City of Austin AUDIT REPORT

A Report to the Construction Cost Management

Austin City Council

Mayor
for Water Treatment Plant 4
Lee Leffingwell
Audit
Mayor Pro Tem
Sheryl Cole November 2012
Council Members
Chris Riley
Mike Martinez
Kathie Tovo
Laura Morrison
Bill Spelman

Office of the
City Auditor
City Auditor
Kenneth J. Mory REPORT SUMMARY
CPA, CIA, CISA, CRMA The Contract Manager at Risk agreement does not guarantee that costs to the
City will be limited to the Construction Cost Limitation (CCL) of $359 million.
Project management has initiated cost containment strategies; however,
Deputy City Auditor these have not been sufficient to keep costs within the approved CCL. In
Corrie E. Stokes addition, through value engineering and deferrals, the preliminary plant
CIA, CGAP, CFE design concept has1been modified and certain components
Audit Title,of
Month
the Year
plant have
been redesigned or downsized.
 AUDIT NUMBER: AU12124

TABLE OF CONTENTS

BACKGROUND ............................................................................................................................... 1

OBJECTIVE, SCOPE, AND METHODOLOGY ....................................................................................... 2

AUDIT RESULTS .............................................................................................................................. 3

Appendices
Appendix A: Management Response ..................................................................................................... 7
Appendix B: Comparison of Initial Cost Estimates to Contract Amounts .............................................. 8
Appendix C: WTP4 Planned Capacities With Deferrals and Value Engineering Changes ...................... 9

Exhibits
Exhibit 1: CM’s Obligations Relating to WTP4 Project Costs ................................................................. 4
Exhibit 2: Cost Reductions from Allowable Value Engineering Details .................................................. 5
Exhibit 3: Cost Reductions from Deferral Details ................................................................................... 5
Exhibit 4: Total Difference from Original Estimate, Including Deferrals and Allowable Value
Engineering Adjustments ........................................................................................................................ 6

GOVERNMENT AUDITING STANDARDS COMPLIANCE

We conducted this performance audit in accordance with Generally Accepted Government Auditing
Standards. Those standards require that we plan and perform the audit to obtain sufficient,
appropriate evidence to provide a reasonable basis for our findings and conclusions based on our
audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objectives.

AUDIT TEAM

Walton Persons, CPA, CICA, Assistant City Auditor

Henry Katumwa, CGAP, CICA, Auditor‐in‐Charge
Charles Holder, CPA, Auditor
Neha Sharma, CPA, Chartered Accountant, CIA, CISA, Auditor

Office of the City Auditor

Austin City Hall
phone: (512)974‐2805
email: [email protected]
website: http://www.austintexas.gov/auditor
Copies of our audit reports are available at http://www.austintexas.gov/auditor/reports

2 Audit Title, Month Year

Printed on recycled paper

Alternate formats available upon request
BACKGROUND
On November 11, 2009, the City of Austin signed a CMAR agreement with MWH Constructors, Inc.
for the construction of WTP4. The agreement provided for a CCL of $359 million. Approximately
$354 million has been encumbered on the project as of September 30, 2012.

At a September 26, 2012 Audit and Finance Committee meeting, Austin Water Utility (AWU)
management indicated that they plan to request an increase in the CCL of approximately $15.5
million, bringing the project cost to about $374 million, a 4.3% increase. AWU management states
that it needs the additional funding to meet the cost of the remaining construction contracts
required to complete the project.

Generally, CMAR agreements commit a construction manager to delivering a project within a GMP.
The CM acts as a consultant to the owner in the development and design phases and as a general
contractor during the construction phase. When a construction manager is bound to a GMP, they
must manage and control construction costs to not exceed the GMP, or be responsible for overages.
The WTP4 project is comprised of 13 GMPs.

WTP4 is designed to have an initial capacity of 50 million gallons per day (MGD), with the potential
of expanding to a maximum capacity of 300 MGD. The plant is scheduled to be operational in 2014.
AWU is the owner of the project and the Public Works Department is overseeing the plant
construction.

Office of the City Auditor 1 Construction Cost Management for WTP4 Audit
November 2012
OBJECTIVE, SCOPE, AND METHODOLOGY

The audit of the Construction Cost Management of Water Treatment Plant 4 was conducted as part
of the Office of City Auditor’s Fiscal Year (FY) 2012 Strategic Audit Plan, as presented to the City
Council Audit and Finance Committee.

Objective
The objective of this audit was to determine if AWU can provide reasonable assurance that Water
Treatment Plant 4 will be delivered on budget.

Scope
The audit scope included project information relating to the WTP4 budget, scope, and schedule for
construction, as provided for by the CMAR agreement. This audit was focused on providing
transparency and accountability regarding the cost estimates and revisions to these estimates
caused by changes made or proposed by management to the original project design and cost
estimates. In reconciling these differences, OCA has not made any judgments as to the
appropriateness of any of management’s decisions. OCA neither has the expertise nor did it acquire
outside expertise necessary to evaluate these management decisions; an independent engineer’s
assessment would be required to accomplish this and is outside the scope of this audit. As a result,
we are also unable to provide assurance as to whether the additional amount requested to
complete the project would be sufficient.

Methodology
To accomplish our audit objectives, we performed the following steps:
 Interviewed key City staff responsible for monitoring the WTP4 project.
 Selected and tested a judgment sample of change orders to determine compliance with
established change order processes and procedures.
 Reviewed documentation obtained from the Public Works Department and AWU relating to our
audit objectives.
 Reviewed sections of the CMAR agreement applicable to our audit objectives.
 Considered risk of fraud, waste, and abuse.
 Considered Information Technology risks.

Office of the City Auditor 2 Construction Cost Management for WTP4 Audit
November 2012
AUDIT RESULTS
The Construction Manager at Risk (CMAR) agreement has been used for reviewing costs and making
decisions regarding the construction of the WTP4 to control costs. The construction manager (CM) is
responsible for ensuring that contracts awarded through the bid process do not exceed the
Guaranteed Maximum Price (GMP) for each work package of the project. The CMAR agreement
does not ensure that the final aggregate total of all GMPs stays within the $359 million Construction
Cost Limitation (CCL) for the project.

According to project management’s assertions, initial estimates for construction costs were based
on engineering estimates made in 2009 and certain decisions were made for environmental and
community impact reasons that increased the project cost. Since that time, construction bid awards
have been higher than the original estimates, and the original plant design concept has been
modified to control costs.

Finding 1: The WTP4 Construction Manager at Risk agreement does not guarantee that
WTP4 will be constructed within the Council‐authorized amount of $359 million.
In 2009, Council approved the CMAR agreement and authorized a CCL of $359 million for the WTP4
project.1 The CMAR agreement breaks the construction work into work packages. Potential
subcontractors bid on one or more work packages. Subcontractors awarded a contract agree to a
GMP for the work and the individual GMP amounts in aggregate constitute the total contract
amount of the overall project GMP.

The CMAR agreement obligates the CM to the contract amounts awarded to subcontractors at the
agreed upon GMP. The CM is responsible for ensuring that each subcontractor stays within the
GMP amount. The CM monitors the project and proposes cost containment strategies to stay within
the CCL of $359 million. Exhibit 1 shows the current structure of the project as it relates to the CM’s
key obligations relating to project costs.

As of September 30, 2012, the aggregate GMP amounts are approaching the $359 million CCL, with
three more contracts still to be awarded. The aggregate amounts of the existing GMPs have been
higher than originally estimated, as shown in Appendix B. According to management, the total costs
governed by the CMAR agreement will exceed the CCL of $359 million if and when all GMPs are
awarded.

1
The CCL included in the CMAR agreement was based on a Class 3 estimate, as defined by the Association for
the Advancement of Cost Engineering International Forecasting System. The range of accuracy for a Class 3
estimate is +30% to –15%.
Office of the City Auditor 3 Construction Cost Management for WTP4 Audit
November 2012
 EXHIBIT 1
CM’s Obligations Relating to WTP4 Project Costs

WTP4 Council‐authorized CCL ‐ $359 million Guaranteed Maximum Price

Construction phase work is divided into work
packages/individual GMP contracts. Individual GMP amounts
will in aggregate constitute the entire project GMP.

Key CM cost containment responsibilities listed in the CMAR CM is responsible for performing
agreement: tasks indicated under the CCL
 Perform constructability reviews amount. In addition, the CM is
 Propose value engineering solutions to reduce costs solely responsible for all costs
 Prepare cost management reports that would cause the overall GMP
 Prepare cost estimates to be exceeded.
 Evaluate contractor bids

SOURCE: OCA review of the CMAR agreement

Finding 2: Project management initiated cost containment strategies; however, these

have not been sufficient to keep the plant cost within the approved CCL of $359 million.
The CMAR agreement allows project management to make changes through value engineering in
order to ensure that construction costs do not exceed the CCL of $359 million. Project management
has a process in place to evaluate and approve the components changed through the value
engineering process. We reviewed a sample of 10 change orders out of 64 that have been initiated.
Based on our review, the approval process complies with the terms of the CMAR agreement. We did
not test management’s assertions on the appropriateness or impact to plant capacity and longevity
of these changes.

Based on our review, project management has made several value engineer changes that have
resulted in cost reductions. In addition, project management has deferred certain
phases/components to contain costs. Exhibits 2 and 3 show cost reductions from value engineering
and deferrals. Based on our review:
 Value engineering resulted in a cost reduction of approximately $24 million to date.
 Certain plant components/phases have been deferred until future capacity is required, which
resulted in a cost reduction of approximately $20 million to date.

Office of the City Auditor 4 Construction Cost Management for WTP4 Audit
November 2012
 EXHIBIT 2
Cost Reductions from Allowable Value Engineering Details
Value Engineering Details Amount
Allow alternate pipe materials for tunnel carrier $ 7,620,000
Remove 3 finished water pumps 6,500,000
Revise allowable excavation technique at raw water intake 2,000,000
Eliminate concrete fill at WTP4 and Jollyville shafts 1,830,400
Eliminate permanent concrete liner and backfill for shaft 1,200,100
Eliminate roads and retaining wall along southern clear well boundary 765,000
Allow flowable fill (in addition to cellular fill) for pipe grouting 731,500
Remove redundant Bullick Hollow ductbank 700,000
Raw water intake alternative foundation design 539,995
Other redesign 2,272,252
Total Value Engineering $ 24,159,247
SOURCE: OCA analysis of data provided by Public Works Department and survey of project management

EXHIBIT 3
Cost Reductions from Deferral Details
Deferral Details Amount
Forest Ridge water main line $ 15,900,000
Delete two of seven pump shafts at RWPS 1,838,589
Filter to waste and back wash pipe 775,000
Delete one wash water decant basin (180,000 gallon) 472,000
Delete one sludge holding tank 331,786
Other deferrals 419,400
Total Deferrals $19,736,775
SOURCE: OCA analysis of data provided by Public Works Department and survey of project management

In the past three years, the construction manager has executed 10 construction contracts,
encumbering approximately $354 million (99%) of the authorized CCL. Three remaining contracts,
with an initial estimated cost of $19.7 million (the revised estimated cost is $18.5 million plus
contingencies of $0.4 million), have not yet been awarded. Exhibit 4 provides a comparison of the
original project cost estimates to the estimated cost to complete construction.

Office of the City Auditor 5 Construction Cost Management for WTP4 Audit
November 2012
 EXHIBIT 4
Total Difference from Original Estimate, Including Deferrals
and Allowable Value Engineering Adjustments ($ millions)

Net of:
Amount encumbered as of September 30, 2012 $ 354.0 Value eng. $ 24.2 M
Deferrals $ 19.7 M
Add: Initial estimate for remaining construction $ 19.7 Total $ 43.9 M
Total estimated cost of construction governed by CMAR agreement 373.7
Less: CCL based on preliminary design −359.0
Difference from original estimate $ 14.7

Additional Requested Amount $ 15.5

SOURCE: OCA analysis of WTP4 project status reports

AWU management indicated that they plan to request an increase in the CCL of $15.5 million,
bringing the project cost to about $374 million, a 4.3% increase. However, management also stated
that allowances and contingencies may result in additional savings. See Appendix B for a
comparison of initial cost estimates to actual contract amounts.

Based on the September 2012 Monthly Project Status Report prepared by AWU, 3 of the 13 initial
GMP work packages that have not yet been awarded are:
 GMP 3H – Bullick Hollow Road Ductbank
 GMP 3I – Filter Backwash Pump Station
 GMP 4 – WTP4 and Raw Water Pump Service Site Finishes
The initial estimated cost for the three GMPs is $19.7 million. However, contracts for these GMPs
have not yet been executed.

Finding 3: Through value engineering and deferrals, the preliminary plant design concept
has been modified and certain components of the plant have been redesigned or
downsized.
The first phase of WTP4 was planned for a capacity of 50 million gallons per day (MGD), with the
potential for a maximum capacity of 300 MGD. Based on management’s assertions, the plant will be
capable of meeting its planned initial treatment capacity. However, based on project management
decisions, certain components on the original plant design have been changed through the value
engineering process or deferred.

The original plant design had specific treatment capacity requirements measured in MGD limits for
various components. For instance, according to project management the electric ductbank was
designed to deliver enough redundant power to enable the plant to operate at full capacity of 300
MGD. After the redesign, through the value engineering process, project management asserts that
it is now capable of delivering enough redundant power to pump 150 MGD. Refer to Appendix C for
some of the WTP4 deferrals.

Office of the City Auditor 6 Construction Cost Management for WTP4 Audit
November 2012
APPENDIX A

MANAGEMENT RESPONSE

Management reviewed and provided comments regarding drafts of this report. Since we did not
issue recommendations, management is not required to provide an action plan. Management
concurred with the findings in this report and elected not to include a written response.

Office of the City Auditor 7 Construction Cost Management for WTP4 Audit
November 2012
APPENDIX B

COMPARISON OF INITIAL COST ESTIMATES TO CONTRACT AMOUNTS (IN $MILLIONS)

Contract
Project Phase Initial Estimate Variance
Amount2
General Conditions (GC / Fee / Pre‐Construction) 51.8 54.9 (3.1)
GMP 1 ‐ Raw Water Intake & Tunnels 55.7 63.2 (7.5)
GMP 2 ‐ Raw Water Pump Station 12.9 18.5 (5.6)
GMP 3A ‐ Early Out Procurement 7.0 6.8 0.2
GMP 3B ‐ Clearwells & Clarifiers 14.5 14.5 0.0
GMP 3C ‐ WTP4 Walls, Conveyances & Filters 14.2 18.0 (3.8)
GMP 3D ‐ WTP4 Washwater, Solids Handling &
16.0 19.6 (3.6)
Chemical Bldg
GMP 3E ‐ WTP4 Electrical, I&C, Yardpiping &
37.1 42.0 (4.9)
Ductbank
GMP 3F ‐ Lime Building and Balance of Clearwell 4.7 8.1 (3.4)
GMP 3G ‐ Admin Bldg and Maintenance Bldg 4.8 5.4 (0.6)
3
GMP 5 ‐ Transmission Main System:
Jollyville Transmission Main 77.5 85.6 (8.1)
Forest Ridge Transmission Main 15.9 0.0 15.9
TOTAL $312.1 $336.6 ($24.5)
SOURCE: OCA analysis of the WTP4 project status reports

2
Contract amounts do not include construction contingencies and allowances. The encumbered amount of
$354 million is equal to the total contracted amount plus related contingencies and allowances
3
The transmission main system, as initially designed, included two transmission mains: the Jollyville
Transmission Main and the Forest Ridge Transmission Main. Construction of the Forest Ridge Transmission
Main has been deferred by project management.
Office of the City Auditor 8 Construction Cost Management for WTP4 Audit
November 2012
APPENDIX C

WTP4 PLANNED CAPACITIES WITH DEFERRALS & VALUE ENGINEERING CHANGES

SOURCE: WTP4 project management, modified by OCA analysis to reflect significant value engineering changes and deferrals.

Office of the City Auditor 9 Construction Cost Management for WTP4 Audit
November 2012