INTERNAL AUDIT REPORT

Operational Audit- Capital

AOA Perimeter Fence Line Standards Project

June 2017 – August 2020

Issue Date: September 8, 2020

Report No. 2020-11

AOA Perimeter Fence Line Standards Project

TABLE OF CONTENTS

Executive Summary ................................................................................................................................................ 3

Background ............................................................................................................................................................. 4

Audit Scope and Methodology ............................................................................................................................... 5

Schedule of Findings and Recommendations ....................................................................................................... 7

Appendix A: Risk Ratings ..................................................................................................................................... 10

AOA Perimeter Fence Line Standards Project

Executive Summary

Internal Audit (IA) completed an audit of the AOA Perimeter Fence Line Standards Project for the

period March 2017 through August 2020. The audit was performed to assess the quality of the Port’s

monitoring of the Project to assure it was meeting project management standards in an efficient and

effective manner.

We selected this project to audit based on the number of change orders (CO’s) and the delays in

schedule completion. We selected the largest dollar value change orders, ones that changed the

scope of the project, those that approved the extension of the contract, and those that were the result

of errors and omissions.

The project delivery method was a design-bid-build with a lump sum contract. The construction

contract total is currently $4.6 million, which includes approximately $570,000 in change orders. The

contract required that the contractor substantially complete the work no later than 225 days following

the contract execution date, which would have been October 9, 2019. To date, there has been an

additional 181 approved days that extended substantial completion to April 7, 2020. As of the

conclusion of this audit, the Contractor had not completed the Project. Port management anticipates

that the Project will not be completed until the end of September 2020.

Through discussions with the Port’s project staff, significant reasons that the Project did not meet

critical milestones included: errors in design from the Port’s in-house team, and the Contractor’s failure

to provide adequate resources. These design errors resulted in approximately $106,000 in avoidable

costs and an additional 56 days added to the completion of the Project.

The Port is entitled to liquidated damages for unapproved schedule delays. As of the date of this

report, we estimate liquidated damages are $232,000, however, the actual amount is unknown until

the Project is complete and a full reconciliation is performed.

We identified the following opportunities where internal controls could be enhanced or developed.

These opportunities are listed below and discussed in more detail beginning on page seven of this

report.

1. (Medium) The Contractor’s lack of experience with the Port’s contract provisions and inadequate

management of the Project resulted in critical milestones not being met, negatively impacting the

completion dates.

2. (Medium) The Port’s processes during the design phase, can be strengthened: to decrease the

potential for errors in drawings and scope changes, to avoid additional project costs, and to reduce

the need to extend a Project’s completion date.

Glenn Fernandes, CPA

Director, Internal Audit

Responsible Management Team

Elizabeth Leavitt, Sr. Director Engineering, Environment and Sustainability

Wayne Grotheer, Director, Aviation PMG

Nora Huey, Director, Central Procurement Office

Tina Soike, Chief Engineer and Director of Engineering Services

Janice Zahn, Asst. Engineering Director - Construction

AOA Perimeter Fence Line Standards Project

Background

Authorization from the Port of Seattle Commission was obtained on June 13, 2017 to design, advertise

and execute a construction contract for the Airport Operations Area (AOA) perimeter fence line

(Project). The Port construction team determined that a design-bid-build with a lump sum contract was

the most efficient method because it allowed the Port to manage the design of the Project in-house,

develop phasing that minimized operational impacts, and manage unforeseen site conditions and

risks. Massana, Inc. was selected to be the general contractor and the Port authorized Massana to

proceed with the Project on June 06, 2019 at a base construction lump sum contract cost of $4 million.

The final construction contract total, as of the audit report date, is $4.6 million which includes

approximately $460,000 in change orders and the potential of an additional $110,000 in COVID-19

related safety expenses. The contract required that Massana substantially complete the work no later

than 225 days following the contract execution date, which would have been October 9, 2019. There

were an additional 181 approved days that extended the substantial completion date to April 7, 2020.

As of the date of this audit report, Massana has not completed the Project. Port management

anticipates that the Project will not be Substantially Complete until the end of September 2020.

After the event of 9/11, the Port of Seattle established a minimum fence height of twelve feet for the

AOA perimeter fence wherever permissible by the Federal Aviation Administration (FAA). Portions of

the perimeter fence have been replaced with the twelve-foot fence over time as construction projects

moved fence lines. However, areas along the fence line still exist with lower heights that needed to be

upgraded. The scope of the Project was to replace approximately 8,100 linear feet of seven-foot AOA

perimeter fence with a twelve-foot fence, plus one foot of barbed wire at the top. Approximately 6,500

linear feet out of the 8,100 linear feet of fence was replaced with a non-climbable fence. In addition,

the Project replaced AOA access gates, installed faster gate operating systems, and installed a

security camera system.

The following table details the current schedule and budget.

Schedule (Per August 2020 Trend Log and Pay Estimate 13)

Approved Contractual Substantial Completion Date

04/07/20

Forecasted Substantial Completion Date

09/30/20

Contractual Project Physical Completion Date

11/29/20

Forecasted Project Physical Completion Date

01/28/21

Budget (Per August 2020 Trend Log and Pay Estimate 13)

Original Contract Sum

$4,042,695

Executed CO’s and Potential Cost Risks

$572,736

Contract Sum to Date

$4,615,431

Total Completed and Stored to Date

$2,939,743

% Complete

64%

AOA Perimeter Fence Line Standards Project

Audit Scope and Methodology

We conducted the engagement 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 conduct an engagement to obtain sufficient, appropriate evidence

to provide a reasonable basis for our findings and conclusions based on our engagement objectives.

We believe that the evidence obtained provides a reasonable basis for our findings and conclusions

based on our engagement objectives.

The period audited was March 2017 through August 2020 and included the following procedures:

Project Communications

• Reviewed monthly reports between Massana 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.

• Reviewed daily construction/manpower reports.

• Assessed trends within a specific area or trade.

• Identified significant impacts to schedule or cost.

Change Orders

• Obtained an understanding of the Port's change order review process.

• Verified approvals by required personnel (e.g. Port, Architect, etc.)

• Confirmed approved change order amounts tied to the Change Order Log.

• Reviewed for reasonableness and allowability (i.e. not base contract scope).

• Calculated proper markups (for force account CO's).

• Tested subcontractor back-up including direct costs and inclusion of accurate markups.

• Reviewed supporting documentation supporting change order/claim submission, specifically

error/omission and scope change orders.

• Verified the inclusion of reasonable unit pricing.

• Reviewed potential CO's in the trend development stage to determine if they are not within the

original scope of the project, reasonable, and allowable.

Pay Estimate Review

• Obtained an understanding of the project management team’s review and approval of pay

estimates.

• Tied out total amount paid per the pay estimates to PeopleSoft financial reports.

• Assessed the reasonableness of the overall percent complete by pay estimate.

• Verified compliance with retainage requirements.

Bid Protest

• Obtained an understanding of the Port’s adherence to the requirements of holding a bid protest

hearing.

• Verified approvals were obtained by required personnel.

• Reviewed documentation for reasonableness and compliance with policies (bid protest,

administrative letter, administrative hearing minutes, and the Port’s formal response).

Compliance with FAA Grant requirements

• Obtained an understanding of FAA grant requirements.

• Verified compliance with material grant requirements that are susceptible to non-compliance.

AOA Perimeter Fence Line Standards Project

Liquidated Damages

• Reviewed the contractual obligations for the collection of liquidated damages if the project does

not meet substantial and/or physical completion milestones.

• Calculated the potential liquidated damages that the Port may seek collection.

AOA Perimeter Fence Line Standards Project

Schedule of Findings and Recommendations

The Contractor’s lack of experience with the Port’s contract provisions and inadequate

management of the Project resulted in critical milestones not being met, negatively impacting

the completion dates.

The Project was awarded to Massana Inc. on February 26, 2019 and a Notice to Proceed was issued

on April 12, 2019. The initial duration of the contract was for 225 calendar days. The Contract’s terms

required Substantial Completion by October 9, 2019. Physical Completion was to occur 120 days after

Substantial Completion.

Events such as; Covid-19 impacts, adverse weather in December 2019 and January 2020, lack of

information in the contract documents, and Port design errors and scope changes resulted in the

Port’s approval of 181 additional days through change orders. With these additional days, Substantial

Completion was extended to April 7, 2020 and Physical Completion to November 29, 2020.

Besides the approved reasons for the extension to the completion of the Project, the Contractor’s lack

of timely development of fall protection compliance documents, lack of experience with the Port’s

contract provisions, failure to provide adequate resources, and inadequate managing of the Project,

resulted in the Substantial Completion milestone not being met. Additionally, there is a possibility that

the Physical Completion milestone will also be missed.

On February 25, 2020, The Port issued a Notice of Forbearance, that the Port was willing to forbear

taking action to impose Liquidated Damages for 90 days from the date of the letter. According to the

letter, the Contractor was expected to meet certain criteria, including: completion of the project within

the 90 days, submitting information justifying the delay, and providing time for the Port to complete its

analysis of the matter. The letter stated that if the Contractor did not meet the criteria, the Port

reserved the right to assess Liquidated Damages from the original milestone date. The Contractor did

not meet the requirements of the letter.

The Contract allows the Port to pursue liquidated damages of $1,207 per day after the Substantial

Completion date and, starting 60 days after Substantial Completion, $323 per day until Physical

Completion is met. The Port anticipates that Substantial Completion will not be achieved until the end

of September 2020. Based on a projected five-month delay, we estimate that the Port will be entitled

to pursue approximately $232,000 in liquidated damages, however, the final amount is unknown until

the Project is complete and a full reconciliation is performed.

Recommendation:

Upon completion of Project, Port management should calculate and pursue liquidated damages from

the Contractor.

Management Response/Action Plan:

The team agrees with the recommendation that Liquidated Damages should be imposed in the

amount of $1,207 per day for unexcused delays beyond the original Substantial Completion date and

$323 per day for unexcused delay beyond the Physical Completion date. The team fully intends to

pursue Liquidated Damages and that has been conveyed to the Contractor. Liquidated Damages will

be assessed once the Contractor achieves Substantial and Physical Completion when we can quantify

the actual unexcused delay.

DUE DATE: December 31, 2020

1) Rating: Medium

AOA Perimeter Fence Line Standards Project

The Port’s processes during the design phase, can be strengthened: to decrease the potential

for errors in drawings and scope changes, to avoid additional project costs, and to reduce the

need to extend a Project’s completion date.

The Port used its in-house design team to prepare the Project’s drawings which were included in the

proposal documents. At the time of our engagement, the Port had 16 approved change orders (CO)

and one unexecuted CO for potential COVID-19 safety costs. The following table details the types of

CO’s and the amounts.

Justification Code Summary

No. of

CO’s

Amount

Approved

Contract

Extension

Error/Omission Designer

$150,600

Error/Omission Owner

6,416

Tenant Requested

58,280

Scope Change

147,440

COVID-19 Safety Provisions

110,000

Total:

$472,736

181 days

Source: SQL Server Reporting Services Production- Full Trend Log, August 3, 2020

We selected six CO’s for review, based on those we considered high risk. Examples included;

designer errors and omissions, large dollar value CO’s, and CO’s that were approved to extend the

contract completion date. Our review covered $384,000 and 140 days of the approved contract

extension days.

One of the CO’s that we reviewed, CO 2 was to fabricate and install a crash rated overhead beam

gate, in lieu of the proposed ground track gate shown in the contract documents. CO 2 was approved

as a not-to-exceed CO in the amount of $140,000; and $105,000 has been paid to date. The CO will

be reconciled to actual costs later. CO 2 is unique in that it’s coded as a scope change, but also

includes parts that could be coded as a designer error. During our discussions with project

management, unique instances such as this occur periodically in projects, and it is difficult to code

them so that the justification is accurately represented. The Port’s Project Management Group (PMG)

and Engineering Services have an opportunity to consider changing how to code CO’s in these unique

instances; such as by creating new justification codes, or by other means.

Based on our review, we concluded that the CO’s were for allowable purposes, properly reviewed and

approved, and included adequate supporting documentation. Two of the CO’s in our sample were

related to errors in design, and these CO’s totaled $100,600 and resulted in an additional 56 days

being added to the Project. We recognize that errors and/or omissions do periodically occur during the

design process, however, these change orders may have been preventable with a stronger design

process.

Recommendations:

• Management should strengthen its processes during the design phase to obtain assurance that

suggested designs meet safety standards and that stakeholder expectations are met.

The Trend Log lists this as a potential risk but has not yet been approved. The 41-day extension has been approved as a

CO.

2) Rating: Medium

AOA Perimeter Fence Line Standards Project

Management Response/Action Plan:

The team agrees with the assessment that the change orders on this project stem from complex and

interrelated issues, including both scope changes and design errors. With regard to the errors and

omissions components, a few efforts are underway to improve processes such that these risks are

minimized for future work. These efforts include documenting the increased depth of understanding of

compatibility of gate controller and structural systems for future designers’ use, updating of Port

Master Specifications and Standards to reflect gate system needs, and updating of typical details.

Construction Management will also consider how best to code change orders with complex and

interrelated issues. As is the policy for all projects, a Lessons Learned (LL) session will be conducted

for this project upon completion.

In April 2020, the Aviation Division also instituted additional processes for reviewing and approving

discretionary scope changes from initial project approval through design and construction. In addition

to the existing documentation accompanying discretionary change orders during construction, any

scope changes will also require approval by the project manager, program leader and project sponsor.

For scope changes over $50,000, the change must be approved by a Project Review Board made up

of the Director of Aviation Project Management Group, the Director of Aviation Capital Programs, and

the Director of Aviation Finance and Budget. For changes over $500,000, it requires an additional

approval by the Aviation Chief Operating Officer, and for changes over $1,000,000, it requires

approval by the Managing Director of Aviation. This process will be reviewed in October 2020 to

determine whether changes are needed based on the first six months of implementation. In addition to

this new process for discretionary changes, existing processes for budget increases requiring approval

by the Aviation Investment Committee and authorization increases requiring approval by the Port

Commission remain in effect.

DUE DATE: December 31, 2020

AOA Perimeter Fence Line Standards Project

Appendix A: Risk Ratings

Findings identified during the audit are assigned a risk rating, as outlined in the table below. Only one

of the criteria needs to be met for a finding to be rated High, Medium, or Low. Findings rated Low will

be evaluated and may or may not be reflected in the final report.

Rating

Financial

Stewardship

Internal

Controls

Compliance Public

Commission/

Management

High Significant

Missing or not

followed

Non-compliance

with Laws, Port

Policies,

Contracts

High probability

for external audit

issues and / or

negative public

perception

Requires

immediate

attention

Medium Moderate

Partial controls

Not functioning

effectively

Partial

compliance with

Laws, Port

Policies

Contracts

Potential for

external audit

issues and / or

negative public

perception

Requires

attention

Low Minimal

Functioning as

intended but

could be

enhanced to

improve

efficiency

Mostly complies

with Laws, Port

Policies,

Contracts

Low probability for

external audit

issues and/or

negative public

perception

Does not

require

immediate

attention