INTERNAL AUDIT REPORT
Operational Audit- Capital
Central Terminal Infrastructure Upgrade Project
(Bid and Design Phases)
October 2014 – November 2020
Issue Date: November 24, 2020
Report No. 2020-18
Central Terminal Infrastructure Upgrade Project
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TABLE OF CONTENTS
Executive Summary ............................................................................................................................................... 3
Background ............................................................................................................................................................ 5
Audit Scope and Methodology .............................................................................................................................. 6
Schedule of Findings and Recommendations ..................................................................................................... 7
Appendix A: Risk Ratings ...................................................................................................................................... 9
Central Terminal Infrastructure Upgrade Project
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Executive Summary
Internal Audit (IA) completed an audit of the Central Terminal Infrastructure Upgrade Project (Project)
for the period October 2014 through November 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.
The Project will be audited in two parts; this audit focused on the bidding and design phases while the
second audit will focus on the construction and closeout phases, which is scheduled to occur in the
1
st
quarter of 2021.
The delivery method for this Project was a design-bid-build with a lump sum contract. The Port
entered into an agreement with HNTB Corporation (HNTB) on October 23, 2014 to furnish design
services for the Terminal Utility Upgrades Design of Airport Dining and Retail project. In 2016, the
Airport, Dining and Retail Infrastructure Modifications project and the Central Terminal HVAC
Upgrade project were advertised, but due to incoming bids being higher than the engineer’s estimate,
both procurements were canceled in October 2016. As a result of these irregular bids, the project
management team combined the two construction projects into one larger project and estimated the
combined Project to be $10.2 million. Osborne Construction Co. (Osborne) was awarded the contract
in the amount of $9.3 million.
The contract required that the contractor substantially complete the work no later than 730 days
following the contract execution date, which would have been December 26, 2019. Based on the
October 2020 trend log, there have been an additional 278 approved days that have extended
substantial completion to September 29, 2020. As of the conclusion of this audit, the Contractor had
not completed the Project. Currently, the Port’s project team stated that the Project will be
substantially completed at the end of November 2020.
Through discussions with the Port’s project staff, one of the main reasons that the project did not
meet critical milestones, and experienced cost overruns, was the lack of involvement from key
stakeholders during the review and approval of designs. Additional reasons that contributed to project
delays and cost overruns, included the lack of design review after merging the two original projects,
and Port turnover in key departments involved with the Project. Management conducted a “lessons
learned” assessment for the Project in 2019, in which they self-identified these issues.
The construction contract total is currently $12.2 million, which includes approximately $2.7 million in
change orders (COs); a 29% increase in project costs. Although not all change orders could have
been prevented during the design phase, a stronger design and approval process could have
prevented some of them. Additionally, we have noted similar concerns in other audits of capital
projects. We identified the following opportunity where internal controls need to be enhanced or
developed. This opportunity is discussed in more detail beginning on page seven of this report.
1. (Medium) The lack of involvement, participation, and collaboration between the key stakeholders
during the review and approval of designs resulted in additional project costs and schedule
delays.
Glenn Fernandes, CPA
Director, Internal Audit
Central Terminal Infrastructure Upgrade Project
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Responsible Management Team
Wayne Grotheer, Director, Aviation PMG
Dawn Hunter, Director, Aviation Commercial Management
Nora Huey, Director, Central Procurement Office
Tina Soike, Chief Engineer and Director of Engineering Services
Janice Zahn, Asst. Engineering Director - Construction
Central Terminal Infrastructure Upgrade Project
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Background
The purpose of the Project was to provide the shell space and associated vertical circulation for
expansion of, and improvements to, the airport dining and retail (ADR) space in the Central Terminal.
The outcome was anticipated to improve customer service and increase non-aeronautical revenues.
A space demand analysis showed there was a need in the Central Terminal for an additional 12,000
square feet of ADR space to meet the anticipated 2025 passenger projections. This project will add
approximately 10,000 square feet of new ADR space to the Central Terminal. The Port entered into
an agreement with HNTB Corporation (HNTB) on October 23, 2014 to furnish design services for the
Terminal Utility Upgrades Design of Airport Dining and Retail project.
In 2016, the Port advertised two separate projects for bids. The first project was the ADR
Modifications Central Terminal Project with an engineer’s estimate of $3.4 million. The ADR
Modifications Project received one bid of $7.5 million, which was 120% above the engineer’s
estimate. The second project was the Central Terminal HVAC Upgrade Project with an engineer’s
estimate of $2.9 million. This project also received one bid of $8.7 million, which was 194% above the
engineer’s estimate. As a result of these irregular bids, the Port’s Project Management Team
combined the two construction projects into one larger project, the Central Terminal Infrastructure
Upgrade Project, with an estimated project cost of $10.2 million. Osborne Construction Co. (Osborne)
was awarded the contract for $9.3 million.
The Project has experienced multiple construction change orders. Some of these were driven by
business and customer service related decisions, but nonetheless, have resulted in schedule delays
and increases to the Project’s budget.
The following table details the current schedule and budget.
Schedule (Per October 2020 Trend Log)
Original Contract Completion Date
12/26/2019
Forecasted Contract Completion Date
09/29/2020
Budget (Per October 2020 Trend Log)
Original Contract Sum
$9,309,641
Executed COs and Potential Cost Risks
$2,969,591
Projected Contract Sum to Date
$12,279,232
Original Contingency
$1,021,000
Revised Contingency Total
$3,021,000
Remaining Contingency
$51,409
Central Terminal Infrastructure Upgrade Project
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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 October 2014 through November 2020 and included the following
procedures:
Bid-Law Compliance
• Obtained an understanding of Port staff’s understanding and compliance with bid law
regulations through inquiry with the Central Procurement Office’s management and staff.
• Reviewed supporting documentation from bid packets, including: the public solicitation, bid
proposals, bid tally sheets, applicable state laws, and Port policies and procedures.
Invoice Review Process
• Obtained an understanding of the Port project team’s review and approval process of designer
invoices.
• Assessed whether the process was adequate to assure invoices were accurate, for allowable
purposes, and properly supported by reviewing supporting documents and performing testing
procedures.
Project Management (Lessons Learned)
• Reviewed the “lessons learned” spreadsheet from the Lessons Learned Database.
• Obtained an understanding of issues encountered during the project through inquiry with
management.
• Reviewed supporting documentation, including email correspondence, invoices and service
directives.
Central Terminal Infrastructure Upgrade Project
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Schedule of Findings and Recommendations
The lack of involvement, participation, and collaboration between the key stakeholders during
the review and approval of designs resulted in additional project costs and schedule delays.
We interviewed multiple departments that were identified as key stakeholders and sponsors for the
Project, including the Aviation Project Management Group, Construction Management, Aviation
Maintenance, Aviation Facilities and Infrastructure, ADR, HNTB, and the prime contractor (Osborne),
to understand the history of the project including the planning, design, and issues encountered.
Although the Port has a process in place which gives stakeholder and department sponsors an
opportunity to review designs and provide feedback, we noted the following weaknesses in the
process that could potentially impede the success of a project:
• It is not mandatory for key stakeholders to provide feedback and approve key design milestones.
Full approval of the designs early, may decrease the potential for scope changes after the design
is approved.
• An email with the designs is sent for review and feedback to stakeholders. For projects with major
operational and customer service impacts, stakeholder departments not regularly affiliated with
construction projects, may not have the technical expertise to understand engineering drawings.
The project management team has an opportunity to be more involved with these stakeholders to
assure they have a complete understanding of a project and its impacts.
As a result of the weaknesses highlighted above, the project experienced multiple design changes
which resulted in numerous error and omission change orders, scope changes, and schedule delays.
In multiple instances, the Aviation Division Directors collectively made the decision for these changes.
The following table details the total designer error change orders and owner error/omission change
orders:
Justification Code Summary
No. of
COs
Amount
Approved
Contract
Extension
Error/Omission Designer
79
$497,206
0
Error/Omission Owner
11
$1,236,310
123
Total:
90
$1,733,516
123 days
Source: SQL Server Reporting Services Production- Full Trend Log, October 7, 2020
Additional reasons that contributed to the added cost were management and staff turnover in key
departments. Port management self-identified these issues by conducting a “lessons learned” review
in 2019. IA recognizes that errors and/or omissions do periodically occur during a project; however,
better involvement, participation and collaboration between key stakeholders, project sponsors, and
the designer during the pre-construction and design phases would have prevented some of these
change orders.
Recommendations:
• Obtain approval from stakeholder departments for all critical milestones during the design phase
(15%, 30%, 60%, 90%, and 100%) within a set deadline. It should be the responsibility of the
design reviewer/approver from the stakeholder departments to respond timely. Once each design
milestone is approved, there should be no deviation from the approved designs, except in rare
circumstances.
1) Rating: Medium
Central Terminal Infrastructure Upgrade Project
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Management Response/Action Plan:
There are three key points from the Aviation Division in response to the audit findings. First, since this
project went through the bid and design phase there have been significant changes to project
processes that if in place at the time could have mitigated the cost increases. Second, two significant
changes to construction sequencing and project design were made as conscious business decisions
to meet customer service needs and to gain revenue which offset the cost of the changes. Finally,
additional process changes are under development to address the recommendation of mandatory
design review participation.
The first relevant project process change made in 2020 is additional requirements during the project
definition phase. There are three main areas of focus that were added to our project definition
process in January 2020: 1) anticipated operational impacts or constraints, 2) temporary facilities or
systems, and 3) customer service or external communications.
The second relevant project process change was in April 2020, when the Aviation Division adopted a
change management process for discretionary project scope changes from initial project approval
through construction. Project budget changes still require approval of the Aviation Investment
Committee and Port Commission and existing approval authority for construction change orders
under EX-2 are also unchanged. This new process is intended to put further scrutiny on changes
within the budget as well as those ultimately requiring further approvals due to the need for project
budget increases. Discretionary changes in project scope above $50,000 now require approval of a
Project Review Board (which consists of the Directors of Aviation Finance & Budget, Aviation
Facilities & Capital Programs, and Aviation Project Management); additional approvals are required
for changes above $500,000 (Aviation Chief Operating Officer) and above $1,000,000 (Aviation
Managing Director).
For the central terminal infrastructure upgrade project, the significant changes made during
construction included delayed closure of the Anthony’s restaurant and addition of HVAC utilities for
temporary hot food dining options in front of the construction barrier. These decisions were made by
the Aviation Division Directors in response to customer service and ADR tenant impact concerns,
recognizing that this would add construction cost. The added construction cost of those two changes
was $563,000 while the additional Port revenues resulting from these changes was over $1,100,000
during the months of November 2018 through March 2020.
Finally, Aviation Project Management is developing additional process changes to address the
recommendation of mandatory design review participation. Changes include designation of
mandatory reviewers for each project beginning or already in design and development of
communications expectations for non-technical design reviewers (e.g. Aviation business
management), These changes will be complete in Q2 2021.
DUE DATE: June 30, 2021
Central Terminal Infrastructure Upgrade Project
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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
