Auditor: State building projects plagued by $24.6 million in cost overruns

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Auditor: State building projects plagued by $24.6 million in cost overruns

Mon, 06/19/2017 - 3:06pm -- tim

Tables and graphics courtesy of Vermont Auditor of Accounts, June 16, 2017. See descriptions of projects below. SEE FULL REPORT HERE

by Timothy McQuiston Vermont Business Magazine Vermont Auditor Doug Hoffer today released a report on the Vermont Department of Buildings and General Services capital projects that says it not only suffers cost overruns, but that it also does not have processes in place to even know how to fix the problem. Average costs of a sampling of projects ran nearly a third over budget and some as high as 71 percent above projected costs. The report concludes that “the department’s reputation is at risk.”

Between 2012 and 2016, the report says, the Legislature appropriated over $278 million for BGS-managed capital projects, such as the Vermont Psychiatric Care Hospital in Berlin, the Public Health Lab in Colchester, the District Heat Plant in Montpelier, and the Public Safety Facility in Westminster.

The auditor’s review of 10 BGS capital projects found that costs for nine completed projects were $24.6 million above the total estimated costs of $92 million. The median cost overrun for these projects was 31 percent, with a range of 11 to 73 percent. Expected completion dates were missed for all 10 projects and ranged from two months to almost four years late.

One project was not completed as of June 30, 2016, and costs were under-the-estimate at that time.

The project scope changed for some projects, which increased costs in some instances. For example, the state originally planned to renovate a purchased building for the Public Health Lab. However, the state later determined that the building was not suitable for a laboratory and demolished the building to construct a new lab at the site.

Based on the auditor’s analysis of project documents and interviews with project managers, BGS attributes these differences to many factors, including changes to code requirements, unforeseen conditions, and tenant or building owner requests. Project managers cited delays in funding or site acquisition and design changes as other explanations.

The auditor, however, believes that these explanations do not identify the underlying causes of cost increases, schedule delays, and scope changes. The auditor found that BGS’ process weaknesses hinder the identification of underlying causes:

  • First, BGS has not evaluated its management of capital projects by comparing actual results to defined baseline estimates and assessing why they miss the mark.
  • Another shortcoming is that BGS lacks assurance that the mechanisms it uses to track project costs identify all costs associated with capital construction projects.
  • In addition, BGS has very limited policies and procedures related to capital projects.

Without a comparison of actual results to estimates, complete data, and thoroughly documented policies and procedures, BGS does not have the means to address the risk of continued cost and schedule overruns and significant changes to project scope.

During the audit, the auditor observed instances of noncompliance with the state’s procurement and contracting policies.

Among its conclusions, the audit states that: “According to BGS, delays increase costs, but the department has not systematically analyzed why projects may exceed cost estimates or schedule timeframes. Furthermore, contract change orders accounted for 22 percent of the cost overrun for the nine completed projects, but BGS has not consistently documented the reasons for the change orders and does not quantify the dollar amount for the various reasons cited in change orders. Without an evaluation of project results and documentation of the effect of various reasons for change orders, BGS lacks information to determine what improvements could be made to its management of capital projects.

BGS has very little documented guidance pertaining to the many steps involved in managing a capital construction project. For example, BGS does not have guidance for the preparation of cost estimates. Documentation of policies and procedures is critical to the daily operations of a department because they set forth the fundamental framework and the underlying methods and processes all employees rely on to do their jobs. They provide specific direction to and help form the basis for decisions made every day by employees. Without this framework of understanding by employees, the efficiency and effectiveness of operations can be adversely affected and the department’s reputation is at risk.

The auditor also questioned the process that gives the BGS commissioner sole authority over lease arrangements.

For instance, the National Life lease obligates the state to pay $37.4 million over a 10-year lease term and required the state to pay the cost of tenant improvements above a $3.5 million landlord allowance.

The state occupies significant space inside the landmark building that overlooks the State House.

The auditor suggests BGS should collaborate with the Administration Agency to determine whether a particular real estate lease requires the approval of the Administration secretary.

In general, BGS Commissioner Chris Cole agreed with Hoffer’s findings. He attributed the cost overruns to: The two-year capital bill, which makes for estimates, while more flexible, more uncertain in the second year of the cycle; project schedules, which can be far flung; the inexact science of construction estimates; unforeseen site conditions; and contract amendments. Cole was appointed by Governor Scott and became commissioner in January 2017. He previously was Transportation Secretary under Governor Shumlin.

The auditor, while acknowledging that Cole made reasonable points, was firm in stating that the process is flawed and that BGS’s problems are systemic and it really does not know what is the root cause of the cost overruns. VBM