Management Letter – Review of the Port Capital Improvement Program Page 1
Management Letter
To: Ralph Graves,
Managing Director, Capital Development Division
From: Joyce Kirangi
Director, Internal Audit
Date: March 31, 2011
Re: Review of the Port Capital Improvement Program
Internal Audit has completed an audit of the Capital Development Division. This was a
performance audit reviewing management’s effectiveness in managing the processes and
procedures implemented by the Capital Development Division. We also visited many business
units across the Port and evaluated whether these processes and procedures were carried as
intended.
Although our audit is concerned primarily with current practices, our procedures focused mainly
on 2009 transactions. During the course of the audit, we noted weaknesses related to
transparency and the Small Works Roster that could be improved. Based on the numerous tests
that we conducted, the noted weaknesses were not significant enough to warrant inclusion in the
audit report; however, if not addressed, the issues could become significant in the future.
1. Unclear Documentation on Two Change Orders or Unclear Project Manual Language
We reviewed the project manual and two change orders related to the construction of the
Aviation Consolidated Warehouse Distribution Center.
a. Possible Overpayment
During the planning phase of the Aviation consolidated Warehouse project, Port
management conducted a geotechnical engineering study to assess the subsurface
conditions of the site. The study concluded that the site contained concrete debris, brick
debris, cobbles, boulders, and traces of organic materials. The geotechnical report also
disclosed presences of concrete slabs in some test pits. Port management made the
geotechnical report available to prospective bidders, and clearly referenced the study in
the public bid manual.
Project Manual Specifications
Section 02240, Part 7.03 – Rammed Aggregate Pier Excavation states:
“Should any obstruction be encountered during the drilling or excavation for the Rammed
Aggregate Piers, the General contractor shall be responsible for removing such
obstruction or the Pier shall be relocated or abandoned…”
Management Letter – Review of the Port Capital Improvement Program Page 2
Section 02240, Part 8
- Measurement & Payment states:
“No separate measure or payment will be made for rammed aggregate piers. The cost of
the rammed aggregate piers as required shall be included as a portion of the lump sum
price bid for the project.”
We questioned two change orders that Port management paid for the rammed aggregate
piers contract work. Change order No. 5 for $130,000 was to remove obstructions
encountered by the contractor during the drilling for the geo-piers installation. Change
order No. 9 for $163,000 was for over-excavation and structural backfill repair. The
Resident Engineer documented in the change orders that the contractor had encountered
“unforeseen conditions” including concrete pieces that prevented the drilling of the geo-
piers to the required depth.
Per the Project Manual Section 02240, Part 7.03, and Section 02240, Part 8, it appears
that the contractor was responsible for all the cost related to the rammed aggregate piers.
The cost should have been part of the contractor’s lump-sum price bid. The two change
orders that we reviewed and questioned did not clearly document why additional payment
to the contractor was necessary.
Recommendation
We recommend Port management review the project manual specification language and
the two change orders and re-assess whether the contractor was entitled to additional
compensation. We further recommend that change orders be clearly documented to reflect
when additional payment is warranted.
Department Response
These change orders were initiated during our transition period, where POS CM staff were
using an old change order procedure while efforts were underway to finalize an in-depth
procedure that provide staff with expectations and requirements for documentation (CM
SOP #10) along with training. In review of these two change orders, POS acknowledges
that the entitlement for the change and description of the justification did not clearly
convey the thinking and opinion made by the POS Resident Engineer that the project
manual specification language was unenforceable. Our current procedures detail the level
of documentation that is required by POS CM staff to explain entitlement along with
periodic training and lessons learned discussion to ensure that staff understand our
expectations for thorough and accurate documentation. POS CM staff will re-assess
whether the contractor was entitled to the additional compensation in the two change
orders in collaboration with POS legal.
b. Appearance Of Change Order Splitting
Resolution 3605, as amended, requires Commission approval for change orders (COs)
estimated to exceed $200,000 (before 11/3/2009) or $300,000 (after 11/3/2009).
Management Letter – Review of the Port Capital Improvement Program Page 3
For the two change orders discussed above, Port management issued two separate cost
estimates in March 2009. The cost estimates were written within one week of each other
and totaled $293,000. One single event triggered the need for the change orders.
Specifically, during the drilling for the geo-piers installation, the contractor encountered
excessive obstructions. One change order was for $130,000 to remove the excessive
obstructions, and another for $163,000 for the contractor to use alternative method of
over-excavation or structural backfill repair on the disturbed sub-grade areas.
Because one common trigger (event) changed the scope of work, management should
have issued only one change order, and obtained commission approval for the total
amount of the change order. Writing two separate change orders, instead of one, has the
appearance of splitting change orders in order to avoid Commission approval. At the time,
any change order exceeding $200,000 required Commission approval
Recommendation
We recommend CPO management continue its current practices of training Port staff on
CPO policies and compliance with Port procedures.
Department Response
POS CM staff evaluates the merit of discrete issues or events that give rise to a change
order based on its individual circumstances. The issues of over-excavation to allow
geopier installation in Change Order 5 and the fundamental change in foundation type in
Change Order 9 were considered two discretely different issues that arose from a similar
condition of debris-laden soil conditions in February and March of 2009 respectively. One
required the contractor to remove obstructions whereas the other issue required a new
foundation type which had to be designed and drafted by the designer of record. POS CM
staff believed that while the causes of both change orders were the debris-laden soil,
these were two different changes required to solve the two issues. There was no intent to
split change orders and avoid Commission approval.
There will be instances where the Port will need to issue incremental change orders to
direct changed work as the scope of work is being fully defined to ensure that we satisfy
the RCW on prompt pay and to direct critical work in the field. Our current practice
requires email notifications to Port managers and directors for the cumulative value of the
change, in addition to the EX-2 signature authority limits. We will continue to review and
revise our current procedures to provide key accountabilities and transparency and
provide staff training and management oversight to ensure that CM staff understands and
complies with Port policies, procedures and expectations
.
2. Small Works Roster System
The Port utilizes the online Small Works Roster system to solicit contractors for Small Works
opportunities. The Port provides all registered contractors an equal opportunity to compete for a
contract.
We noted a deficiency in the design of the online Small Works system. The current system can
allow exclusions of otherwise eligible contractors from the bid solicitation. When there is a Small
Management Letter – Review of the Port Capital Improvement Program Page 4
Works contract, all contractors within that particular trade (craft) are solicited (invited) to bid. The
system automatically sends the solicitation to all the contractors who have “Active” status in the
roster system. Thus, the integrity of the contractor “status” is critical to the open and fair
competitive process.
The current Small Works Roster system does not track or maintain an audit trail of the status
changes. Any update to the system overrides the prior recorded status. An “Active” contractor
could be excluded from the bid solicitation by changing its status to “In-Active” and revert it back
to “Active” status after solicitation. A contractor could also be unintentional excluded from
solicitation without accountability.
Indeed, we found five contractors that had not been invited to some contract bids. Because of
the lack of system audit trail, we could not determine why the contractors were not invited to bid.
Management is aware of the current Small Works Roster weaknesses and is in the process of
procuring a new Small Works Roster.
Recommendation
We recommend that management implement a compensating control procedure for the design
deficiency in the online Small Works Roster system.
Department Response
POS promotes open competition on its small works roster procurements. First, we send
procurement notifications to all active firms identified in the category or categories that relate to
the work. Second, we publish the procurement documents on the Port’s website so that any
firm, even firms not on the roster, may submit a bid for the contract.
The current small works roster is older system. In 2008 POS evaluated making changes to the
current system. One of the many changes would have been to track changes to the active and
inactive status report. The cost to make the changes to the current small works roster was in
excess of $200,000. Instead of making the changes, POS determine a more appropriate action
was to develop a new bid and roster management system. CPO has been working with ICT
since early 2009 and the project was approved and moved into development in late 2009. This
system will track changes in status so that we will have accountability on when a contractor is
made inactive or active. Due to technical issues the original go live date of February 2011 has
been pushed back to late June 2011.
With regard to the 5 contractors, those contractors were identified on 2 procurements. We
believe this issue cited occurred as a result of CPO issuing pre-announcements notifications.
Basically to alert contractors to upcoming work, we may send pre-announcements to
contractors in certain categories. With our current system, we then send the actual notification
to the list of contractors who received the pre-notifications. We could not issue a new list
without cancelling the original pre-notification. Companies who joined the roster between the
pre-notification pull and the actual roster notification would have been missed. This practice
has been discontinued.
