2008-01-AU Limited Scope Performance Audit Report Department of Public Works CIP Contract Change Orders and Supplements for FY 2006-2007

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Executive Summary The primary goals of construction contract management are to ensure that capital improvement projects are delivered efficiently, effectively, equitably and with accountability. This is accomplished through communication and implementation of and adherence to clearly defined internal controls. As outlined in the FY 2007 -2008 CIP budget, the County of Hawaii proposed approximately $748,675,000 in capital improvement projects to repair, improve and construct County -owned facilities over the next six years. Of this six -year CIP projection, $323,669,000 is estimated for completion of Department of Public Works projects. Professional services contracts and construction contracts will account for most of these DPW expenditures, with contract supplements and change orders representing a significant portion thereof if current trends continue. While contract supplements and change orders are routine components of construction management and cannot be completely avoided, the accepted industry average is between + or - 10% of original contract values. Of the 16 professional services contracts active during the FY 2006 -2007 audit period, contract supplements issued to date represent a 90% increase over original contract amounts. Of the 60 construction contracts active during the FY 2006 -2007 audit period, change orders issued to date range from -6% to +114% of original contract amounts. Of the 14 professional services contracts and 14 construction contracts meeting our audit sample criteria of greater than + or — 10% of original contract values (or outside the accepted industry average), 64% remain open and exceed their original contractual completion dates and 50% remain open and exceed their current contractual completion dates. The Legislative Auditor initiated this limited scope performance audit to evaluate the Department of Public Works' practices, policies and procedures for minimizing the need for and controlling the timing and cost of professional services contract supplements and construction contract change orders. While we did not find contract supplements or change orders issued for unnecessary work, departmental policies and procedures and internal controls were found to be inadequate resulting in contract supplements and change orders arising from avoidable or foreseeable circumstances such as insufficient identification of user needs prior to project design and construction (scoping), inadequate site assessment, errors or omissions in design plans and specifications, and under- or over - estimation of project costs by professional services consultants, construction contractors and /or County engineers. We also noted instances of contract supplements and change orders issued for work outside the scope of original contracts. While in certain instances, a cost savings may have been realized by the County when a contractor already in the project area did not charge mobilization costs for additional work, contract supplements and change orders need to be examined in light of their compliance with procurement law and fair competition and impact on public perception and confidence. It is also imperative that DPW develop, implement and adhere to sufficient internal control policies and procedures to provide reasonable assurance that the possibility of undetected abuse relating to supplements and change orders is kept to an acceptable level. While the Department of Public Works' practices, policies, and procedures for monitoring and control of contract supplements and change orders were the focus of this limited scope performance audit, the Legislative Auditor also determined that several extra - departmental and