City Was Ineffective in Managing Construction Project

Published on September 16, 2021

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DENVER – Denver did not effectively manage a recent construction project, resulting in a high risk of overpaying and a potential lack of fair competition in subcontracting, according to a new audit report from Denver Auditor Timothy M. O’Brien, CPA.

“Potentially inflated costs and noncompetitive contracting are exactly what we don’t want to see as the city continues construction at a fast pace,” Auditor O’Brien said. “All construction companies in the city should get a fair shot at doing business with the city and the taxpayers should be confident they got what their dollars paid for.”

Specifically, we found the city relied too much on the contractor for the Northfield Fire Station construction project to keep the project on time and within budget. The city did not do enough to verify costs and to track subcontracting to ensure fair and competitive practices. Staff in the Department of Transportation & Infrastructure also did not enforce compliance with all contract terms.

The department chose a specific type of project delivery method for the Northfield Fire Station construction called “construction manager/general contractor.” This method is beneficial for technically complex construction projects that have an accelerated schedule and budget constraints. The method uses an integrated approach where the owner, designer, and contractor work together from early on to plan, design, and build.

However, to maximize the advantages of this method, the city must monitor and oversee all phases of the project. That means the city must monitor costs from the designer and validate the construction manager’s cost estimates to make sure they aren’t higher than they should be. If the initial estimates are inflated, later on in the project the builder could charge the city for extra costs that are still within the project’s overall price cap — resulting in the city overpaying for the project.

“The project’s managers misunderstood the concept of a ‘guaranteed maximum price’ — they thought the city would pay that amount no matter what, when the city should pay less if actual costs were less,” Auditor O’Brien said. “This is a common misconception among project managers — not just a problem on this project — and the city should work to rectify this.”

This type of project delivery method has a high tendency for costs to grow, making the city’s oversight of the process even more crucial to minimize inflated costs and ensure efficient use of taxpayer dollars.

We did find the city overpaid or paid more than expected in some circumstances. In one case, the general contractor, PCL Construction Services Inc., paid itself more than $10,000 for preconstruction services that had already been completed and paid for a year earlier. And in another case, the company hired itself as a subcontractor and then awarded itself more money than it had proposed to spend in its bid.

“Although the city got what it paid for on this project, the appearance of unfair practices or favoritism is a significant reputational risk for the city,” Auditor O’Brien said. “Transparency is important when such large amounts of taxpayer money are going to private companies.”

PCL Construction Services subcontracted with itself in four instances and received only two other bids for the work. Although their own bid may count as the required third proposal, it does not promote the appearance of a competitive bidding environment.

More than two-thirds of construction costs on the Northfield Fire Station project went to 29 subcontractors. However, Department of Transportation & Infrastructure staff did not adequately oversee how those subcontractors were hired.

PCL Construction Services also hired two subcontractors without getting three separate bids as required, and it hired nine subcontractors without explaining why they were chosen even though their cost proposal was not the lowest.

When we asked department staff why they left all decision making on subcontractors to the general contractor, they said it was “irrelevant” because the city is not a party to the agreements. However, the city — as owner and ultimate authority of its construction projects — should have more involvement in ensuring fair and open competition.

“Because the city isn’t a party to subcontracts, it should not deal with the subcontractors directly in this type of process,” Auditor O’Brien said. “That does not, however, preclude the city from exercising proper oversight through the general contractor to guarantee a fair and competitive process.”

The city also needs to do more to validate costs and enforce contractual billing rates. We found some city staff did not fully understand the different types of payment terms. By improperly enforcing contractual billing rates and failing to enforce areas of noncompliance with the contracts, the city paid an inaccurate amount to the project’s designer, OZ Architecture Inc.

The lack of oversight on the Northfield Fire Station construction project resulted in diminished advantages of the city’s chosen project delivery method. The Department of Transportation & Infrastructure needs policies and procedures for projects using the “construction manager/general contractor” method and for determining whether this is the best method to use. Creating new policies will ensure consistent treatment for all projects and contractors.

Finally, the city needs to establish a schedule for invoices and verify the accuracy of change order costs.

“This audit was part of a series looking at how the city manages its construction projects,” Auditor O’Brien said. “This isn’t the first time we found inadequate oversight, and I hope city leaders will keep our findings in mind on all future projects.”

The Department of Transportation & Infrastructure agreed with all 13 of our recommendations.

AUDITOR TIMOTHY O'BRIEN, CPA
Denver's Auditor

Denver Auditor's Office
201 W. Colfax Ave. #705 Denver, CO 80202
Email: auditor@denvergov.org 
Call: 720-913-5000
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