Professional Documents
Culture Documents
November 2014
Dennis J. Gallagher
Auditor
The Auditor of the City and County of Denver is independently elected by the citizens of Denver.
He is responsible for examining and evaluating the operations of City agencies for the purpose
of ensuring the proper and efficient use of City resources and providing other audit services and
information to City Council, the Mayor and the public to improve all aspects of Denvers
government. He also chairs the Citys Audit Committee.
The Audit Committee is chaired by the Auditor and consists of seven members. The Audit
Committee assists the Auditor in his oversight responsibilities of the integrity of the Citys finances
and operations, including the integrity of the Citys financial statements. The Audit Committee is
structured in a manner that ensures the independent oversight of City operations, thereby
enhancing citizen confidence and avoiding any appearance of a conflict of interest.
Audit Committee
Dennis Gallagher, Chair
Robert Bishop
Maurice Goodgaine
Jeffrey Hart
Leslie Mitchell
Rudolfo Payan
Audit Staff
John Carlson, Deputy Director, JD, MBA, CIA, CGAP, CRMA
Sonia Montano, Internal Audit Supervisor, CGAP, CRMA
Robyn Lamb, Internal Audit Supervisor
Kelsey Yamasaki, Lead Internal Auditor, MPP
Griffin Zigrang, Senior Internal Auditor, MA
You can obtain copies of this report by contacting us at:
Dennis J. Gallagher
Auditor
To promote open, accountable, efficient and effective government by performing impartial reviews and other audit services
that provide objective and useful information to improve decision making by management and the people.
We will monitor and report on recommendations and progress towards their implementation.
If you have any questions, please call Kip Memmott, Director of Audit Services, at 720-913-5000.
Sincerely,
Dennis J. Gallagher
Auditor
DJG/jac
cc:
To promote open, accountable, efficient and effective government by performing impartial reviews and other audit services
that provide objective and useful information to improve decision making by management and the people.
We will monitor and report on recommendations and progress towards their implementation.
Dennis J. Gallagher
Auditor
AUDITORS REPORT
We have completed our second in a series of audits of the Denver International Airport (DIA)
South Terminal Redevelopment Program (STRP). The project has been rebranded and is now
referred to as the Hotel and Transit Center (HTC) project after its two largest scope elements. The
purpose of the audit was to examine and assess the governance of HTC, including project
management and change order review processes, and to identify possible inefficiencies and
opportunities for improvement.
This performance audit is authorized pursuant to the City and County of Denver Charter, Article
V, Part 2, Section 1, General Powers and Duties of Auditor, and was conducted 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.
The audit revealed that the HTC budget has increased since the inception of the project and
may continue to increase before the project is complete. Based on our assessment, many
factors have contributed to the cost increases, including DIAs failure to hire an independent
construction consultant during the initial phases of developing contract terms. Further, we
believe that DIA agreed to generous contract terms benefiting its prime contractors in an effort
to complete the HTC project on time. From the initial $500 million to the current $544 million, we
cannot provide assurance that the HTC budget will not ultimately increase to $599 million.
Although DIA has made efforts to address risks to the HTC projects schedule and budget by
creating a Project Management Team (PMT) and change management process, these efforts
may not be effective enough to control costs. We recommend that DIA take advantage of its
contractual terms with its primary contractors and conduct, as a management activity, a
construction close-out review using a specialized cost recovery firm. This is standard practice in a
capital construction project of this scale.
As a result of DIA leaderships focus on HTC, it is possible that funding of other essential projects
and maintenance not related to HTC is being affected. Specifically, we note in the report that
the budget for DIAs capital improvement program has increased but potentially not at the rate
required to meet the needs of the aging existing facility. Further, DIA leadership does not have
operations maintenance plans in place, which are essential for managing and maintaining the
existing facility. These plans will also be crucial for the ongoing maintenance of the new facility.
To promote open, accountable, efficient and effective government by performing impartial reviews and other audit services
that provide objective and useful information to improve decision making by management and the people.
We will monitor and report on recommendations and progress towards their implementation.
REPORT HIGHLIGHTS
Denver International Airport Hotel and Transit Center
November 2014
The audit assessed Denver International Airports management of the construction of the Hotel and Transit
Center and its preparedness for future capital projects and maintenance.
Background
Highlights
Purpose
The objective of the audit was to
determine whether DIA leadership
has an adequate project
management structure in place to:
Identify and mitigate current and
future risks that may impact the
projects budget
Ensure that costs related to HTC
are properly accounted for
TABLE OF CONTENTS
INTRODUCTION & BACKGROUND
11
SCOPE
12
OBJECTIVE
12
METHODOLOGY
12
FINDING
14
14
RECOMMENDATIONS
41
APPENDICES
43
43
47
48
AGENCY RESPONSE
49
INTRODUCTION
& BACKGROUND
Growth and Expansion of Denver International Airport
Denver International Airport (DIA), which opened in February 1995, is the largest
airfield of any U.S. airport, encompassing fifty-three square miles located
approximately twenty-four miles northeast of Denvers central business district. DIA was
designed to incorporate the latest technology and safety and has developed an
accomplished record for on-time performance, safety, and convenience.1 In 2000,
the U.S. Department of Transportation granted $21.5 million to DIA for the construction
of a sixth runway to increase the number of international flights that the airport can
accommodate, as well as to ensure that the airport is operating efficiently. In 2011,
DIA ranked as the fifteenth-busiest airport worldwide. Recently, DIA ranked as the fifthbusiest airport nationwide.2
The City initiated the South Terminal
Redevelopment
Program
(STRP) to
improve services at DIA and to create
convenient intermodal transportation
options between the airport and
downtown. Further, according to DIA
leadership, STRP helps to complete the
original vision for DIA when initially
constructed in the 1990s. STRP consists of
three primary projects: a public transit
center, an airport hotel, and an open-air
plaza.
Public Transit Center This aviation commuter rail station will serve trains
connecting DIA with downtown Denvers Union Station as part of the Regional
Transportation Districts (RTDs) East Rail Line, under construction by Denver
Transit Partners.
Hotel and Conference Center The new 519-room Westin hotel will feature
conference center space for meetings, banquets, conventions, and trade
shows, as well as a restaurant, fitness center, and indoor pool. The hotel will
Among Colorado commercial service airports, DIA is the busiest of fourteen Colorado airports in terms of the number of
enplaned passengers in 2012. Colorado Springs Airport, a small hub airport south of DIA, principally serves local demand
and ranks second in the State of Colorado after DIA. For rough comparison, in 2012, approximately 822,000 passengers
were enplaned at Colorado Springs compared with 26.6 million passengers at DIA. CITY AND COUNTY OF DENVER,
COLORADO, DEPARTMENT OF AVIATION, Airport System Subordinate Revenue Bonds, SERIES 2013A and SERIES 2013B,
Bond Report, July 10, 2013.
2
Market Demand and Financial Analysis. The Westin Denver International Airport Denver, CO, PFK Consulting, September
18, 2012.
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allow business travelers to conduct meetings close to DIA, saving them time
and offering a convenient alternative to traveling downtown.
Public Plaza An open-air plaza will connect the transit center and hotel to
the existing Jeppesen Terminal and will feature a large open area partially
covered by a glass canopy. The plaza will provide a venue for programs and
events where passengers and visitors can find entertainment, relaxation, art,
and restaurants.
The program also includes an extension
of
the
Automated
Ground
Transportation System (AGTS), which is
the train that currently serves the
concourses, as well as an expansion of
the existing baggage system.
The Department of Aviations South Terminal Redevelopment Program Performance Audit, City and County of Denver
Auditors Office, January 2012, www.denvergov.org/auditor/DenverAuditor/AuditServices/AuditReports.
City and County of Denver
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2014, DIA leadership announced that overall project costs could grow an additional 5
to 10 percent, raising the cost of the project to as much as $599 million.4
The program schedule comprises work for the transit center, hotel, and plaza. DIA
entered into an intergovernmental agreement with RTD to substantially complete key
transit center components by January 1, 2014.5 In addition, the original schedule for
the hotel and plaza called for construction completion of both elements in November
2014. In our January 2012 audit, we reported that the transit center components
would not likely be completed until August 2014 and the hotel would not likely be
completed until July 2015 as was estimated by DIA leadership at that time. However,
the transit center components were completed in January 2014 and most recently,
the hotel component and plaza were projected to be completed in August 2015.
Material changes to the size and scope of the hotel are not anticipated. The hotel is
expected to be financially self-sustaining when it opens.6
State of DIA 2014, Going from Great to Greater, April 29, 2014, http://business.flydenver.com/info/news/index.asp
Substantially complete is the specific contractual term used in the IGA. Substantially complete does not indicate the
project is entirely complete, but that the space can be utilized by RTD. Achieving substantial completion by January 1, 2014,
will allow RTD to begin installing elements of the PTC that need to be in place prior to commuter service beginning in
December 2014.
6
Market demand analysis performed for DIA by PKF Consulting, October 12, 2011,
http://business.flydenver.com/stats/financials/documents/hotelreport2012.pdf.
5
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Source: Graphic developed by the Auditors Office based on source information from the HTC
Program Managers.
In November 2010, DIA increased its oversight of HTC by placing a Director of Program
Oversight and Integration, who works for DIA, in the HTC management structure.
Following, in April 2011, the South Terminal Expansion Partnership (STEP), which
included Hunt Construction Group and Saunders Construction, Inc., was selected as
the prime contractor for the construction of the Public Transit Center portion of the
HTC project. The resulting organizational structure is reflected in Figure 2.
When Parsons was selected in 2009, the HTC project was referred to as the South Terminal Redevelopment Program or
STRP.
City and County of Denver
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Figure 2: Hotel and Transit Center Project Management Structure, November 2010
April 2011
Source: Graphic developed by the Auditors Office based on source information from the HTC
Program Managers.
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Calatrava concept going forward. In exchange for the use of the concept, the City
agreed not to use some Calatrava signature elementslittle touches that made the
concept uniquely a Calatrava design. In addition, the City agreed to pay Calatravas
firm approximately $850,000, including previously submitted invoices and a $250,000
licensing-related payment. Gensler, the architectural firm that formerly served as the
public transit center architect reporting to Parsons, was given the role of overall design
coordinator, overseeing all aspects of the projects design process and directly
reporting to DIA leadership.
As we described in our 2012 audit of the project, this model had two distinct
advantages.8 First, by no longer contracting out for the project management role, DIA
leadership had the opportunity to save money. Parsons remained on the project, but
because they would no longer be responsible for procuring or overseeing
subcontractors, its contract was amended to reflect these changes, and the originally
contracted amount of $160 million was reduced to $100 million. 9 Second, DIA
leadership could enhance program reporting. According to the HTC Program
Manager, one of his first goals at the time was to improve program reporting,
including developing a report that is easy to understand, and to meet more regularly
with City Council to provide updates on HTC progress.
Following this re-structuring, in March 2012, City Council approved a contract that
merged M. A. Mortenson Co., which was building the hotel, and STEP (Hunt and
Saunders), which was working on the transit center, into a single unit, collectively
referred to as MHS (Mortenson, Hunt, and Saunders). The resulting integrated triventure is serving as the Construction Manager/General Contractor (CM/GC) for the
hotel and public transit center.10 The contract covers construction of the hotel; the
public transit center that includes the RTD transit station and platform, conference
center, security screening area, baggage-handling tunnels, and concourse train
extension; and the interface with the terminal.11 According to HTC Program Managers,
Mortenson and Hunt and Saunders were merged into the MHS tri-venture to ensure
that HTC does not deviate from its original cost estimate and timeline.
The Department of Aviations South Terminal Redevelopment Program Performance Audit, City and County of Denver
Auditors Office, January 2012, www.denvergov.org/auditor/DenverAuditor/AuditServices/AuditReports.
9
Parsons scope of services includes broad program management support services for the planning, design and construction
support of the project. This may include services for which support is requested such as program control services, contracts
management services, and construction support.
10
See Appendix A for more information on different types of contract delivery methods for airport projects, including
Construction Manager/General Contractor.
11
Ann Schrader, 3 DIA redevelopment contracts merged into 1, Denver Post, March 7, 2012, accessed September 22,
2014, http://www.denverpost.com/ci_20123511/3-dia-redevelopment-contracts-merged-into-1.
City and County of Denver
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Figure 3: Hotel and Transit Center Project Management Structure, November 2011
March 2012
Source: Graphic developed by the Auditors Office based on source information from the HTC
Program Managers.
Note: While Parsons supports the HTC Program Managers as part of the Project Management
Team in project management responsibilities, it is contractually equivalent to the other prime
contractors.
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Source: Graphic developed by the Auditors Office based on source information from HTC
Program Managers.
Note: The individual who currently serves as Deputy Program Manager of Administrative
Oversight was formerly titled Director of Program Oversight and Integration. The Director of
Program Oversight and Integration is shown in Figures 2 and 3.
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Members
DIA CFO, Chair
DIA Chief of Staff
DIA Contractor Parsons Brinkerhoff
Department of Finance Debt Administrator
Department of Public Works Chief Operating Officer
Department of Finance Consultant
Source: March 27, 2013, Denver City Council, Business, Workforce and
Sustainability Committee meeting PowerPoint developed by DIA.
Note: DIAs CFO resigned effective September 12, 2014. Until a replacement CFO is hired, the
CFOs duties are being reassigned to DIAs current Director of Financial Planning and Analysis
and Director of Business Management Services. The HTC Program Manager stated on
September 16, 2014, that the interim plan is to have both Directors sit on the Change
Management Committee and that a determination would be made at a later date who would
chair the committee.
Change management is a process implemented to effectively manage and control changes to a contract that can
ultimately increase a projects costs.
13
The update occurred during the March 27, 2013, meeting of the Business, Workforce and Sustainability Committee of the
Denver City Council. The project update was delivered by DIAs Chief Executive Officer, former Chief Financial Officer (CFO),
and HTC Program Manager.
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and keeping within the project budget. The new HTC change management process
starts when a proposed change order (PCO) is submitted by a contractor through
DIAs electronic record-keeping system, whether it is a City-initiated change or
contractor-initiated change. The PCO is evaluated by the PMT for merit and funding,
including reviewing cost and price elements, technical elements, contract scope and
performance requirements, and budget and schedule impact. The PMT engages in
fact-finding, such as questioning cost elements, obtaining actual documentation to
substantiate pricing, and obtaining bids from subcontractors. During this fact-finding
process, the PCO is negotiated with the contractor. Once negotiations cease, the
PCO may be resubmitted by the contractor, if necessary. The signed PCO is then
routed through DIA for approval and the contractor begins the work. The PCO is then
presented to the CMC, which meets on a monthly basis, for final approval resulting in
an official change order issued through DIAs electronic record-keeping system.14
The i3 consultant works with the PMT and project contractors to identify and assess
proposed change orders and other potential risks and their financial impact. The i3
consultant compiles these observations monthly for presentation by himself and the
HTC Program Manager to the CMC. The monthly CMC meetings began in August 2013
and include three main agenda items:
As of July 2014, the CMC had approved MHS contract changes totaling $4.1 million, of
which $1.4 million was hotel related, $2.6 million was public transit center related, and
$114,000 was RTD related. All of the approved changes were within the existing
owners contingency; therefore, the contract Guaranteed Maximum Price (GMP) of
$365 million has not yet been exceeded.15 The majority of the changes were due to
design evolution (44 percent), regulatory issues (15 percent), design errors and
omissions (14 percent), and owner-requested items (10 percent).
In addition, the i3 consultant projects the magnitude of the potential increases in the
MHS and Kiewit contracts, which include work to be performed on the hotel, public
transit center, other related capital improvement projects, and the RTD projects. The
potential increases are determined by identifying and estimating four types of
changes and risks related to the project as follows:
1. Change orders that have already been approved
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2. Potential change orders the contractor has identified and presented to the
PMT and that are being reviewed and negotiated
3. Potential change orders identified by the contractor that have not yet been
presented to the PMT for review and negotiation
4. Issues independently identified by the PMT and i3 consultant
These four categories of changes and risks are combined together to determine the
total potential changes to the contract amounts.
Further, the i3 consultant projects the magnitude of the potential contractors
increases by scope element budget, including the HTC project, other related capital
improvement projects, and RTD projects.
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SCOPE
The audit assessed the efficiency and effectiveness of the governance of the Denver
International Airport (DIA) Hotel and Transit Center (HTC) project, which included an
evaluation of the budget, Capital Improvement Plans (CIPs) and maintenance plans.
We attempted to determine whether costs charged to HTC were in accordance with
the terms and conditions of applicable contracts, and to ensure labor and materials
are properly billed and received.
OBJECTIVE
The objective of the audit was to determine whether DIA has an adequate project
management structure in place to:
Identify and mitigate the risks associated with additional budget increases
Ensure that DIA is strategically prepared for future capital planning and
maintenance of the entire airport
METHODOLOGY
We utilized several methodologies to achieve the audit objective. These evidence
gathering techniques included, but were not limited to:
Reviewing all applicable City rules and regulations and DIA policies and
procedures
Interviewing former DIA employees with knowledge about CIPs and HTC
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FINDING
DIA Leadership Has Taken Action to Improve Project Management
of the Hotel and Transit Center but These Efforts Have Not Been
Fully Effective in Mitigating Risks
Denver International Airport (DIA) is undergoing significant changes to improve
services at DIA and to create convenient intermodal transportation options. The Hotel
and Transit Center (HTC) project consists of three primary elements: a public transit
center, which will serve trains connecting DIA to downtown Denver; an on-site hotel
and conference center; and an open-air plaza connecting the transit center and
hotel to the existing Jeppesen Terminal. Our audit of the project assessed the HTC
project management structure, specifically with regard to the budget and future
capital planning and maintenance. We found that, despite changes made to the
governance and management of the project, the HTC budget has continued to rise,
and we cannot provide assurance that the budget will not exceed current
projections.
Since its inception, the projected cost to complete HTC has changed. In 2011, HTCs
original budget was set at $500 million but was increased in 2013 to $544 million. HTC
project management has stated that the budget may increase between 5 and 10
percent, which would bring the cost of the project up to as much as $599 million.
Although DIA leadership and HTC project management instituted a change
management process to manage and control project changes that could further
increase costs, we found that the process is not sufficient to keep costs from rising. We
determined that budget increases may have been the result of the HTC project not
having an independent construction consultant on staff from the beginning of the
project as well as costly contract terms that were negotiated to incentivize on-time
completion of the project.
We sought to determine whether the $599 million projected maximum budget for HTC
was accurate. However, we could not verify this estimate due to lack of
documentation. Further, we found the HTC invoice review process to be insufficient to
assess whether all project costs have been reasonable and in compliance with
contract terms. In addition to the HTC-specific budget, we determined that additional
costs will add $130 million to the overall cost of the redevelopment program.
Specifically, this includes $75 million for other related capital projects, $53 million for
transportation-related infrastructure, and an additional $2 million that have not been
captured by any established budget. We did find, however, that the $75 million in
other related capital projects need to be completed, regardless of HTC.
In assessing DIAs capital investments and maintenance plans, which are necessary to
rehabilitate, upgrade, and maintain DIAs existing aging infrastructure, we found that
DIA leaderships focus on HTC may have reduced focus on the funding of non-HTCrelated projects and maintenance of the existing facility. Although capital investments
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in the airfield have increased in recent years, budget reductions made to specific
projects from 2012 to 2013 raise some concerns. Further, capital investments in the
terminal complex have decreased, and DIA does not have operations maintenance
plans in place, despite the fact that DIA is an aging facility. DIA will have a difficult
time managing the HTC facility in the absence of well-structured maintenance plans
for the current facility.
Business Workforce and Sustainability Committee Meeting, May 14, 2014. City and County of Denver SIRE Public Access
System, accessed on September 19, 2014. www.denvergov.org/sirepub/mtgviewr.aspx?meetid=1952&doctype=MINUTES.
17
Denver International Airport Unveils Conceptual Design of the South Terminal Redevelopment Program. Denver
International Airport, accessed on September 19, 2014. http://business.flydenver.com/pr/DIAPR_1007290.pdf.
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and relocation of certain utilities. Table 2 provides a history of the projects budget
and projected cost to complete by year.
Table 2. History of HTC Project Budget
Year
2010
2011
2012
2013
2014
HTC Budget
(in millions)
N/A
$500
$500
$544
$544
Other Related
Projects Budget
(in millions)
N/A
N/A
$75
$128
$128
Total Budget
(in millions)
N/A
$500
$575
$672
$672
Projected Cost At
Completion
(in millions)
$900
$500
$600
$672
$737
Source: Developed by the Auditors Office based on source information from the HTC Project
Management Team. Projected costs at completion are higher because the budget has not yet
been adjusted.
In January 2012, our office released an audit of HTC, which found that the projects
components were not forecasted to be completed on-time or on-budget.
Specifically, based on projections developed in late 2011 by Parsons, the then project
manager, the project was estimated to be completed six to eight months behind
schedule and approximately $9 million over budget.18
In October 2012, DIA issued $870 million in bonds, the proceeds from which were to be
used in part to finance the cost of HTC.19 In the 2012 Official Bond Statement, DIA
leadership noted that such factors as labor and materials may cause the actual cost
of completing the project to exceed the established budget of $500 million. DIA
leadership also communicated to City Council in October 2012 that the project was
currently estimated to be completed 5 percent over budget. 20 Additionally, in 2012,
DIA leadership again redefined the scope of HTC. While the project still included the
key elements of the hotel, public plaza, and transit center, the other related projects
that had been included in the scope in 2011 were removed from the scope and
classified as their own separate project. A budget of $75 million was set for these
projects, which were to still to be completed by HTC contractors. HTC Program
Managers explained that Parsons should not have included these projects in the
original budget. However, DIA leadership did not question Parsons inclusion of these
projects until budget duress occurred. Therefore, HTC Program Managers set a
separate budget for these other capital projects to stay within the $500 million budget
that was set for HTC.
18
The Department of Aviations South Terminal Redevelopment Program Performance Audit, City and County of Denver
Auditors Office, January 2012, www.denvergov.org/auditor/DenverAuditor/AuditServices/AuditReports.
19
Revenue Bond Series 2012 A-C. Denver International Airport, accessed on September 19, 2014.
http://business.flydenver.com/stats/financials/reports/2012_seriesA-B-C.pdf.
20
Business Workforce and Sustainability Committee Meeting, October 31, 2012. City and County of Denver SIRE Public
Access System, accessed on September 19, 2014,
www.denvergov.org/sirepub/mtgviewer.aspx?meetid=1274&doctype=MINUTES.
City and County of Denver
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In the 2012 Official Bond Statement, DIA leadership communicated to investors that
they budgeted $180 million to complete the hotel, another $320 million to complete
all other aspects of HTC, including the plaza and transit center, and $75 million to
complete other related capital projects. These budget elements are presented in
Table 3.
Table 3. October 2012 Budget for HTC and Other Related Projects
Budget
(in millions)
Scope Element
Hotel
$180
Non-Hotel
$320
$500
$75
$575
In July 2013, DIA issued $726 million in bonds, the proceeds from which again were to
be used in part to finance the cost of HTC. 21 DIA leadership had also recently
increased HTCs budget from $500 million to $544 million, representing a 9-percent
increase in the budget. One reason DIA leadership increased the budget by $44
million was because the designs of key components of the project were finally
completed. This enabled HTC Program Managers to obtain a more accurate estimate
of what the final cost of the project would be. No changes to the project scope were
made at this time. However, the scope of the other related projects did change to
include the costs related to two RTD projects. With the addition of these two projects,
DIA leadership increased the budget for other related projects from $75 million to $128
million. Table 4 provides a breakdown of the budget by project.
Table 4. July 2013 Budget for HTC and Other Related Projects
Budget
(in millions)
Scope Element
Hotel
$177
$298
Enabling
$63
Owners Costs
$6
$544
$75
$53
$672
Revenue Bonds Series 2013 A-B. Denver International Airport, accessed on September 19, 2014.
http://business.flydenver.com/stats/financials/reports/bonds_2013A-B.pdf.
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Since the inception of HTC, DIA leadership and HTC Program Managers have
communicated changes to the scope and budget of the project to City Council,
stakeholders, and the public through regular presentations and bond offering official
statements. City Council members did not voice any concerns or ask any questions
about the budget overruns. The changes to the project have also been
communicated by the Denver Auditors Office. As noted in our January 2012 audit of
HTC, we found that the project was likely to exceed the $500 million budget set in
2011.22
Regular communication by DIA leadership and HTC Program Managers with City
Council and key stakeholders, including airline partners, about the changes to the
scope and budget of HTC is a best practice. According to the Project Management
Institute, regular communication with stakeholders is a key process to keep
stakeholders engaged and project teams motivated, which help ensure that projects
are delivered on-time and within budget.23
Potential Issues May Cause the Project to Exceed its $544 Million Budget
and May Eventually Cost As Much As $599 Million or More
According to the HTC Program Manager and a consultant for the City, i3 Integration
LLC (i3), it is definite that the HTC project will exceed the current $544 million budget,
but unlikely to increase more than 10 percent. As such, the project is now estimated to
cost between $571 and $599 million. DIA will need to rely on cash on hand or
additional bond issuances to cover the costs of the overruns. Significant capital
improvement cost overruns leading to increased debt or spending cash on hand can
negatively affect DIAs bond ratings.24 General reasons provided by the consultant for
the projected increase include an accelerated schedule to accommodate RTD, rising
labor and materials costs, and unanticipated existing conditions, such as the 2013
flood. However, while we believe that these reasons have validity, we also determined
that the newly implemented change management process is not sufficient, the
project lacked an independent construction consultant from the beginning, and
generous contract terms have been negotiated for on-time completion. These
combined factors either contribute to or fail to mitigate risks related to rising project
costs.
Change Management Process Is Not Sufficient to Keep Costs from Rising
In response to the 2013 increase in the HTC project budget from $500 million to $544
million, a Change Management Committee (CMC) and change management
review process were developed to manage and control project changes that could
further increase costs. As stated in the Introduction and Background section of this
report, the City hired i3 to assist the CMC and PMT with establishing the change
management review process. Members of i3 work with the PMT and contractors to
22
See The Department of Aviations South Terminal Redevelopment Program at the Denver Auditor's website.
Communication: The Message Is Clear. Project Management Institute, accessed on September 19, 2014.
www.pmi.org/~/media/PDF/Knowledge%20Center/Communications_whitepaper_v2.ashx.
24
Fitch Affirms Denver, COs Sr. Airport Revs at A+; Subs at A; Outlook Stable, September 26, 2014,
http://finance.yahoo.com/news/fitch-affirms-denver-cos-sr-194600862.html.
23
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identify and analyze potential risks and their financial impact to the project, and
determine strategies to mitigate or minimize the risks. The PMT has weekly contractor
meetings to discuss potential changes and risks associated with the project. The
outcome of the PMT and contractor meetings, any relevant supporting documents,
and risks identified by the PMT, exclusive of contractors, are reported to i3, which then
uses the observations to assess remaining work and risks. The assessment is presented
in various forms, including monthly reports by contract and scope element as well as a
monthly presentation to the CMC. These status updates promote oversight,
understanding, and transparency within the City.
In addition, the CMC was developed to oversee all significant change orders, an
important tool for ensuring that the total HTC project cost remains within the $544
million budget.25 However, members review and approve only significant changes
proposed by MHS; other contractors proposed changes are not afforded this same
scrutiny. According to the i3 consultant, the change order review process was
implemented in this limited capacity because the MHS contract was in its infancy at
the time the CMC was developed, whereas the other contracts were further along. A
management decision was made at that time to focus the CMCs resources on the
contract deemed the highest risk the MHS contract.
In addition to reviewing only significant change orders, a proposed change order
(PCO) is sometimes submitted to the CMC for final approval after a change directive
has already been issued by the PMT to the contractor to proceed with the changes
immediately (see Appendix B for an
overview of the process). An example of
The CMC is a major control
this is when scope modifications are
necessary to work imminently being
designed to help ensure the
performed.
For
instance,
between
project remains within the $544
January 2014 and April 2014, three
million budget but it is less
change directives were issued to MHS
effective as work on the changes
related to work being performed at that
time. However, these changes, totaling
may already have begun or been
approximately
$680,000,
were
not
completed.
brought before the CMC until May 28,
2014. According to HTC Program
Managers, the change management review process was implemented in this way to
facilitate the timeliness of the project, as the CMC only meets on a monthly basis. The
CMC is a major control designed to help ensure that the project remains within the
$544 million budget but it is less effective as work on the changes may already have
begun or been completed before the CMC has the opportunity to review and
approve the proposed change. Accordingly, the CMC should develop a process by
which change orders can be approved timely to ensure that all significant
contractors changes are approved by the CMC prior to work commencing.
25
Significant change orders are defined by the PMT and the i3 consultant. For example, all MHS proposed change orders of
$50,000 or more.
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Is large in size
With large construction projects being as costly as they are, it is imperative to have
sound processes and procedures in place as well as sufficient independence in the
project management function to prevent loss of funds, fraud, and negative impact to
operations. Cost avoidance when an independent construction audit consultant is
retained for a project can be up to 5 percent of total project cost.
Contracts for the HTC project and related invoices and change orders were reviewed
by the Auditors Offices independent construction auditing consultant and
construction monitor for compliance and reasonableness. The analysis found that the
26
CM/GC Guidelines for Public Owners, Associated General Contractors of and National Association of State Facilities
Administrators, second edition, 2007.
27
We consulted with an independent construction audit consultant and the Construction Monitor from the Auditors Office
about this practice.
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CM/GC Fee Percentage and Labor Rate The MHS contract includes a
CM/GC fee, which will be paid to MHS as a percentage of the total project
cost or Cost of Work. This fee, representing MHSs profit, was established at 4.25
percent, which is regarded as being at the high end of what is typical in a
large capital project. The HTC Program Manager indicates that CM/GC fees
typically range from 2 percent to 5.25 percent.
The analysis performed by our independent
construction auditing consultant also
Contract terms were
identified concerns related to billable costs
for MHS labor and the impact that has on
negotiated favorably for
the profit paid to MHS. In the MHS contract,
the tri-venture to
DIA agreed to a supervisory labor rate of
incentivize on-time
140 percent for both preconstruction and
project completion, at a
construction activities. Typically the labor
rate is lowered when moving from the
cost to the HTC budget.
preconstruction phase into the construction
phase, since the owner is able to provide
field office space and equipment for the contractor. However, in the MHS
agreement, the rate remained the same for both phases. When calculating
the labor rate, the hourly wage of an MHS contractor is multiplied by the labor
rate to derive the amount HTC will be billed. Currently, the total estimated
charges by MHS for both preconstruction-phase and construction-phase labor
could total approximately $26 million.
28
CM/GC projects are characterized by a contract between an owner and a CM who will be at risk for the final cost and time
of construction. See Appendix A for additional details.
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A portion of the 140 percent addition to the labor rate would typically cover
the contractors cost of labor burden, such as payroll taxes, insurance, and
fringe benefits. Working with our independent construction auditing consultant,
we estimate that actual costs of labor burden would average no more than 40
percent of direct salary costs. Therefore, we would estimate that at least 100
percent of the labor markup would cover home office overhead, which is
typically part of the CM/GC fee.
According to HTC project management representatives, at the time the
contract was negotiated, they understood that they were agreeing to pay for
contractor home office overhead in addition to the agreed upon 4.25 percent
fee for contractor profit. HTC project management representatives indicated
that the combined charges for MHS profit and overhead were warranted
given the importance of the project and the risk that MHS was accepting to
deliver the project on schedule.
Finally, working with our independent
construction auditing consultant, we
MHS charges for labor
estimate that the effective additional
will amount to at least
CM/GC fee to cover MHS home office
overhead included in the MHS charges for
$8 million and increase
labor will amount to at least $8 million,
the CM/GC fee from 4.25
which is the equivalent of at least 2.5
to at least 6.75 percent.
percent in additional CM/GC fee.
Therefore, the total payments to MHS for
overhead, at least 2.5 percent of Cost of Work, and profit at 4.25 percent of
Cost of Work, result in an effective CM/GC fee of at least 6.75 percent, which is
a high and lucrative profit margin.
The HTC Program Manager indicates that the terms of the agreement represent best
value and are within applicable general industry guidelines. However, these terms are
on the high side according to both the HTC Program Manager and our independent
construction auditing consultant. The concept of best value takes into consideration
actual price and potential for schedule delays. The PMT presumably took into
account their risk and decided the terms were the most practicable for the HTC
project balancing costs versus the desire to complete the project on schedule.
Overall, through our review of project contracts, we believe that the terms of the
contract DIA signed with MHS are a reason why project costs have increased from the
original $500 million budget set in 2011. As such, we recommend that the DIA Chief
Executive Officer retain an independent construction consultant to assist DIA
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leadership and personnel in reviewing and negotiating contract terms on any future
unique and large scale construction projects to ensure that DIA and the City obtain
fair or favorable contract terms.
Auditors Could Not Verify that HTC Will Not Exceed $599 Million
The audit team sought to determine whether the $599 million projected maximum
budget for HTC was accurate. However, we could not verify this estimate due to lack
of documentation, both based on i3 reporting and HTC document retention
practices. In addition, the HTC invoice review process could be further improved to
mitigate rising costs.
The PMT and i3 Final Project Cost Estimates Lack Full Supporting Documentation
Due to a lack of documentation supporting the PMT and i3 consultants projected
maximum project cost of $599 million, auditors were unable to conclude whether the
potential HTC budget increase of 10 percent is accurate, and we cannot provide
assurance that the budget will not increase more than that amount. To try and
validate the potential HTC budget increase of up to $599 million, auditors tested
multiple project changes and risks identified in the i3 consultants May 2014 monthly
reports by contract.29 During this test, auditors determined that limited documentation
is available to support many of the potential changes and risks identified in the
reports. For example, the PMT and i3 consultant did not have documentation for the
potential changes and their estimated amounts identified by the contractors that
have not yet been presented to the PMT for review and negotiation. In addition, there
was no documentation supporting the amounts assigned to risks independently
identified by the PMT and i3 consultant since these risks were developed in
brainstorming sessions. Furthermore, documentation obtained for review of various
estimated changes and amounts identified by the contractors that since had been
reviewed and approved, or submitted and in negotiation with the PMT, sometimes
varied greatly from the original amount carried on the report. Finally, we noted three
instances of differences between the amounts presented in the May 2014 report and
29
See Introduction and Background for information detailing the four types of changes and risks identified in monthly
reports generated by i3.
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Some contracts, invoices, and change orders are not in Aconex but are
located on a shared network drive.
Some contracts, invoices, and change orders are in Aconex but are not easily
found using the Aconex search function.
These limitations exist since there are no formal Aconex guidelines regarding what
documents should be uploaded into the system, when, and how they should be
classified, including whether or not a document should be marked confidential.
Compounding this issue of incomplete documentation is the PMTs lack of
subcontract documentation in Aconex or elsewhere, which will be discussed later in
this section.
Aconex was purchased only for the HTC project but Textura was implemented in 2013
for all DIA construction projects. For HTC, Textura is being used by DIA Business
Management Services (BMS) and PMT staff to manage invoices and payments related
to the MHS contract only.30 Auditors learned that Textura does not contain supporting
documentation for MHS invoices, but rather only the invoice and schedule of values,
which DIA personnel compare to ensure that the two align. However, Textura was not
built to hold supporting documentation, but rather seems to serve as a one-stop
documentation storage center for high level review.
30
Textura is a web-based system that was implemented by DIA to manage invoices and payments for construction
contracts.
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The lack of organization and full project documentation in Aconex and Textura makes
it difficult for third parties, such as auditors, and non-project personnel to review key
project documents such as monthly dashboards, invoices, change orders,
subcontracts, and budgets. The disorganized records may have resulted in less than
high quality reviews of invoices and therefore, errors may not have been identified. As
such, HTC may have improperly paid
contractors for items not allowed under the
contract, paid more than the amount
Disorganized records may
allowed under the contract, or paid for work
have resulted in lower
that had yet to be completed. Turnover in
quality reviews of invoices
personnel and improper recordkeeping also
and therefore, errors may
leave a gap in the institutional knowledge
that may be beneficial to auditors
not have been identified.
conducting
a
close-out
audit.
More
importantly,
due
to
the
inadequate
recordkeeping it would be difficult for auditors to conduct a close-out audit and for
DIA to ensure that it is adhering to the City's record retention policy.
The City has a Citywide Records Management Program, which specifies that all City
agencies must retain all City records, including financial documents such as invoices,
for seven years.31Aconex will be used until the end of the HTC project, including the
close-out phase, at which time the records will either be placed in a static cloudbased environment or on a drive for retention. We recommend that DIA Executive
Management take the necessary steps to ensure records related to the HTC project
are properly maintained and organized, which includes assurance that all supporting
documentation for invoices and change orders are included in Aconex. In addition,
these records should be retained in accordance with the Citys retention schedule.
Invoice Review Process Is Insufficient To Assess Whether All Costs Were Reasonable
and in Compliance with Contract Terms
To address concerns from our 2012 audit, DIA leadership agreed to dedicate more
resources to HTC invoice reviews and perform bi-annual comprehensive reviews of
invoices. However, during our follow-up work to assess the implementation of
recommendations from the original audit, and through our work conducting this audit,
we found that the changes DIA leadership and HTC management have made to the
invoice review process were incomplete and remain ineffective.32
HTC Program Managers further developed and defined the invoice review process,
which required an increase in Parsons staff to assist with reviews. However,
implementing detailed invoice reviews has not been made a priority by HTC
management. This has resulted in a continued lack of resources, limited supporting
documents, and staff turnover and has reduced the effectiveness of the process.
31
Executive Order 64 governs the Citys Records Management Program. In addition, the Denver General Records Retention
Schedules includes references to the latest regulatory environment and best practices and defines the minimum retention
period.
32
The Department of Aviations South Terminal Redevelopment Program Follow-up Report, City and County of Denver
Auditors Office, October 2013, www.denvergov.org/auditor/DenverAuditor/AuditServices/AuditReports.
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Further, the PMT has not been conducting periodic comprehensive audits of randomly
selected invoices to ensure that monthly reviews were appropriate.
Current Invoice Review Process The current invoice review process contains six steps
that are designed to ensure that all invoices submitted by the prime contractors are in
alignment with contract terms. Figure 5 provides a summary of the current invoice
review process.
Figure 5. HTC Invoice Review Process
2) Project Management Team Reviews Invoice and Reconciles with Prime Contractors
6) DIA Finance and Administration and City Controller's Office Process Payment
Source: Developed by the Auditors Office based on source information from the HTC Project
Management Team.
33
The schedule of values is used for establishing the cash flow of a project. It is a listing of elements, systems, items, or
other subdivisions of the work, establishing a value for each, the total of which equals the contract sum.
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performed, and other direct costs billed are identified during the invoice review, the
PMT is responsible for reconciling these issues with the prime contractor.
Once issues are sufficiently reconciled, the PMT forwards the invoice to the BMS HTC
Contract Administrator (CA) for review. The CA performs a high-level review of the
invoice to ensure compliance with contract terms and other legal guidelines, rules,
and requirements, and works with members of the PMT to address any concerns
related to this review. The CA then ensures that the invoice is allocated to the
appropriate funds, all required funds are encumbered, and adequate funds remain to
pay the invoice.
After the CA approves the invoice, it is routed to the HTC Program Managers for
review and approval. The invoice is then forwarded again to the CA for final
reconciliation and approval before submittal to the DIA Finance and Administration
Division and the City Controllers Office for payment processing.
Invoice Review Process Concerns Although the current invoice review process is an
improvement from the process used when the first audit of HTC was conducted in
2012, the process can still be enhanced. Specifically, the current process lacks a
detailed evaluation of subcontractor invoices. According to DIA leadership and HTC
Program Managers this is due in part to the Citys Prompt Payment requirement.
However, we found that DIA lacks sufficient subcontractor information.
The intent of the Citys Prompt Payment requirement is to make timely payments to
contractors, and to authorize and mandate the payment of interest on amounts due
when payments are delayed at no fault of the
contractor.34 According to DIA leadership and HTC
DIA and HTC Managers
Program Managers, this requirement does not
have yet to develop a
always allow adequate time for a detailed,
method to periodically
comprehensive review of an invoice prior to
payment. Our prior audit of HTC recommended
assess invoices in a
that DIA leadership develop a performance
detailed manner.
evaluation methodology for the invoice review
process, to be implemented at least twice
annually. Although DIA leadership agreed with the recommendation, they have not
yet developed a method to periodically assess invoices in a more detailed manner.
Since prime contractors are responsible for managing, supervising, and directing the
work of their subcontractors, they also review subcontractors invoices for adherence
to contract terms. The PMT does not maintain these subcontracts on file, since they do
not have a contractual relationship with the subcontractors. We question how HTC
personnel can ensure that the prime contractors are conducting a thorough review of
invoices from their subcontractors before submitting for payment. Further, without
reviewing subcontractor invoices, the PMT cannot ensure that subcontractors are
charging reasonable prices on services and materials.
34
D.R.M.C. 20-107.
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35
Streamlining the Payment Process While Maintaining Effective Internal Control, U.S. Government Accountability Office,
May 2000, accessed September 22, 2014, http://www.gao.gov/products/AIMD-21.3.2.
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An efficient and effective dashboard has the potential to ensure project managers
and stakeholders have a readily available resource to quickly understand the progress
of a project in addition to insight, explanations, and a shared understanding of
information. However, we believe that the monthly dashboards approach developed
by the PMT is not an effective project management tool to help them or DIA
leadership understand the historical, current, and projected progress of HTC, or help in
communicating progress of HTC to the public. HTC Program Managers should include
additional elements in the monthly dashboards such as current schedule and
estimates of project completion. In addition, to increase the transparency of the
project the monthly dashboards should be made public.
36
The HTC Project Management Team, or PMT, consists of the DIA Program Managers and various Parsons personnel.
According to the i3 consultants May 2014 projections of scope element budgets including the HTC, other related, and
RTD projects.
37
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Project
Level 4 & 6 Bridges Construction
Excavation to Runways/Taxiways/Pond 927
Design/Planning/CM (of Other CIP)
Level 4 & 6 Bridges Operations
Sanitary Sewer (Lift Station)
66 Storm Sewer
Master Plan Design/Planning/CM
Excavation Phase I
ASD-X Relocation
Automated Ground Transportation System
Baggage System Improvements
Level 4 Security Checkpoint
East Airfield Storm Drain
Temporary Fencing
Projects Total
Budget
$25,151,049
$12,000,000
$6,500,000
$5,300,000
$5,000,000
$4,781,271
$3,500,000
$3,015,852
$2,688,357
$2,300,000
$2,300,000
$1,200,000
$736,994
$300,000
$74,773,523
Source: Developed by the Auditors Office based on source information from the HTC Project
Management Team.
38
The dispute relates to whether DIA or RTD is responsible for paying for different aspects of the construction to connect
RTDs rail infrastructure to HTC.
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The business cases and related supporting documentation provided by DIA leadership
and HTC Program Managers for the fourteen capital projects indicated the projects
would need to be completed whether HTC was being built or not due in large part to
DIA reaching its capacity to serve passengers and its aging infrastructure. DIA was
built in 1995 to serve up to 50 million passengers annually and is projected to serve
more than 53 million passengers this year. Furthermore, since 1995, changes in
technology, aviation, and security require DIA leadership to ensure that DIA
infrastructure is able to appropriately meet the current and future needs of its
customers and partners.
Moreover, the added burden HTC puts on DIAs current infrastructure may have
accelerated the need to complete these other related capital projects. We did not
validate the cost-effectiveness of completing these projects in tandem with HTC.
However, it seems reasonable that HTC Program Managers could achieve economies
of scale by leveraging existing HTC contracts.
Overall, despite of the need to complete these other related capital projects, and
whether the cost should or should not be part of HTCs budget, we believe that in the
future DIA leadership can better classify capital projects. DIA leaderships classification
of the projects listed in Table 5 above hinders transparency of the project and raises
questions about overall project management. Since DIA leadership already has a
classification system to communicate the size and scope of its capital program, we
recommend that the DIA Chief Executive Officer ensure that the classification system
is used, which will help ensure that the need and cost of capital projects are not
misinterpreted or misconstrued by the simultaneous pursuit of other capital projects.
DIAs Intergovernmental Agreement with RTD Is Adding to Redevelopment Program
Costs
DIAs intergovernmental agreement (IGA) with RTD has had an impact on the overall
cost of the redevelopment program. As mentioned, in 2013, DIA leadership
established a $53 million budget for extending the RTD train platform an additional 400
feet and for construction costs to connect RTD rail infrastructure to the transit center.
This project was added because of a dispute between DIA and RTD regarding which
agency was responsible for paying for different aspects of the construction to
connect RTDs rail infrastructure to HTC. This disputed project is commonly referred to
as NOX, or North of the X, due to the location of the construction that needs to be
completed.
Signed in March 2010, the IGA between DIA and RTD outlined that DIA was
responsible for designing and constructing the rail station within HTC, interface
between the rail line and HTC, and relocating or building out utilities as needed. It
notes that RTD is responsible for paying for all or a portion of these costs, depending
on whether they are related to the rail station, the interface, or utilities. As such,
because of how the IGA was written, DIA and RTD management disagreed about
which party was responsible for paying for which elements of the construction. An
independent arbitrator found that RTD was responsible for less than $8 million of the
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costs being disputed. Currently, DIA is suing RTD to pay the $53 million. Until the dispute
is resolved, DIA leadership has assumed the full cost of the project.
An Additional $2 Million Is Not Accounted for in Any Established Budgets
We identified an additional $2 million that could be accounted for as HTC costs but
are not currently incorporated in the $544 million HTC budget, the $75 million other
related capital projects budget, or the $53 million RTD infrastructure project budget.
Of the $2 million we identified, $450,000 is associated with the Citys contract with i3 to
provide program financial assurance consulting services. The other $1.5 million we
identified is associated with full and pro-rated salaries of several DIA personnel who
work on HTC. Therefore, we recommend the HTC Program Managers evaluate and
include costs associated with the redevelopment program that are not yet captured
in the current budgets.
DIAs Capital Program Has Increased, but May Not Be Sufficient To Meet
the Needs of an Aging Facility
DIAs capital program has increased over the years. In 2008, the capital program
spanning 2008 through 2013 was budgeted for over $987 million. In 2013, the capital
program spanning 2012 through 2018 was budgeted for nearly $1.4 billion. A
significant component of that program is HTC. On average, DIA leadership budgeted
nearly $200 million annually to capital projects from 2008 through 2018; annual
budgets range from a high of $500 million to a low of $13 million. Figure 6 shows the
budgeted capital spending by year for capital programs 2008 through 2013.
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2009 2010
2009 Total
2011 2012
2010 Total
2013 2014
2011 Total
Source: Developed by the Auditors Office based on DIAs 2010 through 2013 capital
improvement plans and the 2008 and 2009 Bond Official Statements.
The DIA capital programs include projects that are classified into seven categories:
airfield, baggage and train system, commercial, environmental/utilities, roads,
technology, and terminal complex. In addition to these seven categories, DIA
leadership has recently added two other categories to the capital program: one for
HTC and another for other related HTC projects. The 2012 capital program, with a
budget of $1.1 billion, spanning from 2012 through 2018, included eighty-nine projects
that fell into one of the aforementioned nine categories. The 2013 capital program,
budgeted for $1.4 billion, also spanning 2012 through 2018, included 123 projects.
Table 6 compares the 2012 and 2013 capital programs by category.
Table 6. Comparison of DIAs Capital Program by Category, 2012 and 2013
Capital Project
Category
2012 Budget
2013 Budget
Change
HTC
$499,626,000
$544,267,515
$44,641,515
Airfield
Terminal Complex
Other Related HTC
Technology
Commercial
Roads
Baggage/Train
Environmental/Utilities
$216,200,325
$81,348,140
$75,137,360
$46,710,452
$45,670,501
$42,403,125
$37,675,000
$17,548,525
$229,630,294
$163,141,718
$138,207,609
$47,594,374
$45,670,501
$55,631,655
$141,822,464
$15,559,771
$13,429,969
$81,793,578
$63,070,249
$883,992
$0
$13,228,530
$104,147,464
($1,988,754)
$1,062,319,428
$1,381,525,901
$319,206,473
Total
Source: Developed by the Auditors Office based on DIAs 2010 through 2013 capital
improvement plans and the 2008 and 2009 Bond Official Statements.
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The increase in size and scope of DIAs capital program over the years has been
largely driven by the need to invest in aging infrastructure, expand the capacity of
infrastructure to serve more passengers, and upgrade existing infrastructure to support
a competitive business enterprise that can meet the evolving needs of its customers
and partners.
In addition to progressively increasing the size of the capital program from 2008
through 2013, DIA leadership has also recently worked to improve the capital planning
process. The new capital planning process, which is currently being implemented,
aims to improve the processes around identifying capital needs, prioritizing and
funding capital projects, and monitoring the progress of project implementation. The
decision to update the process was driven by the need to improve long-term planning
and ensure that DIA resources are utilized as efficiently and effectively as possible.
Overall, it appears that DIAs capital program and revised capital planning process
positions DIA to meet the current and future needs of its customers and partners.
However, we did not validate the efficiency or effectiveness of DIAs capital program
or revised capital planning process in addressing the airports aging infrastructure or
upgrading current infrastructure to meet the needs of customers and partners. As
such, although DIA leadership has consistently increased the scope and size of the
airports capital program, and is currently working to improve the capital planning
process, we were unable to determine whether the current capital program is
sufficient to ensure that the rehabilitation and improvements of existing assets are
being appropriately met.
Capital Investments in the Airfield Have Fluctuated Over Time In reviewing DIAs
capital programs from 2008 through 2013, we specifically examined projects related
to the airfield due to its central importance to DIA operations. Airfield projects in the
capital program include the rehabilitation of taxiways and runways, construction of
high speed taxiways to improve airfield efficiency, and installation of taxiway lights.
We found that over the years, the average annual budgets for airfield projects have
fluctuated, with a low of $14.4 million budgeted in 2011 to a high of $43.9 million
budgeted in 2009. Since 2011, the budgets for airfield projects have increased to over
$30 million. Figure 7 shows the average annual amount budgeted for airfield projects
for capital programs 2008 through 2013.
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$43,900,250
$38,959,543
$40,000,000
$30,000,000
$30,885,761
$29,520,833
$20,000,000
$32,804,328
$14,402,718
$10,000,000
$0
Airfield 2008 Airfield 2009 Airfield 2010 Airfield 2011 Airfield 2012 Airfield 2013
('08-'13)
('09-'12)
('09-'12)
('11-'16)
('12-'18)
('12-'18)
Source: Developed by the Auditors Office based on DIAs 2010 through 2013 capital
improvement plans and the 2008 and 2009 Bond Official Statements.
In comparing the 2012 and 2013 capital programs as shown in Table 6 above, we
found that the overall scope and budget for the airfield increased. In 2012, the capital
program budgeted $216.2 million to be spent on nineteen airfield projects from 2012
through 2018. The 2013 program budgeted $229.6 million for twenty-four airfield
projects. While overall scope of the airfield portion of the capital program increased
by five projects and in size by $13.4 million, the budgets for seven of the projects
outlined in both the 2012 and 2013 programs were cut. Cuts to these seven projects
totaled more than $38.5 million.
Overall, since capital investments in the airfield have trended downward over six
years, and budget reductions have been made to specific projects from 2012 to 2013,
we are concerned that DIA leadership may not be pursuing comprehensive
rehabilitation and improvement projects.
Capital Investments in the Terminal Complex Have Decreased In addition to
reviewing airfield capital projects, we also reviewed terminal complex capital projects
due to the central importance of the Jeppesen Terminal and concourses to DIA
operations. Terminal complex capital projects include such projects as the five-gate
expansion of Concourse C and improvement to building fire protection, electrical,
heating, and cooling systems. We found that over the years, the budgets for the
terminal complex capital projects have decreased. Figure 8 shows the average
annual amount budgeted for terminal complex capital projects for capital programs
from 2009 through 2013.39
39
We exclude the 2008 terminal complex capital budgets from our analysis due to the size of the budgets in the program. In
the 2008 capital program, $479 million was budgeted for terminal, concourse, and central plant projects for 2008 through
2013. This averaged to $80 million being budgeted per year.
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Figure 8. Average Annual Terminal Complex Capital Budgets, Capital Programs 2009
through 2013
$40,000,000
$30,000,000
$37,939,500
$25,655,107
$26,133,436
$23,305,960
$20,000,000
$11,621,163
$10,000,000
$0
Terminal 2009 Terminal 2010 Terminal 2011 Terminal 2012 Terminal 2013
('09-'12)
('09-'12)
('11-'16)
('12-'18)
('12-'18)
Source: Developed by the Auditors Office based on DIAs 2010 through 2013 capital
improvement plans and the 2008 and 2009 Bond Official Statements.
Note: Capital projects in the 2009 capital program follow a different classification system
than is currently used. As such, the amount presented for the 2009 terminal complex may
include budgets of projects that have since been reclassified into different categories.
While overall average annual budgets have decreased over the years, in comparing
the 2012 and 2013 capital programs, which both span 2012 through 2018, we found
that overall budget for the terminal complex decreased, as did the number of
projects to be completed. The 2012 program budgeted $81 million to be spent on
twelve terminal complex projects from 2012 through 2018. The 2013 program
budgeted $163 million for thirty-three terminal complex projects. While the overall
capital spending on the terminal complex increased in scope by twenty-one projects
and in size by more than $82 million, the budgets for eight of the projects were
decreased by amounts totaling more than $24 million.
Overall, decreased capital investments in the terminal complex and the budget cuts
made to specific projects from 2012 to 2013 raise some concerns. DIA is now close to
twenty years old, and it is expected to continue to have a significant capital
improvement program for the foreseeable future in order to maintain the airport and
to invest in future demand.40 Specifically, we have concerns regarding the limited
capital resources available, the competition for these resources, and the lack of
operational maintenance plans.
40
Fitch Affirms Denver, COs Sr. Airport Revs at A+; Subs at A; Outlook Stable, September 26, 2014,
http://finance.yahoo.com/news/fitch-affirms-denver-cos-sr-194600862.html.
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and continuous maintenance occurs at the airport. 41 The audit found that DIAs asset
management strategy was inadequate to effectively plan for maintenance needs.
We recommended that DIA develop an asset management plan and a five-year
operations and maintenance plan, and address issues related to contingency
planning, conditions assessment, performance measures, and workforce planning.
This audit found that DIA does not have specific operations maintenance plans in
place and, as a result, it is difficult to determine whether maintenance projects are
conducted in a timely manner and at reasonable costs. Budgets for operations
maintenance are based on historical data and AIM personnel identifying necessary
projects instead of AIM assessing the conditions of the assets and the appropriateness
of plans to identify when replacement or maintenance should occur. AIM does not
break out operating budgets into projects and priorities but rather expense type.
As part of our audit follow-up program, we monitored DIAs progress on implementing
the nine recommendations issued in the 2012 audit. At the completion of our follow-up
process, we issued a follow-up report in May 2014 in which we reported that six of the
nine recommendations had been implemented.42 Most notably for the purposes of
this current audit, AIM management reported that a comprehensive asset
management improvement program had been implemented to improve overall asset
management strategy and communication. This implementation included a structural
reorganization within AIM to create an independent asset management office with
staff, equipment, and funding. In addition, an AIM Asset Management Policy was
developed. At the time of follow-up, AIM had not yet developed a five-year
operations and maintenance plan but was working on one to be considered for the
2015 budget. Although projects related to CIP were provided, there were still no plans
related to operations maintenance.
We reviewed AIM data related to budget and actual expended amounts for
operations. Although DIA leadership indicated that funding for maintenance has
increased from 2009 to the present, as shown in Table 7, the actual expenses have
stayed fairly static until 2013, which may be due to the restructuring of AIM by
including more divisions. Larger maintenance projects are included in the CIP each
year but the operating budgets related to operations maintenance averaged
approximately $156 million for 2009 through 2013 and actual expenses averaged
approximately $148 million for the same time period. The budgets have remained
static for the past few years, which is questionable considering the airport is an aging
facility.
41
Denver International Airport Facility Management Performance Audit, City and County of Denver Auditors Office,
February 2012, www.denvergov.org/auditor/DenverAuditor/AuditServices/AuditReports.
42
Denver International Airport Facility Management Follow-up Report, City and County of Denver Auditors Office, May
2014, www.denvergov.org/auditor/DenverAuditor/AuditServices/AuditReports.
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Table 7: DIA Operations Maintenance Budget Amounts and Actual Expenses 20092013
2009
2010
2011
2012
2013
Budget
$143,480,738
$147,337,783
$154,048,332
$155,840,250
$157,225,083
Actual
$141,737,670
$140,700,621
$140,862,996
$142,964,602
$160,289,138
43
International Facility Management Association, Research Report #32: Operations and Maintenance Benchmarks (2009).
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Discrepancies Identified through FAA Annual Inspections Are Being Addressed Timely
DIA has been under scrutiny regarding its spending approach for airfield projects and
the possible impact on safety of not allocating sufficient resources. We reviewed the
reports generated by the FAA from 2009 through
2013 from its annual inspections of DIAs airfield.
The reports contain discrepancies between
Discrepancies identified
current conditions and FAA criteria as well as dates
through FAA annual
by which DIA will resolve the discrepancies. We
inspections are being
reached out to an FAA inspector to discuss the
inspection process and to inquire about how DIA
addressed timely.
addresses discrepancies and whether the work is
being done in a timely manner. The FAA inspector
indicated that the FAA and DIA are in regular communication to ensure timely
resolution and that they have no other concerns related to DIA, citing it as one of the
finest airports. We were informed by the FAA Inspector that the DIA team is
dedicated to safety and, over the past few years, work related to the airfield has
increased.
Although AIM management has taken steps to incorporate a comprehensive asset
management improvement program, additional adjustments are still in need related
to operations maintenance and to ensure the new HTC facility is managed properly.
We recommend that AIM continue to implement the comprehensive asset
management improvement program, which will include operations maintenance
plans, to assure that maintenance is appropriate for the airport.
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RECOMMENDATIONS
We offer the following eleven recommendations to improve the operations of the DIA Hotel
and Transit Center project and future construction projects.
1.1
1.2
Project Management Structure and Timing DIA Executive Leadership should establish a
project management structure that includes change management early in the process
of future construction projects in order to meet DIAs needs and provide the greatest
opportunity for budgetary success.
1.3
Construction Close-Out Review The DIA Chief Executive Officer should make specific
plans to engage a qualified resource to conduct a construction close-out review of the
project records maintained by the Hotel and Transit Center Project Management Team,
the tri-venture parties, and as may be necessary any applicable subcontractors, to
assist DIA in the determination that there have been no material third-party overbillings
to the airport. The DIA Chief Executive Officer should ensure that the recommended
construction close-out review begin no later than three months before substantial
completion of the project and continue until the final change order and invoice is
submitted by Mortenson, Hunt, and Saunders.
1.4
Independent Construction Consultant The DIA Chief Executive Officer should retain an
independent construction consultant to assist DIA leadership and personnel in reviewing
and negotiating contract terms on any future unique and large scale construction
projects to ensure that DIA and the City obtain fair or favorable contract terms.
1.5
Organization of Records DIA Executive Leadership should take the necessary steps to
ensure records related to the Hotel and Transit Center project are properly maintained
and organized.
1.6
Records Retention DIA Executive Leadership should ensure the Hotel and Transit Center
project records are retained in accordance with the Citys retention schedule.
1.7
Interim Construction Audits The DIA Hotel and Transit Center Project Management
Team should conduct periodic interim audits prior to substantial completion to address
any potential payment problems that may be better addressed during the project than
at the conclusion of the project, which may include statistical sampling.
1.8
Dashboards The DIA Hotel and Transit Center Program Managers should include
additional elements in the monthly dashboards such as current schedule and estimates
of project completion. In addition, to increase the transparency of the project the
monthly dashboards should be made public.
1.9
Capital Projects Classification The DIA Chief Executive Officer should ensure that the
classification system is used, which will help ensure that the need and cost of capital
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APPENDICES
Appendix A Types of Contract Delivery Methods for Airport
Projects
Historically, public procurement law has limited public entities to the use of a DesignBid-Build (DBB) project delivery method. Recently, a wide range of project delivery
methods have emerged for publicly funded projects in the United States. 44 The
development of the public procurement laws initially limiting public entities to use of
the DBB project delivery method is due in part to the Brooks Act. Enacted in 1972, the
Brooks Act held that design services on federally funded projects in the United States
should be procured on the basis of qualifications only.45 Conversely, several state laws
and statutes across the nation have limited the procurement of constructors to the
lowest responsible, responsive bidder. The combination of these two procurement
practices has helped solidify the proliferation of DBB in the public sector.46 The
Construction Industry Institute maintains that there are three fundamental project
delivery methods: Design-Bid-Build (DBB), Design-Build (DB), and Construction
Manager at Risk (CMR) also commonly referred to as Construction Manager/General
Contractor (CM/GC).
Design-Bid-Build DBB is a traditional project delivery method. In a DBB arrangement,
a project owner retains a designer to furnish complete design services and then
advertises and awards a separate construction contract that is based on the
designers completed construction documents. The owner is responsible for the details
of design and warrants the quality of the construction design documents to the
construction contractor. The owner owns the details of design during construction
and, as a result, is financially liable for the cost of any design errors or omissions
encountered in construction. The construction phase of DBB projects is generally
awarded on a low-bid basis. There is no incentive for the builder to minimize the cost
of change orders in this delivery method. In fact, there can be quite the opposite
effect. A builder who has won a project by submitting the lowest bid may need to
look to post-award changes as a means of enhancing profit on the project. A 2007
review indicated three defining characteristics of a DBB project. 47
1. There are separate contracts for design and construction
2. Contractor selection is based entirely on cost
3. Design documents are 100 percent complete
44
Airport Cooperative Research Program Report 21: A Guidebook for Selecting Airport Capital Project Delivery Methods,
2009.
45
The Brooks Act (Public Law 92-582), enacted on October 18, 1972, establishes the procurement process by which
architects and engineers are selected for design contracts with federal design and construction agencies.
46
Airport Cooperative Research Program Report 21: A Guidebook for Selecting Airport Capital Project Delivery Methods,
2009.
47
Ibid.
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DBB projects can also be awarded on a negotiated basis and a best-value basis. In
both cases, the probability that the project will be awarded to a builder who has
submitted a mistakenly low bid is reduced. Ideally, a builder will be motivated to
complete the project in such a way that it will be invited back to do the next
negotiated contract or that will reflect well on the reputation of the firm for future
awards. Regardless of the procurement method, DBB involves less builder input to the
design than DB or CMR. The owner must rely on the designer or agency CM (and not
the builder) for a constructability review. With DBB the owner has full control over the
details of design. DBB is also characterized by the greatest amount of competition in
both the design and construction areas. Qualified designers can compete for the
design without restriction. Constructors who can furnish the requisite bonding can
compete without constraint. Design subconsultants and construction trade
subcontractors can also compete with nominal restriction. Finally, as DBB is viewed as
the traditional project delivery method nationally, it is understood and accepted by
owners, designers, and construction industries.48
Design-Build DB is a project delivery method where the owner obtains design and
construction services in the same contract from a single, legal entity referred to as the
design-builder.49 While there are many DB approaches, the most common are the
one-step and the two-step processes. The one-step process provides for competitive
evaluation of technical proposals, with the contract award decision based on best
value to the owner agency. Typically, the determination of best value is based on a
combination of technical merit and price. The two-step process separates the
technical proposal from the price. The method typically uses request-for-qualifications
(RFQ) or a request-for-proposal (RFP) approach as opposed to an invitation-for-bid.
There are three major DB components. First, the owner develops an RFQ or RFP that
describes essential project requirements in performance terms. Second, proposals are
evaluated. Finally, with evaluation complete, the owner must engage in some process
that leads to contract award for both design and construction services. The DB entity
is liable for all design and construction costs and usually provides a firm, fixed price in
its proposal. Defining characteristics of DB include four major concepts. 50
1. A single point of responsibility
2. A schedule that allows for overlapping design and construction
3. A design-builder that furnishes preconstruction services during design
4. An owner that expects the design-builder to provide a firm, fixed price and
to commit to a delivery schedule
DB may reduce competition as all parties to the DB contract are selected using
qualifications and past performance as a selection factor. Because the owner
transfers responsibility for all design and construction in the DB contract, the owner
loses the ability to foster competition between design sub-consultants and
construction trade subcontractors. There is typically no requirement to competitively
48
Ibid.
Ibid.
50
Ibid.
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bid for subcontract work packages, and often the scale, complexity, and speed at
which DB projects are executed precludes firms with no DB experience from being
able to participate. Moreover, because the contract is awarded before the design is
complete, DB can also create an unfavorable risk environment for subcontractors
whose cost-estimating systems lack sophistication to accurately forecast costs.
Construction Manager/General Contractor CM/GC projects are characterized by a
contract between an owner and a CM who will be at risk for the final cost and time of
construction. The terms Construction Manager at Risk (CMR) and CM/GC sometimes
cause confusion because of the assumption that the phrase at risk connotes cost
guarantee. To simplify, many choose to avoid the debate over the term at risk and
instead use the term CM/GC. In this agreement, the owner authorizes the construction
manager to handle the details of a projects lifecycle. The idea of CM/GC is to furnish
professional management of all phases of a projects life to an owner whose
organization may not have those capabilities. These projects normally use the
qualifications-based procurement method to select the CM/GC. 51 It is possible to
apply best-value procurement using qualifications and proposed fees being taken
together to form the best-value metric. Typically, a CM/GC contract contains a
provision in which the CM/GC stipulates a Guaranteed Maximum Price (GMP) above
which the owner is not liable for payment. Often these contracts include incentive
clauses in which the CM/GC and owner can share any cost savings realized below
the GMP. CM/GC contracts can contain provisions for the CM/GC to handle some
aspects of design, but generally the owner retains the traditional responsibility by
having a separate design contract and furnishing the CM/GC with a full set of plans
and specifications upon which all construction subcontracts are based. The CM/GC
will usually be paid for furnishing preconstruction services such as cost engineering,
constructability review, and development of subcontractor bid packages.
Characteristics of a CM/GC contract may include six major concepts.52
1. The designer and the CM/GC hold separate contracts with the owner
2. The CM/GC is chosen based on criteria other than just the lowest
construction cost, such as qualifications and past performance
3. The CM/GC contracts directly with trades and takes on performance risk
4. The schedule allows for overlapping design and construction
5. The owner procures preconstruction services from the CM/GC
6. The owner expects the CM/GC to provide GMP and to commit to a
delivery schedule
Transparency maybe enhanced, as costs and fees are posted, which diminishes adversarial
relationships between components working on the project, while at the same time eliminating
bid shopping.53 Constructability and speed of implementation are the major reasons an
owner would select the CM/GC method. Unlike DBB, CM/GC brings the builder into the
51
Ibid.
Ibid.
53
Ibid.
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design process at a stage that can have impact on the project. The CM/GC is expected to
provide genuine project cost estimates early in the project lifecycle. 54
54
Ibid.
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AGENCY RESPONSE
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