INTERNAL AUDIT REPORT
LIMITED OPERATIONAL AUDIT
PIER 66 - NORWEGIAN TENANT IMPROVEMENT PARTNERSHIP
August 2015 - October 2017
ISSUE DATE: February 5, 2018
REPORT NO. 2017-19
Pier 66 -
Norwegian Tenant Improvement Partnership
August 2015 - October 2017
INTERNAL AUDIT
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TABLE OF CONTENTS
EXECUTIVE SUMMARY .......................................................................................................................................... 3
BACKGROUND ....................................................................................................................................................... 4
AUDIT SCOPE AND METHODOLOGY ...................................................................................................................... 5
SCHEDULE OF FINDINGS AND RECOMMENDATIONS .......................................................................................... 6
APPENDIX A: RISK RATINGS .................................................................................................................................. 8
Pier 66 -
Norwegian Tenant Improvement Partnership
August 2015 - October 2017
INTERNAL AUDIT
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EXECUTIVE SUMMARY
Internal Audit (IA) completed an audit of the Port of Seattle (Port) and Norwegian Cruise Line Holdings
LTD. (NCLH) tenant terminal improvement project for the period August 2015 - October 2017. The
objectives of this audit were to determine whether Port staff followed policies, procedures, and Lease
Agreement (Agreement) requirements.
In August 2015, the Port entered into the Agreement with NCLH to redevelop the Bell Street Cruise
Terminal at Pier 66. The redevelopment expanded the facility to accommodate 4,500 passengers, both
embarking and disembarking, from a single vessel. The Port was responsible for up to one-half of the
project costs not to exceed $15 million.
This Agreement capped the financial risk to the Port at $15 million and relied significantly on external
firms to design and construct. Leveraging external expertise is frequently practiced for Port capital
projects, but this sometimes could be perceived as transferring accountability. Port personnel understand
the intricacies of public service, not only fiscal stewardship, but social and environmental commitments,
which may not be fully appreciated or valued externally. Therefore, ultimate responsibility for success and
risk of capital projects, regardless if the work is performed externally, remains with the Port.
The Agreement also leased the terminal to NCLH for 15 years until the end of the 2030 cruise season.
The partnership between NCLH and the Port is intended to better accommodate future needs and trends
in the Alaska cruise market and also benefits both parties by commensurately sharing in certain
revenues.
In our opinion, Port staff generally performed effective oversight and management of the project.
However, we identified an opportunity that will strengthen internal controls. This issue is discussed in
more detail, beginning on page six.
1) Port Management should strengthen its monitoring and approval process of change orders.
We extend our appreciation to Port management and staff for their assistance and cooperation during the
audit.
Glenn Fernandes, CPA
Director, Internal Audit
RESPONSIBLE MANAGEMENT TEAM
Ralph Graves, Sr. Director of Capital Development
Stephanie Jones-Stebbins, Managing Director, Maritime
Michael McLaughlin, Director Cruise Operations
Richard Jenkins, Director Seaport PMG
Pier 66 -
Norwegian Tenant Improvement Partnership
August 2015 - October 2017
INTERNAL AUDIT
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Seattle ranks as the number one U.S. West Coast cruise port, in number of passengers, with eleven
different ships offering Alaska cruise itineraries. In 2017, the Port hosted over 1 million passengers. In
2018, passengers hosted are projected to increase to approximately 1.1 million. Seattle’s cruise industry
is thriving and fuels the region’s economy. An estimated $2.7 million is infused into the local economy
each time a homeport ship docks at the Port.
On August 14, 2015 the Port of Seattle (Port) entered into a Lease Agreement (Agreement) with
Norwegian Cruise Line Holdings LTD. (NCLH) to renovate the cruise terminal at Pier 66. The agreement
created a unique contractual relationship between the Port, a government agency, and a private entity,
NCHL, leveraging the skills and assets of each entity.
The Agreement included a 15 year lease with NCLH with an option to extend the lease for an additional
five years. The total cost of the renovation was estimated at $30 million. The Port agreed to invest up to
one-half of the renovation costs, not to exceed $15 million, through its property tax levy. The renovation
expanded space for processing cruise passengers from 44,000 square feet to 151,000 square feet,
including the installation of two new passenger-boarding gangways, and an automated conveyor system
that moves passenger luggage from curbside to ship. The facility now accommodates 4,500 passengers,
both embarking and disembarking, from a single vessel.
As of August 2017, the Port paid approximately $14 million in renovation costs, $450,000 in fit and finish
upgrades, and $68,000 in mitigation costs.
The Norwegian Bliss, currently under construction, will be the largest cruise ship homeported on the U.S.
West Coast. The Norwegian Bliss will support 1,716 crew members and 4,004 passengers. It is
scheduled to “set sail” from Pier 66 on May 30, 2018.
The Port receives Port Directed Cruise Fees based on the total number of disembarking and embarking
cruise passengers at the Bell Street Cruise Terminal. The table below reflects the Port directed cruise
fees:
PORT DIRECTED CRUISE FEES (DISEMBARKING AND EMBARKING PASSENGERS )
*
CRUISE SEASON
TOTAL CRUISE FEES
2016 224,308 $3,912,513
2017
$4,381,379
*
Data Source: Billing Worksheet - Accounting and Financial Reporting
BACKGROUND
Pier 66 -
Norwegian Tenant Improvement Partnership
August 2015 - October 2017
INTERNAL AUDIT
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We conducted this performance audit in accordance with Generally Accepted Government Auditing
Standards and the International Standards for the Professional Practice of Internal Auditing. Those
standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide
a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the
evidence obtained provides a reasonable basis for our findings and conclusions based on our audit
objectives.
The period audited was August 2015 – October 2017. We utilized a risk-based approach from the
planning phase to the testing phase of our audit. We gathered information through document requests,
research, interviews, observations, and analytical procedures. We assessed significant risks and
identified controls to mitigate those risks. Our audit included the following procedures:
Payment applications
• Obtained an understanding of the Port’s monitoring of pay applications through inquiry and
observation.
• Obtained NCLH’s general ledger (G/L) project costs and reconciled to pay applications.
Prevailing wages
• Obtained an understanding of Port processes to verify compliance with prevailing wage laws.
• Reviewed general contractor and sub-contractor timesheets and paystubs to verify prevailing
wages were paid.
Construction oversight / change orders
• Obtained an understanding of Port management’s project oversight.
• Obtained an understanding of how the general manager processed and submitted change orders.
• Reviewed two change orders for reasonableness, accuracy, and allowability for reimbursement.
Marketing allowance
• Obtained an understanding of the marketing allowance and how it was applied.
• Reviewed supporting documentation on expenses charged to the marketing allowance.
Cost/Benefit analysis
• Reviewed the sufficiency and reasonableness of information provided to Port Commission for
decision making.
Maritime Museum asset disposal
• Obtained an understanding of the disposal of Maritime Museum assets through inquiry with Port
management.
• Verified that disposed assets were removed from the Port’s financial records.
• Reviewed documents from the Asset Management Department to determine whether Port policy
was followed.
Fit and Finish Allowance
• Reviewed pay applications and supporting documentation to determine if expenses charged to the
fit and finish allowance were allowable and complied with the lease agreement.
AUDIT SCOPE AND METHODOLOGY
Pier 66 -
Norwegian Tenant Improvement Partnership
August 2015 - October 2017
INTERNAL AUDIT
6
SCHEDULE OF FINDINGS AND RECOMMENDATIONS
PORT MANAGEMENT SHOULD STRENGTHEN ITS MONITORING AND APPROVAL OF
CHANGE ORDERS
Changes orders (CO’s) are a change from the original scope, drawings, plans, or specifications of a
project. They may be caused by a change in local building code, unforeseen field conditions, design
changes or as a way to account for allowances, refunds or alternates. CO’s represent the largest financial
risk in a construction project because the changes may not be necessary and/or costs may be inflated.
Therefore, approval of both the scope and costs is critical to accuracy of payment requests.
This project included 14 CO’s, six of which modified the scope at a total cost of $2.2 million.
Port Management actively reviewed, identified, and corrected monthly pay applications prior to making
payment. Management was also engaged and frequently communicated with NCHL regarding the status
and milestones of the project.
However, an opportunity exists for Port management to develop a process to review and approve CO’s
for reasonableness and accuracy. We tested two CO’s that represented the largest financial change and
identified the following exceptions:
• Eight approved subcontractor CO requests did not include quotes and/or a breakdown of costs to
substantiate or support the cost of the CO at a total cost of $98,000.
• NCLH did not re-estimate the costs to determine whether the CO costs were reasonable prior to
submitting the CO request to Port Management.
Recommendations:
• Develop a process to review and approve CO’s. This process should include a review of
documentation to substantiate the request. As a best practice, the Port should require the project
manager, in this case NCLH, to provide a re-estimate of the costs to assess reasonableness.
Management Response/Action Plan:
Port management appreciates Internal Audit’s review, findings, and recommendations on monitoring and
approval of change orders.
Port’s tenant Norwegian Cruise Line Holdings (NCLH) retained Bermello Ajamil & Partners as their
consultant (Consultant) to design and manage the tenant improvement project at the Bell Street Cruise
Terminal. The Consultant worked closely with NCLH’s general contractor on implementing the
construction under a Guaranteed Maximum Price contract. A series of change orders were executed with
the general contractor as more investigative and design work progressed. Some change orders were
executed to address field conditions, scope refinement, as well as implementation of additional design
requirements imposed by US Customs and Border Protection late in the design process. Port
management relied on NCLH through their Consultant team to exercise professional judgment on
1) RATING: MEDIUM
Pier 66 -
Norwegian Tenant Improvement Partnership
August 2015 - October 2017
INTERNAL AUDIT
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adequacy of change order supporting documentation from both the general contractor and its
subcontractors. Before Port receives invoices for reimbursement and conducts its own reviews, NCLH
management has already reviewed, approved, and paid the general contractor.
Port has limited its financial risks by capping Port’s allowance reimbursement up to $15M (50% of the
estimated project costs of $30 million) through terms of the lease agreement, and currently the total
forecast project cost is over $30 million. Port management agrees there are opportunities to further
reduce risks and will evaluate incorporation of additional requirements on minimal acceptable back-up
documentation and re-estimates for change orders in future tenant improvement
agreements. Management will coordinate with Legal and other divisions to ensure consistent application
within the Port.
Pier 66 -
Norwegian Tenant Improvement Partnership
August 2015 - October 2017
INTERNAL AUDIT
8
APPENDIX A: RISK RATINGS
Findings identified during the course of the audit are assigned a risk rating, as outlined in the table below. The
risk rating is based on the financial, operational, compliance or reputational impact the issue identified has on
the Port. Items deemed “Low Risk” will be considered “Exit Items” and will not be brought to the final report.
Rating Financial Internal Controls Compliance Public
Port Commission/
Management
HIGH
Large financial
impact
Remiss in
responsibilities
of being a
custodian of
public trust
Missing, or inadequate
key internal controls
Noncompliance
with applicable
Federal, State,
and Local Laws,
or Port Policies
High probability
for external audit
issues and/or
negative public
perception
Important
Requires immediate
attention
MEDIUM
Moderate
financial impact
Partial controls
Not adequate to identify
noncompliance or
misappropriation timely
Inconsistent
compliance with
Federal, State,
and Local Laws,
or Port Policies
Potential for
external audit
issues and/or
negative public
perception
Relatively important
May or may not
require immediate
attention
LOW/
Exit Items
Low financial
impact
Internal controls in place
but not consistently
efficient or effective
Implementing/enhancing
controls could prevent
future problems
Generally
complies with
Federal, State and
Local Laws or Port
Policies, but some
minor
discrepancies
exist
Low probability
for external audit
issues and/or
negative public
perception
Lower significance
May not require
immediate attention
Efficiency
Opportunity
An efficiency opportunity is where controls are functioning as intended; however, a modification would make
the process more efficient