Capital Development Program Audit Response: 7-9-13

Capital Development Program Audit Response
Board of Airport Commissioners Meeting 9 July 2013 Presented by: Roger A. Johnson, Deputy Executive Director
Audit of LAWAs Capital Development Program

Scope: The audit was at the request of the City Controller and designed to evaluate the efficiency and effectiveness of Los Angeles World Airports (LAWA) processes for capital improvement projects, including construction management practices the audit was primarily focused on processes and practices related to the LAX capital development program due to the significant program costs more than $3.6 billion currently underway.
Harvey M. Rose Associates, LLC Audit of LAWA Capital Development Program Executive Summary June 12, 2013
Audit of LAWAs Capital Development Program

Summary of Results: Overall, the report found that, while LAWA has succeeded in building an effective capital development organization under substantial pressures, opportunities exist to enhance the transparency and accountability of the process and reduce financial risks to LAWA.
Harvey M. Rose Associates, LLC Audit of LAWA Capital Development Program Executive Summary June 12, 2013
Key Findings
The audit report includes seven major findings that examine LAWAs capital development activity. These findings are in the areas of:
Construction Manager at Risk (CMAR) Delivery Method

CMAR Contractual Relationship (Section 2) Monitoring CMAR Change Management (Section 3) CMAR Quality Assurance Monitoring (Section 4)
Program Management
Long Term Program Management Strategy (Section 7) Value Engineering (Section 1)
Capital Improvement Process

Capital Decision Making Processes (Section 5) Capital Improvement Plans and Budget (Section 6)
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Construction Manager at Risk (CMAR)
CMAR Schedule Benefit
CMAR Contractual Relationship (Section 2)

Auditors General Finding: LAWA did not realize the full benefits of the Construction Manager at Risk (CMAR) delivery model. LAWA staff stated that they expected a large volume of change orders on the Bradley West projects. However, the CMAR Contractor has stated that the volume of change orders was higher than anticipated, contributing to cost escalation and impeding its ability to manage the project effectively. LAWA disagrees with this finding. The CMAR delivery model was selected to enable us to meet an accelerated project schedule. LAWA would not have been able to meet the accelerated schedule using any other delivery method.
The number of change orders on this project was not driven by the selection of the CMAR delivery method. LAWA anticipated a large volume of change orders on this project due to the fact that we went out to bid with incomplete design in order to achieve an accelerated schedule.
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Auditors General Finding: LAWA Response Cont.
The quote attributed to the CMAR that the number of change orders have been higher than expected and have contributed to cost escalation and impeded their ability to manage the project effectively is self-serving and untrue.

Auditors Recommendations: 2.1 Conduct a post-project assessment of the costs and benefits of the CMAR model. Include a comparison of alternative models. The decision to utilize the CMAR delivery method was based on a need to meet an accelerated schedule, which was accomplished. LAWA disagrees with this recommendation and does not plan on conducting a cost/benefit comparison. 2.2 Evaluate the CMAR model, as implemented for the Bradley West Gates and Core projects, by reviewing the agreements and the incentive structure they provide. LAWA agrees with this recommendation. LAWA has already implemented several changes in our contracts.

Auditors Recommendations: 2.3 Develop formal criteria for choosing project delivery models on future capital projects and ensure that project management and other pertinent staff are made aware of the strengths and weaknesses of all procurement models considered. LAWA agrees with this recommendation. We believe the decision process to use the CMAR delivery method on the Bradley West project was sound. We are working on a more formal project delivery decision process for all future projects. LAWA continues to conduct training on the use of alternative delivery methods for PMs and other staff supporting projects. The characteristics of each project delivery method will be incorporated into our formal PM Training program.
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Monitoring CMAR Change Management (Section 3)

Auditors General Finding: A major benefit of the CMAR model is to shift risk. However, LAWA has not implemented this model in the most effective manner. LAWA has not taken sufficient action to ensure the CMAR Contractor effectively manages the change order process. LAWA disagrees with this finding. The CMAR delivery method was selected to achieve an accelerated schedule, not to transfer the risk. LAWA does agree that the CMAR Contractor has not effectively managed the change order process. LAWA chose to partner with the Contractor rather than aggressively enforce the contract to achieve the objectives of the project.
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Auditors Recommendations: 3.1 Review contract provisions in the Bradley West Construction Agreements, to strengthen language and expectations of CMAR change management for future projects. Specific areas that could be strengthened include the expectation of the CMAR role in the meriting review process, pricing estimation for proposed change orders, and the acceptability of CCR revisions that contain cost increases, but no changes in the scope of work. LAWA agrees with this recommendation and has already changed the contract language. 3.2 Follow through on formal communications to the CMAR management regarding contractual provisions requiring the CMAR to submit CPCNs and CCRs within the timeframes stated in the agreement. LAWA continues to follow through on formal communications related to Contractor Potential Change Notice (CPCN) and Contractor Change Request (CCR) submittals. These communications occur on all construction contracts regardless of the delivery model utilized.
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Auditors Recommendations: 3.3 Formally communicate that unsupported estimates used as placeholders, as well as CCR revisions that do not contain changes in scope, will not be accepted. LAWA continues to clearly communicate to all contractors that unsupported estimates for change orders are not acceptable. LAWA does not accept, nor approve CCRs where there have been no changes. We will continue to enforce that policy. 3.4 Consider enhancing the monitoring of CMAR performance of change management to include its ability to meet contract prescribed timelines for change submittals to reduce the risk of schedule impacts, that subcontractors will not be paid in a timely manner, and to ensure the project may be closed out with an efficient and effective process. LAWA believes that this recommendation will be met through the activities conducted under recommendation 3.1.
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Auditors Recommendations: 3.5 Conduct a post-project analysis of the resources allocated to CMAR Change Management by LAWA functions under the Bradley West project budgets to determine whether they exceeded the mean or median amount spent, as a percentage of total costs, on this administrative function. Report results to the Board of Airport Commissioners. The CMAR Contractor consistently failed to submit fully supportable Contractor Change Requests (CCRs) on time, or with sufficient documentation to support the value of the change. As a result, LAWA has had to utilize more change management staff than would normally be required on a project. The number of staff used was appropriate given the circumstances. According to the auditors own findings, these efforts have saved the City in excess of $56 million on CCRs as of November 2012 and facilitated timely payment to subcontractors for change order work.
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CMAR Quality Assurance Monitoring (Section 4)

Auditors General Finding: LAWA may be performing Quality Control (QC) functions assigned to the CMAR Contractor for which they are being compensated. LAWA may be incurring additional costs due to the duplication of efforts. LAWA inspectors are not following all procedures for monitoring the performance of the CMAR Contractor. These weaknesses may result in deficiencies in construction. LAWA disagrees with this finding. The CMAR Contractor is performing a QC function. The City inspectors are acting as the Owners Representative ensuring that the work is being performed in accordance with the contract. There is no duplication of effort.
All work in place was inspected and signed off by LAWA inspectors. LAWA inspectors have logged over 50,000 inspection requests.
In addition, LAWA inspectors walk the job and sign off on all work submitted for payment. LAWA does not pay for defective work.
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Auditors Recommendations: 4.1 Update and make readily available the LAWA Construction Inspection Division Procedures Manual. LAWA agrees that the procedures manual needs to be updated to reflect current practices and is in process of doing so. The manual will be completed by December 2013. 4.2 Direct inspector staff to follow procedures outlined in the LAWA Construction Inspection Division Procedures Manual. LAWA continues to do so. 4.3 Provide training to LAWA inspector staff on records and information management procedures to ensure that staff are knowledgeable about requirements and equipped to comply with them. LAWA agrees and will conduct refresher training as procedures evolve.
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Auditors Recommendations: 4.4 Review processes and determine if procedures, notably those related to Job Memos and the issuance of Notices of Noncompliance, should be revised. LAWA will do so. 4.5 Standardize and maintain LAWA-owned logs to track the full history of document communications with a given contractor.
LAWA continues to do so.

4.6 Review the Request for Inspection processes and define the implementation of Request For Inspections in institutional documents for standardization of Request For Inspections processes and procedures.
LAWA ADG will review the Inspection Request (IREQ) process for standardization.
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Long Term Program Management Strategy (Section 7)

Auditors General Finding: LAWA has not developed a strategy to transition City staff into program management and other roles that are currently held by consultants. The cost of utilizing consultants is estimated to be approximately 15-20 percent greater than City staff. Use of consultants is hindering City staff development. LAWA disagrees with this finding. LAWAs current staffing (136 employees) exceeds the number of staff required to implement the projected $150 - $200 million per year of capital projects forecasted at the end of the current development program. The City does not employ certain technical disciplines required to implement capital projects.
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Auditors General Finding: LAWA Response Cont.
The auditors evaluation of the cost of consultants compared to city staff is flawed. Applying the same methodology to City and consultant staff, using the Controllers overhead rate for City staff, the cost for consultants is approximately 8.6% less than the cost for City staff. The cost analysis does not take into account the long-term costs of converting consultants to City staff.
City staff are fully engaged in the development program.
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Auditors Recommendations: 7.1 Direct staff to develop a long-term strategy for the use of consultants and LAWA staff in program management and support roles, including the identification of the amount and types of baseline staffing that will be required on a long-term basis, and an estimate of the amount and types of consultant staffing that will be required. The strategy should be based on a cost-benefit analysis that justifies the allocation of LAWA staff and consultants. This analysis has already been completed.
7.2 Build upon and broaden its recent effort with the Airport Engineer classification to identify any airport-specific job classifications that could be established by the City and enable LAWA to recruit and retain appropriate capital development staff. Any such proposed classifications should be provided to the Department of Human Resources for review.
LAWA agrees and has already engaged Human Resources in this process.
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Auditors Recommendations: 7.3 Direct the Human Resources Division to review existing job classifications for capital development at the airport and conduct analysis to determine whether the addition of new airport-specific classifications is appropriate. LAWA supports this recommendation.
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Value Engineering (Section 1)

Auditors General Finding: LAWA has not formalized a structured Value Engineering process. Some important elements exist, and efforts reportedly are being made to strengthen the procedural foundation and approach. LAWA agrees with this finding. We are in the process of developing a more structured Value Engineering process.
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Value Engineering (Section 1)

Auditors Recommendations: 1.1 Direct staff and request legal counsel to prepare an assessment of past practices on the LAWA development projects, to ensure that design review and cost engineering efforts can satisfactorily meet FAA expectations regarding the use of structured Value Engineering. This recommendation was included in the draft report when the audit findings assumed potential violations of federal requirements. Since the report no longer alleges violations of federal requirements, this recommendation is no longer necessary. 1.2 Develop and establish policies and procedures that ensure that a structured Value Engineering program is implemented at LAWA.
LAWA will develop a more formal, structured Value Engineering process.
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Capital Decision Making Processes (Section 5)

Auditors General Finding: The Board has limited involvement in the review and prioritization of proposed projects and is not involved in the general assessment and initial concepts or budgets. The Board delegates these responsibilities to executive staff. This dynamic is partly driven by a perceived conflict of interest. LAWA disagrees. Staff consistently informs the Board during Management Reports and contract awards throughout the life of major projects. During planning and environmental milestones, staff presents the Board with proposed concepts, potential scope and cost estimates for Boards input. Examples are: Bradley Program Midfield Satellite Concourse North Element Central Utility Plant New Face of the Central Terminal Area (CTA) Terminal 4 Connector
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Auditors Recommendations: 5.1 Request a written legal opinion from the City Attorneys Office regarding any potential conflict of interest related to the Boards duties and authorities related to airport development and CEQA review. 5.2 If a conflict of interest is determined to be a factor by the City Attorneys Office, develop a proposal to reassign the CEQA review responsibility from the Board to the City Planning Department or another entity within the City, thereby enabling the Board to conduct a more substantial level of review of the capital development program. LAWA will seek further legal counsel and determination as recommended.
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Auditors Recommendations: 5.3 Building on LAWAs current periodic open-call for projects practice, conduct a comprehensive needs assessment of airport capital assets, including both potential development projects and facilities maintenance needs, based on the results-oriented goals and objectives that flow from the organizations mission. LAWA agrees. This effort was completed in October 2012 and the next assessment will occur in Fall 2014. The needs were evaluated based on established criteria aligned with LAWAs mission and vision.
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Auditors Recommendations: 5.4 Develop a policy and systemic process for LAWA executive management to use on an on-going basis going forward to evaluate the costs and benefits of various proposed projects and prioritize among them. If deemed appropriate pursuant to Recommendations 5.1 and 5.2, the outputs of such a process should be officially reported to the Board of Airport Commissioners so that it may be involved in the selection of capital development projects. LAWA agrees and this effort was completed. A capital plan reflecting the highest priority projects the needs assessment was presented to the Board in June 2013.
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Capital Improvement Plans and Budget (Section 6)

Auditors General Finding LAWA has not developed a CIP or multi-year Capital Budget (CB) and the CB only includes a high level summary of anticipated expenditures for each major element for the budget year. Estimates include broadly defined cost components, which can raise the total budget by as much as 52% over estimated construction costs and could result in a greater commitment of funds.
LAWA agrees, and a traditional five-year CIP was completed in June 2013. However, LAWA disagrees that budgets are overstated. Project estimates are developed using industry standard metrics and refined along design milestones.
Identified Needs
CIP
Capital Budgets Periodic Board Updates
Contract Awards
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Auditors Recommendations: 6.1 Continue efforts to develop a multi-year capital plan that would be presented to the Board of Airport Commissioners in public session. Present a five-year capital spending plan as part of the annual budget review process. LAWA agrees and this was accomplished in June 2013. 6.2 Present a five-year capital spending plan as part of the annual budget review process. This recommendation should be modified to reflect the presentation of a fiveyear capital spending plan rather than budget. LAWA agrees and this was accomplished in June 2013. 6.3 As part of the annual budget process, or as required by the needs of the organization, seek Board approval of detailed, individual capital project budgets. LAWA agrees. The Board is provided detailed total project costs and appropriates funds at the time a construction contract is awarded.
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Auditors Recommendations: 6.4 Require all project budget packages to specifically identify allowances and other cost components for which the basis of the estimate cannot be reliably determined. LAWA agrees, and these activities are being performed. 6.5 Review the analytical basis for estimating project soft costs and contingencies and consider establishing variable standards based on project scope. LAWA agrees and procedures are in place for estimating project soft costs and contingencies based on project scope, complexity, and other factors.
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Auditors Recommendations: 6.6 Implement comprehensive and formalized policies, procedures and standards for developing, implementing and monitoring capital project budgets. LAWA agrees. LAWA currently has in place robust policies and procedures for developing, implementing, and adjusting capital project budgets throughout the full life cycle of a project. LAWA will continue to refine monitoring and reporting procedures.
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Audit Abbreviations
(in order of use) ADG Airports Development Group
CMAR Construction Manager at Risk

CCR Contractor Change Request CPCN Contractor Potential Change Notice QC Quality Control IREQ Inspection Request
CEQA California Environmental Quality Act

CIP Capital Improvement Program
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Capital Development Program Audit Response: 7-9-13

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