A&E Consultant Rates:
Management Response
Audit Committee
February 5, 2020

Agenda
2019 actions related to negotiation process
Additional data on calculating profit
Feedback from Architectural & Engineering Community
Leadership oversight
Summarize management response
2020 action plan
2

2019 Actions Related to Negotiation Process
February                           November
Refined Negotiation Summary template          Tested revised negotiation process
May                            clarifying authority and accountability
Negotiation process concerns raised          December
internally                                             Directors met with frontline team to discuss
Began defining process improvements             consultant compensation
July                                January (2020)
Internal Audit commenced                     Met with 22 consulting firms involved in
Launched enhanced filing system                  audit to understand compensation and
areas of improvement
October
Management identified key considerations
impacting contracts and compensation

3

Calculation "implied" profit based individual rates
does not reflect realized profit
Consideration must be given to contract
compensation package, qualifications, & risk
WSDOT  Cost Reimbursement              Port of Seattle  Billing Rates
Additional Direct costs paid                     Limit reimbursement for direct costs
Labor Escalation                             Escalation based on index
Promotions                             Limit timing of escalation & promotions


4

"Implied" Profit Calculated in Audit is Inflated
Audit based "profit" for 15 firms on the generic safe harbor rate of 110%
8 firms reported higher overhead rates to CPO; 3 others are diverse/small business firms

Actual Provided Overhead Rates
150%    150%    161%    167%    170%    180%    185%    210%

ACEC cited Deltek Clarity A&E Survey 2018  median overhead 160% and top
quartile 183%.

5

Architect & Engineering Community Feedback
Internal Audit Committee received feedback from ACEC on audit
Profit should be evaluated on the total contract compensation package
CPO met with 22 out of 35 firms early January

Concern: Impact               Request: Predictability
Port pays less than other Owners        Schedule - faster
Fair and reasonable price               Negotiation process  sets tone
Operational effectiveness               Compensation fair & cover risk
Labor escalation; reimbursables        Easier to add job classification
Inclusion, equity and diversity             (people)


6

Leadership Oversight in 2018 & 2019
CPO engaged with Executive Leadership Team         Date            Topic
(ELT) on critical procurement & contract                            CPO 2018 Initiatives
issues                                                             State Audit  Lessons
January 2018
Learned
WMBE Initial Plan
CPO will engage with ELT in 2020  already                        Diversity in
April 2018
Contracting
requested meeting in quarter 1
Diversity in
Contracting
December 2018
Supplier Database
Will assess whether to create new governing                       (VendorConnect)
board or continue to utilize ELT                      February 2019    MWBE Utilization
Process
October 2019
Improvements

7

Summary  Management Response
Finding 1: 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 markups
exceed what the industry deemed reasonable.
Recommendation: 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.
Management Response: Methodology utilized in the audit report assessed profit in
isolation without regard to contract, risk, and other costs. Management will define
principles related to compensation & update procedures. Management will assess if the
rate tool should be validated after determining how we will contract in the future.

8

Summary  Management Response
Finding 2: Management approval was not required when hourly rates exceeded the maximum rates
produced by the service rate negotiation tool/model.
Recommendation: 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 Service Agreements Manager and
Planning & 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.
Management Response: Management agrees on an escalation process for exceptions and the
negotiation team is empowered to make decisions. Management is updating negotiation &
escalation process.

9

Summary  Management Response
Finding 3: A reconciliation between the final negotiated rates and the contract did
occur. As a result, we were unable to verify that all positions and rates in the
contract were accurate.
Recommendation: CPO should retain documentation to evidence the agreed upon
rate and position. CPO should use this documentation, to verify that the rates are
accurately captured into the contract before it is executed.
Management Response: Management implemented controls to reconcile contract
with the results of negotiation. Contract Administrator & Price Analyst are
accountable.

10

Summary  Management Response
Finding 4: CPO 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.
Recommendation: 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.
Management Response: Executive Leadership Team oversight of CPO has and will
continue to occur.
11

Way Forward
Aggressive 2020 Action Plan
Quarter 1
Share & implement revised negotiation & escalation process
Share common themes from consultant meetings
Define compensation (what are we incentivizing)
Quarter 2
Peer review with airports and local agencies
Quarter 3
Engage ELT and consulting community on contract changes
Quarter 4
Develop contract documents, process maps, and other associated documents

12

Thank you