INTERNAL AUDIT REPORT
OPERATIONAL AUDIT - CAPITAL
Checked Baggage Optimization Project - Phase I
MARCH 2017 – JUNE 2019
ISSUE DATE: June 10, 2019
REPORT NO. 2019-08
Checked Baggage Optimization Project- Phase I
March 2017 – June 2019
2
TABLE OF CONTENTS
EXECUTIVE SUMMARY ........................................................................................................................................... 3
BACKGROUND ........................................................................................................................................................ 4
AUDIT SCOPE AND METHODOLOGY ..................................................................................................................... 5
SCHEDULE OF FINDINGS AND RECOMMENDATIONS......................................................................................... 7
APPENDIX A: RISK RATINGS .................................................................................................................................. 8
Checked Baggage Optimization Project- Phase I
March 2017 – June 2019
3
EXECUTIVE SUMMARY
In collaboration with Talson Solutions, LLC, an independent construction auditing firm with experience in
baggage handling systems, Internal Audit completed an audit of the Checked Baggage Optimization Project
– Phase I (Project) for the period March 2017 through June 2019. The audit was performed to assess the
quality of the Port’s monitoring of the Project to assure it was meeting project management standards.
Overall, the Port’s project team is managing the Project well and has gone through additional efforts to steer
the project completion as close as possible to the contractual substantial completion and overall Phase I
completion date. Without this effort, Phase I would be further behind the original schedule than the currently
projected four to six months. Without continuous oversight from Port staff, the project could incur additional
schedule delays.
Our review noted that Port management’s monitoring and documentation of change management aligned
with industry standards and best management practices. This was especially evident in the areas of
documenting the reasons for changes, estimating change values, complying with contractual mark-up
provisions, assessing and implementing lessons learned, and using detailed subcontractor hourly wage rates
for support of labor costs. Furthermore, the project team closely monitored PCL Construction Services, Inc.
(PCL) deficiencies in oversight of its subcontractors and expressed those deficiencies through numerous
serial letters of deficient performance. We noted that Force Account Change Orders have not been reconciled
as required and should be prior to final payment to PCL.
PCL experienced significant challenges in maintaining staff with baggage handling project experience, which
may have resulted in lack of sufficient oversight and unanticipated, less than average subcontractor
performance and delays. Furthermore, PCL’s addition of the current project manager was not facilitated by a
formal submission to the Port as required by the contract’s specifications. Other than these noted concerns,
PCL is generally meeting its contractual obligations and responsibilities. PCL’s initial schedule appeared
appropriate to meet the contractual substantial completion and overall Phase I completion dates.
We noted the following issue for managements’ consideration upon completion of Phase I:
1. (Medium) – PCL did not effectively monitor its subcontractor’s performance. As a result, critical
milestones were not met by agreed upon target dates, negatively impacting the completion dates for
Phase I.
This issue is discussed in more detail beginning on page seven of this report.
Glenn Fernandes, CPA Kenneth Brzozowski, CCA, CCP
Director, Internal Audit Talson Solutions, Engagement Director
RESPONSIBLE MANAGEMENT TEAM
Ralph Graves, Sr. Director Capital Development
Jeffrey Brown, Director Aviation Facilities & Capital Programs
Wendy Reiter, Director Aviation Security
Wayne Grotheer, Director Aviation PMG
Janice Zahn, Assistant Engineering Director, Construction
Checked Baggage Optimization Project- Phase I
March 2017 – June 2019
4
In collaboration with the Transportation Security Administration (TSA), the Port of Seattle, is optimizing
the outbound baggage handling system at the Airport which encompasses roughly 110,000 square feet
within the baggage screening area. The new system will replace the existing aging system which has
reached capacity with significant passenger growth at Seattle-Tacoma International Airport in the last
five years; including the addition of ten new airlines. The Project increases screening capacity for greater
baggage volumes, increases flexibility for bags to be checked from any ticket counter, allows the airport
to meet the established minimum-connect-time goal, and increases energy efficiency.
The Port entered into a $52 million Lump Sum Contract in March 2017, with PCL for Phase I construction
activities which commenced in April 2017 and was scheduled to be completed in June 2019. The Port
also entered into a $12 million contract with BNP Associates, Inc., for comprehensive design work on
the Project, primarily focusing on Phase I.
The Port acknowledged a four to six-month delay in achieving completion of Phase I construction
activities. As of the Contractor’s April 2019 Payment Estimate No. 22, there have been $2.5 million in
change orders.
The overall project budget appears to have sufficient funding in place. Potential risks include material
price increases and continued unforeseen conditions for future phases that could result in unexpected
contingency usage. Phase I budget details include:
a) Project contingency $7.2 million (has not yet been used).
b) Construction contingency to fund change orders (original budget of $8 million with
approximate $5.6 million remaining).
c) Remaining Allowance and Contingency funds will be transferred to Phase II & III.
The following table details the current schedule and budget.
Schedule (Per April 2019, Pay Estimate 22)
Contractual Substantial Completion Date
08/10/19
Forecasted Substantial Completion Date
12/22/19
Contractual Project Completion Date
12/05/19
Forecasted Project Completion Date
03/23/20
Budget (Per April 2019, Pay Estimate 22)
Original Contract Sum
$52,000,000
Change Orders
$2,526,743
Contract Sum to Date
$54,526,743
1
Total Completed and Stored to Date
$46,504,600
% Complete
85%
1
PCL is forecasting approximately $1.6 million additional change orders that will result in a revised lump sum contract
value of approximately $56 million.
BACKGROUND
Checked Baggage Optimization Project- Phase I
March 2017 – June 2019
5
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 March 2017 through June 2019 and included the following procedures:
Lump sum agreement
• Reviewed agreements and exhibits for key contract provisions to identify scope, contractual
obligations and deliverables.
• Assessed compliance to the contract.
• Assessed the selection process and the bid awarded to PCL.
Subcontractor review
• Reviewed agreements and exhibits for key contract provisions to identify scope, contractual
obligations, and deliverables.
• Assessed compliance to the contract.
• Assessed potential variances or gaps in contractual obligations and scope responsibilities
between the subcontractor and PCL, suppliers, and vendors.
• Assessed contract status of notable subcontractors for change orders, conformance to
contractual obligations, and schedule and delivery.
Pay estimate review
• Tied amount disbursed to PCL with the Port’s control group register.
• Assessed the reasonableness of the overall percent complete to PCL’s percent complete.
• Verified the accuracy of monthly amounts paid to subcontractors.
• Tied PCL change orders to the change order log.
• Assessed the inclusion of supporting documentation for stored material.
• Verified the invoicing timelines.
• Assessed billing trends for irregularities.
Project Communications
• Reviewed monthly reports between PCL and the Port.
• Reviewed drawings, submittals and requests for information (RFI).
• Reviewed RFI and submittal logs for open items affecting the project phase completion.
• Reviewed the submittal log for timeline of any delays (Jervis B. Webb shop drawings).
• Reviewed daily construction/manpower reports.
• Assessed trends within a specific area or trade.
• Identified significant impacts to schedule or cost.
AUDIT SCOPE AND METHODOLOGY
Checked Baggage Optimization Project- Phase I
March 2017 – June 2019
6
Schedule Review
• Reviewed schedule documentation, including review of resource loading, float durations and
critical path modeling for accuracy and reasonableness.
• Performed a root cause analysis to identify contributing factors to known schedule delays.
• Reviewed baseline and update schedules.
Project Financial Testing
• Assessed the Project’s current financial status.
• Reviewed Port cost reports, budgets, general ledgers, submittals and other cost documentation
for potential duplicate payments.
• Assessed other budgeted values (architect, consultants, legal, etc.).
• Performed a root cause analysis to determine contributing factors to potential cost overruns.
Owner Change Orders
• Verified proper approvals.
• Confirmed the approved potential change order tied to the change order log.
• Reviewed potential change orders for reasonableness.
• Verified the accuracy of contractor and subcontractor markups.
• Reviewed subcontractor backup, including direct costs and inclusion of accurate markups
allowed by subcontractor.
• Tested subcontractor hourly wage rate detail sheets.
• Reviewed documentation supporting PCL’s change order/claim submissions, specifically for
errors & omissions change orders.
Equipment Testing
• Assessed the installation, testing and certification of explosive detection system machines
(EDS) provided by the TSA.
• Reviewed documentation for conformance of the design, manufacturing, testing and
inspections of the EDS by third party inspection agencies and others.
• Assessed factory acceptance testing.
• Assessed local acceptance testing.
• Assessed any issues within test reports.
• Reviewed deliverables within the TSA’s agreement with the Port.
Design Review
• Assessed designer obligations (conceptual, design, CDs, etc.).
• Assessed design issues leading to changes, delays, and cost impacts.
• Assessed for incomplete designs within contract documents.
• Assessed designer timeline for reviews (RFI, Submittals, etc.).
• Reviewed for potential designer error and omission types of changes.
• Performed a root cause analysis to determine contributing factors of potential open design
items.
Checked Baggage Optimization Project- Phase I
March 2017 – June 2019
7
SCHEDULE OF FINDINGS AND RECOMMENDATIONS
PCL did not effectively monitor its subcontractor’s performance. As a result,
critical milestones were not met by agreed upon target dates, negatively impacting
the completion dates for Phase I.
The project was awarded to PCL on March 2, 2017 with a duration of 891 calendar days. The Contract’s
terms require Substantial Completion by August 10, 2019 and Physical Completion by December 8,
2019. If these milestones are missed, the Contract allows the Port to pursue liquidated damages of
$3,243 per day after the Substantial Completion date and $1,016 per day after the Physical Completion
date. Based on the projected four to six-month delay, the Port would be entitled to pursue between
$545,000 and $801,000 in liquidated damages.
PCL subcontracted with Jervis B. Webb Company (Webb), a subsidiary of Daifuku Co. Ltd., to design
and engineer the baggage handling system conveyors (BHS). The Contract between the Port and PCL
required PCL and Webb to host Factory Acceptance Testing that demonstrated the system met the
minimum design and performance criteria.
Between August 27, 2018 and August 31, 2018, the Port, TSA, and design teams attended the Factory
Acceptance Testing at Webb’s headquarters in Michigan. Webb failed to meet numerous design and
performance criteria and therefore, the entire system did not meet the requirements of the Contract. Port
management attended two additional Factory Acceptance Tests in Michigan, as well as multiple weekly
factory visits, to assure that the BHS conveyors met contractual requirements. Port staff put forth
significant efforts to minimize further delays and steered the project appropriately. Not including staff
time, this resulted in approximately $20,000 in additional direct costs to the Port.
By not effectively managing its subcontractors and not passing the Factory Acceptance Test, PCL
anticipates a schedule delay of approximately four months, while the Port estimates a schedule delay
of approximately six months. This schedule delay will impact the Port’s ability to commence Phase 2
and subsequently Phase 3 projects and ultimately impacts the overall completion date of the Project.
Recommendation:
Upon completion of Phase I, Port management should calculate and pursue liquidated damages from
PCL.
Management Response/Action Plan:
The team is in agreement with the recommendation that liquidated damages should be imposed in the
amount of $3,243 / day for unexcused delays beyond the original Substantial Completion date and
$1,016 / day for unexcused delays beyond the Physical Completion date. The team fully intends to
pursue liquidated damages and that has been previously conveyed to the Contractor. This will be done
once the Contractor achieves Substantial Completion and Physical Completion, when we can quantify
the actual delay.
1) RATING: MEDIUM
Checked Baggage Optimization Project- Phase I
March 2017 – June 2019
8
APPENDIX A: RISK RATINGS
Findings identified during 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
impact
Remiss in
responsibilities of
being a custodian
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