PERFORMANCE AUDIT OF THE CONSTRUTION OF THE
LOS ANGELES POLICE HEADQUARTERS FACILITY

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EXECUTIVE SUMMARY

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The Controller's Office has completed its performance audit of the construction of the new Police Headquarters Facility. The primary objectives of the audit were to perform an overall assessment of the management functions on the Police Headquarters Facility project and to conduct contract compliance reviews of the two contracts with DMJM Design / Roth+Sheppard Joint Venture, the project architect, and Vanir Construction Management, Inc., the project construction management consultant.

BACKGROUND

On February 25, 2003 the Los Angeles City Council (City Council) approved a report from the Municipal Facilities Committee, consisting of the Chief Administrative Officer, Chief Legislative Analyst and the Office of the Mayor, for the construction of a new Police Headquarters Facility on City-owned property. The need for a new facility to replace the existing Parker Center building had been identified for a long time as it was considered outdated, in need of expensive seismic retrofits and too small to accommodate the present needs or projected growth of the Los Angeles Police Department. The new Police Headquarters Facility is expected to bring much needed facility improvements to support Los Angeles Police Department's mission to enhance public safety.

The construction of the new Police Headquarters Facility is one of the most expensive and visible projects the City of Los Angeles (City) has undertaken in recent years. To date, the Police Headquarters Facility project has faced schedule delays and budget increases due to land acquisition issues, construction cost escalation, local construction market conditions, and changes to project scope. In June 2004, the Police Headquarters Facility project was originally budgeted at $303 million with a scheduled completion date of March 2009. Currently, the project is budgeted at $437 million with a scheduled construction completion date of May 2009 for the Police Administration Building and Main Street Parking / Motor Transport Division Facility, and June 2010 for the Aiso Street Parking structure.

It is also worth noting that various aspects of the project are also funded from the City General Fund and not reflected in the $437 million dollar project budget. In 2007, $725 thousand was budgeted against the General Fund for Fiber-optic and Copper communication connections to the Police Administration Building. Additionally, there is a 2008 budget request for $16 million from the General Fund for the purchase of freestanding furniture, radio systems, microwave systems, MATV distribution system, audio/visual systems, voice and date network components and computer servers.

The Department of Public Works Bureau of Engineering (BOE) is responsible for delivering the Police Headquarters Facility according to directives from the Municipal Facilities Committee. BOE is working in partnership with Los Angeles Police Department and other City departments on project planning, development and design to deliver a facility that meets the current and future needs of Los Angeles Police Department.

As of December 2007 construction of the Police Administration Building was approximately 47% complete with less than 2% change orders. Construction of the Main Street Parking / Motor Transport Division Facility and Aiso Street Parking structure parking facilities had not yet begun. Of the $437 million total project budget, approximately $130 million had been expended.

SCOPE

The scope of this audit focused on the overall project management practices of the Police Headquarters Facility project as performed by BOE. Two consultant contracts were also included in the audit scope: Agreement No. 106467 with DMJM Design / Roth+Sheppard Joint Venture and Agreement No. 109458 with Vanir Construction Management, Inc. Contract No. C-110760 with Tutor-Saliba Corporation, the general contractor on the Police Headquarters Facility project, was not included in our scope, however we considered City project management practices related to the construction contract.

BOE's construction administration process is largely governed by policies and procedures found in BOE's Project Delivery Manual, which was reviewed and referenced during the process review section of this audit.

The period covered by our audit is February 25, 2003 through December 31, 2007.

Fieldwork was performed between October 24, 2007 and February 1, 2008, which included interviewing City personnel, consultants and contractors, and reviewing project documentation and billing records.

The audit was conducted in accordance with Generally Accepted Governmental Auditing Standards.

SUMMARY OF RESULTS

Overall, our audit disclosed that BOE's project management was adequate, including its monitoring of construction activities. In addition, our audit disclosed that payments to contractors were made in accordance with the contract terms.

Our audit, however, found that an alternative delivery strategy from the typical “designbid-build” method used may have been more advantageous, and resulted in lower costs. In addition, we noted certain deficiencies in the negotiation process with the construction contractor, construction management firm, and the architectural design firm.

Due to the absence of clear BOE policies related to negotiating with a single bid contractor and the minimal documentation maintained by BOE, it does not appear the City achieved any substantial cost savings from Tutor-Saliba Corporation for the original Police Administration Building construction contract of $231,337,246. In order to achieve a true negotiation with Tutor-Saliba Corporation, BOE needed the authorization from Municipal Facilities Committee to reject the bid and not award the contract.

Additionally, BOE did not utilize all available mechanisms in the cost negotiation process with the project architect and the project construction management firm. As a result, it is not clear whether BOE obtained the most favorable contract rates for these two agreements, with a combined value of $26,500,000 (including executed amendments).

KEY FINDINGS

SECTION I. PROJECT MANAGEMENT ASSESSMENT

There were limited cost savings on the single bid negotiations of the construction contract.

  The Police Headquarters Facility project received a single bid for construction of the Police Headquarters Facility Police Administration Building, which was reduced through discussions with the general contractor. Due to the nature of the fixed price contract, absence of clear BOE policies related to negotiating with a single bid contractor, and the minimal documentation maintained by BOE, it does not appear that the City achieved any substantial cost savings from the general contractor through negotiations. Rather, reductions were due to shifting costs to other contractors or the City, substituting or eliminating some design elements, and accelerating the payment schedule.

The City is not taking advantage of the Construction Manager at Risk delivery methodology, which may have resulted in cost savings on the PHF project.

  The Construction Manager at Risk method results in the engagement of the general contractor at the design stage and has a guaranteed maximum price compensation structure instead of a lump sum. BOE has not been permitted by City policy to add Construction Manager at Risk to its available project delivery methodologies. As a result, the City is limited in its ability to implement the most optimal method to deliver its projects. The Construction Manager at Risk methodology is utilized by other agencies and municipalities in California.

BOE does not have a formal plan to transition key employees off a project in the event the employees leave City employment.
  There appears to be one key individual, the former City program manager, now retired, who holds the majority of historical knowledge related to the Police Headquarters Facility project. By having critical project knowledge largely held by one individual outside of City staff, the City risks having insufficient project information if that individual leaves the project permanently or if a disagreement should arise.

BOE does not have a fully effective contractor outreach program.

  Several Los Angeles area general contractors, who were part of the BOE outreach effort, were contacted to gain an understanding of why the contractors did not submit a bid on the Police Administration Building. The common theme expressed by the contractors was that they did not feel they knew about the Police Administration Building early enough. As a result, they were busy with other projects when the Police Administration Building was advertised. The contractors attributed this problem largely to the City's lack of a continuous contractor outreach program.

BOE directed Tutor Saliba Corporation to proceed with work through the issuance of Emergency Change Orders with Board of Public Works verbal authorization and e-mail confirmation but before finalizing the Board Report approval process within the 30-day requirement in the Project Delivery Manual.

  The current project change order process is slowed by the time it takes to move through several layers of authorizations and ultimately obtain approval from the Board of Public Works. In order to keep the project moving and avoid disruption, BOE directed Tutor-Saliba Corporation to proceed with work utilizing the existing emergency change order process with Board of Public Works verbal authorization and e-mail confirmation, but before finalizing the Board Report approval process within the 30-day requirement in the Project Delivery Manual. By doing so, BOE is risking not having sufficiently reviewed and documented scope and price justification prior to start of work.

BOE's design driven construction change orders do not distinguish between an
error and an omission.

  Currently, BOE's design driven construction change orders do not distinguish between an error and an omission. Additionally, the design contract does not establish a contractual ‘standard of care' against which errors and omissions should be measured. As a result, it becomes more difficult for the City to establish and quantify the value of an architect's failure to meet minimum standards of care, which in turn impacts cost negotiations resulting from design errors and omissions.

SECTION II: CONSTRUCTION MANAGEMENT AGREEMENT

It is unclear if BOE obtained the most advantageous contractual rates with Vanir, due to the limited documentation and definitive policies regarding rate negotiation protocols.

  BOE did not consider cost as one of the criteria for selection of a construction management firm. In addition, BOE did not require a list of hourly billing rates for key personnel and activities as part of the submission requirements in the Request for Qualifications and did not require Vanir Construction Management, Inc. to submit a cost proposal for their services during the selection process. Vanir Construction Management, Inc. did submit a staff cost projection schedule with hourly rates after they were selected, but the hourly rates were established by BOE. Additionally, it cannot be determined if the current hourly rates takes into consideration that the City is housing the Vanir Construction Management, Inc. staff in City rented office space.

The Vanir agreement contract terms contain limitations.

  The current agreement with Vanir Construction Management, Inc. contains articles which do not consistently define requirements, are duplicative, or may not limit potential risk exposure for the City. All City contracts need to provide clear definitions of terms and utilize appropriate language so that both the City and consultant have a firm understanding of what is expected by both parties. A clearly formulated contract also reduces the risk of disputes and promotes a successful relationship between the City and consultant.

BOE inappropriately used Vanir's reimbursable expense allowance to quickly procure services from DMJM.

  BOE directed Vanir Construction Management, Inc. to use its reimbursable expense allowance as a way to procure additional needed services from the architect, DMJM Design / Roth+Sheppard Joint Venture, instead of amending the architectural agreement. This is a questionable use of Vanir Construction Management, Inc.'s reimbursable expense allowance.

BOE directed Vanir to begin work before a contract had been formally executed.

  Vanir Construction Management, Inc. performed work prior to formal contract execution at the direction of BOE. Issuing a ‘notice to proceed' may obligate the City to compensate the consultant without having fully agreed to the terms or conditions protecting either the City or Vanir Construction Management, Inc.

SECTION III: ARCHITECTURAL AND ENGINEERING AGREEMENT

BOE did not follow its own procedures when procuring and administering the architectural and engineering contract.

  BOE did not sufficiently negotiate the original DMJM Design / Roth+Sheppard Joint Venture contract and subsequent amendments. Instead of obtaining a cost proposal from DMJM Design / Roth+Sheppard Joint Venture, BOE proposed a cost estimate they felt was reasonable. As a result, the City may not have obtained the best possible price for design services.

  BOE directed DMJM Design / Roth+Sheppard Joint Venture to begin work before the contract was formally executed. This practice continued during the design and construction phase, as DMJM Design / Roth+Sheppard Joint Venture has reportedly completed a significant amount of work totaling $1.3 million related to Amendment no. 3, which has not yet been executed.

  BOE used DMJM Design / Roth+Sheppard Joint Venture's reimbursable expense allowance as a contingency fund to pay for services performed by other firms. This may not be an appropriate use of contract reimbursables, which are typically incidental costs that are specifically related to the contract's defined scope of services.

The contract type used by BOE may not be the best type for architectural and engineering services.

  BOE did not utilize a cost-based contract for architectural and engineering services. Instead, a lump sum contract was executed, which may not have been the most cost effective option when designing a unique project, such as the Police Headquarters Facility. While BOE reportedly always uses lump sum contracts for well-defined and routine design work, for future projects it should consider alternative contract types, which may reduce City costs.

The DMJM agreement contract terms contain limitations.

  The current agreement with DMJM Design / Roth+Sheppard Joint Venture contains articles which do not consistently define requirements, are duplicative, or may not limit potential risk exposure for the City. All City contracts need to provide clear definitions of terms and utilize appropriate language so that both the City and consultant have a firm understanding of what is expected by both parties. A clearly formulated contract also reduces the risk of disputes and promotes a successful relationship between the City and consultant.

REVIEW OF REPORT

Audit findings were presented and discussed with BOE on February 11, 2008, and a draft report was subsequently provided to management. We held an exit conference with BOE management on March 7, 2008 to discuss the contents of this report. We considered the Bureau's comments before finalizing the report. We appreciate the cooperation and assistance extended to us during the audit by the various departments and offices.