2021_04_08_SCM_Audit_Central_Terminal_Infrastructure_Audit_Report
INTERNAL AUDIT REPORT
Operational Audit- Capital
Central Terminal Infrastructure Upgrade Project
(Construction and Closeout Phases)
December 2017 – March 2021
Issue Date: March 24, 2021
Report No. 2021- 03
Central Terminal Infrastructure Upgrade Project
TABLE OF CONTENTS
Executive Summary ...................................................................................................................................................3
Background ................................................................................................................................................................4
Audit Scope and Methdology ...................................................................................................................................5
Summary Schedule of Findings and Recommendations .........................................................................................6
Appendix A: Risk Ratings ........................................................................................................................................ 10
Appendix B: Force Account Change Order Exceptions for Osborne Employees ................................................. 11
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Central Terminal Infrastructure Upgrade Project
Executive Summary
Internal Audit (IA) completed an audit of the Central Terminal Infrastructure Upgrade Project (Project)
for the period December 2017 through March 2021. The audit was performed to assess the quality of
the Port’s monitoring of the Project to assure it was meeting project management standards in an
efficient and effective manner.
We selected this project to audit based on the number of change orders (COs) and the delays in
schedule completion. We selected the largest dollar value COs, ones that changed the scope of the
project, those that approved the extension of the contract, and those that were the result of errors and
omissions. We noted that in all of the Force Account COs that we reviewed, the Port was overbilled by
the contractor. While the Port should have preventative controls to identify many of these, the primary
responsibility lies with the contractor to assure billings are accurate and reconcile to their internal
records. This assures that they are both accurately, billing the Port and paying their staff.
The Project was audited in two parts. The first audit; report no. 2020-18 issued on November 24, 2020,
focused on the bidding and design phases while this audit focused on the construction and closeout
phases.
The project delivery method was a design-bid-build with a lump sum contract. The construction contract
total was $12.2 million, which included approximately $2.77 million in COs. Through discussions with
the Port’s project staff, significant reasons that the Project did not meet critical milestones included:
errors in design, scope changes, and varying site conditions. The contract required that Osborne
Construction Company (Osborne) substantially complete the work no later than 730 days following the
contract execution date, which would have been December 26, 2019. During the course of the project,
the Port approved 278 additional days that extended substantial completion to September 29, 2020.
Even with the additional approved days, Osborne did not meet the revised substantial completion date
and actual substantial completion was achieved on December 31, 2020. As of March 8, 2021, the Port
accepted two additional Time Impact Analyses (TIAs) for a total of 93 additional days which extended
the Contract’s completion date to December 31, 2020.
We identified the following opportunities where internal controls can be enhanced or developed. These
opportunities are discussed in more detail beginning on page six of this report. Additionally, we
communicated matters to management, related to the Small Business Utilization compliance through a
separate letter.
1. (High) The audit identified that the Port was overbilled approximately $18,181 through force
account change orders. These were primarily due to incorrect labor hours and billing rates
submitted by Osborne and an inadequate review of documentation by the Port.
2. (Medium) Osborne did not meet critical milestones which resulted in the overall Project not being
completed on time and the Port incurring additional costs to oversee the Project.
Glenn Fernandes, CPA
Director, Internal Audit
Responsible Management Team
Wayne Grotheer, Director, Aviation PMG
Tina Soike, Chief Engineer and Director of Engineering Services
Janice Zahn, Asst. Engineering Director- Construction
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Central Terminal Infrastructure Upgrade Project
Background
The purpose of the Project was to provide the shell space and associated vertical circulation for
expansion of, and improvements to, the airport dining and retail (ADR) space in the Central Terminal.
The outcome was anticipated to improve customer service and increase non-aeronautical revenues. A
space demand analysis showed there was a need in the Central Terminal for an additional 12,000
square feet of ADR space to meet the anticipated 2025 passenger projections. This project added
approximately 10,000 square feet of new ADR space to the Central Terminal.
In 2016, the Port advertised two separate projects for bid. The first project was the ADR Modifications
Central Terminal Project, with an engineer’s estimate of $3.4 million. The ADR Modifications Project
received one bid of $7.5 million, which was 120% above the engineer’s estimate. The second project
was the Central Terminal HVAC Upgrade Project with an engineer’s estimate of $2.9 million. This
project also received one bid of $8.7 million, which was 200% above the engineer’s estimate. As a
result of these irregular bids, the Port management team combined the two construction projects into
one larger project, the Central Terminal Infrastructure Upgrade Project, with an estimated project cost
of $10.2 million. Osborne was awarded the contract for $9.3 million.
The Project experienced multiple construction COs. Some of thes e were driven by business and
customer service-related decisions, but nonetheless, resulted in schedule delays and increased the
Project’s budget. The final construction contract total, as of the audit report date, was $12.2 million
which includes approximately $2.9 million in COs.
The following table details the Project’s schedule and budget.
Schedule (Per February 16, 2021 Trend Log)
Original Contract Completion Date 12/26/2019
Approved Time Extension (Calendar Days) 278
Revised Substantial Completion Date 09/29/2020
Actual Substantial Completion Date 12/31/2020
Budget (Per February 16, 2021 Trend Log)
Original Contract Sum $9,309,641
Executed COs and Potential Cost Risks $2,943,338
Projected Contract Sum to Date* $12,252,979
Original Contingency * $1,021,000
Revised Contingency Total* $3,021,000
Remaining Contingency $77,662
* Contingencies used are included in Project Contract Sum to Date.
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Central Terminal Infrastructure Upgrade Project
Audit Scope and Methdology
We conducted this engagement 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 conduct an engagement to obtain sufficient, appropriate evidence to
provide a reasonable basis for our findings and conclusions based on our engagement objectives. We
believe that the evidence obtained provides a reasonable basis for our findings and conclusions based
on our engagement objectives.
We used a judgmental method to determine the samples selected for our audit test work. The results of
this work cannot be projected to the entire population as we did not select a random sample.
The period audited was December 2017 through March 2021 and included the following procedures:
Change Orders
• Obtained an understanding of the Port's change order review process.
• Verified approvals by required personnel (e.g. Port, Osborne, etc.)
• Confirmed approved change order amounts tied to the Change Order Log.
• Reviewed for reasonableness and allowability (i.e. not base contract scope).
• Calculated proper markups (for force account COs).
• Tested subcontractor back-up including direct costs and inclusion of accurate markups.
• Reviewed supporting documentation for change order/claim submission, specifically errors/
omissions and scope COs.
• Verified the inclusion of reasonable unit pricing.
Small Business Utilization
• Obtained an understanding of the Port’s monitoring of compliance with small business utilization
requirements.
• Verified compliance with requirements through document review, submitted reports, and
Osborne’s Job Cost Ledger.
• Obtained an understanding of the Port’s monitoring of Monthly Amounts Paid to Subcontractors
(MAPS) reports.
• Compared the most recent MAPS report to Osborne’s Subcontractor Job Cost Subledger.
Critical Milestones
• Obtained an understanding of the Port's monitoring process.
• Obtained substantial and physical completion date and letters of forbearance.
• Tied out the dates of actual substantial completion to the expected dates.
• Assessed the reasonableness of excused/extended days approved through COs.
• Calculated potential liquidated damages.
Closeout Process
• Obtained an understanding of the Port's closeout review process. Reviewed documented
procedures for formally closing out construction contracts
• Confirmed if Osborne completed the required deliverables, and the Port inspected and accepted
the goods and materials.
• Verified that the final payment and the release of retention will not occur until all documentation
is received (including warranty documents, as-built drawings, inspection and acceptance
records, operating and maintenance manuals....etc.)
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Central Terminal Infrastructure Upgrade Project
Summary Schedule of Findings and Recommendations
1) Rating: High
The audit identified that the Port was overbilled approximately $18,181 through force account
change orders. These were primarily due to incorrect labor hours and billing rates submitted by
Osborne and an inadequate review of documentation by the Port.
We selected six Change Orders (COs) for review, based on those we considered high risk. Four of the
six COs were Force Account COs, which accounted for approximately $732,584 of the $1 million in
Force Account COs. A Force Account CO is issued on a Not-To-Exceed (NTE) basis in order to
compensate the Contractor for costs and expenses including labor, material, and equipment expended.
These expenses are tracked by the Contractor on a daily basis and Daily Force Account Field
Documents are submitted and then signed off by the Port Field Inspector. Upon completion of the CO
work, the Port issues a separate CO to reconcile the difference between the original amount of the NTE
CO and the Contractor’s approved costs plus applicable markup.
We requested job cost ledger and timesheets directly from Osborne, these were additional documents
that are not usually provided to the CM. We noted instances in our sample of Force Account COs in
which documentation that we received from Osborne did not accurately support the amount submitted
to the Port for payment of labor hours and rate. It appeared that Osborne systematically overbilled the
Port for hours worked and rates for several of their employees and the Port’s Construction Manager did
not catch these errors and approved them for payment. Below are some examples which are described
in more detail in Appendix B.
• The Port was billed overtime hours for salaried employees of Osborne. Additionally, there were
incorrect Field Documents submitted by Osborne and approved by the Port.
• Duplicate Field Documents were submitted / billed for the same day by Osborne. The Port
approved and paid these duplicate documents without noticing they were duplicates.
• The Port was billed for a full day when Osborne employees were not onsite for the entire day.
Additionally, there were multiple instances when the Port was billed for an entire week and the
employee’s timesheet showed that the Osborne employee did not work for a large portion of that
week.
Contractors have the primary responsibility to submit accurate documents and billings to the Port;
however, the Port also has a responsibility to review these documents to assure that they are accurate.
Recommendations:
• In the future, the Port should require contractors to submit all supporting documentation together,
including a list of hourly and salaried employees as part of the CO supporting documentation.
• In the future, the Port should require the contractor to submit daily force account sheets for all
employees working on force account COs.
• CM should seek and recover any amount due to the Port from the overbilling.
Management Response/Action Plan:
The team is in agreement with your recommendations. While we exercised due diligence in our
oversight of the contractor’s change order documentation, our current procedures are based on
reviewing contractor’s submitted records. The examples provided in Appendix B, including additional
contractor records obtained by internal audit, has identified what appears to be contractor submitting
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Central Terminal Infrastructure Upgrade Project
incorrect information for cost reimbursement, resulting in the Port overpaying for work not performed as
well as potential underpayment for several construction workers performing overtime work.
The team will review our overall management of Force Account change orders and make revision
regarding salaried versus hourly workers.
The team will investigate any overpayments made to the contractor and issue a deductive change order
to correct this issue. In addition, the team will investigate and ensure that the contractor pays the hourly
workers any backpay that is required by law.
The team will reinforce, with our contractors and at the next Port of Seattle/Association of General
Contractor’s Best Practices committee meeting, the importance of submitting factually correct records
and proper payment of wages for hourly construction workers.
DUE DATE: June 30, 2021
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Central Terminal Infrastructure Upgrade Project
2) Rating: Medium
Osborne did not meet critical milestones which resulted in the overall Project not being
completed on time and the Port incurring additional costs to oversee the Project.
There were four critical milestones included in the Contract that needed to be substantially completed
by specific dates for the Project to remain on schedule. If Osborne failed to meet those milestones, the
Contract included a calculation of the additional costs that the Port would incur, and the Port could
assess liquidated damages (LDs) against Osborne as detailed in the following table:
Milestone Liquidated Damages
Milestone No. 1 $2,274/day
Milestone No. 2 $1,074/day
Milestone No. 3 $1,399/day
Milestone No. 4 $ 855/day
During the Project, there were 278 excused days added to the schedule, which extended the contract
completion date to September 29, 2020. Even with these additional days, Osborne did not meet the
revised completion dates for any of the four milestones. However, instead of seeking LDs the Port
issued multiple forbearance letters. These letters provided Osborne additional days to complete the
milestones and provide the Port with documentation justifying why the milestones were not met, without
seeking LDs. Even with the additional days provided in the forbearance letters, Osborne did not meet
the stated requirements. In two cases milestones were not completed by the forbearance letter
requirement, and in all cases, Osborne did not submit the required documentation for justification.
When Osborne did not comply with the requirements of the forbearance letters, the Port was entitled to
assess LDs from the original date that a milestone should have been completed.
MS Original Excused Revised/ Actual Diff Letter of Liquidated
Date of Extension Approved Substantial (Days) Forbearance Damages
Completion (Days) Date of Completion Date for
Completion Completion
1 9/22/2018 160 3/1/2019 3/28/2019 27 3/9/2019 $61,398
2 4/20/2019 151 9/18/2019 9/24/2020 372 10/6/2020 399,528
3 6/19/2019 274 3/19/2020 12/31/2020 287 10/6/2020 401,513
4 12/26/2019 274 9/25/2020 11/18/2020 54 1/4/2021 46,170
$908,609
Note: The LDs represent current amounts. Discussions with CM group indicate that it is likely that days will be approved for
each critical milestone. Therefore, when a CO is approved, LDs will potentially be decreased or eliminated.
The Project’s overall substantial completion occurred on December 31, 2020. As of March 8, 2021, the
CM team had recently received and approved two TIAs which extended the Contract’s completion date
to December 31, 2020. Given that a considerable amount of time has passed since the completion of
the critical milestones, reliance will be placed primarily on the information provided by Osborne. There
is the potential that some of the days that could be excused, might not have been approved during the
Project. Additionally, if the Port enforced critical milestone dates, or the requirements of the forbearance
letters during the Project, Osborne may have been more diligent in completing the milestones and
ultimately the Project sooner, which would have resulted in a lower cost to the Port.
Recommendation:
• We recommend that management reconcile the actual milestone completion dates to the contract
requirements and assess whether the Port is due any LDs.
• In the future, management should enforce critical milestone dates, and the requirements of
forbearance letters, during the course of a project, rather than after a project is complete.
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Central Terminal Infrastructure Upgrade Project
Management Response/Action Plan:
The team is in agreement that reconciliation of actual milestone completion dates to the contract
milestone completion dates is required and the contractor will be assessed liquidated damages for all
unexcused delays to interim milestones, substantial completion and physical completion dates.
The team agrees that management of milestones should be addressed in a timely manner during
construction as required by our standard operating procedures. Management will reinforce with staff
and provide a higher level of oversight to ensure staff understands the importance of timely actions
related to schedule management and milestones. The team will also reinforce with the contractors the
importance of timely submissions of documentation for schedule delays.
DUE DATE: June 30, 2021
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Central Terminal Infrastructure Upgrade Project
Appendix A: Risk Ratings
Findings identified during the audit are assigned a risk rating, as outlined in the table below. Only one of
the criteria needs to be met for a finding to be rated High, Medium, or Low. Findings rated Low will be
evaluated and may or may not be reflected in the final report.
Financial Internal Commission/
Rating Compliance Public
Stewardship Controls Management
High probability
Non-compliance
Missing or not for external audit Requires
with Laws, Port
High Significant followed issues and / or immediate
Policies,
negative public attention
Contracts
perception
Partial Potential for
Partial controls
compliance with external audit
Requires
Medium Moderate Laws, Port issues and / or
Not functioning attention
Policies negative public
effectively
Contracts perception
Functioning as
Low probability for
intended but Mostly complies Does not
external audit
could be with Laws, Port require
Low Minimal issues and/or
enhanced to Policies, immediate
negative public
improve Contracts attention
perception
efficiency
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Central Terminal Infrastructure Upgrade Project
Appendix B: Force Account Change Order Exceptions for Osborne Employees
Difference:
CO Total Expected Over/(Under)
CO Purpose Title Issue Description Billed Amount1 Billed
174 North Superintendent 12/9/2019- 12/18/2019 Timesheet shows 64 hours $ 9,832.84 $4,458.95 $5,373.89
Ceiling worked at the regular rate. Daily Field Records
show 94 hours worked (104 hours billed) at
overtime rate. 12/18/19 FA field records double
counted.
174 North Carpenter 12/9/2019- 12/18/2019 Timesheet shows 21 hours 1,733.78 1,400.36 333.42
Ceiling worked. 26 hours billed 12/9/2019 counted twice
(Original signed Daily FA Sheet shows 5 hours
while copy has 4 hours).
174 North Night OCC original request- $7,497.67. POS approved 7,497.67 6,700.94 796.73
Supervision
Ceiling $6,700.94, but OCC still billed $7,497.67 $ 6,504.04
176 COVID COVID Sup. Worked 4/27 and 5/1 for week ending 5/2/20. Port $11,479.20 $8,953.78 $2,525.42
Reimb. weekly salary charged entire week.
Onsite four hours on 4/27 (per parking receipt).
Billed for 8 hours.
176 COVID COVID Sup. Week ending 6/6/20- Worked three days (6/1, 6/2 & 9,183.36 8,265.02 918.34
Reimb. weekly salary 6/3). Port billed for entire week.
176 COVID COVID Sup. Did not work on July 3- Independence Day holiday. 9,183.36 8,724.19 459.17
Reimb. weekly salary Port billed for this day.
176 COVID COVID Sup. Only worked on 7/31 for week ending 8/1/20. 11,479.20 9,183.36 2,295.84
Reimb. weekly salary Timesheet does not indicate that days were worked
on the Project between 7/25 to 7/30.
176 COVID COVID Sup. Did not work on CTIUP 9/1 - 9/3 for week ending 10,560.86 8,724.19 1,836.67
Reimb. weekly salary 9/5/20. Port charged for entire week.
Did not work on 9/7, Labor Day. Port billed. $ 8,035.44
137 HSS Beam Superintendent 9/20/2019 & 9/30/2019 - 10/3/2019 timesheet $ 4,686.00 $2,386.60 $ 2,299.40
Install in shows 40 hours worked at the regular rate. Daily
North CT Field Records shows 60 hours worked at overtime
rate.
137 HSS Beam Carpenter 9/16/2019- 9/20/2019 Daily Field Records shows 1,417.04 1,194.76 222.28
Install in 25.5 hours worked at regular rate. 9/20/2019 Daily
North CT field records shows 12 hours worked, possible
overpayment of 4 hours as timesheet shows only 8
hours $ 2,521.68
155 Scaffolding Carpenter 4 hours billed at overtime rate for 10/26/19. Per $306.08 $0 $306.08
timesheet did not work on that day.
155 Scaffolding Superintendent 8 hours billed at overtime rate for 10/26/19. 814.00 0 814.00
Timesheet does not indicate time worked. $ 1,120.08
1 These amounts are calculated based the documents IA received directly from Osborne (Timesheets) and are not provided to Port as part of their CO
review process.
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Central Terminal Infrastructure Upgrade Project
Total $18,181.24
Example 1:
There were multiple Daily Force Account Field Documents (12/9/2019 through 12/13/2019) that appear
to be copies with only the Port’s Field Inspector’s original signature. In all instances, the Port was billed
12 hours per day for the Superintendent, however, the Contractor only paid the Superintendent eight
hours per day.
Typed Signature
Typed Signature
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Central Terminal Infrastructure Upgrade Project
Example 2:
Original signed Daily Force Account Field Documentation shows five hours worked on 12/9/2019 while
the copy lists four hours worked. The Contractor included both documents in their hourly calculation
and billed the Port nine hours for the Carpenter on this day.
Typed Signature
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Central Terminal Infrastructure Upgrade Project
Example 3:
The Port agreed to reimburse Osborne 100% of expenses for a COVID-19 Safety Supervisor to be
onsite eight hours per day. On April 27, 2020, the parking garage receipt shows that the Safety
Supervisor was onsite for four hours, however, the Port was billed for eight.
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