Review of the Selection and Award of Subcontracts through Construction Manager at Risk Agreements

Transcription

1 Exhibit 1 Review of the Selection and Award of Subcontracts through Construction Manager at Risk (CM@Risk) Agreements June 22, 2011 Report No Evan A. Lukic, CPA County Auditor

2 Table of Contents Executive Summary... 3 Methodology... 4 Background... 4 Findings and Recommendations... 9 APPENDIX A... 15

3 Executive Summary This report presents the results of our review of the subcontractor selection and award process for Construction Manager at Risk agreements between the County and Managing General Contractors (MGC). The objective of our review was to assess compliance with contract requirements and public procurement principles. We reviewed nine contracts managed by three County agencies, for the period of 2004 to 2009, totaling $120.9 million with direct construction costs of $89.7 million. We identified the following issues: The County s CM@Risk contracts do not include two key public procurement provisions that are required by the Broward County Administrative Code, likely increasing construction costs and limiting fair and open competition; and Contract administrators provided insufficient oversight to ensure MGC compliance with contract requirements. We recommend the Board of County Commissioners direct the County Administrator to take steps to ensure: A) fair and open competition in the selection and award of subcontracts in future CM@Risk contracts and, B) that administrators perform their responsibilities in accordance with Chapter 21.8 of the Broward County Administrative Code to include: 1. Requiring that awards be made to the lowest responsible and responsive bidder whose bid meets the requirements and award criteria established in the Invitations for Bids unless otherwise determined and documented to be in the County s best interest, 2. Mandating that changes to bids can only be made to correct arithmetic errors, 3. Ensuring that all bids submitted are considered and included in the bid tabulation prepared by the MGC, 4. Establishing education, training and experience qualifications for the contract administrator function, 5. Developing and conducting contract administration specific training, 6. Performing periodic reviews of current construction projects for compliance with contract requirements, and 7. Providing project specific evaluations of the contract administrator s performance. 3

4 Purpose and Scope The objectives were to review selected agreements to evaluate compliance with contract requirements for the selection and award of subcontracts and assess compliance with public procurement principles. Our review covered nine construction agreements totaling $120.9 million, between 2004 and 2009, with direct construction costs of approximately $ million. Methodology To accomplish our objectives, we: Reviewed: o A sample of nine Managing General Contractor agreements with completion dates within three years of the start of our review, managed by three County agencies and various project managers and the following CM@Risk general contractors: Moss and Associates, LLC for 5 projects: three dated December 5, 2006, one dated December 11, 2007, and one dated April 28, 2009, Skanska USA Building, Inc. dated December 13, 2005, Balfour Beatty Construction (formerly Centex Construction, LLC) dated October 10, 2006, James A. Cummings, Inc. dated February 10, 2004, and Biltmore Construction Company, Inc. dated September 19, o Chapter 21 of the Broward County Administrative Code. Interviewed o County staff at Construction Management Division, Aviation and Port Everglades Departments. o General contractor representatives at Moss and Associates, LLC, Skanska USA Building, Inc. and Balfour Beatty Construction. Background In the construction industry, building professionals must consider several factors before choosing a construction delivery method. These factors include cost, project complexity, budget constraints, time limitations for project delivery, the type of structure and the level of expertise available. 1 This amount also includes subcontractor awards valued at $20,000 and less and expenditures awarded through changes to subcontracts which were excluded from our review. 4

5 In recent years, Broward County experienced increased building activity, as evidenced by construction of libraries, fire stations and expansion programs at the seaport and airport. To complete these projects, the County utilized various delivery methods widely used in the construction industry. The delivery methods include Design-Bid-Build, Design-Build, and the Construction Manager at Risk These methods are briefly described as follows: Design-Bid-Build: This is typically referred to as the traditional construction method. In this delivery method the owner contracts with an architect to design the project and the resulting drawings and specifications are used by the owner to secure competitive bids from builders. Typically the owner executes a lump sum contract with the builder that submits the lowest responsive bid. Design-build: In this delivery process, the owner prepares or uses a consultant to prepare a Design Criteria Package 2 for the selection of a construction management team. The construction management team (team) consists of a general contractor and multiple consultants (including Architects, Engineers and other specialty consultants) and is selected based on weighted criteria. After selection, the owner contracts with the construction management team for both design and construction services. The team can be led by the consultant, general contractor or construction manager and creates a single-point of responsibility from project inception to completion. Construction Manager at Risk (CM@Risk) 3 : The CM@Risk model involves a construction manager who assumes the risk of building the project. In this delivery method the owner hires an architect for project design. Early in the design process, the owner selects a managing general contractor (MGC) to provide advice on the cost effectiveness of various design and construction alternatives, scheduling, advisory services, value engineering to the design team and management assistance to the owner. The MGC, later during the construction phase, takes on the financial obligation for construction of the project for a guaranteed maximum price (GMP). Our review covers nine construction agreements procured using the CM@Risk model. Broward County s use of the CM@Risk delivery method The CM@Risk model used by the County includes pre-construction and construction phases. 2 Design Criteria Package includes performance criteria, drawings and specifications to be used by the Design-Build firm to design and construct the project. 3 The County also uses the CM@Risk Modified process. This procurement method requires several general contractors to be prequalified. Once the general contractors are pre-qualified, the project goes through the traditional bid process. This process results in increased competition between the contractors. 5

6 Pre-construction Phase Early in the design process, the County develops a Request for Letters of Interest 4 (RLI) to solicit a Managing General Contractor (MGC). MGCs who respond to the RLI are short-listed 5 by a Selection Committee (SC). The short-listed MGCs present their experience and qualifications to the SC. The SC selects the top ranked firm and County staff negotiates a pre-construction services contract for approval by the Director of Purchasing or the Board of County Commissioners (Board). Pre-construction services typically include collaboration with the design team (consultant) during the design process to provide site investigations, scheduling, constructability 6, cost and value engineering 7 recommendations. The MGC also provides periodic project estimates, prepares the construction schedules and begins development of a Guaranteed Maximum Price (GMP). Developing the GMP Typically the MGC performing pre-construction services is engaged to complete the construction phase. Near the end of design and the pre-construction phase, the MGC develops the GMP, which represents the total maximum price of the project. The GMP includes the direct construction cost (DCC), management services, general conditions, contractor s fixed fee, owner allowances and contractor contingency funds. Developing these cost elements of the GMP involves in-house expertise, professional estimators, bid solicitations and construction cost resources. In addition to the above costs elements the GMP includes negotiated amounts for contractor s fee and estimated costs for both owner allowances and contractor contingencies. Below are brief descriptions of the elements of the GMP: o Direct construction costs represent the estimated cost of all trades necessary to complete construction. This includes construction service costs for trades such as roofers, electricians, plumbers, carpenters, and landscapers. o Management services represent the proposed cost for the MGC to manage the project. This typically includes the cost of the MGC s project management team such as engineers, project managers, superintendent, and clerical staff. 4 Request for Letters of Interest is a document used to solicit vendors for a project when the service/product and evaluation criteria are difficult to define with reasonable exactness. 5 Short-listing refers to the process of selecting a list of applicants from a longer list, who have been deemed suitable and from which the successful person will be chosen. 6 Constructability involves a review of construction processes during pre-construction to identify obstacles, to reduce or prevent errors, delays and cost overruns before the project is completed. 7 Cost and Value Engineering services include an analysis of project requirements to assess alternative design concepts and methods to achieve cost effective outcomes without compromising project objectives. 6

7 o General conditions include the MGC s direct operating costs such as general office equipment and contractor field office (trailer), used during the construction period. General conditions may include other construction related costs such as bonds, builder s risk, liability insurance, and other owner requirements. o Contractor fixed percentage fee is negotiated by the County and represents the MGC s profit. o County allowances are available for use at the County's discretion to cover scope items added by the County during construction. The MGC is required to obtain approval from the contract administrator to utilize the County allowance. At the conclusion of the project, unused allowances revert to the County. o Contractor Contingencies are reserves for unforeseen costs during construction. Contractor contingencies are used to cover costs overruns within the direct construction cost budget for example for permitting and bonding. The MGC is required to obtain approval from the contract administrator to utilize the contractor contingency funds. After final completion of the project, unused contractor contingencies usually revert to the County. In some instances, the MGC share in the savings, in the form of a bonus at project completion. Because the GMP represents a guaranteed maximum price, once the GMP is agreed to, the MGC assumes financial responsibility for the project and is thereby at risk. Project costs exceeding the GMP are absorbed by the MGC unless the increase is due to changes requested by the owner. Construction Phase Following agreement on the GMP and approval of the construction contract, the MGC solicits bids from subcontractors for the direct construction costs. Subcontractor Selection and Award Process During the construction phase, the MGC provides management services to supervise and direct the work of subcontractors. Articles 11 or 19 of the Managing General Contractor agreements reviewed required the MGCs to: Obtain competitive pricing and subcontracts for 100% of the direct construction cost, unless waived in writing by the design team (consultant), contract administrator or program manager, and Obtain a minimum of three bids for each subcontract or purchase order, when available. In order to solicit sub-contractors, the MGCs typically place advertisements in the local paper to publicly notify contractors of the pending projects. Contractors responding to the advertisement are provided Scope Sheets outlining the scope of work and specifications. Contractors provide bid responses to the MGC detailing their estimates 7

8 for quantities of materials, labor, price, etc. The MGC evaluates each bid response for responsiveness 8 and responsibility 9, experience of the contractor and ability to perform and conform to the project schedule. On occasion, representatives from the MGC may meet with contractors to ensure the submitted bid responses are complete. The MGC also adjusts bid submittals for missing scope items, permitting costs and future price escalations, as necessary. The bid responses are evaluated by the MGC in light of the committed minority/cdbe participation goals, and reviewed and analyzed prior to submitting recommendations to the consultant and contract administrator for approval 10. After approval by the contract administrator, the MGC executes subcontracts with the approved contractors to provide construction services. During the construction phase, the MGC manages the work performed by subcontractors, provides technical assistance for construction issues, and coordinates with County personnel for periodic project status updates. In addition, County project managers and a construction inspector routinely visit the project site to observe the progress of the construction. Sample Reviewed During the period February 2004 to December 2009 the County awarded 19 CM@Risk contracts totaling approximately $234.2 million 11. Our review was limited to the administration of the bid solicitation and award process and focused on a sample of nine of the CM@Risk projects totaling approximately $120.9 million (52%) with direct construction costs of approximately $89.7 million. Table 1 on page 9, lists the contract price elements for the nine projects reviewed. 8 A Responsive Bidder is a contractor who submits a bid which conforms in all material respects to a solicitation. 9 A Responsible Bid is one where the bidder has the overall capability to satisfactorily perform the requirements of the contract. 10 Articles 11 or 19 of the agreements allow subcontracts and purchase orders for items valued at $20,000 or less to be awarded without the prior approval of the Consultant. 11 This amount was obtained from the County s Project Management Information system (PMIS). PMIS includes data on consultant agreements, construction contracts and amendments, open-end agreements, change order administration, monthly construction project status reports and final payment information. The $234.2 million was not verified during the review. 8

9 Table 1 CM@Risk Projects Reviewed Projects Direct Construction Costs Other Cost Components [Note 1] TOTAL GMP Terminal 4 Expansion $28,283,440 $13,647,650 $41,931,090 Miramar Library 12,191,756 3,885,905 16,077,661 Fire Station Projects Airport/Seaport Warehouse 10,686,055 2,122,050 12,808,105 Hazmat 6,715,763 1,536,295 8,252,058 West Park 4,548,668 1,596,086 6,144,754 Everglades 4,016,182 1,136,556 5,152,738 New Bridge Over FPL Canal 8,049,124 3,209,986 11,259,110 Environmental Protection Department Laboratory Facility 12 5,169,056 1,334,489 6,503,545 West Regional Library 10,029,255 2,786,518 12,815,773 Total $89,689,299 $31,255,535 $120,944,834 Source: Schedule prepared by using cost data for the CM@Risk contracts reviewed. Note 1: Cost components include: General Conditions ($7.1mil); Management Services ($8.9mil); Contractor s Fee ($5.2mil) and Allowances and Contingencies ($10.0mil) Findings and Recommendations Fair and open competition is a basic principle of public procurement. This principle enables the County to maximize to the fullest extent practicable, the purchasing value of public funds by fostering effective broad based competition within the free enterprise system, while ensuring fair and equitable treatment of all persons who deal with County Procurement 13. It is accomplished through competitive solicitation and award practices. There are two primary means of achieving fair and open competition for subcontractor selection and awards: (1) contract requirements and (2) the County Administrative Code (policy and procedures). 12 The facility was later renamed as the Environmental Monitoring Laboratory. 13 Broward County Administrative Code, Volume II Operational Policy Chapter 21 Procurement Code Finance and Administrative Services. 9

10 Finding 1 - The County s CM@Risk contracts do not include two key public procurement provisions that are required by the Broward County Administrative Code, likely increasing construction costs and limiting fair and open competition The contract requirements intended to ensure fair and open competition are summarized below and detailed at APPENDIX A on page 15: The Managing General Contractor (MGC) must obtain competitive pricing and subcontracts for 100% of the contractor s direct construction costs, unless waived in writing by the consultant, contract administrator or project manager, and The MGC shall obtain bids from a minimum of three subcontractors for each subcontract, when available. To further ensure fair and open competition and equitable treatment of vendors, Chapter of the County s Administrative Code establishes the County s policy with respect to public procurement activities. The objective of the policy is to ensure that award practices provide fair and equitable opportunities for vendors to respond to County procurement needs. There are two key provisions of the Administrative Code addressing subcontractor awards: 1. Changes to bids can only be made to correct arithmetic errors, and 2. Awards must be made to the lowest responsible and responsive bidder whose bid meets the requirements and award criteria established in the Invitation for Bids. None of the nine CM@Risk contracts we reviewed contained these two key provisions. Although not precluded by the contracts, we found 157 subcontractor awards were either based on adjusted bids or were not to the lowest bidder. Consequently, the subcontractor awards likely resulted in higher construction costs and questionable bid award practices. We found the MGCs made adjustments to bids in eight of the nine contracts reviewed. The MGCs also awarded subcontracts to contractors who were not the lowest bidders in five of the contracts reviewed. We reviewed bid documents for 220 subcontractor awards with direct construction cost totaling $79.7 million and found that: The MGCs made adjustments totaling $2.9 million increasing amounts submitted by contractors for 102 (46%) subcontractor awards reviewed. In some instances the MGCs increased bids submitted by contractors to adjust for costs associated with missing scope items, permitting, price escalations and various allowances. 10

11 55 of the subcontractor awards totaling $27.6 million were to contractors that did not submit the lowest bids. o 38 of the awards totaling $17.1 million were to minority/cdbe vendors presumably to meet contractual requirements. Articles 8 and 32 of the agreements required minority participation goals 14 ranging from 15 to 27 percent. However, we found that the MGC for some contracts made commitments for 19.9 to 46.8 percent. Minority participation goals are established by the County to provide minority businesses the opportunity to receive and participate as subcontractors and suppliers on contracts awarded by the County. o 17 of the subcontractor awards totaling $10.5 million were to other contractors that did not submit the lowest bids. In three of the instances the MGC adjusted only the lowest bidder; consequently, after adjustments were tabulated the contractor was no longer the lowest bidder. Because of a lack of documentation, we were unable to determine if the adjustments to the bids or the awards to other than the lowest bidders were appropriate. In addition, we could not determine if all bids submitted were considered by the MGC and included in the bid tabulations provided in response to our request. Recommendations: We recommend the Board of County Commissioners direct the County Administrator to take steps to ensure fair and open competition in the selection and award of subcontracts in future CM@Risk contracts to include: 1. Requiring that awards be made to the lowest responsible and responsive bidder whose bid meets the requirements and award criteria established in the Invitations for Bids unless otherwise determined and documented to be in the County s best interest, 2. Mandating that changes to bids can only be made to correct arithmetic errors, and 3. Ensuring that all bids submitted are considered and included in the bid tabulation prepared by the MGC. 14 One of the contracts reviewed did not require minority participation goals due to suspension of the County s Minority and Women Business Enterprise (M/WBE) program, however the MGC for this project voluntarily committed to a 10% Community Disadvantage Business Enterprise (CDBE) goal. 11

12 Finding 2 - Contract administrators provided insufficient oversight to ensure MGC compliance with contract requirements The primary role of the contract administrator is to provide oversight of contracts from the date the agreement is executed until the work is completed and accepted. As such, contract administration constitutes the essential element of the procurement process designed to assure that the contractor complies with the requirements of the contract and the County gets what it pays for. According to Chapter 21.8 of the Broward County Administrative Code, the contract administrator has the responsibility to ensure that the provisions of each contract are complied with by both the County and the contractor. The Director of each agency was named as contract administrator for the nine CM@Risk contracts sampled. The contracts required the Managing General Contractors to: Obtain competitive pricing and subcontracts for 100% of the contractor s direct construction costs, unless waived in writing by the consultant, contract administrator or program manager, and require the MGC to obtain bids from a minimum of three subcontractors for each subcontract, when available, Obtain approval of each contractor from the consultant and contract administrator or approval from the program manager prior to the award of each subcontract, and Retain project documentation for at least three years following final completion of the project. Our review found non-compliance with the contract requirements for all nine contracts, resulting from insufficient contract administrator s oversight. The MGC s did not comply with the requirements for a minimum of three bids, approval of subcontracts prior to award, and retention of project documents. Without good contract administration, fair and open competition may be subverted and the County may be paying more than necessary. The following issues were noted: Contract administrators for eight of the projects did not ensure the MGCs received a minimum of three bids for subcontractor awards totaling $20.3 million. Articles 11 and 19 of the agreements 14 require the MGC to obtain bids from a minimum of three contractors for each subcontract, when available. Additionally the Administrative Code also requires the contract administrator to ensure that the provisions of each contract are complied with by both the County and the contractor. Our review of documentation provided by the MGCs identified that three bids were not received for 89 subcontractor awards totaling $20.3 million. The contract administrator also did not provide sufficient oversight to ensure this requirement was met. As a result, we were unable to determine whether the prices paid by the County were competitive and whether fair and open competition was subverted. 12

13 Contract administrators for three projects did not ensure that the MGCs obtain the required approvals prior to award of subcontracts totaling $18.6 million. Articles 11 and 19 of the agreements 15 require the MGC to obtain approval from the Consultant and contract administrator or Program Manager prior to awarding the subcontract. This requirement is important because it allows the County the opportunity to review bid amounts prior to the subcontractor awards. The contract administrator did not provide evidence that the MGCs obtained the required approvals for 34 subcontractor awards. The project files for seven of the 34 subcontractor awards included correspondence from the MGC to the contract administrator, stating that if no written objection to the recommended subcontractor was received, the MGC would proceed with the award. Our review found no response to the MGC and no evidence of review of the subcontractor proposals by the contract administrator. The MGC subsequently executed agreements with the seven subcontractors. Neither the MGC nor the contract administrators complied with contract requirements to retain project records for approximately $31.2 million in direct construction costs. Articles 16.1 of the agreements 16 require the MGCs to retain project documentation for at least three years following final completion of the project. This requirement is important because it allows the County time to exercise the right to review or audit the project records for compliance. Without the bid documents we could not determine that the bid awards were made in a fair, open, and competitive manner, and cannot verify required approvals. Our review found the following: One MGC or contract administrator did not provide bid documents for direct construction costs totaling $10 million for a project that was completed in November Another MGC did not provide bid documents for three subcontractor awards totaling $862,700 for a project with a final completion date of March The MGC also did not provide bids documents for all contractors who were unsuccessful in soliciting the 34 subcontracts totaling approximately $21.2 million. Without all the supporting bid documents we were unable to verify the accuracy of bid summaries prepared by the MGC and the appropriateness of the subcontractor awards 15 Refer to APPENDIX A for excerpts from Articles 11 and 19 of the agreements. 16 Refer to APPENDIX A for excerpts from Articles 16 and 25 of the agreements. 17 Our inquiries were within 3 years of the project completion date. 13

14 Recommendations: To strengthen contract administration we recommend the Board of County Commissioners direct the County Administrator to take steps to ensure contract administrators perform their responsibilities in accordance with Chapter 21.8 of the Broward County Administrative Code to include: 4. Establishing education, training and experience qualifications for the contract administrator function, 5. Developing and conducting contract administration specific training, 6. Establishing effective monitoring of current construction projects for compliance with contract requirements by supervisory personnel, and 7. Providing project specific evaluations of the contract administrator s performance. 14

15 APPENDIX A Selected requirements for award of subcontracts and retention of project records Excerpts from Articles 11 and 19 and Articles 16 and 25 of the CM@Risk agreements reviewed. Articles 11 and Unless waived in writing by the Consultant or Contract Administrator, the CONTRACTOR must obtain competitive pricing and subcontract, in compliance with the requirements of this Article 11, for One Hundred Percent (100%) of the Contractor's Direct Construction Cost required under this Agreement. Subcontracts and purchase orders, involving amounts not in excess of Twenty Thousand Dollars ($20,000) may be awarded without the prior approval of the Consultant. All other subcontracts and purchase orders shall be awarded according to the following procedure: Subcontracts and Purchase Orders Project Records The CONTRACTOR shall prepare for Consultant's and Contract Administrator's review and approval a list of subcontractors and suppliers for each bid who meet the CONTRACTOR's schedule of minimum requirements. The CONTRACTOR shall obtain bids from a minimum of three (3) such subcontractors for each subcontract, when available. After receiving such bids, the CONTRACTOR shall analyze them and make recommendations to the Consultant for awards. When the Consultant and Contract Administrator has approved the award of any such subcontract or purchase order, the CONTRACTOR shall contract solely in its own name and behalf, and not in the name or behalf of the COUNTY, with the specified subcontractor or supplier Unless waived in writing by the PROGRAM MANAGER, the CONTRACTOR must obtain competitive pricing and subcontract, in compliance with the requirements of this Article, for One Hundred Percent (100%) of the Contractor's Direct Construction Cost required under this Contract. Subcontracts and purchase orders, involving amounts not in excess of $20,000 may be awarded without the prior approval of the PROGRAM MANAGER. All other subcontracts and purchase orders shall be awarded according to the following procedure: The CONTRACTOR shall prepare for PROGRAM MANAGER's review and approval a list of subcontractors and suppliers for each bid who meet the CONTRACTOR's schedule of minimum requirements. The CONTRACTOR shall obtain bids from a minimum of three (3) such subcontractors for each subcontract, when available. After receiving such bids, the CONTRACTOR shall analyze them and make recommendations to the PROGRAM MANAGER for awards. CONTRACTOR shall provide to the PROGRAM MANAGER a copy of each subcontractor's bid sheet or tabulation and, when requested, any other documentation in its possession pertaining to such bids and a full copy of the resulting subcontract. When the PROGRAM MANAGER has approved the award of any such subcontract or purchase order, the CONTRACTOR shall contract solely in its own name and behalf, and not in the name or behalf of the COUNTY, with the specified subcontractor or supplier. Articles 16 and Project Records: COUNTY or its designee shall have the right to inspect and copy the books and records and accounts of CONTRACTOR and all subcontractors including but not limited to books, records, correspondence, instructions, drawings, receipts, payment records, vouchers, and memoranda which relate in any way to the Project, and to any claim for additional compensation made by CONTRACTOR, and to conduct an audit of the financial and accounting records of CONTRACTOR which relate to the Project and to any claim for additional compensation made by CONTRACTOR. CONTRACTOR shall preserve and make available to COUNTY all financial records, supporting documents, statistical records and any other documents which relate to the Project and to any claim for the required retention period of the Florida Public Records Act (Chapter 119, Fla. Stat.), if applicable, and, if the Public Records Act is not applicable, for a period of three (3) years following final completion of the Project Project Records: COUNTY or its designee shall have the right to inspect and copy the books and records and accounts of CONTRACTOR and all subcontractors including, but not limited to, books, records, correspondence, instructions, drawings, receipts, payment records, vouchers, and memoranda which relate in any way to the Project, and to any claim for additional compensation made by CONTRACTOR, and to conduct an audit of the financial and accounting records of CONTRACTOR which relate to the Project and to any claim for additional compensation made by CONTRACTOR. CONTRACTOR shall preserve and make available to COUNTY all financial records, supporting documents, statistical records and any other documents which relate to the Project and to any claim for the required retention period of the Florida Public Records Act (Chapter 119, Fla. Stat.), if applicable, and, if the Public Records Act is not applicable, for a period of three (3) years following final completion of the Project. 15