TxDOT Internal Audit Construction Contract Administration Audit (1201-5) Department-wide Report

Transcription

1 Construction Contract Administration Audit (1201-5) Department-wide Report Introduction This report was prepared for the Transportation Commission, TxDOT Administration and Management. The report presents the results of the Construction Contract Administration Audit which was conducted as part of the Fiscal Year 2006 Audit Plan. The objectives of the audit were: to determine if the department s highway construction contract administration is administered in compliance with the related construction contract/specifications and departmental policies, procedures and guidance; to obtain the construction inspectors opinions about employee relationships with the contractors; and to determine what training is needed in construction contract administration. Background According to the Construction Division (CST), the department had 1,874 active construction projects as of August 2006 and that translated into a total contract awarded amount of approximately $15 billion. In addition, the total amount of all change orders in Fiscal Year 2006 was approximately $207 million or approximately 3.5% of the total amount under contract during that period. The projects examined in this audit were selected from those projects that were in the SiteManager system as of August Scope The primary audit team included Raymond Martinez (Lead Auditor), Maria Alvarado, Augustine Nwoko, Dennis Olson, Roger Stacy and Cynthia Walker (Staff Auditors) with Paula Bishir-Jensen (Auditor-in-Charge) providing oversight for the audit. The auditors added to the team to assist with the district fieldwork included Anna Abraham, Kathy Baca, Allen Barr, Karin Faltynek, Milan Hawkins, Roberto Manzo and Lee Stone. The audit work was conducted during the period of February 2006 to February All work was performed in accordance with the International Standards for the Professional Practice of Internal Auditing of The Institute of Internal Auditors. Audit work included a preliminary survey of the construction contract administration function and the development of an audit program for the fieldwork. The Audit Office conducted fieldwork in all twenty five districts and individual reports were distributed to each district. The audit program covered the following areas: change orders; material on hand (MOH); commercially useful function (CUF) reviews and two party checks; pre-construction meeting; payroll reviews, labor interviews and compliance statements; bulletin board postings; pay estimates; traffic control; diaries, start work and contract time; storm water pollution prevention plan (SW3P); haul tickets; post construction audits; and railroad insurance. The selection of the compliance sample was judgmental and based on a variety of criteria. For example, a minimum of two active construction projects were selected from each district to Report of 8 February 12, 2007

2 determine compliance with the applicable requirements. An attempt was made to select large projects from two different area offices, projects with MOH and projects with change orders. The number of change orders that were examined in each district varied. However, a cursory review of all the change orders in SiteManager was conducted and an attempt was made to select change orders under the district s approval authority (i.e. those less than $300,000) that appeared questionable. A second sample was selected if the district had any projects that required CUF reviews. If so, those projects were examined to determine if the CUF reviews were conducted as required. A third sample was also selected if the district had any projects that required railroad insurance. Those projects were examined to determine if the railroad insurance was obtained as required. Opinion We think the department is in general compliance with the applicable requirements but improvements are needed in the following areas - change orders, partnering, traffic control, material on hand, payrolls, railroad insurance and bulletin board postings, as indicated in Finding No. 1. In addition, the audit identified some best practices in the districts regarding the construction contract administration function. These practices were compiled on Attachment A in an effort to share the information department-wide. The inspectors opinions about employee relationships with the contractors indicate that the relationships are good, but a few concerns were identified which emphasize the need for continuing discussions about conflicts of interest with district personnel. This issue is discussed in more detail in Observation No. 1. The feedback obtained from district personnel indicates that improvements can be made in the training program in order to meet the districts needs. This issue is discussed in more detail in Observation No. 2. Detailed Finding and Recommendation No. 1: Patterns of consequential non-compliance with the applicable requirements were identified in the following areas - change orders, partnering, traffic control, material on hand, payrolls, railroad insurance and bulletin board postings. Change Orders (COs) COs were inappropriately used in the following ways 1 CO added a bonus to the contract; 1 CO paid an incentive for a detour before the work was completed and there was a major change to the detour that wasn t documented by a CO; 1 CO allowed third party work and funds were accepted by the district without an Advance Funding Agreement; COs were used to sell portable concrete traffic barriers to the contractor; 3 COs reference the termination of the contract by the district but CST had no record of the termination; and value engineering COs were identified in two districts. Report of 8 February 12, 2007

3 In addition, the explanations or supporting documentation for some COs weren t adequate in 5 districts and 17 districts had line items that exceeded the area engineer s or district engineer s approval authority but the COs were signed by the district because the net amounts were negative. Partnering Non-compliance with the Partnering Program requirements was found in all the Partnering COs that were reviewed. For example, some districts lacked the required registration form or attendance list or evaluation forms, or meals were paid without an overnight stay, or gratuities were paid or there was no formal facilitator. On a few COs, the facilitator s travel expenses exceeded the state rates and on one CO, 4 rooms were paid for 2 facilitators and no receipts were provided. Traffic Control The inspections of traffic control devices weren t conducted, documented or retained in properly labeled folders as required by department policy, in 16 districts. For example, 2 districts weren t doing the quarterly inspections, 1 district lacked some of the required monthly inspections, 3 districts didn t conduct some inspections at approximately two week intervals as required and 1 district didn t conduct inspections at night when the project was suspended. Regarding the documentation, the quarterly inspections of barricades weren t documented on the Form 599 (Traffic Control Devices Inspection Checklist) as required, in 6 districts. Regarding the folders, the Form 599s weren t in folders marked with the required label ( DO NOT DISCLOSE EXCEPTED FROM DISCLOSURE BY 23 USC 409 ) in 5 districts. In addition, it was identified: that the guidance in the Construction Contract Administration Manual for quarterly barricade inspections is separate from the guidance for the monthly inspections; that the manual doesn t clearly specify that the quarterly inspections are required in addition to the monthly inspections; that there is no indication on the Form 599 if the inspection was a monthly or quarterly inspection; and that there are no instructions on the back of the Form 599 for the quarterly inspections. Material on Hand (MOH) The MOH wasn t monitored as required in 17 districts. For example, 13 districts weren t conducting the required annual review of the contractor s MOH records (although 8 of those districts had a compensating control, e.g. they required invoices). On 1 project, two items had been moved but not placed on the project, other items weren t clearly marked, one item cost less than the $1,000 minimum amount and the contractor didn t respond to requests for documentation. In 2 districts, the area office personnel didn t know the location of the MOH for their projects. In addition, it was identified that there is a lack of guidance in the Construction Contract Administration Manual to help the districts mitigate the risks in this area. Payrolls Report of 8 February 12, 2007

4 The payrolls weren t monitored or protected, or labor interviews weren t conducted as required in 19 districts. For example, there were no procedures in place to protect sensitive information on the contractor s payrolls (e.g. social security numbers) in 17 districts. Some of the required labor interviews were lacking in 8 districts. The sampled area offices in 1 district weren t conducting the required 10% review of the contractor s payrolls. Some of the contractor s payrolls and/or compliance statements weren t submitted within the required 7 day period in 8 districts. In addition, it was identified: that there is a lack of guidance in the Construction Contract Administration Manual on how to document payroll reviews (e.g. initials and date); that there are two different versions of the labor interview form on CST s website and in the manual; that the manual doesn t specifically state that labor interviews must be conducted for the subcontractors; and that the manual should be consistent when referring to the 7 day requirement for submitting payrolls. Railroad Insurance On projects that required railroad insurance, 20 districts didn t verify that the insurance was obtained or that the documentation was sent to CST. For example, 14 districts were unaware of their role for verifying the railroad insurance, 8 districts had work near the railroad without evidence of railroad insurance and the insurance was obtained but the documentation wasn t forwarded to CST in 2 districts. In addition, there is a lack of guidance in the Construction Contract Administration Manual regarding the district s or division s responsibilities regarding railroad insurance. Bulletin Board Postings The bulletin boards weren t adequately monitored in 12 districts. For example, the bulletin boards lacked the required posters or had outdated, illegible or incomplete posters in 11 districts, monitoring of the bulletin boards wasn t assigned to anyone in 1 district and one bulletin board was not accessible to the contractor s employees in 1 district. In addition, it was identified: that there is a lack of guidance in the Construction Contract Administration Manual regarding where to place the board or the structure of the board itself; that the manual has little guidance on how to comply with the requirements when there is no field office; that the manual contains two separate lists of required posters; and that there should be a link to the required bulletin board posters on the Internet for the employees and the contractors. Criteria: The Construction Contract Administration Manual, Chapter 1 (Overview) states All work must be administered in accordance with the contract specifications, terms and conditions, state and federal laws and regulations, and departmental policy. The manual also states The Construction Division (CST) provides general oversight of the letting, management and administration of highway construction contracts Report of 8 February 12, 2007

5 The Federal-Aid Highway Program Stewardship/Oversight Agreement for Design and Construction, Part II State and Division Office Roles and Responsibilities, C, states TxDOT is responsible for compliance with all laws and regulation for State oversight projects, and will monitor the programs and projects by making periodic reviews. Cause: The non-compliance may have occurred because: the districts were unaware of the requirements; they misunderstood the requirements; they had other priorities; or the discrepancies that occurred were undetected by the district or CST. Also, CST is not currently conducting oversight visits of the districts. Effect: Non-compliance in the construction contract administration function may result in inconsistent practices, unintended results, safety risks, potential repercussions by other state and federal agencies, or the potential for fraud. Non-compliance may also impact the quality, cost or scheduled completion of the department s highway construction projects. Recommendation: CST should review the results of this audit and make any necessary revisions to the Construction Contract Administration Manual in order to clarify or improve the guidance. This review should cover, at minimum, the areas described in this report as well as those areas discussed with CST in the exit that did not have consequential non-compliance. This includes the following suggestions: CST may need to clarify when work days should and should not be suspended when the contractor cannot work on the critical path; it may be beneficial for the districts if CST develops a spreadsheet to calculate mobilization payments; and CST should provide better and more timely guidance to the districts when emergencies that affect highway construction projects occur in the future. This effort should be coordinated with any other involved divisions (e.g. the Traffic Operations Division, Office of Civil Rights and the Business Opportunity Program Office) and with the districts. CST should meet with the Assistant Executive Director for Engineering Operations to discuss change orders and the Partnering Program to determine if any changes are needed in the requirements or the guidance in order to help the districts use change orders and Partnering as intended and in compliance with department policy and state laws, rules and regulations. CST should also initiate oversight field visits in order to ensure that the districts are complying with the applicable requirements. These field visits should cover, at minimum, the areas described above (including those change orders that are under the district s approval authority), and any other areas in construction contract administration that the Administration and CST consider to be at risk. Management Response and Action Plan: Change Orders (COs) - The requirements outlined for change orders in the Construction Contract Administration Manual (CCAM) will be reinforced to the districts in routine visits to Report of 8 February 12, 2007

6 the districts by the Construction Division Field Engineers. The CCAM will be modified to provide guidance to the districts for addressing signature authority or additional coordination for individual change orders that significantly increase the overall project cost growth, individual change orders with significant increases and decreases that balance to an amount within the Area Engineer's authority, and large overall decrease change orders (absolute value thresholds). Partnering - The Guidance document for Partnering will be revised to provide additional direction regarding eligible costs under the special provision for Partnering. Traffic Control - The Construction Contract Administration Manual will be modified to provide additional direction regarding conducting of routine barricade inspections, quarterly barricade inspections, and proper labeling and storage of reports. This work will be led by Construction Division in coordination with Traffic Operations Division. Material on Hand (MOH) - The Estimates Manual will be modified to provide additional direction regarding Material-On-Hand submissions and verification of stockpiled materials. Payrolls - The Construction Contract Administration Manual will be modified to provide additional direction regarding proper storage of payroll information and documentation for review of 10% of payrolls. Requirements for submission will be clarified along with correction of any discrepancies in forms. Railroad Insurance - The Construction Contract Administration Manual will be modified to provide additional direction regarding division and district roles and procedures regarding railroad insurance. Bulletin Board Postings - The Construction Contract Administration Manual will be modified to provide additional direction regarding bulletin boards and acceptable locations. CST will institute periodic oversight reviews of projects and the oversight functions performed by the districts. The CST field engineers will conduct one project oversight review per quarter using the Interim Project Review Checklist. These reviews will include review of the district s oversight functions and documentation. Reports and summary of findings will be provided to the appropriate district and division. Observations No 1: Potential conflicts of interest or harmful relationships between TxDOT s employees and the contractors employees were identified in five districts. The Construction Contract Administration Manual, Chapter 9, Section 3 (Conflicts of Interest and Ethics) states Do not participate in any activity that could be considered a possible conflict of interest. Refer to Conflict of Interest in the Human Resources Manual for more information. Report of 8 February 12, 2007

7 The Human Resources Manual, Chapter 8, Section 10 (Conflict of Interest, General Conditions) states Employees are responsible for avoiding conflicts of interest or even the appearance of conflicting activities. Employees should contact their supervisor or DE/DD/OD if there is any doubt as to the possibility of a conflict of interest. Recommendation: CST should periodically discuss conflicts of interest with district management (e.g. district directors of construction) and ensure that the districts have a process in place to convey the policy to their employees. This discussion should include a reminder of the policy regarding conflicts of interest, specific examples of inappropriate conduct and actions the department can take to minimize these occurrences. Management Response and Action Plan: Construction Division field engineers will reinforce the importance of monitoring for conflicts of interest with the directors of construction in routine visits and document district s actions to assure conflicts of interest do not occur. No. 2: The districts have training needs that should be addressed in the construction contract administration function. About half the districts indicated that the timing or scheduling of training was an issue. Also, a few districts requested more SiteManager training, construction records auditor training or that training be provided at the district in order to minimize travel. A list of the suggestions from each district was provided to CST during the exit. Recommendation: CST should review their training program and consider different ways to meet the districts training needs in the construction contract administration function. For example, CST should consider developing training courses or refreshers that can be accessed by district employees in an easier manner, such as via the i-way (TxDOT s Learning Content Management System) or with DVDs. We understand that CST is currently developing some online training with the Texas Transportation Institute for materials testing. In addition, CST should pursue their idea of developing a user group meeting for district construction records auditors and possibly a manual for their needs. Management Response and Action Plan: Contract Administration and SiteManager training & training materials are continually offered to the districts. The Inspector Development Program will be implemented. Construction Division currently has two full time staff dedicated to training and development of district employees and will continue to pursue effective methods to increase knowledge in the districts. Closing Comments Report of 8 February 12, 2007

8 The results of this audit were discussed with the Construction Division Director in an exit conference held on February 5, 2007 and with the Assistant Executive Director for Engineering Operations in a briefing held on February 6, We thank the Construction Division and all the districts for their assistance and cooperation with this audit. Report of 8 February 12, 2007