The objectives of the Program and Performance Audit Report (Audit Report) performed by Sharpton, Brunson, and Company, P.A. (SBC) were to:

·         Determine whether sufficient management controls exist

·         Review the reliability and timeliness of financial and operating results

·         Ascertain compliance with applicable laws, regulations, and contracts, and

·         Provide observations and recommendations to improve performance

The observations provided in the Audit Report indicate that the program areas selected for review:                      

1.       contain sufficient management controls                   

2.       produce reliable and timely financial and operating results    

3.       are materially compliant with applicable laws, regulations and contracts

4.       effectively contribute to the successful execution of the Program     

The WaterWorks 2011 Program Management Team, which consists of CH2M HILL and City staff, was encouraged that the SBC review team found solid program management practices in place.  The PMT also recognizes that the observations provide an opportunity to enhance the program’s operations, practices, processes, and procedures.  Several of the observations provided to the team during preliminary feedback discussions are excellent suggestions which have already been implemented by the team including reporting improvements and Change Control Board process improvements.

CH2M HILL contract incentives were evaluated as part of the audit review.  While there are no incentive terms in the contract, CH2M HILL has made a commitment to the City to deliver the program for $59.8 million (for program management and office costs).  This commitment was documented in a letter to the City Manager on April 12, 2007.  This commitment has focused CH2M HILL on completing the Program in a timely manner and staffing at levels appropriate to deliver the work.   

Approximately 70% of the planned facility work and 54% of the planned pipe work has been completed. The solid program management practices that SBC found to be in place, together with the enhancements proposed in the audit responses will ensure a strong finish for the program.  The program is currently on schedule to have the majority of the work completed by 2010. 

The PMT responses to the Executive Summary observations are provided below and the remaining observation responses are summarized in Exhibit 1.  While the team realizes the audit report has generated ideas for enhancements, many of which were previously considered, the current program practices represent an appropriate balance between cost and risk.  Several of the enhancements recommended by the SBS Review Team have either been implemented or are in the process of being implemented as noted in the responses below.

Process and Compliance Related Observations

ES-1 – Program allowance dollars were not derived taking a risk assessment approach.

As noted in the performance review report, the escalation factors for 2007 to 2009 were specifically increased to assess the risk of price escalation (bid risk) in the future.  Applying these factors resulted in a contingency allowance of $79 million. 

The adequacy of the $79 million was evaluated by the PMT through consideration of potential sewer area cost increases and change order funding. As stated in Commission Memo 06-157:

The new inflation projections equate to the $79 million allowance for inflation for remaining projects which have an approximate value of $303 million; or a 26% total inflationary allowance for remaining work.  This allowance is intended to address the potential for continued extraordinary construction price increases based on recent experiences in excess of national trends and projections.  This allowance will also be utilized to address change order costs and scope additions over the remainder of the program.

The adequacy of the $79 million was evaluated based on sewer area cost increases, change orders and additional scope.  At the time, the gravity sewer cost increases were estimated based on information available; many projects were still in design and cost increases were estimated based on previous project trends.  An evaluation of potential costs increases at the time showed the need for additional funding of $46 million for gravity sewer projects. Of this approximately $20 million was funded from the contingency remaining prior to October 2006 when the $79 million was added to the program.  Therefore, the remaining sewer area project needs were projected at $26 million.

At the same time, the projected need for change order funds based on 6% of construction remaining was $27 million.

Given the additional sewer area projections of $26 and the remaining change order projected funding needs of $27 and accounting for additional scope, the proposed $79 million allowance was determined to be appropriate.

As designs have been finalized, additional cost adjustments have been necessary, particularly for sewer area projects.  An analysis of the adequacy of the contingency fund is provided under Observation ES-3.

ES -2 – Commission Agenda Reports (CARs) presented to the City Commission do not identify the cost impact of construction awards versus the Program Controls System (PCS) budget.

The information presented in CARs is intended to include information that is most relevant to the recommendation being presented to the Commission. Information regarding the program level budget; and projects that have been added to and deleted from the program, have been reported periodically to the Commission.  It is not believed that providing budget information on a project-by-project basis would add value to project-level decision making. Since the original goal was to implement all projects identified in the Program Delivery Plan; since budget has been managed and reported on a program level scope; and since project scope is largely not discretionary – the individual project budget overruns and underruns have been managed internally, with the overall goal being to deliver as many of the projects as possible under the existing program budget.

ES -3 – Current contingency balance does not appear to be sufficient to complete the program as currently scoped.

The PMT has taken the approach that additional rate increases to fund the Program are not feasible and that the Program should be managed to the current budget.  Projects are prioritized to provide the highest priority projects within the budgetary constraints.  Projects are proposed for deferral to deliver the highest priority projects while keeping the Program within budget. We agree that there is the possibility that additional projects may need to be deferred but not to the extent suggested by the SBC review team.

Additional details on the contingency balance evaluation are provided in Appendix A.  A summary of the results is provided below.

Contingency Fund Adequacy

The PMT will continue to provide updates to the City Commission on the adequacy of the contingency fund.  The majority of the work has been bid and awarded which has greatly reduced the remaining bid risk. 

Contracted bid risk - An analysis of the contract awards versus the PCS budget and contingency funding projections is provided in Appendix A.  This analysis shows that the PMT has generally made adequate projections for the anticipated budget adjustments.  The average variance for the combined budget and contingency projection versus the award showed that the projection was 3% higher than the award on average which indicates that the projections to date have been conservative. With the exception of gravity sewer projects, the total projected need was below the contract award price by 11 to 33%. However, the gravity sewer contracts were 16% higher than planned.

Remaining bid risk – Based on the current bid risk evaluation, the PMT believes the  projections for the remaining contract projects are adequate.  However, to take this evaluation one step further, the PMT has assumed that an additional 20% cost increase could be incurred on the gravity sewer projects.  Under this worst-case scenario, the program would need an additional $10 million in funding which is well below the range of $42 to $79 million for bid risks projected in the Audit Report.

Change orders - Contingency fund needs for potential future change orders has been projected based on 6% of all remaining construction budgets (remaining active and future) and is currently estimated at $20 million. The current change order rate for completed projects is 2.2% and 3.4% for all projects – active and completed. Therefore, based on historical program data, 6% is a conservative estimate.

Approximately $86 million will be performed by City crews or funded from the Fiveash membrane fund.  This leaves only $243 million in contract work (remaining active and future) with change orders.  Under this scenario, the required change order funding would be in the range of $14 million which is $6 million less than currently projected.

The PMT change order projection is conservative since:

·         It is based on 6% change orders whereas current performance is in the 2 to 3% range It is based on 6% of all remaining funds whereas only a portion of the remaining funds is anticipated to go to outside contractors where change orders will be incurred.

Credits – The credit projection was based on 4% of all remaining work in December 2006 and resulted in a $20 million credit projection.  If this analysis is conducted for only contract work (total active and future contract value) the credit projection is reduced to $13 million.  Since October 2006 approximately $0.9 million in credits have been processed. Significant credits are anticipated as additional projects are completed and closed out.  In October 2007, two projects were in the closeout/final change order process with $1.0 million and $0.8 million.  These credit change orders will be presented to the City Commission in November.  With the credits processed to date and 4% of the remaining active and future contracts as potential credits; the PMT believes that the proposed total $20 million total credit projection is still valid. 

Summary – The current contingency management evaluation shows that up to $20 million in planned projects may need to be deferred to fund priority utility needs.  Based on the information presented above, the variance from the current contingency projection can be summarized as follows:

Potential changes:

Remaining bid risk                     +$10 million

Change orders                          -$6 million

Credits                                      +$7 million

Net impact                                $11 million

As shown above, the net impact under a worst case scenario is that an additional $11 to $17 million could be required.  This estimate is much less than the $27 to $79 million projected in the Audit Report. These are extremely conservative estimates and there are several areas, such as claims (planned at $5 million), where funding may not be required resulting in additional funding availability.

If additional funds are needed, options are:

·         Utility rates can be increased to cover the increased construction costs; or

·         Projects can be deferred or scopes reduced to manage within the current budget

The PMT’s current strategy is to manage within the total program budget.  Costs associated with general construction cost increases, change orders, and additional project scope will be funded using the remaining contingency fund, as well as with funds from project scope reduction and project deletion/deferral.

ES -4 – Projects are not defined and tracked by the way the work is being contracted and managed.

PCS general practice for project and task numbering is as recommended in the audit report. However, there are cases where the desired project number has already been used for another project.  In these cases, deviations from the general project numbering practice have been required and the system contains a general flag alerting the viewer to that exception.  Despite the importance of the numbering convention, the program users have been trained to reference and query the projects by name.

The PCS system has the capability to link the projects and is routinely used to produce reports that link the tasks.  As an example, the Work Package report links tasks from the various water and sewer components into a summary for each project. Additionally, the system has been, and is currently, used to track contract data and is able to produce various standard reports as well as customized reports at any level. Several example reports are provided in Appendix B.

ES-5 – Work being performed for multiple projects, but contracted within one contract, should be linked within PCS.

As noted in ES-4 above, the PCS system has the capability to link the projects and is routinely used to produce reports that link the tasks.  As an example, the Work Package report links tasks from the various water and sewer components into a summary for each project. Additionally, the system has been, and is currently, used to track contract data and is able to produce various standard reports as well as customized reports at any level. Several example reports are provided in Appendix B.

ES-6 – Program reporting can be enhanced to better reflect project status and performance measurements.

The PMT will continue to respond to requests by internal and external stakeholders to enhance reporting. Reports are currently focused on performance metrics to facilitate review of program performance.  Continued tracking of construction starts, dollars expended, projects completed and sewer certifications achieved continues to be an appropriate measure of performance.  Additional enhancements to the reports have been implemented including: expansion of the goals, activities, and issues section to reflect prior period performance; graphical representations of data; fund source tracking; contingency fund reporting; sewer connection tracking data; and contract information. 

ES-7 – The Change Control Board review process should be strengthened to include greater review of the cost impacts to the Program.

The list of proposed contingency fund needs will be provided at the CCB such that if a project withdrawal from the contingency fund is above that in the projected list, a flag will be raised by the project controls staff so that the project specific impact is immediately identified. This new procedure will provide greater review of potential cost impacts under current CCB procedures. 

There is a keen awareness of the cost impacts of proposed changes.  Under the current practice, each project that needs a budget increase is scrutinized by the Change Control Board. The CCB considers issues such as: the true cost of an individual project is largely market-driven (i.e., award price is based on competitively-established low bid proposal); and scope reduction is often not feasible (e.g., design is needs-driven and in conformance with typical municipal utility infrastructure standards).

Other improvements to the CCB process that were implemented as a result of the preliminary audit feedback have included presentation guidelines, improved agendas, and improved decision tracking.

CCB Presentation Guidelines – The Change Control Board has proven to be an effective forum for managing changes on the program.  The team will continue to work diligently to ensure that the information provided to the CCB is as complete and as informative as possible.  The PMT has developed presentation guidelines, which will provide better consistency among the CCB presenters.  In addition, these guidelines will be used by the lead team to determine that impacts have been appropriately presented and discussed.  There are multiple levels of presentation of change order issues to the CCB, such as Heads Up, Action Item, Draft Change Order and Final Change Order.  Each type of presentation demands differing levels of detail/background knowledge of the presenter. 

Improved Agendas - At the time of the performance review, the CCB agenda consisted of a list of people that would be presenting items at the CCB meeting.  This list is sent via e-mail to the CCB participants the day prior to the meeting.  Based on preliminary feedback from the review team, the agenda was revised to include a listing of the items each person is presenting.  Distribution of the agenda the day prior to the meeting continues.

Improved Tracking System - Based on preliminary feedback from the review team, significant improvements to the CCB have been implemented.  The agenda listing topics to be discussed is distributed prior to the meeting, a list of attendees is recorded, and a formal tracking system has been developed to track items presented and decisions made.  Previously, the decisions were tracked on the paper record produced for the meeting, which was difficult to search.  The new electronic log system allows for searches of the CCB items by presenter, project or date.  In addition, the presenters have been provided with guidelines for presenting information, which will allow the presenters to be better prepared and to provide consistency among the presentations.

ES-8 – The City should consider including a Change Order Allowance in construction contracts.

The idea of increasing approval thresholds for change orders is currently under consideration (low threshold of $10,000 inhibits the ability to react timely to construction issues, and to pay timely for delays and other unforeseen construction impacts). Change order allowances cannot be used to preempt approval requirements established under the City’s Code of Ordinances. 

Contract and Performance Related Observations

ES-9 – The City’s Program Manager may be overextended in the WaterWorks 2011 Program.

Staff will explore options for expanding the formal responsibilities of the Engineering Design Manager position vacated by Maurice Tobon to possibly include deputy program management responsibilities in support of the City’s program manager. Immediately prior to SBC’s engagement, Maurice Tobon, who had been serving in the capacity of a deputy program manager in many ways, was promoted out of the WaterWorks 2011 program. Tim Ashmore, Engineering Design Manager in the WaterWorks 2011 program has assisted at the program level on occasion since that time.

ES-10 – There should not be direct or indirect oversight of City personnel by CH2M HILL.

Direct and indirect oversight of City personnel by CH2M HILL will be eliminated to the extent possible by increasing the number of construction projects being managed by City Engineering Design Managers; by reassigning City Engineering Inspectors to those projects being managed by City Engineering Design Managers; and by having the City Engineering Design Manager responsible for the City in-house design team perform program-level design manager duties. There are currently two City Engineering Design Managers that perform the duties of Construction Manager.  Their role as Construction Manager will be increased; and City Engineering Inspectors will be reassigned to projects being managed by them.

There is currently one City Engineering Design Manager responsible for management of the City in-house design team.  That Design Manager will take-on the additional duties associated with schedule and budget maintenance and reporting at the program level – thereby eliminating CH2M HILL design manager involvement.

Financial Framework Observations

ES-11:  There area areas for enhancements to the Financial model which include but are not limited to the following:

·         Training City staff to understand and utilize the Financial Model to improve and enhance internal controls.

·         Potentially streamline water and sewer projection methodologies.

·         Potentially consolidate current external Excel files into one model in order to dynamically link all relevant information.

·         Potentially develop one or a few schedules which consolidate all assumptions.

City Financial Model Operations/Staff Training - The financial modeler will work with City staff so that they have a higher level of understanding of the model and can provide input on assumptions. As it currently exists, the financial model is complex and would require a significant effort for the City to assume the modeling role.  As an example, the model uses many sources for the data used to generate the forecast which include, but are not limited, to the following: City FAMIS accounting system reports, the annual financial statements, budgeting documents and analysis, operating data, utility billing and collections, various engineering studies and forecasts, financial and rate studies, and comprehensive plan. 

A detailed, complex financial model may not be required if it is only used for budgeting purposes (i.e., once the complex CIP is complete). The City could consider development of a simpler management tool to assist in estimating the longer term budget impacts of annual capital improvements in the future.

The City may want to use the current model only for external financing purposes and for evaluating the impact of alternative courses of action. The City has used the model for handling “what if” questions numerous times since the inception of the WaterWorks program.

Streamline Projection Methodologies - There are various sources for the data, most are in hard copy format, and many require analysis to make final determinations on the proper data to use within the model structure. Further streamlining this process could be done but would not provide a significant benefit.

Consolidating Excel Schedules - The model currently links many external Excel files for direct input into the model. Opportunities exist to provide additional links including those to revenue and billing reports that are expected to be developed by the City in the near future. These additional links and consolidation can be implemented in the next financial model update.

Consolidating Assumption Schedules - The model currently includes a schedule that outlines all the major assumptions.

SBC also suggested a utility billing analysis be performed on an annual basis. The City is currently proceeding to create utility billing reports that will allow a utility billing analysis to be performed on demand and has contracted to purchase a new utility billing system that has extensive management reporting capabilities.

Responses to the remaining audit report observations are summarized in Exhibit 1.  A summary of significant observations and responses from Exhibit 1 is provided below:

Invoice Review - The invoice review checklist will be modified to include percent complete and common lump sum contract items (such as mobilization).  The invoice review checklist was designed at the beginning of the program as a generic guide with 21 items and will be further enhanced through these additions. In addition, staff have started utilizing a mobilization payment eligibility calculation in the electronic worksheet copies of the contractor pay applications.

Prompt Payment - The program prompt payment policy is based on 19 business days and a revised analysis of the payment process based on business days (not calendar days) shows that 92% of program invoices were processed in this timeframe.  The PMT continues to focus on payment efficiency to retain a strong working relationship with the contractors as well as to meet ongoing program performance measures. The team has instituted a number of processes and procedures including prompt payment invoice reviews and the use of uniquely colored cover folders for each pay application in order to distinguish them from other documents on team member's desks.

PCS Enhancements - PCS will be re-programmed to provide a flag to identify a cost greater than budget at the moment of entry as an additional control measure.  However, appropriate controls are currently in place to monitor this situation.  Under current practice, when expenditures exceed budget, the task is identified in the Cost Performance Report, which is distributed in the Monthly Schedule Meeting. Any task with cost greater than budget is flagged for the design manager or construction manager to update the budget.  A copy of the Cost Performance Report is provided in Appendix 2.

The Audit Report findings indicate that CH2M HILL has implemented solid program management practices for the WaterWorks program. Several of the observations have been implemented by the team to further enhance to program’s operations, practices, processes, and procedures. 

Contingency Fund – Current funding is adequate and is being managed to prioritize utility needs.

 As shown in the analysis included in this response, the PMT still feels that the current projection is adequate.  Under a worst case scenario, an additional $11 to $17 million could be required.  This estimate is much less than the $27 to $79 million projected in the Audit Report. These are extremely conservative estimates and there are several areas, such as claims (planned at $5 million), where funding may not be required resulting in additional funding availability.

If additional funds are needed, the Commission has a choice:

·         Utility rates can be increased to cover the increased construction costs; or

·         Projects can be deferred or scopes reduced to manage within the current budget

The PMT’s current strategy is to manage within the total program budget.  Costs associated with general construction cost increases, change orders, and additional project scope will be funded using the remaining contingency fund, as well as with funds from project scope reduction and project deletion/deferral.

Program Control System – PCS is a viable tracking system and from a technological perspective, has the capability and flexibility needed to successfully track costs, schedule, and changes for the WaterWorks program.

Change Control Board – The CCB has been strengthened to provide a greater awareness of change impacts, improved presentations, and improved tracking of the results.

Summary

The observations provided in the Audit Report indicate that the program areas selected for review:                      

1.      contain sufficient management controls             

2.      produce reliable and timely financial and operating results          

3.      are materially compliant with applicable laws, regulations and contracts

4.      effectively contribute to the successful execution of the Program           

The WaterWorks 2011 Program Management Team was encouraged that the SBC Review Team found solid program management practices in place.  The PMT also recognizes that the observations provide an opportunity to enhance the program’s operations, practices, processes, and procedures.  Several of the observations provided to the team during preliminary feedback discussions are excellent suggestions which have already been implemented by the team including reporting improvements and Change Control Board process improvements. Implementing these enhancements will only serve to further strengthen the solid program management practices already in use on the WaterWorks program.