INTERNAL AUDIT REPORT



Operational Audit - Capital
Baggage Optimization Project Phase 2

November 2019-June 2021

Issue Date: August 23, 2021
Report No. 2021-14 



POrt ==="     INTERNAL AUDIT
of Seattle'

Baggage Optimization Phase 2 Project 



................................................................................................................................................. 3 
............................................................................................................................................................. 5 
............................................................................................................................... 6 
....................................................................................................... 7 
......................................................................................................................................... 8 















2

Baggage Optimization Phase 2 Project 

Internal Audit (IA) completed an audit of the Baggage Optimization Phase 2 Project for the period
November 2019 through June 2021. The audit was performed, to assure the Port was meeting project
management standards, to better understand the reasons behind the differences with the independent
estimate and the bids received, and to review a sample of change orders. 
The Port hired BNP Associates, Inc. (BNP)  to furnish design services for the Baggage Optimization 
Phase 2 project, which estimated the value of the project at $179.16 million in May 2019. However,
when the Project went to bid in November 2019, the Port received two bids, the lowest being $293.94 
million, which was approximately 64% higher than the engineer's estimate. Due to the bids coming in
high, the project received a negative vote on the Majority in Interest (MII) ballot from the Managing
Airline partners at Seattle International Airport (SEA). The Port had to pause the project for 180 days 
for feedback, which is required under a negative MII vote. After the expiration of the 180-day period,
the Port moved forward with the project and awarded the contract as originally procured to the original
lowest bidder, Hensel Phelps (Hensel). 
We contacted Alaska, Delta, and Southwest to understand their perspective of the high bids. Concerns
expressed by the airline representatives included the number of times they experience perpetual
scope, schedule, and budget increases with projects at SEA, restrictions on interaction with the
market, and selecting a design-bid-build lumpsum project delivery method, given the complexities
involved with this project. We also interviewed the estimator at BNP; the estimator explained some of
the reasons for the bid coming higher were premium labor rates for working limited hours during nonbusiness
times, a one-year extension to the project, a small pool of bidders, and additional cost for
out-of-state contractors. Additionally, the airlines indicated disappointment that the Port reduced the
time of the project by 6 months, by making various efficiency changes, but only received a $2.6 million
deduct change order from Hensel. 
Through discussions with Port Management, IA learned that design-bid-build lumpsum contract
seemed the only way to go forward with the project, one reason being federal grant requirements
(grant). The grant required the design to be 100% complete before any federal funds could be given. 
Federal Grant Funding was approximately $90 million which was applied to Phase I & II. Additionally,
according to Port staff, a significant reason that the Project received higher bids than expected was
that there were only five companies who could perform this work, which impacted competitive pricing.
Additional reasons Port staff provided include competing with private companies like Amazon, FedEx,
and UPS for the same type of work, did not adequately predict operating risks, work complexities, and
inefficiencies that the bidders foresaw in the 24/7 operations of a growing airport. The Port determined
that because they only received two bids, which were within 9% of each other, the low bid was an
accurate reflection of the current construction market and Hensel, being the lowest bidder, was
awarded the construction contract. 
We selected this project to audit based on the cost of the project and the number of change orders
(COs). Our sample for testing included the largest dollar value COs, ones that changed the scope of
the project, and those that resulted in a credit back to the Port both in terms of time and amount. 
We did identify the following opportunity where internal controls could be enhanced or developed. This 
opportunity is listed below and discussed in more detail beginning on page seven of this report. 
1.   (Low) The audit identified a discrepancy of $29,156 which occurred because  Hensel Phelps
submitted a change order cost proposal to the Port, for one of its subcontractors, that differed from
the agreed-upon amount between Hensel and the subcontractor. According to Hensel, they did not
keep adequate supporting documentation to justify the discrepancy.  Hensel addressed the
discrepancy during the course of the audit by initiating a change order with the subcontractor. 

Glenn Fernandes, CPA 
Director, Internal Audit 
3

Baggage Optimization Phase 2 Project 

Responsible Management Team 
Wayne Grotheer, Director, Aviation PMG 
Tina Soike, Chief Engineer and Director of Engineering Services 
Janice Zahn, Assistant Engineering Director - Construction 


















4

Baggage Optimization Phase 2 Project 

The Baggage Optimization Project replaces six individual baggage screening systems and centralizes the
operations of the checked baggage system at the Airport. The project aims to achieve the maximum
outbound baggage capacity within the current airport footprint and increases flexibility by allowing bags to
be checked in from any ticket counter and be conveyed to the appropriate location. It would also meet the
established minimum-connect-time goal and provide greater energy efficiencies. Additional benefits include 
increased reliability, redundancy, and security. This project addressed growing passenger demands of the
region and is scoped to accommodate 60 million annual passengers. 
Phase 2 would expand on the centralized baggage screening area in the airport's Central Terminal and
replaced conveyor systems to the north portion of the bag well. Phase 2 would also construct the final
baggage sortation matrix, move concession storage to their final locations, move the maintenance shop to
their permanent location, add screening capacity with more Explosive Detective System (EDS) machines,
increased the Checked Baggage Resolution Area (CBRA) capacity, and added more capacity to the South
Satellite baggage system. 
The construction phase of the Project included TSA funding, that covered approximately $92 million of the
cost of construction. The bid opening for this project was on November 19, 2019 and received only two
bids. The low bidder, Hensel Construction Co. (HP), submitted a bid for $293,937,000, 64 percent over the
Engineer's Estimate of $179,157,000. The second bid was for $322,216,451, 80 percent over the
engineer's estimate. The Port determined that because they only received two bids and which were within
9% of each other, the low bid was an accurate reflection of the current construction market, and also a rebid
would not guarantee any cost savings but would delay the project at least 7-8 months, that might raise
prices and could cause new bids to be even higher. Hensel, being the lowest bidder, was awarded the
contract. 
As a result of the discrepancies between bids and the Port's estimate on this project, the Aviation Project
Management Group (AVPMG) identified and reported several lessons learned to the Commission which
would be implemented for future projects. One of the more significant procedural changes, that is now part
of the AVPMG's standard process, is that a second independent cost estimate is performed for any project
that exceeds $50 million. 
The project delivery method was a design-bid-build with a lump sum contract. The construction contract
total is currently $292.53 million, which includes approximately negative $1.69 million in COs. The contract
required that the contractor substantially complete the work no later than 1510 days following the contract
execution date, which would have been August 26, 2024. To date, there has been a time saving of 179
approved days that has decreased the substantial completion date to February 29, 2024. 
The following table details the current schedule and budget. 
Schedule (Per July 8, 2021 Trend Log) 
Original Contract Completion Date                              08/26/2024 
Approved Time Extension (Calendar Days)                           -179 
Actual Substantial Completion Date                             02/29/2024 
Budget (Per July 8, 2021 Trend Log) 
Original Contract Sum                                       $293,937,000 
Executed COs (1)                                          ($1,688,243) 
Revised Contract Sum                                    $292,248,757 
Potential Risk1 (2)                                                    $283,367 
Contingency (3)                                              $29,394,000 
Remaining Contingency (3)+(1)-(2)                            $30,798,876 


1 Potential risk includes amount for unexecuted COs, and open trends for potential changes. 
5

Baggage Optimization Phase 2 Project 

We conducted the 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 CO test work. Our sample
for testing included the largest dollar value COs, ones that changed the scope of the project, and
those that resulted in a credit back to the Port both in terms of time and amount. While these appear to
be the higher risk change orders, since we did not select a random sample, the results of this work
cannot be projected to the entire population of change orders. 
The period audited was November 2019 through June 2021 and included the following procedures: 
Project Cost Estimate 
Obtained an understanding of the Port's project cost estimate process. 
Obtained  reasons from the Port for bids coming higher than the engineer's estimate for
construction costs. 
Discussed the estimate with the estimators at BNP Associates, Inc. 
Interviewed Managing Airline partners to understand their reasoning for voting for or against the
bids during the MII ballot. Get an understanding of their perspective of the high bids. 
Met with the CPO department to understand if there are any restrictions on having a dialogue with
the potential bidders during the design and bidding phase to understand current market conditions. 
Gathered all the information and assessed  the reasonableness of  choosing  the  design-bid 
lumpsum method over other delivery methods. 
Change Orders 
Obtained an understanding of the Port's change order review process. 
Verified approvals by required personnel (e.g., Port, Contractor, etc.). 
Confirmed approved change order amounts tied to the Change Order Log. 
Reviewed change orders for reasonableness and allowability. 
Calculated proper markups. 
Reviewed  supporting documentation,  supporting change order/claim submissions, specifically
error/omission, scope changes, and COVID-19 orders. 
Requested additional supporting documents from the general contractor (GC) and their
subcontractors for lumpsum COVID-19 CO. 
Compared the proposal submitted by the GC to the Port with the subcontractor executed CO (this
was obtained by the GC directly). 
Requested clarifications and additional support for discrepancies noted in COVID-19 CO. 
Pay Applications 
Obtained an understanding of the project management team's review and approval of pay
estimates. 
Selected all the Project's pay applications and, 
verified amounts paid to the two main subcontractors tied with the amounts billed to the Port, 
verified the GC paid the subcontractors timely, 
assessed the reasonableness of the overall percent complete by pay estimate, and 
verified compliance with retainage requirements. 


6

Baggage Optimization Phase 2 Project 

1) Rating: Low 
OPPORTUNITY 
The audit identified a discrepancy of $29,156 which occurred because Hensel Phelps submitted 
a change order cost proposal to the Port, for one of its subcontractors, that differed from the
documented agreed-upon amount between Hensel and the subcontractor. According to Hensel,
they did not keep adequate supporting documentation to justify the discrepancy. Hensel
addressed the discrepancy during the course of the audit by initiating a change order with the
subcontractor. 
The Port issued a lumpsum CO to reimburse the contractor, Hensel Phelps for COVID-19 related
expenses. The CO  was issued in line  with the Port  letter dated May 12, 2020,  that allowed 
construction managers and resident engineers to initiate and conclude COVID-19 related negotiations 
as they deemed fit for the project. The total amount approved for this CO between the Port and Hensel
was $246,574. The discrepancy we identified accounts for 11% of the CO. 
As part of our audit testing, we requested Hensel provide us with their subcontractor detail ledger
report, supporting documentation which included their proposals, and the signed COs between Hensel 
and their subcontractors. We noted  the cost proposal Hensel submitted to the Port  for their
subcontractor, Performance Abatement Services (PAS), was for $49,957, which was significantly more
than what Hensel paid PAS for this CO. The actual CO executed between Hensel and PAS was
$22,708 which resulted in a difference of $27,249 ($29,156 including markup). On June 29, 2021, we
explained to the Port's Construction Management team the difference and requested them to reach
out to Hensel for clarification. Additionally, we requested Hensel provide us additional supporting
documents that include a summary of the negotiation for the subcontractor CO. On July 21, 2021,
Hensel provided a copy of a second CO between Hensel and PAS which covered the difference in
amount that we identified. Th e second CO was executed on July 13, 2021, which was after we
reported the discrepancy. Due to the timing of the second CO, we requested Hensel to provide us with
additional support for both COs, such as a summary of negotiations or, any email communications to
verify that Hensel had an agreement to pay PAS the total amount included in the proposal in two
separate COs. Hensel  responded that neither they nor PAS maintained supporting documentation, 
and that the people who were involved in the negotiation of the original CO were no longer with the
company2. However, a later telephone conversation with Hensel's Operations Manager indicated that
the discrepancy was identified because of the audit request and had been rectified by issuing the
second subcontractor CO. 
The audit noted Hensel did not maintain and keep Project documents and records as required by
section G-04.38 of the General Conditions section of the Contract. As a result, Internal Audit could not
get sufficient audit evidence to provide reasonable assurance of the accuracy and completeness of the
information provided by Hensel. 

Recommendation: 
No Response necessary. During the audit, Hensel remedied the discrepancy by creating another
change order with the subcontractor. 
Management Response/Action Plan: 
N/A 
DUE DATE: Completed 
2 Although no longer assigned to the Baggage Optimization Project, the Construction Manager, who signed the original CO, 
was still employed with PAS. Internal Audit made multiple attempts by telephone, email, and assistance from the Port's
Resident Engineer to discuss this CO with the PAS Construction Manager but did not receive a response. 
7

Baggage Optimization Phase 2 Project 

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 for
Non-compliance
Missing or not                         external audit        Requires
with Laws, Port
High       Significant      followed                            issues and / or      immediate
Policies, 
negative public      attention 
Contracts 
perception 
Potential for
Partial controls    Partial
external audit
compliance with                        Requires
Medium    Moderate                                   issues and / or
Not functioning    Laws, Port                               attention 
negative public
effectively          Policies 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 











8