Primary Fire Station Continuing Operations Preservation
Project - MC/CM Cost-of-Record Audit

November 2024 - March 2026

Issue Date: June 18, 2026
Report No. 2026-10

This report is a matter of public record, and its distribution is not limited. Additionally, in accordance with
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Primary Fire Station Continuing Operations Preservation Project- MC/CM Cost-of-Work Audit

Table of Contents
Executive Summary ................................................................................................................................ 3
Audit Scope and Approach...................................................................................................................... 5
Detailed Audit Methodologies, Observations, and Results ..................................................................... 6
Labor.................................................................................................................................................... 6
Specified General Conditions .............................................................................................................. 9
MC/CM Fee ....................................................................................................................................... 11
Subcontractors................................................................................................................................... 11
Equipment.......................................................................................................................................... 11
"Other" ............................................................................................................................................... 11
Material .............................................................................................................................................. 12
Appendix A- "OTHER" Questioned Transactions .................................................................................. 13
Appendix B- "MATERIAL" Questioned Transactions ............................................................................ 14

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Primary Fire Station Continuing Operations Preservation Project- MC/CM Cost-of-Work Audit

Executive Summary
The Port entered a contract with Hoffman Construction Company of Washington to serve as the
General Contractor/Construction Manager (GC/CM) for the Primary Fire Station Continuing Operations
Preservation Project. This project was designed to implement improvements at Station 1, assuring the
facility could continue to operate effectively until it is eventually displaced by future development. The
scope of work focused on maintaining operational capability and supporting the ongoing use of the
existing fire station during the interim period before redevelopment occurs.
Hoffman's original contract sum was a Guaranteed Maximum Price (GMP) $15,656,267, with $132,949
in changes. Hoffman's contract as of March 2026 was $15,789,216.
State law permits public agencies to use an alternative subcontractor selection process for
subcontracts anticipated to exceed $3 million when operating under the GC/CM project delivery
method. This process requires public agencies to conduct an independent audit to confirm that costs
have been properly accrued.
For this project, Hermanson Company LLC (Hermanson) was chosen to serve as the Mechanical
Contractor/Construction Manager (MC/CM). As of the March 2026 Pay Application, Hermanson's
Guaranteed Maximum Price (GMP) totaled $4,602,214, with $4,080,199 billed to date. The MC/CM is
entitled to receive payment for substantiated costs, the agreed-upon fee, and fixed-price Specified
General Conditions (SGCs), up to the final GMP value.
The objective of this audit was to independently assess Hermanson's asserted MC/CM project costs for
the Primary Fire Station Continuing Operations Preservation Project, confirming that billed amounts
were properly supported, accurately recorded, and consistent with contract requirements.
During our review, we identified certain costs that raised concerns and may be classified as
questioned costs. The Port should pursue these items, and Hermanson's substantiated project costs
should be reduced by $171,225,1 or the appropriate documentation should be obtained.
However, upon testing Hermanson's Job Cost Ledger financial report against the amounts billed, it
was determined that Hermanson coded more costs than were billed, totaling $19,920. If these
additional costs are allowed, the reduction would decrease to $152,569. This reduction would result in
GMP savings and may require Hermanson to refund the Port, as outlined in the subsequent table.

This statement identifies audit concerns and offers Port management a potential business opportunity and
decision point. We understand that Hermanson might dispute our findings and that business decisions and
accommodations may result.
1

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Primary Fire Station Continuing Operations Preservation Project- MC/CM Cost-of-Work Audit

This engagement was not performed in accordance with professional audit standards, as we did not
formally review internal controls. Our assessment was based solely on evidence obtained from tested
documents. Our tests revealed that project cost details were generally well-documented and
appropriately coded to their respective projects, timeframes, and phase codes.
Although most documentation was sufficient, we have provided specific recommendations that the
Port can implement in future projects, to further strengthen process integrity and enhance project cost
substantiation.
# Recommendations
1 The Port typically approves billable labor rates according to its Master Labor Rate
Template, which outlines rates by craft. If someone requests higher rates, the Port should
maintain justification for approval and implement additional steps during Pay Application
review to confirm contractors are paying employees the extra base hourly wage.

Ref.
Pg. 9

2 Obtain Tax Rate Notices and compare them to the rates listed in the Master Labor Rate
spreadsheet to ensure accuracy.
3 Update SUTA and FUTA formulas on the Master Labor Rate Template.
4 Obtain a detailed list of contractor Shop Burden items before approving billable rates.
5 Pre-approve proposed rental and storage rates and review itemized documentation for
components such as Shop Burden.

Pg. 9

Glenn Fernandes, CPA
Director, Internal Audit

Responsible Management Team
Janice Zahn, Chief Engineer, Engineering General Services
Brian Sweet, Director, Engineering Construction Management

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Pg. 9
Pg. 9
Pg. 12

Primary Fire Station Continuing Operations Preservation Project- MC/CM Cost-of-Work Audit

Audit Scope and Approach
The audit approach was primarily substantive, with a strong emphasis on comprehensive testing of
project costs. The procedures were designed to cover the planned scope and were executed with careful
attention to detail, assuring that the audit objectives were achieved as intended. The audit report
presents the principal findings and observations derived from the review, accurately representing the
results of the assessment.
The audit process began by electronically obtaining Hermanson's job cost report. Multiple tests were
performed to confirm the accuracy of basic mathematical functions, such as the summation of amounts
and the precise calculation of extended values. These foundational checks were supplemented by
focused searches within the dataset to identify and scrutinize substantial dollar charges that required
further investigation.
The subsequent section of this report concentrates on the total asserted project cost of $4,080,199, as
discussed in the audit.

The audit identified that certain portions of Hermanson's asserted expenses were adequately
documented and well-supported within the pay estimates submitted to the Port. However, other
segments of the costs, primarily associated with labor billings, were not initially accompanied by
sufficient supporting documentation for the Port's interim review and payment processing. To address
these gaps, the audit team requested additional documentation from Hermanson for items that were, in
their assessment, lacking proper substantiation. Upon receiving these requests, Hermanson
subsequently provided further supporting materials, which were used to validate and substantiate
specific amounts in question.
The scope of the audit encompassed comprehensive coverage due to the nature of Hermanson's cost
assertions between November 2024, through March 2026. Our review tested 100% of billed costs.
Three primary factors contributed to the high percentage of costs examined. First, a substantial portion
of Hermanson's project costs originated from subcontractors operating under fixed-price agreements,
which enabled extensive audit coverage of high-dollar items. Second, Hermanson received contractual

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Primary Fire Station Continuing Operations Preservation Project- MC/CM Cost-of-Work Audit

payments for its Specialized General Conditions (SGCs) on a fixed-price basis. Third, we applied
electronic auditing techniques to review all Hermanson's recorded craft labor, equipment, material, and
"other" coded charges.
The audit objectives and testing procedures were carefully designed and implemented to assure that all
costs remained within the boundaries defined by the Contract. For example, direct costs were reviewed
to confirm they did not include elements already covered by fixed general conditions or seeking direct
costs for amounts recoverable through markup.

Detailed Audit Methodologies, Observations, and Results
Labor
Division 00 70 01 - General Conditions covers a table of cost categories and markups that allows
Hermanson to be reimbursed for direct labor and labor burden costs. Labor rates were set at project
start and revised every six months per the Collective Bargaining Agreement. The Port provided
Hermanson with a Master Labor Rates Template, requiring updates for state unemployment and
worker's compensation rates. Our review found the Port lacked Hermanson's annual Tax Rate Notices
needed to verify spreadsheet entries; we obtained these directly from Hermanson.
Division 00 83 00 §1.05 of the Agreement outlines the submission requirements for employee payroll
and work hour records. According to the Agreement, contractors are required to submit Employee and
Work Hour Records Electronic Payroll Information (EPI) to the Port. This obligation extends to the prime
Contractor as well as every subcontractor and supplier who are required to pay prevailing wages. The
submission must cover each week from the commencement of work on the project until its completion.
Although the records are maintained in weekly increments, they are to be submitted monthly to the CPO
Systems Administrator.
The Agreement further stipulates that all payroll information submitted for the specified period must be
correct and complete. Specifically, it requires, "...that the wage rates paid to laborers or mechanics, as
documented in these records, must not be less than the applicable wage rates established in any wage
determination incorporated into the contract."2
We audited 100% of Hermanson's asserted labor hours and costs using electronic analysis and
verification procedures, comparing the data to L&I certified payroll reports, payroll information submitted
through the Port's Contractor Data System (CDS), and Hermanson's Job Cost Detail. All reported hours
were confirmed to match those recorded in the Job Cost Detail. We then reviewed the base hourly wage
paid to each worker to determine whether the wages paid were consistent with the rates approved by
the Port.
Article VII (E)(2) of the United Association Local #32 Master Labor Agreement stipulates: "When special,
or customer required occupied conditions exist, and none of the Sections regarding shift work can be
applied, irregular shifts for a full calendar week may be established under the following conditions: (1)
Prior agreement between the Employer and Local 32 is required before the commencement of shift
work. (2) Employees shall receive twenty percent (20%) above the Straight Time Base Rate and
Vacation for each hour worked." This stipulation does not apply to Commercial Plumbers which would
2

General Conditions, GC/CM Contract No. MC-0320968, for General Contractor/Construction Manager
Services, Primary Fire Station Continuing Operations Preservation Project, § 008300 1.05(B)(2)(a).

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Primary Fire Station Continuing Operations Preservation Project- MC/CM Cost-of-Work Audit

consist of those working on this project. Furthermore, the Sheetmetal Workers Union has a comparable
provision: "4-10 Shift work on Occupied Premises Only: When the customer or general contractor
mandates that work cannot occur during regular business hours due to occupancy, this shift must be
compensated at twenty percent (20%) above the regular day shift rate. Shift work on occupied premises
will be permitted provided three (3) consecutive days of shifts, excluding Saturday or Sunday." 3
The Port did not maintain documentation as to the negotiation on approving labor rates. However, it
appears that these Articles were referenced to justify the premium "occupied space" rates, raising three
primary concerns. First, Article VII of the MLA pertains exclusively to Service Plumber Mechanic and
Supermarket Plumbers, and not Commercial Plumbers who made up the workforce for this Project.
Second, the tasks executed were carried out during standard shifts, not qualifying as "irregular shifts,"
which does not satisfy the requirements set forth. Finally, the Project site was cordoned off, thereby
failing to meet the criteria for an occupied space. Concerning the Sheetmetal workers, a review of the
L&I Certified Payroll reports indicates no evidence of 4 ten-hour shifts as required by its Collective
Bargaining Agreement.
For both the Sheetmetal workers and the plumbers & pipefitters assigned to the Project site, Hermanson
compensated the fieldwork staff at the standard labor rate applicable to their respective trades and
classifications; none received the "occupied space" premium. Consequently, the Port's reimbursement
should have been based on the billable rate defined in its Master Labor Template rather than the
"occupied space" rate. Accordingly, we are questioning $130,965 in billed labor costs which includes the
Fee portion.

We found multiple errors in Hermanson's certified payroll to L&I and its submissions to the Port's
Contractor Data System, mainly regarding shop workers totaling $235,718. Hermanson acknowledged
the mistakes and is correcting them. The Port's contract administrator confirmed that the closeout
process includes reconciling CDS with L&I, which should catch these reporting errors.
3

Standard Form of Union Agreement Between SMACNA Western Washington and Local Union No. 66 of the
International Association of Sheet Metal, Air, Rail, and Transportation Workers, art. XVII(G), at 30 (June 1,
2024).

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Primary Fire Station Continuing Operations Preservation Project- MC/CM Cost-of-Work Audit

We confirmed that shop workers received the appropriate base labor rates. Except for two individuals
who were billed above the approved rates, all others were charged correctly. We are questioning
$1,531 as detailed in the table below, which includes the Fee.

Beyond the standard labor burden, covering taxes and benefits, Hermanson applied an additional
"Shop Burden" of 24.60% to SHOP-Plumbers and Pipefitters, as well as Sheetmetal workers.
Typically, such a Shop Burden is intended to account for indirect costs associated with the operation
of a shop, including expenses like rent, utilities, insurance, clerical support, and small tools.
To validate the appropriateness of this Shop Burden, we examined the Project documentation and
requested Port staff provide a detailed breakdown of the Shop Burden components. Despite these
efforts, Port staff did not supply the requested information. This indicates that the Port may not have
obtained or reviewed the Shop Burden components before authorizing the billable rates.
The absence of detailed documentation regarding the Shop Burden composition introduces a
significant risk. Without transparency, it is highly probable that certain cost elements included in the
Shop Burden percentage may also be billed separately as direct cost-of-work line items. Additionally,
these elements may have already been captured within specified general conditions, regular general
conditions, or the contractor fee, resulting in potential duplication and overbilling.
During our review of the Master Labor Template in addition to the questioned costs, we identified
several concerns related to the calculation of Federal Unemployment Tax Act (FUTA) costs.
Employers are required to pay 0.6% of an employee's hourly wage, but only on the first $7,000 of
annual income per employee, for a total maximum of $42.00 per employee. However, the formula
used in the Master Labor Template does not recognize this maximum annual wage threshold. Instead,
the template applies a flat 0.6% to the base labor hourly rate across all hours worked, regardless of
the $7,000 threshold, which leads to an inflated billable rate and provides contractors with profit
beyond the actual costs incurred.
This miscalculation is often based on the misconception that owners would need to track each
worker's cumulative salary to avoid collecting FUTA after the threshold is reached. However, if the
correct formula is used, pay application reviewers will not have to perform additional monitoring
because contractors will automatically be reimbursed accurately when an employee spends their
entire working time on a specific project.4 This table shows an example of when the maximum
threshold is ignored.

4 As a rule, trades people work 1,500-1,550 hours per year. Using this range for the calculation, the actual burden rate

increases to only $0.03 per hour. If 2,080 hours are used, the burden rate decreases to $0.02 per hour.

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Primary Fire Station Continuing Operations Preservation Project- MC/CM Cost-of-Work Audit

Like the Federal Unemployment Tax Act (FUTA), the State Unemployment Tax Act (SUTA) formula
applied within the Master Labor Template does not account for the maximum dollar threshold
established by SUTA regulations. Rather than limiting the application of the SUTA tax rate to the
designated annual wage cap per employee, the formula erroneously applies the rate to the base labor
hourly rate for all hours worked throughout the year. This practice results in an inflated billable rate,
leading to reimbursement amounts that exceed the contractor's actual SUTA liability. Consequently,
contractors receive more payments than the true costs incurred for SUTA contributions, mirroring the
miscalculation observed with FUTA.
Recommendations
1. The Port typically approves billable labor rates according to its Master Labor Rate Template, which
outlines rates by craft. If someone requests higher rates, the Port should maintain justification for
approval and implement additional steps during Pay Application review to confirm contractors are
paying employees the extra base hourly wage.
2. Each year, the Port should collect Tax Rate Notices and compare them to the rates listed in the
Master Labor Rate spreadsheet to ensure accuracy.
3. Update SUTA and FUTA formulas on the Master Labor Rate Template.
4. Obtain a detailed list of contractor Shop Burden items before approving billable rates.
Specified General Conditions
GC/CM contracts are divided into distinct subcategories as required by State Law.5 The Total Contract
Cost (TCC) is separated into three main components: Specified General Conditions (SGC), the Fixed
Fee, and the Maximum Allowable Construction Cost (MACC).
SGCs encompass administrative functions necessary for the project. These include general conditions,
subcontractor management, cost tracking, scheduling, meetings, safety, quality assurance and warranty
management. SGCs may either be bid or negotiated, depending on the project requirements. The
GC/CM fee is a fixed percentage applied exclusively to the MACC. This approach follows guidance
outlined by the Capital Projects Advisory Review Board's Best Practices Manual.6
The following table represents how TCC is established.

5 RCW § 39.10.370(4)

6

Capital Projects Advisory Review Board, General Contractor/Construction Manager Best Practices Manual 11 (Apr. 2025).

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Primary Fire Station Continuing Operations Preservation Project- MC/CM Cost-of-Work Audit

Source: CPARB General Contractor/Construction Manager Best Practices Manual 11 (April 2025).

SGCs were approved at $1,034,876. Pay Application # 19 reports that Hermanson invoiced $970,687
against the SGC allocation. Since SGCs are defined as lump sum amounts, they fall outside the scope
of audit procedures.
During our verification of costs charged under both the Material and "Other" categories, we identified
certain line items that were considered unallowable. These items met the established criteria for
inclusion as SGCs, which means they should not have been billed as cost of work items. A detailed
discussion and analysis of these findings are presented in the following sections, outlining the rationale
for their exclusion and the appropriate classification under SGCs.
The table below lists the items that qualify as SGCs and, consequently, should not be billed separately
as cost of work. This distinction assures that all costs are categorized correctly in accordance with
contract requirements and prevents duplicate billing for items already covered under the lump sum SGC
allocation.

7

7

MC-0320968 Primary Fire Station COPP GCCM Construction Contract MACC rev., at 2200.

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Primary Fire Station Continuing Operations Preservation Project- MC/CM Cost-of-Work Audit

MC/CM Fee
The MC/CM fee is a set percentage, covering profit and overhead. Overhead includes office expenses
allocated to the project, costs for subcontractor bidding, B&O taxes, bonds, and insurance. The
Summary Matrix of Cost Allocation in General Conditions lists additional factors affecting the fee
percentage. The Fee applies only to the MACC, not SGCs; for this project, it was set at 9%. We validated
the amounts by recalculating with the Schedule of Values and the Total Completed and Stored to Date
on Pay Application #19 without exception.
Subcontractors
Herman's Job Cost Ledger shows fixed-price subcontractor costs totaled $855,608 as of PA #19 and
were distributed among seven different subcontractors. However, only $840,608 was billed resulting in
a potential that Hermanson is entitled to $15,000. To ensure accuracy and compliance, we verified
Hermanson's reported payment amounts to each subcontractor by reviewing their Application and
Certification for Payment, as well as their Conditional Waiver and Release Upon Progress Payment.
Our testing confirmed that all costs were substantiated, and no exceptions were identified. This
comprehensive review provides assurance that payments were correctly processed and documented.

Equipment
Hermanson billed $662,000 for equipment, all confirmed by matching invoices in the pay applications
with no discrepancies.
"Other"
Hermanson utilized the "Other" transaction category code to bill items that did not fit within the standard
cost categories. A comprehensive verification was performed on all costs billed under this category.
During this review, it was determined that several items billed as "Other" should instead be classified as
SGCs, as outlined in the contract agreement. Other items should have been included as part of the Fee,
according to the established General Conditions and the Table of Cost Categories & Markups.

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Primary Fire Station Continuing Operations Preservation Project- MC/CM Cost-of-Work Audit

Hermanson submitted $4,538 in warehouse storage fees as part of the Pay Application. However,
General Conditions G-08-04(a) stipulates specific documentation requirements for progress payments
related to materials delivered to the site but not yet incorporated into the work. The contractor must
provide certified invoices from subcontractors or suppliers and proof of payment, either in the form of
canceled checks or acknowledgments of receipt of full payment from those parties. In this instance,
Hermanson only submitted summary documents describing the material, its location, and a charge rate
of $4 per square foot. The required supporting documents, as detailed in G-08-04(a), were not provided
in the Pay Applications.
Based on our verification and documentation review, we are questioning $22,255 which includes the
applicable sales tax and MC/CM Fee.

Recommendation:
5. Pre-approve proposed rental and storage rates and review itemized documentation for components
such as Shop Burden.
Material - $179,254
We performed a thorough review on all costs billed under the "Material" category. This comprehensive
verification process included an evaluation of documentation supporting each item submitted for
payment. During our review, we identified certain items classified as "Material" that did not align with the
Agreement's definition. Specifically, several costs should have been categorized as SGCs, as stipulated
in the Agreement. Additionally, some items were determined to fall under the Fee category, as outlined
in the General Conditions and the Table of Cost Categories & Markups.
Hermanson submitted a total of $179,254 in material costs, all of which underwent detailed testing and
verification. Among these, items requiring reclassification as SGCs or General Conditions were isolated
for further review and found that $2,709 in material costs lacked adequate supporting documentation.
Consequently, after our verification and review of supporting materials, we are questioning $16,475
which includes the applicable sales tax and the MC/CM Fee.

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Primary Fire Station Continuing Operations Preservation Project- MC/CM Cost-of-Work Audit

Appendix A- "OTHER" Questioned Transactions

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Primary Fire Station Continuing Operations Preservation Project- MC/CM Cost-of-Work Audit

Appendix B- "MATERIAL" Questioned Transactions

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Primary Fire Station Continuing Operations Preservation Project- MC/CM Cost-of-Work Audit

Appendix B - "MATERIAL" Questioned Transactions (Cont.)

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Primary Fire Station Continuing Operations Preservation Project- MC/CM Cost-of-Work Audit

Appendix B - "MATERIAL" Questioned Transactions (Cont.)

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Primary Fire Station Continuing Operations Preservation Project- MC/CM Cost-of-Work Audit

Appendix B - "MATERIAL" Questioned Transactions (Cont.)

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