Financial Stewardship                    Accountability                       Transparency
Port of Seattle Audit Committee 
Special Session
Architectural & Engineering Consultant Rates
February 5, 2020
Pier 69, Commission Chambers
12:30 PM  1:30 PM

Operational Excellence                    Governance

Architectural & Engineering Consultant Rates
Architectural and Engineering costs account for approximately
10-20 percent of capital costs
$3.6 billion in capital spending over the next five years
RCW 39.80.050 states "The agency shall negotiate a contract
with the most qualified firmat a price which the agency
determines is fair and reasonable"

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Washington State Auditor's Office
(Columbia River Crossing Project  April 2014)
"industry sources indicate you must know a firm's overhead
rate to know the profit markups you are paying"
"most state transportation departments typically pay a 10
percent to 12 percent consultant markup on labor and
overhead."
"the American Council of Engineering Companies (ACEC), helped
develop a WSDOT policy that would directly benefit larger firms
that engage sub-consultants to perform work for the state agency."
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Industry Standards / Benchmarks
23 CFR Part 172, "Fixed fees in excess of 15 percent of
the total direct labor and indirect costs of the contract
may be justified only when exceptional circumstances
exist."
Benchmarked with several airports and local
governments.

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IA approach to determining consultant markup
Obtained direct labor for 407 consultants (8 contracts / 33 firms)
Consultant Markup = Negotiated Rate  (Direct Labor + Indirect Cost*)
Example:
Negotiated Rate: $160.00
Direct Labor: $48.47
Overhead: 136.92% ($66.37)
Calculation: $160  ($48.47 + $66.37) = $45.16 (39.3%)
* Approved FAR 48 CFR Part 31 audited overhead rate, WSDOT overhead rate, or Safe Harbor rate

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1) Rating: High
CPO had not established guidelines for what is determined
fair and reasonable. Our testing of over 400 A&E consultants
identified many instances where profit margins exceeded
what the industry deemed reasonable.
Below table reflects the profit margins of the firms tested: [Note: Industry
standard ranges between 10  15 percent.]



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Recommendations
The Procurement Council should determine what the Port
deems a fair and reasonable rate and should document the
rationale for transparency.
CPO should engage a third party to perform an independent
model validation of the rate tool, so that management can
gain confidence that the model produces accurate market
rates.
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2) Rating: High
Management approval was not required when hourly rates
exceeded the maximum rates produced by the service rate
negotiation tool/model.
Tool developed by BCG and uses market data to produce a target and max rate.
10 contracts and 693 position reviewed.
Below table reflects the number of positions that exceeded the maximum and
the amount that the Port agreed to pay over the maximum rate for every hour
worked:


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Recommendations
CPO should implement a management review process when consultant
rates exceed the maximum. This review should be documented and
contain established criteria and approval thresholds (i.e., up to 20%
over the maximum) for both the Services Agreement Manager and
Planning and Analytics Manager to approve.
If the thresholds exceed their authority or if agreement cannot be
reached, approval should be escalated to the appropriate person (i.e.,
director, COO) for approval, as required by the authority guidelines.
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3) Rating: High
A reconciliation between the final negotiated rates and the
contract did not occur. As a result, we were unable to verify
that all positions and rates reflected in the contract were
accurate.
Below table reflects the type and number of exceptions:



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Recommendations
CPO should retain documentation to evidence the agreed
upon rate and position.
CPO should the use this documentation, to verify that the
rates are accurately captured into the contract before it is
executed.

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4) Rating: Medium
The Central Procurement Office is responsible for
procuring all contracts related to public works,
consulting services, and goods and services.
Governance meetings, for Executive Leadership Team
(ELT) oversight of CPO, had not occurred since
December 7, 2017.

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Recommendations
The Chief Operating Officer should lead an effort to determine the
meeting frequency and information that is deemed necessary to
perform effective governance.
We also recommend that, at a minimum, the CFO and the Port's
Managing Directors of Aviation and Maritime, attend these
meetings.
Finally, we recommend developing a charter that defines the
purpose, objective, and voting rights (if necessary) within the
Governance Committee.
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