NOVEMBER 2000

REPORT NO. 01-046

AUDITOR GENERAL
William O. Monroe, CPA CONSTRUCTION CONTRACT MONITORING FUNCTION FLORIDA DEPARTMENT OF TRANSPORTATION
SUMMARY Our audit of the Florida Department of Transportations construction contract monitoring function focused primarily on the Construction Engineering and Inspection (CEI) process and the final acceptance and payment (final estimates) process. The audit included the period July 1998 through February 2000 and selected Department actions taken through September 2000. The CEI process is a key component in the Departments efforts to ensure that construction projects are built as planned and meet applicable engineering and materials standards. The CEI process represents a significant part of total project costs. In general, we found that the CEI process (including related records) was in material compliance with law, established procedures, and good business practices. The final estimates process includes an independent review and analysis of work completed and contractor payments to ensure that all design plans and specification requirements have been satisfied, and all quantity measurements support the final contract payment. In reviewing the final estimates process, we found that it provided Department management reasonable assurance that documentation evidencing the completion of work was maintained and that calculations supporting contract payments were made appropriately. The Departments Inspector General has reported that, in those instances in which a contractor files a claim contesting the Departments determination as to the amount of final payment that is due to the contractor upon completion of the project, the Departments process for handling final payments to contractors could be improved. The Department has acknowledged this concern and has already formed a claims task force that has identified process changes that need to be made. INTRODUCTION The Florida Department of Transportation is responsible for coordinating the planning of a safe, viable, and balanced transportation system serving all regions of the State. One of the primary missions of the Department is to construct and repair the roads and bridges that comprise the State transportation system. Each new or repair project involves planning, construction, engineering supervision, and final acceptance and payment for work performed. The Department contracts with private vendors to perform both new construction and repairs to the existing transportation system. Department staff or contracted consultants perform the engineering supervision of the work contracted for. Regardless of who performs the engineering supervision work, the Department is responsible for approving the work and determining the final amount to be paid for the work performed. The construction supervision process is called Construction Engineering and Inspection (CEI), which primarily consists of a project engineer ensuring that only approved materials are utilized (including obtaining laboratory tests to determine the adequacy of the materials put into place); observation of the work performed by the contractor to ensure that work is being performed in conformity with the project design plans; reviewing and approving contract and plan modifications; preparing monthly progress estimates to support progress payments to the contractor; and ensuring the complete performance of the contractors obligations

CONSTRUCTION CONTRACT MONITORING FUNCTION FLORIDA DEPARTMENT OF TRANSPORTATION under contract. Evidence of CEI is maintained in Department-required documentation such as daily reports for each contractor on the job site and records which detail the computations showing the amount of actual materials used in the project. The maintenance of CEI records is a key component in the Departments ability to demonstrate due diligence in the construction contract monitoring function. The Departments planned construction contracts and related CEI costs are included on Table A. Approximately 75 percent of planned CEI costs are for consultant contracts.
Table A Planned Program Costs
(in millions)

F iscal Year

Table B C ontract C laim s P aid (in m illions) $ 20. 9 41. 3 65. 4

1996-97 1997-98 1998-99

Source: OIG Report.

FINDINGS AND RECOMMENDATIONS Our audit included a review of the CEI process for 10 ongoing construction projects, a review of Department records evidencing the testing of materials in 34 construction contracts, and a review of the final estimates process for 15 completed projects. We found that these Department processes and records were in material compliance with law, established procedures, and good business practices. In addition to providing the Department with the necessary assurances regarding the safety of the States transportation system, the construction contract monitoring function is a key component in establishing the Departments position in most contract claim settlement proceedings. Although we found the construction contract monitoring function to be operating properly, we are aware that the Department has continued to experience an increasing level of contract claims (see Table B). Additionally, the Departments Inspector General has noted (see IG Report 04G-9005, dated June 30, 2000) the existence of potential contractor fraud in the claims settlement process. As a result, a series of criminal investigations of some Department contractors has been initiated, resulting in several indictments. At the time of our review, additional investigative work was ongoing. The Departments Inspector General also indicated that the Department could not adequately demonstrate its accountability for managing claim settlement amounts because they were often not clearly established or sufficiently documented to be fair and equitable. He further noted that claims were not adequately tracked and monitored. In response to the Inspector Generals report, Department management formed a claims task force to address these issues. The report of the task force, dated

Fiscal Year

Construction Contracts 1998-99 1999-00 2000-01 $1,658 1,688 2,393

CEI $245 235 375

CEI as a % of Construction 14.8% 13.9% 15.7%

Source: FDOT Program and Resource Plan, July 2000.

Progress payments to contractors are not based on contractor billings. Rather, they are prepared by the project engineer based on contractually-established prices for the quantities of specific materials or services used in the project during the month. The Departments handling of final payments to contractors (i.e., the final estimates process) includes an independent review and analysis of work completed and contractor payments made to date. The final estimate review is performed to ensure that all design plans and specification requirements have been satisfied, and all quantity measurements support the final contract payment. During or subsequent to the completion of a project, a contractor may seek additional monetary compensation, time, or other adjustments to the contract. When the contractors entitlement to or the impact of such an adjustment is disputed by the Department, it may result in the filing of a written claim by the contractor. As shown in Table B, the Department continues to experience a significant increase in the dollar amount of contract claims.

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CONSTRUCTION CONTRACT MONITORING FUNCTION FLORIDA DEPARTMENT OF TRANSPORTATION September 29, 2000, addressed several changes that should be taken to address documentation evidencing the fair and equitable nature of all claim payments. We recommend that the Department continue its efforts to ensure that the construction contract monitoring function operates effectively. We also recommend that the Department continue its efforts to resolve the concerns of the Inspector General and the claims task force. SCOPE, OBJECTIVES, AND METHODOLOGY This operational audit focused on the Florida Department of Transportations construction contract monitoring function. Our objectives were: w To determine if the Department operated, or contracted for, an adequate CEI process for construction supervision including documentation of materials placed into the projects and a contemporaneous review of the quality of the work performed. To determine if the Departments materials sampling program was operated in an economic and efficient manner and in accordance with State and Federal rules and regulations. w To determine if the Departments final estimates process for making the final payment on completed contracts provided that only amounts reasonably owed were paid.

Our audit included examinations of various transactions (as well as events and conditions) occurring during the period July 1998 through February 2000, and selected actions taken through September 2000. AUTHORITY Pursuant to the provisions of Section 11.45, Florida Statutes, I have directed that this report be prepared to present the results of our operational audit.

William O. Monroe, CPA Auditor General AUDITEE RESPONSE In a letter dated November 9, 2000, the Department Secretary concurred with our recommendations, stating, in part, that the Department would . . . continue to ensure quality construction through proper CEI oversight and look for ways to enhance the effectiveness of CEI services. The Secretarys complete response can be viewed on the Auditor Generals Web site.

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CONSTRUCTION CONTRACT MONITORING FUNCTION FLORIDA DEPARTMENT OF TRANSPORTATION

To promote accountability in government and improvement in government operations, the Auditor General makes operational audits of selected programs, activities, and functions of State agencies. This operational audit was made in accordance with applicable Government Auditing Standards issued by the Comptroller General of the United States. This audit was conducted by Joseph H. Kennedy, Jr. and supervised by David F. Westberry. Please address inquiries regarding this report to David F. Westberry, Audit Manager, via E-mail at davewestberry@aud.state.fl.us or by telephone at (850)488-0961. This report and audit reports prepared by the Auditor General can be obtained on our Web site (http://www.state.fl.us/audgen); by telephone (850 487-9024); or by mail (G74 Claude Pepper Building, 111 West Madison Street, Tallahassee, Florida 32399-1450).

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