Office of the County Auditor Evan A. Lukic, CPA County Auditor

Transcription

1 Review of Management Services Billings - Terminal 4 Expansion Project Phase 1B at Fort Lauderdale Hollywood International Airport (RLI No AV-01) September 13, 2010 Report No Office of the County Auditor Evan A. Lukic, CPA County Auditor

2 Table of Contents Executive Summary... 2 Purpose and Scope... 3 Methodology... 3 Background... 3 Findings and Recommendations... 9 Office of the County Auditor 1

3 Executive Summary This report summarizes our review of management services billed by Skanska USA Building Inc. (Skanska) under the Terminal 4 Expansion Project Phase 1B agreement (RLI No AV-01). This review was initiated at the request of Broward County Aviation Department (BCAD) personnel for assistance in reviewing amounts billed by Skanska. Our objective was to determine whether the amounts billed were consistent with the terms of the agreement. Our review disclosed: o o o Skanska overbilled the County $464,704. The overbilling was principally related to rates paid to two subcontractors in excess of rates allowable under the contract. Pay applications and supporting schedules did not sufficiently document work performed, certain subcontracted services did not appear to be project related, and other services were not clearly defined in the subcontract. As a result, we were unable to determine the extent to which certain billed services added value, were commensurate with the amounts billed, or were within the scope of the County s contract with Skanska. Skanska s subcontractor agreements did not include provisions mandated by their contract with the County. As a result, we were unable to obtain all documents necessary to thoroughly complete our review of one subcontractor s charges. We recommend the Board of County Commissioners direct the County Administrator to: 1. Deny payment of $464,704 (BCAD has withheld payments to Skanska pending the outcome of this review). 2. Take steps to ensure future pay applications include sufficient documentation to determine whether services are within the scope of the project, add value, and are commensurate with the amounts billed. 3. Strengthen contract compliance by requiring prime contractors to provide evidence that County contract requirements are included in each subcontract. Office of the County Auditor 2

4 Purpose and Scope This review was initiated in response to ongoing concerns of BCAD management. Our objective was to determine whether the amounts billed were consistent with the terms of the agreement. Our review covered the period from April 2006 to August Methodology To accomplish our objectives, we: Reviewed: o The Construction Contract between Skanska USA Building Inc. and Broward County dated December 13, 2005 (including all amendments), o Agreements between Skanska and its three subcontractors performing management services, o Selected pay applications, including underlying management services invoices from Skanska and its subcontractors, o Skanska and subcontractors payroll registers and other supporting documentation, o January 2009 and February 2009 recorded tapes of negotiation meetings between BCAD and Skanska, o BCAD s memorandum summarizing the review of Management Services, dated June 26, 2009, and o Skanska s Audited Financial Schedules 1 and Report of Independent Certified Public Accountant (CPA) dated June 19, Interviewed Skanska staff and two of their subcontractors, BCAD, and Keith and Associates, Inc. (Project Manager). Background Contract Summary On December 13, 2005, the Board of County Commissioners (Board) approved a contract with Skanska USA Building Inc. (Skanska) as the Construction Manager at Risk (CM@Risk) 2 for the Terminal 4 Expansion Project at the Fort Lauderdale-Hollywood International Airport, awarded under RLI No AV-01. The contract, for pre- 1 Financial schedules were prepared consistent with the Federal Acquisition Regulation (FAR) guidelines for Cost & Pricing data. 2 CM@Risk is a delivery method that entails a commitment by the Construction Manager to deliver the project within a Guaranteed Maximum Price. In addition to acting in the owner's interest, the construction manager must manage and control construction costs to not exceed the GMP. Office of the County Auditor 3

5 construction services and early work, was approved in the amount of $12.5 million. The parties entered into this contract before design documents were sufficiently completed to establish a Guaranteed Maximum Price (GMP) for the project. Therefore, it was anticipated that one or more addenda would be executed to establish a GMP and incorporate the documents fully describing the scope of work. On April 17, 2007 the Board approved an addendum to the contract establishing a GMP contract price of $34.9 million and 500 days for contract completion. On March 12, 2009 the Board approved the first amendment to the contract addendum increasing the GMP to $42.2 million and extending the project completion period to 806 days. The contract price elements approved in the original contract, addendum and amendment are summarized in Table 1 below: Table 1 Summary of Contract Price Elements Terminal 4 Expansion Project Contract Price Elements Original Construction Contract 12/13/2005 GMP Addendum 4/17/2007 First Amendment 3/12/2009 Estimated Direct Construction Cost $ $ 22,366,342 $ 28,283,440 Contractor s General Conditions 2,437,065 2,667,489 County s Early Construction Allowance 12,265,080 [Note 1] Management Services 3,007,469 4,816,040 Lump-sum Pre-Construction Services 148, , ,639 Reimbursable Pre-Construction Costs 100, , ,000 Contractor s Fixed Fee (4%) 1,299,835 1,531,937 County s Allowance Account 4,385,000 3,752,280 Document Completion Allowance 300, ,737 Construction Contingency 834, ,167 TOTAL $ 12,513,719 $ 34,878,676 $ 42,179,729 Source: Schedule Prepared by Office of the County Auditor using Contract Price Elements Note 1: The $12,265,080 in Early Construction Allowance was included in Estimated Direct Construction Cost as part of the Addendum approved by the Board on April 17, Contract Phases The original contract and addendum required Skanska to provide services for four phases of work: preconstruction services, construction, post construction, and warranty services. Office of the County Auditor 4

6 Preconstruction Services - This phase of the contract requires Skanska to: Review the contract documents, project requirements, existing on-site and off-site development, and surveys, Perform cost estimates and value engineering, Make recommendations to the County regarding constructability, staging, phasing, maintenance of airport operations, and maintenance of traffic during construction, and Prepare project schedules for all phases of the contract and bid packages for construction cost estimates to cover the scope of work of the project. Construction Services - This phase of the contract requires Skanska, as the CM@Risk, to provide management services, bid major subcontracts, hire subcontractors to perform the scope of services pursuant to the contract documents which include the technical specifications, drawings, general conditions, change orders, field orders, submittals and to be responsible for compliance with jobsite and worker safety requirements. Post-Construction Services - This phase of the contract requires Skanska to coordinate: Project close-out, including cooperating with preparation of the Certificates of Substantial and Final Completion, Completion of all punch list 3 items, warranty provisions, and Maintenance & Operational Manuals, Commencement of operations, and Transition to occupancy by the County and its tenants. Warranty Services - This phase of the contract requires Skanska to participate with County representatives in warranty inspections in the sixth and eleventh months after substantial completion. 4 Further, Skanska is responsible for coordinating and scheduling all warranty and service work. Management Services This review focused on reviewing the accuracy of management services invoices billed under the contract. In general, management services include staffing to provide project oversight for each of the phases listed above. For these services, allowable expenses include salaries for 21 staff positions such as a Project Executive, Engineers, and Estimators. For each hour of service provided, Skanska is permitted to bill the hourly rate 3 A "punch list" represents a summary of uncompleted or unsatisfactory work items. Examples of punch list items include damaged building components or problems with the final installation of building materials. 4 Article 1.28 of the contract defines Substantial Completion as the date certified in writing that indicates that the work is sufficiently complete in accordance with the contract documents and the project is available for use or occupancy by County for its intended purpose. A certificate of occupancy or temporary certificate of occupancy must be issued for substantial completion to be achieved. Office of the County Auditor 5

7 derived from salary plus defined burden rates for fringe benefits 5 consistent with the FAR guidelines. To determine the burden rate 6 for fringe benefits, the contract requires Skanska to provide the County with audited financial schedules of fringe benefits, and other allowable costs, within 90 days of the approval of the contract. While the majority of the management services were provided by Skanska s employees, some duties were performed by five staff positions 7 via contracts with three subcontractors. For each hour of service, the subcontractors billed Skanska at the rates in their contract with Skanska. The County contract provides for subcontractor rates based on the cost of work 8 plus overhead and profit. The contract limits the aggregate of the subcontractors' overhead and profit to fifteen percent (15%) of the subcontractors' cost of the work. The subcontractor s overhead and profit is in addition to the overhead and profit paid to Skanska in accordance with the agreement 9. During the term of the contract certain amounts billed by Skanska were contested by BCAD. Table 2 on page 7 depicts the chronology of events affecting payments for management services during the term of the contract. For example, in response to the failure to submit the certified schedules of fringe benefits, the County suspended payments for labor burden. In another instance, the County suspended payments for management services when there were concerns that billings were not commensurate with the progress of construction (earned value). 5 Article 33.2 of the contract states that fringe benefits include: sick leave, vacation, holiday, unemployment, excise and payroll taxes, contribution to social security, retirement benefits, etc. 6 The contract specified an initial fringe benefit factor/ burden rate of 50.68%. This percentage was later established as 50.04% with the audited financial schedules provided by Skanska dated June 19, The five staff positions filled by subcontractors include an Engineer, Assistant Superintendent, Senior Project Coordinator, Administrative Assistant, and a Project Executive 8 Cost of work represents hourly payroll rates plus fringe benefits. 9 The contract provided for $2,667,489 in General Conditions (Overhead) and Contractor Fees of $1,531,937 (Profit). Office of the County Auditor 6

8 Table 2 Chronology of Events Affecting Payments for Management Services April 2006 to February 2010 Number Dates of Description of Events Months April 2006 to June 2007 July 2007 to April Management services billed by Skanska and paid by the County based on hourly rates plus burden/fringe factor of 50.68%. In July 2007, the County suspended payment of the burden (fringe factor) because Skanska did not provide certified schedules of fringe benefits within 90 days as required by the contract. Management services billed by Skanska were paid by the County based on hourly rates without additional payment for burden. May 2008 to November Payments for management service were suspended because BCAD determined that billings were not commensurate with the percentage of construction completed. August 2008, BCAD requested the County Auditor to review Management Services costs billed in pay applications 28 and 29. The First Amendment to the contract approved by the Board on March 12, 2009, authorized the following: March 2009 A lump-sum amount of $1,533,228, for management service fee to cover the period March 2009 to February 2010 payable in 12 equal monthly installments of $127,769. $343,538 in retroactive payments for management services billed by subcontractors between May and November $214,757 for unpaid burden/fringe factor during the suspension period above. The amount was calculated using the certified fringe factor rate of 50.04%. The amendment required invoices, cancelled checks, payroll registers, time sheets, etc. to substantiate the costs billed. Retroactive lump-sum payment of $200,000 in management services for the period December 2008 to February 2009, payable as follows: o $100,000 upon approval of the first amendment and issuance of the Notice to Proceed, and o $100,000 no later than 30 days after achieving timely Substantial Completion. July 2009 BCAD identified overbilled amounts totaling $142,397 for services billed by two subcontractors. On July 10, 2009 BCAD requested County Auditor s assistance in reviewing amounts billed by Skanska and has withheld payment pending completion of this review. Source: Schedule prepared by Office of the County Auditor Office of the County Auditor 7

9 Management Services Billing Process Skanska and its subcontractors reported the following procedures for documenting hours and invoicing for services under this contract: Skanska s employees assigned to the County project enter the hours worked by project number in Skanska s electronic job cost system. The job cost system is a subset of the payroll system. At the end of the month, the accountant reviews the hours for accuracy, making adjustments where necessary for non chargeable hours such as: holiday, sick-time and vacation. The accountant then prepares a manual time sheet showing the hours for each employee, which is then signed by both the employee and supervisor. The accountant tallies the total hours for each employee and calculates the billable amount by multiplying the number of hours by the hourly rates provided by the Project Manager 10. The accountant prepares a schedule listing the employee names, total hours worked, hourly rates, and the fully burdened billable amount which includes the burden/fringe factor. Subcontractors employees prepare time sheets that document hours worked on the project. The time sheets are signed by the employee and supervisory personnel from both Skanska and the subcontractors. At the end of the month, the subcontractors tally the hours for each employee and prepare an invoice to Skanska at the hourly rates included in the agreements between Skanska and the subcontractors. Monthly Pay Applications Skanska is required by Article 6.1 of the contract to bill the County on a monthly basis. Skanska s accountant prepares the monthly pay application, including: The schedule showing management services provided by Skanska along with underlying time sheets, Invoices for management services from the three subcontractors with the supporting time sheets, Direct construction costs plus supporting documentation, Contractor s general conditions, The contractor s fee of four percent, and A deduction for retainage, as required by the contract. 10 The Project Manager named in the original contact was URS Corporation (URS was Project Manager through December 2008). The Project Manager was changed to Keith & Associates, Inc. in January 2009 (approved in the First Amendment). Office of the County Auditor 8

10 The pay applications are reviewed and approved by the Project Manager and BCAD personnel and are then forwarded to the Accounting Division for payment. The resulting vendor checks are mailed directly to Skanska. Current Project Status During the period December 2005 to February 2010, the County paid Skanska approximately $35.2 million which includes management services fees of approximately $4 million (11.4%). The project achieved Substantial Completion on January 23, 2010 and Final Completion on March 24, Table 3 below summarizes expenditures through February 28, Table 3 Payments to Skanska through February 28, 2010 Terminal 4 Expansion Project DESCRIPTION ALLOWABLE CONTRACT AMOUNT AMOUNT BILLED RETAINAGE AMOUNT PAID BALANCE Direct Construction Cost $ 29,335,595 $29,098,429 $ 1,964,816 $27,133,613 $ 237,166 Contractor s General Conditions 2,682,898 2,562,860 2,562, ,038 Management Services 4,819,464 4,009,598 4,009, ,866 Document Completion Allowance 599, ,550 County Early Construction Allowance 2,753,197 2,753,197 Contractors Fixed Fee 1,544,108 1,426, ,281 1,284, ,236 Lump-Sum Pre-Construction Services 148, ,639 14, ,775 0 Reimbursable Pre-Construction Costs 100,000 92,941 92,941 7,059 Construction Contingency 259, ,010 TOTAL $42,242, $37,339,339 $ 2,121,961 $35,217,378 $4,903,122 Source: Schedule prepared by Office of the County Auditor from information provided by BCAD Findings and Recommendations Finding 1. Skanska overbilled the County $464,704. A. Skanska s invoices included $410,684 of overbillings because rates charged by two subcontractors were in excess of the rates permitted by the County s contract. Articles and 16.1 of the contract state the rate charged by subcontractors represents the cost of work plus overhead and profit, and in no event shall the aggregate 11 The amount includes 13 change orders totaling $62,732 issued since the first amendment was approved on March 12, Office of the County Auditor 9

11 of the subcontractors' overhead and profit markups exceed fifteen percent (15%) of the subcontractors' cost of the work. We reviewed invoices totaling approximately $845,900 for work performed by two subcontractors during our review period from April 2006 to August We reviewed the subcontractors agreements and requested schedules 12 showing the fringe, overhead and profit information for the review period. One subcontractor provided the requested information for 2006, 2007, 2008, and The second subcontractor provided only a schedule for 2007; as a result, our review for this subcontractor was limited. For all invoices during the review period, we traced the hours billed to time sheets, validated pay rates to the payroll registers, and applied the fringe, overhead, and profit percentages 13 in accordance with the contract provisions in Article We also recalculated management services fees. Our review found the County was overbilled $410,684 because the subcontractors billing rates were not based on their actual cost, overhead and profit as required by Skanska s contract with the County. There was no apparent relationship between the rates billed to the County and rates actually paid to employees. B. Skanska s invoices did not reflect actual hours and pay rates resulting in net overbillings to the County of $44,299. We reviewed approximately $779,300 in invoices for management services for work performed directly by Skanska during 11 of the 25 months between April 2006 and April We reviewed the hours documented on time sheets; agreed hours billed to Skanska s electronic job cost system, validated pay rates to the payroll registers, applied the burden/fringe factor, and recalculated the management services fees for the sample invoices. Our review found that hours billed to the County by Skanska exceeded the hours charged to the project in Skanska job cost system and the billed rates varied from the rates in Skanska s payroll register. We utilized the hours 14 and actual payroll rates documented in the job cost and payroll systems and found the County was overbilled $44,299 C. The Skanska invoice for unpaid labor burden was overstated by $9,721. Exhibit 3 of First Amendment, approved by the Board on March 10, 2009, provided for payment of labor burden totaling $214,757 for the ten-month period from July 2007 to April This figure represented amounts billed by Skanska for the period when payment for 12 A FAR audit exemption request was approved by the County Auditor on May 5, 2008 for the two Subcontractors performing management services. 13 Due to the subcontractor s failure to provide information as requested we applied the 2007 fringe, overhead and profit percentages to invoices for 2006, 2008, and Vacation, holidays, and training hours erroneously coded to thet4 project in the Skanska s Job Cost and Payroll System were adjusted during the review. Office of the County Auditor 10

12 burden was suspended by the County because Skanska failed to submit certified schedules of fringe benefits as required by the contract. We reviewed invoices for three of the ten months of the suspension, recalculated the labor burden and found Skanska overbilled the County by $9,721. Table 4 below summarizes the amounts overbilled: Table 4 Summary of Amounts Overbilled Description Amount A. Subcontractors Excess Rates $ 410,684 B. Skanska Hours & Rates > Actual 44,299 C. Skanska Unsupported Labor Burden 9,721 Total Overbilled $ 464,704 Source: Schedule prepared by Office of the County Auditor BCAD has withheld payment to Skanska pending the results of this review. Recommendation 1. We recommend the Board of County Commissioners direct the County Administrator to deny payment of $464,704. Finding 2. We were unable to determine the extent to which certain billed services added value, were commensurate with the billed amounts, or were within the scope of the County s contract with Skanska. A. Invoices and supporting schedules did not document the work performed. Article 33.2 of the GMP Addendum approved by the Board on April 17, 2007, states management services shall be paid for as shown in Exhibit 3 and 3-1 for all personnel engaged directly on the project for time directly attributable to the project or the work and services described in a work authorization. We found management services invoices did not contain sufficient supporting documentation to verify the work performed. Skanska s and subcontractors Office of the County Auditor 11

13 invoices submitted to the County typically contained a schedule listing the staff members, the total number of hours worked, and their hourly rates along with time sheets. The invoices did not include descriptions of work performed. This information is essential to determine if the services were actually provided, added value, were commensurate with the billed amounts or were consistent with the agreed upon scope of services. B. Certain subcontracted services did not appear to be project related; other services were not clearly defined in the subcontract. i. The scope of services in one subcontractor agreement did not appear to be consistent with the management services required by the contract between Skanska and the County. We noted the subcontract provides for services including: Establishment of a library of available certified Disadvantaged Business Enterprise (DBE) contractors. Coordination of outreach initiative to recruit DBE contractors. Promotion of Skanska s DBE program within the business community. These services do not appear to add value to the project because the County has an existing library of DBEs which is available to Skanska and the outreach initiative and promotion of Skanska s DBE program do not appear to be project related. ii. While the scope of services in one other subcontract was vague providing services, limited to consulting to Skanska for the Ft Lauderdale Airport projects. This subcontractor was billed as the project executive. As noted above, the invoices did not include descriptions of work performed and as a result, we could not verify the nature of services actually provided. Recommendation 2. We recommend the Board of County Commissioners direct the County Administrator to take steps to ensure future pay applications include sufficient documentation to determine whether services are within the scope of the project, add value, and are commensurate with the amounts billed. Office of the County Auditor 12

14 Finding 3. Skanska s subcontractor agreements did not include provisions mandated by their contract with the County. Article 25.3 of the Skanska contract states the Contractor (Skanska) shall require subcontractors to keep and maintain comparable project records for the same time period and to permit the County to review, inspect, and audit such records. The contract specifically states that the Contractor shall include such requirements in all written subcontracts and purchase orders issued. We reviewed the agreements between Skanska and three subcontractors and found the agreements did not include the requirements to keep and maintain project records and permit the County to review such records. As noted above in finding one, we were not successful in obtaining all documents necessary to fully complete our review of one subcontractor s charges. Recommendation 3. We recommend the Board of County Commissioners direct the County Administrator to strengthen contract compliance by requiring prime contractors to provide evidence that County contract requirements are included in each subcontract. Office of the County Auditor 13