

• For Hoffman Construction Company (Hoffman)

o Review Hoffman’s subcontracting practices

o Review the inclusion and application of “in-kind donations” in the subcontractor’s bid

o Review sole source awards, if any

• Project Controls

o Evaluate the effectiveness of the internal project controls employed by JMI

o Evaluate the effectiveness of the internal project controls employed by the UO

• Review the nature and effectiveness of the University’s outreach program

• Identify any improvements that UO can apply in future projects, to obtain best value for public funds, to ensure fair and responsible practices, and to achieve other public goals

To carry out its audit tasks, MRC reviewed the available contemporaneous project documents including but not limited to:


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• Contracts, Amendments and Addendums to the Contracts between the parties involved

• OUS policies and procedures, Oregon Revised Statutes (ORS) and Oregon Administrative Rules (OAR)

• Project invoices from Hoffman, Ellerbe, JMI, Clair and other miscellaneous vendors and consultants

• Monthly Project Reports from Hoffman and JMI • UO financial system outputs • Project budgets (planned and current) • Cost Proposal Notifications (CPNs) and supporting documents • Documents relative to subcontractor selection • Certified payroll reports

In addition to document reviews, MRC conducted detailed interviews with personnel from:

• Hoffman • JMI • UO – Capital Construction • UO – Business Affairs • UO – General Counsel • UO – Finance and Administration • NCP • University of Oregon Foundation • Department of Justice for the State of Oregon • Ellerbe Project Manager and Accountant

In its review, MRC also assessed the reasonableness of certain costs through comparisons to market and industry guides. For example, equipment rental prices billed in contractor or subcontractor change orders. MRC’s detailed findings and conclusions are discussed in Sections 3 through 7 of the report.


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Contract Assessment and Audit

A fundamental purpose of the audit was to determine if the University of Oregon was billed correctly and received what it contracted and paid for. This evaluation was accomplished through an assessment of the following areas:

• Contract Billings • Change Orders • University Project Payments • Project Controls

The contracts subject to audit included: “...the UO’s project management, architectural services, construction and consulting contracts related to design and construction of the Arena.”1 Specifically, these firms included:2

• JMI Sports, Inc. – Development Manager / Owner’s Representative • Ellerbe Becket Architects – Design and Architectural Services • Hoffman Construction – Construction Manager / General Contractor

MRC reviewed the processes, protocols, procedures, other controls, and documentation employed to assess and pay for the performance of the contracting parties. MRC conducted interviews with the on-site management and administration personnel responsible for contract billings, as well as off-site audit field work consisting of document reviews and interviews with the home office personnel of JMI in San Diego, CA and Hoffman in Portland, OR. Discussions were also conducted with Ellerbe. MRC also conducted interviews of several University, State and Foundation employees involved or familiar with the project’s contracting and execution phases, and MRC was regularly on-

1 Oregon University System Request for Proposals RFP # 2010-05 Matthew Knight Arena Project Audit. May 21, 2010. Page 15, Scope of Work, A – Nature of Services, part 1

2 As identified in the Oregon University System Request for Proposals RFP # 2010-05 Matthew Knight Arena Project Audit. May 21, 2010. Page 8, Background. Pages 8-15


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site at the Arena for the few months that entailed audit field work, where interviews were conducted and independent observations were made. MRC’s observations, findings and recommendations are presented below.

JMI Sports JMI serves as the Project’s Development Manager providing development oversight and management of the Project team on behalf of the University. In its role as Development Manager, JMI effectively served as the Owner’s Representative in conjunction with the University’s Capital Projects division. Given the size, scope, schedule and complexity of the Arena, MRC found that JMI’s involvement was critical to the success of the Project. However, MRC noted inconsistencies regarding the manner in which JMI’s contract, and contract billings were managed. MRC notes that JMI and its site and home office teams were supportive of the audit. MRC advised JMI of the observations regarding contract billings (discussed below) and JMI readily provided information and answers to MRC’s inquiries. Fees and reimbursable expenses paid to JMI for its services are specified in its contract.3 Specifically, JMI’s billings are to include: reimbursable personnel and overhead expenses, reimbursable business expenses at a lump sum, reimbursable insurance expenses and a development management fee. Finding 1: JMI’s contract billing practices varied from contract

language. Recommendation 1: The University should consider revising future contracts

to explicitly define contract billing terms. Management Response 1: Management acknowledges that while both the

university and JMI had a common understanding of the contract language, which was implemented as understood by both parties, future contracts of a similar nature should include more explicit language.

JMI’s rates were not negotiated as required by contract. Rates were billed based on projections of salary cost. These projections were used to develop the estimate of payroll cost that was provided in JMI’s contract, dated March 2008. JMI’s contract states: “The University and Development Manager shall mutually agree upon personnel billing rates” and that the University will reimburse JMI for personnel costs based on these rates. MRC found no documentation to substantiate that the University and

3 March 1, 2008 Development Management Agreement between The State of Oregon acting by and through The State Board of Higher Education on behalf of The University of Oregon and its Athletic Department – Section 5


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JMI negotiated the rates for JMI’s personnel. Lacking a negotiated rate, JMI’s billings reflect a Lump Sum invoicing methodology based on JMI’s estimate of personnel cost that was included in JMI’s contract4 dated March 1, 2008. The contract billing stipulation appears in JMI’s contract, Article 5.1, as follows:5

“The University shall reimburse the Development Manager for cost associated with the Development Manager’s Project personnel and general overhead during the Agreement Term. The University and Development Manager shall mutually agree upon personnel billing rates and the time allocation for each Development Manager employee assigned to the Project. On a monthly basis, the University shall reimburse the Development Manager 135% of the agreed upon personnel rates, as compensation for Project related salaries, payroll burden and general overhead. Attached hereto … is the Development Manager Cost Summary, which provides an annual estimate of these total costs.”

Based on discussions with the University, MRC understands that JMI’s contract was intended to be a Lump Sum agreement. It is beyond the scope of MRC’s work to make a similar legal interpretation. MRC considered the contract wording when evaluating JMI’s billing practices. Regarding personnel expense, JMI’s contract language incorporates wording such as “reimburse” and “cost associated.” The contract refers to an “estimate” of these costs but does not state that the estimate established a fixed fee to be used for billing purposes. The contract is silent regarding an agreement constituting a fixed price or lump sum for personnel cost. Other JMI contract costs, such as Reimbursable Business Expense, are more clearly defined as a “fixed rate” with a numerical cost defined directly in the language of the contract. Based on these contract terms, MRC found that JMI’s contract wording with respect to personnel expense was not followed. MRC notes that as a lump sum or fixed price agreement for personnel expense, which is the University’s position, then JMI billed according to its estimated costs provided at contract inception. MRC found that JMI’s estimate of cost provided in March of 2008 included guaranteed increases for personnel expense through 2010. This is a business decision for the University, where the need to confirm pricing for development and construction costs to attain budget approval must be weighed against the risk of future price escalation. MRC understands that these considerations were made by the University. MRC recommends that the University incorporate specific language in future contracts to explicitly classify contract expenses as lump sum. In the event the contract requires 4 Appendix A of JMI’s contract

5 March 1, 2008 Development Management Agreement between The State of Oregon acting by and through The State Board of Higher Education on behalf of The University of Oregon and its Athletic Department – Section 5.1


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agreement or negotiation of rates or costs, MRC recommends that the University document these agreements. Finding 2: JMI’s Fixed Price $1.6M Contract Addendum for adjacent

University projects cites potential cost savings as the basis for expanding JMI’s scope; however, MRC found that the absence of time tracking for the hours spent by JMI employees prevented the identification or measurement of these savings.

Recommendation 2: The University should consider requiring actual time

detail as part of contract addendum pricing negotiations on future development manager or other professional services contracts.

Management Response 2: Management acknowledges the comment and

understands the recommendation. After the Arena Project was underway, the UO started other projects adjacent to the Arena: the Parking Garage, the Triangle Area, and the Alumni Center. The University amended JMI’s Contract for the additional work. Addendum #1 was executed March 1, 2009 for a lump sum amount of $1,605,000.6 MRC interviews with project personnel indicated JMI had a designated Senior Project Manager for the Parking Garage and the Alumni Center who worked from JMI’s home office of San Diego. Interviews and the project records indicated that some of the personnel assigned to the Arena Project also supported the adjacent projects. JMI’s lack of time tracking and documentation of personnel costs (agreed upon rates billed at actual time) by project prevented MRC from verifying JMI’s payroll costs on the Arena versus other University projects. MRC found that some of JMI’s Arena personnel included in the Arena estimate at 100% utilization performed work on the other University projects. Accordingly, MRC questioned how JMI employees could be full-time on the Arena and also bill the other projects. JMI explained that its billing practice is based on a forty-hour week, where 40 hours represents 100% of time spent. For those employees that work on other University projects and exceed 40 hours, JMI bills in excess of 100% of the rates, and allows for billing in excess of 40 hours. JMI explained its billing practice to MRC, as follows:7

“JMI Sports does not track the exact time that employees spend on each project, given that we do not invoice our clients on an hourly basis. Instead, average time allocations are estimated for each project team member, based upon a 40 hour work week. Those

6 March 1, 2009 – Addendum #1 to Development Management Agreement Between The State of Oregon acting by and through The State Board of Higher Education on behalf of The University of Oregon and its Athletic Department and JMI Sports LLC for Arena Project – 4.1

7 October 6, 2010 JMI Sports Letter Response to an MRC audit request


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who are solely working on the arena project, or that spend at least 40 hours per week on the project, are allocated at 100%. Those employees who also devote considerable time to other projects, carry an allocation that reflects the average amount of time that we (with their input) assess they are spending on the arena project. For these individuals, their actual time spent working on the arena project varies from week to week, and month to month; however, our assigned allocations are conservative in the aggregate. To meet the demands of our projects, a typical work week for most employees exceeds 40 hours; therefore, this billing strategy based on estimated percentages of a 40 hour work week, versus actual hours worked, is of benefit to the University.”

MRC questions this billing methodology given the absence of time tracking, which would be a practice that would allow JMI to both know and show that an employee actually worked 40 hours on a project. Further, without the recording of time, it is not possible to evaluate how much “substantial” time JMI employees spent on other University projects after working full-time on the Arena Project. Last, because the billing allocation JMI uses in invoicing the University is based on the premise that employees charging “full time” to the project worked at least 40 hours, the absence of any records to show this time prevents verification by the University, or its auditors. JMI provided MRC with an analysis of the billing rates developed for the Arena Project. These rates were based on the projected average annual compensation (salary plus bonuses) of JMI’s employees. Given this computational basis, JMI is compensated for its entire annual costs when an employee is billed at 40 hours per week; JMI does not incur additional cost when an employee works more than 40 hours in a week. Further, JMI’s estimated rates include projected bonuses and raises. Since there is no incremental cost to JMI for work over 40 hours per week, the University should consider the potential of paying in excess of JMI’s actual personnel costs when implementing lump sum agreements. Additionally, while the University endeavored to save cost by leveraging JMI’s knowledge of UO and its existing mobilization on-site, MRC recommends that the University consider putting these contracts out for competitive bid in the future to validate savings. Based on a review of the scope of work in JMI’s Contract addendum, MRC also recognizes JMI’s financial risk given the range of work that may be required. Specifically, the Addendum states: “The Development Manager will provide the services indentified in Section 2 of the Agreement.”8 Any underestimated level of effort could create an increased personnel expense to JMI. In this regard, the University effectively shifted the risk of increased costs to JMI by using a fixed price for the Addendum work. However, given the absence of time tracking, the University has no way of verifying which projects that JMI personnel spent time. In the event of a change order for increased costs, the University would not be able to assess the overruns or underruns of JMI’s hours across three projects, on one contract, without time detail. There were no JMI cost overruns during the Project, and MRC presents these comments as a best practice for consideration on future jobs. 8 March 1, 2009 – Addendum #1 to Development Management Agreement Between The State of Oregon acting by and through The State Board of Higher Education on behalf of The University of Oregon and its Athletic Department and JMI Sports LLC for Arena Project – 2.1


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Finding 3: Lump Sum billing set in 2008 for the personnel cost of

the University did lock in pricing risk and allow for accurate project budgeting; however, actual market conditions indicate a lump sum structure was not required.

Recommendation 3: UO should consider using guaranteed maximum prices

or target price contracts, along with lump sum pricing for future development manager contracts. Under these contracting structures, the University can develop long term (over 1 year) project budget amounts, include shared savings provisions if appropriate, and better align the cost of development services with market conditions.

Management Response 3: Management acknowledges the comment and

understands the recommendation and will consider this when balancing risk in future contract situations.

MRC’s interpretation of JMI’s contract was that JMI and the University were required to negotiate its billing rates for the cost of personnel charged to the project and bill actual amounts or agreed allocations. MRC did not find documentation beyond JMI’s March contract to demonstrate these negotiations occurred. The University’s position differs from MRC, asserting that personnel cost was agreed upon as a lump sum. Given that the University was a party to the contract, and MRC was not, comments in this area are noted for the University’s consideration in drafting future contracts. In the event the contract for JMI’s personnel is a lump sum agreement, MRC notes that at the time of the agreement (March of 2008), JMI had yet to hire the majority of its employees used for the Project. This was a primary factor that MRC considered when presented with the University’s contract interpretation; it has not been MRC’s experience to see pricing locked in for 3 years for employees yet to be hired as Development Managers. As a best practice, and at a minimum, MRC recommends that the qualifications, years of experience and detailed duties for each planned hire be clearly determined and documented before agreeing to long-term fixed pricing. MRC also recommends that the University negotiate these employee rates based on current market conditions for each hire, as allowed by contract with JMI, but not done during the Arena Project. The projection of JMI’s payroll cost for 2008, 2009, 2010, and 2011 was submitted in March of 2008 and billed approximately as presented. JMI provided MRC an analysis of employee cost for these years. This analysis showed that generally, JMI’s projections and subsequent payments to employees included both raises and bonus amounts each year. Given that JMI billed the Project pursuant to the projections in 2008 that included raises and bonuses for future years, JMI locked in increases for compensation into 2011. Granting raises and awarding bonuses are a normal practice in the construction industry. However, there have been significant increases in construction unemployment rates during the period of JMI’s contract, which can become a significant factor in compensation


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increases. Accordingly, MRC found that locking in JMI’s payroll costs for the term of the 3 year contract was not necessarily advantageous to the University given the actual market conditions. JMI did prepare two reconciliations of its payroll costs. While MRC was able to verify select compensation amounts, some conflicting amounts were noted. Further, in the absence of appropriate time tracking and documentation – such as hours billed to a project code – MRC could not rely on the analysis of billings prepared by JMI to validate the costs JMI actually incurred for personnel working on the project. Given the absence of corroborative information, it is not appropriate for MRC to quantify the actual payroll costs, increases, and bonuses paid by the University since a reasonable comparison of actual costs to billed costs would not result. Conclusion 4: JMI managed the Project effectively but MRC

recommends improvements to formalize and document project control policies and procedures.

Recommendation 4: The University should implement a pre-qualification

process prior to engaging an Owner’s Representative to evaluate the methods, processes and management tools the firm will use to align with the goals of a public project.

Management Response 4: Management acknowledges the conclusion but believes

that appropriate due diligence was performed as evidenced by the successful completion of a major public works project that was on time and on budget.

JMI met or exceeded contract obligations in several areas. MRC found that JMI’s involvement facilitated the resolution and management of several project challenges, from development through construction, as well as the on-time, on-budget status. MRC also found that JMI established and followed informal project control procedures during the Project, where formalized processes would constitute a best practice. Accordingly, MRC noted some deficiencies in project management. However, the impact of these observations was immaterial. MRC’s comments are provided to illustrate areas for on-going development for JMI, and opportunities for the University to implement additional best practices when setting prequalification and contract criteria for Development Managers. MRC’s discussion of project management performance, including effective practices and areas for development, are below. Project Accounting

JMI employs competent colleagues in the areas of project accounting, as well as the other project control areas noted below. MRC found JMI employed appropriate methods to


MRC 17

segregate duties in financial areas, and had several informal practices for oversight and quality control, including regular oversight from JMI’s executives. However, MRC noted areas where project accounting practices could be developed to strengthen reporting and controls. MRC notes, these areas were not found to be materially deficient. MRC’s recommendations in project accounting include: Implement a documented reporting procedure to verify Owner expenditures as a best practice MRC found that JMI complied with its responsibilities to develop and maintain the overall project budget. JMI‘s Accounting Project Manager and UO Accounts Service Manager communicated to ensure JMI’s records reconciled to the separate reporting system maintained by UO. However, communication was over the phone and no formal report was issued to UO’s Accounts Service Manager. MRC recommends that, in addition to the cross-check of the financial statements and records, JMI should document the control process itself and enhance the reporting around project budget monitoring. This would enhance accountability and assist in identification of any budget-to-actual variances in University spending, as well as any deficiencies in the UO’s reporting systems. While system defects are less common, as a financial system becomes customized for a particular use, such as for a construction project, human error is possible. Incorporate a system of daily time tracking JMI did not use a time tracking or accounting system to capture actual hours spent by its personnel on the Project. As such, no contemporaneous records (i.e., documentation that was generated when the cost or time was incurred) exist to verify the actual time spent by each individual billed to multiple University projects. While this record keeping can vary, it may consist of:

• A system that includes a designated project code where employees can charge daily time (hours)

• Daily logs that demonstrate the time spent on a given project by date JMI did provide budgeted and actual summaries of payroll cost allocations in Excel spreadsheets. These summaries do not adequately support the time spent on the Arena Project but did adequately verify for the project period that the employees worked for JMI full or part time. Include backup for actual costs or actual against estimated costs in each invoice for any reimbursable expense. Thresholds can be set given the needs of the University and materiality of the charge MRC’s review of JMI’s monthly billings found that JMI’s invoices did not include backup for the cost of personnel that were on-site or working on Arena business off-site. As a reimbursable contract, this information would be required to substantiate costs. Invoice documentation also serves the University in the event of change orders or contract addendums, where a cost history serves to validate future pricing.


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Project Reporting JMI submitted monthly project reports to NCP and the UO. The monthly project reports complied with the Contract requirements and included budget, project status, expenditures, a milestone project schedule, and cash flow projections. Require consistent and detailed reporting regarding project progress Based on its contract9 and as typical for every large construction project, Hoffman was required to submit a monthly project report to the Owner’s Representative. Hoffman submitted three monthly reports to JMI after which it was mutually agreed that Hoffman did not need to submit more because it was redundant with the reports that JMI was submitting to NCP and UO. MRC reviewed Hoffman’s reports and noted that Hoffman’s reports included a much higher level of detail than the JMI reports regarding the progress of the project. Given the scope and dollar value of the project, and the availability of this information, MRC found that Hoffman’s reporting should have been continued and provided to the University. MRC has commented here, under JMI’s section, given JMI’s responsibilities on behalf of the University for oversight in this area. Appropriate practices regarding meeting minutes; best practice recommendation: obtain signed copies of meeting minutes as part of project reporting The project team (Hoffman, JMI, and UO) conducted weekly project meetings. These meetings were documented by Hoffman and made available via a project website. MRC found this to be an appropriate practice. MRC noted one area for improvement that would benefit the University: the UO (or its Development Manager) should obtain signed copies of the meeting minutes each week. A best practice would be to have all project stakeholder representatives’ at the weekly meetings sign the meeting minutes, then the University maintains these documents. This memorandum can become important should there be a disagreement regarding discussions regarding project actions later in the job. MRC understands that the main discussions and communications between the parties were held during the Weekly Construction Coordination Meetings, where representatives from Hoffman, UO, JMI, Ellerbe, TVA, and sometimes the engineers (Haris, HEI) attended. Hoffman kept detailed meeting minutes which were provided to JMI and UO. MRC noted there was no documented commentary back from JMI or the UO. The construction coordination meeting minutes include information on new, resolved and unresolved items, 4-week look-ahead schedule, RFI log, submittal log, and design items that needed to be addressed. Effective communication by JMI MRC understands from various interviews with key project participants that the JMI Executive Project Manager was the focal point for coordination and reporting activities

9 February 6, 2009 CM/GC Contract, Article 3-Work of the Contract, Section 3.2.7


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between Hoffman and NCP and UO. The Executive Project Manager received updates on the project status from JMI’s Senior Project Manager. JMI’s San Diego-based Project Manager was responsible for accounting, and for updating the Executive Project Manager on project budget, cash flow and commitment reports. MRC found these JMI practices to be effective. No communication gaps were identified between the JMI team, Hoffman and UO. University Payment Authorizations Increase documentation to substantiate reviews and approvals and consider the use of earned value metrics to audit project completion for payment purposes There was an established process for review and approval of payment applications but the accountability of the authorizations in the process could be strengthened with improved documentation and written policies and procedures. UO procedures should mandate an Earned Value assessment of costs, and uniform procedures for budgeting and payment tracking that would allow independent verification of budget status.

Section 2.1 of JMI’s contract stated:10

“The Development Manager shall develop and implement procedures for the timely review and processing of applications by the Contractor and other consultants for progress and final payments.”

There was an established process between JMI and UO for review and approval of payment applications. The progress payments were based upon percent completion of the work. The percent complete was visually verified by JMI and UO’s representative on-site. While visual verification of percent of the work is appropriate, it should not be the sole factor used to determine the project status. An Earned Value (EV) calculation is an industry best practice and should be used for verification of the project status against cost and schedule. Scope Management / Change Orders Enhance documentation regarding change order discussions and decisions JMI did not have formal project control policies and procedures regarding change orders. Formal policies, processes and procedures, and appropriately tracking the nature of the changes would increase accountability for the scope/change process. Contractor’s CPNs should be rigorously reviewed in order to assure that the application of fees and mark-ups are correct. However, MRC concluded based on its interviews and review of related information that JMI and Hoffman did review changes on an adequate basis. MRC documents its understanding below.

10 March 1, 2008 Development management Agreement between The state of Oregon acting by and through The State Board of Higher Education on behalf of The University of Oregon and its Athletic Department – Section 2.1 (k)


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JMI did not maintain a CPN log that identified the reason for the change. Starting with Amendment 6, JMI maintained CPN backup information used for the Amendment which included the amount and description of the CPNs, the related documents (RFI, CCD) and the approval entity. The CPN log provided by JMI which was used for Amendments 3-5 included only the cost breakdown for each CPN. It is industry best practice for the Owner or Owner’s Representative to maintain a change order log identifying the reason for the change as a check against the Contractor’s log. Based upon discussions with JMI’s team and review of contemporaneous documents, MRC understands that all project documentation was entered in online management software. JMI routinely interacted with the design team and discussed alternate solutions to a problem, and helped determine if a change was appropriate for the Owner’s needs and standards. When a CPN arrived, the Senior Project Manager (SPM) received the CPN and reviewed the change together with Hoffman and Ellerbe; the SPM then discussed and questioned the costs as appropriate. After the JMI SPM approved the cost, the CPN was sent to the JMI Executive Project Manager (EPM), who reviewed it again with the SPM. MRC found that the SPM performed an extensive review and as necessary, made reductions/adjustments to CPNs that benefited the University. As discussed during an interview with MRC, the CPN review was always based on the intent of GMP drawings. The EPM also noted that there were many design corrections due to the fast-track nature of Project and coordination problems between design disciplines. MRC found this to be a valid statement based on the complexity of the Project. JMI was responsible for the final CPN cost approval. As noted in other sections of this report, there were some inappropriate mark-ups which JMI failed to identify. However, these markups were not material and the differences went both ways – in favor and not in favor of the UO. As a best practice, MRC’s recommendation is to enhance the documentation to memorialize the progress and changes during the job, which can be developed from effective processes already employed by JMI in managing project change. Schedule Control Incorporate contemporaneous reviews of electronic schedules in the project oversight process Both JMI and Hoffman managed the project schedule successfully. A complex Arena Project was on-time at the end of MRC’s field work. MRC’s comments relate to opportunities for improvement. JMI was responsible to develop the overall project schedule which should include Hoffman’s construction schedule, plus the design and permitting activities. JMI included a milestone schedule in its monthly project reports for the UO. After review of selected schedules, MRC found that JMI’s scheduling process did not meet industry best practices for scheduling since its milestone schedule did not use relationship logic to determine project status but applied mandatory date constraints to its activities. MRC’s position is that a review of relationship logic provides a more accurate and


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predictable project schedule assessment because the effects of performance determine the dates when milestones will be met. JMI was responsible for reviewing Hoffman’s schedule. Hoffman submitted its monthly schedule updates in PDF format to JMI and JMI’s Senior Project Manager reviewed them. This review included confirming if the schedule updates met the key milestone dates for the project. MRC reviewed Hoffman schedules and noted that overall they complied with the industry best practices for scheduling. There were some areas of improvement, which MRC discussed with Hoffman’s Superintendant. Notwithstanding the fact that Hoffman provided an acceptable schedule for the Work, the schedule was a print-copy (PDF file). JMI as an Owner Representative should have required Hoffman to submit the electronic (Primavera 6) version of the schedule, which would have allowed JMI to evaluate the schedule for logic relationships, critical and near-critical path activities, and inappropriate logic or duration revisions. This review is necessary to ensure accurate project status. It allows JMI and the UO to independently assess, then agree or disagree about whether the dates Hoffman submits are reasonably estimated by examining the information Hoffman relies upon but does not show up in a printout from a PDF file. This level of review is much like auditing a financial model, where cell calculations in a spreadsheet (Excel) can be viewed to determine if the calculations are done right. Based on this assessment, MRC found that JMI’s schedule review process can be improved to meet industry best practices.

Ellerbe Becket Architects Ellerbe Becket Architects (Ellerbe) provided design services for the Arena Project. NCP contracted with Ellerbe for the Arena Project in December 2005 for Site Planning and Schematic Design.11 This “Schematic Design Agreement” was a lump sum, not-to exceed contract for $1,261,150, which was later increased by 8 Additional Service Requests (ASR) to a total contract value of $2,527,190. NCP and Ellerbe subsequently entered into a “Preconstruction Agreement” effective May 28, 2008 for pre-construction work during the time period between December 18, 2007 and the date on which bonds were issued.12 In January 2008, Ellerbe and NCP prepared a draft agreement which provided an overall design fee of $9,916,850.00 with 25% for the Design Development Phase. The draft contract amount of $2,245,269.00 for the Design Development Phase was changed in May 2008 to $2,380,044. The “Final Architect’s Agreement” between NCP and Ellerbe was a lump sum, not-to-exceed contract for basic architectural services for $7,536,806 plus expenses.13

11 December 23, 2005 Architect’s Agreement for Architectural Services between Ellerbe Becket Architects and NCP, effective November 30, 2005

12 May 28, 2008 Architect’s Preconstruction Agreement for Architectural Design Development Services between NCP and Ellerbe Becket Architects

13 December 22, 2008 Architect’s Agreement for Architectural Services Construction Documents through Project Closeout between NCP and Ellerbe Becket Architects


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There were 12 Contract Amendments issued at the end of MRC’s field work. The total contract value for Ellerbe including the base contract and the amendments is $9,298,814. Thus the total fees for Ellerbe as of August 31, 2010 were:

• Schematic Design and ASRs $2,527,190 • Design Development Fee $2,380,269 • Final Architect Agreement and ASRs $9,298,814

Total $14,206,048 The Schematic Design contracts and ASRs 1 and 2 were invoiced prior to UO involvement, therefore MRC did not review the invoices for these services as they were not part of the scope of review. From November 21, 2007 to August 31, 2010, Ellerbe submitted 104 invoices totaling $10,374,126. These invoices represent the amount after the project became public. MRC reviewed all 104 Ellerbe invoices, 100% of the invoiced amount. Finding 5: JMI approved Ellerbe invoices without the specified

retainage, and the University paid Ellerbe Contract billings on that basis.

Recommendation 5: Payment terms should be verified by the Owner’s

Representative and the University as part of the invoice approval process. The University should consider incorporating a contract billing checklist on future projects. This sheet should include the contract provisions regarding retainage, billing rates, mark-ups, and other invoicing requirements. As each invoice is reviewed, the contract sheet can be updated to document that contract requirements were verified.

Management Response 5: Management acknowledges the comment and will

consider the recommendation in future projects. The Final Architect’s Agreement between NCP and Ellerbe provides for 5% retainage:14

“An amount equal to 5% of the payment for each phase shall be retained by NCP until that phase is accepted by NCP and University’s Development Manager.”

MRC’s review of the invoices and payments made by the University to NCP revealed that the University did not hold retainage from Ellerbe’s payments. Further, MRC found no evidence that JMI brought the discrepancy to the University’s attention. Both the University and JMI reviewed Ellerbe’s invoices as part of the payment approval process.

14 December 22, 2008 Architect’s Agreement for Architectural Services Construction Documents through Project Closeout between NCP and Ellerbe Becket Architects, Section 8, page 16


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The University Director of Capital Construction stated that UO’s standard policy does not specify retainage to be held on Architects. While retainage on design contracts may be less typical than its use on construction contracts, it was included in Ellerbe’s contract. Retention serves as a control for an owner, where a nominal portion (5% to 10%) of a vendor’s invoice is withheld from the actual payment amount. Generally, the amount is considered earned in the period being invoiced, but withheld until later in the project, after an owner’s verification of satisfactory performance over several billing periods. Given that 5% retention was negotiated in Ellerbe’s contract, the failure to enforce this provision eliminated a control available to the University should there have been performance issues with the design scope. Conclusion 6: Three Ellerbe invoices did not have appropriate back up

for reimbursable expenses. Backup for these expenses is required by contract.

Recommendation 6: The University and JMI should require Ellerbe to comply

with the Contract. The University should consider incorporating a contract compliance checklist with its invoice review, approval and payment process.

Management Response 6: Management acknowledges that non-material

differences of less than 1% were indentified. While this exception rate is quite small the university’s goal is to provide proper internal control against all exceptions. The university is performing active follow up on these invoices.

The Final Architect’s Agreement requires Ellerbe to provide back-up for “Extra Services” and “Reimbursable Expenses” with its invoices. MRC reviewed all Ellerbe invoices for extra services and reimbursable expenses and found three instances where backup detail was not provided. The three invoices lacking expense backup totaled $99,290.12, or less than 1% of the total invoices submitted.

Hoffman Construction Company Hoffman was contracted by NCP to build the Arena Project in February 2009.15 The GMP was to be established after design was complete and the majority of the subcontractors’ bids were received. An Early Work Amendment was executed in April 2009 for $61,331,013.64 to allow early procurement of long-lead items, release of critical bid packages, and start of foundation work.16 The GMP of $149,944,100 (which includes the

15 February 6, 2009 CM/GC Contract between NCP and Hoffman

16 April 14, 2009 Amendment No. 1, First Early Work Amendment to CM/GC Contract


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Early Work Amendment amount) was set in the GMP Amendment executed June 3, 2009.17 MRC reviewed Hoffman Construction pay applications from January 2009 through June 2010, focusing on the composition and applicability of the various costs. MRC also conducted several interviews with Hoffman’s field and home office personnel. MRC’s compliance review of Hoffman’s Payment Requests focused on the following areas:

• Retainage held on invoices • Percentage completion calculations • Subcontractor supporting documentation • Certified Payroll submissions • Prevailing Wage Rates • Equipment Rates used for billings to UO

Finding 7: Hoffman’s contract documents contain contradictions

regarding the calculation of CM/GC fee; the discrepancy results in a nominal overstatement of the contract price for CM/GC Fee.

Recommendation 7: Prior to final payment, the University and Hoffman

should review the language and calculation to determine the proper pricing. This review should also include Warranty Fee (see Finding 10).

Management Response 7: Management is working with Hoffman to review the

pricing as is recommended to determine if there has been an overestimate of the contract price.

The calculation of fee as identified in the estimate calculation included as a contract exhibit (part of the Hoffman contract) is inconsistent with the wording in the contract provisions. The discrepancy results in a variance/increase of $25,238 in the contract value. By calculating fee on a pool of costs without the Warranty Fee reserve as described in the contract language, the price of the contract decreases as compared to the contract spreadsheet/exhibit. This variance is classified as a low risk item given the relative small dollar amount compared to the contract value. The Contract between Hoffman and the University18 defined the CM/GC fee in Article 6.1 as 3.25% of the Estimated Cost of the Work. In the Contract language following the CM/GC formula, the Contract provided for an additional fee, a 0.6% “Warranty Fee.”19 The Warranty Fee is described as an “addition to the CM/GC Fee.”

17 May 14, 2009 GMP Amendment to Contract (Amendment is dated May 14, 2009 and executed June 3, 2009)

18 February 6, 2009 CM/GC Contract between NCP and Hoffman

19 February 6, 2009 CM/GC Contract between NCP and Hoffman, Article 6.3


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In Hoffman’s GMP estimate exhibit, which is included as part of the GMP Amendment, Hoffman included Warranty Fee in the Cost of the Work (COW), and applied the 3.25% CM/GC Fee to this higher COW value. Hoffman’s classification of the Warranty Fee as COW is contrary to the “in addition to” language in Article 6.1. The inclusion of Warranty Fee in COW is also inconsistent with Article 9 ”Costs Excluded from Cost of Work” item 9.1.8, which specifically excludes the cost of warranty cost from COW, and the GMP Amendment to Contract which lists CM/GC Fee as 3.25% of the Estimated COW, and Warranty Fee as 0.6% of COW (in other words, the formula for Warranty Fee at 0.6% of COW inherently excludes of Warranty Fee costs from COW). Recalculation of the GMP with the revised CM/GC fee calculation results in a minor reduction in the GMP of $25,238 (see recalculation in the next section). MRC notes that the relevance of this item should be considered against a contract price of approximately $150,000,000, where MRC concluded it to be a notable but low risk finding. Finding 8: Contract language ambiguity regarding the Warranty

Fee resulted in a nominal discrepancy in the calculation of contract price.

Recommendation 8: Prior to final payment, the University and Hoffman

should review the language and calculation to determine the proper pricing. This review should also include CM/GC Fee (see Finding 9)

Management Response 8: Management is working with Hoffman to review the

proper pricing as is recommended. The Warranty Fee calculation in the GMP was inconsistent with the language of the Hoffman’s Contract. MRC found that the revision to the calculation for Warranty Fee results in an increase of $62,035. When considering this recalculation and the correction to Hoffman’s CM/GC Fee, as affected by this calculation, there is a net increase of $36,797.0020 to the contract price. Hoffman’s Contract for the Arena includes a 0.6% Warranty Fee in addition to the CM/GC Fee. Article 6.3 of the Contract establishes the Warranty Fee for the Project and the GMP Amendment to the Contract indicates the Fee as 0.60% of the Estimated COW. Hoffman’s estimate for the work calculates the Warranty Fee as 0.6% of the Cost of the Work minus Hoffman’s contingency, minus all insurance costs, and minus bond expense. Article 8 of the Contract provides that all these cost shall be part of the Cost of the Work except CCIP costs, therefore Hoffman’s exclusion of these costs from the Cost of the Work is incorrect. Recalculation of the GMP correcting the CM/GC Fee calculation and the Warranty Fee calculation in accordance with the Contract terms is reflected in the following table.

20 $62,035 - $25,238 = $36,797


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RECALCULATION OF GMP WITH CORRECTED CM/GC FEE AND WARRANTY FEE

Hoffman Estimate

Corrected Calculation

COW subtotal $ 129,426,074 $129,426,074 Insurance, Bonds, Etc. 15,123,863 15,123,863 Warranty Fee 776,556 Incl. below Subtotal $ 145,326,493 $144,549,937 Less CCIP (4,784,725) (4,784,725) Subtotal - COW $ 140,541,768 $139,765,212 CM/GC Fee 3.25% 4,567,607 4,542,369 CCIP 4,784,725 4,784,725 Warranty Fee 0.6% Incl. above 838,591 Subtotal $ 149,894,100 $149,930,897 Preconstruction Cost 50,000 50,000 GMP $ 149,944,100 $149,980,897

Fee Calculation Comparison: $4,567,607 less $4,542,369 = $25,238

GMP Calculation Comparison: $149,980,897 less $149,944,100 = $36,797 MRC notes the complexities explaining the calculations in Findings 7 and 8 as a discussion item in the report. As noted, the contract language defined the calculation of the elements of contract price (Cost of the Work, Insurance, Warranty Fee, CM/GC Fee, etc., shown above) one way, and then a spreadsheet exhibit to the contract calculated the fees in a different way. Finding 7 and 8 are similar because they discuss Warranty Fee. MRC has separated these discussions because MRC determined two impacts of the calculation warranted distinct reporting. Finding 7 explains that Hoffman’s CM/GC Fee (the profit it makes to build the arena) is overstated by $25,238 based on how Hoffman did its calculation. Finding 8 then discusses how the placement of the Warranty Fee affects the overall determination of contract price. MRC’s calculation revealed that Hoffman’s fee should go down by $25,238, while its Warranty Fee should go up $62,035. MRC also found that the total GMP should be $36,797 more than calculated in the spreadsheet exhibit to the contract. Hoffman’s GMP estimate was included as an attachment to its Contract with the University and its calculations were fully transparent. MRC found no evidence that either JMI or the University questioned its method of calculation of the GMP. MRC understands that significant negotiations were conducted, and adjustments were made to Hoffman’s contract when the Arena became a public project. Since these fees are fixed within the GMP Amendment to Hoffman’s Contract and the amount of the discrepancy is minimal, MRC recommends that the fee discrepancies should be resolved through bi-lateral negotiation between the University and Hoffman. Finding 9: For Change Orders that increased the GMP, Hoffman

incorrectly applied the CM/GC fee to CCIP costs, and


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added warranty fee. The net variance resulting from the misapplication of fees totals $26,435.88.

Recommendation 9: The University and Hoffman should resolve the variance

in the GMP by removing warranty from the Change Order calculation and issuing the appropriate CPN to recover the $26,435.88 variance.

Management Response 9: Management is working with Hoffman to resolve the

variance in the GMP as is recommended. This has been corrected in CPN A-305.

MRC reviewed the application of various mark-ups used in Hoffman’s changes and found a discrepancy between the Contract requirements and the application of the mark-up in Cost Proposals. The net variance resulting from the misapplication of fees totals $26,435.88, which is composed of $1,479 of incorrect CM/GC mark-ups and $24,956.88 of incorrect Warranty Fee additions. Mark-Ups Hoffman’s Contract with the University excludes markup of CM/GC fee on CCIP costs on Change Orders. Hoffman’s CPNs incorrectly applied CM/GC fees to the CCIP costs.21 As a result of charging CM/GC fee on top of CCIP costs, $1,479 was added to the CM/GC budget. MRC discussed the issue with all parties and Hoffman has agreed to issue a CPN to correct the problem. Warranty Fee The requirements regarding changes to the Work describe the method of calculating the change costs, the application of CM/GC fees, and the procedures for submittal and approval of change proposals. A mark-up for Warranty Fee is not identified in the change order provisions of the Contract, i.e., the Warranty Fee should not be included as a mark-up on change orders.22 Amendments to the Contract increasing the Cost of the Work incorrectly included Warranty Fee. Hoffman’s contract with the University does not contain provisions for adjustment to the Warranty Fee. Warranty Fee incorrectly added in Contract Amendments totaled $24,956.88.

21 February 6, 2009, Addendum to University Arena Construction Contract, Section 1.18 “The cost of the CCIP shall be billed to and paid by NCP” … “but shall not be a cost of work on which the Contractor charges a mark up.” 22 Article 7.2.8 of Hoffman’s Contract: “GMP increases…shall not exceed the increased Cost of the Work…plus or minus the CM/GC Fee.”


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MRC rates the above findings as low given the limited materiality level relative to contract value and based on MRC’s observations of cooperation between Hoffman and the University regarding the resolution of minor discrepancies. The CM/GC arena contract was not a typical contract for the UO based on the larger dollar value relative to other UO projects, the change from private to public use, and given the modifications made that came through negotiations that MRC found to benefit the UO (i.e., no cost saving provision was allowed, where Hoffman would receive a portion of any underruns). MRC found that the University effectively negotiated and contracted with Hoffman with respect to the use of public funds. MRC’s discussions regarding contract and change pricing above are provided as a future reference regarding areas to review in the Universities contracting processes. Conclusion 10: The process for final release of the Warranty Fee

shared savings was not defined in the Contract. Recommendation 10: The University and Hoffman should negotiate on the

timing of the release of any Warranty Fee shared savings to Hoffman at the end of the Project and document this understanding prior to final completion.

Management Response 10: Management is working with Hoffman to negotiate

the timing of the release of the Warranty Fee and to document the understanding as is recommended. Management and Hoffman have reached an agreement on how the Warranty Fee will be billed over the course of the warranty period and at completion of all associated warranty work.

The Contract provides for Warranty Fee savings to be shared equally with the CM/GC up to the lesser of 50% of the savings or $250,000. During its review and discussions with project participants, MRC found that neither the Contract’s Progress Payment provisions, nor its Final Payment provisions define the process for application and release of the Warranty Fee balance and Hoffman’s portion of any savings at the end of the warranty period. Conclusion 11: Certain subcontractor markups included in change

orders varied from OUS General Conditions Requirements.

Recommendation 11: Although the net impact of these variations was

minimal, Change Proposal Notifications (CPNs) from subcontractors should require a breakdown clearly identifying mark-ups to allow verification of compliance with the mark-up provisions of the Contract, i.e., OUS General Conditions Section D.1.3.(c).


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Management Response 11: Management agrees that the variances are minimal and that the Siemens and Pence/Kelly variances are advantageous to the University and notes the recommendation with regard to CPNs on future construction contracts.

With respect to subcontractor mark-up on change orders, OUS General Conditions Article D.1.3.c specifies the mark-ups allowed on subcontract changes. Based on a review of the selected CPNs, MRC found that the process was not entirely transparent and that some subcontractors’ mark-up calculations varied from the Contract provisions. Since the variances identified fell above and below the rates identified in the OUS General Conditions, the net impact of the variances was offsetting and minimal for the Change Orders reviewed. Summary of Exceptions

• Siemens Building Technology/JKG Electrical - 12% on labor instead of 15% • Pence/Kelly - 5% on subcontractor’s work (should be 10% because it is less than

$5000) • CECO Concrete – Initial error in mark-up (15% on labor, equipment & material) was

later identified by Hoffman, but no documentation for the credit of the $142 overcharge was provided.

• Farwest – Lump sum labor with no mark-up. • Bergelectric – 10% on the first $5,000 and 5% on the balance. Should have been

5% on total Cost of the Work. • DCCI – Lump sum with no mark-up.

Conclusion 12: Hoffman’s subcontractors used appropriate labor

rates in change orders. Recommendation 12: None Management Response 12: Management notes and agrees that Hoffman’s

subcontractors used appropriate labor rates in change orders.

Only two of the major subcontractors: Bergelectric, and Oregon Cascade had labor rates for change order work specified in their subcontracts. MRC tested one-third of the Amendments and found that all rates used in the CPNs were in compliance with Contract requirements. Conclusion 13: Rental equipment in change proposals are

inadequately described, preventing comparison with published rate schedules.

Recommendation 13: Contractors should be required to provide reference

number and page number from the equipment rate


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publication used (Blue Book or other industry publication) to facilitate verification of rental rates.

Management Response 13: Management understands the recommendation and

will consider this in future contracts. Out of the 24 CPNs reviewed, MRC selected 28 pieces of rented equipment for comparison of rental rates to the Blue Book (an accepted industry guide to assess the market cost of equipment rentals). Of the 28 selected for review, only 3 items were clearly identified the Blue Book tables. The equipment description provided by the Contractor and/or its subcontractors lacked a sufficiently detailed description of the equipment in the supporting documentation. Because of the lack of detail, MRC was unable to verify the reasonableness of the rental rates. MRC requested additional information from Hoffman in order to verify the rates, but the additional information was not available at the close of field work. MRC recommends a revision in the procedures for change orders that will require a clear reference to the exact rate utilized to price equipment rental. MRC conducted its own probable rate estimates based on the information available. While a definitive conclusion was not possible due to the limited detail, given the dollar amounts involved, MRC concluded a low risk that rate variances could present a material overcharge. Conclusion 14: Hoffman’s management of project change benefited

the University. Generally, change orders were compliant with Contract requirements. The project team’s management of change resulted in a $5.4M savings in the GMP.

Recommendation 14: None Management Response 14: Management strongly concurs that Hoffman’s

management of project change benefitted the university.

Change Orders to Hoffman’s contract are defined as Cost Proposal Notifications (CPN). As of October 14, 2010, there were over 140 CPNs on the Arena Project which were bundled into 10 Amendments. The total value of work in all Amendments (1-10) is $9,909,890. Amendments 3, 4 and 10 increased the GMP by $4,497,306 and the remaining $5,407,584 was funded by Owner savings. Owner savings result when the actual cost of the work incurred for a particular scope item is less than the cost that was estimated in developing the price for that work in the contract. Hoffman’s GMP contract does not provide a shared savings clause. Accordingly, the full savings attained during construction return to the University and can be used to fund change orders. To evaluate if the change orders were priced in accordance with the contract requirements, MRC selected Hoffman CPNs with values greater than $50,000 as representative sampling


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for its review.23 Twenty-four approved CPNs were valued over $50,000 with a combined value of $4,574,172. The CPNs represented 80% of the total amount of CPNs issued at that time. MRC reviewed the CPNs for:

• Hoffman’s fee application • Compliance with the contract – review labor, equipment and material mark-up • Equipment rates’ conformance with the Blue Book Equipment rates • Labor rates compliance with contracted rates

MRC found that Hoffman, JMI and the University processed change orders in accordance with Hoffman’s contract terms with the minor exceptions noted in this report. Conclusion 15: Charges for the Contractor Controlled Insurance

Program (CCIP) are being billed in accordance with the Contract requirements, but modifications to CCIP billing provisions on future GMP contracts may provide the University with an opportunity for savings.

Recommendation 15: CCIP expenses can be billed based on actual

insurance cost. In the future, the contract provisions for CCIP payments should be evaluated accordingly to assess potential cost savings.

Management Response 15: Management understands the finding and

recommendation and will take these into consideration on future projects.

The Contract with Hoffman Construction allows Hoffman to employ a Contract Controlled Insurance Program or CCIP24 to be billed at a composite rate of $28.10 per $1,000 of monthly job billings. A review of the charges billed by Hoffman for the period from January 2009 through June 2010 (pay applications 1-17), indicates that Hoffman billed a total of $2.77 million for CCIP during that period. These charges were calculated by applying the $28.10 per $1,000 rate specified in the Contract by the total invoice amount from the previous month. The total invoice amount includes the Cost of the Work, CCIP costs plus the CM/GC Fee. The Contract does not define the term “monthly job billings,” however MRC found that Hoffman’s application of the composite rate to the previous month’s gross requisition amount appears to be a reasonable interpretation of the language, particularly given the Contract language indicating the rate shall be billed “up to the full amount of the GMP.”

23 Testing was done on August 13, 2010. 24 February 6, 2009 CM/GC Contract between NCP and Hoffman, Article 17.4


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Billing the CCIP expense as specified does not allow proper tracking of actual payroll costs versus budget. One Industry Best Practice would require billing to reflect incurred cost based on actual payroll. The actual cost billing would allow monthly tracking and monitoring of the expense in relation to the budgeted amount, provide consistent reporting metrics among projects, and would allow the University to benchmark these costs against other projects. Conclusion 16: Hoffman, JMI and the University agreed to waive

inclusion of supporting documentation for invoices on contracts less than $50,000. MRC did not find any discrepancies in the invoicing but identified the protocol as a possible control weakness since subcontracts could be divided or issued intentionally below this threshold to avoid scrutiny.

Recommendation 16: Requirements for backup documentation should

consider both contract value and invoice amount. As a best practice for public projects, all supporting documentation should be provided. Should thresholds be established, procedures and approval(s) for setting thresholds should be documented.

Management Response 16: Management believes the threshold of $50,000 was

appropriate as evidenced by no discrepancies in invoicing. Management acknowledges the comment related to documentation decision making around thresholds.

MRC noted that overall, adequate subcontractor invoices were included with Hoffman’s Pay Applications, including schedule of values, percentage complete calculations and modifications. However, MRC found that supporting documentation for Hoffman subcontractor invoices less than $50,000 were not submitted with the pay applications. MRC understands that this is an accommodation reached by JMI, the University and Hoffman to minimize the amount of paperwork included in the pay application. Hoffman confirmed that copies of all expenses were available for review and that JMI periodically requested copies of smaller invoices for review. MRC found no documentation regarding the agreement of this threshold, nor evidence of JMI’s requests and subsequent reviews of smaller invoices. Conclusion 17: Hoffman’s management of retainage meets the

requirements of the contract and is consistent with industry best practices.

Recommendation 17: The University should continue its practices of

retainage on its capital project contracts.


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Management Response 17: Management notes the recognition that retainage management by Hoffman is consistent with industry best practice.

The CM/GC contract allows for a 5% retainage or the general contractor may deposit acceptable bonds and securities of equal value in a custodial account with an approved bank or trust company to be held in lieu of the cash retainage for the benefit of UO.25 All bank statements showing evidence of the custodial account held at US Bank with the appropriate investment values of bonds and securities were provided for the pay applications that were reviewed by MRC. Conclusion 18: Hoffman’s calculations for percentage of completion

and its accounting of the contract’s schedule of values meet the requirements of the contract and are consistent with industry best practices.

Recommendation 18: The University should continue its practices of

requiring appropriate project management in this area.

Management Response 18: Management notes that Hoffman’s compliance with

contract requirements for percentage of completion calculations is consistent with industry best practice.

Hoffman utilized a schedule of costs for its billings in accordance with Article 13 of its Contract with the University. Costs to date are calculated as the percentage of completion times the line item cost. MRC noted that each progress billing calculated the percentage of completion for each line item and the computation of each payment was proper and in order. The percentage completion calculations were reviewed and approved by both JMI and UO project managers. MRC provided earlier comments regarding earned value assessments in review project progress and billings. These comments relate to what an owner or its representative can do as a separate validation of a contractor’s calculations. These practices become relevant in the event of a dispute between an owner and contractor regarding progress and billings, which did not occur on the Arena Project. Conclusion 19: Hoffman’s management and compliance regarding

prevailing wage rates met the requirements of the contract and are consistent with industry best practices. However, the review of some prevailing wage information was hindered by the lack of appropriate data submitted in subcontractor spreadsheets attached to the BOLI form. No material exceptions were noted in these areas.

25 February 6, 2009 CM/GC Contract between NCP and Hoffman, OUS General Conditions, Section E.5.1.2


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Recommendation 19: The University should continue its practices of requiring appropriate project management in this area. UO should hold all contractors (and subcontractors) to the BOLI form WH-38 – Payroll/Certified Statement standard, and ensure that the subcontractors’ attached schedules reflect all elements of the BOLI form.

Management Response 19: Management acknowledges that Hoffman’s

management and compliance regarding prevailing wage is consistent with industry best practice. It is management’s requirement that these standards be met. Management notes the recommendation on supplemental schedules and will apply appropriate monitoring.

MRC examined certified payroll reports from selected Hoffman’s subcontractors and compared the rates to the official labor rate publications as noted in Hoffman’s Contract; these steps were done to test whether prevailing wage rates were paid. MRC chose the five highest value subcontracts (Anning Johnson, W&W Steel,26 Bergelectric, Oregon Cascade, and Pence/Kelly), as well as four low value subcontracts (Hoffman Structures Inc., Schonert & Associates, Western Partition, and Alliance Industrial). The contract value of the reviewed subcontractors was approximately $63 million. MRC selected certified payroll reports for each subcontractor from several time periods in which these subcontractors were working on the Project and reviewed a total of $1,260,402 of gross payroll. Hoffman’s contract with NCP requires that Hoffman and its subcontractors pay prevailing wages.27 Article 3.25 page 10 gives further detailed requirements regarding prevailing wages.28

The Early Work Amendment, executed on April 14, 2009 specifies that prevailing wages must be paid in accordance the “Prevailing Wage Rates for Public Works Contracts in Oregon” rate book for January 1, 2009 as reflected in the website referenced. The GMP Amendment signed June 3, 2009 further specifies that the April 1, 2009 Amendments be met, for both work previously completed and future work. Hoffman included the following provision in its Arena subcontracts:

“Subcontractor shall comply with requirements of the prevailing wage law in ORS Chapter 279C. Workers must be paid not less than the Prevailing

26 W&W Steel was the steel subcontractor. They supplied the steel for the project but had subcontractors erect and install the steel. According to Hoffman, DCCI was their largest installation subcontractor, so MRC reviewed DCCI’s certified payroll.

27 February 6, 2009 CM/GC Contract between NCP and Hoffman, Article 11.3.3(e), page 29

28 February 6, 2009 CM/GC Contract between NCP and Hoffman, Article 3.2.5, page 10


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Wage Rates for Public Works Contracts in Oregon, effective January 1, 2009.”

In accordance with the Contract provisions, Hoffman and its subcontractors were required to submit certified payroll reports in order to confirm that prevailing wages were met.29 MRC found that of the $1,260,402 worth of payroll records reviewed, all employees but one had been paid the specified prevailing wage rates or more. Based upon the information received from Hoffman and the subcontractors, it was found that one Anning Johnson apprentice was paid below prevailing wage rates during the tested periods.30 The value of the underpayment was less than $30.00 of the payroll reviewed. MRC found that the subcontractors it reviewed complied with the prevailing wage provisions of the Contract. On the Arena Project, all subcontractors submitted the WH-38 form, but in most cases, failed to fill in the required information on the form but deferred to an attachment of their own design, ultimately defeating the purpose of a standardized form. The information needed to confirm prevailing wages in terms of trade classification and hourly fringe rate was not on the certified payroll report submitted by Anning Johnson and two other subcontractors, thus MRC’s review relied on the fringe rate information received from the subcontractors.

University of Oregon Finding 20: The invoice payment process developed by the

University employed adequate customization to address project needs, however, the authorization steps could be enhanced through oversight and communication protocols. As a result, unreconciled variances regarding compliance with fund allocations and contract billing stipulations were found.

Recommendation 20: When customizing a billing process, the University

should enhance its review and payment process to include a contract billing compliance step. In addition, the University should develop and/or practice a defined policy regarding acceptable levels of receipt documentation. Finally, authorizations to process payment should signify compliance with contract and funding terms.

29 February 6, 2009 CM/GC Contract between NCP and Hoffman, OUS General Conditions, Section C.2.1 30 The Anning Johnson certified payroll report failed to provide the trade classification and the hourly fringe rate for the three employees identified., MRC received the information through Hoffman, whom it had asked to confirm trade classification and fringe rate from Anning Johnson for the three employees in question.


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Management Response 20: Management acknowledges the value of adding a process billing compliance step and will continue its practice to review acceptable levels of receipt documentation on future projects based on the size and complexity of projects and other relevant risk factors.

Management employed appropriate and documented cash management on three related projects. At the time of the audit the final reconciliations of cost allocation were in process. Final reconciliation has been completed and cost allocation is complete.

Every project owner employs some type of process to review, authorize and execute payment of capital costs. From an audit perspective, it is important to identify the parties engaged in activities that generate cost, those that approve and supervise these activities, those that authorize payments (can be more than one step), and those that execute payment. Appropriate degrees of separation should exist in these steps, while maintaining adequate proximity between the reviewers and approvers to ensure compliance and accountability. MRC found that University considered these factors when developing its procedures for the Arena Project. The Arena Project presented new payment-process intricacies to the University given the number of participants involved and the size of the Project. MRC found that the University endeavored to develop and implement a process that was customized to meet the requirements of the project. However, MRC found that funds for the Arena Project were used for other projects until such time that the University could reconcile these payments. MRC reviewed the University’s vendor accounting detail and summary information, including a project-specific report from the Capital Construction’s Accounts Services division. The report obtained for audit listed all payments made through 8/31/2010 from the Arena Fund. The report details financial information tracked and recorded by the University in its financial accounting software.31 Total payments32 amounted to $128,055,725. MRC selected a sample representing 94% of these payments, or $119,921,421 of invoiced amounts. Appendix B lists the University payments reviewed in MRC’s sample. MRC traced the payments from the University’s accounting system back to the invoices obtained in the sample to determine accuracy and appropriateness. MRC reviewed the invoice date, number and amount, along with a review of the scope of work performed to verify it was appropriately classified. MRC further reviewed the procedure in which the

31 The University uses Banner Financial Information System (FIS) as its accounting software. Banner is a software system used by numerous Universities for functions such as human resources, admissions records and administration, financial aid, and finance. The University used its FIS system to manage the Arena Project invoicing and payments. MRC is familiar with the software and found it incorporates appropriate controls while providing utility for capital projects. 32 The Arena invoices entered into the Banner FIS feeds into UO Business Affairs Office accounts payable (A/P). The Business Affairs Office uses the system to issue the appropriate payment for approved invoices.


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invoices were processed, verifying the account coding, approvals, notes and remarks that were made on the invoice copies by the University and other approvers. Notwithstanding the exception noted in this section regarding fund reconciliation, MRC found that the process established by the University included review and approval steps that were generally appropriate for processing and recording project costs. The process flow below illustrates the invoice approval protocols for the Project.

INVOICE SUBMISSION AND APPROVAL PROCESS

HoffmanPay App

Ellerbe

JMI Review & Approve

UO Business Affairs -Payment processed

JMI Invoices

NCP Review & Approve

UO Capital Constr.Review & Approve

Other Contracts

The exceptions noted by MRC (discussed below) relate to the payment of the Development Manager’s invoices without adequate review, and the use of Arena Project funds for other projects. Exceptions that relate to the overall effectiveness of the billing controls were identified in the following areas:

• Development Manager/Owner’s Representative invoices contained inadequate backup and did not comply with contract terms; MRC found no evidence to demonstrate that JMI’s billing practices or individual invoice amounts were ever questioned.

• $1.2M of Arena Funds for Parking Garage construction (a separate contract) • $26,337 of Arena Funds used for the Alumni Center project • Approximately $4,000 of Arena Funds used for testing services for Parking Garage

construction A discussion of these items is presented below. Development Manager / Owner’s Representative Invoices As discussed earlier in this report, the JMI invoices processed and paid were not supported with documentation to substantiate the cost of personnel that worked on the project; i.e., the time spent and the hourly rates. MRC found no evidence in the payment documentation to demonstrate that the contract was ever reviewed or the invoices were


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ever questioned for the lack of adequate support. However, MRC found the invoices were processed according to the system employed, receiving the necessary approvals. Based on the interviews conducted by MRC with the reviewers and approvers, and specifically related to the invoices processed for the Development Manager, MRC found that a sense of reliance existed among the reviewers and approvers that others in the process had or would ensure compliance and adequacy. This did not happen. MRC acknowledges the University’s position that these amounts fell under a Lump Sum billing arrangement, which was not MRC’s conclusion. However, as a Lump Sum billing, the level of review could be less. Arena Funds for the Garage Construction Project MRC initially identified approximately $1.207 million of shared costs that were yet to be reconciled between the Arena and the Garage Project funds. MRC discussed these findings with the University and understands these reconciliations will be completed. The University advised MRC at the close of audit field work that they identified at least $602,788 to be reconciled. The supporting documents reflecting the reconciliation of the costs were not provided prior to the close of the audit; however the reconciliation was adequately addressed during the audit close out meeting with MRC, OUS and the University. It is important to note that this is an exception related to how the costs were paid; MRC did not find any exceptions related to the validity of the costs being incurred for the benefit of approved University projects. MRC’s review of Arena Fund payments through August 31, 2010 found funds were allocated to the Arena for the Garage Contract. The Arena shared part of the same building foundation; therefore the Garage Contract anticipated an allocation of costs for these shared items. According to Amendment 1 of the Garage Contract, the costs for the Earthwork and Shoring are to be allocated to the Arena and Garage with the estimated budgeted amounts as listed in the table below.

ARENA AND GARAGE ALLOCATIONS Earthwork

Arena 83.60% Garage 16.40%

Shoring

Arena 26.30% Garage 73.70%


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Attachment F of Amendment 2 to the Garage Contract includes a detailed GMP estimate that allocates certain Contract costs to the Garage, Alumni Center and the Arena. MRC reviewed the most current Hoffman schedule of values for the Garage Project at the time of its review and calculated the actual Earthwork and Shoring costs. Following the allocation protocols mandated, MRC reconciled the calculations. MRC’s calculations found that the allocation resulted in Arena costs totaling $6.057 million, while the University had allocated costs to the Arena funds of $7.757 million. The result was an over-allocation of $1.207 million. The calculations are provided in Appendix D of this report. The University’s response to MRC regarding the allocations explained that the initial approach to the allocation of the Garage cost to the Arena Fund was to make the first payments from available Arena funds in the amount equal to the estimated allocation based upon the original GMP. The University indicated its intent to reconcile the final dollars at the completion of the Project. This plan is supported by the pay applications that were reviewed by MRC. In its review, MRC noted that allocations to the Arena fund were not determined by a percentage charged for the shared costs, but rather a dollar amount, up to the originally estimated amount. Arena Funds used for the Alumni Center Project MRC found that $26,337 of Ellerbe Becket Additional Service Request charges for Alumni Center work were paid with Arena funds. MRC discussed these findings with the University’s Accounts Services Manager who indicated that the misallocation would be corrected. MRC’s review of Ellerbe’s ASRs identified five ASRs that pertained to the construction of the Alumni Center but were charged against the Arena fund. The table of Alumni Center Related ASRs is presented in Appendix C of this report. MRC traced these amounts to Ellerbe’s invoices to determine if these payments were made from the Arena funds. MRC observed that $40,507 was submitted for payment to UO and of this total, $26,337 was paid from the Arena Fund. Testing Services for the Garage Project Paid using Arena Funds MRC found that $4,000 of Clair Company, Inc. (Clair) costs were incorrectly allocated to the Arena Project. MRC discussed the issue with UO and UO indicated that the funds will be reallocated appropriately. UO contracted with Clair for testing and inspection services for the Arena Project for an initial amount of $15,000. Clair was subsequently contracted to perform testing and inspection services for both the Arena and Garage Structure in the amount of $536,723. Two subsequent amendments were issued adjusting the Contract value to $630,023. Clair submitted separate invoices to UO for the Arena and Garage Structure, but UO distributed payments between the Arena and Garage Structure based upon a percentage of the contract value instead of the actual amount invoiced per structure. As a result, approximately $4,000 of cost related to the Garage project was allocated to the Arena.


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Conclusion 21: The negotiated contract with Hoffman had a

sufficient level of review by the University. The subsequent GMP Amendment to the Contract was not adequately checked, resulting in the misapplication of some fee mark-ups.

Recommendation 21: The University should perform a more rigorous

examination of its contracting procedures to avoid inconsistencies in future contracts. Specifically, it should clearly identify responsibilities between various entities to assure the proper checks and balances occur in the review and approval of proposed Contract amendments.

Management Response 21: Management agrees and will apply processes to

provide greater clarity in future contracts. As an Owner, UO was involved in the contract negotiations and it is responsible for ensuring that the all the costs are in accordance with the contract terms.

MRC reviewed Hoffman’s GMP Contract and also discussed the evaluation and review process by the University with personnel from the University’s legal department, its Athletic department, the UO Capital Construction department and the Department of Justice. All were involved during contract negotiation and contract review. MRC found that the GMP contract overall was reasonable. In addition, the 2008-2009 market conditions and Hoffman’s experience as a construction manager allowed Hoffman to negotiate costs at contract time that were lower than the originally estimated subcontracts. This provided the University with savings used for project upgrades. Although the contract was reviewed by several layers of authority and as mentioned above was a reasonable contract which allowed UO to realize over $5 million in Owner’s savings, MRC found some discrepancies related to contract language. These discrepancies were discussed previously in this report but are listed in summary below.

• Incorrect application of CM/GC fee on the Warranty Fee which resulted in overstatement of the estimated CM/GC fee of $25,238

• Warranty Fee in Change Order Work – the Contract does not support addition of Warranty Fee when there is a Change Order increase of the GMP

• The application of an estimated CCIP rate to project billings does not allow an accurate assessment of actual costs nor does it identify budget variances in advance of their occurrence.


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4

Hoffman Subcontractor Selection and Subcontracting Practices

Overview This portion of the audit addresses the subcontracting practices of the University’s CM/GC, Hoffman Construction Company, essentially asking if the subcontracting process was open to potential bidders, if the award of the subcontracts was fair and competitive and if the in-kind donation provisions of the subcontractors were administered appropriately. For in-kind donations, the audit also included a review of the process from an industry best practice perspective, and evaluation of value. MRC found that Hoffman’s subcontracting processes were generally fair and reasonable, transparent to all parties, and that its treatment and accounting for in-kind donations was appropriate.

Hoffman’s Subcontracting Procedures Conclusion 22: MRC found that Hoffman’s subcontracting

procedures were in accordance with the Contract requirements and met the intent and spirit of the competitive bidding requirements of the Contract.

Recommendation 22: None Management Response 22: Management agrees that Hoffman’s subcontracting

procedures were in accordance with the contract. MRC found that Hoffman used best practices to promote competitive bidding.


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Hoffman’s CM/GC Contract outlines the policies for soliciting subcontracts on the Project, Hoffman’s obligations for soliciting MBE/WBE and emerging small business participation, and the criteria for subcontractors’ selection.33 The Contract specifically instructs the Contractor to perform its subcontracting in a competitive manner “that will not encourage favoritism or substantially diminish competition.” Hoffman’s CM/GC contract also specifies specific steps and timing for its solicitation and bidding activities.34 MRC found that Hoffman typically advertised the bid packages in four publications (Portland DJC, Seattle DJC, Eugene Register Guard and Portland Observer) and on Hoffman’s website. The advertisements were typically published 15 days prior to the RFP response due date. Relative to utilization of minority businesses, Hoffman’s Bid Invitations stated:

“CM/GC and Owner are committed to promoting and stimulating the growth of minority, women and emerging small business (m/w/esb) firms and maximizing opportunities for State of Oregon certified m/w/esb firms to participate in the work of this project. Notwithstanding that a specific m/w/esb contracting goal has not yet being established for this project, bidders are strongly encouraged to utilize such firms through sub-tier contracting and /or material purchases and will be required to provide documentation of their good faith efforts and achievements.”

In order to evaluate subcontractors’ bid proposals, Hoffman prepared a bid evaluation spreadsheet for each bid package which included the scope of work and any alternates, depending on the specific bid package. Each of the spreadsheets included a line item for considering gift-in-kind donations. MRC’s interviews with Hoffman personnel indicated that Hoffman’s selection process also included a financial qualification/review of the low bidder when the low bidder was one that Hoffman was not familiar with. On the larger bid packages, such as electrical, mechanical and steel, Hoffman submitted the subcontractors’ responses to the A/E for technical review without including the bid price, and subsequently performed interviews with the three lowest bidders with the A/E and JMI present. Hoffman sought competitive pricing for all subcontracts and purchase orders. In cases where there were less than three bidders, Hoffman requested special approval from JMI before awarding the subcontract. Gift-In-Kind Donations Conclusion 23: Gift-in-kind donations on subcontracts were credits

against the cost of subcontracted services. The inclusion of in-kind donation in the subcontracting process was appropriate and in accordance with

33 February 6, 2009 CM/GC Contract between NCP and Hoffman, Article 11

34 February 6, 2009 CM/GC Contract between NCP and Hoffman, Article 11.3.3


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OUS policies. MRC knows of no industry best practice or equivalent for in-kind donations.

Recommendation 23: The University should consider Hoffman and JMI’s

practices for use on future projects that involve gift in kind donations.

Management Response 23: Management agrees that JMI and Hoffman practices

set a high standard for gift-in-kind donations and will continue to apply these standards in future projects.

In-kind donations/gifts-in-kind (GIK) by definition are not gifts of money, but gifts of goods or services. Based upon review of the available documents and discussion with the UO, MRC understands that UO follows a standard policy for GIK donations.35 Based on its interviews with key project personnel, MRC found that the UO consulted with the Department of Justice (DOJ) and gained approval of the language to be placed in the subcontractor RFPs before Hoffman issued the RFP’s with the in-kind donations provisions. Hoffman included a letter from the UO Athletic Department in each bid package solicitation seeking gift-in-kind donations of “construction labor, materials, services or combinations thereof,” that “Contracts will be awarded to the lowest responsive, responsible bidder,” and that gift-in-kind donations “will only become applicable if your firm is the net-low responsive bidder” as requested by the University.

Conclusion 24: Hoffman considered the offers of in-kind donations in

its evaluation of the subcontract bid/selection process and employed best practices. The UO and JMI oversaw this process.

Recommendation 24: The University should only use GIK’s on low

bid contract procurements. The University should also consider implementing Hoffman’s and JMI’s practices for managing GIK’s on future projects.

Management Response 24: During future procurements, management will

consider the recommendation that gift in kind procurements only on low bid procurements.

Hoffman’s subcontracting process, including its evaluation of in-kind donations, was consistent, accountable and transparent in line with industry best practices. Hoffman’s selection of subcontractors was based on the net lowest bid (Bid minus GIK donation) and provided no bias or additional weight for GIK donations.

35 OUS Policy .190 Account Codes specify how donations should be recorded and evaluated


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Hoffman comparatively evaluated GIK proposals during the bidding process to determine the lowest responsive bidder. If the bid included a GIK, then that bid was adjusted in the amount of the GIK donation and the revised value evaluated against the other subcontractor’s bids. Hoffman’s selection of subcontractors was based on the net lowest bid (Bid minus GIK donation), where only the lowest bids were selected. Conclusion 25: The gift-in-kind donations were reasonably evaluated

and valued, and the University received a benefit from the program

Recommendation 25: GIK’s should only be used on low-bid contract award

processes, such as the Arena Project. Management Response 25: Management acknowledges the benefit received from

gift in kind donations and understands the recommendation on low-bid contract award processes.

If a subcontractor’s bid indicated a gift-in-kind donation, the bid value was adjusted to reflect the donation. If the adjusted bid represented the lowest bid, an evaluation of the GIK amount was made. If the variance between the low bid and the next lowest bid was greater than the value of the stated GIK donation, Hoffman listed the stated value of GIK donation in its evaluation. If the variance between the low bidder and next lowest bidder was less than the stated GIK donation amount, the donation was valued as the difference between the low bidder and next lowest bidder. For example, for the "Metal Panels" on the Arena Project, Skyline Sheet Metal submitted a bid of $3,979,091. Skyline's bid included a GIK donation of $39,791. The next highest bid for the Metal Panels was Crown Corp. with a bid of $3,987,450. The difference between Skyline’s bid and Crown Corp’s bid was $8,359, and thus did not indicate that the University was receiving the full value of Skyline’s stated donation value of $39,791. In accordance with Hoffman’s evaluation process, Hoffman reported the value of Skyline Sheet Metal’s donation as $8,359. JMI maintained a log titled “Bid Comparison with Gift in Kind” which provides information regarding the value of the low bidder, the stated Gift-in-Kind value, the net value of the low bid, the value of the next lowest bid, and net Gift-in-Kind value. Through August 2010 JMI’s report indicates the value of the gift in-in-kind donations totaled $882,195 from eighteen (18) subcontractors with a combined value $54,133,875, therefore the Gift-in-Kind donations reflect a savings of approximately 1.6% on these subcontracts.36 JMI provides the “Bid Comparison with Gift in Kind” log to the UO Development Office and the UO Foundation. The UO Foundation uses the list to record the Gift-in-Kind donation in its Donors List, which it shares with the University Athletic Department. The UO Development Office issues letters to donors acknowledging their gift,37 but the letters do not place a value on the donation.

36 See JMI Bid Comparison with Gift in Kind Spreadsheet attached to this report

37 Letters are sent only for corporate gifts valued at over $20,000


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Advance Purchase of Long Lead Items Conclusion 26: The award of subcontracts for long lead items did not

circumvent the competitive bid process, and allowed timely purchase of these items to avoid delays that could result from the lack of critical material or equipment.

Recommendation 26: None Management Response 26: Management agrees that the competitive bid

processes were appropriate. NCP’s February 6, 2009 Agreement with Hoffman required Hoffman to provide NCP with a schedule for the procurement of long lead items.38 Long lead items require significant time to procure, manufacture and/or deliver to a project. Hoffman was subsequently authorized to proceed with the procurement of identified long lead items by Amendment 1 to the Agreement dated April 14, 2009. Materials for the electrical and mechanical work fell into the categories of long lead items; accordingly, Hoffman executed initial contracts with Bergelectric and Oregon Cascade for a portion of the total contract price. The initial award subcontracts for long lead items included a clause to clarify the intent, scope, and limitations of the initial award and how the balance of the contract was to be executed.39 Hoffman issued an initial award to Bergelectric, the lowest responsible bidder, for the amount of $2,560,897.00 on May 8, 2009. The subcontract indicates the “Balance to be Awarded” of $10,898,703.00, for a total contract value of $13,459,600.00. Hoffman issued an initial award to Oregon Cascade, the lowest responsible bidder, in the amount of was $3,200,558 with the subcontract noting $11,578,342 as balance to be awarded for a total contract value of $14,778,900. The issuance of limited value subcontracts for long lead items did not circumvent the competitive bid process, but provided a benefit to the University by allowing pre-construction activities to proceed in order to mitigate or avoid potential delays to the Project. Conclusion 27: Hoffman sought competitive pricing for all

subcontracts and purchase orders. Recommendation 27: None Management Response 27: Management agrees.

38 February 6, 2009 CM/GC Contract between NCP and Hoffman, Article 3.1.7, page 8

39 Bergelectric Agreement Article 2


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Hoffman solicited bids for subcontracts as described in previous sections of this report. In cases where there were less than three bidders, Hoffman requested special approval from JMI before awarding the subcontract.


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5

University Outreach Measures As part of the audit requirements, MRC was tasked with the review of the University’s outreach efforts; that is, the efforts to identify and encourage local, minority owned, and small business enterprises to participate in the Arena’s construction. Accordingly, MRC reviewed the various Contract provisions, and the efforts of the parties to assess the effectiveness of their efforts.

Conclusions and Recommendations The University worked with its contractor to promote the inclusion of minority owned businesses (MBE), women owned businesses (WBE), and emerging small businesses (ESB) in the construction of the Arena Project by including specific requirements in Hoffman’s contract. Although not having specific goals for participation, the University included language that required Hoffman to encourage involvement. According to the CM/GC contract, Hoffman was to “advise Owner for Subcontracting opportunities for minority/women ESB firms.”40 Article 11.1 General Subcontracting Practices further detailed their responsibility; however there were no percentage goals or requirements included: 41

“11.1.2 The CM/GC shall cooperate with and assist Owner and University to comply with Oregon Administrative Rules ("OAR") 580-061-0030 and OAR 580-061-0035, respecting the solicitation of Minority, Women and Emerging Small Business Enterprises. CM/GC shall also take the actions specified in ORS 200.045(2) and (3) to make good faith efforts to subcontract with Minority, Women and Emerging Small Business Enterprises. Requirements imposed on the CM/GC shall be imposed by CM/GC on its Subcontractors

40 February 6, 2009 CM/GC Contract between NCP and Hoffman, Article 3.1.6(b), page 7

41 February 6, 2009 CM/GC Contract between NCP and Hoffman, Article 11.1.2 and 11.1.3, page 27


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. 11.1.3 The CM/GC shall report to Owner on the results of the efforts under Article 11.1.2 following award of all subcontracts. The CM/GC shall also submit quarterly reports to Owner listing Work contracted to date with Minority, Women and Emerging Small Business Enterprises.”

Chapter 580 of the Oregon Administrative Rules (OAR) contains policies for OUS schools. The OARs referred to in the CM/GC contract are from Division 061, which is the “OUS Procurement & Contracting Code.” Based on discussions with the University and a review of documents, MRC also found that Division 063 “Capital Construction and Contracting” requirements also applied to this project. These OARs discuss OUS’s general Affirmative Action policy as well as the Emerging Small Business Program. The policies do not contain any specific requirements for MBE, WBE or ESB participation (i.e., percentage goals or other participation mandates), but sets out the State’s non-discrimination policies and the goal to expand and encourage participation of minority and small local business. Hoffman met the requirements for encouraging and soliciting the involvement of women owned, minority owned and emerging businesses. The contract with Hoffman contained specific requirements for subcontract solicitation and advertisement, which Hoffman met. Hoffman tracked and documented its minority owned, women owned and emerging business subcontractor participation in the project and kept the University updated with this information. Hoffman’s corporate office includes a division dedicated to promoting outreach and tracking Hoffman’s efforts for its various projects. As part of these processes for the Project, Hoffman maintains a “U of O Arena Good Faith Effort Report.” As of September 2010, the report revealed the following:

• Seventeen (17) Bid Packages were advertised or promoted for participation • Solicitation for six (6) bid packages resulted in a finding of no certified

subcontractors available • Hoffman identified 213 certified subcontractors for the remaining eleven (11) bid

packages • Hoffman tracked the certification of these subcontractors as MBE, WBE or ESB,

including notation for any businesses that qualified for more than one certification • Hoffman tracked the dates of its original outreach to these contractors, as well as

Hoffman’s follow up date Hoffman also tracked participation through its financial controls. Specifically, Hoffman maintains a “M/W/ESB Subcontracting Report” for the Project. This report details all the subcontracts for the project, then provides a breakdown of contract values awarded for MBEs, WBEs and ESBs. The report also appropriately normalizes the total participation by eliminating duplication of any subcontractor that qualifies as more than one certified firm (for example, a firm that is both an ESB and WBE is not counted twice in total participation values). Hoffman documented its formal policies and procedures to support the owner’s goals for MBE, ESB and WBE participation. Hoffman’s process flow is presented below.


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MBE, WBE and ESB participation in the construction of the Arena Project through Hoffman’s contract was 4.58% on September 13, 2010. In the “M/W/ESB Subcontracting Report” prepared on September 13, 2010, Hoffman reports $5,731,075, or 4.58% of subcontract values have been awarded to MBEs, WBEs and ESBs. Hoffman also tracks the dollar value and percentage by business certification in this report. The results by business type were:

• MBE - $547,496 in subcontract values; 0.44% participation • WBE - $3,806,313 in subcontract values; 3.04% participation • ESB - $2,836,338 in subcontract values; 2.27% participation

Because some business qualify as more than one business type, the amounts presented above can not be added to arrive at the total participation dollars and percentage ($5,731,075 / or 4.58%). As previously noted, Hoffman only counts a contract value once in arriving at its total. Conclusion 28: Hoffman employed industry best practices to

promote and encourage the use of small and disadvantaged businesses in the project. The University’s contract requirements do not identify specific goals for MBE, WBE and ESB participation for the Project. The lack of specific goals does not provide a benchmark against which the effectiveness of encouragement can be measured. The University relied on Hoffman to execute an effective outreach program and Hoffman employed industry best practices in this regard.

Recommendation 28: The University should evaluate if informal

participation goals are appropriate given the variety


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of considerations that must be weighed (the goals themselves, the availability of qualified contractors, the state of competition in the marketplace and how this affects MBEs/WBEs/ESBs, the technical complexity of future projects, etc.).

The University should consider establishing a more defined standard of encouragement, including specific measures that a CM/GC should employ, such as those used by Hoffman.

Management Response 28: Management agrees that Hoffman employed industry

best practices in MWESB participation. Management has been and continues to actively working with the OUS system to create a more formal goal setting process in this area to ensure that all future contractors clearly understand the university’s, the system’s and the state’s goals in MWESB.

The nature of the University’s outreach program is as defined: one of encouragement. There is no requirement for a dollar value or other measurement of participation. Appropriately, the University delegated this goal to its CM/GC, Hoffman Construction. This is appropriate because the CM/GC is in a position to promote these goals. Certified business participation goals should be weighed against the success goals of a project and what is being asked of those who build it. The CM/GC’s objective for the Arena was to identify, evaluate, negotiate and subcontract to a number of contractors that are qualified to build a contemporary arena comprised of numerous technical and specialty types of construction (concrete, steel, electrical, finishes, etc.). The CM/GC must do this in accordance with the drawings and specifications of the contract, which beyond the mandates for things such as structural integrity and quality, include compliance with codes. This must be done at a cost agreeable to the University, which includes a schedule of completion that must be met to attain the goals of the project (open the arena, generate revenues). In the case of the subcontracts for the Arena Project, all subcontractors selected were the lowest bid. The effectiveness of the outreach program is 4.58% participation for a project that is on schedule and has significant savings from the original GMP (before using savings for owner-directed changes). There is limited guidance available to establish what meets or exceeds the standard of encouragement. Progress against the standard is not quantifiable by any definitions provided by the University or OUS. MRC understands that the University is developing updated standards for outreach goals. The University employed a contractor with experience and processes to promote certified participation. Hoffman included the goal of encouragement in its RFPs for subcontract bids and made 213 outreach efforts directly to subcontractors, then followed up directly with these MBEs, WBEs and ESBs. The project success goals of cost, schedule, and quality


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are being met. In the absence of a defined target percentage or dollar value for participation, MRC found that the Project employed effective measures of outreach.


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6

Improvements and Best Practices Conclusion 29: The University, Hoffman, JMI, Ellerbe and the

additional parties involved in the contract are approaching the conclusion of an on-time, on-budget project, where the experiences from the Arena Project can be applied to future jobs.

Recommendation 29: An on-time, on-budget project carries significant

weight relative to the findings and comments in this report. The University should conduct a post-construction review with Hoffman and JMI to consider what factors drove the success of the project’s schedule, cost, scope and quality, and then incorporate these practices as appropriate into its construction program.

Management Response 29: Management appreciates the acknowledgement of

the importance of an on-time and on-budget project and the contributions of all parties that led to this conclusion. Management does engage in continuous process improvement in capital construction management and notes the importance of the auditor’s recommendation to continue this practice.

The audit includes an assessment to identify “any improvements that UO could apply in future projects to obtain best value for public funds, to ensure fair and responsible practices, and to achieve other public goals.”42 Similarly, the audit RFP also requests

42 Oregon University System Request for Proposals RFP # 2010-05 Matthew Knight Arena Project Audit. May 21, 2010. Page 16, Scope of Work, A – Nature of Services, part 5


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commentary related to best practices for public projects involving both public and private funding.43 This section presents a discussion of these considerations. MRC found that the Arena Project was unique in that it did not start out strictly as a public project. MRC understands that project development began within the University in 2002 and then shifted to the University Foundation in 2003, where the intent was for the Foundation to either operate or donate the project to the University. In short, it can be viewed as a public project that became private, and then became public again44. Given the scope, cost, public profile and complexity of the project, as well as the status (on-time, on-budget), several findings regarding best practices and improvements were noted. Causes of project failures can often be traced to events that occur well before ground is broken. If the upfront work is not done correctly, the project participants will be challenged to resolve conflicts during or after construction. This upfront work can be expansive, from design development, cost estimating, and contract drafting, among others. Considering the results to-date, MRC found that the University, Department of Justice, JMI, Hoffman and other project participants developed an effective contractual framework and team structure to build the Arena. MRC found that the success of the Arena Project with respect to attaining goals of cost, schedule, scope and quality can be attributed in part to the work done in developing the Guaranteed Maximum Price contract. Notwithstanding the challenges of shifting between private and public status (and perhaps as a result of it), the University and its project team were able to progress three important steps in developing the GMP: initial design development, which led to the development of the project budget, which concluded with finalization of a price (GMP). There is a direct correlation between time and cost in construction. Generally, the longer a project goes on, the more it costs. The project’s completion date ranks high in importance among the University’s goals considering the PAC 10 basketball schedule and debt service to be paid from Arena revenues upon completion. The University should consider its key project participants and the practices employed that resulted in a successful schedule. Hoffman’s effective management of subcontractors, costs, schedule, scope and quality should not be discounted. The CM/GC is the front line of managing the risks of project failure. Hoffman does this without sharing in owner savings, for a 3.25% fee and $250,000 bonus if it minimizes warranty work. The University managed change (public-private-public) while doing its part as an owner that responds to the litany of needs that accompany a large capital project. JMI’s expertise as Development Manager provided critical coordination and management of design, permitting, and contractors while coordinating with the University’s project team. Ellerbe, TVA and the other design consultants created the project, which included overcoming the challenges associated with a unique concept. 43 Oregon University System Request for Proposals RFP # 2010-05 Matthew Knight Arena Project Audit. May 21, 2010. Page 16, Scope of Work, A – Nature of Services, part 3

44 This interpretation is based on information MRC obtained and is subject to amendment should new information be presented. This is not a finding but rather a perspective to consider in this section.


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While the audit scope provides for some acknowledgement of successful performance, the purpose of an audit is verification and assessment of compliance and accountability. The greater the exceptions noted in these steps, the more pronounced the recommendations become. While the performance of the stakeholders noted above has led to exceptions, MRC found there was an absence of significant and material findings. To this point, credit for the things that never went wrong should go to the project team. The University should take advantage of this project experience by meeting with the project participants after final completion to identify lessons learned. Fixed CM/GC Fee The parties have voiced differing understanding of the CM/GC Fee provisions of the Contract. Contract provisions indicate a fixed lump sum fee not to be adjusted for GMP buyout savings. There are several provisions within Hoffman’s Contract that indicate the conversion of the CM/GC Fee from a percentage of the Cost of the Work to a lump sum fixed fee. MRC’s discussion with Project personnel indicates that there is disagreement among the parties as to how the Contract language impacts the final accounting for the Project. Accordingly, MRC has reviewed the pertinent terms of the Contract in an attempt to clarify the issue. Article 6 of the Contract describes the fees to be applied to the project and defines the basis for determination of the GMP. It states in part that the CM/GC fee will be established as “3.25% of the Estimated Cost of the Work at the time of establishment of the GMP” after which it will become a “fixed dollar lump sum.” 45 The lump sum fee can be adjusted by Amendment or Change order, “plus or minus” depending on the change to the Cost of the Work.46 Article 7 of the Contract sets forth the provisions for changing the Contract, and states that adjustments to the GMP after execution of the GMP Amendment may be made in only two circumstances: 47

1. Change in scope 2. As otherwise expressly provided in this CM/GC Contract

The only factor other than a reduction in the scope of the work in a change order, which could affect the cost of the work, is a reduction in cost resulting from buy-out savings. The handling of these “underruns” are set forth in Article 6.9 of the Hoffman’s Contract with the University, which states that underruns after buyout will be reflected in change orders transferring projected cost underruns to an Owner-controlled contingency fund “to be held

45 February 6, 2009 CM/GC Contract between NCP and Hoffman, Article 6.3

46 February 6, 2009 CM/GC Contract between NCP and Hoffman Article 6.3.1 and 7.2.8

47 February 6, 2009 CM/GC Contract between NCP and Hoffman Article 7.2


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within the GMP” and that “transfer of funds to Owner-controlled contingency fund will not reduce the CM/GC fee.” All of the clauses noted support the conclusion that CM/GC fee is fixed as a lump sum when the GMP is established and can only be reduced by a Change Order reducing the scope of the Work, that is, the CM/GC fee is not reduced due to buyout underruns. The final contract provision supporting this conclusion is Article 14 regarding Final Payment. Article 14.2 “Calculation of Final Payment” provides the method for calculating the amount of final payment on the Contract as follows:

CM/GC Fee + Preconstruction Fee + Actual Cost of the Work - Amounts which Owner’s Auth. Rep withholds approval of payment - Previous Payments

Amount of Final Payment There is no provision in the calculation specified in Article 14 for adjustment of the CM/GC fee to the actual Cost of the Work. Accordingly, the Contract indicates that the CM/GC Fee is a fixed lump sum based on the estimated Cost of the Work when the GMP is established, and can only be adjusted for changes to the scope of the Work. Savings accrued due to improved buyout accrue to the Owner but do not reduce the CM/GC Fee. Any savings that are to accrue to the University at Final Completion are realized only through the reduced value of the Amount of Final Payment, and there is no associated reduction in the CM/GC fee for these savings. Management of Public Project with Multiple Funding Sources The University employed best practices by incorporating State and University regulations and policies in its Arena contracts when it was determined that public funding would be used for the project. The use of public funds in any endeavor invokes a fiduciary duty on the recipients to exercise sound judgment, prudent practices, and effective management of those funds in order to obtain best value for the public good. As a result of this overarching mandate, most public jurisdictions have implemented ordinances, laws, or administrative procedures to assure compliance with this mandate and avoid even the suggestion of any mismanagement of public funds. When a project utilizes funds from both private and public sources, an inherent conflict can be created since the private funds are not subject to the same mandate as the public funds. Best practices in this circumstance are to contractually require the procurement to meet the appropriate public standards and laws as if the entire project was publicly funded. The Arena Project appropriately mandated the application of State of Oregon rules and regulations on the project participants.


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Conclusion 30: A partnership existed between the UO Foundation and UO in the development of the Arena.

Recommendation 30: The University should impose ethical standards on

its partners comparable to those mandated by the University on its employees.

Management Response 30: All of the university’s contractors adhere to

professional standards. In the case of NCP’s Contract with Hoffman, the Contract included specific provisions for assignment of the Contract to the University. These Contract provisions and references recognized the University’s active participation in the development efforts even when it was privately funded. In effect, the Foundation and NCP were business partners with the University in their collective quest to develop a new arena for the University of Oregon. As a best practice, any business partner engaged with a State Agency should be required to employ the appropriate ethical standards, comparable to those mandated by the University for its own employees. Although much of this interaction between the parties occurred prior to the audit period (i.e., outside the audit scope), some information regarding the development effort was conveyed to MRC through its interview process. Based on the sequence of events as MRC understands them, no indication of conflict of interest or ethical misconduct was found.


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Appendix A: Audit Scope of Work SCOPE OF WORK

A. Nature of Services:

Contractor shall provide audit and control advisory services related to the UO’s contracting and subcontracting activities for the Matthew Knight Arena Project in the areas detailed below.

1. For the UO’s project management, architectural services, construction and consulting contracts related to design and construction of the Arena:

a. Determine whether contract billings are in accordance with contract documents.

b. Determine whether change orders are appropriate and properly priced. If inappropriate change orders are identified, determine whether the subcontractor’s bid amount plus the amount paid for inappropriate change orders exceeded competitive bids submitted by other contractors.

c. Reconcile project billings to payments made and recorded in the University’s financial system.

d. Identify potential cost exceptions, overcharges or duplicate payments. This review should consider wages, hours charged, labor rates, labor burden (including amounts paid for fringe benefits and pension), materials and supplies (including small tools), equipment rentals, and self-performed work. Verify compliance with applicable prevailing wage laws. Also consider if the total rental fees paid for equipment were reasonable compared to purchasing similar equipment.

e. Identify potential control deficiencies and exposure to overcharges on future contracts (i.e., opportunities for improving methods and procedures as they relate to contract terms, bidding and selection procedures, job site inspection and monitoring procedures, billing review procedures, controls over change orders and pricing, etc.)

2. For subcontractors retained by Hoffman pursuant to the CM/GC contract for construction of the Arena:

a. Review subcontracting practices to determine whether the process was competitive and appropriately documented in accordance with contract requirements and industry best practices. This review should consider responsibilities and risks assumed by the UO, CM/GC and the CM/GC’s subcontractors during the project and conditions under which revisions to sub-contractor proposals were allowed.

b. Review the inclusion of “in-kind donations” in sub-contractor bids. Determine what the term “in-kind donation” refers to in this context, and whether the inclusion of “in-kind donations” in sub-contractor bids was appropriate in accordance with CM/GC


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contract requirements and industry best-practices. Determine whether offers of “in-kind donations” were included as part of the sub-contractor evaluation and selection process, and if so, whether this was appropriate in accordance with CM/GC contract requirements and industry best-practices. Determine whether “in-kind donations” were actually received and were of benefit to the UO. Also determine the nature, value and source of “in-kind donations,” and whether values attributed to “in-kind-donations” were reasonable.

c. For instances where competitive contracting practices were not required (i.e., sole source or self-performed work), determine what measures were taken to validate pricing and ensure that pricing was representative of market conditions.

3. Evaluate the effectiveness of the internal controls employed by the project manager (JMI) and the UO to ensure that costs were in compliance with contract terms and reasonably priced in accordance with market conditions, and that risks were adequately balanced in accordance with industry best practices. This evaluation should include evaluating the effectiveness of the internal controls employed by the UO to ensure that maximum not-to-exceed and guaranteed maximum contract prices were reasonable. In addition consider best practices associated with public projects involving both public and private funding, including any best practices related to potential conflicts of interest

4. Evaluate the extent to which UO promoted competition by encouraging the participation of Oregon-owned businesses, emerging small businesses, minority-owned businesses and women-owned businesses in the Arena Project. Determine the nature and effectiveness of UO’s outreach measures in this regard.

5. Identify any improvements that UO could apply in future projects to obtain best value for public funds, to ensure fair and responsible practices, and to achieve other public goals.

Contractor’s services relate specifically to the University of Oregon and its contracting activities related to the Arena Project. In the event that Contractor requires access to the records of the University of Oregon Foundation, all requests must be made to OUS IAD. OUS Internal Audit Division will review such requests and determine whether they are appropriate to pass on to the Foundation, given that the Foundation is a private, 501(c) (3) organization.


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Appendix B: University Payments Reviewed

UNIVERSITY PAYMENTS REVIEWED

Vendor Total Amount Reviewed

University of Oregon Foundation dba NCP $110,433,866

CMGS 11,346Ball Janik, LLP 14,000JMI Sports, LLC 279,074Clair Co. Inc. 20,337David Evans & Assoc 257FEI 7,482City of Eugene 613,657GRI 18,5322G Construction 492,345Balzhiser & Hubbard 7,751JKG Electric 16,903PBS Engineering & Environmental 13,951Staton 111,821Sunset 886Janet Echelman 11,000Jason Bruges Studio 100,000Giny Vos 2,750Satre 7,738Hoffman Construction 7,756,725

TOTAL $119,920,421


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Appendix C: Alumni Center ASRs

ALUMNI CENTER RELATED ASRS

ASR Date

Amendment Executed

Date Description Amount

Amd 4 / ASR 31 1/12/2010 3/11/2010

Revise the arena site plans due to changes to the design of the Alumni Center courtyard - Alumni Center project will reimburse the Arena Project for these costs. $ 27,175

Amd 4 / ASR 34.1 1/25/2010 3/11/2010

CUP Revisions and Coordination for Valet Bike Corral Relocation - requested by Alumni Center and Alumni Center will reimburse Arena Project for costs. 5,928

Amd 5 / ASR 34.1A 3/9/2010 3/31/2010

CUP Revision and Coordination for Valet Bike Corral Relocation - requested by Alumni Center and Alumni Center will reimburse Arena Project for costs. 7,608

Amd 5 / ASR 36 3/5/2010 3/31/2010

Relocation of Street Trees - Relocate trees in order to allow a clear view corridor, Alumni Center project will reimburse Arena Project for these costs. 4,883

Amd 5 / ASR 38 3/5/2010 3/31/2010

Revised Alumni Center Fire Department Connection - Alumni Center project will reimburse Arena Project for these costs 10,664

Total $ 56,258


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Appendix D: Arena Fund Allocation Calculation Appendix D: Arena Fund Allocation Calculation details the results cash management activity that occurred during construction. The timing of the audit was prior to the completion of the two projects involved (the arena and the garage) and management is completing a final reconciliation and cost allocation in a timely manner.

ARENA - GARAGE ALLOCATION VARIANCE

Description Total per Req

#20 Allocation

Percentage

Allocation of Garage

Costs Calculated Shoring – Scheffler $ 2,521,865 26.30% $ 663,250 Earthwork - K&E 5,821,556 83.60% 4,866,821 Other Allocated Costs (Est. per Amendment #2) 341,910Insurance/Bonding/Contingency 462,706GC Fee 215,379 Total Estimated Allocation $6,550,067

Allocation of Cost to Arena per Fund

(7,756,725)

Over-Allocation of Arena Funds

$1,206,658


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MRC Construction Consulting Services