The Authority frequently amends its contracts to add additional time or funds. Of the nine contracts totaling more than $1.3 billion in our review, the Authority used amendments to increase the value of six by a total of $183 million and to extend the contract terms for five of those six. In addition, it amended two other contracts to reduce their value by nearly $40 million when reassigning tasks and funds to other contractors. Only one contract that we reviewed, for financial advisory services, has no amendments. As Table 3 shows, the amendments increasing the contracts' value represent significant additional costs. These amendments more than doubled the value of two contracts and increased the value of three others by more than 40 percent. Amendments have thus unquestionably contributed to the high-speed rail system's cost overruns.
Table 3
The Authority Has Added Large Amendments to Many of the Contracts We Reviewed
CONTRACTOR/SERVICE | TOTAL VALUE OF AMENDMENTS | NUMBER OF AMENDMENTS | ORIGINAL CONTRACT VALUE | CURRENT CONTRACT VALUE | TOTAL TIME EXTENSION | ORIGINAL CONTRACT TERM |
State Road 99 construction | $64,200,000 | 3 | $225,900,000 | $290,100,000 | - | January 2013-June 2020 |
Wong+Harris, Joint Venture Construction oversight firm | 35,500,000 | 3 | 34,209,000 | 69,709,000 | 12 months | May 2013-December 2018 |
T.Y. Lin International Bakersfield to Palmdale regional consultant* | 26,558,000 | 3 | 46,100,000 | 72,658,000 | 24 months | February 2014-January 2019 |
Parsons Transportation Group Central Valley Wye regional consultant* | 25,640,000 | 6 | 55,000,000 | 80,640,000 | 63 months | December 2008-June 2014 |
Nossaman, LLP Legal services† | 18,500,000 | 10 | 500,000 | 19,000,000 | 114 months | January 2009-June2011 |
HNTB Corporation Construction oversight firm* | 12,800,000 | 1 | 30,064,000 | 42,864,000 | 1 month | January 2016-November 2020 |
KPMG, LLP Financial advisors | - | 0 | 40,000,000 | 40,000,000 | - | June 2016-June 2020 |
WSP USA, Inc. | (33,630,000) | 3 | 700,000,000 | 666,370,000 | - | July 2015-June 2022 |
Arcadis US, Inc. Construction oversight firm‡ | (6,000,000) | 1 | 71,885,000 | 65,885,000 | - | November 2014-April 2019 |
Totals | $143,568,000 | 30 | $1,203,658,000 | $1,347,226,000 |
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Source: Authority's contracts and contract amendments.
* The board recently approved amendments for these three contracts; although the amendments have not yet been officially executed, they are included in this table.
† State law requires that the Authority, as a state agency, obtain written consent of the attorney general before contracting with outside counsel. The contract manager explained that the attorney general typically gives approval for outside counsel in two-year increments, which has necessitated regular contract amendments for legal services.
‡ Two of these contracts received amendments that decreased their original values. The Authority moved $6 million from the Arcadis US, Inc. contract into an increase for the Wong+Harris, Joint Venture contract. The Authority removed $33.6 million from the WSP USA, Inc. contract as a result of removing certain tasks from the contract's scope of work.
The Authority designed its contract management policies and procedures, as well as its associated tracking requirements, to ensure that it identifies the need for changes in a timely manner and that it appropriately ensures those changes' justification before adopting them as amendments. For example, when an involved party identifies a potential need for a change, such as a change in the scope of the contract or in required deliverables, the policies and procedures require the contract manager to include the change in the change tracking log; document who identified the need for it; describe the issue or potential change; and identify its proposed cost, its impact to the contract schedule, and the relevant dates in the process. The policies and procedures also require the contract manager to assess the potential change for merit and discuss this determination with an appropriate supervisor for approval. The Authority may also provide amendment details in a staff report to the board, which during the period of our review had to approve any amendments to existing engineering and architectural contracts with values that exceed $5 million. The Authority presented all of the proposed amendments we reviewed to the board.
We reviewed three amendments, each for a different contract, and found that none of the contract managers had maintained change tracking logs, despite a requirement to do so. | Despite these requirements, the contract managers for the contracts we reviewed could not consistently provide documentation demonstrating the Authority's independent evaluations of potential amendments. Since April 2017, when the Authority established its new policies and procedures, it has approved 13 amendments for eight of the nine contracts in our review. We reviewed three of these amendments, each for a different contract. However, when we tried to identify the details related to the amendments' necessity and size, we found that none of the contract managers had maintained change tracking logs. Further, when we asked for supporting documents with the information we expected to find in the tracking logs, the contract managers frequently provided the documentation that Authority staff had used to present the recommended amendments to the board. When we requested documentation showing how the Authority determined these three amendments had merit as the board materials attested, contract managers for two of the contracts had to request this documentation from the RDP consultants or from the contractors themselves. The Authority documented its analysis of the third amendment we reviewed, but that analysis was incomplete. |
An example involving a $3 million amendment with a one-year extension demonstrates why relying on contractor-provided evidence is problematic. When we asked about this amendment, the contract manager first provided us with the formal high-level amendment request that the former contract manager signed. According to Authority procedures, a contract manager should sign this form only after determining that the proposed amendment has merit. The contract manager also provided the staff report that the Authority presented to the board when the board considered the amendment. The staff report asserted that a number of unforeseen changes had impacted the scope, budget, and overall schedule of the contract's work, precipitating the need for the amendment. When we asked for evidence supporting the claims that the board documents made regarding the amendment's merit, the current contract manager provided additional documentation that the Authority received from an RDP consultant working with the contractor. This documentation showed that the contractor was the source of information regarding the amendment's necessity and accompanying costs, and it included no evidence that the Authority independently verified the contractor's claims. In fact, the content in the Authority's report to the board came directly from the contractor's amendment request. When it does not independently verify and document the need for contract amendments, the Authority risks authorizing additional funds for unnecessary or unwarranted changes.
Contract managers were also unable to demonstrate if and how they independently determined that the approved amendment costs were appropriate and justified. When we reviewed another amendment, we found that the contract manager had originally drafted an amendment request for $26.7 million based on the contractor's estimates for the cost of land acquisitions and utility relocations. The contractor later determined that it required an additional $2.5 million, causing the contract manager to increase this amendment proposal to $29.2 million, which the board ultimately approved. When we questioned how the Authority had evaluated the need to add the $2.5 million or the appropriateness of the $29.2 million total cost, the contract manager stated that the contractor had increased the amount of additional funds it claimed to need after further consideration and analysis. However, the contract manager was unable to provide documentation showing the Authority had independently determined the accuracy of the amendment's costs either before or after the contractor increased them. | Contract managers were also unable to demonstrate if and how they independently determined that the approved amendment costs were appropriate and justified. |
For the third amendment we reviewed, the Authority documented a justification for why it required the amendment, but its analysis was incomplete. Specifically, when one of the oversight firms that manage the Authority's construction contracts was projected to deplete its contract funds nine months ahead of schedule, Authority staff requested that the board approve a third amendment for $28.5 million to retain the oversight firm's services for an additional year. The amendment documents the Authority presented to the board indicate that the Authority considered seeking a new vendor to replace the oversight firm, but it decided to recommend the amendment instead. The Authority's documents assert that the need for the amendment stemmed from its assigning work to the oversight firm that was outside of the original contract because of changes to the construction contract. However, the contract manager could not tell us how much money went to the oversight firm for performing out-of-scope work and acknowledged that he had not documented the oversight firm's adequate performance, as we discuss in more detail later. The board expressed concerns about substantial cost increases, stating that the Authority generally had some issues in the past with oversight of construction management, and it directed Authority staff to return in 90 days to update it on the oversight firm's progress in fulfilling the objectives of the contract. However, it also unanimously approved the amendment. When staff reported back, they presented the board with a template they planned to use to evaluate the three oversight firms' performance in the future.
Our analysis of the amendment documents indicates that future cost overruns may be likely for this contract. In the documents, Authority staff calculated that retaining the existing oversight firm was more cost-effective because of its familiarity and experience with the project. In reaching this conclusion, the staff compared the amendment amount to what they indicated was the remaining value of the work still to be completed for the corresponding construction contract. However, when making this comparison, the Authority failed to account for a significant amount of expected future construction costs. The amendment documents, dated March 2018, projected that $545 million of additional construction work would remain as of July 2018. However, a status report from July 2018 shows $676 million remaining, for a total contract value of $1.5 billion. Further, cost projections from December 2017, three months before the amendment discussion, indicated that the construction contract would ultimately cost more than $2 billion due to expected changes. The Authority's failure to account for this expected work suggests that it may need additional amendments for the oversight firm's contract in the future. If the Authority continues to account for expected construction cost increases only after those increases take effect, it must develop a process for tracking the actual impacts of those increases on its oversight firms to ensure their spending is reasonable and to reduce the likelihood that the contracts run out of funds prematurely.