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OFFICE OF INSPECTOR GENERAL
CONSTRUCTION CONTRACT CLAIM SETTLEMENTS
REPORT 04G-9005 JUNE 2000
Florida Department of Transportation
JEB BUSH GOVERNOR
605 Suwannee Street Tallahassee, Florida 32399-0450
THOMAS F. BARRY, JR. SECRETARY
June 30, 2000 Mr. Thomas F. Barry, Jr., P.E., Secretary Florida Department of Transportation 605 Suwannee Street, MS 59 Tallahassee, Florida 32399-0450 Re: Construction Contract Claim Settlements Report 04G-9005 Dear Secretary Barry: The report on our audit of Construction Contract Claim Settlements is attached. The objective of this audit was to determine whether the Department has an adequate claims management system that includes reasonable evidence that claims are 1) settled for amounts that were clearly established and adequately documented to be fair and equitable and 2) adequately tracked and monitored and accurately reported. We concluded that the Department has made recent improvements, but more are needed to mitigate the risks associated with managing claims. Essentially, the Department cannot adequately demonstrate its accountability for managing claims because claim settlement amounts often were not clearly established or sufficiently documented to be fair and equitable, and they were not adequately tracked and monitored or accurately reported. The Department’s senior staff agrees with our recommendations to appoint a cross-functional task team to develop a coordinated process for managing and resolving claims, for developing procedures and guidelines relating to the General Counsel’s evaluations and advice, and for identifying the minimum requirements for tracking and monitoring claims. If we can be of further assistance, please let me know. Sincerely,
(Original Signed by) Cecil T. Bragg, Jr., CPA Inspector General CTB/ecb Attachment
CONSTRUCTION CONTRACT CLAIM SETTLEMENTS
AUDIT REPORT NUMBER 04G-9005
OFFICE OF INSPECTOR GENERAL
This audit was conducted to assist management in the effective implementation of transportation programs by the Department. CIA Sections 20. as amended) and Standards for the Professional Practice of Internal Auditing published by the Institute of Internal Auditors. procedures and other operations of the Department and recommend improvements. 2 ! Report No. This audit was conducted in accordance with applicable Government Auditing Standards issued by the Comptroller General of the United States (1994 revision. require the Florida Department of Transportation's Inspector General to review. 04G-9005 . evaluate and report on policies.Audit Team Members Audit Manager Audit Team Eldon Blaxton.23. CFE Bob Anderson Kim Smith. CIA. CPA John Greene Jim Maxwell. Florida Statutes.055 and 20. We included such tests and other auditing procedures as were considered necessary under the circumstances. plans.
Claims Referred to the FDOT Office of General Counsel 2. and Reporting Settlements 4 7 11 13 14 18 EXHIBITS 1. 04G-9005 ! 3 . Management Responses Distribution 25 28 Report No. Monitoring. Tracking.TABLE OF CONTENTS Page EXECUTIVE SUMMARY BACKGROUND and INTRODUCTION OBJECTIVES. Summary of Large Claim Settlements 8 9 13 APPENDIX Large Claim Settlements 23 ATTACHMENTS 1. SCOPE and METHODOLOGY FINDINGS and RECOMMENDATIONS I. 2. Claim Settlements by Fiscal Year 3. Determining and Documenting Settlements II.
the Department and the contractor cannot agree on the scope or cost of the change.EXECUTIVE SUMMARY Contract Changes Contracts to construct roads and bridges often require modification to accommodate such issues as unforeseen conditions. the Department’s Office of General Counsel (OGC) becomes involved. or adjustments to satisfy changing local needs and concerns. Occasionally. provides the contractor the opportunity to file a “contract claim. This “dispute. When contractors do file for legal proceedings.” Resolving Claims Few claims are filed with the courts because districts typically negotiate settlements to disputes. respectively.5 percent. plan errors. these amounts reflected represented 2. Objectives The objective of this audit was to determine whether the Department has an adequate claims management system that includes reasonable evidence that claims were: ! Settled for amounts that were clearly established and sufficiently documented to be fair and equitable. the cost of changes to them must be established by other means. enabling Department or consultant CEI staff to perform more thorough and timely claim analyses.8 percent. ! Overall Conclusion The Department has made recent improvements. a revised claim specification should generate more timely and detailed contract claims. The Department cannot As a percentage of total completed construction contracts each year.2 percent. 1 Two risks the Department faces in managing these claims are the risks that they may be settled for amounts that have not been clearly established and adequately documented to be fair and equitable and that claim settlements may not be adequately tracked and monitored and accurately reported. $41.3.4 million. 04G-9005 2 1 . and 4. Claims Payment Trend The Department’s annual reports to the Legislature indicate that the total dollars spent on claim settlements is increasing. Even then. however.” then. 3. While these contracts are competitively bid. Totals reported for the 3 fiscal years ending 1998-99 were $20.9. For example. respectively. 4 ! Report No. 2 but more are needed to mitigate the risks associated with managing claims. most of the claims filed with the courts are ultimately settled through negotiations by the districts or by arbitration with the OGC involved in an advisory capacity. and Adequately tracked and monitored and accurately reported. Most contract changes are agreed to and paid with supplemental agreements (SA) that modify the contract. effective with contracts let in February 2000. and $65.
the audit team could not locate the contractor’s written “Notice of Intent” to file a claim.11. assuming such an analysis was prepared. the audit team established that the definition of “claim” was somewhat elusive.” defined in CPAM Section 4. I. for any of the 29 in the expanded judgmental sample. District staff generally did not comply with the Department’s Construction Project Administration Manual (CPAM) Section 4. or the “fair value” of.3 million claimed. 04G-9005 ! 5 . the audit team could find analytical support of entitlement for about 29 percent of the $53. or any of the 14 settlement files reviewed in the OGC. the team did not find the “Forwarding Memorandum.4.1. and they were not adequately tracked and monitored or accurately reported. most of the settlement documentation reviewed for large claim settlements did not explain how the settlement amount evolved from the claim analysis prepared by the Department or consultant CEI. In assessing these responsibilities. Moreover. For over half the settlements represented in the random sample of 50. for any of the settlements in the random sample. II. although not required by the CPAM. settlement amounts. Report No. While the Department can legitimately contend that it settled the claims reviewed in this audit for about 43 percent of the $124. and annual reports to the Legislature contained errors. Claim settlements were not always adequately tracked and monitored or accurately reported.4 procedures for documenting claims. Claim settlement files generally did not include supporting documentation establishing the entitlement to.adequately demonstrate its accountability for managing claims because claim settlement amounts often were not clearly established or sufficiently documented to be fair and equitable.6 million paid out. Finally. procedures and processes for effectively tracking and monitoring claims were lacking.
The Department’s General Counsel establish procedures or guidelines to govern activities relating to evaluating claims and advising the districts. The task team should propose improved policies. 04G-9005 . procedures and guidelines governing the claim settlement process.Recommendations ! We recommend that: The Assistant Secretaries jointly appoint a cross-functional task team to develop a coordinated process for managing and resolving claims. ! ! 6 ! Report No. and The Assistant Secretaries charge the cross-functional task team to identify the minimum requirements for monitoring claims from their inception to their resolution and establish who is responsible for each. The State Construction Engineer should use those requirements as a basis for designing a simplistic system to track and report contract claims.
to the Contract. this section has required the contractor to provide a written “Notice of the Intent” to file a claim before beginning the work on which the company based the claim. This section further states that if such notification is not given.2. provides the contractor an opportunity to file a “contract claim. This section states. then the Department will direct the work to be performed or deleted and make an adjustment either for or against the Contractor in such amount as the Engineer may determine to be fair and equitable.” then. Among other things. The Contractor and the Department shall agree to the basis for the adjustment prior to the performance of the work. excluding loss of anticipated profits.3 Section 5-12 of the Specifications governs contract claims (“Claims by Contractor”). 3 Section 4-3. Occasionally. though. the Department and the contractor cannot agree on the scope or cost of the change. Report No.BACKGROUND AND INTRODUCTION Contract Changes Contracts to construct roads and bridges often require modification to accommodate such issues as unforeseen conditions. If the Engineer makes alterations or changes in quantities that significantly change the character of the work under the Contract. 04G-9005 ! 7 .3 of the Standard Specifications includes criteria for establishing the value of contract changes. plan errors. This “dispute. or adjustments to satisfy changing local needs and concerns.” Standard Specifications The Department’s Standard Specifications for Road and Bridge Construction (Specifications) is a document published by the Florida Department of Transportation (FDOT) and included by reference in all construction contracts. If the parties cannot agree to the basis. Since at least the 1986 edition. the Specifications address contract changes and claims. Section 4-3 of the Specifications (1999 edition) governs changes to the contract (“Alteration of Plans or Character of Work”). While these contracts are competitively bid. the Engineer will make an adjustment. the cost of changes to them must be established by other means. the contractor waives the right to claim extra compensation. Most contract changes are agreed to and paid with SAs that modify the contract.
Claims Payment Trend Annual reports the Department submitted to the Legislature indicate that the total dollars spent on claim settlements is increasing. 8 ! Report No. If the offer is rejected and verdict exceeds the offer by more than 25 percent. Resolving Claims Typically. 04G-9005 4 . the verdict was considered to be favorable. in one of the three cases taken to trial. the districts negotiate settlements to disputes. most claims filed with the courts are ultimately settled through negotiations by the districts or by arbitration with the OGC involved in an advisory capacity. Exhibit 1 reflects the manner of resolution for cases referred to the OGC in FY1997-98 and 1998-99: Claims Referred to the FDOT Office of General Counsel Type of Settlement Arbitrated Negotiated Offer of Judgment4 Dismissed Î Taken to Trial Î Total Cases Exhibit 1 1997-98 4 16 0 1 1 22 1998-99 7 16 1 4 2 30 Î For the five cases dismissed. prior to 1999. The revised Specifications also specify the information to be included in contract claims and require contractor certification of the claim. Even then. the plaintiff’s attorney fees must be paid in addition to the verdict. the Department’s OGC becomes involved. Few cases actually go to trial. so claims are not normally filed with the courts. the Department is considered to have prevailed. the Department modified the Specifications to require that changes to contracts be based on contractor costs plus specified markups. Prior versions of the Specifications did not require specific content or certification of the claim and. Totals reported for the past 3 fiscal years were as follows: An “offer of judgment” is an offer to settle prior to trial. When contractors do file for legal proceedings.Revision to Standard Specifications In February 2000. did not include criteria for pricing contract changes.
and 4. these amounts represented 2. respectively. recommendations and attachments essential to understanding the disputed issues.Claim Settlements (By Fiscal Year) 5 $65. This Memorandum should provide subsequent reviewers sufficient information to determine the legitimacy of claim issues as well as the strength of the Department’s position to defend itself against the claim. The Forwarding Memorandum is supposed to include specific statements. Section 4. procedures for administering construction contracts and their attendant claims are contained in the CPAM. A unilateral payment is used to effect a contract change and a timely payment when the contractor either refuses to timely execute an SA or the Department and the contractor cannot agree on the cost of the work. 04G-9005 ! 9 6 5 .9 1996-97 1997-98 1998-99 (Millions of $) Exhibit 2 Claims Risks ! Two risks the Department faces in managing claims are the risks that: Claims may be settled for amounts that have not been clearly established and adequately documented to be fair and equitable.6 and Section 4.11 specifically addresses the preparation of claim review packages and requires a Forwarding Memorandum.4 provides guidance and outlines requirements for documenting and analyzing contract claims.4. As a percentage of total completed construction contracts each year.2 percent. a document intended to transmit critical information regarding the claim to the next level of review. 3. Section 4.3 of the CPAM provides guidance and outlines requirements for contract changes (SAs and unilateral payments). and Claim settlements may not be adequately tracked and monitored and accurately reported. Report No.8 percent. analyses.4 $41.5 percent. ! Mitigating Risks To help mitigate those risks.3 $20.
the claim is paid using a Contract Invoice Transmittal (CIT) and processed in accordance with specific procedures for that type of payment. If a lawsuit is filed. To initiate payment.Payments All contract payments are processed through the Central Office. The Office of Comptroller reviews the authorization. forwards the information to the State Comptroller for payment. and when complete. 04G-9005 . are paid as part of the monthly progress estimate for the project. including those settling claims not filed with the courts. 10 ! Report No. SAs. the districts submit authorization to the Department’s Office of Comptroller.
000 or more as “large claim settlements. Civil Litigation Counsel.790. The random sample accounted for $10. 1999. and two Resident Engineers (or their respective designees) in each of the eight districts.8 Because of anomalies involving six claim settlements greater than $250. the team selected a judgmental sample of 29 more claim-settlement SAs issued from January 1.7 percent of the total dollars represented by SAs for the year.845.033.000 and that also met at least two of the following four conditions: The audit team interviewed the General Counsel in six districts and the District Construction Engineers.” Report No. SCOPE and METHODOLOGY Objectives The objective of this audit was to determine whether the Department has an adequate claims management system that includes reasonable evidence that claims are: ! Settled for amounts that had been clearly established and sufficiently documented to be fair and equitable.7 The audit team also reviewed written procedures pertaining to claims as well as payment processing techniques to understand how claim settlement information was accumulated and reported. 1998.000. ! Scope and Methodology The survey phase of this audit began with interviews of district and Central Office personnel involved with managing and processing claims. For ease of reference. 04G-9005 ! 11 9 8 7 . The team also interviewed the State Construction Engineer and the Office of General Counsel’s Chief. As an initial audit step.5 percent of the total reported. through October 31.433 (24 percent) of this total.OBJECTIVES.9 SAs selected were those for which the amount was greater than $250. reducing the universe to 286 claim settlement issues with a cumulative amount representing 99. the claim settlement SAs accounted for 26. The cumulative settlement amount of these 29 SAs was $26. and Adequately tracked and monitored and accurately reported. For perspective. this report will refer to settlements of $250.316. The SA Tracking System included 387 claim issues settled with SAs totaling $45. The audit team eliminated all SA claim settlement issues of $5.499 in FY1998-99.000 or less. the team selected a random sample of 50 claim settlements paid by SAs in FY1998-99.
12 ! Report No. Throughout the audit.000 or more from the FY1997-98 and FY1998-99 Reports to the Legislature. 04G-9005 . 10 The contract files reviewed for these 14 settlements were those maintained by the OGC. The focus was to determine if the OGC was provided adequate claim analyses to establish a fair-value or “risk exposure” for the claim and if the OGC prepared documentation to establish the basis for the settlement amount. and to see if the supplemental agreement or claim file included a Forwarding Memorandum as specified in CPAM Section 4. to see if the settlement amount was reconcilable to a “fair-value” analysis amount.! ! ! ! The SA was written after final acceptance of the contract. The results of these reviews follow in the Findings and Recommendations section.107. The cumulative settlement amount of these was $15. The previous SA was written more than 6 months prior to this SA.” identifying it as a claim issue. the team assessed internal controls associated with the two risks mentioned in the Background and Introduction section. The SA was the last one written for that contract. 10 The team selected a sample of settlements of $250. The focus of the review of large claim settlements was to determine whether the claim was supported by a Department or consultant claim analysis for both entitlement and financial issues.11. or The SA was assigned a reason code “851” or was coded “C.604.4. The team then reviewed documentation supporting a third sample of 14 large claim settlements that had been referred to the OGC.
529 For example.672 1.348. Report No.555 31.585 Claim Analysis None None -0$ 15. enabling Department or consultant CEI staff to perform more thorough and timely claim analyses.506.052. effective with contracts let in February 2000.292 Unknown 29.168 Total Settlements $ 10.353 75.442 Observation No claim analysis in file No claim and no claim analysis No entitlement per analysis Some entitlement per analysis Total Exhibit 3 49 $124.393.230 $15.590. The Department cannot adequately demonstrate its accountability for managing claims because claims often were not: ! Settled for amounts that were clearly established and sufficiently documented to be fair and equitable. ! Exhibit 3. a revised claim specification should generate more timely and detailed contract claims.580.886. summarizes the audit team’s observations with respect to the large claim settlements associated with the three samples reviewed: Summary of Large Claim Settlements (49 Settlements.615. 11 but more are needed to mitigate the risks associated with managing claims.168 $ 53. below.860 10.846.637. and Adequately tracked and monitored or accurately reported.FINDINGS AND RECOMMENDATIONS Overall Conclusion The Department has made recent improvements. See Appendix) Nbr Claims 9 2 7 31 Total Claimed $ 18.580. 04G-9005 ! 13 11 .
and the requirement for a written notice is the first step in the claim process. An analysis of settlements in the random sample indicated the Department effectively signaled it would be lenient in enforcing contractual provisions for resolving 14 ! Report No.. I.). Whether that be the case or not.4. although not required by the CPAM. or any of the 14 settlement files reviewed in the OGC. settlement amounts. Section 337.1. Claim settlement files generally did not include supporting documentation establishing the entitlement to. Finally. assuming such an analysis was prepared. including the settlement of contract claims. Notice of Intent Since at least 1986.4. District staff generally did not comply with CPAM Section 4. the Specifications are contractually binding. Specifically. or the “fair value” of. defined in CPAM Section 4.221. the team did not find the Forwarding Memorandum. Moreover. F. the audit team could not locate the contractor’s written Notice of Intent to file a claim. requires the Department to establish a process to resolve claims and to document its final decision on all claims. for any of the 29 in the expanded judgmental sample. The purpose of this notice is to afford the Department the opportunity to keep strict account of actual costs.3 million claimed.S.11. the Specifications have required that a contractor provide written notice of the intention to file a claim for extra compensation before beginning the work on which the claim is based. 04G-9005 .While the Department can legitimately contend that it settled these claims for about 43 percent of the $124. including reasonable support for its decision. for any of the settlements in the random sample. the team could find analytical support of entitlement for about 29 percent of the $53.4 procedures for documenting claims. authorizes the use of SAs to effect contract changes. most of the settlement documentation that was available for large claim settlements did not explain how the settlement amount evolved from the claim analysis prepared by the Department or consultant CEI. Section 337.6 million paid out. Department staff stated that the written Notice of Intent was not particularly important in dealing with claims and that the absence of a written notice would not stand in court as a basis for withholding payment to the contractor. The Specifications further provide that the contractor waives the right to claim extra compensation if such written notice is not provided. Florida Statutes (F. in over half the settlements represented in the random sample of 50. The Department’s procedures are outlined in CPAM Section 4.S.11(8).
The settlement was negotiated by telephone for the amount of $2.931. the sum of the consultant CEI’s claim analyses for direct costs amounted to $108. 8 of the 29 lacked evidence of any analysis of the claim. The audit team found no details to explain the basis of the claim. Consultant-Lecturer. The random sample of 50 claim settlement issues included 27 claims (54 percent) for which no Notice of Intent was on file. thus contributing to the delays and additional costs.” This settlement was documented on a sheet of scratch pad paper.” Projections are based on a confidence level of 95 percent. 04G-9005 ! 15 14 . the Department did not know about the claims until they were filed. the contractor submitted a claim for $5.” the “upper limits” are 190 and 99.256 based on alleged total costs plus 15 percent profit. Jr. 13 Two examples illustrate the inadequacy of the documentation explaining the rationale for the settlement:14 1) In one claim settlement. The consultant CEI also indicated the contractor left the job for 6 months to pursue hurricane-related work.1.000 on the condition that the contractor “send in back up documentation. Moreover. Faughn. Calculations were made using software developed by James A. the examples illustrate how the Department risks criticism that it cannot adequately demonstrate its accountability for managing claims.11.12 Forwarding Memoranda None of the 29 large claim settlements in the judgmental sample was supported by a Forwarding Memorandum as described in CPAM 4. return of liquidated damages. but they were after-the-fact summaries of the negotiated settlement. The audit scope did not include an assessment of whether the settlement amounts were justifiable. The statistical probability. 13 12 Several files included summaries that were called “memoranda” of some sort. is that at least 118 of the 286 claims over $5. “Statistical Sampling for Auditors.000 had no written Notice of Intent.400. Report No.4. The purpose of the Forwarding Memorandum is to document the Department’s assessment of the contractor’s entitlement to the claim and to document the Department’s assessment of a fair and equitable settlement. additional subcontractor costs (which were not yet paid). Projections above are “lower limits.. The consultant CEI had kept detailed records of the impact of numerous changes in the storm water drainage for the project. although other documentation in those files indicated the Department was aware of the claim issues for 15.claims by not enforcing the requirement for a written notice. then. nor did it find any documentation that explained how the Department moved from the consultant’s analyses to the settlement amount. At the conclusion of this project.925. adjustment of asphalt overrun. and in at least 37 instances. respectively. and 3 lacked the contractor’s claim document. overhead and interest.
Requiring that all claims be supported by a “determination of entitlement” and an “analysis of fair price” before entering into any negotiations and requiring that the analysis serve as the basis for negotiating a settlement. including the following: ! Establishing and enforcing a consistent definition of “claim” that clearly addresses the dispute element. The district ultimately settled for $3. The audit team was told that no Department records were available to substantiate the value of work claimed by the contractor and paid for by the district. The contractor filed a claim for $4. minimum standard of training in negotiation skills for all Department or consultant staff who are involved in analyzing claims and negotiating settlements. equipment and material markups on the 16 claim issues. no agreement was reached on payment.807.689) that was already accounted for in the various labor. Requiring a predetermined.” assigned to that liability.115 for 16 claim issues and the elimination of “Home Office Overhead” ($938. the process employed should address critical elements of managing claims. Enforcing the requirement that the contractor provide a written “Notice of Intent” to file a claim prior to beginning the work on which the claim is based. and equipment with the exception of one claim issue for hauling embankment (valued at $395.2) In another case. Recommendation 1 We recommend that the Assistant Secretaries jointly appoint a cross-functional task team to develop a coordinated process for managing and resolving claims. This contract included incentives and bonuses for meeting milestone dates and completing the project early. Requiring that all claims be supported by a “Forwarding Memorandum” thats meets the Department’s CPAM requirements. procedures and guidelines governing the claim settlement process. The task team should propose improved policies. In negotiations between the district and the contractor. ! ! ! ! 16 ! Report No. However. or “fair-value.132.699 in the settlement). 04G-9005 . and the contractor performed the work. materials. and the consultant did not maintain records of the contractor’s labor. District staff indicated additional work was given to the contractor.004. the contractor agreed to reductions totaling $189.611 at the conclusion of the job. At a minimum. the team found documentation indicating some Department liability but found virtually no Department or consultant analysis indicating the extent.
887. Greg Xanders. Including language in each settlement agreement advising the contractor that the settlement is subject to audit of the company’s records and that the Department may pursue civil or criminal sanctions in the event the claim was falsely presented. the contractor waited until filing suit to provide details of some of the major portions of their claim. General Counsel staff. As one example: Both OGC files and district files included multiple claim analyses that generally refuted the major issues raised in a contractor’s claim totaling $5. ! ! Management Response: The State Highway Engineer stated. member(s) from the OIG Audit staff. According to the documentation available. some of the bullets (2 and 7) have already been addressed by the new claims specification. The Department had made unilateral payments totaling $586. Bullet 4 will need to be addressed in a manner to look for a way to keep such “determinations” and “analysis” as confidential information to prohibit use against the Department in legal actions. and Periodically monitoring claim settlements as part of the Department’s formal Quality Assurance Review Program. The OGC’s Case Closing Report references claim analyses that Report No.! Including provisions for project-level and higher managers to request realtime assistance from the Office of General Counsel or the Office of Inspector General in assessing entitlement or establishing fair price.596 to resolve issues for which the Department believed it had some responsibility. However. the Department agreed to substantial settlements. The team’s efforts will include addressing the 7 bullets listed under this recommendation. State Construction Engineer. the analyses often indicated the claim had little or no merit. Claims Involving OGC The team reviewed 14 claim settlements for which the Department’s OGC had some involvement. We agree to the need for a cross-functional team to review the process for managing and resolving claims. yet. None included a Forwarding Memorandum. and Central Office Construction. The team will include district representatives. 04G-9005 ! 17 . Of the claims for which analyses were on file. will establish the team and lead its initial meeting.170.
Agree. Section 337. Section 20. 04G-9005 . specifies that the policies. Although the extent of this documentation may need to vary on a case by case basis. It is not advisable to seek any Chapter 119 amendment at this time.23. requires the Department to report all claim settlements to the Legislature annually. rules.000. the district settled all claim issues with the contractor “. Section 334.048. The Office of General Counsel will set up guidelines for attorneys to document settlement advice in a fashion which will not adversely affect the department’s ability to litigate or settle future construction claims. According to that report. rules.. Management Response: The General Counsel responded. the OGC agrees improved documentation is needed and desireable.200. F.the day before trial was to start. provides that the Department of Transportation is to be a decentralized agency with a Central Office to establish and monitor the implementation of policies.S. Further. If such documentation poses a legitimate threat to the Department’s litigation position. Negotiations were conducted by telephone.S. 18 ! Report No. II. The record of negotiations consisted only of names written on a sheet of paper along with the agreed upon settlement amount of $4. F.” Documentation in files reviewed at both the OGC and in the district did not explain how the settlement amount was established.. F. Advice given to the districts should include the parameters within which they believe a settlement would be in the Department’s best interest.. At a minimum.S. The first indication of a settlement was in the OGC’s Case Closing Report. Recommendation 2 We recommend that the Department’s General Counsel establish procedures or guidelines to govern activities relating to evaluating claims and advising the districts. In assessing these responsibilities. procedures and standards are to establish accountability for all aspects of the Department’s operation. procedures and standards... these guidelines should establish a framework for evaluating claims and specify minimum requirements for documenting the basis for them. Claim settlements were not always adequately tracked and monitored or accurately reported.221. the Department should seek an exemption from the public records law.stated the contractor and subcontractor caused their own problems.
These varying definitions resulted in substantial differences in the claim settlements reported from the districts. staff considered a claim to exist if the additional work and the cost thereof could not be agreed to before work was performed. the Department’s CPAM defined a claim as. Definition of “Claim” A construction contract is unique among the various types of contracts because of the “changes clause. November 1991. Auditing.” As presently defined in CPAM 4. CPAM 4.. procedures and processes for tracking and monitoring claims were lacking. or other adjustments to the contract. the entitlement or impact of which is disputed by the Department. Reviewing. April 2. the State Construction Office changed the definition of “claim. time. 04G-9005 ! 19 17 . and annual reports to the Legislature contained errors. an issue was not considered to be a claim if district staff could agree to a settlement amount for the issue. Report No.S. the concepts included in these definitions were not consistently and uniformly applied within the Department.. In another district.”16 The Federal Highway Administration’s definition. Revised Definition In the December 1999 CPAM Update. Jr.. Theodore J. Department of Transportation. U. 1997.4. time.” This clause is essential because changes are inevitable. 1997. a contractor’s written demand seeking additional money.. further specifies that a claim exists when the disputed demand goes beyond project-level staff.) 15 Trauner. A claim is an unresolved. or disputed.the audit team determined that the definition of “claim” was somewhat elusive. Federal Highway Administration.15 Prior to December 1999.4.” (Emphasis added. change. In one district. or other contract adjustments only becomes a claim when “. and Resolving Construction Claims. 17 In practice. which is consistent with the CPAM definition.the entitlement or impact of which is disputed by the Department and which cannot be resolved by negotiations between the contractor and the Department’s Districtlevel personnel. 16 Contract Administration Core Curriculum. “A written demand submitted to the Department by the contractor in compliance with contract documents and seeking additional monetary compensation.
Central Office staff explained that the system was unreliable and was burdensome to maintain. tends to obviate the requirement for some person or position near the source of the dispute to begin documenting contractors’ activities. Project Managers need to: Acknowledge and respond to alleged instances of extra work. none of the SA claim settlements reviewed in this audit would have been identifiable as a claim because they would have been treated as though no dispute existed. The absence of this information hinders the management of claims and the claims process. three-character field to identify the cause of the claim. monitoring and reporting on pending and settled claims. and. Claims Tracking The Department’s only means of identifying and locating claim files for review is through the SA Tracking System and the Construction Office’s Annual Reports to the Legislature. those referred to the OGC may not have had records kept to serve as a basis for refuting the claim. Summarize the claim issues and critical information for transmittal to higher levels in the organization for resolution. In turn. district staffs need a method of tracking. and inefficiencies and establish the Department’s initial position as to entitlement. The Annual Report offers little more than the dollar amounts of the settlements. The Department once maintained a Claims Tracking System but terminated it during 1999. Act to mitigate the impacts of claim issues alleged by the contractor. Hence.The revised definition essentially does not recognize the “dispute” element of a claim until it has passed through all levels of district review. Except for those referred to the OGC. The SA Tracking System provides little information useful for managing claims as it records only payments and provides for only a single. Attempt to reach agreement with the contractor and establish and document the specific points of disagreement. materials. disruption. The definition. Document information relative to the alleged claim issue and the labor. Managing Claims ! To properly manage claims. delay. equipment and contract time expended by the contractor. Moreover. ! ! ! ! To manage and control this process. itself. 04G-9005 . the Department has no central source of 20 ! Report No. the Department reduces its ability to defend itself against baseless or exaggerated claims.
combined with a compilation of Case Closing Reports from the OGC. and approximately $7 million of SA claim settlements included in the 1998-99 report had been reported in the prior year’s report. Claims Monitoring The absence of some system or process to monitor claims also means the absence of any oversight of district successes or failures in resolving contractor claims. any review of claim settlement issues may be unintentionally biased to “worst-case” examples. claims negotiation and settlement were not addressed in the QARs performed. Claims Reporting Our review indicated the FY1998-99 Report of Claims to the Legislature was inaccurate. Claim settlements totaling over $3 million were not reported.meaningful information on pending or potential claims. Therefore. the Department had no means to identify and review claim issues that had been denied by the Department or consultant project engineer and for which no SA was ever written. 04G-9005 ! 21 18 . The State Construction Engineer should use those requirements as a basis for designing a simplistic system to track and report contract claims to facilitate the district’s management of claims and the Central Office’s oversight and reporting of claim settlements. The process used to accumulate and report claim settlements was an informal process of extracting information from the SA Tracking System. Central Office oversight revolves around the Quality Assurance Review (QAR) process. Those SAs that were included in the FY1998-99 report were “dummy” SAs intended only to record the payment against the contract 18. Recommendation 3 We recommend that the Assistant Secretaries charge the cross-functional task team to identify the minimum requirements for monitoring claims from their inception to their resolution and establish who is responsible for each. the audit team found no evidence of Central Office oversight of the districts’ negotiation and settlement of claims. nor does it have complete information on claims that were successfully refuted by the Department. Department staff made no attempt to reconcile the data to the Department’s accounting records. Generally. Other than the SA Tracking System. Report No. A dummy SA is created to force a claim paid with a Contract Invoice Transmittal to post to the Contract Reporting System. Because Central Office monitoring of claims was limited to the SA Tracking System. however.
The districts do have a handle on typically what their major claims are. Also.Management Response: The State Highway Engineer agreed and stated. it must be simple to use and provide useful information. This will also be looked at by the team. If a program is determined to be beneficial and needed by the districts. the new specification has tightened the process on a contractor filing a claim with all the details in a more timely way. 04G-9005 . Central Office can then access as necessary for process reviews. Such a program would be primarily for district use in their management of claims. 22 ! Report No.
242 1.532 430.214 1.000 1.894 10.000.000 525.954.108.996.000 387.000 280.000 551. 19 19 13 10 5 19 14 11 8 43. 17 6 2 10 6 6 16 9 Claim 1.836 525.000 551.554.735 1.202 1.905 1.959.633 495.400.269 10.381 5.000 1.432.177 2.186 597.507 2.681 428.121 Claim Analysis Settlement 1.821 1.129.850 543.951 882.925.000 900. 44 26 9 5 5 26 9 16.000 1. 04G-9005 ! 23 .038.150 517.513 1.182 0 162.850.931 260.000 1.902 2.836 0 325.634 119.545 1.745 5.829 2.442.226 658.373.273 115.450.482 574.783 495.685 519.000 195.112 2.707.488.000 1.000 835.606.907.049.773.539 1.125 2.076 1.000 689.728 105.057 525.053.833 445.335.266 1.742.000 4.370.000 260.200.860 865.050.000 240.384 108.APPENDIX Large Claim Settlements $ Amount Per Contract How SA Number Selected District Number 18858 18949 19198 19211 19388 19456 18349 18462 18551 18626 18746 18758 18768 18887 18903 18929 18960 18969 19011 19113 19114 19129 19171 19183 19281 19343 19410 19485 19754 19757 19758 19782 19839 R R R R R R J J J J J J J J J J J J J J J J J J J J J J J J J J J 7 5 3 6 Tpk Tpk 7 5 3 5 5 Tpk 7 4 5 3 7 5 4 6 6 7 3 6 6 4 3 4 2 2 2 7 2 50 7 6 12 20 37 16 9 16 17.000 1.752 329.651.112 819.000 481.335.182 3.595 2.141.000 525.516 528.000 1.867 646.000 497.810 1 1 Report No.273 436.117 133.000 519.900.255 734.478 1.501.162 1.000 Note 4 1 1 1 1 4 2 2 3 1.000 743.450.038.865 3.498 1.000 581.639 476.019.400.025.000 113.011.
04G-9005 .269 15.829 2. Audit team used what appeared to be "best supported.132.060 259.Initial random sample Notes 1 2 3 4 No claim analysis was found in the files reviewed.850.230 $15.439 290.065 5.APPENDIX (Cont.573 597.627 83.000 Note 1 1 5 1 Totals 49 Settlements $124.666 3.486." Total entitlement per that analysis was allocated to the two contracts in proportion to the contractor's claims for them.Contract Invoice Transmittal OGC .493.000 2.889 2.417 3.200.529 Abbreviations CIT .887. Claims Review Committee recommended $260.388 Claim Analysis Settlement 3. Neither a claim analysis nor the contractor's claim was found in the files reviewed. The claim was not found in the files reviewed.) Large Claim Settlements $ Amount Per Contract How SA Number Selected District Number 19926 19945 E3539 17765 17799 17826 17932 18378 18401 18411 18819 18884 18924 19204 19329 19608 J J G G G G G G G G G G G G G G 1 7 3 4 6 3 2 6 6 7 2 6 5 3 2 7 25 7 CIT CIT CIT CIT CIT CIT CIT CIT CIT CIT CIT CIT CIT CIT Claim 4.000 550.188.478 450.004.550 816.844 0 0 0 2.000 1.768 448.626 199.000 411.168 $53.000 720.538 2.611 335.236.296.000 480.Files reviewed in Office of General Counsel J .289 0 0 134.000 4.580.132.348.000 1.000.000 1.107 268. 5 24 ! Report No.000 1.571 400.Judgmental sample based on anomalies in random sample R .Office of General Counsel Tpk .900.590.270 3.500.170 1.877.295.157 927.000 477.375. Files included multiple analyses done by multiple consultants.439 507.750.177.126 4.084.807 268.Turnpike District How Selected G .400 1.101.
04G-9005 ! 25 .Attachment 1 Management Response Report No.
Attachment 1 (Cont. 04G-9005 .) Management Response 26 ! Report No.
) Management Response Report No. 04G-9005 ! 27 .Attachment 1 (Cont.
Secretary. Secretary. Assistant Secretary for Transportation Policy Nancy Houston. Division Administrator. Secretary Ken Morefield. Senate Transportation Committee Attention: Reynold Meyer Chairman. Secretary. Legislative Programs Administrator Bill Kynoch. Jr. Chief Information Officer Carolyn Runyan. Weathermon (2) David Twiddy. General Counsel Dick Kane. Procedures Administrator Marcia Cooke. Secretary. Secretary..Attachment 2 Thomas F. Florida Transportation Commission Attention: Bill Ham (2) William Monroe. House Committee on Transportation Attention: John Johnston Chairman. Assistant Secretary for District Operations Cris Speer. Secretary. District 6 Ken Hartmann. Turnpike District Freddie Simmons. District 4 Michael Snyder. Comptroller Nelson Hill. State Highway Engineer Bill Albaugh. District 7 Jim Ely. Auditor General Attention: L. Senate Budget Committee Attention: Tom Barrett Chairman. District 3 Rick Chesser. State Construction Engineer Pamela Leslie. Governor's Chief Inspector General Attention: James Thomas Chairman. Director. FHWA 28 ! Report No. House Transportation and Economic Development Appropriations Committee Attention: Eliza Hawkins Chairman. Joint Legislative Auditing Committee Attention: Terry Shoffstall John Turcotte. District 2 Edward Prescott. District 1 Huey Hawkins. Assistant Secretary for Finance and Administration John Browning. Office of Program Policy Analysis and Government Accountability (3 copies) James E. Barry. Public Information Administrator Sarah Porter. District 5 Jose Abreu. Jr. John. Chairman. Budget Officer Robin Naitove. 04G-9005 Distribution . Highway Operations Director Greg Xanders.. Secretary. R. Secretary. St.
RECYCLED PAPER . write or e-mail: Ms. For a copy of the report. Florida 32399-0450 Permission is granted to reproduce this report. please email@example.com (IA906NM) Office of Inspector General Florida Department of Transportation 605 Suwannee Street.state.For further information call (850) 488-2501 / Suncom 278-2501 or Fax (904) 488-4417 Suncom 278-4417. Mail Station 44 Tallahassee. Nancy Moon nancy.fl.
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