Internal Audit Report 


Review of the Port Capital Improvement Program 

Current Practices 




Issue Date: April 05, 2011 
Report No. 2011-06

Internal Audit 
Capital Improvement Program (CIP) 
Current Practices 

Table of Contents 
Transmittal Letter .................................................................................................................................... 3 
Executive Summary ................................................................................................................................ 4 
Audit Report ............................................................................................................................................. 5 
Background .............................................................................................................................................. 5 
Department Highlights and Accomplishments .................................................................................... 7 
Audit Scope and Methodology ............................................................................................................... 8 
Conclusion ............................................................................................................................................. 11 


Table of Figures 
Figure 1  Project Costs ................................................................................................................................ 6 
Figure 2  Central Procurement Office Training Classes ............................................................................. 7 
Figure 3  Professional/Personal Services Agreements by Category .......................................................... 8 
Figure 4 - Total Number of Small Works Contracts ...................................................................................... 8 








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Internal Audit 
Capital Improvement Program (CIP) 
Current Practices 

Transmittal Letter 
We have completed an audit of the Capital Development Division (CDD). The Division oversees
and manages Port-wide procurement and the Capital Improvement Program (CIP). 
Our audit objective was to review and assess the effectiveness of management controls over
the Capital Improvement Program. 
Our audit focused on the current CIP practices. Most of the policies and procedures governing
the current CIP practices were established and implemented in 2009 or the early part of 2010. 
We conducted the audit using due professional care. The audit was planned and performed to
obtain reasonable assurance that the controls implemented by the CDD are operating as
intended  to  achieve  the  Division  objective  of  effectively  delivering  Port-wide  centralized
procurement and CIP.
Based on our review, the CDD has established adequate and effective controls over the CIP,
and the Port has adequately addressed the 2007 State Auditor's Office (SAO) audit
recommendations. 
We noted some weaknesses, not significant enough to include in the audit report, which we
communicated to management in a separate letter. 
We extend our appreciation to CDD management and staff for their assistance and cooperation
during the audit. 


Joyce Kirangi, CPA 
Internal Audit, Director 





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Internal Audit 
Capital Improvement Program (CIP) 
Current Practices 
Executive Summary 

Audit Scope and Objective  The Port Chief Executive Officer (CEO) and  the Managing
Director, Capital Development Division (CDD), requested this audit. 
Our audit objective was to review and assess the effectiveness of management controls over
the Capital Improvement Program. At the Port, the CDD oversees and manages Port-wide
procurement and the Capital Improvement Program (CIP). 
We reviewed and assessed risks to the overall strategies, processes, policies, and other
procedures that the CDD has established in order to effectively manage the Port-wide CIP. The
established processes and strategies cover all phases of the CIP from planning, design,
procurement and construction, and close-out of the capital projects. As part of the audit, we
visited many business units across the Port and evaluated whether the established controls
were carried out as intended. 
The CDD, with its 220 FTEs, manages the Port's CIP, which has annual project costs of
approximately $300 million, as well as procurement of non-capital goods/services. 
Our audit focused on the current CIP practices. Most of the policies and procedures governing
the current CIP practices were established and implemented in 2009 or the early part of 2010. 
Background  The Port's CDD was created largely in response to the 2007 State Auditor's
Office performance audit. As a result of the audit, the CEO implemented many policy changes
including department re-alignment and re-organization. 
The CDD is comprised of the following groups that help in delivering Port-wide centralized
procurement and CIP services: 
Aviation Project Management 
Seaport Project Management 
Engineering Services 
Port Construction Services (PCS) 
Central Procurement Office (CPO) 
Audit Result Summary  The CDD has adequate and effective controls over the CIP. The
controls  provide  reasonable  assurance  of  management  effectiveness  and  compliance. 
Additionally, the Port has adequately addressed the 2007 SAO recommendations related to the
reviewed areas. We, however, noted some weaknesses, not significant enough to include in the
audit report, which we have communicated to management in a separate letter. 


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Internal Audit 
Capital Improvement Program (CIP) 
Current Practices 
Audit Report 
Background 
The Port Chief Executive Officer (CEO) and the Managing Director, Capital Development
Division (CDD), requested this audit. 
Our audit objective was to review and assess the effectiveness of management controls over
the Capital Improvement Program (CIP). At the Port, the CDD oversees and manages Port-wide
centralized procurement and delivery of CIP services. 
We reviewed and assessed risk to the overall strategies, processes, policies, and other
procedures that the CDD has established in order to effectively manage the Port-wide CIP. The
established processes and strategies cover all phases of the CIP from planning, design,
procurement and construction, and close-out of the capital projects. As part of the audit, we
visited many business units across the Port and evaluated whether the established controls
were carried out as intended. 
The Port CDD was created largely in response to the 2007 State Auditor's Office performance
audit. As a result of the audit, the CEO implemented many policy changes including department
re-alignment and re-organization. The CDD is now one of five divisions of the Port and has
been organized to deliver centralized procurement, projects, construction, and contract
administration support.
The following five major organizational units comprise the CDD and support its mission: 
Aviation Project Management 
The group provides planning, design and project management of projects at the Airport
Division 
Seaport Project Management 
This group provides planning, design and project management of projects at Seaport and
Real Estate divisions 
Engineering Services 
This group provides engineering and related design, contracting, administration, surveying,
mapping, quality management, construction safety and construction management services
Port Construction Services 
This group provides construction, building, renovation, remodeling, alteration, repair or
improvement of real property for the Port that is estimated to be $200,000 or less (300K as
of July 26, 2009) 
Central Procurement Office (CPO) 
This group provides construction contract services, goods & services (purchasing), and
service agreements. Because the group is independent from the operating departments,
its reviews of contract services and payment requests, among other things, is more
objective and reliable for audit purposes. 
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Internal Audit 
Capital Improvement Program (CIP) 
Current Practices 
Procurement group oversees Purchase Requisitions and Purchase Orders, among other
things. 
Construction Contract Services administers small works and major construction contract
procurements and payments. 
Service Agreementprocures and/or provides technical support service agreements 

The following table summarizes project costs by division for the past three years. 
(in millions)             2008                  2009                   2010 
Airport         229         66%      217         63%     205         85% 
Seaport        88        25%      46        13%      24        10% 
Corporate       8         2%       8         2%       6         3% 
Real Estate     21         6%      74        21%       5          2% 
Total           347        100%      345        100%      240        100% 
Figure 1  Project Costs 
Source: PeopleSoft 

Audit Objective 
Our audit objective was to review and assess the effectiveness of management controls over
the Capital Improvement Program. Based on the results of our CIP risk assessment, our audit
objective was further defined to focus on the following areas and to determine whether: 
1.  The CDD has established effective controls over its CIP. Additional audit evaluation and
tests of compliance was focused in the following specific areas that we deemed high risk
or significant to the CIP program: 
a.  Procurement of Professional and Personal Service Agreements for the Port's defined
Categories I & II, including compliance with the CPO requirements. 
b.  Procurement of Small Works Contracts. 
c.   Change Orders estimates  evidence of due diligence over cost estimates,
negotiation, monitoring, and approval. 
d.  Contract Payments and effective cost management for: 
Personal & Professional Service Agreements--adequate support and review of
contract payments. 
Small Works--adequate support and review of contract payments. 
Major Construction  adequate support and review of contract payments. 
e.  Performance measuresassess established performance measures for
reasonableness, practicality, and effectiveness in measuring intended outcomes 
2.  Management has addressed the 2007 SAO recommendations related to the specific
areas noted in objective number one above. 
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Internal Audit 
Capital Improvement Program (CIP) 
Current Practices 

Our audit focused on the current Capital Improvement Program practices. Most of the policies
and procedures governing the current CIP practices mostly were established and implemented
in 2009 or the early part of 2010. 
The Port expends millions annually in the CIP. The CDD employs approximately 220 FTEs (as
of  March  2011)  to  manage  such  project  costs,  as  well  as  procurement  of  non-capital
goods/services. 

Department Highlights and Accomplishments 
During  the  review,  we  observed  considerable  management  efforts  and  significant
improvements in the following areas: 
New Central Procurement Office (CPO) Policies and Procedures 
Staff Training on New CPO Policies and Procedures 
Reduction in Risk Exposure Related to Category 1 Professional/Personal Agreements 
Increasing Competition in Small Works 
Implementation and Continuous Refinement of Performance Measures 
The CDD has established and implemented a number of new policies and procedures. 
Beginning with CPO-1 on personal and professional services, the CDD has implemented
procedures on every aspect of procurement from goods/services to competition waivers. 
To effectively manage newly implemented policies/procedures, the CDD has been training
and assisting Port staff to promote the correct application of the new policies/procedures. The
Port's Learning Management System indicates that approximately 1,000 Port staff has been
attending CPO classes on a variety of subject areas. 
The  CDD  continues  to  offer  classes  to  educate  new  staff  and  to  maintain
awareness/competency with existing staff. 
attendance 
Some CPO Course Description 
2009   2010   Total 
Central Procurement Office Policy CPO-1 -- What is it and how do I use it?        381     90    471 
Service Agreement Contract Administration and Review of EX-2, EX-2a                  131    131 
Evaluative Criteria for Contracts and Documenting Selection Decisions                     82      82 
Drafting Evaluative Criteria for Contracts and Documenting Selection Decisions     80             80 
Insurance Requirements for Service Agreements                                        71     71 
Standardization Of Project Manuals                                               55             55 
Procurement Basics                                                                 18     18 
Overview of Contracting Policies: Small Works                                     10             10 
Figure 2  Central Procurement Office Training Classes 
Source: HR Learning Management System 
Prior to the formation of the CDD, a significant number of Category 1 Professional Services
Agreements (<$50,000) were used to procure personal/professional services. Category 1
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Internal Audit 
Capital Improvement Program (CIP) 
Current Practices 
PSAs were relatively free of compliance requirements as the dollar threshold was low. Due to
the easy of compliance, there was a tendency to misuse Category 1 to avoid higher scrutiny
of Category 2 and 3 PSA. Indeed the SAO report pointed a number of instances where
Category 1 classification seemed to have been misused. 
The CDD implemented a number of things  to control potential misuse, including new
policies/procedures and extensive training to Port staff. As can be seen from the graph below,
CPO has made significant progress to decrease risk exposure related to Category 1 PSA. 
Category 1 (<$50,000)    Category 2 (>$50,000 and <$200,000)    Category 3 (>$200,000)
500
Number of Contract  400
300
200
100
0
2005        2006        2007        2008        2009        2010
Calendar Year
Figure 3  Professional/Personal Services Agreements by Category 
Source: PeopleSoft 
The SAO report indicated certain weaknesses in Small Works contracts specifically as it
relates to fair competition and invoice splitting. As figure 4 below shows, competition has
been promoted steadily, and statistics show that a fewer number of contractors are now 
getting  multiple  Small  Works  contracts.  This  is  a  clear  indication  that  there  is  more
competition with Small Works contracts. 
2005   2006   2007   2008   2009   2010 
Total Number of Small Works Contracts          91      97      99      60      52     25 
Contractors with more than one contract          21      21      16      10       8       2 
contractors with more than one contract as
23%   22%   16%   17%   15%    8% 
a percentage of the total 
Figure 4 - Total Number of Small Works Contracts 
Source: PeopleSoft 
The CDD is among the leading groups at the Port to proactively establish meaningful
performance measures, and measure expected outcome. While the process as a whole is still
maturing, the CDD has already implemented a number of measures to include, but is not
limited to: 1) soft costs, 2) construction timeline, and 3) change orders. The measures are
reported quarterly and are made available on the Division's intranet. 

Audit Scope and Methodology 
We conducted the audit to determine whether management controls in the Capital Improvement
Program (CIP) were adequate to provide reasonable assurance of effective operations and
compliance with Port policy/procedure. Our audit examined current practices but focused
primarily on operations in 2009 for test of details purposes. Our work was conducted at various
locations throughout the Port and involved CIP projects of all Port divisions. 
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Internal Audit 
Capital Improvement Program (CIP) 
Current Practices 

Our approach to the audit was risk-based from planning to test sampling. We reviewed and
assessed risk of the strategies, processes, policies, and other procedures that the Capital
Development Division has established in order to effectively manage the Port-wide CIP. The
established processes and strategies cover all phases of the CIP from planning, design,
procurement and construction, and close-out of the capital projects. As part of the audit, we
visited many business units across the Port and evaluated whether the established controls
were carried out as intended. 
We applied additional detailed audit procedures to areas with the highest likelihood of significant
negative impact. We considered the nature of the activity and evaluated it within the context of
our audit objectives. Our consideration included control (both manual and system driven)
assessment and control testing, as necessary. 
Our additional detailed audit procedures can be grouped and summarized into procurement,
disbursement, and performance measures. We approached each audit area with the following
methodology: 
1.  Procurement 
For professional and personal service agreements, we evaluated whether management controls 
were adequate to ensure proper and compliant procurement practices for PSAs. We reviewed
Category 1 (<$50,000) and 2 (>$50,000 and <$200,000) Professional Services Agreements 
(PSA) for risk of splitting. Splitting of PSA is a concern as it can be used to circumvent
management's intentof competitive procurement. There were 101 consultants with Category 1
agreements in 2009. Of these, there were 19 consultants with multiple PSAs. We focused on 
the consultants who may have gotten multiple consulting agreements through splitting. We
further eliminated consultants with multiple agreements whose contracts, as a whole, during
2009 did not exceed $50,000. Consulting agreements less than $50,000, as a whole, would not
be at risk of contract splitting. We utilized the same approach for Category 2 PSAs with the
dollar threshold of agreements between $50,000 and $200,000. There were 36 agreements
under this category and included five consultants with multiple agreements. Our procedures
resulted  in  four  Category  1  and  two  Category  2  agreements for  testing. We reviewed
procurement documents for the evidence of splitting of contracts, significant negotiation, and
compliance with current Port policies and procedures. 
For the Small Works, there were 53 contracts executed in 2009 with 41 contractors. To 
determine the adequacy of Small Works procurement practices, we selected contractors with
two or more contracts equal to $200,000, and any contract over $200,000. We additionally
excluded contracts with less than $50,000. Our sampling resulted in a group of 17 (or 32%) 
contracts. We reviewed the online Small Works Roster system and associated documentation to
determine proper invitation to bid and procurement practices. 
For change orders, we reviewed to determine compliance with Port policies and procedures. 
There were 34 Major Construction contracts with a total of 554 change orders in 2009. We
excluded change orders less than $10,000 as Port policy requires no cost estimates for such
change orders. We focused on change orders with round figures (in the thousands) which could
be indicative of an arbitrary estimate without an adequate engineering or scope based rational
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Internal Audit 
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Current Practices 
for the change order. Our sampling strategy resulted in 28 (or 5%) change orders from eight
contracts (or 23%). We reviewed an assortment of documentation, including but not limited to 
the public bid materials, evidence of proper and adequate cost estimate analysis, negotiation,
scope of work changes, and approval. 

2.  Payments 
For professional service agreements, there were 311 disbursements for a total amount of 
$4,886,821 under 47 agreements to 33 consultants in 2009. We considered disbursements to
consultants with multiple agreements or a single agreement with disbursements to multiple
projects in 2009. These transactions are more likely to have errors due to complexities involved
with having to bill for similar service to a number of projects and under multiple agreements. We
also considered an average payment amount as well as the timing of the payment. As a result,
19 disbursements from nine or 19% of 2009 agreements were selected for examination. The
sample included 4 consultants or 12% of the total population of 33 consultants in 2009. We
reviewed  invoices  and  accompanying  documentation  for  adequate  support,  proper 
disbursement, and approval. 
To determine whether Small Works disbursements were for actual hours worked and services
rendered, we evaluated 80 Small Works contracts with disbursements in 2009 totaling $2.7
million dollars. We considered disbursements with six or more months apart among them. Small
Works contracts are generally for short-term projects, and thus disbursements are expected
every month or two. A resulting population was further excluded, based on an average number
of projects assigned to the construction manager. The total number of contracts in 2009 was
divided by the total number of construction managers to calculate an average number per
construction manager. We then selected disbursements from projects assigned to Construction
managers who had a higher number of projects than average. Consequently the likelihood of
error and improper charges for labor and/or materials would be higher in these projects. Our
sampling resulted in nine disbursements for a total of $447,983 (or 17%) from six Small Works
contracts (or 7.5%). We reviewed contractor submitted time sheets and invoices for evidence of
proper support for disbursements. 
For Major Construction contracts, we reviewed 2009 progress payments to determine whether
they were properly based on verifiable progress. There were 45 Major Construction contracts
with disbursements totaling $162 million dollars in 2009. We included contracts whose 2009
disbursements were in excess of 50% of 2008 or 2010 disbursements. The 50% threshold is
considered a significant increase and thus could be an indicator that progress was overstated in
order to receive payment for work not yet performed. We further considered contracts with
multiple monthly vouchers. Progress payments are typically invoiced monthly, and as such
multiple invoices in a month could be another indicator of improper progress payments. Our
sampling resulted in seven (or 16%) contracts  with $67,279,625 (or 41%)  of the 2009
disbursements. We reviewed contractor submitted invoices and accompanying documentation
for evidence of adequate support, and approval of progress payment requests. 


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Internal Audit 
Capital Improvement Program (CIP) 
Current Practices 
3.  Performance Measures 
We reviewed implemented performance measures for completeness with regards to types of
measures, reasonableness, practicality, and effectiveness in measuring the intended result. We
conducted the review from a risk-based perspective to ensure that the implemented measures
are related to the Division's significant risks. Specifically, we reviewed the following measures
for evidence of complete rational and accurate compilation: 
Construction Soft Costs  measures quarterly the percentage of indirect construction
costs. 
Cost Growth during Construction measures quarterly for the change in the original
contract price made through change orders. 
Project Status  quarterly reports the status of projects in terms of budget and schedule. 
Project Schedule Growth  measures from the initial Commission authorization to start
of design work to Planned/Actual Substantial Completion. 
Procurement Timeliness of Service Agreements  measures milestone of Category 3
Services Agreements. 

Conclusion 
The Capital Development Division (CDD) has adequate and effective controls over the Capital
Improvement Programs (CIP) to provide reasonable assurance of management effectiveness
and  compliance.  Additionally,  the  Port  has  adequately  addressed  the  2007  SAO
recommendations related to the reviewed areas. We, however, noted some weaknesses, not
significant enough to include in the audit report, which we have communicated to management
in a separate letter. 








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