AUDIT OF GENERAL SERVICES
CONSTRUCTION OF THE
EAST LAKE LIBRARY
Karleen F. De Blaker
Clerk of the Circuit Court
Ex officio County Auditor
Robert W. Melton, CPA, CIA, CFE
Chief Deputy Director
Prepared by: Supervised by:
Bart H. Siegel, CPA, CFE, CFP, CGFM Ronald M. Peters, CIA, CISA
Internal Auditor Senior Internal Auditor
NOVEMBER 9, 2000
REPORT NO. 2000-13
AUDIT OF GENERAL SERVICES
CONSTRUCTION OF THE
EAST LAKE LIBRARY
TABLE OF CONTENTS
EXECUTIVE SUMMARY 1
OPPORTUNITIES FOR IMPROVEMENT 3
We have conducted an audit of the construction of the East Lake Library administered by the Department of General Services. Our audit objectives were to determine whether the terms of the Construction Management Agreement were complied with, to evaluate the effectiveness of the oversight process, and to determine compliance with any applicable laws.
The General Services Department (GS) administered a contract with Bandes Construction Company for construction management services of the East Lake Library, including the design and construction phases. In the Design phase, Bandes was to provide value engineering services, review construction documents, assist and meet with the Design Professional, prepare cost estimates, and assist with the permitting process. In the construction phase, Bandes was to provide all management supervision, financing, labor, materials, tools, fuel, utilities, equipment and services of every kind and type necessary to complete the work in a workmanlike manner. All parties involved agreed upon a guaranteed maximum price for construction services of $466,622 and a fixed management fee of $57,500.
We concluded that General Services' oversight of the construction of the East Lake Community Library was adequate. The Construction Manager was in general compliance with the Contract requirements, and no violations of law were found. However, our audit disclosed some opportunities for improvement.
We noted that changes had been made to documents in the Applications for Payment Package that had been previously approved. The Schedule of Values, a key document which recaps the payment being requested, contained changes in pencil without indication as to who made the changes or why they were made. We also noted that two Applications for Payment were more than the amount certified by the architect. If independent certification is not present, the risk of inappropriate payments is increased.
GS's Application for Payment review and approval process needs improvement. Of four Applications for Payment reviewed, $163,174 out of $266,662 (62%) had inadequate supporting documentation. Consequently, based on the county's paid invoice records, we could not confirm compliance with contract terms.
Work performed by the subcontractor was not always billed in the proper category. We noted that structural steel was charged to masonry, roofing sheathing, shingle roofing, and concrete. We also noted a billing of $4,160 for steel trusses was charged to rebar.
As part of our review, we reviewed records maintained by the Construction Manager. We identified $25,764 in payments, which did not have adequate support. We also noted that the CM submitted its own invoice for payment rather than the subcontractor's.
The report contains a total of 10 recommendations for improvement. Management
generally concurred with all of the recommendations.
Scope and Methodology
The purpose of this audit was to: 1) determine if the terms of the Bandes Construction Management Agreement for the East Lake Library were complied with, 2) evaluate the effectiveness of Bandes and General Services contract oversight process, and 3) determine compliance with any applicable laws.
The scope of this audit included a review of the contract and related documents to include bonds, insurance coverage, and other deliverables that were required by the contract. We tested to determine if contractor payments and reimbursements were in compliance with the terms of the agreement and whether supporting documentation was adequate. Project oversight activities were analyzed, and any applicable laws were tested for compliance. The audit period was from May 19, 1998, through December 31, 1999. We performed such other audit procedures as we considered necessary in the circumstances.
We have concluded that the Pinellas County Department of General Services (GS) oversight of the construction of the East Lake Community Library was adequate. The Construction Manager (CM) was in general compliance with the Contract requirements, and no violations of law were found. However, our audit disclosed opportunities for improvement. Those opportunities are presented in this report.
GS administered the "Agreement for Construction Management Services" with Bandes Construction Company, Inc. for the construction of the East Lake Library. The Construction Management Services contract addresses both the "Design Phase" and the "Construction Phase" of the project. In the Design Phase, the CM was to provide value engineering services, review construction documents, assist and meet with the Design Professional (DP) and Program Consultant during the various design phases, prepare cost estimates and assist the DP in obtaining various permits. In the Construction Phase, the CM was to provide all management supervision, financing, labor, materials, tools, fuel, supplies, utilities, equipment and services of every kind and type necessary to diligently, timely and fully perform and complete the work in a good and workmanlike manner. The DP, CM, and GS, together, performed a value engineering and construction analysis and determined a Guaranteed Maximum Price for construction services of a not-to-exceed amount of $466,622. The fixed management fee was $57,500.
Our audit disclosed certain policies, procedures, and practices that could be improved. Our audit was neither designed nor intended to be a detailed study of every relevant system, procedure or transaction. Accordingly, the opportunities for improvement presented in this report may not be all-inclusive of areas where improvement may be needed.
1. Changes That Affect Reliability Were Made to Previously Approved Documents Present in the Applications for Payment Package.
We noted the following concerns relating to the presentation of Contract-required forms:
B. For two Applications for Payment, the "Architect's Certificate For Payment", "Amount Certified" was substantially less than the payment authorized by GS. The discrepancy was caused by changes made to the CM's SOV. Having the DP certify the payment amount is a key internal control for the confirmation that the construction work was completed as stated by the CM. If this independent certification is not present, the risk of inappropriate payments is increased.
- All four Schedule of Values (SOV) forms reviewed as part of our Application for Payment testing had changes to line items made in pencil. There were no indications as to who made the changes or an explanation for the changes. The SOV is a form required by the Contract to be submitted with the Application for Payment. The SOV is the key document that recaps the calculation of the payment being requested. Allowing modifications to the SOV, without requiring proper supporting documentation and authorizations, increases the risk of the progress payment request being incorrectly stated. Applications for Payment containing material modifications should be returned by the County to the CM for correction and resubmission.
- The letter submitted by the DP with the Applications for Payment covering "Certification" does not reflect the requirements stated on the Application and Certificate for Payment form and the requirements contained within the DP Contract. The DP's attestation letter states:
- ". . . has reviewed the Pay Application for general conformance to the work in place and certify Pay Application No.__ in the amount of $__."
- The GS Payment form statement states:
- "In accordance with the Contract Documents, based on on-site observations and the data comprising the above application, the Architect certifies to the Owner that to the best of the Architect's knowledge, information and belief the Work has progressed as indicated, the quality of the Work is in accordance with the Contract Documents, and the Contractor is entitled to payment of the AMOUNT CERTIFIED."
- The DP Contract Section A.7.2(e) mirrors the GS Payment form statement, but is more explicit with reference to determining the amount owed. The acceptance of the DP letter for certification of the Application for Payment introduces inconsistency into the scope of the certification that could result in GS making payments for work not completed.
A. Changes to the SOV be properly documented and approved. Material changes should require the resubmission of the corrected Application for Payment by the CM.
B. Modifications to documents that contain authorized signatures require re-authorization when the amount is changed.
C. Application for Payment certification letters from the DP adhere to the requirements enumerated in the Contract.
A. The Design & Construction Division concurs with this recommendation
and in the future will insist on properly executed applications for payment
without pencil changes; however, if penciled changes become mandatory
due to the circumstances of the project, the author will be identifiable.
B. The Design & Construction Division generally concurs with this
recommendation. As the audit indicates, re-submittals and
re-authorizations should have been adhered to; however, outside
influences and non-cooperation by the DP & CM essentially made this
impossible on this particular project. A stronger project team and
stronger controls should avoid this issue on future projects.
C. The Design & Construction Division generally concurs with this
recommendation. As the audit stated, this requirement is in our DP's
contract agreement and we feel the actual Applications for Payment
certifications were adhered to. It is our opinion the cover letter is
incidental to the DP's actual certification executed on the "AIA
Application & Certification for Payment."
2. GS's Application for Payment Review and Approval Process Needs Improvement.
We reviewed four construction phase Applications for Payment received and approved by GS totaling $266,662 (out of ten Applications for Payment totaling $528,497 for the entire project). We found significant deficiencies in the supporting documentation that indicate weaknesses in GS's internal controls as they relate to the review and approval of Applications for Payment. The type of deficiencies found could have permitted the payment of expenditures that were not authorized by the Contract. As a result of our review, the following issues were identified:
- Of the four Applications for Payment reviewed, $163,174 were submitted with inadequate supporting documentation (could not confirm compliance to the Contract terms) that represented 62% of the reviewed amount paid. The following specific deficiencies were found:
- The CM submitted 27 invoices totaling $83,489 relating to different types of labor charges. Subcontractor invoices were not attached. Personnel time sheets related to labor hours worked or a breakdown of the individual components of the rates charged were not provided.
- The CM submitted its own invoices for eight line items totaling $49,473. Subcontractor invoices to support these expenses were not attached. Two of the CM's invoices were altered to reflect a lesser amount. The modifications to these invoices were not approved by the CM or the reasons for the changes stated.
- Two line items totaling $5,775 on a Subcontractor Application For Payment (SAFP) form and the related subcontractor invoices were changed (the amount requested on one item was increased and the other decreased). There were no notations on the invoices indicating who made the changes, who authorized the changes, or the reason for the changes.
- Three line items totaling $12,534, on a SAFP form, did not agree with the amounts listed on the SOV (the amount requested was larger than the amount listed).
- Three SAFP forms totaling $11,903 listed a larger reimbursement amount than was listed on the SOV. The explanation, written in pencil, on the SAFP form stated that the subcontractor was billing Bandes for one amount, but Bandes requested a lesser amount from the County. The notation was not signed, and there was no explanation for the notation.
- Two SAFP forms totaling $47,903 were included in the Applications for Payment package, but the items were not listed on the SOV.
- It is essential that all payments be properly documented. The CM submitted a Change Order package, that was previously utilized to obtain Board of County Commissioners' (BCC) approval for the additional work (an estimate), as support for the Application for Payment reimbursement. Submitting estimates for the cost of work, instead of the actual invoices, generated the following issues:
- Change Order No. 1 for $14,660 was supported by estimates or proposals from the subcontractors. These estimates totaled $13,280. In addition, the CM billing included a charge in excess of the actual costs for labor (used inflated "burden rate" and more than 10% markup for "overhead and profit" rate).
- Change Order No. 2 for $51,559 was supported by estimates, proposals, or bids from subcontractors totaling $34,725 and stand-alone CM invoices for $3,229. The majority of the Applications for Payment, $37,954, were not supported by an actual invoice from the subcontractor that performed the work.
- Change Order No. 3 for $29,261 included a $18,531 cost projection for an external cinder block wall. The change order documentation addressed the wall construction but did not include the estimate from the subcontractor. The Application for Payment that contained the request for payment for the wall was not supported by the actual invoice from the subcontractor that constructed the wall.
- The identical documentation supporting a subcontractor invoice for $1,500 covering the connecting of a water meter line was submitted twice by the CM and paid both times. The item was processed in Application for Payment No. 2 (charged to the Contingency expense line) and a second time in Application for Payment No. 8 relating to Change Order No. 1. GS's Contingency Authorization control sheet does not list the $1,500 item as being charged to the Contingency expense line. However, the GS control sheet represents 14 tasks that were authorized but are not supported by actual vendor invoices presented for payment through the Application for Payment. Consequently, we could not verify whether or not a duplicate payment actually occurred.
A&B. Reimbursements not be approved without appropriate supporting documentation regarding the expenditure. Actual invoices and/or SAFP should be required.
C. GS determine through a review of their contingency documentation and discussion with the CM if the item is a duplicate billing. If so, the $1,500 overpayment should be recovered.
A&B. The Design & Construction Division concurs with this recommendation.
The issue with the CM ignoring requests for supporting documentation
has prompted us to prepare the attached format (Attachment "A") for
submission to our CONTRACTS/AGREEMENTS/REPORTING/
PROCESSES TEAM (CARP) to incorporate in our future contracts.
C. The Design & Construction Division generally concurs with this
recommendation; however, the payment was not paid twice for this
contingency. It should be noted that the $1,500.00 should have
remained in the CM's contingency after the initial billing of that line item
and not made a part of a subsequent change order, which confused the
audit trail. A subsequent meeting after the preliminary memo draft
between the auditor and DCD verified the $1,500.00 was not paid twice.
Internal Audit Reply:
C. We have not concluded that a duplicate payment did not occur.
Management apparently based its conclusion on authorized payments
from contingencies. However, we were unable to correlate actual
billings to authorized amounts. Consequently, we have not been able
to determine whether a duplicate payment was made.
3. GS Does Not Have Formal Written Policies and Procedures Addressing the Review and Approval Process Associated with Application for Payment Reimbursements.
No manual that specifies the various responsibilities of and procedures to be performed by the signatories on the Application for Payment has been developed by GS. Written policies and procedures should be established to promote consistent operations and to implement a strong internal control environment. In addition, the responsibilities of and the procedures to be performed by GS are not specified in the Contract. This situation contributed to the acceptance of inadequate supporting documentation for the Applications for Payment paid by GS.
We Recommend formal written policies and procedures addressing the review and approval process associated with the payment of Application for Payment reimbursements be established. These standards should prohibit reimbursements being processed without having first received appropriate supporting documentation. The CM's contract should stipulate that adequate supporting documentation must be submitted before the DP or GS will accept the Application for Payment for processing.
The Design & Construction Division concurs with this recommendation. Written
policies and procedures in the contract agreements are being revisited by our
CARP Team to ensure a more detailed & enforceable protocol. With the advent
of a recently developed "AIA Application for Payment - Line Item Back-up
Information" format (Attachment "A"), along with strict enforcement, the Division
should resolve the unacceptable documentation issue.
4. GS Was Not Provided With the CM's Policy and Procedure Manual.
The Contract (Exhibit B, Section H) requires the CM to submit a manual to GS prior to receiving payment for work performed. GS was unable to provide us a manual for review. The manual is intended to ensure the CM has policies and procedures in place that provide reasonable assurance that the monitoring and accounting practices are sufficient to ensure compliance with the agreement. If the CM's Application for Payment process was addressed in the manual, GS could have discussed and resolved any procedural issues prior to the presentation of the first invoice by the CM.
We Recommend the Notice to Proceed not be provided until the CM's Policy and Procedure Manual is reviewed and approved by GS.
The Design & Construction Division concurs with this recommendation, having
never received a copy of the CM's Policy and Procedure Manual. A CM
requirement checklist (Attachment "B") was established on this project; however,
this item was ignored by the CM and overlooked by the county's project staff.
The Design & Construction Division will continually monitor, document and
enforce the use of the Construction Manager's Requirements Checklist
5. The Name/Numbering System Utilized in the Master Project Schedule (MPS), and the SOV Are Not Identical.
The MPS that was provided by the CM to GS did not categorize the activities so that they correlated to the "Item No." or "Description of Work" in the Application for Payment. The usefulness of the MPS would be dramatically enhanced if the "Task Name" as listed in the MPS matched the "Item No." in the Application for Payment. By identifying activities identically throughout all reports submitted by the CM and the DP, the oversight personnel would better comprehend the meaning of the report. Without categorizing activities identically, oversight personnel are unable to readily compare the Application for Payment to the MPS Time Line plan. This would be beneficial in determining whether or not the project is on schedule, determine the percentage of work that was completed, and verify that the compensation being requested is appropriate. This lack of coordination limits the usefulness of the MPS to the GS Contract Oversight Manager and the DP. The County's Utilities Department utilized a relationship numbering system where the first three numbers of six digits represented the Application For Payment Line Number and the second three numbers represented individual MPS Time Line task. The correlation enabled the CM and the DP to easily determine the progress payment due to the contractors.
We Recommend GS consider requiring the name/numbering system used in the MPS and the SOV be identical.
The Design & Construction Division partially concurs with this recommendation;
however, this may be an unreasonable recommendation for vertical construction
projects due to the number and complexity of building tasks and components as
compared to horizontal or public works-type projects. The recommendation has
been turned over to the CARP Team to research and make recommendations
as to the feasibility and operational aspects of such a system.
6. Work Accomplished by the Subcontractor is Not Always Properly Identified in the Application for Payment Line Item.
During our review, we noted two instances when expenses were not posted to the proper line item. As a result, the Application for Payment "Work Completed" line item amount is incorrectly stated and will not reflect the proper distribution to the "Scheduled Value" (budget) for that line item.
Line Item No. 13 $ 256 Masonry
- In Application for Payment No. 6, a billing for $5,743 from a subcontractor for structural steel was charged to four line items that do not appear to relate to the service being billed, as follows:
Line Item No. 19 1,500 Roofing Sheathing and Felt
Line Item No. 18 692 Shingle Roofing
Line Item No. 11 3,295 Concrete
- In Application for Payment No. 5, a billing for $4,160 from the same subcontractor for steel trusses was applied to Line Item No. 12, Rebar. The approved SOV budget for the construction phase did not have a line item amount allocation for structure steel.
We Recommend work accomplished by the CM be properly identified and classified in all reports. To accurately account for and monitor all costs, it is essential that the costs be properly classified. If all costs are not properly classified there is an increased risk that inappropriate costs could be paid.
The Design & Construction Division concurs with this recommendation. This
particular problem has been unique to this project. The CM, with the lack of
detailed information from the DP, completely erred and overlooked the
Miscellaneous Steel in his final GMP and therefore needed to invoice the items
which you refer to, elsewhere.
7. The CM Did Not Maintain an Adequate Tracking System Between the Application for Payment Line Items and the Supporting Documentation for the Project Expenditures.
As a part of our audit, we reviewed records maintained by the CM. Section 8.3 of the Agreement for Construction Management Services with Bandes requires the CM to "keep all records and supporting documentation which concern or relate to the Work . . . ." and "The County has the right to audit, inspect and copy all such records and documents . . . ."
Based on the inadequacies found in the Application for Payment support documentation tested in the audit sample (Opportunity for Improvement No. 2), we conducted limited testing on all ten Applications for Payment on file with GS. For all ten Applications for Payment, we identified 50 Application for Payment line items totaling $219,816 that were not supported by an invoice or a SAFP, and we requested the CM to supply the supporting documentation for the expense. The results of the testing are listed below:
- Invoices do not always provide proper support. Of the total population of $219,816, the CM furnished us with invoices for $117,239 and supporting SAFPs of $76,813 leaving $25,764 not meeting the support requirement. The $25,764 falls into three areas: 1) CM paying against documentation other than an invoice or SAFP ($4,053), 2) the documentation supplied by the CM did not adequately support the line item expenditure or was used to support another line item ($12,259), and 3) the support did not cover the total dollar amount of the line item ($9,452).
- The CM did not maintain the supporting documentation by Application for Payment No./line item. The CM's accounts payable records are filed by subcontractor. When the CM completed the preparation of each Application for Payment, the supporting documentation was filed in each subcontractor's file. The process made the audit trail by Application for Payment No./line item not readily traceable. The audit trail was further diluted by the CM submitting their own invoice for a line item and not being required to supply subcontractor documentation for each CM invoice. (Note that the CM was not performing any work on the project except for oversight; therefore, the CM should not be submitting their own invoices for line items.)
- In most cases the SAFPs were also not readily identifiable to an Application for Payment No./line item and in some instances related to a number of CM invoices.
- In Application for Payment No. 5, a recap sheet for work performed by a subcontractor was submitted by the CM to support a $4,160 charge. The subcontractor's final SAFP listed total work performed of $7,847 with the expenses being processed in Applications for Payment No. 1 and No. 8. It appears that the item in Application for Payment No. 5 is a duplicate payment. However, based on the poor reliability factor of the Application for Payment documentation, the subcontractor could have performed additional work but the wrong documentation was submitted by the CM.
We Recommend GS management properly review the Application for Payment and request any additional documentation in a timely manner from the CM. SAFPs that support more than one line item should be itemized by line item. SAFP time frame should always be the same period as the Application for Payment and never overlap Application for Payment periods. Conflicting support documentation should be resolved prior to the Application for Payment being approved by GS. In addition, management should consider expanding the Contract section to include the requirement that supporting documentation that relates to work performed be traceable to the Application for Payment line items.
The Design & Construction Division concurs with this recommendation. Since