Attachment North Satellite for Audit Meeting held Jun 25, 2018 1:00pm at Pier 69

North Satellite

INTERNAL AUDIT REPORT
OPERATIONAL AUDIT
North Satellite (NSAT) Renovation and Expansion Project

APRIL 2012 – MAY 2018

ISSUE DATE: JUNE 8, 2018
REPORT NO. 2018-02

North Satellite (NSAT) Renovation and Expansion Project
April 2012 – May 2018
INTERNAL AUDIT

TABLE OF CONTENTS

EXECTIVE SUMMARY ..................................................................................................................................................3
BACKGROUND ............................................................................................................................................................4
AUDIT SCOPE AND METHODOLOGY .........................................................................................................................5
SCHEDULE OF FINDINGS AND RECOMMENDATIONS.............................................................................................6
APPENDIX A: RISK RATINGS ................................................................................................................................... 10
APPENDIX B: Schedule Delays and Additional Costs ........................................................................................... 11
APPENDIX C: HOK Study Reimbursement ............................................................................................................. 12
APPENDIX D: NorthSTAR Organization Chart ....................................................................................................... 13

North Satellite (NSAT) Renovation and Expansion Project
April 2012 – May 2018
EXECTIVE SUMMARY
Internal Audit (IA) completed an audit of the North Sea-Tac Airport Renovation (NorthSTAR) Program
for the period April 2012 through May 2018. Our audit focused on the North Satellite (NSAT) Renovation
and Expansion project, which is the largest segment of NorthSTAR. The audit was performed to assess
Port staff’s monitoring of the project and whether they followed policies, procedures, laws, and
contractual requirements.
Alaska Air Group, Inc. (Alaska Airlines) is the largest airline at the Seattle-Tacoma International Airport
(Airport) and serves as Alaska Airlines primary hub. The Port and Alaska Airlines are partnering to
create an efficient “Curb to Gate” operation at the north end of the Airport. As of January 2018, total Port
costs were $98.3 million from a Commission approved budget of $658.3 million. The project is expected
to be completed in the spring of 2021.
In general, Port staff is managing the project effectively and has applied sound practices. Deliverables
are discussed frequently in team meetings and quarterly update reports are provided to the Port
Commission. Furthermore, The Port has contracted with the firm, R.L. Townsend and Associates, to
perform independent construction cost control and cost verification consulting services.
Because of the complexity of the NorthSTAR Program, there are multiple departments involved in the
project. Our audit identified opportunities where departments can work collaboratively to assure the
project is cost effective and completed on schedule. We identified the following issues which are
discussed in more detail on page six:
1. A letter of understanding (LOA) that the Port issued to Alaska, to assure alignment, was not legally
binding, but nonetheless had the ability to materially impact the project’s cost and timeline. Failure
to adhere to this LOA resulted in changes that increased the cost of the project by approximately
$31.8 million and delayed the schedule by approximately 39 weeks.
2. The process utilized to reimburse Alaska for work performed, did not adequately involve key
stakeholders to assure that what was reimbursed, was aligned with the value received by the Port.
We extend our appreciation to the Aviation Director’s Office, the Aviation Project Management Group,
Engineering General Services and the Central Procurement Office for their assistance and cooperation
during the audit.

Glenn Fernandes, CPA
Director, Internal Audit
RESPONSIBLE MANAGEMENT TEAM
Lance Lyttle, Managing Director Aviation
Ralph Graves, Sr. Director of Capital Development
Jeffrey Brown, Director of Aviation Facilities and Capital Programs
Wayne Grotheer, Director of Aviation Project Management Group
Janice Zahn, Assistant Engineering Director

North Satellite (NSAT) Renovation and Expansion Project
April 2012 – May 2018
BACKGROUND

The North Sea-Tac Airport Renovation Program (NorthSTAR) is a collaborative effort between the Port
and Alaska Airlines to improve traveler experience and customer service. The North Satellite (NSAT)
Renovation and Expansion Project is the largest segment of NorthSTAR Program and the focus of our
audit. The NSAT component addresses the expansion of the North Satellite from 12 to 20 contact gates,
modernization of the existing North Satellite facility including North Satellite and Concourse C Satellite
Transit Stations. NSAT also expands the baggage system to accommodate the satellite expansion.
The Project is being delivered through a General Contractor/Construction Manager (GC/CM) approach.
This approach uses an architect engineer (AECOM) to produce the design, but uses GC/CM (Hensel
Phelps) for construction. A GC/CM is procured through a multi-part selection process that includes
consideration and evaluation of the GC/CM bidder qualifications and experience, together with some
cost elements. The GC/CM is selected early in design and assists the Port in evaluating the project
during the design phase and then provides construction management services.
Once the drawings were complete, the GC/CM entered into a construction agreement and assumed the
risk for the construction means and method (ie., the GC/CM became the general contractor and hires
the subcontractors directly). Hensel Phelps is the GC/CM on the NorthSTAR project.
Construction is expected to be performed in two phases, beginning with the expansion of eight gates to
the west of the current facility, followed by renovation. The Project is on schedule for completion in 2021.

Funding for the project comes from a combination of airline fees, the Airport Development Fund and
Passenger Facility Charge revenues. The Port’s portion of NSAT is estimated at $658.3 million. Alaska
Airlines will contribute an estimated $41 million to build a new lounge and employee spaces. The current
capital cost by segment is shown in the following table:

North Satellite (NSAT) Renovation and Expansion Project
April 2012 – May 2018
AUDIT SCOPE AND METHODOLOGY

We conducted this performance audit in accordance with Generally Accepted Government Auditing
Standards and the International Standards for the Professional Practice of Internal Auditing. 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.
The period audited was April 2012 through May 2018. We utilized a risk-based approach from the
planning phase to the testing phase of our audit. We gathered information through document requests,
research, interviews, observations, and analytical procedures. We assessed significant risks and
identified controls to mitigate those risks. Our audit included the following procedures:
Bid-Law Compliance
• Obtained an understanding of Port staff’s compliance with general contractor/construction
manager (GC/CM) bid regulations.
• Reviewed supporting documentation from bid packets, including: the public solicitation, bid
proposals, bid tally sheets, and applicable state laws.
Project Management (Lessons Learned)
• Reviewed spreadsheet from the Lessons Learned Database.
• Obtained an understanding of issues encountered during the project through inquiry with aviation
staff.
• Reviewed supporting documentation, including: email correspondence, invoices, and
reimbursement calculations.
Artwork Program
• Obtained an understanding of the Airport’s artwork program through inquiry and observation of
artwork at the Sea-Tac International Airport.
• Reviewed email correspondence on how the Port determined where to build the glasswork for
the North Satellite.
Change Orders
• Obtained an understanding of Port management’s oversight of change orders, including creation,
negotiation and approval.
• Reviewed Trend Log Full Report from the Port’s SQL Server Reporting Services Production.
• Selected and reviewed lump sum change orders where independent estimates were similar to
contractor proposals for adequate documentation and price negotiations.
• Selected and reviewed force account change orders for compliance with procedures, allowability,
adequate price negotiations and cost reconciliations.

North Satellite (NSAT) Renovation and Expansion Project
April 2012 – May 2018
SCHEDULE OF FINDINGS AND RECOMMENDATIONS
1) RATING: HIGH

A letter of understanding (LOA) that the Port issued to Alaska, to assure alignment, was not
legally binding, but nonetheless had the ability to materially impact the project’s cost and
timeline. Failure to adhere to this LOA resulted in changes that increased the cost of the project
by approximately $31.8 million and delayed the schedule by approximately 39 weeks.
The Port and Alaska Airlines entered into a letter of understanding on the NorthSTAR program. Although
the letter was not legally binding, it established how the Port and Alaska Airlines would work together in
the planning, design and construction of the Project. Among other things, the letter listed specific
milestones that required Alaska Airlines to concur in writing.
By obtaining concurrence, both parties could rely on milestones to limit changes in project scope or
design. The Port received written concurrence for the project through the 30% design milestone.
However, Alaska did not provide written concurrence for the 90 - 100% milestone. Instead, it provided
implicit concurrence by email. Those concurrences did not prevent Alaska from requesting design
changes after milestones were established. These requests resulted in approximately $31.8 million of
additional costs and 39 weeks of schedule delays. Of the $31.8 million, $15.6 million was related to
scope changes and $16.2 million in soft costs.
The largest single design request included dual passenger loading and unloading doors, requiring the
Port to amend completed designs. Alaska Airlines decided not to pursue the dual door request which
resulted in the Port amending the designs again. Aviation Project Management Group (AVPMG)
estimated this particular request cost the Port $1.2 million and a four week delay. In August of 2017 Port
Management communicated to the Commission that a request had been made to Alaska, seeking
reimbursement for the cost of removing the dual door. To date, no action has been taken on this.
Appendix B provides information on requests resulting in additional costs and delays in the schedule.
Recommendations:
1. We recommend Alaska also sign any future letters of understanding and accept financial
responsibility for changes made after designs have been approved. Without a formalized letter of
understanding that is accepted and followed by all parties, project costs can increase and the project
timeline could be delayed.
2. As presented to and approved by Commission on August 15, 2017, the Aviation Director’s Office
should seek reimbursement of $1.2 million for the dual passenger doors.
Management Response/Action Plan:
In general, the intent of the Letter of Understanding between Alaska and the Port, dated April 5, 2012,
was followed. Alaska concurred in writing, verbally, or as implied through emails.
As to the audit recommendation to enter into a contract with a tenant, a legal determination is necessary
for any airline tenant regarding whether such a contract would be allowable, in conflict with, contradict,
or modify requirements of the Signatory Lease Operating Agreement (SLOA).
For future projects, we will:

North Satellite (NSAT) Renovation and Expansion Project
April 2012 – May 2018
• Require tenants to possess or provide a strong technical team sufficient to meet the needs of
the project.
• Develop an improved change management process into the Tenant Reimbursement Agreement
to better control scope changes and to determine responsibilities for cost increases.
• In the future, changes to design, scope, and schedule, will not be pursued without a written
agreement.
Additionally, we will prepare a written letter and request reimbursement of $1.2 million from Alaska for
the dual passenger doors.
DUE DATE: July 31, 2018

North Satellite (NSAT) Renovation and Expansion Project
April 2012 – May 2018
2) RATING: MEDIUM
The process utilized to reimburse Alaska for work performed, did not adequately involve key
stakeholders to assure that what was reimbursed, was aligned with the value received by the Port.
Alaska Airlines hired HOK Architecture/Design in 2010 to conduct a study on the North Satellite. The
purpose of the study was to analyze Alaska’s existing facilities, its operations, and evaluate potential
capital investment strategies.
In 2012, Alaska Airlines submitted a letter requesting reimbursement of $1,685,255. Although not legally
obligated, Port management determined the study may assist the Port in obtaining cost savings during
the NorthSTAR renovation project. Between 2012 through 2015, there were communications on how
much, if any, the Port would reimburse Alaska Airlines. In 2015, the Port’s Legal Council stated, by
email, that the Aviation Project Management Group (AVPMG) was the team with the most knowledge to
determine the amount to reimburse Alaska. AVPMG concluded that $385,871 was a reasonable amount
and submitted that information to the Aviation Director’s Office.
Based on further discussions and Alaska Airline’s influence, The Aviation Director’s Office agreed to
reimburse Alaska $508,587. True knowledge of benefits to the Port and utilization of work of others
resides with those closest to the process, in this case, AVPMG. Additionally, funding for this request was
drawn from AVPMG’s capital budget, furthering the argument to rely on AVPMG’s recommendation.
Appendix C provides additional information on the HOK study reimbursement.
Recommendations:
As a matter of process, on a going forward basis, decisions to reimburse third parties with Port funds,
should be based on estimates of value provided by the appropriate individuals or departments, with
subject matter expertise. In this particular case AVPMG’s estimates of value should have been utilized.
Management Response/Action Plan:
Since 2017, Aviation performs all concept development for Port owned facilities through the On Call
Planning consultants. This will make it unnecessary for tenants to develop concepts with the expectation
of reimbursement from the Port.
In the future, tenants are expected to obtain a reimbursement agreement with the Port prior to
performing the work and incurring cost for which reimbursement is expected.
For any major airport renovation project a substantial amount of time and effort is devoted to evaluating
and defining the existing systems. The HOK’s Program provided a high level summary of the existing
condition of mechanical, electrical, plumbing, fire protection, and BHS. While a summary of existing
conditions may not seem to be of much value, the work and research involved should not be ignored.
The appendices and detailed analysis referenced for each system provide an excellent resource for
understanding the existing systems, as well as identifying record documents which could be used to
evolve the design.
One could reasonably assume that the information contained within HOK’s document could be passed
along to another design firm and greatly assist them in their preliminary evaluation of the existing
building. The value of the HOK as-built information and analysis should not be discounted and the
quality of the content considering the preliminary nature of a program definition report was good. The
basis for reimbursing the $508,000 was not only the estimated value contributed to the final design, but

North Satellite (NSAT) Renovation and Expansion Project
April 2012 – May 2018
also the estimated cost, if the Port had conducted the concept development. Typically, in concept
development, time and effort goes into developing concepts that are not selected and are not
incorporated into the final design.

DUE DATE: Immediately

North Satellite (NSAT) Renovation and Expansion Project
April 2012 – May 2018
APPENDIX A: RISK RATINGS
Findings identified during the course of the audit are assigned a risk rating, as outlined in the table below. The
risk rating is based on the financial, operational, compliance or reputational impact the issue identified has on
the Port. Items deemed “Low Risk” will be considered “Exit Items” and will not be brought to the final report.
Port Commission/
Rating Financial Internal Controls Compliance Public
Management
Large financial
impact Noncompliance
High probability
with applicable Important
Missing, or inadequate for external audit
Remiss in Federal, State,
HIGH key internal controls issues and/or
responsibilities and Local Laws, Requires immediate
negative public
of being a or Port Policies attention
perception
custodian of
public trust
Partial controls Inconsistent Potential for Relatively important
compliance with external audit
Moderate
MEDIUM Not adequate to identify Federal, State, issues and/or May or may not
financial impact
noncompliance or and Local Laws, negative public require immediate
misappropriation timely or Port Policies perception attention
Generally
Internal controls in place Low probability
complies with
but not consistently for external audit
Federal, State and Lower significance
Low financial efficient or effective issues and/or
LOW/ Local Laws or Port
impact negative public
Exit Items Policies, but some May not require
Implementing/enhancing perception
minor immediate attention
controls could prevent
discrepancies
future problems
exist
Efficiency An efficiency opportunity is where controls are functioning as intended; however, a modification would make
Opportunity the process more efficient

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North Satellite (NSAT) Renovation and Expansion Project
April 2012 – May 2018
APPENDIX B: Schedule Delays and Additional Costs
Expansion (Oct 2013) through 30% Design (Aug 2014) - Alaska Requests
Scope Addition Schedule Cost
Delay (in
weeks)
Alaska requests delay in kicking off the 30% design workshops/charrettes schedule – 5 weeks $2,000,000
including request for Port to conduct numerous studies
From 30% Design (Aug 2014) through 60% (June 2015) Design Review
Delay in Alaska’s concurrence of 30% design (3 weeks vs. 2 weeks) 1 week $400,000
Alaska “Plain Vanilla” (Only 737 aircraft) Aircraft Layout Study (Gate Study) 4 weeks $2,000,000
Alaska: aircraft parking/ GSE layout/ Safety Risk Assessment, Dual/Tri Taxilane, 777 4 weeks $1,700,000
at north satellite (NSAT), wide-body study at C Gates, 4-Car STS trains and decision
making.
Dual Door Design/Redesign (Dual Door Deletion) – Design effort to delete DD from 4 weeks $2,900,000
dwgs ($175k) plus expended costs to date and cost to “redesign” DD space. ($1.2M scope,
$1.7M time)
From 60% Design (June 2015) through 90% (October 2015) Design Review
Connect AAG MDF to Emergency Power N/A $72,400
Relocate STS Switchgear & Smoke Evac Ductwork (trend #029) N/A $5,273,000
“Pause the Project” Analysis (8 people x 3 weeks effort) N/A $140,000
From 90% Design (October 2015) through Present
Alaska Lounge expansion (3rd floor, etc) N/A $7,000,000
(9/13/16 Commission Meeting)
Construction Phasing Concurrence (10/14/15 – 02/08/16 = 16.5 weeks) 16 weeks $6,400,000
Alaska Budget Concurrence (MII ballot) (2/8/16 – 3/11/16 = 5 weeks) 5 weeks $2,000,000
Additional CCTV Cameras (shared cost - DC#08 $116.8k total) N/A $58,300
Alaska ITC Changes for NSAT-Fiber & Redundant pathway (DC#18) N/A $275,000
Alaska Radio Coverage Survey -- (PENDING DC#20) TBD $670,000
Holdroom Seating – Level of Service (based upon 2.5 FTE effort for 10 wks) N/A $250,000
Alternate Boardroom Tint/Glazing study N/A $5,000
Alaska Boardroom Glass Revision / Study N/A $250,000
Revise North Satellite Striping N/A $0
Alaska Lounge Point of Connection Changes N/A $393,000
Gate Information Display (GID) Relocation N/A TBD
Expand Unaccompanied Minors Room N/A $0
Additional Copper from Alaska MDF to Port MDH Rooms (DC#34) N/A $30,000
Additional CAT6 Cable to each GID (DC#33) N/A $53,000
Total schedule delay generated cost 39 weeks $16,200,000
Total Scope related cost $15,669,700
TOTAL IMPACT $31,869,700

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North Satellite (NSAT) Renovation and Expansion Project
April 2012 – May 2018
APPENDIX C: HOK Study Reimbursement
Project Description HOK Cost- AVPMG- AAG- Counter AV Director’s Difference
(AAG Orig. Suggested Request Office Reimb. (AV Dir.
Request) Reimb. Agreement Office &
AVPMG)
Employee Space $114,332 - - - -
NSAT Gates/Bldg. Expansion $114,332 $28,583 $57,166 $28,583 -
Remain Over Night aircraft $304,886 - - - -
parking
Dual/Tri Taxi lines $16,769 - $12,577 $8,384 $8,384
Satellite Transit System (STS) $2,287 $571 $571 $571 -
Lobby updating – NSAT
STS Lobby - Concourse C $7,622 $1,906 $1,906 $1,906 -
Concourse- NSAT $312,508 $156,254 $156,254 $156,254 -
Concourse C $4,573 $2,287 $2,287 $2,287 -
Boardrooms $114,332 $5,717 $5,717 $5,717 -
Baggage Handling System $76,221 $76,221 $76,221 $76,221 -
NSAT Mechanical, Electrical, and $457,328 $114,332 $228,664 $228,664 $114,332
Plumbing
Seismic Strengthening- NSAT $144,821 $72,410 -
Main Terminal Improvements $15,244 - $7,622 - -
$1,685,255 $385,871 $621,395 $508,587 $122,716
HOK Study Reimbursement Timeline and Communications
Date Description
2010-2011 Alaska Airlines hires HOK Architecture/Engineering firm to assist in analyzing Alaska's
existing facilities and operations and evaluate potential capital investment strategies.
April 5, 2012 Port and Alaska agree to Letter of Understanding on each party’s role and responsibilities
related to North Satellite project. Port may consider reimbursing Alaska if Port uses study.
May 2012- Dec. 2014 No known communication
January 9, 2015 Alaska requests reimbursement of $1.6 million for HOK costs incurred.
January 15, 2015 Email between Port Council and AVPMG. Council stated AVPMG is only department with
enough knowledge to determine reimbursement amount, if any.
December 17, 2015 Port response to reimbursement request. Stating, study fell short and Port did not utilize all
of report. Port request for additional information from Alaska.
December 31, 2015 Alaska email to Port. Discusses meeting with Port AV management. Alaska provided HOK
contract.
January 14, 2016 AVPMG email to Management. Concerns about reimbursement.
January 16, 2016 AVPMG email to AV Director’s Office Management suggesting $385k is justifiable
reimbursement.
February 18, 2016 Letter to Alaska Airlines detailing Port’s recommendation of $385k reimbursement.
March 22, 2016 AVPMG email request additional detail from Alaska if it wants additional reimbursement.
February 9, 2017 Alaska counter proposal for reimbursement of $621,395.
July 21, 2017 AVPMG email to AV Management. Dual passenger door delay and additional cost should
offset HOK study reimbursement.
July 21, 2017 AV Director’s Office management response both should be kept separate and AV Director’s
Office management made agreement to reimburse Alaska.
August 15, 2017 Reported to Port Commission: “The Port has requested AS reimburse the Port for the cost
of removing the Dual Door scope…”, “The Port has also agreed to reimburse AS
$508,587.24 for a portion of the HOK study…”
August 24, 2017 AV Director’s Office management email that Port agreed to reimburse Alaska $508,587

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North Satellite (NSAT) Renovation and Expansion Project
April 2012 – May 2018
APPENDIX D: NorthSTAR Organization Chart

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