Construction Manager/General Contractor Project Delivery Method

An image of Denver Fire Station 39 at dusk with the two garage door bays open.

 

 

Objective

To determine whether the Department of Transportation & Infrastructure’s construction management was adequate enough to ensure:

  1. The city received the scope of work included in its three contracts for the Northfield Fire Station construction project.
  2. The city paid the correct amount to build the Northfield Fire Station.

Background

Transportation & Infrastructure used the “construction manager/general contractor” project delivery method to build Northfield Fire Station No. 39 in Denver’s Central Park neighborhood. This approach is ideal for technically complex construction projects with accelerated schedules and budget constraints. The fire station was completed in July 2020 and cost about $8.8 million.

Why this matters

Inadequately managing city construction projects means the City and County of Denver potentially wastes taxpayer money. The city might not receive all contractually required services and deliverables it is paying for, and it risks paying too much for the services it does receive.
 
With the COVID-19 pandemic having a lingering impact on the price of construction materials and services, it is more important than ever that the city properly manage its construction projects.

Findings

The Department of Transportation & Infrastructure Inadequately Managed the Northfield Fire Station Construction Project and Did Not Effectively Monitor Costs to Ensure the City Was Not Overcharged
 
The Department of Transportation & Infrastructure did not properly monitor and oversee all phases of the Northfield Fire Station construction project. This lack of oversight caused the city to diminish the advantages of the “construction manager/general contractor” project delivery method.
 
Specifically, we found department staff over-relied on the contractor, PCL Construction Services Inc. Department staff did not validate the
contractor’s cost estimates to ensure project costs were not inflated.
 
They also did not enforce compliance with all contract terms and required deliverables for design and construction, and they did not adequately oversee how PCL Construction Services awarded work to subcontractors — including whether the company awarded itself a portion of the construction work in a fair and competitive manner.
 
Transportation & Infrastructure also lacks documented policies and procedures detailing how it determines the best delivery method to use for a construction project and the steps necessary to manage the unique risks associated with the construction manager/general contractor method. We also identified inconsistencies in the department’s understanding of how to manage the various payment terms of a contract that uses this delivery method.
 
Department of Transportation & Infrastructure staff did not verify cost estimates during preconstruction, nor did they verify the final cost estimate that established the guaranteed maximum price the city would pay for the Northfield Fire Station project.

 

In addition, the department lacks a standardized and documented threshold for determining how reasonable a contractor’s cost estimates are. Without these processes, the Department of Transportation & Infrastructure cannot guarantee the city is getting the best price on construction costs.

Recommendations

1.1 Validate Contractors’ Cost Estimates –  The Department of Transportation & Infrastructure should develop and document a process to independently verify contractors’ cost estimates — either internally or by contracting with an independent third-party estimator. The department should hold review meetings at key project milestones that include the contractor, the designer, the cost estimator, and department staff who will evaluate and negotiate cost estimates. Meetings to discuss cost estimates should be thoroughly documented, along with the department’s internal cost-estimation activities.

Agency Response: Agree, Implementation Date – June 30, 2022

1.2 Establish Thresholds for Price Variations  –  The Department of Transportation & Infrastructure should develop and document thresholds for differences in all cost estimates that should prompt further evaluation of a contractor’s estimates. These thresholds should be thoroughly documented and adjusted based on a project’s risk and budget. Project thresholds should be established before the guaranteed maximum price is negotiated, and the final agreed-upon price should be within an acceptable deviation of the established threshold.

Agency Response: Agree, Implementation Date – June 30, 2022

1.3 Ensure All Cost Estimates Are Developed, Delivered, and Collaborative –  The Department of Transportation & Infrastructure should ensure collaboration and provide leadership of the construction team when producing the schematic, design development, and construction documents. This collaboration should be documented either in meeting minutes of construction team meetings or by other means. In addition, the department should enforce the contract terms requiring the department to review and approve the schematic, design development, and construction documents.

Agency Response: Agree, Implementation Date – December 1, 2021

1.4 Actively Participate in Subcontracting –  The Department of Transportation & Infrastructure should ensure project managers are actively involved in the awarding of subcontracted work to ensure the terms of a construction manager/general contractor agreement are adhered to regarding subcontracted work. Specifically, project managers should ensure a contractor’s subcontracting process is fair, reasonable, and — to the greatest extent practicable — based on open competition.

 At a minimum, the department’s involvement should include:

  • Obtaining and reviewing the documentation of each bid package submitted by a subcontractor to ensure at least three bids per building trade are received and that the lowest qualified bidder is selected.
  • Ensuring the contractor tried to re-solicit the bid when three bids are not received.
  • Documenting and retaining the department’s review and approval of the selected subcontractors — including both the contractor’s rationale for not selecting the lowest bid and the project manager’s approval.
  • Obtaining and reviewing subcontracts for unallowable terms, fees, and other items to ensure the subcontracts do not contradict the agreement between the city and the contractor.

 Agency Response: Agree, Implementation Date – June 30, 2022

1.5 Actively Participate in a Contractor’s Awarding of Self-Performed Work – The Department of Transportation & Infrastructure should ensure project managers are actively involved in the awarding of any contractor’s self-performed work to ensure the contractor adheres to the terms of its contract. Specifically, project managers should ensure the bidding process is fair, reasonable, and based on open competition. 

 At a minimum, project managers should:

  • Obtain and review documentation of the bid packages for self-performed work to ensure the contractor received at least three bids and that the lowest qualified bidder is selected.
  • Ensure the contractor tried to re-solicit the bid when three bids are not received.
  • Document and retain the department’s review and approval of the selected subcontractors — including the contractor’s rationale for selecting itself when it is not the lowest bidder.
  • Document and review the bids, proposed costs, and scope to understand why significant cost differences occur.
  • Obtain and review all self-performed work agreements for unallowable terms, fees, and other items that may not be reasonable, such as duplicate work and costs.

Agency Response: Agree, Implementation Date – June 30, 2022

1.6 Enforce Contractual Billing Rates and Properly Manage Payment Terms  –  The Department of Transportation & Infrastructure should enforce contractual billing rates as written in professional service contracts. Furthermore, the department should ensure the staff who oversee construction contracts understand the different types of payment terms so the terms are managed accordingly.

 Agency Response: Agree, Implementation Date – Sept. 16, 2021

1.7 Develop and Implement Policies and Procedures for the Construction Manager/General Contractor Delivery Method –  The Department of Transportation & Infrastructure should develop and implement policies and procedures addressing the unique risks of the construction manager/general contractor delivery method. These policies and procedures should detail the steps required to effectively deliver such projects — from when a project is scoped through the end of construction.

 Agency Response: Agree, Implementation Date – June 30, 2022

1.8 Develop and Implement Policies and Procedures for the Construction Manager/General Contractor Delivery Method –   The Department of Transportation & Infrastructure should develop and implement policies and procedures for a project delivery selection process that aligns with leading government practices. At a minimum, this process should be thoroughly documented and include primary selection factors as outlined in the Colorado Department of Transportation’s project delivery selection matrix, as well as selection rationale.

Agency Response: Agree, Implementation Date – June 30, 2022

1.9 Develop and Document Policies and Procedures for the Project Risk Register –  Along with Recommendation 1.7 for policies and procedures specific to the project delivery method, the Department of Transportation & Infrastructure should include specific details in its policies and procedures to ensure the department’s risk register aligns with leading government practices. At a minimum, the policies and procedures should include the five components of a risk register (i.e., risk identification, risk assessment, risk mitigation, risk allocation, and risk monitoring), who should be involved in creating the register, and how it is to be used throughout the project.

Agency Response: Agree, Implementation Date – June 30, 2022

1.10 Train Project Managers –  Along with the efforts to address the second part of Recommendation 1.6, the Department of Transportation & Infrastructure should ensure that staff charged with project oversight understand the various payment terms that accompany different types of construction contracts, and the department should adequately train all staff to ensure they have a consistent understanding.

Agency Response: Agree, Implementation Date – September 16, 2021

1.11 Verify Billed Costs  –  The Department of Transportation & Infrastructure should ensure staff charged with project oversight verify the actual cost of work on “guaranteed maximum price” contracts to ensure the city pays the correct amount and pays only for allowable items. At a minimum, this review should verify that the costs included in a pay application:

1. Are reimbursable according to the terms of the contract.
2. Accurately reflect the amount incurred by the contractor.

3. Are supported with documentation (e.g., vendor invoices, time sheets, etc.). 

Agency Response: Agree, Implementation Date – June 30, 2022

1.12 Enforce Contractually Required Payment Terms – The Department of Transportation & Infrastructure should ensure project managers enforce contract terms related to the submission of pay applications, and project managers should develop pay schedules with contractors.

Agency Response: Agree, Implementation Date – September 16, 2021

 

1.13 Develop and Implement Processes for Change Orders  – The Department of Transportation & Infrastructure should develop and implement processes for verifying costs for change orders on construction contracts. The processes should be well documented and, at a minimum, include:

  • Obtaining an itemized breakdown of the proposed change order costs and validating the costs to verify their accuracy.
  • Negotiating any differences in pricing.
  • Comparing itemized change order costs with contract terms to ensure all items included in the change order are allowable.
  • Recalculating all markup for profit applied to the costs to ensure they are accurate and comply with contract terms.
  • Ensuring other parties — such as the project designer — are involved in reviewing the change order, as contractually required. 

Agency Response: Agree, Implementation Date – September 16, 2021

 

Auditor's Letter

September 16, 2021

The objective of our audit of the Northfield Fire Station construction project was to assess how well the Department of Transportation & Infrastructure managed the $8.8 million project — specifically, to determine whether the city received all that it contracted for under the construction manager/general contractor project delivery method and whether the city was overcharged. I am pleased to present the results of this audit.

While we found the city received what it contracted for, the audit determined the Department of Transportation & Infrastructure inadequately managed the Northfield Fire Station construction project, which resulted in the city overpaying.

Transportation & Infrastructure needs to validate contractors’ cost estimates and charges, enforce contractors’ compliance with contract terms and deliverables, and oversee contractors’ subcontracting processes. The department should also adequately train staff to properly manage technically complex construction projects and the contract payment terms associated with such projects. By implementing recommendations for stronger and more consistent management of construction projects, the Department of Transportation & Infrastructure will be better equipped to ensure the city does not overpay for construction services.

This performance audit is authorized pursuant to the City and County of Denver Charter, Article V, Part 2, Section 1, “General Powers and Duties of Auditor.” We conducted this performance audit in accordance with generally accepted government auditing standards. 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.

We extend our appreciation to the personnel in the Department of Transportation & Infrastructure who assisted and cooperated with us during the audit. For any questions, please feel free to contact me at 720-913-5000.

Denver Auditor,

Auditor's Signature
Timothy O'Brien, CPA

 

Follow-up report

A follow-up report is forthcoming. 

 

 

 

 

 

 


 

Tim O'Brien Headshot

AUDITOR TIMOTHY O'BRIEN, CPA
Denver Auditor

 



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