Item 7. IAF Report

INTERNAL AUDIT REPORT 
OPERATIONAL AUDIT 
INTERNATIONAL ARRIVALS FACILITY 





JULY 2015  OCTOBER 2018 
ISSUE DATE: DECEMBER 07, 2018 
MANAGEMENT ACTION PLANS ADDED ON DECEMBER 31, 2018 
REPORT NO. 2018-14 

INTERNAL AUDIT



International Arrivals Facility 
July 2015  October 2018 

TABLE OF CONTENTS 

EXECTIVE SUMMARY ..................................................................................................................................................3 
BACKGROUND ............................................................................................................................................................4 
AUDIT SCOPE AND METHODOLOGY .........................................................................................................................5 
SCHEDULE OF FINDINGS AND RECOMMENDATIONS.............................................................................................7 
APPENDIX A: RISK RATINGS ................................................................................................................................... 12 














2

International Arrivals Facility 
July 2015  October 2018 
EXECTIVE SUMMARY 
Internal Audit (IA) completed an audit of the International Arrivals Facility (IAF) for the period July 2015 
through October 2018. The objectives of the audit were to assure compliance with key terms of the
contract, to identify potential risks that might impede timely completion of the project, and to identify
opportunities for cost savings on future projects.  We noted that the pay application process, that
governs the review and payment of funds due to Clark Construction, is well established, thorough, and
poses a minimal risk to the Port. 
In 2014 project costs for Phase 1, which included construction of the IAF facility and a bridge connector
between the South Satellite and Concourse A, were estimated at $316 million and scheduled for
completion at the end of the 2nd Quarter of 2018. Due to a variety of reasons including an increase in
scope, total project costs increased to $968 million. Clarke Construction and the Port agreed to the
Guaranteed Maximum Price (GMP) of $774 million with an anticipated completion date of December 
2020. Port related costs are expected to be an additional $194 million. 
Our audit was conducted shortly after Commission approved the GMP. Many contractual elements were
negotiated with a "not subject to audit" clause, accordingly our findings focus on future capital projects.
In order to increase awareness and to improve how the Port executes major construction projects, we
offer the following: 
1.  The Port has an opportunity to reduce future contract costs by requiring a labor multiplier rate that is
in line with industry standards and the Seattle Area. The labor multiplier rate for the GMP increased
from 35.7% to 88.7%. If a labor multiplier rate, in line with the Seattle Region, of between 30% and
45% is utilized, the resulting payroll related cost savings would be between $11 and $8.2 million. 
2.  The Port has an opportunity to reduce future contract costs by setting a maximum amount of
insurance coverage for which the Port will reimburse contractors. The rate that the Port is
reimbursing Clark for insurance coverage is $7.49 per $1,000 of contract value. If coverage required
by the Port's Risk Management Group was adhered to, the Port would incur a rate of $3.95 per
$1,000; resulting in cost savings of approximately $2.8 million. 
3.  The Port has an opportunity to reduce costs in future capital projects by strengthening the language
in its contract agreements by requiring contactors to utilize "not-to-exceed" terms in their contracts
with subcontactors. 
These findings are discussed in more detail beginning on page seven. We extend our appreciation to 
Port Management for their assistance and cooperation during the audit. 


Glenn Fernandes, CPA 
Director, Internal Audit 

RESPONSIBLE MANAGEMENT TEAM 
Dave Soike, Chief Operating Officer 

3

International Arrivals Facility 
July 2015  October 2018 

BACKGROUND 

The Port contracted a Design-Build team, Clark/SOM, to design and construct a new International
Arrivals Facility (IAF) at Seattle-Tacoma International Airport (the Airport) using a Progressive Design
Build (PDB) project delivery model. In a PDB, construction of the project begins during preliminary
design and continues while the design progresses. During this period, the project is guided by a target
budget and target schedule. When the design is sufficiently complete to identify and allocate cost and
schedule risk, the owner and the design-builder negotiate a guaranteed maximum price (GMP) for the
work along with a final schedule. 
On the IAF project, the scope of the project increased and the project was negatively affected by other
factors, which increased the project cost, lengthened the schedule and delayed the agreement on the
GMP Amendment. 
In May 2018, the Commission retained an independent Executive Review Panel (ERP) to review the
execution and supervision of the project's progressive design-build delivery method, project cost
escalation,  the  process  used  to  negotiate  a  guaranteed  maximum  price  (GMP),  and  make
recommendations on the project going forward. 
The project encountered time delays and cost increases in both design and in construction. The
dynamics of the growing airport increased needs that necessitated significant design and construction
scope additions to the project. As a result necessary changes have contributed to lengthening the
construction portion of the schedule for the main part of the facility by 8 months from September 2019 to
May 2020. Two additional international capable gates will reach construction completion in November
2020. 
In September 2018, the GMP amendment was approved with Clark Construction at a total cost of $774
million. The overall IAF program cost will be approximately $968 million, as shown in the following table: 
Description                                   Cost 
International Arrivals Facility                       $931,445,000
International Arrivals Facility - Expense            $13,000,000
SSAT Narrow Body Gates                      $5,500,000
Outbound Baggage                          $18,500,000
Total                                           $968,445,000





4

International Arrivals Facility 
July 2015  October 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 July 2015 through October 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: 
General Liability Insurance 
Obtained the Financial Summary and Details section of the final GMP. 
Reviewed the Summary of Matrix Cost Allocation from the GMP. 
Identified components of insurance coverage deemed unnecessary by the Port's Risk
Management. 
Not to Exceed Subcontracts 
Obtained prime subcontracts to identify which ones were based on a not to exceed. 
Obtained an understanding of the Port's monitoring of the Design Builder's compliance with
prime subcontracts. 
Reviewed pay applications for adequate subcontractor supporting documentation. 
Business Equipment, IT Equipment & Tools 
Obtained an understanding of the Port's inventorying of equipment that may be salvageable at
the conclusion of the project. 
Reviewed pay applications for purchased equipment. 
Timely Payments to Subcontractors 
Obtained the Design-Builder's detail transaction report. 
Traced dates of payment from the Port to the Design Builder and payments from Design Builder
to prime subcontractors. 
Change Management 
Obtained an understanding of the written authorization and approvals procedures. 
Reviewed policies and procedures. 
Reviewed the IAF signatory approval matrix. 
Reimbursements 
Inquiry of the IAF Program staffs' review of pay applications and their understanding of
allowable, reimbursable expenses. 
Obtained pay applications. 
Reviewed cover sheets and supporting invoices. 

5

International Arrivals Facility 
July 2015  October 2018 
Compared expenses to allowable costs per the Summary Matrix of Cost Allocation. 
Labor Multiplier 
Obtained an understanding of Program managements' review of multiplier components prior to
approval of the GMP. 
Obtained worksheet of multiplier components. 
Reviewed components for reasonableness. 
Compared the approved multiplier to industry standard percentages. 
















6

International Arrivals Facility 
July 2015  October 2018 
SCHEDULE OF FINDINGS AND RECOMMENDATIONS 
1) RATING: MEDIUM
The Port has an opportunity to reduce future contract costs by requiring a labor multiplier rate
that is in line with industry standards and the Seattle Area. The labor multiplier rate for the GMP
increased from 35.7% to 88.7%. If a labor multiplier rate, in line with the Seattle Region, of
between 30% and 45% is utilized, the resulting payroll related cost savings would be between 
$11 and $8.2 million. 
Labor multipliers are a combination of a contractor's fringe benefits  and statutory payroll costs.
According to the contract, the labor multiplier includes "fringe benefits, burdens, bonuses, deferred
compensation, profit sharing, health care, sick leave/vacation, et al." 
The burden rate in the initial 2015 contract with Clarke was 35.7%. However, the new labor multiplier in
the final GMP increased to 88.7%.
Our research reflects that labor multiplier rates in the construction industry range between 30 and 45%.
According to the U.S. Labor and Statistics, the average labor rate for the Seattle Region is 30%.
Applying the industry standard rate of between 30% and 45%, results in labor related cost savings of
$11 million to $8.2 million. 
Furthermore, the new contract includes a "not subject to audit clause." As a result, we were unable to
assess the reasonableness of the new rate. 
Recommendations: 
1.  Port management should obtain a general understanding of the components of the labor burden and 
assess the reasonableness prior to entering into contractual agreements. 
2.  Audit clauses facilitate transparency and empower the Port to verify compliance with contract terms.
Therefore, we recommend that future contracts do not include audit limitations. 
3.  Contract language should be explicit as to what payroll costs or benefits comprise labor burden and
what percentage will be allowed. Furthermore, contract documents should state that once state
and/or federal maximums are reached for payroll taxes (FICA, FUTAetc.), these costs will no
longer be billed to the Port. 
Management Response/Action Plan: 
1.  I concur. 
2.  I concur. 
3.  I concur, and I concur with the suggestion related to payroll step functions (FICA, etc.). However, it
should be noted that there may be an administrative burden for the contractor or Port to identify,
track, total, and invoice when each individual's state and federal maximums end versus a simpler
multiplier calculation covering all employees. Also, to the extent a future contractor's actual and
verifiable labor multiplier exceeds state and federal maximums, then contractually requiring a lower
multiplier costs would result in the contractor not recovering its actual costs, which would endanger
the project's success form the outset and encourage the contractor to try to recover those costs in
other ways. 

7

International Arrivals Facility 
July 2015  October 2018 
I will work with port construction management, legal, and procurement in the next 150 days to
determine if contract language terms can be identified and developed that would have potential use
in future similar or applicable contracts. 
Background:
Audit Finding #1 (and Findings # 2 and #3, below) address future project costs, and as stated in
response to each, I generally concur with the findings and recommendations.  With regard to
comments relating to the IAF in the three findings, I note that at the time of the GMP Amendment,
the IAF project was facing significant cost, schedule, and performance challenges and many
disputed legal issues.   The GMP Amendment was a collaboratively (but also competitively)
negotiated document that was premised on a full project reset waiver that resolved significant
disputed issues, and major negotiation points were the allocation of future schedule and cost risk
associated with upcoming construction challenges and an aggressive schedule.

DUE DATE: 5/31/2019 













8

International Arrivals Facility 
July 2015  October 2018 
2) RATING: MEDIUM
The Port has an opportunity to reduce future contract costs by setting a maximum amount of
insurance coverage for which the Port will reimburse contractors. The rate that the Port is
reimbursing Clark for insurance coverage is $7.49 per $1,000 of contract value. If coverage
required by the Port's Risk Management Group was adhered to, the Port would incur a rate of
$3.95 per $1,000; resulting in cost savings of approximately $2.8 million. 
In late 2017 the AECOM engaged HPM, a construction audit firm, to review costs and processes for
reasonableness based on experience. HPM's report, dated August 2018, identified that the .749%
general liability insurance rate was above comparable rates being charged within the Seattle market.
HPM calculated the average actual GLI rate as a percentage of project revenue for construction
managers with $1 billion or more in revenue, as .385%. 
The Port's Risk Management Group reviewed the GLI rate that Clark proposed for the GMP and 
identified several items that were unnecessary. For example, Clark charged GLI coverage of $300
million when Risk Management only required GLI coverage of $25 million. After adjustments were made
to Clark's GLI rate, based on the Port's Risk Management Group's required GLI coverage, the GLI rate
is reduced to .395%, which is extremely close to the rate independently calculated by HPM. 
The Port's Legal Counsel, IAF Program Management, and Risk Management team discussed the
insurance coverage limits the Port was willing to reimburse Clark. Risk Management, which possesses
subject matter insurance knowledge, provided input and suggestions which were not incorporated into
the final contract. We understand the pressure that Management was under to agree to a GMP,
accordingly we offer this for future contracts. 
The final contract language (Assumptions & Clarifications) states "Premiums associated with provided
rates for insurance and bonds are fully recoverable at the rate of $7.49 / $1,000 of contract value." The
contract also states "Rates and coverage structures are proprietary and not subject to further review and
audit." 
Recommendations: 
1.  Contract language should specify the maximum insurance coverage the Port will reimburse. For
example, the language could read "The Port will pay actual insurance costs up to the amounts listed
in  this  article.  Insurance  costs  incurred  by  the  contractor  for  additional  coverage  are  not
reimbursable." 
2. Establish an internal control process so that Risk Management's review and approval is obtained to
assure that recommendations are embedded into contract language. 
4.  Audit clauses facilitate transparency and empower the Port to verify compliance with contract terms.
Therefore, we recommend that future contracts do not include audit limitations. 
Management Response/Action Plan: 
Response to Finding: 
I concur with finding #2 regarding General Liability /Insurance related to future project costs.
Response to Recommendations: 
1.  I concur. 

9

International Arrivals Facility 
July 2015  October 2018 
2.  I concur. 
3.  I concur. 
I will work with port legal, risk management, and procurement in the next 90 days to determine if
contract language terms can be identified and developed that would have potential use in upcoming
applicable contracts.
Background:
The Port sets liability insurance requirements for capital and small works construction that include
different types of coverage with different upper limits (of insurance required) depending on the job
scope, location, duration, if on water/off water, value of job and if hazardous materials are potentially
involved. Thus there are many drivers that will have an impact on the cost of liability insurance
coverage to the contractor, not the least of which is the Contractor's own risk profile, which may be
unique to each contractor. The Port sets requirements on a project-by-project basis. Contractors
should be charging the Port an overall insurance rate (per $1000 of construction value) based on the
Port's contract insurance requirements and not on what the contractor thinks they need for coverage. 
The Port is proposing to establish contractual limits for an acceptable range of liability insurance cost
(per $1000) based on the requirements the Port puts in the contract specifications. The midpoint of this
range would be approximately $3.75 (plus or minus $.50) for projects that are valued at $50 Million or
less; and $3.50 (plus or minus $.50) for projects over $50 Million. This bracketing would enable a
maximum payment level (as suggested by the auditor) beyond the typical port insurance coverage level
of $25,000 per year for a construction value of $50 million projects and $50,000 per year for a
construction value of $100 million.  However, an unintended consequence may be that to the extent a
contractor's actual insurance costs exceed the permitted amount for the specified insurance levels, it
may compromise future cost negotiations or create negative contractor performance incentives that the
Port will need to manage.

DUE DATE: 3/31/2019 








1 0

International Arrivals Facility 
July 2015  October 2018 
3) RATING: MEDIUM
The Port has an opportunity to reduce costs in future capital projects by strengthening the
language in its contract agreements to require contactors to utilize "not-to-exceed" terms in their
contracts with subcontactors. 
The IAF Project management team instructed Clark Construction to issue its subcontracts on a Not-To-
Exceed (NTE) method. NTE contracts are administered on an actual cost basis, plus a percentage for
overhead and profit. Of seven main subcontractors reviewed, whose contracts totaled approximately
$206 million, all contained the term, "not-to-exceed". However, Clark Construction was administering
these subcontracts as lump-sum agreements. Under the lump-sum method, the subcontractor will be
paid 100% of the contract value, regardless of actual costs. 
It is easier to administer contracts on a lump-sum basis because costs can be billed on a percentage of
completion basis with minimal documentation. However, any savings that may occur due to process
efficiencies or decrease in costs, such as credits, will go to the subcontractor and not to the Port.
Furthermore, a lump sum contract does not provide the Port the ability to review actual costs in an open
book environment. Given the time constraints and pressure to complete the IAF, this method might be
appropriate at the current time with the IAF. 
Recommendation: 
1.  Future  contract  language should  be  explicit,  to  allow  enforcement  of  preferred  reimbursement
methods. For example; when management determines that subcontracts should be administered on
a cost reimbursement basis, such as a NTE contracts, the contract language should specifically say
so. 
Management Response/Action Plan: 
Response to Finding: 
With regard to project delivery methods where a substantial portion of the subcontracted work is priced
through competitive negotiations, I generally concur with finding #3 regarding "Not-to-Exceed" (NTE)
terms versus "lump Sum" (or other contract terms).

Response to Recommendations: 
I concur. I will work with port legal, procurement, and capital teams in the next 120 days to determine if
contract language terms can be identified and developed that would have potential use in upcoming
applicable contracts.  Part of this will depend on the local subcontracting community's acceptance of a
transition from lump-sum to NTE subcontracts and the weighing of the related benefits and challenges
associated with each subcontracting method. 

DUE DATE: 4/30/2019 


1 1

International Arrivals Facility 
July 2015  October 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 








1 2

Limitations of Translatable Documents

PDF files are created with text and images are placed at an exact position on a page of a fixed size.
Web pages are fluid in nature, and the exact positioning of PDF text creates presentation problems.
PDFs that are full page graphics, or scanned pages are generally unable to be made accessible, In these cases, viewing whatever plain text could be extracted is the only alternative.