Audit of the Los Angeles World Airports' Capital Development Program

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Audit of the Los Angeles World Airports’Capital Development Program

Prepared for the

City ControllerCity of Los Angeles

Submitted by

Harvey M. Rose Associates, LLC1390 Market Street, Suite 1150San Francisco, California 94102

(415)-552-9292

http://www.harveyrose.com

http://www.harveyrose.com/





June 12, 2013

Ms. Wendy GreuelCity Controller City of Los Angeles200 North Main Street, Room 300Los Angeles, CA 90012

Dear Controller Greuel:

Harvey M. Rose Associates, LLC is pleased to present this Audit of the Los Angeles World Airports’ Capital Development Program. The audit was requested by your office to evaluate theefficiency and effectiveness of LAWA’s processes for capital improvement projects, including

construction management practices, with a primary focus on LAX’s capital expansion.

Thank you for providing our firm with the opportunity to conduct this audit for the City of LosAngeles. Upon your request, we are available to present the report to the City Council or other responsible City officials.

Sincerely,



TABLE OF CONTENTS

Executive Summary ....................................................................................................... i

Controller’s Accountability Plan .............................................................................. viii

Introduction ................................................................................................................... 1

1. Value Engineering ................................................................................................ 20

2. CMAR Contractual Relationship ........................................................................ 28

3. Monitoring CMAR Change Management .......................................................... 36

4. CMAR Quality Assurance Monitoring ............................................................... 45

5. Capital Decision-Making Processes ..................................................................... 56

6. Capital Improvement Plans and Budget ............................................................. 66

7. Long-term Strategy for Program Management ................................................. 74

Appendix A: Ranking of Recommendations .......................................................... A-1

Appendix B: U.S. Airport Survey Instrument ...................................................... B-1

Appendix C: U.S. Airport Survey Responses ........................................................ C-1

Appendix D: City Department Survey Instrument ............................................... D-1

Appendix E: City Department Survey Responses ................................................ E-1



Executive Summary

Primary areas for improvement include LAWA’s implementation of the Construction-Manager-At-Risk (CMAR) model, especially with regard to the prevalence of change orders; LAWA’s

informal decision-making and prioritization processes around capital planning and lack of amulti-year Capital Improvement Plan; and LAWA’s lack of a long-term strategy to strengthenin-house program management capacity. These and other areas of weakness increase LAWA’sfinancial risk and hinder full transparency.

The findings and weaknesses described in this report reflect a complex set of notableorganizational challenges, including a lack of institutional knowledge and capacity to design and implement a major development program after decades of dormancy; market pressures to

accommodate international carriers with contact gates for large new aircraft; interest voiced byCity officials and the Board of Airport Commissioners to complete the projects expeditiously;and, the need to contend with lawsuits from the airlines and surrounding communities, as well asother complex stakeholders interests. Under these pressures, LAWA has succeeded in building astrong and effective organization, with an adequate internal control system, while simultaneouslyimplementing the largest public works project in the history of the City of Los Angeles.

Key Findings LAWA has not formalized a structured Value Engineering process, as required by the

FAA for some grant programs and recommended as a best practice for all capitalprojects. While some important elements of Value Engineering exist, LAWA couldensure conformity with federal guidelines and achieve greater life-cycle cost savings byimplementing a structured program.

The Federal Aviation Administration (FAA) requires that structured Value Engineering

processes be used for certain airport projects that are funded with federal AirportImprovement Program (AIP) grants. Although not mandatory, the FAA also recommendsthat Value Engineering “guidelines and specifications” be followed for most large capital

projects, including those funded with Passenger Facility Charge (PFC) revenues.

Further, design and construction industry best practices recommend the use of ValueEngineering at the 30% design phase, and federal advisories recognize that by employingValue Engineering principles at the earliest stages of a project, the opportunity for

influencing final costs is greatly increased. Distinct from Value Engineering, CostEngineering is more typically emphasized by LAWA throughout the design and construction phases, with a focus on evaluating initial construction cost, rather than the life-cycle costimplications of design and construction decisions.

LAWA has not implemented a formal Value Engineering process that meets the standards setby the FAA including the performance of such a process by an independent impartial team



Executive Summary

The Construction Manager at Risk (CMAR) project delivery method, chosen for use onthe Bradley West Gates and Core projects, was an effort to enable an accelerated

schedule while maintaining control over the projects’ designs. While LAWA’s analysisof the benefits of using the CMAR model, which had never been used before by theDepartment, supported management’s decision to move forward in this manner, certaincircumstances and project expectations may have prevented LAWA from realizing themodel’s full benefits..

The CMAR contract agreements for the Bradley West Core and Gates projects appropriatelyinclude Component Guaranteed Maximum Price (CGMP) caps, which accumulate to

Aggregate Guaranteed Maximum Prices (AGMP) also referred to as the contract amounts.However, total expected costs may exceed these amounts and budgeted contingencies due tothe volume of change orders. As a result of this and other factors, the risk to the CMAR contractor may have been diluted and the contractor’s incentive to deliver the projects withinthe contract amounts combined with contingencies may have been compromised.

Despite involving the CMAR in the design process for approximately one year during the pre-construction phase, LAWA reports that a majority of change orders have resulted from

design changes, owner betterment requests, and/or scope expansion, and plan errors.. LAWAstaff has noted that some, but not all, of the design deficiencies are the result of the project’saggressive schedule and complexity.

The CMAR agreements for the Bradley West projects do not contain sufficient controls,including sanctions, to ensure contractor performance in key areas. For example, althoughthe CMAR contracts require performance bonds or 10% retention of each progress paymentclaimed during the Construction Phase, there are no specifications that directly address theenforcement of CMAR performance related to its Quality Assurance or Change Managementresponsibilities.

LAWA has not effectively overseen the CMAR change order management function onthe Bradley West Gates and Core projects to fully ensure that unnecessary costs areavoided. As a result, LAWA may be incurring greater costs, be vulnerable to disputesover contractor change requests, or experience delays in project close-out.

LAWA has not taken sufficient action to ensure that the CMAR for the Bradley West projects effectively analyzes subcontractor change estimates for accuracy and reasonableness. LAWA staff change order cost estimates are consistently and significantlylower than the CMAR change order proposal amounts. Based on sampling, AirportsDevelopment Group (ADG) estimators have determined that the CMAR recommended change order amounts were overstated by an average of 16 5% and 11 2% for the Bradley



Executive Summary

instance, the CMAR submitted a proposal for $393,378 worth of structural steel work at twogates; however, the change order request was eventually settled for only $826.

Furthermore, the CMAR has not complied with contractual obligations to submit changeorder requests and cost estimates in a timely manner and LAWA has not consistentlyenforced such provisions, resulting in sizeable delays to change order processing. Up untilOctober 2012, LAWA had not enforced this contract provision even as it received contractor change requests, on average, over four weeks after the contractually required timeframe of 21days. The delayed efforts by ADG to enforce compliance of contractual timelines has had limited response from the contractor thus far. These delays raise the risk of subcontractors

not getting paid on-time, schedule impacts to some work, increased risk of disputed changeorder requests, and additional difficulties for LAWA when it is time to close-out projectsafter construction is complete.

LAWA may be performing Quality Control (QC) functions assigned to the BradleyWest projects CMAR and for which the CMAR is already compensated through theexecuted contracts. LAWA may be incurring unforeseen costs because of theduplication of efforts, along with other inefficiencies in the CMAR-LAWA relationship.

By contract, the Bradley West projects CMAR QC staff is responsible for the first review and testing of completed construction elements. The contracts further state that LAWA inspectorssubsequently perform a final review, or quality assurance (QA) review, ensuring constructionelements comply with applicable plan specifications and codes. In practice, however, LAWAinspectors perform more detailed and frequent QC duties, and do not actively review theCMAR QC performance, which may be deficient. Interviews suggested that the CMAR’s QCstaff is not consistently present on job sites and, instead, may rely on the report of thesubcontractor project manager or the foreman regarding the quality of the work product.LAWA inspector staff suggests that the inability of the CMAR to achieve QC program goalsmay relate to the level of staffing assigned to the QC function under the plan, even thoughLAWA reimburses the CMAR approximately $4.5 million annually to perform this function.

LAWA inspectors have not employed a comprehensive system for recording complianceactivity, which hinders its ability to implement an effective system for monitoring the

performance of the CMAR. This occurs, in part, because the LAWA Construction Inspection Division Procedures Manual does not define policies regarding the use of Requests for Inspection and is not clear regarding the implementation of other inspector compliance tools,specifically Job Memoranda and Notices of Noncompliance. Furthermore, a completeversion of the manual is not centrally located, readily available, or routinely updated.

LAWA’s established process for capital decision-making includes a limited level of



Executive Summary

The BOAC has limited involvement in the review and prioritization of proposed projects and is not involved in the assessment of initial project concepts or budgets. Instead, these

responsibilities have been assumed by executive staff and the Board may have less thanoptimal involvement in major capital project decision-making processes.

In describing the reasons for the BOAC’s limited involvement in project approval, LAWAmanagement stated that the City Attorney has advised that there is a “tension”, or potentialconflict leading to “pre-decisional bias”, between the Board’s roles when (1) considering and approving individual capital projects, and (2) fulfilling environmental review responsibilitiesunder the California Environmental Quality Act (CEQA). However, this concern about pre-

decisional bias is not founded in any written legal opinion. Further, per the LAX SpecificPlan, the City Council provides the final CEQA approval on LAX Specific Plan Amendment projects. Additionally, a review of State law suggests that the City may have flexibility indetermining which entity serves as the final CEQA approver. These factors suggest that theCity and LAWA have the ability to configure processes and the assignment of functions in amanner that would eliminate concerns about pre-decisional bias, while also enhancing theBoard’s role in formal project approval.

Executive management does not conduct comprehensive needs assessments, based on theresults-oriented goals and objectives that flow from the organization’s mission, nor has itestablished a systemic process for determining which projects should be prioritized and advanced for development. Without an organized framework within which potential projectconcepts are vetted according to established criteria and priorities, the rationale for decision-making may not be clear to LAWA stakeholders.

LAWA does not have a multi-year Capital Improvement Plan (CIP). Further, LAWAhas overstated large baseline capital program budgets in the past, including a $40.5million surplus on one major project. This practice may result in a greater commitmentof funds than might otherwise be necessary with more accurate forecasting, andincreases the risk of unnecessary or avoidable expenditures.

LAWA does not have a multi-year capital plan that has been presented to the Board of Airport Commissioners in a public setting. This diminishes accountability and transparencyin the organization. Instead, general capital improvement concepts are included in a 2004Master Plan and the Specific Plan, and Specific Plan Amendments only include “rough order of magnitude cost estimates” for seven development alternatives presently under consideration. LAWA should continue efforts to develop a robust capital improvement plan

process, to ensure compliance with the intent of the City Charter and improve transparencyand accountability over capital project decision-making.



Executive Summary

can raise the total project budget. Although budgets are refined as projects move through theconceptual and design phases, initial estimates showing allowances, soft cost components

and contingencies should be clearly presented and described to ensure that FinanceDepartment budget personnel have all of the information necessary to conduct a thoroughreview and assessment of capital budget reasonableness.

LAWA pays an estimated 15 to 20 percent more for program management servicesprovided by a contractor than it would pay for City staff. Without a strategy totransition program management functions to City personnel, LAWA will continue topay a premium for services, which will be required through at least 2018.

While the need for consultant program management services in the first years of LAWA’scapital development program was clear, LAWA has not developed a strategy or plan totransition LAWA staff into capital development program management and other roles thatare currently held by AECOM consultants. As of November 13, 2012, the AECOM contracthad been amended and extended three times. The third amendment increased the term fromsix to eight years and the total contract amount from $162,720,000 to $201,934,228. If even

just one-third of the consultant staff, representing approximately $48 million over the current

life of the AECOM contract, had been replaced by City personnel, the City conservativelycould have saved an estimated $7.2 million, based on a 15 percent differential between Cityand consultant costs. LAWA has not conducted any cost-benefit analyses or provided anylong-term strategy for use of consultants versus City staff in program management servicesin the future, nor has it required the contractor to provide formal training and staff development opportunities for City staff.

The extent of LAWA’s future capital development program remains unclear, thoughinformation contained in the Specific Plan Amendment Study (SPAS) and public statementsmade by LAWA management indicate that total costs could range between $6 billion to morethan $12 billion. In any case, LAWA’s capital development program will continue for several years to come and will require skilled program management professionals. Even if the need for such knowledge and expertise declines over the next ten years, as LAWAaccomplishes major components of its current capital development program, there willalways be a baseline need for skilled capital improvement program expertise. As long asLAWA continues to rely heavily on consultants instead of developing City staff resources, itwill pay a premium for such services.

Review of Report

On February 12, 2013, a draft report was provided to the LAWA Executive Director for reviewd t A it f h ld ith LAWA t M h 6 2013 t



Executive Summary

allocation of the City’s indirect costs for every new City position added, using the indirect costfactors included in the Controller’s Cost Allocation Plan (CAP). It is our view that while this is

an appropriate methodology for allocating indirect costs across all City departments on a proportional basis and ensuring the General Fund is appropriately reimbursed for the cost of services to enterprise and grant-funded projects, it is not appropriate for estimating the truemarginal cost of converting from contractors to City personnel. For example, it is unlikely thatthe City would incur significant additional costs for office space (i.e., space is already being

provided for contractor personnel), or for additional City Administrative Office, Controller or City Attorney personnel if some contractor positions were converted to City staff. Further, theCity does not incur many categories of indirect cost charged by the contractor, such as travel

expenses (City employees are local), the high salaries paid to private sector executives (up to$546,000 in annual compensation), or profit and incentive compensation paid to employees.

In addition, LAWA does not agree with the audit findings related to the applicability of using a public works benchmarking study to assess LAWA's use of consultant staff in Section 7.However, our technical consultant – who has had experience managing major public workscapital projects across a broad spectrum of organizations, including municipal public worksdepartments, clean water departments and large international airports – disagrees and indicates

this type of benchmarking study can be broadly applied.



Controller’s Accountability Plan

R ECOMMENDATIONS P AGE M AYOR /C OUNCIL

ACTION R EQ ’D DEPARTMENT

ACTION R EQ ’D

SECTION 1. VALUE E NGINEERING

The LAWA Executive Director should:

1.1 Direct staff and request legal counsel to prepare anassessment of past practices used on LAWAdevelopment projects, to ensure that design reviewand cost engineering efforts can satisfactorily meetFAA expectations regarding the use of structured

Value Engineering.

27 LAWA

1.2 Develop and establish policies and procedures thatensure that a structured Value Engineering programis implemented at LAWA.

27 LAWA

SECTION 2. CMAR C ONTRACTUAL R ELATIONSHIP

The LAWA Executive Director should direct ADGmanagement to:

2.1 Conduct a post-project assessment of the costs and benefits of the CMAR model. Include a comparisonof alternative models.

35 LAWA

2.2 Evaluate the CMAR model, as implemented for theBradley West Gates and Core projects, byreviewing the agreements and the incentive

structure they provide.

35 LAWA

2.3 Develop formal criteria for choosing projectdelivery models on future capital projects and ensure that project management and other pertinentstaff are made aware of the strengths and weaknesses of all procurement models considered.

35 LAWA

SECTION 3. M ONITORING CMAR C HANGEM ANAGEMENT


3.1 Review contract provisions, such as Articles 01 2300 (Change Orders), 01 24 00 (LAWA Initiated Changes) and 01 25 00 (CMAR Change Request)

44 LAWA






ACTION R EQ ’D

in the scope of work.

3.2 Follow through on formal communications to theCMAR management regarding contractual

provisions requiring the CMAR to submit CPCNsand CCRs within the timeframes stated in theagreement.

44 LAWA

3.3 Formally communicate that unsupported estimates

used as placeholders, as well as CCR revisions thatdo not contain changes in scope, will not beaccepted.

44 LAWA

3.4 Consider enhancing the monitoring of CMAR performance of change management to include itsability to meet contract prescribed timelines for change submittals to reduce the risk of scheduleimpacts, that subcontractors will not paid in a

timely manner, and to ensure the project may beclosed out with an efficient and effective process.

44 LAWA

3.5 Conduct a post-project analysis of the resourcesallocated to CMAR Change Management functions

by LAWA under the Bradley West project budgetsto determine whether they exceeded the mean or median amount spent, as a percentage of total costs,on this administrative function. Report results tothe Board of Airport Commissioners.

44 LAWA

SECTION 4. CMAR Q UALITY ASSURANCEM ONITORING

The LAWA Executive Director should direct the Chief Airports Inspector to:

4.1 Update and make readily available the LAWAConstruction Inspection Division Procedures

Manual .

54

LAWA

4.2 Direct inspector staff to follow procedures outlined in the LAWA Construction Inspection DivisionProcedures Manual .

54LAWA

4 3 Provide training to LAWA inspector staff on 54 LAWA






ACTION R EQ ’D

revised.

4.5 Standardize and maintain LAWA-owned logs totrack the full history of document communicationswith a given contractor.

54LAWA

4.6 Review the Request for Inspection processes and define the implementation of Request for Inspection in institutional documents for

standardization of Request for Inspection processesand procedures.

54 LAWA

SECTION 5. C APITAL DECISION -M AKING P ROCESSES

The Board of Airport Commissioners should direct theLAWA Executive Director to:

5.1 Request a written legal opinion from the CityAttorney’s Office regarding any potential conflictof interest related to the Board’s duties and authorities related to airport development and CEQA review.

64 BOAC

5.2 If a conflict of interest is determined to be a factor by the City Attorney’s Office, develop a proposalto reassign the CEQA review responsibility fromthe Board of Airport Commissioners to the CityPlanning Department or another entity within the

City, thereby enabling the Board of AirportCommissioners to conduct a more substantial levelof review of the capital development program.

64 BOAC

5.3 Building on LAWA’s current periodic “open-call”for projects practice, conduct a comprehensiveneeds assessment of airport capital assets, including

both potential development projects and facilitiesmaintenance needs, based on the results-oriented

goals and objectives that flow from theorganization’s mission.

64 BOAC

5.4 Develop a policy and systemic process for LAWAexecutive management to use on an on-going basisgoing forward to evaluate the costs and benefits of various proposed projects and prioritize among

64 BOAC






ACTION R EQ ’D

SECTION 6. C APITAL IMPROVEMENT P LANS ANDBUDGET

The Board of Airport Commissioners should direct theLAWA Executive Director to:

6.1 Continue efforts to develop a multi-year capital plan that would be presented to the Board of Airport Commissioners in public session.

72 BOAC

6.2 Present a five-year capital spending plan as part of the annual budget review process.

72 BOAC

6.3 As part of the annual budget process, or as required by the needs of the organization, seek Board of Airport Commissioner approval of detailed,individual capital project budgets.

72 BOAC

6.4 Require all project budget packages to specificallyidentify allowances and other cost components for which the basis of the estimate cannot be reliablydetermined.

72 BOAC

6.5 Review the analytical basis for estimating projectsoft costs and contingencies and consider establishing variable standards based on projectscope.

72 BOAC

6.6 Implement comprehensive and formalized policies, procedures and standards for developing,implementing and monitoring capital project

budgets.

72 BOAC

SECTION 7. L ONG -T ERM P ROGRAM M ANAGEMENTSTRATEGY


7.1 Direct staff to develop a long-term strategy for theuse of consultants and LAWA staff in programmanagement and support roles, including theidentification of the amount and types of baselinestaffing that will be required on a long-term basis,and an estimate of the amount and types of

82

LAWA






ACTION R EQ ’D

established by the City and enable LAWA to recruitand retain appropriate capital development staff.Any such proposed classifications should be

provided to the Human Resources Division for review.

7.3 Direct the Human Resources Division to reviewexisting job classifications for capital developmentat the airport and conduct analysis to determine

whether the addition of new airport-specificclassifications is appropriate.

82 LAWA



Introduction

Harvey M. Rose Associates, LLC (HMR) is pleased to present this Audit of the Los AngelesWorld Airports’ Capital Development Program. This report was prepared at the request of theCity Controller in accordance with the powers and duties prescribed in Article II, Section 261(e)of the City Charter.

Objectives and Scope

The audit was designed to evaluate the efficiency and effectiveness of Los Angeles World Airports’ (LAWA) processes for capital improvement projects, including constructionmanagement practices. Although LAWA owns and operates Los Angeles International Airport(LAX), LA/Ontario International Airport (ONT), and Van Nuys Airport (VNY), the audit was

primarily focused on processes and practices related to the LAX capital development programdue to the significant program costs – more than $3.6 billion - currently underway.

The specific objectives of the audit were to:

Perform a broad review of how LAWA conducts long-range planning for various capitalimprovements, including whether LAWA has an appropriate process to prioritize projectsdepartment-wide and identify financing for capital improvements.

Determine if the current organizational structure ensures efficient and effectivemanagement of construction projects.

Determine whether the LAWA project management functions (including contractoversight, contract monitoring, and accurate payment of contract invoices) are performed in an effective manner to ensure projects are completed on time, on budget, and in themost economical way. Based on a sample of LAX construction projects, this includesassessing if:

a. LAWA’s solicitation, evaluation, and award of project contracts are in accordancewith City and Department policies;

b. Project contractors provide services in accordance with the terms of their contracts;and

c. Contractors submit complete and accurate claims for payment in accordance with theterms of their contract, and that costs were reasonable for services provided.

Conduct a broad review and sufficient test work, based on the sample of construction projects, to assess the adequacy of the following functions:

a. Project Strategy, Organization, and Administration



Introduction

Assess best practices of other City departments and other large municipal-owned airports thatcould improve construction management efficiency and effectiveness within LAWA.

The scope of the audit included consultant, contractor, and departmental functions related toconstruction projects that were completed at LAX as of FY 2010-11 and projects currently in

progress.

Methodology

This performance audit was conducted in accordance with Government Auditing Standards , July2011 Revision by the Comptroller General of the United States. In accordance with thesestandards and best practices for conducting performance audits, the following five key phaseswere conducted:

1. An entrance conference was held with the Executive Director and other LAWA officials. The purpose of the entrance conference was to introduce Harvey M. Rose Associates, LLC staff and consultants, describe the performance audit process and protocol, and requestinformation about the capital development program at LAWA. Following the entranceconference, an overview of the Airports Development Group (ADG) and capital developmentactivity, including a tour of the exterior of the Bradley West project, was provided by theLAWA Deputy Executive Director over ADG.

2. An initial review of LAWA capital development was performed, including interviews withkey LAWA officials and a review of documentation provided by several departments withinLAWA. During the Initial Assessment, 26 individuals were interviewed, including managersand directors of the major LAWA organizational divisions, to obtain an overview assessmentof organizational strengths and weaknesses. At the conclusion of these activities, a moredetailed plan was developed for conducting subsequent performance audit activities.

3. Field work was conducted to research key elements of LAWA capital development activity,which included additional interviews and tours, and the collection and analysis of data. Inaddition to basic field work activities, sampling was conducted in the following areas:

a. Change Order Files: A random sample of 100 estimator files were examined,representing a statistically significant sample of multiple types of change orders, tomeasure variances among sub-contractor, CMAR and LAWA estimates of the cost of change orders and to determine whether suitable controls have been established over change management processes.

b S li it ti d A d Fil A j d t l l f 15 t ti d f i l



Introduction

4. A benchmarking survey of seven other U.S. international airports, as well as two Citydepartments that operate substantial capital programs, was conducted in order to identify best

practices and compile other information for use in comparative analysis and the developmentof recommendations.

5. A quality assurance review process was undertaken to ensure the factual accuracy of thereport. This process included an internal peer review conducted by personnel from HMR, aswell as a review of the draft report by responsible LAWA officials. After officials completed their review of the draft report, an exit conference was held to discuss the report’s factualaccuracy and clarity. LAWA officials were also requested to provide comments on therecommendations contained herein.

Overview of LAWA

Los Angeles World Airports (LAWA) 1 is a Los Angeles City department that owns and operatesa system of three airports: Los Angeles International Airport (LAX), Los Angeles/OntarioInternational Airport (ONT) and Van Nuys Airport (VNY). 2 The Department has an employee

workforce of approximately 3,500 employees and additional consultant personnel distributed between these three airports. LAWA serves a major portion of the Southern California air passenger and cargo market.

Passenger traffic, both domestic and international; air cargo; and, most FAA defined aircraftmovement are highly concentrated at LAX. ONT, located 35 miles east of downtown LosAngeles in San Bernardino County, serves about 10 percent of the passenger traffic of LAX.VNY has no commercial passenger traffic, but with nearly 300,000 general aviation movements

reported in calendar year 2011, it has the vast majority of general aviation activity of the threeLAWA airports and, according to LAWA, it is one of the busiest general aviation airports in theworld.

Overview of Capital Development at LAWA

In recent years, LAWA has embarked upon a major development and modernization program atits three airports, with most of the focus on LAX. When completed, the development project willhave resulted in major airfield, terminal, noise mitigation and infrastructure improvements atLAX, with the centerpiece development being the modernization of the Tom BradleyInternational Terminal (TBIT) and construction of the new Bradley West terminal annex. Theseimprovements will reportedly position LAX as a preeminent international hub in the United States.



Introduction

LAWA Capital Project Financing

In FY 2011-12, LAWA had an annual operating budget of approximately $657.7 million and made direct capital project budget appropriations of approximately $939.2 million. As of June30, 2012, LAWA held net assets of approximately $4.36 billion, which was comprised of $8.57

billion in total assets and $4.21 billion in total liabilities. Of the $8.57 billion in total assets,$5.33 billion represented the value of total capital assets, net of depreciation, as of June 30,2012. 3 Notably, over the past three fiscal years, LAWA’s total capital asset value has increased

by $1.37 billion, or 34.4 percent from $3.97 billion as of June 30, 2010 to $5.33 billion in 2012.

The net assets of $4.36 billion included $2.41 billion invested in capital assets net of related debt(i.e., the “book value” of property, facilities and other assets wholly owned by LAWA), whichhas increased by 19.6 percent over the three year period since 2010. In FY 2011-12, LAWAreported major “ capital asset activities” for the year, amounting to $987.0 million in expendituresor commitments 4, as shown in Table I.1. Table I.3, later in the Introduction, displays budget and expenditure data by project groupings (i.e., elements) as of September 30, 2012.

Table I.1FY 2011-12 LAWA Capital Projects Activities (In Millions)

Project Category Description Amount

Tom Bradley International Terminal Improvements and security upgrades. 579.5$Utilities Replacement of Central Utility Plant/co-generation facility. 98.2 Terminals Renovations at Terminals 5 and 6. 69.4 Residential Soundproofing Residential acquisition, soundproofing, and noise mitigation. 41.4 Security Security program in-line baggage screening. 31.6 IT Various IT network and systems projects. 27.9 Elevators/Escalators Repairs and improvements of elevators and escalators. 15.8 Aifield and Runways New north/south crossfield taxiway and apron. 5.8 TOTAL EXPENDED 869.6$

Airfield and Runways Various 7.8$

Noise Mitigation Various 6.8 Terminals and Facilities Various 84.9 Miscellaneous Various 17.9 TOTAL COMMITTED 117.4$

GRAND TOTAL 987.0$

Expended

Committed



Introduction

Revenue Bonds Used to Finance Capital Projects

LAWA issues revenue bonds to finance its major capital project activities. As of June 30, 2012,LAWA’s outstanding long-term debt attributable to these bonds was approximately $3.58

billion, which was a decrease of approximately $48.3 million over the $3.63 billion amountoutstanding as of June 30, 2011 and $1.0 billion over the amount outstanding as of June 30,2010. Despite this substantial and rapid increase in LAWA’s total bonded indebtedness, LAWAcontinued to receive high bond ratings from Standard and Poor’s (AA), Moody’s InvestmentServices (Aa3) and Fitch Ratings (AA) as of June 30, 2012, suggesting it has the financialcapacity to absorb such debt obligations.

Between June 30, 2011 and June 30, 2040, after all of the existing revenue bonds have been paid in full, LAWA will have made $3.6 billion in bond principal and $3.5 billion in bond interest

payments, for a total of approximately $7.1 billion. In FY 2011-12, LAWA made an annual payment of $236.5 million toward this debt; and, in FY 2012-13, LAWA is scheduled to pay$241.3 million toward this debt. Over time, these bonds will be repaid from a variety of sources,including Unrestricted Net Operating Revenues, Passenger Facility Charges (PFCs), Customer Facility Charges (CFCs), Capital Grants, and other sources of airport income.

Unrestricted Net Operating Income – A portion of LAWA’s unrestricted net operating income isused to fund capital projects and debt service. This net operating income represents uncommitted operating fund balances that become available after subtracting total operating expenses fromtotal operating income. Total operating income is generally derived from non-airline related feesand charges (e.g., concession fees and commercial rentals), and airline related fees and charges(e.g., aircraft landing and apron fees, and long-term terminal leases and tariffs). Operating

expenses include the cost of maintaining and operating LAWA airports, but does not include thecost of major capital projects. In FY 2011-12, LAWA collected approximately $902.2 million inoperating income and incurred $657.7 million in operating expenses, for net operating income

before depreciation and amortization of $244.4 million. This amount does not include restricted “non-operating income” received from PFCs, CFCs and grants, which are discussed more fully

below.

Passenger Facility Charges – Passenger Facility Charges (PFCs) are fees imposed by airports on

enplaned passengers. PFC revenues are used to finance eligible airport related projects that preserve or enhance safety, capacity, or security of the national air transportation system; reducenoise or mitigate noise impa cts arising from an airport; or furnish opportunities for enhanced competition among carriers. 5 Both the fee amount and the intended use of fee income arereviewed and must be approved by the Federal Aviation Administration (FAA) and are subject tofederal audit



Introduction

Bradley International Terminal (TBIT) renovations, Bradley West and related projects. Projectapprovals, as of June 30, 2012, included the following:

Table I.2FAA Approved Capital Projects to be Funded with PFCs (In Thousands)

Source: Los Angeles World Airports (Department of Airports City of Los Angeles, California)Comprehensive Annual Financial Report as of June 30, 2012

In FY 2011-12, LAWA collected $130.8 million in Passenger Facility Charges. Of this amount,

the Board of Airport Commissioners authorized the use of $25.2 million for the TBITRenovation and Bradley West development projects. All of the $25.2 million was used to paydebt service on bond proceeds being used to meet current costs. PFCs are also used to fund capital projects on a pay-as-you-go basis.

Customer Facility Charges – In November 2001, the Board approved the collection of a State-authorized Customer Facility Charge from rental car companies serving LAX and ONT airports.State law allows airports to collect a fee of $10 per on-airport rental car company transaction to

fund the development of consolidated car rental facilities and common-use transportationsystems. 6 In FY 2011-12, LAWA collected $29.6 million from these fees. Through June 30,2012, LAWA had expended $43.9 million of $167.0 million in collections on approved projects.

Federal Grants – Various federal grants are available to LAWA for Airport ImprovementProgram (AIP) and Transportation Security Administration (TSA) capital projects. In fiscal years2011 and 2012, LAWA received $75.2 million and $62.4 million in such grants, respectively.These grants are categorical in nature and are awarded on a project specific basis. AIP grants aretypically used to fund airfield, taxiway and runway improvement projects; TSA grants aretypically used for improvements to passenger and baggage screening areas.

Airline Contributions – The airlines also provide resources to LAWA under the terms of their long-term terminal lease agreements that are used to fund certain capital projects and pay for debt service (e g rents Federal Inspection Service Charges and direct payments for terminal

Terminal Development 1,731,257$Noise Mitigation 907,313 Airfield Development 106,751

Land Acquisition 33,680 Aircraft Rescue and Firefighting Vehicles 1,899 Total FAA Approved Projects 2,780,900$



Introduction

developing a new methodology for determining rates and charges under the tariff. On September 17, 2012, the new methodology was approved by the Board and on November 13, 2012, the newrates for calendar year 2013 were adopted. According to LAWA Finance Department staff, thenew rate structure is intended to produce a uniform method for determining airline charges,ensure that the airlines’ share of costs are more equitable, and provide additional future sourcesof income for airline terminal and other airline supported improvements.

LAWA Capital Project Costs

LAWA is currently involved with capital projects that have combined budgets of approximately$3.64 billion that are grouped into six project “elements”, including (1) Airside, (2) Landside, (3)Utilities and Infrastructure/Central Utility Plant, (4) Terminals, (5) Residential Soundproofing,and (6) Bradley West. Descriptions and the relative budgets for each are described below.

The two organizational units that are most heavily involved in capital development are theLAWA Planning Division and the Airports Development Group (ADG). The process for assessing, approving and implementing development projects typically begins in the PlanningDivision and then progresses through the design phase to construction, overseen by ADG. Thesimplified flow charts on the next two pages illustrate the progression of a development projectthrough LAWA (Exhibit 1).



Introduction

Harvey M. Rose Associates, LLC

8

Exhibit 1 Page 1 of 2 LAWA Development Process

LAWA Planning DivisionLeads developmentand approval

process for Master Plan andSpecific Plan Amendments.

Airport Board of Commissionersadopts plans.

Proposal requestconsidered by LAWACapital Review Team

LAWA Planning Division Developsproject definitions and scope

statements from Board orExecutive directive, or approved

department submittals

YES

LAWA Planning DepartmentDepartment collaborationConceptual design up to 30%Environmental reviewInitial cost estimateProject schedule

Finance Department

Reviews project cost estimate,identifies funding source,ensures availability of funding

and recommends a budget (i.e.,"Definition Package").

LAWADivisionsDevelop and submit business case

justification for capital projectproposals arising from

Board/Executive directive orsolicitation and assessment of

division needs

No

To Page 2

Airport Development GroupCollaborates with the PlanningDepartment on developmentapproach [a] Design-Bid-Build

(DBB), [b] Construction Managerat Risk (CMAR) or [c] Design-

Build (DB).



Introduction

Harvey M. Rose Associates, LLC

9

Exhibit 1 Page 2 of 2 LAWA Development Process



Introduction

LAWA Planning Division

Initial planning functions are conducted by the Planning Division, which prepares the Master Plan, Specific Plan Amendments, Initial Project Design (up to “30%” complete) and Environmental Reviews. The Planning Division’s groups are generally organized by ADGelement, as shown in Exhibit 2, below.

As part of larger reorganization across LAWA during the last five years, the Planning Divisionhas grown from a size of approximately 20 staff to 58 staff, including primarily planners,

engineers and architects. The Division makes use of consultants, as necessary, to assist withtemporary fluctuations in workload and to provide specialist expertise. Currently, the Divisionreportedly includes 10 embedded consultants.

On an ongoing basis, the Planning Division is responsible for receiving requests for capital projects from LAWA departments and providing the requests to LAWA executives for consideration. To accomplish this, on a periodic basis, Planning makes a broad solicitation for requests from LAWA departments and compiles them for executive review. Upon review by the

Capital Review Team, composed of LAWA Deputy Executive Directors, proposal requests areeither rejected or returned to the Planning Division for project definition and development of scope statements. Planning then works with the requesting department to development theconceptual design up to approximately 30 percent complete; conducts an environmental reviewof project impacts; outlines an initial cost estimate; and defines a project schedule. After theFinance Department prepares a “definition package,” composed of the final cost estimate,funding sources and a recommended budget, the Capital Project Policy Committee reviews the

project for approval before oversight is transitioned from Planning to ADG.

Throughout the process leading up to the formal transition of project oversight to ADG, Planningstaff communicate with ADG element engineers to ensure that ADG input is incorporated intothe planning process. Some projects may move from Planning to ADG substantially earlier thanthe 30 percent design stage, depending on project urgency and complexity, and on the type of

project delivery system to be employed.

Airports Development Group

LAWA established the Airports Development Group (ADG) in 2008 as part of a major reorganization of activities related to capital development. The impetus for the reorganizationwas the initiation of the Tom Bradley International Terminal (TBIT) – Bradley Westdevelopment project, with a special emphasis on developing boarding gates that could

d t th l i ft th t i t ti l i h b t ( th Ai b A



Introduction

Exhibit 2LAWA Planning Division Organization

(LAWA Employees and Embedded Contractors)

TOTAL POSITIONS 58

Notes:

1. Unspecified and variable project-based architectural,engineering and technical

services are purchased fromcontractors (e.g., projectengineering and design).



Introduction

Exhibit 3LAWA Airport Development Group Organization

(LAWA Employees and Embedded Contractors)

ADG divides its project work into the following six primary groups known as e lements: Airside;Landside; Utilities and Infrastructure/Central Utilities Plant (CUP) Replacement; Terminal;Residential/Soundproofing; and Bradley West. Each element contains multiple projects and isoverseen by an Element Manager. With the exception of the Bradley West Element, whoseM t di tl t th Di t f ADG ll El t M t t th A i t t

TOTAL POSITIONS 319

Notes:

1. Excludes City Attorney

personnel.2. The Construction Inspection

Unit excludes wo rkload &specialty staff augmentationreceived from:

- DPW Bureau of ContractAdministration

- DGS Bureau of Standards

- On-Call Inspection and Testing Services provided

by three contractors.

3. Unspecified and variable project-based architectural,engineering & technicalservices are purchased fromcontractors (e.g., projectdesign and engineering).

ADG “Interfaces” with LAWAdepartments:

Administration Finance & Budget LAWA Controller Facilities Management Operations & Emergency

Services

Facilities Management Commercial Development Information Management Law Enforcement &

Homeland Security Public Relations & Media External Affairs

See Attachment 1 for general descriptions of each of these divisionsand units.



Introduction

Airside Element – The Airside Element includes development work on and around the LAXairfield, including the construction, reconstruction and rehabilitation of taxi-lanes; runway safety

area improvements; perimeter fence enhancements; and construction of miscellaneous supportfacilities. Additionally, the Airside Element currently includes the pavement management

program for a taxi-lane at Van Nuys.

Landside Element – The Landside Element includes development and improvements on airport property other than the airfield and terminal areas. Current projects include a second levelroadway expansion; coastal dunes improvement project; parking lot site modifications; and thedemolition of structures on recently acquired properties in the Manchester Square and Belford communities surrounding LAX.

Utilities and Infrastructure / Central Utilities Plant (CUP) Replacement Element – The Utilitiesand Infrastructure Element currently includes one project, the CUP Replacement project. This

project will provide a replacement CUP to supply hot water and chilled water to the CentralTerminal Area (CTA); the required chillers, pumps, generators, boilers and piping to produceand distribute the hot and cold water; and, gas turbine driven generators with heat recovery steamgenerators. The project also includes a utility distribution system; demolition of the existingCUP; pump room upgrades; and a facility management and control system.

Terminal Element – The Terminal Element includes development and improvements within theLAX terminals. Current projects include elevator and escalator replacement; fire-life-safetysystem upgrades; cosmetic improvements; explosive detection system replacement; concessionsenabling projects; power system upgrades; and American with Disabilities Act accessibilityimprovements.

Residential/Soundproofing Element – The Residential/Soundproofing Element currentlyincludes two noise mitigation projects, one for approximately 9,400 units surrounding LAX, and one for approximately 1,049 units surrounding Van Nuys Airport.

Bradley West Element – A stand-alone elemen t that constitutes approximately 52 percent of thecost of the entire capital development program 8, the Bradley West Element is the centerpiece of LAWA’s capital expansion work. The two primary projects are:

• Bradley West Gates:

The planned configuration of concourses will allow for nine Airbus A380 gates; fiveAirplane Design Group gates; and three narrow body gates. The work will also consist of constructing approximately 540,000 square feet of space for passenger services, building

b ildi i i li i i b k f



Introduction

• Bradley West Core Improvements:

The existing Federal Inspection Service (FIS) facilities in TBIT have been improved, and 693,000 square feet of new departure level space will be developed to include new

passenger amenities and an Integrated Environmental Media System (IEMS).Administr ative offices will also be developed. Scheduled to be substantially completed inMay 2013 9, the Bradley West Gates and Bradley West Core projects will provide anentirely new profile for LAX and will allow the airport to accommodate nine largeaircraft that currently cannot be serviced at any existing gate at LAX. Theseimprovements are intended to attract substantially larger numbers of high-end international passengers to LAX. In addition to the Gates and Core projects, the BradleyWest Element also includes the following projects: traffic mitigation; east ramp and concourse demolition; art in public places; and the New Face of the CTA, Phase I

projects.

In total, the elements employ approximately 120 engineers, plus additional support staff. Similar to other divisions within ADG and LAWA, these staff include a mix of LAWA staff and consultants. The mix of consultant and LAWA staff fluctuates and is currently estimated byADG to be approximately 60 percent consultant and 40 percent LAWA staff). Programmanagement services are provided by AECOM, Inc., and Paslay Management Group (PMG)

provides a small number of leadership positions within ADG, including the Owner’sRepresentative position, which reports to the Board of Airport Commissioners through theLAWA Chief Executive Officer.

As of September 30, 2012, the total current budget of all of the projects within the elements wasapproximately $3.64 billion, of which $1.84 billion had been incurred to date. As discussed above, and shown in Table I.3, the Bradley West Element constitutes $1.89 billion, or 52

percent, of the total program budget.



Introduction

program control function was separated from the program management responsibility in order toestablish greater controls and accountability.

One key role of the Program Control group is the review and approval of project change orders.The vast majority of change orders result in increased payments to contractors.

As of September 30, 2012, the cumulative executed and approved change orders for the BradleyWest element totaled $191,768,113, or 15.4 percent of the total base combined contract amount.These figures, including a break-out of the Gates project and the Core project, are shown inTable I.4.

Table I.4Cumulative Bradley West Element Change Orders as of 9/30/12

Source: Airports Development Executive Management Program Status Report, September 30, 2012.

Construction Inspection Division – Another primary ADG organizational unit is the ConstructionInspection Division, which is responsible for performing quality assurance activities in order toensure contractor compliance with quality standards as outlined in the scope of services specified in each contract.

Other Key LAWA Departments

While ADG and the Planning Division were the primary subjects of the audit review, severalother LAWA entities play key roles in the capital development process and were reviewed during the audit process. These include Finance & Budget, Facilities Management Group,Operations, Commercial Development, Comptroller, and the Procurement Services Division. Inaddition, the roles, responsibilities and authorities of the executive office and Board of Airport

Commissioners were examined during the audit.

Summary of Benchmarking Survey

A benchmark survey was conducted of seven large municipal owned U S airports as well as

Executed ApprovedTotal Change

OrdersBase Contract

Value

Total ChangeOrders % of

Contract ValueBradley West Gates 82,232,867$ 4,148,704$ 86,381,571$ 621,550,000$ 13.9%Bradley West Core 89,938,086$ 15,448,456$ 105,386,542$ 622,600,000$ 16.9%Total Bradley West 172,170,953$ 19,597,160$ 191,768,113$ 1,244,150,000$ 15.4%



Introduction

Survey Respondent Selection Process

Survey participants were selected based on an analysis of a number of factors, including (1) 2010 – 2011 change in annual passengers, (2) 2010 – 2040 projected change in annual enplanements,(3) 2010 – 2011 change in annual movements, (4) five-year projected development costs, (5)

portfolio of capital projects, (6) location, and (7) input from LAWA management. The sevenairports in the final group were determined to best match the characteristics of the Los AngelesInternational Airport (LAX) within criteria defined for this audit. Of the seven invited airports,all but one provided a response. The six respondents are listed below:

• John F. Kennedy International Airport (New York)• Miami International Airport• Dallas-Fort Worth International Airport

• McCarran International Airport (Las Vegas)• San Francisco International Airport• Hartsfield-Jackson Atlanta International Airport

For the limited survey of City departments, the audit team considered the scale of capital projectsand contracting activities undertaken by various departments. The Bureau of Engineering,Bureau of Sanitation, Port of Los Angeles/Harbor Department, and the General ServicesDepartment were invited to participate. The Bureaus of Engineering and Sanitation and the Port

of Los Angeles responded to the survey.

A survey questionnaire was developed by the audit team, with input from LAWA management,and administered to the selected airports and the City departments via telephone and internet.The airport and City department survey instruments are provided in Appendices B and C,respectively. The complete sets of airport and City department responses are provided inAppendices D and E, respectively.

Highlights of Key Response Patterns

The six airport respondents provided general information regarding the processes surroundingthe capital planning process and implementation at the respective airports. While differences inairport leadership and governing structure accounted for several notable differences in responses,there were consistencies, which appeared to reflect industry standards.

• While all airports had a method for prioritizing capital projects, two airports specificallyreferenced the Airport Cooperative Research Program (ACRP) Report 49: Collaborative

Airport Capital Planning Handbook as the choice methodological guide for formalizing thecapital planning process. ACRP, overseen by the Transportation Research Board (TRB) of the National Academies and sponsored by the FAA, is an applied research program thatattempts to address industry problems through the research of and the development of



Introduction

o Design-Bid-Build was listed by respondents 83.3 percent of the time, making it themost frequently used delivery model for airport construction projects;

o Airports listed Design-Build in about 20.8 percent of scenarios;o Construction-Manager-At-Risk was only listed by three of the six respondents as a

possible delivery model, and typically it appears to only be employed for large-scale projects.

• Three of the six airports reported employing structured value engineering.

• All airports responded that construction engineering quality assurance staff has the ability tostop payment to contractors.

• All airport respondents reported using a contingency on construction projects, though onlyone of the six airports noted there was not a standard contingency applied across the board for projects, rather it was something determined based on the project. Five of the airportrespondents reported contingencies of between seven and ten percent.

The Los Angeles City department respondents were the Department of Public Works Bureaus of Engineering and Sanitation and the Port of Los Angeles. These responses also displayed notableconsistencies.

• All respondents reported using value engineering.

• All respondents reported quality assurance employees, i.e. inspectors, engineers, etc., are ableto stop payment to contractors.

• All respondents reported maintaining change order tracking mechanisms.

• Like the airports, the City departments were asked to choose the applicable delivery modelsfor a selection of three different construction project categories, which included facilityconstruction projects, renovation/rehabilitation projects, and other projects.

o The Port of Los Angeles only reported using Design-Bid-Build on the facility

construction projects and noted no other dominant model for the other categories.o The Bureaus of Engineering and Sanitation listed Design-Bid-Build for all the categories

with the caveat that a Construction-Manager-At-Risk model may be used for large-scale projects.



Introduction

The first major challenge stemmed from a history of dormant development at LAX. When therecent set of major construction projects began at LAX in 2007, it had been approximately 20

years since any substantial development activity had been carried out by LAWA. BOACdocuments from the time stated, “Today LAX suffers from the combined afflictions of physicaldecay and design inadequacy.” After decades of construction inactivity, LAWA lacked theinstitutional knowledge and capacity to design and implement a major capital improvement plan.

The second major challenge was the aggressive schedule required for the completion of theBradley West Core and Bradley West Gates projects. Urgent market pressures to accommodateinternational carriers with contact gates for large new aircraft, coupled with interest voiced by

the City’s elected officials and the Board of Airport Commissioners to complete the projectsexpeditiously, required LAWA to develop capacity and complete construction in an extremelyshort timeframe. Especially given the lack of recent experience in capital programming and theconsequent need to contract many of the design and management functions to consultants, theaggressive schedule posed an immense challenge.

Finally, LAWA has carried out all of this development activity while contending with lawsuitsand a complex set of stakeholders interests. As a result of a 2006 legal settlement betweenLAWA and several cities surrounding the LAX area, the County and a non-governmentalorganization, LAWA has been subject to limitations on its passenger and gate activity whichinclude perceived limits on its ability to plan for increased activity. In addition, LAWA has

proceeded with construction activity while simultaneously ushering amendments to its Master Plan through the complex environmental review process.

Under these pressures, LAWA has succeeded in building a strong and effective organization,with an adequate internal control system, while simultaneously implementing the largest publicworks project in the history of the City of Los Angeles. While this report contains importantfindings and recommendations for improvement, the audit team was generally impressed withthe professionalism and performance of the members of the LAWA organization. LAWAleadership should be credited for building an organizational culture of distinction whileachieving the aggressive schedule that was driven by market demand and the direction of Cityelected officials.

AcknowledgementsHarvey M. Rose Associates, LLC would like to thank the management and staff from the manyLAWA divisions that participated in this performance audit. In particular, we would like to thank those individuals in the Airports Development Group who took considerable time to discussLAWA’ d id h d t il d d t d th i f ti t th dit t F



1. Value Engineering• The Federal Aviation Administration (FAA) requires that structured Value

Engineering processes be used for certain airport projects that are funded withfederal Airport Improvement Program (AIP) grants. LAWA relies on AIP andother federal grants for various airfield and terminal improvements, amountingto $75 million and $62 million in 2011 and 2012, respectively.

• Although not mandatory, the FAA also recommends that Value Engineering“guidelines and specifications” be followed for most large capital projects,

including those funded with Passenger Facility Charge (PFC) revenue. As of June 30, 2012, LAWA had received authorization from the FAA to spend nearly$2.8 billion in Passenger Facility Charge revenue for capital projects related toterminal development, noise mitigation, airfield development, land acquisitionand aircraft rescue and firefighting vehicles.

• Design and construction industry best practices recommend the use of ValueEngineering at the 30% design phase, and federal advisories recognize that by

employing Value Engineering principles at the earliest stages of a project, theopportunity for influencing final costs is greatly increased. Distinct from ValueEngineering, Cost Engineering is more typically emphasized by LAWA, withmore focus on evaluating initial construction cost, rather than evaluating thelife-cycle cost implications of design and construction decisions.

• LAWA has not formalized a structured Value Engineering process, althoughsome important elements exist, and efforts reportedly are being made to

strengthen the procedural foundation and approach to evaluating project designand materials alternatives using a structured Value Engineering process.Nonetheless, the current LAWA process may violate federal requirements forsome AIP funded projects.

• LAWA should prepare an assessment of current practices to ensure that designreview and Cost Engineering efforts have satisfactorily met FAA expectationsregarding the use of structured Value Engineering for AIP funded projects.

Based in part on the results of this analysis, LAWA should establish, refine andbolster policies and procedures necessary to ensure that a structured ValueEngineering process is established at LAWA and extended to developmentprojects funded from other sources of income, including PFC revenue. Byimplementing these recommendations, LAWA would be more assured that itwould be in compliance with FAA regulations for AIP funded projects and

Section 1: Value Engineering




safety” (Federal Acquisition Regulations, Part 52.248). The U.S. General ServicesAdministration (USGSA) states that, “The primary emphasis is placed on obtaining maximumlife-cycle value for first-cost dollars expended within project budgets. Improved value can berepresented in a number of different ways depending upon specific project needs. This would include improved function, flexibility, expandability, maintainability and/or aesthetics, as well asreduced life cycle cost (LCC).”

Value Engineering has been an important process for ensuring that organizations achieve thegreatest value for cost since the 1940s. Formal Value Engineering requirements and processeswere developed and have been institutionalized at the federal level since the 1960s and are nowconsidered a best practice for capital projects in both the public and private sectors. Federalregulations, including Federal Acquisition Regulations Part 52.248, Federal AviationAdministration Advisory Circular Number 150/5300-15A, the Code of Federal Regulations and other directives require the use of Value Engineering on all projects that are funded with federalgrants. Standards are defined for the construction industry, generally, and certification isavailable through the Society of American Value Engineers (SAVE).

Some Value Engineering Principles Are Informally Applied at LAWA

In 2008, the Federal Aviation Administration (FAA) issued Advisory Circular (AC) Number 150/5300-15A to provide “guidance on using value engineering (VE) on a irport projects funded under the Federal Aviation Administration’s . . . Airport Grant Program”. 1 This AC states that,“In general, use of this AC is not mandatory. However, use of the AC is mandatory for all

projects funded with federal grant monies through the Airport Improvement Program (AIP) and with revenue from the Passenger Facility Charge (PFC) Program.” In 2012, the FAA cancelled the requirement that a structured Value Engineering process be used on PFC funded projects, but

continued to recommend following “the guidance and specifications” included in the AC.LAWA relies on federal AIP and other grants for various airfield and terminal improvements,amounting to $75.2 million and $62.4 million in 2011 and 2012, respectively. In addition, as of June 30, 2012, LAWA had received authorization from the FAA to spend nearly $2.8 billion inPassenger Facility Charge revenue for capital improvement projects related to terminaldevelopment, noise mitigation, airfield development, land acquisition and aircraft rescue and firefighting vehicles.

Nonetheless, LAWA has not formalized a structured Value Engineering process into its major development processes. Instead, several component features of Value Engineering independentlyexist and have been implemented as the development projects of the past few years have

progressed. For example, LAWA has developed a Design and Construction Handbook in anattempt to standardize the types of equipment and systems installed at the airport For example





LAWA intends to standardize escalators to be installed in the renovated terminals to reduce life-cycle costs of maintenance and repair. In another example, on the Central Utility Plant (CUP)

project, a major objective was to design a facility that would provide long-term operating savingsand lowered energy usage. Generally, the Facilities and Maintenance Group at the airport has

been tasked with assessing the “total cost of ownership” when participating in design and construction projects.

In addition, some of the more significant efforts undertaken by LAWA for the Bradley WestGates and Core projects have included the following:

• As part of the master planning process, the architectural firm of Fentress Architects wasretained to develop the conceptual framework for LAX development. As part of that process,various alternative concepts were explored and presented to City and LAWA officials,stakeholders (e.g., the airlines) and the community. Through this process, key aesthetic and design decisions were made that, in part, would eventually drive the cost of Bradley WestTerminal development and other future projects. However, no structured analysis of lower life-cycle cost alternatives were conducted by an independent third party, although theConstruction Manager at Risk (CMAR) recommended Cost Engineering alternatives thatwould limit improvements to Level 5 and Level 6 of the Core to the minimum standardsrequired for structural integrity, and lowering the ceiling height by 10 feet 6 inches. Thesesuggested design changes were projected to save approximately $11.8 million in initialconstruction costs, but all were rejected by LAWA, the airlines and the design team.

• During the design phase, a Program Management Team (PMT) was established to evaluate proposed design attributes, including materials selection, mechanical systems, long-termmaintenance and other features that would drive the cost of the facility. Most decisions were

informal. For others, analysis reportedly was conducted to determine the cost savings thatmight result from design modifications. As an example, decisions were made based on ananalysis of the initial cost and life-cycle cost of installing a centralized pre-conditioned air system for new gates, rather than installing individual air conditioners at each jetway. It wasreportedly found that the centralized system, while more costly to acquire and install, would have a longer useful life and less costly life-cycle cost than installing individual air conditioners at each gate.

• LAWA has also established interdisciplinary teams for each of its capital program elements,which include representatives from the various operating departments, including Operations,Facilities and Maintenance, and others. These teams are intended to facilitate projects and collectively make decisions regarding design and construction alternatives throughout the

process. However, discussions with element managers and operating departmentrepresentatives suggest that participation on the interdisciplinary teams has been variable and




g g

• LAWA has adopted LEED Building Standards in response to a 2006 “Greening LAX” policyadopted by the City Council. Accordingly, the design of the building, as well as water reuseand on-site recovery and recycling programs during construction have reduced fuelconsumption, waste disposal and related cost. As LAWA goes through its design process,LEED Building Standards are employed to identify opportunities for energy efficiency, wastereduction and other alternatives for reducing environmental impacts and the future cost of operations and maintenance (e.g., environmental control systems).

• The Bradley West CMAR (i.e., Walsh Austin Joint Venture) conducted some Cost and ValueEngineering during the pre-construction and construction phases of the project. There isevidence that the PMT received proposals from a joint effort by both the architect, FentressArchitects, and the CMAR on “Value Engineering” opportunities, amounting toapproximately $94.0 million in savings. Of this amount, LAWA executive managementaccepted approximately $31.7 million worth of proposed changes that would produceconstruction savings. However, a review of the line-item proposals indicates that most wereCost Engineering proposals aimed at reducing construction cost but not necessarilyconsidering life-cycle cost to the airport for operations, maintenance and repair. Thedifference between Value Engineering and Cost Engineering is discussed below, withexamples of selected CMAR proposals that lead us to the conclusion that most were CostEngineering and not Value Engineering in nature. As will be discussed further, below, noformal Value Engineering report has been produced by the CMAR.

LAWA More Successfully Implements Cost Engineering Principles

Distinguished from Value Engineering, Cost Engineering has been a construction industry best practice for many years. A narrower discipline, cost engineers analyze design, construction and materials alternatives with a goal of reducing the total cost of construction. This is an ongoing

process, integrated into both the preconstruction and construction phases of a project. It is neither structured (i.e., many alternatives are identified informally, and not until construction is wellunderway and opportunities to modify design or construction standards become apparent); nor,does it necessarily consider operational, maintenance and repair impacts or other life-cycle costs.

LAWA representatives stated that it employs Value Engineering principles on “approximately90%” of all projects, but that the process has not been formalized and reports are generally not

produced. Instead, Value Engineering findings are integrated into final design plans and presented to the FAA for review and approval, when required. These final plans and communications with the FAA do not necessarily include an affirmation from LAWA that ValueEngineering practices were employed. However, in the judgment of our technical experts, the useof the term “Value Engineering” is a misnomer. As mentioned above, these efforts, whileeffective at producing alternatives for reducing construction costs do not necessarily produce




For example, among the proposals produced from the CMAR review of the design plans for theBradley West Gates Project, were several that proposed replacing Terrazzo flooring with carpetin some major passenger circulation areas. While the construction savings was potentiallysignificant, amounting to $2.0 million in one area alone, there is no evidence in the record thatthe shorter useful life of carpet in a heavily trafficked area, and resulting future maintenance,repair and replacement costs, were analyzed or taken into consideration. Other examples includeremoving escalators and replacing them with staircases, modifying structural design in non-critical areas of the terminal, narrowing corridors, and using less costly materials. While each of these may have been effective alternatives for reducing the cost of construction, there is noevidence that analysis of the long-term operational and maintenance costs, and/or the impacts onthe value of building aesthetics and customer experience, were conducted.

In another example, during the initial conceptual design phase, certain aesthetic features of theBradley West Core were endorsed by City officials. Included was the concept of constructing aGreat Hall and a complex wave-like roof structure, both of which would be distinguishingfeatures of the building. While these features and associated finishes will make an impressivestatement about the City of Los Angeles, it does not appear that a comprehensive analysis wasconducted during early project phases to determine the life-cycle cost of incorporating thesefeatures into the design. Consequently, a review of Change Order records maintained by LAWAincludes a March 2011 authorization to purchase window washing equipment for the BradleyWest Core costing $607,000. Further, during interviews, we were advised that LAWA is onlynow evaluating the logistics and associated cost implications of cleaning and repairing windowsin the Great Hall and elsewhere in the terminal during terminal operations, which will becomplicated due to floor to ceiling height, limited ceiling or rooftop access points, and the

potential need to move equipment into the facility during periods when travelers will be present.Had an independent Value Engineering study been conducted, design features could have been

considered that could have potentially mitigated these difficulties.

Value Engineering Contract Provisions Are Not Effectively Exercised

FAA Advisory Circular No. 150/6300-15A, Subsection 7 states that, “VE, as it relates toengineering and the design of projects, is most effective when it is accomplished early in thedesign phase because ideas are still conceptual and the sponsor and designer can be flexible withdecisions without incurring delays in the project schedule . . . Once major decisions (those

involving high cost items) are made, the opportunity for influencing final costs is greatlyreduced. . . . Value engineering studies for airport grant projects should be conducted when thedesign is about 30 percent complete.”

Reportedly, most design and preconstruction contracts at LAWA include provisions for ValueEngineering studies to be performed For example Section 01 22 00 Subsection 1 of both




labeled ‘Value Engineering’ and included in the VE study unless the action includes identifyingthe function, using creativity to develop multiple alternatives, and selecting the alternative thatwill perform the required function at the lowest total cost considering performance, reliability,quality, and maintainability.” Nonetheless, no such study or studies were ever requested byLAWA or prepared by the CMAR during the preconstruction or construction phase. In addition,we were advised that Value Engineering exercises are typically conducted “as part of the design

process, through meetings and discussions, and so specific reports or studies aren’t prepared.”

LAWA Value Engineering Does Not Conform with FAA Guidelines

FAA Advisory Circular No. 150/6300-15A, Subsection 8 and Subsection 9 describe very specificrequirements to accomplish Value Engineering on a project. Specifically, the FAA identifies thefollowing “five characteristics that are essential to its success”:

a. VE relies on the use of many widely accepted analysis concepts and techniques.

b. VE is a systematic process and follows an eight step job plan.

c. VE focuses on identifying and analyzing the function the project component(s) or activityfulfills.

d. VE utilizes creative techniques, especially “brainstorming”.e. VE is performed by a team not associated in any way with the design team and draws

upon the individual and collective viewpoints, experience and knowledge of its members.

As part of the process, Value Engineering follows a structured “VE Job Plan” that systematicallyselects the projects or components to be evaluated; ensures the composition of a team that iscollectively competent to perform the assessment; goes through structured information gathering,

speculation, evaluation and development phases; and, develops formal recommendations and approvals by the sponsor. After implementation, the FAA suggests that audits be conducted “toensure that desired results have been attained.”

LAWA’s process does not meet these minimum FAA guidelines and specifications. First, the processes followed by LAWA are not systematic and do not follow the recommended eight step job plan. LAWA ADG managers stated during interviews that, while they believe ValueEngineering activities are performed, much more work needs to be done to elevate LAWA

standards of compliance with FAA guidelines and specifications. Further, as discussed previously, it does not appear that LAWA focuses its analysis on the functions that thecomponents or activities fulfill. Instead, based on the Value Engineering log maintained by thedepartment for the Bradley West projects, most of the emphasis is placed on reducing the cost of construction instead of reducing the life-cycle cost of the functions that the components fulfill.L l V l E i i d b f d b i d d hi d i ll




LAWA Should Structure a Compliant Value Engineering Process

Representatives of LAWA suggest that the absence of a formalized and structured ValueEngineering process may be the result of several factors:

1. No structured Value Engineering process was in place, nor was the in-house skill setavailable to develop or coordinate a comprehensive Value Engineering process when major capital development activity commenced in 2007. This reportedly occurred because theorganization had approximately 20-years of deferred maintenance and no major construction

projects had been undertaken for a longer period.

2.

The condition of the airport and market pressure to modernize its facilities for largeinternational aircraft required that steps be taken to expedite the design, preconstruction and construction stages of the project, and so priorities were placed on maintaining an aggressiveschedule and other more critical aspects of the development process.

3. Multiple projects at the airport have been undertaken simultaneously and all have been “fast-tracked”, so formalized Value Engineering studies have generally not been conducted.Interviews with key engineering managers within ADG indicate that internal practices need to be formalized, refined and bolstered.

The federal government provides minimum standards for ensuring the effectiveness of a ValueEngineering process. First, FAA Advisory Circular No. 150/6300-15A, Subsection 12 allowstwo approaches for obtaining Value Engineering services: (1) by securing the services of acontractor specialty firm; or (2) by using internal staff who collectively have the skills necessaryto perform Value Engineering analysis. In both instances, personnel must meet the training and certification standards established by the Society of American Value Engineers (SAVE). Inaddition, Subsection 14 states that if the Value Engineering is to be performed by its own staff, a

proposal must be submitted to the FAA for approval prior to the start of any work. Appendix 2,citing excerpts from the Code of Federal Regulations, Subpart 48.2, Section 48.201, requires thatan explicit contract between the sponsor and the contractor be approved by the federalgovernment and that periodic progress reports be submitted to the federal contracting officer.

Although requested, LAWA was unable to provide copies of contracts, FAA approval letters or Value Engineering studies, as evidence that it has complied with the guidelines and specifications included in FAA Advisory Circular No. 150/6300-15A. As a result, LAWA maynot conform with FAA guidance, despite the fact that many positive actions have been taken bythe organization to perform cost engineering and other valuable exercises as it proceeds throughthe early stages of project design and preconstruction review.

LAWA management does not have assurance that it is achieving the greatest value for the life-




ConclusionsLAWA has successfully implemented component features and processes that apply ValueEngineering principles. However, it has not implemented a structured process or taken steps toensure that Value Engineering processes are uniformly applied on every major project. Further,LAWA has not implemented standard procedures or practices that ensure that formal ValueEngineering studies are performed for Airport Improvement Program projects.

Importantly, LAWA does not have assurance that it is achieving the greatest value for the cost todevelop the airport. The impact from the lack of a structured Value Engineering process could besignificant, since LAWA is presently in the midst of a massive development project that isexpected to cost in excess of $6 billion over the next decade.

RecommendationsThe LAWA Executive Director should:

1.1 Direct staff and request legal counsel to prepare an assessment of past practices used on

LAWA development projects, to ensure that design review and cost engineering effortscan satisfactorily meet FAA expectations regarding the use of structured ValueEngineering.

1.2 Develop and establish policies and procedures that ensure that a structured ValueEngineering program is implemented at LAWA.

Costs and BenefitsLAWA would incur costs to implement a structured Value Engineering program from either assigning personnel to the function or retaining consultants. However, through a structured

process, LAWA could potentially achieve greater life-cycle cost savings and be better able todemonstrate to the public and elected officials that it is cost-effectively implementing projects.



2. CMAR Contractual Relationship

• LAWA chose to use a Construction Manager at Risk (CMAR) project deliverymethod for the Bradley West Core and Gates projects, which had never beforebeen used by the department. While the analysis of the benefits of using theCMAR model supported management’s decision to move forward in thismanner, certain circumstances and project expectations may have preventedLAWA from realizing the model’s full benefits. For example, a staff report tothe Board of Airport Commissioners supporting the use of CMAR as the projectdelivery method for the Bradley West Core and Gates projects noted the benefitsof having the construction manager involved in the design process. However, amajority of change orders have resulted from design changes, owner bettermentrequests, and/or scope expansion, and plan errors despite the CMAR’s access todesign plans in the pre-construction phase.

• The CMAR contract agreements for the Bradley West projects appropriatelyinclude total contract amount caps, which are the aggregation of ComponentGuaranteed Maximum Prices for various components of the projects. However,total expected costs may exceed these contract amounts due to the volume of change orders resulting from unknown conditions, owner initiated designchanges and other factors. As a result, the risk to the CMAR may have beendiluted and the incentives for the CMAR to deliver the project under thecontract amount, or the maximum guaranteed price, may have beencompromised, since the CMAR can charge management fees on most costs.

• Further, the CMAR agreements for the Bradley West projects do not containsufficient controls, including sanctions, to ensure contractor performance in keyareas. For example, although the CMAR contracts require performance bondsor 10% retention for each progress payment claimed during the ConstructionPhase, there are no specifications that directly address CMAR performancerelated to its Quality Control or Change Management responsibilities. AlthoughLAWA expects to continue with a high level of construction activity for the nextfive to ten years, it has not initiated any evaluation of the efficiency and

effectiveness of the CMAR project delivery method, as implemented for theBradley West projects, to decide whether it is appropriate or should be modified.

• LAWA should conduct a post-project assessment of the costs and benefits of theCMAR model and compare it to other possible alternatives; evaluate the CMARmodel as implemented for the Bradley West projects to identify the need for

Section 2: CMAR Contractual Relationship



Several Project Delivery Methods Exist for Large Capital Projects

According to experts in the International Airport Management industry, Construction Manager atRisk (CMAR) is an alternative capital project delivery model where a construction manager isengaged to be directly responsible for project construction. Under this model, the CMAR -- and not the owner -- holds the contracts with individual construction contractors (or self-performs theconstruction or a portion of the construction) and oversees overall construction activities for afixed price. Therefore, the CMAR is not just responsible for managing construction schedulesand activities, but also assumes the risk for potential cost overruns. Accordingly, CMAR contracts should clearly assign risk to the parties, describe the basis for ensuring contractor accountability and establish sanctions for CMAR non-performance.

The other two primary delivery models are Design-Bid-Build (DBB) and Design-Build (DB).

• Under the more traditional DBB model, the owner or developer retains an architectural and engineering firm to design the project and prepare construction documents. The owner thentakes responsibility for the management of the project by directly hiring the constructionfirms and coordinating the project schedule.

• Under the DB model, the owner or developer hires a single firm to design and build the project with construction commencing before designs are complete.

LAWA has used both the D-B-B and D-B models for other projects. For example, (a) mostrunway and taxi-lane projects use the DBB model; and, (b) the Central Utility Plant (CUP)

project uses the DB model.

When considering various delivery models, the primary owner objectives should be cost, quality,and schedule. More specifically, these goals should consider:

1. Final Cost2. Lifecycle Cost3. Schedule Duration4. Owner Control5. Need for Expertise from Specialists6. Owner Risk

7. Litigation Risk

8. Cost and Schedule Growth9. Cost of Design Changes10. Degree of Design Completion and

Construction Start11. Prescriptive vs. Performance

Specification

12. Distribution of ResponsibilityGenerally, owner risks of extending the schedule and increasing costs is lowest under a DBmodel, higher under a CMAR model, and highest under a DBB model. However, owner controlover design detail and ability to make late changes with minimal impact to cost or schedule isgenerally highest under a DBB model lower under a CMAR and lowest under a DB model




Exhibit 2.1Schedule, Cost and Owner Involvement

Relationships for Three Major Project Delivery Methods

Source: Extracted from Airport Owners Guide to Project Delivery Systems, published by the Airports Council International – NA, Airports Consultants Council and the

Associated General Contractors of America (October 2006)

Evaluation and Selection of Delivery Model Alternatives

LAWA chose to use a CMAR project delivery method for the Bradley West projects, which had never before been used by the department. By all accounts, the primary driver for choosing thismodel was the desire by LAWA and other City officials for an aggressive construction schedule.Therefore, LAWA’s choice of a CMAR model reflected its priority to place schedule over cost,while retaining some ability to affect project design as the project moved through parallel designand construction processes.

The extent to which LAWA management analyzed the potential risks of employing the CMAR




In October 2008, the LAWA Board of Airport Commissioners approved a resolution thatauthorized the use of either the Construction Manager at Risk or Design-Build as alternativedelivery systems. The related staff report to the Board of Airport Commissioners gives a general

description of the CMAR structure and its purported benefits of: (1) allowing LAWA to maintaincontrol of the design; (2) placing the construction manager “at risk” to deliver the project at theagreed maximum guaranteed price; and (3) a shortening of the entire schedule by allowing theconstruction manager to begin construction in packages as design progresses. Further, the staff report noted that “by having the construction manager participate in the design process, LAWAwould gain the benefit of the firm’s construction experience and knowledge resulting in a morecost effective and ‘constructible’ design.” However, the staff report did not identify or acknowledge any potential risks of utilizing the CMAR model and strategies for reducing thoserisks.

Requiring an ordinance change, the Board requested and the City Council approved changes toCity codes that permitted this action. In the staff report to the Board, it was determined that theBradley West projects could be completed approximately five to seven months earlier using theCMAR model rather than the more traditional DBB.

An April 2009 staff report to the Board of Airport Commissioners for the Bradley West GatesPre-Construction contract with the CMAR did not include a robust discussion of the costs,

benefits or risk of using this model. Rather, the staff report stated that using a DBB model would “delay the January 28, 2012 required completion of the Bradley North Gates.” The reportcontinued to state that, with the Design-Build delivery model, “the owner relinquishes a largedegree of design control . . . which is not recommended on a project like the Tom BradleyInternational Terminal Modernization, or its components, given the complexity of the project.”There was no discussion of the method of implementation, including how potential risks of theCMAR model would be addressed, or of the costs and benefits of other, hybrid delivery models.

The October 2008 staff report noted that LAWA would negotiate and authorize a guaranteed maximum price on a “package by package basis accumulating to a final overall Guaranteed Maximum Price” and the final agreement, and its associated Construction Services Optionamendment would include the term “Aggregate Guaranteed Maximum Price” (AGMP).

The actual pre-construction services agreement defined this term as:

The total not-to-exceed amount payable by LAWA to the CMAR for complete performance of theWork based on the incremental addition of each [Component Guaranteed Maximum Price or]CGMP to the Contract.. If the Cost of the Work exceeds the Aggregate Guaranteed MaximumPrice, the CMAR guarantees to complete the Work at no additional cost to LAWA.

However during the course of our audit LAWA representatives have stated that this term is not




Bradley West Has Incurred a Large Volume of Changes, Despite theCMAR’s Access to Design Plans in the Pre-Construction Phase

As previously mentioned, the October 2008 staff report to the Board of Airport Commissionersrecommending approval of the CMAR model noted that “by having the construction manager

participate in the design process, LAWA would gain the benefit of the firm’s constructionexperience and knowledge resulting in a more cost effective and ‘constructible’ design.”However, a majority of change orders resulted from design errors, owner betterment requests,and design changes. According to ADG reports, the breakdown of the Bradley West projectchange order categories, by proportional dollar amount, are:

Design Evolution 32.7%

Owner Betterment 29.1%

Document Correction 23.4%

Field Conditions 10.7%

Code Requirement 4.1%

Based on these statistics, only 14.8% of the change orders were attributed to unknown field conditions or unanticipated changes in building codes. The remaining 85.2% were attributed todesign changes, owner requested betterment and/or scope expansion, and plan errors. ADG staff has noted that some, but not all, of the design deficiencies are the result of the project’saggressive schedule and complexity. While the project architects and engineers are required tocarry $5 million in Errors and Omissions insurance per claim, final determination of potentialliability is being deferred until the project is completed.

As generally understood in the construction industry and as described in the October 2008 staff report to the Board of Airport Commissioners, CMARs are required to deliver a project within a

prescribed schedule and under a Guaranteed Maximum Price (GMP), which provides anincentive to minimize costs because overages for stated work above the GMP are to be borne bythe CMAR while savings under the GMP would be retained by LAWA. The CMAR contractagreements for the Bradley West Core and Gates projects included Component Guaranteed Maximum Prices (CGMPs), which together accumulate to final overall Guaranteed MaximumPrices (also referred to as the Contract Amount in the Construction Services Optionamendments) for the Bradley West Core and Gates projects. These contract amounts are subjectto change order authority up to project contingency amounts of $66.7 million for the Core projectand $61.4 million for the Gates project. Increases in project costs as a result of change ordershave brought the total contract costs closer to the combined contract authority (the contractamounts and contingency amounts) Although we requested total cost forecasts that are prepared


h h b b b l b f h d h h l



these projects have been subject to a substantial number of change orders, which may result inLAWA exceeding the contract and contingency amounts.

As shown in Table 2.1, below, there were 1,154 closed change orders totaling $105,386,542 inchanges for the Bradley West Core project and 1,897 closed change orders totaling $86,381,571in change orders for the Bradley West- Gates project as of September 30, 2012. This activity issignificant, since it averages over 127 monthly change orders, amounting to additional costs of nearly $8 million per month over the approximately two year period of construction.

Table 2.1Bradley West Change Order Volume As of 9/30/12

ProjectNumber of Closed

Change OrdersNumber of Change OrdersIn Process/Under Review

Dollar Amount of Executed and

Approved Changes

Bradley West Gates 1,897 669 $86,381,571

Bradley West Core 1,154 729 $105,386,542

BW Total 3,051 1,398 $191,768,113 Source: Bradley West Gates and Bradley West Core Project Management Dashboard Reports, September 30, 2012

Under the pre-construction and construction services agreement, the CMAR for the BradleyWest project compensation is determined using three methods: (1) direct cost reimbursement, (2)overhead, and (3) a CMAR fee. The CMAR may charge a fee of 3.95% (Core) and 5.90%(Gates) for all subcontractor and consultant personnel costs, which supplements reimbursementsfor the CMAR’s direct costs and the mark-up on all costs for overhead.

The CMAR had access to the design documents during the RFP process and for approximatelyone year through the pre-construction phase, during which time was charged for pricing theconstruction components. ADG management and CMAR representatives state that it would have

been more beneficial for the CMAR to have been involved earlier in the design stage to moreeffectively identify the need for design modifications, but this was difficult because of theaccelerated schedule. Nonetheless, this preconstruction involvement, beginning in June 2009when the Bradley West Gates pre-construction agreement was executed with a one year term,

provided a significant period of time for the CMAR to identify design flaws and errors in theconstruction documents.

CMAR May Have Disincentive to Minimize Change Order Costs

Our review of processes for the Bradley West Gates and Core projects found that LAWA project


th f t th t th CMAR i b i t d f it di t d t i di t t i t d



the fact that the CMAR is being compensated for its direct and most indirect costs associated with the projects (as defined by Federal Acquisition Regulations, or FAR, Part 31).

As stated earlier, the CMAR is compensated a 3.95% and a 5.90% management fee on Sub-Contractor/Consultant personnel costs for performing services on the Core and Gates projects,respectively. Although management fees of this nature are common in CMAR contracts, becauseCMAR fees are to be applied to all personnel costs – including additional costs resulting fromchange orders – there may be a disincentive for the CMAR to minimize consultant and subcontractor expenses.

The CMAR agreements for the Bradley West Core and Gates projects do not contain sufficient

controls, including sanctions, to ensure adequate contractor performance. Although the CMAR contracts allow for the posting of a performance bond or the use of a 10% retention on each

progress payment during the Construction Phase until work under specified components has beencompleted and accepted by LAWA, there are no specifications that directly address CMAR

performance as it relates to Quality Control or Change Management. Further, although somesections of the agreements specify that work should “conform to the highest professionalstandards for the construction industry” and that “only competent workers shall be employed onthe work,” there are no measurement controls in place to enforce these standards.

LAWA Intention to Evaluate the CMAR Model is Unclear

LAWA documents establish a high level of activity for the next five to ten years based onexisting plans for a mid-field satellite concourse, a connector between Bradley West and themid-field satellite terminals, and an inter-terminal tram system, among others. However, it is notclear whether LAWA intends to take substantive actions to evaluate the efficiency and effectiveness of the CMAR project delivery method, as implemented for the Bradley West

projects, and how it may be applicable to future projects. Given the extensive plans for continued capital development at the airport, it would be in LAWA’s best interest to conduct a post-projectassessment of the costs, benefits and risks of the CMAR model, and to examine contractlanguage that would give LAWA options for providing incentives and/or enforcing compliancewith contract requirements.

Conclusions

LAWA chose to use a Construction Manager at Risk (CMAR) project delivery method for theBradley West projects, which had never before been used by the department. While the analysisof the benefits of using the CMAR model supported management’s decision to move forward inthis manner, certain circumstances and project expectations may have prevented LAWA from


Prices (GMP) referred to as the contract amounts However total expected costs may exceed



Prices (GMP) referred to as the contract amounts. However, total expected costs may exceed these amounts as well as contingencies due to the volume of change orders resulting fromunknown conditions, owner initiated design changes and other factors. As a result, the risk to the

CMAR may have been diluted and the incentives for the CMAR to deliver the project under theGMP or Contract Amount may have been compromised, since the CMAR may chargemanagement fees on most costs.

Further, the CMAR agreements for the Bradley West projects do not contain sufficient controls,including sanctions, to ensure contractor performance in key areas. For example, although theCMAR contracts require performance bonds or 10% retention of each progress payment claimed during the Construction Phase, there are no specifications that directly address CMAR

performance related to its Quality Assurance or Change Management responsibilities. AlthoughLAWA expects to continue with a high level of construction activity for the next five to tenyears, it has not initiated any evaluation of the efficiency and effectiveness of the CMAR projectdelivery method, as implemented for the Bradley West projects, to decide whether it isappropriate or should be modified.

Recommendations

The LAWA Executive Director should direct ADG management to:

2.1 Conduct a post-project assessment of the costs and benefits of the CMAR model. Includea comparison of alternative models.

2.2 Evaluate the CMAR model, as implemented for the Bradley West Gates and Core projects, by reviewing the agreements and the incentive structure they provide.

2.3 Develop formal criteria for choosing project delivery models on future capital projectsand ensure that project management and other pertinent staff are made aware of thestrengths and weaknesses of all procurement models considered.

Costs and Benefits

The costs involved with implementing these recommendations include additional staff time to

conduct assessments of the CMAR project delivery model and its alternatives as well as timespent developing and vetting formal criteria for choosing project delivery models. The benefitsof implementing the recommendations include a richer understanding of the benefits and risks of using a CMAR model for capital projects and a more methodical process for selecting deliverymodels for future projects.

3 M i i CMAR Ch M



3. Monitoring CMAR Change Management• As generally understood in the capital and airport development industries, a

major benefit of the CMAR project delivery model is the transfer of responsibility and a significant amount of risk from the owner to the CMAR forthe entire construction effort. However, ADG has not implemented this projectdelivery model in the most effective manner given that there have been over3,000 changes to the Bradley West projects’ scope amounting to approximately$192 million as of September 2012. Approximately $8.8 million of this amountconsisted of CMAR management fees.

• LAWA has not taken sufficient action to ensure that the CMAR for the BradleyWest projects effectively analyzes subcontractor change order estimates foraccuracy and reasonableness, despite paying the CMAR $4.5 million per yearfor this service. Additionally, based on discussions with various LAWA staff anda review of files shared with the audit team, the CMAR and ADG PackageManagers do not consistently perform independent or sufficient merit reviews of change order requests from subcontractors. Further, the CMAR has not

complied with contractual obligations to submit change order requests in atimely manner and LAWA has not aggressively enforced its own changemanagement guidelines or specific time requirements of the CMAR agreements.

• LAWA has assembled an independent unit of approximately 14 FTE Estimators,to review change order requests. These resources supplement approximately$370,000 paid monthly to the CMAR for administering change management.Even so, LAWA may be incurring unnecessary costs for change order review

due to the CMAR’s substandard analysis of subcontractor cost estimates.Inconsistent merit reviews have led to a higher risk of incurring unnecessarycosts and inefficiencies, namely that estimators are sometimes required to reviewchange requests that should not have been merited. Further, due to the lack of compliance with contractual timelines for change estimates, LAWA is at greaterrisk that subcontractors may not get paid in a timely manner, potentiallyimpacting project schedules, increasing the risk of disputed change requests, andcreating additional difficulties for LAWA at project close-out.

• LAWA should review and strengthen contract provisions for future projects,follow through on communications related to the enforcement of changemanagement contract provisions, enhance monitoring of CMAR performance toinclude its ability to meet contractual timelines, and conduct a post-project

l i f th ll t d t CMAR h g g t f ti t

Section 3: Monitoring CMAR Change Management

CMAR’s Change Management Does Not Fully Prevent Unnecessary



CMAR s Change Management Does Not Fully Prevent UnnecessaryCosts

As generally understood in the capital and airport development industries, a major benefit of theConstruction-Manager-at-Risk (CMAR) project delivery model is the transfer of responsibilityand a significant amount of risk from the owner to the CMAR for the entire construction effort,including the performance risk of subcontract administration and coordination, cost containment,and schedule adherence. However, our review has found that LAWA Airports DevelopmentGroup (ADG) has not effectively implemented the CMAR project delivery model, or contained unnecessary costs that have arisen from the thousands of changes that have been proposed to the

Bradley West project scope. ADG has not taken sufficient steps to ensure that the CMAR effectively implements procedures to avoid unnecessary costs resulting from the change order management function on the Bradley West Gates and Bradley West Core projects (Bradley West

projects).

ADG Not Requiring CMAR to Adequately Review Subcontractor Estimates

LAWA has not effectively overseen CMAR performance of administrative responsibilities on

the Bradley West projects. Specifically, ADG has not ensured that the CMAR conducts effectivereviews of subcontractor scope revisions being requested through the change order process or subcontractor estimates of change order costs prior to submission to LAWA for approval. As aresult, ADG staff is often required to evaluate change orders that have not been thoroughlyanalyzed or have been incorrectly estimated by the CMAR. ADG staff who are charged withreviewing and negotiating change order cost estimates, report that they are also often required to,in effect, negotiate with CMAR subcontractors on the final amount to be paid (although CMAR representatives are present). This should be a CMAR responsibility, since LAWA has no

contractual relationship with the subcontractors. Further, our review of LAWA change order negotiation files for the two Bradley West projects found that the CMAR estimates often includ e simple oversights requiring LAWA review and correction, such as incorrect labor bussing rates. 1

ADG has established an independent unit of estimators to review and evaluate change order submittals from the CMAR for the Bradley West projects. This unit consists of approximately 14FTE staff members (which ADG has recently considered expanding), who spend the vastmajority of their time on the Bradley West projects assessing the basis for the contractor’sestimates, validating that standard rates and estimating techniques for work tasks and materialshave been used by the subcontractor and the CMAR to arrive at its recommendation, comparingthe change order request to the original scope of work and the Change Directive from ADG, and arriving at an independent estimate of cost. While any responsible owner should conduct their own review, regardless of the extent of the construction manager review, the level of effort


required by LAWA for the Bradley West projects is likely more than would otherwise be



q y y p j ynecessary due to inadequate review by the CMAR. Despite numerous communications with theCMAR on the issue, ADG has not taken sufficient steps to ensure that the CMAR for the Bradley

West projects effectively reviews subcontractor change estimates for accuracy and reasonableness. Our review of a random sample of 100 recently closed change order negotiationfiles for the Bradley West projects shows that the CMAR cost estimates rarely vary fromsubcontractor estimates, and if they do, the amounts are typically not significant. On average, theCMAR estimates are only 1.7% below subcontractor estimates on the Bradley West Projects(2.54% below subcontractor estimates for the Bradley West Gates and 0.86% belowsubcontractor estimates for the Bradley West Core projects (95% Confidence Level ±10%)), asshown in Table 3.1 below.

Table 3.1Mean Difference Between Subcontractor and CMAR Change Estimates

Project Mean Subcontractor Es timate Mean CMAR Estimate Mean Percent ReductionBradley West Gates $69,212 $67,451 2.54%Bradley West Core $196,083 $194,400 0.86%BW Aggregate $132,648 $130,926 1.70%

Source: Records of Negotiations from 100 randomly selected, recently closed Bradley West projects change order negotiation files

Further, based on sampling, the CMAR often recommends change order cost estimates prepared by the subcontractor to LAWA, even when it makes a determination that a lower amount isappropriate. Therefore, in most cases the CMAR essentially proposes the estimates provided bythe subcontractors with little or no revision.

CMAR Change Order Cost Estimates Are Consistently Inflated

ADG staff change order cost estimates are consistently and significantly lower than the CMAR change order proposal amounts. Based on our sampling of 100 randomly selected recently closed change order negotiation files, we found that ADG estimators have determined that the CMAR recommended change order amounts were overstated by an average of 16.5% and 11.2% for theBradley West Gates and Bradley West Core projects, respectively (95% Confidence Level±10%). Further analysis of the sample results indicates that the CMAR agrees to nearly all of the

reductions recommended by the ADG estimators. As shown in Table 3.2 below, the average percentage of the reductions accepted by the CMAR for the Bradley West Gates and Core projects equals 78.9% and 93.4%, respectively (95% Confidence Level ±10%).




Table 3.2Mean Difference Between CMAR and LAWA Change Order Cost Estimates

Project

Mean DifferenceBetween CMAR Estimate

and LAWA EstimateMean Percent

Difference

Mean Amount of LAWA ReductionsAccepted by CMAR

Mean Percent of Proposed ReductionsAccepted by CMAR

Bradley West Gates ($10,639) -16.5% ($8,396) -78.9%

Bradley West Core ($8,202) -11.2% ($7,661) -93.4%

BW Aggregate ($9,421) -13.9% ($8,029) -86.2% Source: Records of Negotiations from 100 randomly selected recently closed Bradley West projects change order

negotiation files

Based on data provided by ADG, the avoided cost of the LAWA independent estimation processhas amounted to approximately $56 million as of November 2012, with approximately $2.8million of that amount coming from reduced CMAR fees (the CMAR agreement stipulates feesof 3.95% and 5.9% on the Core and Gates projects, respectively). Additionally, we understand from discussions with ADG Estimators that their recommended estimated reductions are oftensmaller than they otherwise would be due to the difficulty of acquiring documentation to supportfurther reductions.

Additional Cost of Ineffective CMAR Reviews

LAWA directly reimburses the CMAR for its costs of change order management. Through theConstruction Services Agreements, LAWA is providing significant resources to the CMAR for subcontractor administration and coordination, which includes change management functions.Specifically, approximately $370,000 is provided to the CMAR for change management

personnel on a monthly basis totaling to nearly $4.5 million per year. 2 This amount is in additionto approximately $9.26 million that was paid out in CMAR fees on change orders (as of September 30, 2012) to compensate for construction management services. However, given theresults of the sampling and analysis, it is unclear what benefit LAWA is receiving for suchoutlays. ADG staff has stated that they consider this function to be almost entirely administrativeand not focused on vetting change cost estimates for reasonableness. However, the contract with

the CMAR states that the CMAR shall “provide a description of possible CMAR actions or solutions to minimize the cost of the Contractor Potential Change Notice” and the CMAR “may provide an estimate of the adjustment in the Contract Time and Contract Pricing which it believes is appropriate.” Further, the ADG Change Management Flow Chart provided to theaudit team indicates that the CMAR is responsible for evaluating the price and time associated


Meriting Process for Bradley West Change Orders



Meriting Process for Bradley West Change Orders

Generally, before a contractor-generated change order cost estimate is provided by the CMAR

(as a “Contractor Change Request” or CCR), the scope and basis of the proposed change order issubmitted to ADG (as a “Contractor Potential Change Notice” or CPCN) to determine if achange order has merit. The merit review is conducted by the “Package Manager” (aka “ProjectManager”) who either denies the request with a “Field Directive” or authorizes it with a “ChangeDirective.” If a Change Directive is issued, the CMAR is required to submit an itemized cost

proposal in the form of a CCR, which is referred to the ADG Estimating Unit for review.

Based on discussions with various ADG staff and a review of files that they shared with the auditteam, ADG Package Managers and the CMAR do not consistently perform independent or sufficient merit reviews of change requests from subcontractors. Therefore, ADG estimator staff has been required to evaluate some change order requests that have not been sufficiently justified

by the CMAR.

In one instance (Bradley West Gates Contractor Change Request #6686), a review of thenegotiation file found that the CMAR submitted a proposal for $393,378 worth of structural steelwork at two gates. Although this change was merited by LAWA, the ADG estimators were ableto negotiate a final change amount of only $826 for a total savings of $392,552 (or 99.8%) fromthe recommended amount of $393,378. After review and onsite investigation by multiple LAWAstaff members, a LAWA assessment showed that the requisite change in scope was minor and expected to cost less than $4,000. However, the CMAR review of the change proposal estimatefrom its structural steel subcontractor failed to identify the significant flaws in the proposed scope of work and costs, and it could be argued that the change order request from the sub-contractor should not have been merited by the CMAR or by ADG, given the settlement amount.It is our understanding from discussions with ADG staff that these types of deficiencies areidentified frequently in Bradley West change orders.

Delayed Oversight has led to Significant Backlog of Change Orders

The CMAR has not complied with contractual obligations to submit change order requests in atimely manner and LAWA has not consistently enforced such provisions, resulting in sizeabledelays to change order processing. ADG staff has noted that although ADG recognized the

tardiness of change orders very early in the project, LAWA agreed to not enforce the contractualtimelines, but rather to continue to track the changes day by day as they are submitted. Staff noted that this was done in order to keep the Bradley West projects on schedule, and to assurethe subcontractors that they would get paid in a timely manner for change work.


becomes aware of such circumstances. The construction services agreement also requires the



CMAR to submit a complete and itemized estimate in the form of a CCR within 21 days after submitting a CPCN. ADG construction management guidelines also require the CMAR to

submit a CCR within 21 days after receiving a Change Directive for owner-initiated changes.Although the construction services agreements state that LAWA, in its discretion may grantextensions in writing for the submission of CPCNs, the use of extensions appears to have beenapplied liberally as a policy choice by LAWA.

Contractual Timeline Requirements Not Monitored by ADG

ADG does not monitor or report on the aging of deliverables with timelines stipulated by the

construction services agreements and the ADG construction management guidelines. Theconstruction services agreement and the ADG construction management guidelines define thechange management process and the roles of the CMAR and of ADG. According to theagreement and the guidelines, the CMAR waives any claim for an adjustment to the contract

pricing or contract schedule if it does not submit its notice of a potential change (CPCN) or itsitemized proposal for change orders (CCR) within seven or 21 days, respectively, or within suchextension that LAWA may have granted in writing. The audit found that although ADGmanagement monitors change orders globally for each project based on the number of changes ateach step in the established process, there is no formal monitoring or reporting of CMAR compliance with the time requirements established in the construction services agreements.

Contractual Timeline Requirements Not Enforced Until Recently

Until recently, ADG had not enforced the contractual timing requirements for change orders,raising the risk of subcontractors not getting paid in a timely manner, potentially impacting theconstruction schedule, increasing the risk of disputed CCRs, and creating additional difficultiesduring the project close out phase. As recently as November 2012, ADG had accepted CPCNsfrom the CMAR at the point they were received, regardless of whether the CPCNs weresubmitted within the seven day required contractual timeframe. Similarly, up until October 2012, LAWA had not enforced the contractual timeframe for CCRs even when it received CCRs,on average, over four weeks after the contractually required timeframe of 21 days, according toour analysis of all closed contractor generated change orders for the Bradley West projects. Wealso noted that these averages may be somewhat inflated by outliers as the median tardiness wasfive days for the Gates Project and nine days for the Core Project. Nevertheless, these delaysraise risks, such as subcontractors not getting paid on time and increasing the risk of disputed change requests, as described above. Additionally, a majority of the CPCNs that have beensubmitted past the seven day deadline represent cases where the subcontractors and/or CMAR have proceeded with work based on a Request for Information, but without a full review of the

d Thi i h i k f i i f k d/ i


until January 2012. Further, it is not clear if actions taken to reduce delays will improvei f h dl j Af id if i i ifi b kl f C C



processing for the Bradley West projects. After identifying a significant backlog of CPCNswithout adjoining CCRs, a charter was drafted and signed by the CMAR in January 2012. The

charter included a CMAR pledge to take steps to reduce the change order request backlog over the subsequent months. The charter included a provision that the CMAR was to submitassociated CCRs for all CPCNs opened prior to December 31, 2011 by no later than September 30, 2012.

Following the September 30 th charter deadline, ADG management identified that the CMAR had not submitted most of its CPCNs within the seven day contractual requirement. In an October 15 th letter to CMAR management, ADG noted that beginning November 5 th, LAWA would no

longer accept CPCNs that arrive after the contractual timeframe of seven days.

Efforts to Enforce Compliance Have Had Limited Impact

The delayed efforts by ADG to enforce compliance of contractual timelines has had limited response from the contractor thus far. According to discussions with ADG management, theCMAR waited until the end of the eight month submission timetable to provide most of therequisite documentation. Further, many of the submissions from the CMAR were for additional

time extensions rather than completed CCRs. A review of Bradley West monthly project statusreports showed that the number of change orders in the “under merit review” stage of the changemanagement process spiked in October 2012 (the month after the deadline for submission of CCRs) for the Gates and Core projects by 55.1% and 39.7%, respectively, from the prior month.

A review of a random sample of 100 recently closed negotiation files for the Bradley West projects found that the CMAR has been engaged in initially submitting incomplete CCRs and later submitting revised CCRs with no scope change, but with additional costs. Additionally, inone CCR file we reviewed, ADG staff discovered that a “false document” had been submitted for a $9,000 cost item, a practice that the staff noted is “on going” with this subcontractor “and others.” When ADG staff confronted the subcontractor on the issue they were told it wassubmitted as a “place holder” for expected costs in order to expedite change order processing.Additionally, according to discussions with ADG management, the CMAR is making greater useof the established Dispute Resolution Process to appeal changes that are not approved byLAWA, including change requests intended to modify contractual timelines. Further, ADGmanagement has indicated that the CMAR is allowed to revise CCRs that have not yet reached the settlement stage. While this may be common practice at LAWA, the CMAR agreements donot specifically address this issue other than to state that the CCRs should set-out “as specificallyas practicable the requested adjustments to the Contract Pricing, Contract time or other Contract

provisions.”


C l i



Conclusions

The LAWA Airports Development Group (ADG) has not effectively overseen the Construction-Manager-at-Risk (CMAR) change order management function on the Bradley West Gates and Bradley West Core projects (Bradley West projects), to ensure that unnecessary costs areavoided. ADG has not taken sufficient action to ensure that the CMAR for the Bradley West

projects effectively analyzes subcontractor change estimates for accuracy and reasonableness.Our review of a random sample of 100 recently closed change order negotiation files for theBradley West projects shows that the CMAR cost estimates rarely vary from subcontractor estimates, and if they do, the amounts are generally not significant. Further, the CMAR oftenrecommends the subcontractor change order cost estimates to LAWA, even when it makes adetermination that a lower amount is appropriate. In effect, the CMAR is proposing the estimates

provided by its subcontractors with little or no revisions.

ADG staff change order cost estimates are consistently and significantly lower than the CMAR change order proposal amounts. Based on sampling of 100 randomly selected, recently closed change order negotiation files, we found that ADG estimators have determined that the CMAR recommended change order amounts were overstated by an average of 16.5% and 11.2% for theBradley West Gates and Bradley West Core projects, respectively. Based on data provided byADG, the avoided cost of the LAWA independent estimation process has amounted toapproximately $56 million as of November 2012.

Based on discussions with various ADG staff and a review of files that they shared with the auditteam, ADG Package Managers and the CMAR do not consistently perform independent or sufficient merit reviews of change requests from subcontractors. In one instance (Bradley WestGates Contractor Change Request #6686), a review of the negotiation file found that the CMAR submitted a proposal for $393,378 worth of structural steel work at two gates was eventuallysettled for $826. It could be argued that this change order request from the sub-contractor should not have been merited by the CMAR or by ADG, given the settlement amount.

The CMAR has not complied with contractual obligations to submit change order requests and cost estimates in a timely manner and LAWA has not monitored or consistently enforced such

provisions, resulting in sizeable delays to change order processing. Up until October 2012,LAWA had not enforced this contract provision even as it received CCRs, on average, over four weeks after the contractually required timeframe of 21 days, according to our analysis of allclosed contractor generated change orders for the Bradley West Gates and Core projects. Thedelayed efforts by ADG to enforce compliance of contractual timelines has had limited responsefrom the contractor thus far. These delays raise the risk of subcontractors not getting paid on-

h d l k d k f d d d dd l d ff l


R d ti



Recommendations

The LAWA Executive Director should direct ADG management to:

3.1 Review contract provisions, such as Articles 01 23 00 (Change Orders), 01 24 00(LAWA Initiated Changes), and 01 25 00 (CMAR Change Request) in the Bradley WestConstruction Agreements, to strengthen language and expectations of CMAR changemanagement for future projects. Specific areas that could be strengthened include theexpectation of the CMAR role in the meriting review process, pricing estimation for

proposed change orders, and the acceptability of CCR revisions that contain costincreases, but no changes in the scope of work.

3.2 Follow through on formal communications to the CMAR management regardingcontractual provisions requiring the CMAR to submit CPCNs and CCRs within thetimeframes stated in the agreement.

3.3 Formally communicate that unsupported estimates used as placeholders, as well as CCR revisions that do not contain changes in scope, will not be accepted.

3.4 Consider enhancing the monitoring of CMAR performance of change management toinclude its ability to meet contract prescribed timelines for change submittals to reducethe risk of schedule impacts, that subcontractors will not paid in a timely manner, and toensure the project may be closed out with an efficient and effective process.

3.5 Conduct a post-project analysis of the resources allocated to CMAR ChangeManagement functions by LAWA under the Bradley West project budgets to determine

whether they exceeded the mean or median amount spent, as a percentage of total costs,on this administrative function. Report results to the Board of Airport Commissioners.

Costs and BenefitsThe costs of implementing these recommendations include additional staff time to reviewcontract provisions, draft and review communications to the CMAR, create and implementadditional monitoring processes, and conduct a post-project analysis. The benefits of implementing these recommendations include potential reductions in the backlog of changeorders, the avoidance of unnecessary costs, minimizing schedule impacts, and ensuringsubcontractors are paid on time for the Bradley West projects, as well as future CMAR projects.The benefits would also include having a better understanding of the true administrative costs of h CMAR d l l i h i l j

4 CMAR Q lit A M it i g



4. CMAR Quality Assurance Monitoring• The active Construction-Manager-at-Risk (CMAR) contracts for the Bradley

West Gates and Core projects at Los Angeles International Airport, along withthe LAWA-approved CMAR Quality Control (QC) Plan, outline the QualityControl (QC) services to be provided by the CMAR. As defined, the CMAR QCstaff members are responsible for reviewing and testing completed constructionelements first, and then LAWA inspectors perform a final review to ensure thatconstruction elements comply with applicable plan specifications and codes.

• LAWA may be performing QC functions assigned to the Contractor and forwhich the Contractor is already compensated, through the executed contracts,amounting to approximately $122,600 per month, or $1.5 million per year.LAWA may be incurring unforeseen costs because of the duplication of efforts,along with other inefficiencies in the CMAR-LAWA relationship. BecauseLAWA inspectors do not have, or do not follow all procedures for trackinginspection activity or monitoring the performance of the CMAR, management is

unable to effectively gauge CMAR QC performance or overall CMARcompliance with active contracts.

• The LAWA Construction Inspection Division Procedures Manual establishesLAWA policies on processing and monitoring a contractor’s work product.Weaknesses in the practice of CMAR performance monitoring may result indeficiencies in construction, which may affect the integrity of the work elementand increase the possibility of future litigation. Incomplete records of

communication between LAWA and the CMAR pose a risk for LAWA if litigation occurs. Additionally, LAWA is exposing itself to additional unforeseencosts by, in a handful of cases, funding changes to incorrectly completedconstruction elements.

• A revision of the LAWA Construction Inspection Division Procedures Manual could help to codify outstanding ambiguities, notably those related to theissuance of Job Memos and Notices of Noncompliance, as well as those related totracking inspection records. Making the Manual readily available and providingtraining to LAWA inspector staff on records and information managementprocedures to ensure that staff are knowledgeable about requirements andequipped to comply with them may help ensure that inspector staff followrequired procedures

Section 4: CMAR Quality Assurance Monitoring

are to be performed by the CMAR Quality Control (QC) program to verify that constructionmeets the requirements of applicable building codes and the specifications defined in the job



meets the requirements of applicable building codes and the specifications defined in the job plan. After the QC staff determines that the construction element meets the job specifications,

QC staff submit a Request for Inspection to LAWA inspector staff. The submittal of the Requestfor Inspection initiates the final inspection of the work element by the LAWA inspector staff toverify that the work has been performed as required.

During the construction process, but separate from the Request for Inspection process, LAWAinspector staff have several tools available to enforce CMAR compliance with code and stipulated technical job specifications.

• LAWA inspector staff can verbally notify the CMAR if an inspector observes a work element that is not compliant with code or technical job specifications.

• If the verbal notification does not result in the CMAR addressing the matter, the LAWAinspector staff member can document the noncompliance issue by issuing a formal JobMemo to the CMAR.

• Neither the verbal notification nor the Job Memo requires action by the CMAR, but if thecompliance issue remains unaddressed after the issuance of a Job Memo, the LAWAinspector staff member can issue a Notice of Noncompliance to the CMAR regarding thecompliance issue. If this occurs, the CMAR, and thus the subcontractor responsible for thework element, may not receive payment on the work until the noncompliant work producthas been addressed.

CMAR Quality Control Services May Not Be Sufficiently Monitored

The executed contracts with the CMAR for the Bradley West Gates and Core projects outlinesome key components of the inspection processes. The contracts stipulate that the CMAR QC

program is “to perform inspection and testing of all items of work required by the technicalspecifications, including those performed by subcontractors.” The inspections and testing

performed by the CMAR QC team of subcontractor work should precede inspections and testing performed by LAWA inspector staff. The QC Plan defines the structure, staffing,responsibilities, and procedures surrounding the CMAR QC program, and the QC Plan isrequired of the CMAR by the executed contracts to be submitted to and approved by the LAWAinspector staff prior to the commencement of construction.

LAWA Inspector Staff Are Not Actively Reviewing QC Performance


However, LAWA inspectors have maintained such records on other LAWA projects, and toillustrate two specific Notices of Noncompliance for the Taxilane S project were brought to the



illustrate, two specific Notices of Noncompliance for the Taxilane S project were brought to theattention of auditors. The first Notice of Noncompliance, No. 114, states that a contractor’s QC

representative was not present during the welding of a gas line, and a contractor’s QCrepresentative is required to be present for all welding activities. The second Notice of

Noncompliance, No. 202, shows that the LAWA inspectors rejected poured concrete due to“visible cavities and invisible voids that can be felt when tapping to the placed concrete walls.”As reported, these concrete imperfections should have been caught in the initial contractor’s QCinspection before being referred to the LAWA inspector team for sign-off. Maintaining such arecord of CMAR QC staff performance would help to highlight deficiencies in the relationship

between the CMAR QC staff and the LAWA inspector staff.

Quality Control Plan and Program May Not Align With Needs

Having the ability to measure performance would help LAWA evaluate whether the CMAR isaccomplishing the objectives of the approved QC Plan. For example, LAWA inspector staff suggested that the inability of the CMAR to achieve the goals of the program may relate to thelevel of staffing assigned to the QC function under the plan. Reportedly, the LAWA inspectorsare taking primary responsibility for ensuring conformity with applicable specifications and

plans with respect to materials, workmanship, construction, finish, and function, in some cases performing roles intended for the CMAR’s QC team. This level of effort by LAWA is inaddit ion to approximately $122,600 paid per month, totaling approximately $1.5 million per year, 1 to the CMAR for fulfilling its QC responsibilities under the construction agreements.

Interviews suggested that the CMAR’s QC staff members are not consistently present on jobsites when required and, instead, may rely on the report of the subcontractor project manager or the foreman regarding the quality of the work product. Persons interviewed were of the opinionthat the likely cause is the quantity of the work to be inspected within the schedule, given thenumber of CMAR inspectors, which total 10 inspectors and 2 managers. Because a record of CMAR QC performance is not maintained by LAWA, this assertion cannot be independentlyverified. For example, no data exists to determine the number of QC inspections performed per inspector per day, the complexity of the inspections that are performed, or performance againstthe Request for Inspection date.

Further, an assessment of basic staffing, workload, and activity data may not fully describe thecapacity of the CMAR to perform the QC function. For example, representatives of the CMAR noted that subcontractors may be required to add a dedicated QC staff person on contracts, if certain thresholds stipulated by the CMAR are met. However, those thresholds were not welldefined for the audit team and records demonstrating the extent of such requirements are not


Procedures for Requests for Inspection are Inconsistent



As currently established, once a work element has passed inspection and testing by CMAR QC program staff, the LAWA Inspection Division receives a Request for Inspection. The submittalof a Request for Inspection certifies that the work element has passed inspection and testing bythe CMAR QC team. The Request for Inspection initiates the final inspection of the work element and may result in the following determinations:

• The work product is accepted by the LAWA inspector staff, and the subcontractor is allowed to proceed with the next phase of construction;

• The work element is rejected by the LAWA inspector staff, and the subcontractor is notallowed to proceed with construction until noncompliance matters are addressed;

• The work element is partially accepted by the LAWA inspector staff, and the subcontractor may proceed, but needs to resolve more minor noncompliance matters; and,

• The Request for Inspection is cancelled before an inspection, so the inspection is not made.Cancellations are initiated by the CMAR, and it was suggested in interviews that this may beoccurring after the CMAR is verbally advised by the assigned inspector that the work productis not ready for inspection.

Request for Inspection Process Lacks Codification

The Request for Inspection process is not consistently used to initiate a LAWA inspection or totrack performance. Instead, the decision to use the Request for Inspection process may bedecided jointly by the CMAR and the associated LAWA inspector team, depending upon thecomplexity and scale of a project. As repeatedly reported to the audit team, the chief benefit of the Request for Inspection process, which is standard practice in the Los Angeles Building and Safety Department, is to record the acceptance of work that has been completed.

The policies regarding the use of Requests for Inspection are not defined in the CMAR agreements or in the LAWA Construction Inspection Division Procedures Manual . Instead,managers in the LAWA Inspection Division reported that there are informal agreements betweenthe CMAR and LAWA inspector staff, which initiate the use of the Requests for Inspection.Though the lack of formal Request for Inspection policies presents an opportunity for the LAWAinspectors and a contractor to tailor the process to specific project needs, the lack of defined

policies and procedures makes it an unreliable mechanism for tracking construction contractor and subcontractor performance.


maintaining a record of completed construction elements is the chief benefit of the Request for Inspection process, the lack of maintained policies for the documentation of the Request for



p p , p qInspection process presents a potential source of risk for LAWA.

Requests for Inspection Are Not Currently Logged by LAWA

For the Bradley West Gates and Core projects, LAWA inspectors do not log Requests for Inspection or track the results of inspections, so there is no LAWA summary record of inspectionactivity. Requests for Inspection records could only be provided to the audit team by the LAWAinspector staff from physical copies of the individual documents. PDFs of Request for Inspectionsource documentation are also uploaded to Prolog, a document management system, though

there is no way to assess aggregate data through Prolog and it was reported that not alldocuments had been uploaded to the system.

The LAWA Construction Inspection Division Procedure Manual states that the Field Inspector isto “maintain logs to track correspondence/documentation such as RFIs, Field Memos, submittals,etc.” While the Manual does not clearly define the content of the logs, the lack of any internallymaintained logs reflecting aggregate data for issued Requests for Inspection is a technicalviolation of these procedures. According to the executed contracts, the CMAR is responsible for tracking inspections in an Inspection Control Log. However, LAWA inspector staff does nothave routine access to this log, though it was reported in interviews that logs could be requested from the CMAR when required. The lack of regular access to CMAR logs and the absence of LAWA Inspection Division logs with associated outcome data inhibit LAWA inspector staff’sability to assess overall CMAR performance or identify trends in subcontractor performance byanalyzing frequencies in “Rejected” or “Partially Accepted” results.

By tracking the results of the Requests for Inspection, LAWA could use the Requests as a keycomponent of a performance measurement tool. The ability to assess Request for Inspectionoutcomes at a high level could point out increased frequencies of partial acceptances and rejections for certain construction elements within the Bradley West Gates and Core, allowingthe LAWA inspector team to take proactive measures to address deficiencies. Based on a sampleof 195 Requests for Inspection submitted between August 2012 and November 2012:

• 51.3% were accepted, which means the work product was approved and the constructionsubcontractor was allowed to proceed with construction;

• 9.7% were rejected, which means the subcontractor was not allowed to proceed withconstruction until noncompliance matters were addressed;

27 7% ere p rti ll ccepted b the LAWA inspectors me ning the s bcontr ctor m


For 1.5% of the sample, such data was not recorded in the source document. This aggregation of data can help to elucidate CMAR and subcontractor performance. A table displaying sample



p p p y g presults is provided below.

Table 4.1Sample Summary of Requests for Inspection Status

August 2012-November 2012

Source: Bradley West Gates and Core Requests for Inspection submitted to LAWA

Inspection Compliance Tool Benefits Are Not Fully Realized

During the construction process, the LAWA inspector staff have a several tools at their disposalto enforce CMAR compliance with job specifications. LAWA inspector staff regularly visit work sites, with or without the prompting of Requests for Inspection, and in doing so, if a LAWAinspector staff member notices a work element that does not follow the job specifications, averbal notification can be issued to the subcontractor and the CMAR, observing the compliance

issue. If the verbal notification does not result in the CMAR addressing the matter, the LAWAinspector staff member can issue a Job Memo to the CMAR, documenting the compliance issue. Neither the verbal notification nor the Job Memo, contractually or otherwise, requires action bythe CMAR or subcontractor. If the compliance issue remains unaddressed after the issuance of aJob Memo, the LAWA inspector staff member can issue a Notice of Noncompliance to theCMAR regarding the compliance issue. If this occurs, the CMAR, and thus the subcontractor responsible for the work element, may not receive payment on the work until the noncompliantwork element has been addressed.

Current Structure Facilitates Inspector Staff Ability to Stop-Payment

The current organizational structure of the Airport Development Group (ADG) is intended to provide LAWA inspector staff with the ability to actively address concerns about CMAR and

Accepted RejectedPartial

AcceptanceCancelled Unknown Total

Numbers of Reques ts forInspection 100 19 54 19 3 195

Percent of Requests forInspection

51.3% 9.7% 27.7% 9.7% 1.5% 100.0%


Additionally, LAWA inspectors review CMAR invoices and have the authority to stop paymentif a LAWA inspector determines that construction does not meet contract specifications or code.



Although infrequently exercised, this authority provides LAWA inspectors with a valuable tool

for ensuring CMAR and subcontractor compliance.

Outcomes of Job Memos Are Not Logged

A Job Memo is issued to the CMAR by LAWA inspectors when a verbal notification of a problem with a construction element does not resolve the noncompliance issue. While JobMemos are recorded by LAWA inspectors, for the Bradley West Gates and Core projects,LAWA inspectors only log the issuance date, subject, Job Memo number, and the issuer for each

Job Memo. Although the Job Memo log provided to the audit team by the LAWA inspectors hasfields for recording the resolution of the Job Memo, date resolved, and release signature, thesefields are generally not populated, even though these fields are routinely completed for other

projects at the Los Angeles International Airport, such as the CUP and Taxilane S. While thislevel of tracking is not required by either LAWA policy, LA City policy, or by the executed contracts, tracking the outcomes of Job Memos would enable LAWA inspectors to better monitor contractor performance.

Job Memos Are Inconsistently Implemented

Because there is no contractual obligation, LAWA policy requirement, or LA City Coderequirement that the CMAR or its subcontractors take action on Job Memos issued by LAWAinspectors, the CMAR has reportedly requested that the intermediate Job Memo “step” in thenotification process be eliminated. Bypassing the Job Memo step would be a violation of the

LAWA Construction Inspection Division Procedures Manual , which stipulates Job Memos are to precede Notices of Noncompliance.

Job Memos function as the first formal, written notification of a compliance violation after averbal notification has failed to rectify the given issue. The Job Memo step serves several key

purposes, as identified by the audit team:

1. It is a textual clarification of the compliance violation and required remedial action, whichmay aid in the performance of actions to ensure compliance.

2. It aids in the full documentation of the communication between the CMAR and the LAWAinspector staff that can be referenced in the event of litigation.

3. It is an integral step in the escalating notification process as, if the noncompliant work isaddressed with the issuance of the Job Memo it does not necessarily stop work and slow the


justified by some LAWA inspector staff, who report that bypassing the Job Memo processimproves the efficiency of the communication between the LAWA inspectors and associated



CMAR subcontractors. However, this assertion could not be validated. Conversely, it was also

reported that some inspector staff still use Job Memos in the event the inspector wants to ensurethe documentation of the communication between the inspector and the CMAR.

Because Job Memos are intended to precede Notices of Noncompliance, there should be moreissued Job Memos than issued Notices of Noncompliance on record for all projects. However, areview of the complete logs for both Job Memos and Notices of Noncompliance for the BradleyWest Gates and Core projects revealed that fewer Job Memos than Notices of Noncompliancehave been issued to the CMAR. This differential is consistent with the Job Memo bypassing

practice that LAWA inspectors described during the audit process.Table 4.2

Number of Issued Job Memos Compared toNumber of Issued Notices of Noncompliance

Project

Number of JobMemos Issued(as of 11/01/12)

Number of Noticesof NoncomplianceIssued (as of 11/01/12)

Bradley West Gates 120 303

Bradley West Core 72 157

Source: Bradley West Gates and Core logs for issued Job Memos and issued Notices of Noncompliance

Notices of Noncompliance Can Be Addressed Through Change Directives

When a Job Memo evolves into a Notice of Noncompliance, the CMAR can avoid the need tomodify or replace the non-compliant construction by consulting with the Field Engineer, ProjectManager, or Element Manager, depending on the scope of the change, and obtaining a Change

Directive. A Change Directive can modify the contractual job specifications to conform to theexisting work product. This may be a positive process, which enables the CMAR and LAWA tomove forward on projects when the completed work, while different from the original jobspecifications, fits the intent of the design and adheres to code. However, when there is anadditional cost associated with an issued Change Directive, LAWA can bear the cost even when


• In the first Notice of Noncompliance, NNC 0068, newly constructed connections to anexisting storm drain pipe in the Bradley West Terminal tested positive for sewage, a violation



of the job specification plans. A Notice of Noncompliance was issued for the incorrectly

installed drain connections and the subsequent contamination, and the cross-connectionswere corrected by the subcontractor. A Change Directive was issued to ensure the work planincluded the work necessary to perform the alteration to the incorrectly installed cross-connections, and payment was authorized to the Contractor, under FD 0327, from an existingallowance for pot-hole repair that was no longer required, to repair the problem. The totalcost of this change was $15,798, paid by LAWA, even though the incorrect installation wasinconsistent with the job specifications and should have been corrected by the subcontractor or identified by the CMAR during the QA process.

• The second Notice of Noncompliance, NNC 122, notes the Contractor did not provide the proper restraints at full height knock-out walls. A Request for Information was submitted byWalsh Austin to LAWA to explore changing the requirement for the restraints and instead using braces rather than restraints. The subsequently issued Change Directive approved the

braces and set a not-to-exceed amount of $5,410 for the change. The Change Directive ended with a total cost of $6,835, again paid by LAWA, even though the incorrect restraints wereinstalled by the subcontractor.

During the course of the audit, other instances of noncompliance impacting both the projectschedule and costs were brought to our attention by persons who independently contacted theCity Controller. While not discussed specifically in this report, these instances were similar tothe examples described above, since work progressed after it became apparent that someconstruction was performed incorrectly, the schedule was impacted and additional unanticipated and substantial cost was incurred by LAWA.

The Procedures Manual Is Not Readily AccessibleAs previously mentioned, the Request for Inspection process as well as the implementation of inspector compliance tools lack clear codification in the LAWA Construction Inspection DivisionProcedures Manual . Furthermore, based on interviews, a complete version of the LAWAConstruction Inspection Division Procedures Manual is not centrally located, readily available,or routinely updated. The audit team did not receive the Manual immediately after the initial

request for the Manual because, reportedly, the Manual needed to be compiled and updated sections needed to be included in the final submittal to the audit team. Inspection Division personnel stated that the development of the Manual was underway during audit fieldwork.

This Manual should be the formalization of the inspection processes and procedures, and be used




policies, as it would require staff time and resources to facilitate trainings. In the long run,LAWA would likely see a savings through the review and closure of current inefficiencies in theadministration of inspection procedures and policies Perhaps most importantly by improving



administration of inspection procedures and policies. Perhaps most importantly, by improving

the codification of and adherence to inspection processes and procedures, LAWA would reducethe risks associated with potential litigation resulting from incomplete or absent record-keeping.

5. Capital Decision-Making Processes



• The Board of Airport Commissioners has limited involvement in the review andprioritization of proposed projects and is not involved in the assessment of initialproject concepts or budgets. Instead, these responsibilities have been assumed byexecutive staff and the Board may have less than optimal involvement in majorcapital project decision-making processes. This dynamic is, in part, driven byLAWA management’s opinion that a “tension”, or conflict exists between theBoard’s environmental review responsibilities and its more direct roleconsidering capital projects for approval. Further, executive management doesnot conduct comprehensive needs assessments, nor has it established a systemicprocess for determining which projects should be prioritized and advanced fordevelopment.

• This informal governance structure and management’s expanded role in thedecision-making process may pose risks to LAWA long-term strategic bestinterests. Without an organized framework within which potential projectconcepts are vetted according to established criteria and priorities, the rationale

for decision-making may not be clear to LAWA stakeholders.• LAWA should seek a formal legal opinion on the perceived conflict regarding

the BOAC’s role in the CEQA process; conduct a needs assessment of airportcapital assets; and establish policies and procedures for prioritizing potentialprojects. With these actions, LAWA would ensure the BOAC’s involvement inand improve the transparency and accountability of major capital developmentdecision-making at LAWA. These recommendations could be implemented using

existing LAWA resources.

While the City Charter allows the Board of Airport Commissioners (BOAC) to delegateresponsibilities to the Department of Airports (LAWA) General Manager, it also identifiesdevelopment as a primary power and duty of the BOAC. City Charter Section 632 (Powers and Duties of the Board) defines “Development of the Airports” as one of the three primary duties of the Board of Airport Commissioners, stating that the BOAC shall have the power and duty to“purchase, lease, acquire, condemn, design, erect, maintain, improve, repair and operate all

property, improvements, utilities, equipment, supplies or facilities as it may deem necessary or convenient for Departmental Purposes.”

City Charter Section 633 (Powers and Duties of the General Manager) states that the generalg f th D t t f Ai t h ll h th d d t t g th thi g

Section 5: Capital Decision-Making Processes

The BOAC Does Not Consider Detailed Project Budgets UntilConstruction Contracts are Presented for Approval



The BOAC formally approves a number of key documents related to capital development atLAWA. These documents include the following:

1. Airport Master Plan (2004);

2. LAX Specific Plan (2005);

3. Specific Plan Amendment Studies (SPAS);

4. Annual list of projects for which the BOAC has made a CEQA finding;

5. Individual construction and professional services contracts valued over $150,000, whichin some cases may be accompanied by overall project budget information; and,

6. Change orders valued over $150,000 for most projects, or change orders valued over $1 milli on for certain other projects, including the Bradley West Gates and Core

projects. 1

Although the Board approves contracts and appropriations for construction and professional

services throughout the design and development process, it is only presented with high-levelsummary project costs for approval during the annual budget review process. Further, as noted insection six of this report, LAWA has not produced a formal Capital Improvement Plan (CIP) thatdescribes all planned development projects, expected costs of implementation, sources of funding, schedules and other key variables important when determining development prioritiesand the capacity of the organization to finance planned improvements.

While the requirements for formal Board approval of capital development costs are limited tothose listed above, the Board is briefed or otherwise informed of the status of project budgets ona regular basis. The primary mechanism by which staff communicates ongoing updates is themonthly Program Status Report. These reports present a variety of financial data and narrativedescription for all current projects, including current expenditure levels compared to baseline and current budget, an estimate of cost at completion, status of contingency use, and informationregarding schedule and any implementation problems. These reports are well organized and

provide the Board a good tool for understanding the status of the projects within the capitaldevelopment program. However, these reports serve an advisory purpose for projects already

underway. As noted above, the Board does not formally approve project budgets between thevery high level step of annually approving the one-page list of projects during the budget processand the late-stage step of approving individual contracts.

LAWA representatives stated that the Board generally does not take action on the strategic


episodic manner, performing legally mandated functions, such as approving contracts and appropriating funds. In its current role, these representatives suggested that the Board is advised through informal workshops and discussions, and through various staff reports, but that it



generally follows executive management’s leadership regarding the long-range developmentgoals of the organization.

Given these factors, it can be argued that the BOAC has not assumed a formal role reviewing,approving or prioritizing initial capital project concepts or project-level budgets. In addition, theabsence of Board approved project-level budgets or a comprehensive CIP appears to placeLAWA in violation or conflict with the intent of City Charter Section 610 and AdministrativeCode Section 11.28.3, which require the BOAC to annually submit a capital plan or budget to the

Mayor, City Council2

, and City Controller.Instead, LAWA has determined that in order to technically satisfy these Charter and Administrative Code requirements, it must merely submit, as part of its budget process, a list of

projects for which the BOAC has made a CEQA finding. However, the information contained inthe list is limited to a brief title (e.g. “Taxiway S” or “T6 Renovations”), current projected cost,and sourc e of financing, and does not meet generally accepted standards for capital improvement

planning. 3 In addition, the approval of the list of projects that the BOAC has already reviewed

under CEQA is the only formal action taken by the Board to identify projects that may move or have moved forward for development. For example, there is no record that the Board officiallyconsidered or took action on the conceptual design of the Bradley West project, which is in thelist of CEQA approved projects. Ultimately, the design choices for this project had major costconsequences for this project.

Perceived Tension with CEQA Role Limits BOAC Involvement

LAWA management states that based on advice from the City Attorney, there is a “tension” between the Board’s roles when (1) considering and approving individual capital projects, and (2) fulfilling environmental review responsibilities under the California Environmental QualityAct (CEQA). In email correspondence, the LAWA Chief Operating Officer described informalCity Attorney advice, as follows: “it is critically important that the BOAC not act in any way thatappears to be pre-decisional on projects that have yet to be evaluated under CEQA and for whichthe BOAC is anticipated to be asked to make a CEQA finding in the future.” Further, the Chief Operating Officer states that, “we understand there to be substantial downside risk by putting the

2 The plan or budget shall be submitted to the Commerce, Energy and Natural Resources Committee.

3 The Government Finance Officers Association of the United States and Canada (GFOA) Best Practice, Preparing


BOAC in a potentially pre-decisional situation in asking for approval of a capital program, yetthere is no administrative or legal requirement to approve projects to be part of a capital

program. Therefore, we have decided to maintain administration of capital programming



decisions at the management level.”

City Council Provides Final CEQA Approval

Despite the opinion described above, the BOAC does not make the final determination regardingenvironmental compliance for many airport projects. For LAX Specific Plan Amendment

projects, the BOAC makes a recommendation to the City Council, which is ultimatelyresponsible for certifying environmental impact reports and CEQA compliance. According to the

LAX Specific Plan discussion on the environmental compliance process (Sec. 7. LAX PlanCompliance Review), “the Executive Director shall have the authority to recommend approval,approval with conditions, modification or denial of a request for an LAX Plan Compliancedetermination. This recommendation shall be made to BOAC and the City Council …”Subsection F 5 (Procedures, City Council Determination), states that “City Council shallapprove, approve with conditions, modify or deny a request for LAX Plan Compliance. The CityCouncil shall make the same findings required to be made by the Executive Director, supported by facts in the record.” (Emphasis added.) Accordingly, for many projects, the BOAC serves an

advisory role to the City Council, which is similar to the Executive Director’s advisory role tothe BOAC. While not every project is subject to the LAX Specific Plan Amendment reviewrequirements, our understanding is that most of the large projects would be included. In addition,all projects may be appealed directly to the City Council, pursuant to the California PublicResources Code Section 21151.

In addition, the California Code of Regulations and the Natural Resources Agency establishCEQA as a “self-regulating statute,” explaining that “public agencies are entrusted with

compliance with CEQA and its provisions are enforced, as necessary, by the public throughlitigation and the threat thereof.” The California Natural Resources Code provides guidelines for determining the lead agency in cases where two or more public agencies will be involved and states that “the lead agency will normally be the agency with general governmental powers, suchas a city or county, rather than an agency with a single or limited purpose such as an air pollutioncontrol district or a district which will provide a public service or public utility to the project.”However, the law (Section 21067) also states that "‘Lead agency’ means the public agencywhich has the principal responsibility for carrying out or approving a project which may have asignificant effect upon the environment”; and (Section 21069) "‘Responsible agency’ means a

public agency, other than the lead agency, which has responsibility for carrying out or approvinga project.” It appears that cities and counties have some flexibility in determining which entitywill serve as the lead agency. In the case of LAWA, which is defined in the City Charter as the“D f Ai ” i ld b d h i i h “R ibl A ” d h h


Further, the Federal Aviation Administration (FAA) also acts as an external approval authorityon environmental impact determinations made by the City for many LAX development projects,including any projects that would be included in a Specific Plan Amendment. A 2006 legal

l (“S i l d S l ”) b LAWA d l i i di h LAX



settlement (“Stipulated Settlement”) between LAWA and several cities surrounding the LAXarea, the County and a non-governmental organization, required that LAWA seek the review and approval of the FAA if the City Council approves an LAX Specific Plan Amendment in thefuture. The FAA review will include “compliance with all applicable federal laws, including

NEPA [National Environmental Policy Act] and the conformity requirements under the CleanAir Act.”

Comprehensive Capital Needs Assessments Not Routinely Conducted

LAWA has not conducted a formal capital needs assessment that would provide a strong basisfor capital decision making and prioritization processes. According to best practices identified bythe U.S. Government Accountability Office, “a comprehensive needs assessment considers anorganization’s overall mission and identifies the resources needed to fulfill both immediaterequirements and anticipated future ne eds based on the results-oriented goals and objectives thatflow from the organization’s mission.” 4

Instead of a comprehensive needs assessment, the Facilities Planning Group periodically solicits project requests from LAWA operating departments through an open call to the deputy directors.The interval between these efforts varies, and is typically approximately 18 to 24 months. Themost recent open call for project requests occurred in October 2012 and built on a previous list of 57 unfunded capital project needs. These requests are reviewed for “legitimacy” 5 and appropriateness by the Facilities Planning Group and provided to the executive management for review.

Needs Assessments not Informed by Realistic Forecasting

In addition, LAWA has placed a cap on planning for the future expansion of LAX. Due to provisions of the 2006 Stipulated Settlement between LAWA and Surrounding Communities, a“practical capacity of 78.9” million annual passengers (MAP) was established and all planningscenarios since that time have planned for this capacity only. Yet the 2004 LAX Master Planstated that by 2015, LAX would have passenger demand of 98 MAP, and that by 2025, therewould be a regional shortfall of 30 MAP. However, the actual 2011 level was only 61.8 MAP.Further, an updated forecast was completed as part of the LAX Specific Plan Amendment Studywith a baseline year of 2010 and forecasting 78.9 MAP level in the new horizon year of 2025.Although it appears the 2004 projections were overly aggressive based on actual activity and more recent forecasting, the 78.9 MAP projection through 2025 – which is exactly the level


It was stated during interviews that LAWA has no choice but to cap its growth projections at the78.9 MAP included in the Stipulated Settlement. However, based on a review of the Stipulated Settlement, this cap is only in effect until December 31, 2015, the end of the term of theS ttl t Whil LAWA i t t th i i f th Sti l t d S ttl t th t i



Settlement. While LAWA points to another provision of the Stipulated Settlement that requires aseparate gate cap of 153 passenger gates through 2020 as another constraint in its ability to plan,it is not clear that the gates cap should keep LAWA from adjusting its MAP after 2015.

In addition, a review of several Project Definition Booklets (PDB) and Project DefinitionDocuments (PDD) suggest that comprehensive MAP forecasting is not routinely included when

profiling the needs of the airport. As a result, these key documents, which drive sizing and design decisions, are deficient and do not give contract architects and engineers needed forecasting information or a clear perspective on the development needs of the airport.

No Policy or Systemic Process for Prioritizing Projects

LAWA has not developed a systemic process or tool for executive management to prioritizecapital project proposals. Executive management does not systemically score, rank or weigh thecosts and benefits of various proposals that are raised as potential projects for development

before determining which to advance for development. Instead, executive management selects

projects informally with a small committee composed of the Executive Director and selectdeputies. Executive management stated that the lack of development for approximately 20 yearshas rendered the urgent capital needs obvious in recent years and that a more formal process wasnot necessary.

The informal manner in which executive management exercises the delegated authority to makecapital programming decisions may weaken LAWA’s ability to ensure that capital decision-making optimizes LAWA’s long-term strategic best interests. Without an organized framework

within which potential project concepts are vetted according to established criteria and priorities,the rationale for decision-making may not be clear to LAWA stakeholders.

The consequences of having an informal process for prioritizing projects can be significant. For example, decisions were made by two separate administrations at LAWA to proceed with therenovation of the Tom Bradley International Terminal (TBIT) and, later, the construction of theBradley West Gates and Core projects. As a result, the projects have evolved substantially over the years and the sequence of planning and construction may now be adversely impacting the

costs to the airport.

The $737 million TBIT renovation project “included major interior renovations to the departurelounge, the ticketing lobby, the customs and immigration arrivals hall, the arrivals corridors and waiting area (meet and greet); as well as modifications to two gates (including a two level gate)


Terminal was not fully conceptualized until 2008, while the TBIT renovation was underway but before the new Bradley West construction had been initiated. Nonetheless, at the time, it wasdetermined that “the existing north and south concourses at TBIT would be demolished after completion of the new concourses Demolition would include approximately 77 620 square feet



completion of the new concourses. Demolition would include approximately 77,620 square feetof floor area in the north concourse (i.e., two story structure with approximately 38,819 squarefeet on each level) and all of the approximately 127,160 square feet of the south concourse(approximately 63,580 square feet of floor space on each of two levels).” This demolition areaequates to a total of 204,780 square feet of existing terminal area at TBIT.

Now, this evolving concourse interface project is being redesigned a second time as the BradleyWest Gates and Core projects are coming to a close and the basic infrastructure has beensubstantially built. In March 2012, a presentation to the BOAC initiated changes to certain

planned improvements and specified that areas of the recently renovated TBIT would bedemolished as part of the Bradley West connector redesign. In addition, it has been reported thatthe scope change is significant enough to have triggered a decision to remove approximately$273 million of the approved Scope of Work (SOW) for the Bradley West CMAR and competitively rebid the revised SOW.

At the conclusion of audit fieldwork, LAWA reported that the $273 million in TBIT interface

improvements plus $43 million for the “New Face of the CTA” (for a total of approximately$316 million) will be funded by savings due to the reduction in scope from the previouslyreported project budgets and an additional $60 million in funding from other sources.Significantly, though, the summary documentation that has gone to the BOAC does not providesufficient detail to determine the extent of the demolition of renovated areas that will occur under the revised scope. However, based on the review of materials by the audit team’s technicalexpert (architect), the subterranean level of the TBIT is to be enlarged to house the FederalInspection Services (FIS); the interstitial area and baggage handling level is to be enlarged; the

mezzanine and four airline lounges are to be demolished to create a new central securitycheckpoint; and, several airline lounges are to be demolished.

While demolition of some areas have been anticipated from inception, the degree to which theTBIT renovation improvements will be affected is not clear. While we have been advised thatmost of the improvements that are to be demolished were “cosmetic” and relatively low cost, it isnot clear whether changes in construction sequencing or additional time to plan and prioritize

project activity might have resulted in cost savings. Further, because LAWA is changing the

SOW almost three years after the original scope of work was bid, due to market conditions and other factors, it is not certain whether the cost of construction for the new SOW will be higher than originally anticipated under the prior SOW.

Best practices in executive decision-making around capital planning recommend a structured


Exhibit 5.1GAO Capital Decision-Making Framework - Principles and Practices



Source: USGAO, Executive Guide: Leading Practices in Capital Decision-Making, GAO/AIMD -99-32

While LAWA acknowledges that its project prioritization and selection process could beimproved, and staff have bolstered the open call for projects process, as described above, theorganization would benefit by establishing a policy and systemic process to use on an on-going

basis to evaluate the costs and benefits of various proposed projects and prioritize among them.One tool used by some jurisdictions implementing a framework like that outlined in Exhibit 5.1above is a “prioritization matrix” that organizes key project information, clarifies options, and

assists decision makers in understanding options in relation to established criteria and priorities.An example of a prioritization matrix used by Lane County Airports in Oregon is provided asAttachment 5.1. LAWA reportedly utilized such matrices in the past, prior to the current wave of capital development activity. LAWA should consider reintroducing a matrix tool as it developsi li d f i l j d i i ki


ConclusionsThe Board of Airport Commissioners may have a less than optimal level of official involvementin major decision-making processes related to airport development, in conflict with the intent of



ajo dec s o a g p ocesses e ated to a po t deve op e t, co ct w t t e te t oits duties related to development of the airports as prescribed in City Charter Section 632(c). TheBoard’s delegation of capital programming decisions to executive management, without anaccompanying check on that delegated authority, may hinder accountability and transparency of the capital program at a strategic level. Further, the informal manner in which executivemanagement exercises its delegated authority to make capital programming decisions may poserisks to LAWA’s long-term strategic best interests.

RecommendationsThe Board of Airport Commissioners should direct the LAWA Executive Director to:

5.1 Request a written legal opinion from the City Attorney’s Office regarding any potentialconflict of interest related to the Board’s duties and authorities related to airportdevelopment and CEQA review.

5.2 If a conflict of interest is determined to be a factor by the City Attorney’s Office, developa proposal to reassign the CEQA review responsibility from the Board of AirportCommissioners to the City Planning Department or another entity within the City,thereby enabling the Board of Airport Commissioners to conduct a more substantial levelof review of the capital development program.

5.3 Building on LAWA’s current periodic “open-call” for projects practice, conduct acomprehensive needs assessment of airport capital assets, including both potentialdevelopment projects and facilities maintenance needs, based on the results-oriented goals and objectives that flow from the organization’s mission.

5.4 Develop a policy and systemic process for LAWA executive management to use on anon-going basis going forward to evaluate the costs and benefits of various proposed

projects and prioritize among them. If deemed appropriate pursuant to Recommendations5.1 and 5.2, the outputs of such a process should be officially reported to the Board of Airport Commissioners so that it may be involved in the selection of capital development

projects.

Costs and Benefits

These recommendations could be implemented using existing LAWA resources By addressing



6. Capital Improvement Plans and Budget• LAWA has not developed a Capital Improvement Plan or developed a multi-



year Capital Budget. Instead, general capital improvement concepts areincluded in a 2004 Master Plan and the Specific Plan, and Specific PlanAmendments only include “rough order of magnitude” cost estimates for sevendevelopment alternatives presently under consideration. Further, broadprojections of capital improvement project costs serve as the basis for thevarious bond issues, the most recent of which was issued in 2010 and updated forsome projects in 2012. The annual capital budget approved by the LAWA Boardof Airport Commissioners includes only a high level summary of anticipatedcapital expenditures for each major element and for the budget year.

• On a project basis, baseline capital budgets are estimated at initial stages of development. These estimates include broadly defined cost components, such asconstruction allowances, which are budget estimates for unknown, but potentialcosts; percentage-based soft costs, which are general estimates of the cost of architectural, engineering and administrative expense; and, constructioncontingencies. Combined, these broadly defined cost components can raise thetotal project budget by as much as 52 percent over the estimated direct cost of construction. Yet, allowances are not routinely defined in documentation that isprovided to the Finance Department.

• At least one completed large project budget was overstated and other projectbudgets may no longer align with LAWA’s intentions. For example, the budgetfor the completed Crossfield Taxiway project was overstated by $40.5 million, or

22.8 percent. Such over-budgeting may result in a greater commitment of fundsthan might otherwise be necessary with more accurate forecasting, and mayincrease the risk of unnecessary or avoidable expenditures.

• LAWA should initiate a comprehensive capital improvement plan process,including development of policies and procedures that serve as the basis forestablishing and updating capital budgets. As projects move from the conceptualto design phases, detailed line item estimates showing allowances, soft costs and

contingencies should be clearly described, to ensure that Finance has all of theinformation necessary to conduct a thorough review and assessment of capitalbudget reasonableness.

The LAWA Master Plan was adopted by the Board of Airport Commissioners in 2004 and

Section 6: Capital Improvement Plan and Budget

LAWA is in the midst of developing a Specific Plan Amendment Study (SPAS), in order todefine remaining projects and meet conditions included in the LAX Master Plan Stipulated Settlement , which set certain growth limits and other conditions affecting development at theairport. Accordingly, the draft SPAS modifies certain aspects of the 2004 Master Plan as a first



step toward aligning more current development goals at Los Angeles International Airport(LAX) with the terms of the Stipulated Settlement. Completed in July 2012, the draft SPAS is

presently going through the public review process. The SPAS provides a “Rough Order of Magnitude” (ROM) estimate of costs for seven development alternatives being considered byLAWA, which is an industry standard during the conceptual planning phase. None of theseefforts constitute a Capital Improvement Plan.

LAWA does not Produce a Capital Improvement PlanAlthough there has been significant effort to move the development process forward, LAWAdoes not produce a formal Capital Improvement Plan (CIP) that more specifically describes thecurrent and future airport environment, planned capital projects, expected costs of implementation, sources of funding, development schedules and other key variables important toconsider when determining priorities and the development capacity of the organization. Instead of a CIP, LAWA reportedly has relied upon analysis contained in its bond official statements

(OS), such as the 2010 Series D Senior Revenue Bonds for $876 million, to project futuredevelopment costs.

For example, at the time the 2010 OS was published, $5,577,118,000 in completed and ongoing projects had been identified by LAWA and its consultants, with the costs identified using broad estimating techniques. These projects were to be funded, in part, with $2,267,381,000 in bond

proceeds secured by LAWA prior to 2010 plus $536,280,000 in bond proceeds that would besecured by LAWA in the future, for a total of $2,787,612,000 in bond proceeds. An additional

$2,773,458,000 in funding was earmarked from other sources, including net operating revenues,grants from the federal government and Passenger Facility Charges (PFC) collected from airlinecustomers. Interviews with LAWA Finance Department personnel state that this is the mostcomprehensive framework for understanding the future cost of planned airport development.However, Finance Department personnel also state that project inventory and cost estimates are

being continuously reevaluated an d revised as projects progress and new development needs and sources of income are identified. 1 While the estimates made for purposes of sizing bonds areappropriate, they do not provide sufficient information regarding the character and near term

schedule for the development of the City’s airports, and therefore, do not constitute a CIP.


The BOAC Has Delegated Substantial Capital Budget Authority

In addition, the Board of Airport Commissioners has delegated substantial capital budget



authority to management, and project budgets are not presented to the BOAC in most cases untilconstruction contracts are presented for award. For example, the FY 2012-13 LAWA CapitalBudget provides a summary statement of planned capital expenditures for the year by source, astatement of bonded indebtedness and a schedule entitled “Capital Plan Budget Fiscal Year 2012-13”. Consistent with the City Charter and Administrative Code, 2 the latter schedule showsexpenses for “BOAC Approved Capital Projects” by broad title (e.g., Taxiway S), as well assources of funding (i.e., Debt, Grants, PFCs, Tenant Funded and LAWA Cash). This listrepresents the projects for which the BOAC has made a CEQA finding. Also attached to the

budget is a subsidiary schedule that shows projects that are in the “definition/design” phase and are “Pending future action by the BOAC for approval.”

This listing does not constitute a CIP. The annual budget adopted by the Board only includessummary level financial information that reflects planned expenditures for capital projects for theyear. These annual budgets are determined from analysis of (a) the multi-year project budgetsapproved by the Capital Project Committee that will be active during the year, and (b) theschedules for the active projects. The FY 2012-13 Capital Budget includes the following major development appropriations, by source of funding:

Passenger Facility Charge Funded Capital Expenditures $235,425,000Grant Funded Capital Expenditures 55,488,000Revenue Funded Capital Expenditures 660,307,000

Total Capital Expenditures* $951,220,000

* Excludes budgeted expenditures for equipment, capital leases and bond redemption and interest.

As stated previously, although the Board of Airport Commissioners participates in establishingthe conceptual framework for airport development through workshops; approves all contracts,contract amendments and change order modifications over $1 million in value; and, approves theannual capital budget, it does not consider the total cost of individual project budgets untilconstruction contracts are presented for award. Prior to award, this responsibility has beendelegated to the Capital Project Policy Committee, which consists of the Executive Director, theChief Operating Officer and deputy directors, including the Deputy Director of Operations and the Deputy Director of Facilities and Maintenance.


Budget Flexibility Could Result in Financial Risk

Capital project cost estimates allow a substantial degree of flexibility and budgets approved by



the Capital Project Policy Committee appear to have been greater than necessary in someinstances. Although LAWA has generally implemented good budget analysis and control

processes, a high level of budget flexibility and discretion has been granted to capital projects program managers in the interest of expediting modernization project schedules. In interviews,the Finance Director confirmed that capital project budgets are broadly estimated at the outset.

This is illustrated by budget and financial data for the largest closed project. As of September 2012, financial data for the six fully completed projects show that an overall savings of $40.8million from the combined baseline budgets occurred (17.2% of the $232.3 million combined

baseline budgets). Further examination of the data for each individual project shows that three of the six exceeded their original baseline budgets and three of the six were less than the original

budget. However, nearly all of the savings was derived from the Crossfield Taxiway Project(M101A), which accounted for $40.5 million of the $40.8 million in savings for all projects, or 22.8 percent of the $177.8 million baseline budget for the project.

An analysis of the differences between the Baseline Budget and the actual expenses for theCrossfield Taxiway Project also suggests that individual line item costs can vary substantially.On this project, Design and Construction Management services exceeded budget by 51.0% ($2.9million) and 48.1% ($1.4 million) respectively, while offsetting savings from the Baselineconstruction Budget was approximately 7.0% ($8.6 million). Substantial additional savings of approximately $12.1 million resulted from lower charges for Management and Control overhead charged by the Airport Development Group, including LAWA staff and contractors.Significantly, no contingencies were expended from the Baseline Budget, amounting to an

additional $22.6 million in savings.Although not yet completed, budgets for the Bradley West Gates and Core projects appear tohave been constructed with similar flexibility and proposed changes in project scope have not

been reported to the BOAC in a timely manner. These two budgets, which combined received baseline budgets amounting to more than $1.7 billion, are projected to be substantially completed in May, 2013. As with the Crossfield Taxiway Project, LAWA was estimating at the time of thisreport that substantial budget savings will be realized from soft costs and contingency accounts.

The BOAC has been advised that this budget will be reduced as the result of a planned projectscope change that will remove a portion of the originally planned work related to the TomBradley International Terminal (TBIT) renovation and interface with Bradley West, costing anestimated $273 million. At the time of this report, the process for implementing the scope changeand awarding a new contract for the modified project was reportedly underway but a final


LAWA’s project budget development process has evolved over time as the organization hasmodified its process for advancing projects toward development. The typical budgetdevelopment process includes multiple steps intended to develop accurate project budgets,including the following: (1) Initial estimates of project construction costs are made by contract

hi d i h h Pl i D (2) Th i i i l i



architects and engineers who report to the Planning Department; (2) The initial estimates arereviewed by Planning personnel for reasonableness; (3) A second review of the estimate isconducted by the Airport Development Group (ADG); and, (4) The project “package” is sent tothe Finance Department for reconciliation of differences, review, possible adjustment,finalization and submission to the Capital Project Policy Committee for consideration. Thismulti-layered budget development and review process is intended to assess the reasonableness of the estimates, create checks and balances in the estimating process, and ensure that baseline

budget components conform to LAWA policy.

This process is undertaken early in the project scoping process, so estimates are commonly moregeneral and liberally set to allow adjustments for unforeseen costs and potential design changes.Although other actions are taken by LAWA to continually assess, report and modify budgets, if necessary, estimating accuracy may be compromised in some instances because of the generalnature of the initial estimating process and a desire by City officials to quickly modernize theairport to accommodate large aircraft, thereby elevating project schedule above financial risk.

Certain Budget Development Techniques Are Not Transparent

To counter the potential impact from excess budgeting, other processes have been developed toensure that budget appropriations are monitored and modified, if necessary, after actual costs areknown or can be reasonably estimated through completion. Based on interviews and documentreview, residual funding is swept into a general reserve managed by the Finance Departmenteach quarter (i.e., also termed the “Owner’s Reserve”).

Key variables affecting capital project estimating accuracy are summarized below:

A. Budgets for construction services are developed early in the process, requiring estimatorsto use general industry standards and experience to construct broad estimates of projectcosts. These estimates may need to be modified, depending on actual contractor bidsand/or materials cost during the construction phase. As demonstrated for larger projects,these early estimates may be inaccurate at the line item level and may result in large

budget surpluses when the project is completed. B. General budget allowances are made for certain unknown but anticipated construction

costs (e.g., allowances for hazardous waste removal). According to LAWA staff, theseallowances are often undetectable in the budget packages unless purposely itemized by


C. On the largest projects, some “soft costs”, such as design services, may vary substantiallyfrom the baseline budget. The cost of project administration services provided by LAWAstaff and consultants were consistently overstated on the projects reviewed for the audit,suggesting that the initial estimates for these cost categories could be refined.



LAWA routinely allocates soft costs at an additional 27% of the construction, or hard cost budget. This percentage allocation was reportedly developed based on “the experience of other airports”, but has not been refined since initially adopted by LAWA for budget estimating

purposes. LAWA staff state that the data from actual LAX development projects is collected and compared with the estimate as part of the Project Status Report (PSR) process, and that actualcosts on projects are typically lower than the 27% estimate (approximately 23% to 24%).

LAWA has also developed general fixed percentage estimates for contingency appropriations.Depending on the character of the project, the contingency can be set at 10% (for flatwork, suchas taxiway and runway surfacing), 15% (for new vertical construction, such as the Bradley West

projects) and 25% for renovation. However, no contingency adjustments are made for project budgets, based on scale. Our review of completed projects and other projects nearing completionindicates that contingency appropriations may be greater than necessary on larger projects, and could potentially be reduced at the outset.

While actual costs are monitored regularly by LAWA, there have been no actions taken to adjustthe percentages for projection purposes going forward. Our review of the estimates and actualresults suggests the following weaknesses in the current approach exist:

• Because allowances are not always articulated in the estimating documents that go to theFinance Department for review, a detailed, independent assessment of the appropriateness or level of allowance cannot be made by the Finance Department. LAWA should modify itscurrent practice to ensure that all allowances are specifically identified and formally justified in the estimates that are forwarded to Finance for approval.

• Percentage estimates for line-item appropriations for soft costs can vary significantly fromactual costs. This is particularly apparent for the estimates made for design services, and management and control services provided by both in-house and consultant personnel. Thisis illustrated by the description of variances reported on the Crossfield Taxiway project,described previously in this report, where design and construction management services

exceeded the original budget by 48.1%; and, substantial savings of $12.1 million resulted from lower charges for Management and Control overhead. LAWA should initiate a costallocation study to refine the rationale for allocating costs and the appropriateness of rates.

• On several projects contingencies are not drawn down to the extent budgeted Once again as


Therefore, to ensure that budgets more accurately predict actual costs, LAWA should refine theanalysis that serves as the basis for estimating soft costs and contingencies. The analysis should consider whether differential approaches may be appropriate based on (a) the type of project, (b)the scope of the project, and (c) the complexity of the development.



Finally, LAWA has not developed comprehensive policies, procedures and standards for capital project budgeting, although various subsidiary documents related to process and change order approval authorities exist. LAWA should develop such policies, procedures and standards,including specific procedures and standards for estimating soft costs and contingencies.

ConclusionsLAWA does not have a multi-year capital improvement plan that has been presented to theBoard of Airport Commissioners in a public setting. This diminishes accountability and transparency in the organization. In addition, LAWA has overstated its baseline capital program

budgets on at least one major project. This results in a greater commitment of funds than would otherwise be necessary with more accurate forecasting, and may increase the risk of unnecessaryor avoidable expenditures. Further, the Finance Department does not receive sufficiently detailed cost information on allowances and other general estimates of construction costs to make fully

informed decisions on the recommended budget. Estimates of project soft costs and contingencies may be set too high for large capital projects, suggesting that an ongoing processfor evaluating and refining estimating practices may be appropriate.

RecommendationsThe Board of Airport Commissioners should direct the LAWA Executive Director to:

6.1 Continue efforts to develop a multi-year capital plan that would be presented to the Board of Airport Commissioners in public session.


6.3 As part of the annual budget process, or as required by the needs of the organization, seek Board of Airport Commissioner approval of detailed, individual capital project budgets.

6.4 Require all project budget packages to specifically identify allowances and other costcomponents for which the basis of the estimate cannot be reliably determined.

6.5 Review the analytical basis for estimating project soft costs and contingencies and consider establishing variable standards based on project scope and other factors.


Costs and BenefitsThese recommendations could be implemented using existing LAWA resources. Producing acomprehensive capital improvement plan and developing policies and procedures that serve as



comprehensive capital improvement plan and developing policies and procedures that serve asthe basis for establishing capital budgets would better communicate LAWA development goalsand projected costs. As the projects move from the conceptual to design phases, detailed lineitem estimates showing allowances, soft cost components based on better defined projectcharacteristics, and contingencies should be clearly presented and described, to ensure thatFinance Department budget personnel have all of the information necessary to conduct athorough review and assessment of the capital budget reasonableness.

7. Long-Term Program Management Strategy

• While the need for consultant program management services in the first years of



While the need for consultant program management services in the first years of LAWA’s capital development program was clear, LAWA has not developed astrategy or plan to transition LAWA staff into capital development programmanagement and other roles that are currently held by consultants. Despite astated intention to transition to an “owner-driven” organization, the contract forprogram management services has recently been extended to eight years at acost of $202 million, and documentation suggests that these services will continueto be provided by consultants through at least 2018. LAWA has not conductedany cost-benefit analyses or provided any long-term strategy for use of consultants versus City staff in program management services in the future.

• Based on a review of the most common positions held by consultants and acomparison to existing City job classifications, the cost of utilizing consultants isestimated to be approximately 15-20 percent greater than the cost of City staff.In addition, by placing consultants in key roles throughout ADG, staff development opportunities for LAWA personnel are limited. Further, unlessLAWA implements a strategy for aligning staffing needs with specialty skill sets,the continued lack of in-house expertise will perpetuate the deficiencies thatrequired the use consultants in the first place. Even if the need for suchknowledge and expertise declines over the next ten years as LAWA accomplishesmajor elements of its capital development program, there will always be abaseline need for capital development program staff expertise.

• LAWA should develop a long-term strategy for the use of consultants andLAWA staff in program management and support roles, including theidentification of the amount and types of baseline staffing that will be requiredon a long-term basis. LAWA should also broaden its recent efforts to identifyany airport-specific job classifications that could be established by the City andenable LAWA to recruit and retain appropriate capital development staff.Implementation of these recommendations would enable LAWA to develop an“owner-driven” organization that is capable of leading future phases of capital

improvement without relying as heavily on consultants, thereby reducing costs.

Initial Need for Consultant Program Management

Section 7: Long-term Strategy for Program Management

approximately 20 years; and, in some cases, the lack of certain specialized job classificationsamong the City’s existing job classifications (e.g. estimators and schedulers). These justificationswere described in the Regional Airports Planning Division’s 1 request to LAWA’s HumanResources Division for authorization to hire consultants pursuant to City Charter Section 1022,which allows boards of commissioners to enter into “contracts for the performance of work when



which allows boards of commissioners to enter into contracts for the performance of work whenit is determined by the Council or the board of commissioners that the work can be performed more economically or feasibly by independent contractors rather than by City employees.”

Determination by Human Resources

In its “1022 Determination Review” (referring to the City Charter Section noted above) of theRegional Airports Planning Division’s request to hire program management consultants,LAWA’s Human Resources Division determined that there were no other LAWA personnel whocould provide the service, stating “according to the division, LAWA does not have sufficientstaff to perform the work proposed for contracting due to the magnitude and scope of work.”However, the determination also stated that “City classifications have the expertise to performsome of the work proposed for contracting, such as planning, environmental analysis,architectural design, engineering design, project management, design management, inspection,and project control services. The Department of Public Works may have the capability to

perform some of the work proposed for contracting. However, according to the division, thework proposed for contracting requires technical expertise in various disciplines and fields,which city classifications do not have the expertise to perform.”

In its considerations of alternatives and whether LAWA staff could perform the function, theRFP for Program Management Services stated that the “HR Division is continuing its review and if it is determined that City classifications could possibly perform some of the proposed work,LAWA will notify the specific department(s) and provide them with a copy of the RFP.”

Solicitation and Award of Program Management Services Contract

On November 6, 2007, LAWA issued a Request for Proposals (RFP) for “Program ManagementServices for the Capital Improvement Program at Los Angeles International Airport.” The RFPsought to secure program management services including, but not limited to:


• Pre-design• Program Logistics and Support• Planning Management and Assistance Services• Design and Engineering Management•

Construction Management

• Environmental Services• Post-Construction Services• Integrated Project Management Team Reporting• Contracts and Administration



The RFP stated that “it is expected that the contract will be for a term of six (6) years. Five bidswere received by LAWA and three were considered responsive. The three responsive bidders(DMJM Aviation, Inc.; Bechtel Infrastructure Corporation; and Parsons/Jacobs Integrated Program Management Team) were interviewed by a panel of five voting members and two non-voting technical advisors, and a representative from the Office of the City Attorney observed the

process. The firms were scored according to the criteria in the RFP and Bechtel Infrastructure

Corporation and DMJM Aviation, Inc. were the top two scorers. A second round of interviewswas conducted by the same panel as the first round, except that the two original non-votingmembers were not present and LAWA’s Executive Director also participated as a non-votingmember. Upon review of all of the assessment information, LAWA staff recommended theselection of DMJM Aviation, Inc. At this time, DMJM Aviation, Inc. was the aviation operatingfirm of parent company AECOM Technology Corporation.

The BOAC approved the contract (DA-4260) with DMJM Aviation, Inc. on March 3, 2008, and

the Program Management Agreement was dated March 19, 2008. The original contract was for aone-year term and a total amount of $25,000,000. Section 4.2.2 of the contract states that “theCity anticipates that it would like to reserve the option to extend beyond six (6) years,” and stipulated the City’s option to amend the contract to extend the term up to ten (10) years.

An integration of the contractor’s worldwide operations into a single entity resulted in thecontract being assigned to “AECOM Technical Services, Inc.” in 2010.

AECOM Contract Extension and Ongoing Baseline Staffing NeedPursuant to contract DA-4260 cited above, AECOM Technical Services Inc. and itssubcontractors provide program management services for LAWA’s capital improvement

program. From March 2008, when the contract was approved, through November 2012, 865individuals had been authorized to work at LAWA under the contract, including individualsemployed by AECOM and 67 subcontractor firms. AECOM’s program management servicesinclude pre-design services, program logistics and support, planning management, constructionmanagement, environmental services, post-construction services, and other customary services.

As of November 13, 2012, the AECOM contract had been amended and extended three times, asshown in the table below. In the second amendment, $62,720,000 was added without changing


oversight of tenant-initiated improvement projects. The third amendment increased the term fromsix to eight years and the total contract amount from $162,720,000 to $201,934,228.

Table 7.1AECOM Contract Amendments



CO Co t act e d e tsDate of BOAC

ApprovalTotal Contract

AmountTotal Contract

TermOriginal Contract 3/3/2008 25,000,000$ 1 yearAmendment A 2/9/2009 100,000,000$ 6 yearsAmendment B 12/6/2010 162,720,000$ 6 yearsAmendment C 11/13/2012 201,934,228$ 8 years

Source(s): Report to the BOAC, Meeting Date: November 13, 2012, Item #4, Subject:

Amend Contract and Appropriate Funds; RFP for program management services.

LAWA’s cost forecast for the eight year contract includes declining total annual cost in years six,seven and eight, to $21.7 million, $13.7 million, and $9.0 million, respectively. The averageannual cost of the first five years of the contract was $31.5 million, with a pattern of increase,from $21.0 million in year one to an estimated $41.0 million in year five. Should the amounts

budgeted in years six, seven and eight prove insufficient to meet program needs, LAWAmanagement would have the option to present an additional contract amendment to the BOAC,as it did in 2010 with the second contract amendment. As mentioned previously, in that case,$62,720,000 was added to the contract without changing the term of the contract.

Table 7.2AECOM Annual and Cumulative Cost Summary

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8

Annual Cost

PM Staffing 16,912,364$ 23,237,725$ 20,570,104$ 23,423,935$ 27,683,181$ 20,808,677$ 13,081,862$ 8,394,713$Other Services 4,064,722$ 1,263,472$ 6,472,995$ 20,608,167$ 13,331,211$ 881,100$ 600,000$ 600,000$Total Annual Cost 20,977,086$ 24,501,197$ 27,043,099$ 44,032,102$ 41,014,392$ 21,689,777$ 13,681,862$ 8,994,713$

Cumulative Cost

PM Staffing 16,912,364$ 40,150,089$ 60,720,193$ 84,144,128$ 111,827,309$ 132,635,986$ 145,717,848$ 154,112,561$Other Services 4,064,722$ 5,328,194$ 11,801,189$ 32,409,356$ 45,740,567$ 46,621,667$ 47,221,667$ 47,821,667$

Total Cumulative Cos t 20 ,977,086$ 45,478,283$ 72,521,382$ 116,553,484$ 157,567,876$ 179,257,653$ 192,939,515$ 201,934,228$

Forecast

Source(s): Report to the BOAC, Meeting Date: November 13, 2012, Item #4, Subject: Amend Contract and

Appropriate Funds. RFP for program management services.


Plan Amendments presently under consideration. LAWA management has reported to the BOACthat the total capital program budget, as established in Capital Budgets 1 and 2, is estimated to beapproximately $6 billion to $7 billion through 2018 2. Further, in an interview with a local

planning and infrastructure trade association, LAWA Executive Director recently stated, that ontop of the approximately $4.1 billion Capital Budget #1, “We’ve got another $8 billion-plus to

d hi i if ’ ll i k LAX h i hi i d ” 3



spend on this airport if we’re really going to make LAX the airport this city deserves.” 3

In any case, LAWA’s capital development program will continue for several years to come and will require skilled program management professionals. The November 2012 staff reportrecommending the third contract amendment states “ADG will continue to require outside

professional support services through 2018…the primary focus of this action…is to retain key personnel who are critical to the completion of the Bradley West Gates and Core Improvements,Core Renovations, and Central Utility Plan Replacement projects and core staff that will helptransition program management services to the successor firms based upon a new procurement.”As these statements make clear, LAWA plans to continue to purchase program managementservices from consultants for the foreseeable future.

LAWA Uses Comparatively More Consultants Than Others

The Airport Development Group’s total Management and Controls budget amounted to$141,431,367 across all projects active as of September 2012. ADG budgeted 65.3 percent of itstotal Management and Controls budget for consultants and the remaining 34.7 percent was

budgeted for the cost of LAWA Management and Controls personnel. On the project level, these budgets for consultant management and controls services range from a low of 0 percent to a highof 99.8 percent. The Bradley West Gates project budgets 67.0 percent for consultants, and theBradley West Core project budgets 76.2 percent for consultants.

By comparison, the California Multi-Agency CIP Benchmarking Study (2012 Update), which is asurvey of seven of the largest cities in California, reports that, on average, the respondents spent30 percent of total project delivery costs on consultants, and 70 percent on in-house staff.Although this Benchmark Study focuses primarily on public works departments, it provides a

broad indicator of experiences in other jurisdictions that should be considered by LAWA as itsets its own goals for transitioning to a more appropriate mix of stable in-house personnel and consultants with specialty skills.


LAWA Has Not Planned for Transition to a Baseline Organization

Despite LAWA’s stated intent to transition ADG to an “owner-driven” organization and theexpectation that capital development will continue for several years to come, LAWA executive

h t d l d l t t f d t i i b li d t iti i



managers have not developed a plan or strategy for determining baseline needs or transitioningthe program management function to LAWA staff. Similarly, LAWA managers stated that nocost-benefit analysis has been conducted to assess the relative value of relying heavily oncontract-driven program management services.

Further, LAWA has not conducted follow-up analysis of staffing needs and the suitability of LAWA’s existing classifications since the 2007 “1022 Determination,” despite the fact that theinitial review assumed only a six year contract term and the RFP for program managementservices stated that the HR Division would continue its review. A Procurement Services Divisionrepresentative stated that Charter Section 1022 does not require a new review with contractamendments unless the scope of services changes significantly. While LAWA has implemented a position approval process intended to determine if a City job classification could meet thestaffing need instead of a consultant for each new requested position, this process does notamount to a broad assessment of staffing needs that could inform higher-level decision-makersabout the suitability of LAWA’s existing classifications. Such an analysis would guide a strategyto develop a sustainable baseline organization. During the course of the audit, LAWA gained approval for the creation of a new Airport Engineer classification, which is an example of thetype of effort that should be included in a larger organization building strategy.

It should be noted that LAWA has utilized City staff from other City departments in some caseswhere LAWA staff could not meet the need of the capital development program. LAWA hasemployed these individuals by entering into memoranda of agreements (MOA) with PublicWorks, the Department of Building and Safety and the Department of General Services. LAWAreports that the Airports Development Group has expended a total of $47.2 million inInterdepartmental Orders for other City departments, dating back to July 2008. TheseInterdepartmental Orders cover a variety of services, including a large number for testing,inspection, plan check and permitting.

Lack of Formal Staff Development OpportunitiesThe AECOM contract (DA-4260) requires the contractor to work with LAWA to train Cityemployees and conduct other staff development activities, as described in “Services” subsection2.4.5, shown below:

“Program Manager shall assist LAWA in training and developing LAWA and City staff resources.


Aside from the experience of working in an integrated project team environment and the learningopportunities that may arise from that arrangement, it does not appear that AECOM has provided substantive capacity building opportunities for LAWA staff that would prepare them to take ongreater program management roles. LAWA provided training logs for City staff and consultants,including documentation to indicate that some trainings were provided by AECOM. However,this training log is not linked to an overall strategy that defines long term baseline staffing needs



this training log is not linked to an overall strategy that defines long-term baseline staffing needs.Instead, although important, the log focuses on technical training needs that would be expected on any large capital development project, such as worksite safety. By placing consultants in keyroles throughout ADG, and not requiring the program management contractor to formally trainand develop staff to perform core program management functions, LAWA hinders staff development opportunities for LAWA personnel and perpetuates the deficiency that required theuse of consultants in the first place.

Total Cost of Contractors Exceeds Total Cost of City Employees

While it was not feasible in the course of this audit to conduct a comprehensive detailed comparison of the costs of all AECOM contract employees and similar classifications of Cityemployees, a basic analysis was conducted to provide an order-of-magnitude comparison.

Base Rates and Benefits are Slightly Higher for City Employees

To compare the productive hourly cost of City employees with the hourly rates charged byAECOM for its personnel, an analysis was conducted of directly comparable classifications, suchas architects and engineers. The analysis concluded that productive hourly salary rates for Cityemployees are approximately 3.4 percent greater than the base rates charged by AECOM for various classifications that provide program services. In addition, certain employee benefit costs,such as contributions for City retirement, are also greater than the corresponding categories of expense included by AECOM in its total rate calculation.

Indirect Costs are Substantially Higher for Contractors

Federal cost accounting regulations included in Federal Acquisition Regulation (FAR) Part 31allow contractors to charge for direct labor, employee benefits and indirect costs of operations. Inthe most recent fiscal year, AECOM is charging LAWA for indirect costs that amount to 122.4

percent of direct labor rates for on-site personnel. These indirect costs include allocated amountsfor various cost pools, including the following:• Indirect costs of AECOM personnel, including allocated costs for administrative personnel

located at the Home Office.

• “Home Office” allocations which includes costs of executive management earning salaries


• Travel expenses for management and administrative personnel who are not assigned to theLAWA projects (i.e., LAWA directly reimburses travel expenses for assigned personnel).

By contrast, we estimate that the City would primarily incur cost of labor and related benefits, if

LAWA were to employ City personnel rather than consultants, since most of the non-personneloverhead cost categories would not require additional City appropriations For example LAWA



overhead cost categories would not require additional City appropriations. For example, LAWAis already allocated a portion of indirect costs for finance, legal and administrative staff employed centrally by the City. If LAWA were to replace contract personnel with City staff, thetotal City cost for these support services would very likely not be affected. As a result, weestimate that on a marginal cost basis, the combined contractor rate, including both base salaryand overhead, is approximately 15 to 20 percent greater than the cost of providing services withCity personnel, since many of these allocated costs would not be incurred, or would only bemarginally incurred by the City if it used its own personnel.

Further, we recognize that LAWA will always require some contractor assistance above its baseline staffing need to respond to temporary fluctuations in development activity and to retainindividuals with special skills. However, because LAWA has not defined its baseline capital

project staffing need or the key capital program management positions that should be held byCity personnel, an accurate estimate of the amount of savings that would result fromtransitioning to in-house operation could not be determined for this audit. No netheless, if even

just one-third of the consultant staff, representing approximately $48 million 4 over the currentlife of the AECOM contract, had been replaced by City personnel, the City could have saved aconservatively estimated $7.2 million, based on a 15 percent differential between City and consultant costs. The actual savings rate would be variable depending upon the classifications

pay ranges established by the City and mix of staff. While this analysis is merely an order of magnitude estimation and a detailed study would be necessary prior to any major strategy shift, itis intended to illustrate the type of analysis that should be carried out by LAWA management asit considers its long-term options for program management services.

ConclusionsLAWA will continue to pay a premium for the use of consultant program management servicesunless it successfully establishes at least a baseline in-house organization using City jobclassifications. Based on a review of the most common positions held by consultants and acomparison to existing City job classifications, the additional cost difference from usingconsultants in place of City staff is estimated to be approximately 15 to 20 percent. In addition,

by placing consultants in key roles throughout ADG, LAWA hinders staff developmentopportunities for LAWA personnel and perpetuates the deficiency that required the useconsultants in the first place Even if the need for such knowledge and expertise declines over the


next ten years as LAWA accomplishes major components of its capital development program,there will always be a baseline need and, as long as LAWA continues to rely heavily onconsultants instead of developing City staff resources, it will pay a premium for the services.

Recommendations




7.1 Direct staff to develop a long-term strategy for the use of consultants and LAWA staff in program management and support roles, including the identification of the amount and types of baseline staffing that will be required on a long-term basis, and an estimate of

the amount and types of consultant staffing that will be required. The strategy should be based on a cost-benefit analysis that justifies the allocation of LAWA staff and consultants.

7.2 Build upon and broaden its recent effort with the Airport Engineer classification toidentify any airport-specific job classifications that could be established by the City and enable LAWA to recruit and retain appropriate capital development staff. Any such

proposed classifications should be provided to the Human Resources Division for review.

7.3 Direct the Human Resources Division to review existing job classifications for capitaldevelopment at the airport and conduct analysis to determine whether the addition of newairport-specific classifications is appropriate.


Costs and BenefitsImplementation of these recommendations would enable LAWA to understand the costs and

benefits associated with its options as it pursues a more “owner-driven” organizational model. If it so chooses LAWA could build an organization that is capable of leading future phases of



it so chooses, LAWA could build an organization that is capable of leading future phases of capital improvement without relying as heavily on consultants, thereby reducing costs. LAWAcould save approximately 15 to 20 percent on program management costs by transitioningconsultant roles to City staff. In the context of the program management contract to-date, if even

just one-third of the consultant staff had been replaced by City personnel, the City could havesaved a conservatively estimated $7.2 million.

Appendix AOFFICE OF THE CONTROLLER

Audit of the Los Angeles World Airports’ Capital Development Program

Ranking of Recommendations

Section Description of Findings Ranking Recommendations



SectionNumber

Description of Findings RankingCode

Recommendations

1 LAWA has not formalized astructured Value Engineering

process, although some importantelements exist, and efforts

reportedly are being made tostrengthen the procedural foundationand approach to evaluating projectdesign and materials alternativesusing a structured ValueEngineering process. Nonetheless,LAWA is presently in technicalviolation of federal requirements and could be subject to sanctions, if found to be non-compliant. Inaddition, design and constructionindustry best practices recommend the use of Value Engineering at the30% design phase, and federaladvisories recognize that byemploying Value Engineering

principles at the earliest stages of a project, the opportunity for influencing final costs is greatlyincreased.

N

U


1.1 Direct staff and request legal counsel to preparean assessment of past practices used on LAWAdevelopment projects, to ensure that designreview and cost engineering efforts cansatisfactorily meet FAA expectations regardingthe use of structured Value Engineering.

1.2 Develop and establish policies and proceduresthat ensure that a structured Value Engineering

program is implemented at LAWA.

2 While LAWA’s analysis of the benefits of using the CMAR modelsupported management’s decision toemploy the CMAR project deliverymethod for the Bradley West

projects, certain circumstances and project expectations may have prevented LAWA from realizing themodel’s full benefits. For example,LAWA officials state that theyexpected a large volume of changeorders on the Bradley West projectsf i ti i t ti

N

N

U


2.1 Conduct a post-project assessment of the costsand benefits of the CMAR model. Include acomparison of alternative models.

2.2 Evaluate the CMAR model, as implemented for the Bradley West Gates and Core projects,

by reviewing the agreements and the incentivestructure they provide.

2.3 Develop formal criteria for choosing projectdelivery models on future capital projects and

SectionNumber


Recommendations

3 A major benefit of the CMAR project delivery model is thetransfer of responsibility and asignificant amount of risk fromthe owner to the CMAR for theentire construction effort.

h

U

T he LAWA Executive Director should direct ADGmanagement to:

3.1 Review contract provisions, such as Articles

01 23 00 (Change Orders), 01 24 00 (LAWAInitiated Changes), and 01 25 00 (CMAR Change Request) in the Bradley West



However, ADG has notimplemented this project deliverymodel in the most effectivemanner and has not takensufficient action to ensure thatthe CMAR for the Bradley West

projects effectively analyzes

subcontractor change order estimates for accuracy and reasonableness. Further, theCMAR has not complied withcontractual obligations to submitchange order requests in a timelymanner and LAWA has notaggressively enforced its ownchange management guidelinesor specific time requirements of the CMAR agreements.

U

U

N

N

Change Request) in the Bradley WestConstruction Agreements, to strengthenlanguage and expectations of CMAR changemanagement for future projects. Specific areasthat could be strengthened include theexpectation of the CMAR role in the meritingreview process, pricing estimation for

proposed change orders, and the acceptabilityof CCR revisions that contain cost increases,

but no changes in the scope of work.

3.2 Follow through on formal communications tothe CMAR management regarding contractual

provisions requiring the CMAR to submitCPCNs and CCRs within the timeframesstated in the agreement.

3.3 Formally communicate that unsupported estimates used as placeholders, as well asCCR revisions that do not contain changes inscope, will not be accepted.

3.4 Consider enhancing the monitoring of CMAR performance of change management to includeits ability to meet contract prescribed timelinesfor change submittals to reduce the risk of schedule impacts, that subcontractors will not

be paid in a timely manner, and to ensure the project may be closed out with an efficient and effective process.

3.5 Conduct a post-project analysis of theresources allocated to CMAR ChangeManagement functions by LAWA under theBradley West project budgets to determinewhether they exceeded the mean or medianamount spent, as a percentage of total costs,on this administrative function. Report resultsto the Board of Airport Commissioners.

4 LAWA may be performing QCfunctions assigned to the

The LAWA Executive Director should direct theChief Airports Inspector to:

SectionNumber


Recommendations

inefficiencies in the CMAR-LAWA relationship. BecauseLAWA inspectors do not have,or do not follow all procedures

for tracking inspection activity or monitoring the performance of the CMAR, management is

N

N

4.3 Provide training to LAWA inspector staff onrecords and information management

procedures to ensure that staff areknowledgeable about requirements and equipped to comply with them.

4.4 Review processes and determine if



, gunable to effectively gaugeCMAR QC performance or overall CMAR compliance withactive contracts. Additionally,weaknesses in the practice of CMAR performance monitoringmay result in deficiencies inconstruction, which may affectthe integrity of the work elementand increase the possibility of future litigation.

N

N

N

p procedures, notably those related to JobMemos and the issuance of Notices of

Noncompliance, should be revised.

4.5 Standardize and maintain LAWA-owned logsto track the full history of documentcommunications with a given contractor.

4.6 Review the Request for Inspection processesand define the implementation of Requests for Inspection in institutional documents for standardization of Request for Inspection

processes and procedures. 5 The Board of Airport

Commissioners has limited involvement in the review and

prioritization of proposed projects and is not involved inthe assessment of initial projectconcepts or budgets. Instead,these responsibilities have beenassumed by executive staff and the Board may have less thanoptimal involvement in major capital project decision-making

processes. This dynamic is, in part, driven by LAWAmanagement’s opinion that a“tension”, or conflict exists

between the Board’senvironmental reviewresponsibilities and its moredirect role considering capital

projects for approval. Further,executive management does not

conduct comprehensive needsassessments, nor has itestablished a systemic processfor determining which projectsshould be prioritized and

U

N

N

U

The Board of Airport Commissioners should directthe LAWA Executive Director to:

5.1 Request a written legal opinion from the City

Attorney’s Office regarding any potentialconflict of interest related to the Board’sduties and authorities related to airportdevelopment and CEQA review.

5.2 If a conflict of interest is determined to be afactor by the City Attorney’s Office, develop a

proposal to reassign the CEQA reviewresponsibility from the Board of AirportCommissioners to the City PlanningDepartment or another entity within the City,thereby enabling the Board of AirportCommissioners to conduct a more substantiallevel of review of the capital development

program.

5.3 Building on LAWA’s current periodic “open-call” for projects practice, conduct acomprehensive needs assessment of airportcapital assets, including both potentialdevelopment projects and facilitiesmaintenance needs, based on the results-oriented goals and objectives that flow fromthe organization’s mission.

SectionNumber


Recommendations

be officially reported to the Board of AirportCommissioners so that it may be involved inthe selection of capital development projects.

6 LAWA has not developed aCapital Improvement Plan or developed a multi-year Capital

U

The Board of Airport Commissioners should directthe LAWA Executive Director to:

6 1 Contin e efforts to de elop a m lti ear



p y pBudget, and the annual capital

budget approved by the LAWABoard of Airport Commissionersincludes only a high levelsummary of anticipated capitalexpenditures for each major element and for the budget year.

On a project basis, baselinecapital budgets are liberallyestimated at initial stages of development. These estimatesinclude broadly defined costcomponents, can raise the total

project budget by as much as 52 percent over the estimated cost of construction (i.e., termed “hard costs” in the industry and byLAWA). Large project budgetsare typically overstated, whichcan result in a greater commitment of funds than mightotherwise be necessary withmore accurate forecasting, and may increase the risk of unnecessary expenditures.

U

N

N

N

N

N

6.1 Continue efforts to develop a multi-year capital plan that would be presented to theBoard of Airport Commissioners in publicsession.


6.3 As part of the annual budget process, or asrequired by the needs of the organization, seek Board of Airport Commissioner approval of detailed, individual capital project budgets.

6.4 Require all project budget packages tospecifically identify allowances and other costcomponents for which the basis of theestimate cannot be reliably determined.

6.5 Review the analytical basis for estimating project soft costs and contingencies and consider establishing variable standards based on project scope.

6.6 Implement comprehensive and formalized policies, procedures and standards for developing, implementing and monitoringcapital project budgets.

7 LAWA has not developed astrategy or plan to transitionLAWA staff into capitaldevelopment programmanagement and other roles thatare currently held by consultants.Despite a stated intention totransition to an “owner-driven”organization, the contract for

program management serviceshas recently been extended toeight years at a cost of $202

U


7.1 Direct staff to develop a long-term strategy for the use of consultants and LAWA staff in

program management and support roles,including the identification of the amount and types of baseline staffing that will be required

on a long-term basis, and an estimate of theamount and types of consultant staffing thatwill be required. The strategy should be based on a cost-benefit analysis that justifies theallocation of LAWA staff and consultants.

SectionNumber


Recommendations

15-20 percent greater than thecost of City staff. In addition, by

placing consultants in key rolesthroughout ADG, LAWA hindersstaff development opportunitiesfor LAWA personnel and

perpetuates the deficiency that

N

classifications should be provided to theDepartment of Human Resources for review.

7.3 Direct the Human Resources Division toreview existing job classifications for capital

development at the airport and conductanalysis to determine whether the addition of new airport-specific classifications is



required the use consultants inthe first place. Even if the need for such knowledge and expertisedeclines over the next ten yearsas LAWA accomplishes itscapital development program,there will always be a baselineneed for capital development

program staff.

new airport specific classifications isappropriate.

Description of Recommendation Ranking Codes U- Urgent- The recommendation pertains to a serious or materially significant auditfinding or control weakness. Due to the seriousness or significance of the matter,immediate management attention and appropriate corrective action is warranted.

N- Necessary- The recommendation pertains to a moderately significant or potentiallyserious audit finding or control weakness. Reasonably prompt corrective action should betaken by management to address the matter. The recommendation should beimplemented within six months.

D- Desirable- The recommendation pertains to an audit finding or control weakness of relatively minor significance or concern. The timing of any corrective action is left tomanagement’s discretion.

( c h e c k a l l t h a t a p p l y )

z i n g p o t e n t i a l c a p i t a l p r o j e c t s a n d

f o r t h e c a t e g o r i e s o f p r o j e c t s

n o v a t i o n / R e h a b i l i t a t i o n

P r o j e c

t s

O t h e r P r o j e c t s

Appendix B



s C i t y C o n t r o l l e r a s p a r t o f a n a u d i t o f t h e

t s ( L A W A ) . T h a n k y o u

f o r p a r t i c i p a t i n g .

1 6 . A l t e r n a t i v e l y , i f i t w o u l d

b e m o r e

e c o n t a c t M s .

K a t i e

S h o r t a t

n y o t h e r q u e s t i o n s , p l e a s e

d o n o t

l r e p o r t t o y o u , w

h i c h w e

h o p e w

i l l b e a

1 . F o r w

h i c h o f t h e

f o l l o w i n g i s B o a r d a p p r o v a l r e q u i r e d ?

(

2 . D o y o u

h a v e a

f o r m a l a n d s y s t e m

i c p r o c e s s

f o r p r i o r i t i z

s e l e c t i n g

t h o s e t h a t w

i l l b e d e v e l o p e d ?

3 . S e l e c t

t h e d e l i v e r y m o d e l ( s ) t h e

A i r p o r t g e n e r a l l y u s e s

f

s h o w n

b e l o w . ( S

e l e c t a l l t h a t a p p l y . )

S u r v e y

Q u e s t i o n s

A i r f i e l d P r o j e c t s

N e w

F a c i l i t y

C o n s t r u c t i o n

P r o j e c t s

R e

D e s i g n -

B i d - B u i l d

C o n s

t r u c t i o n - M a n a g e r -

A t -

R i s k

D e s i g n -

B u i l d

N o d o m

i n a n t m o d e l , o r

V a r i e s

d e p e n d i n g o n

p r o j e c t

A i r p o r t M a s t e r

P l a n

A i r p o r t M a s t e r

P l a n A m e n d m e n t s

C a p i t a l P

l a n / B u d g e t

P r o j e c t D e f i n i t i o n a n d

B u d g e t

I n d i v i d u a l C o n t r a c t s

( p l e a s e s p e c i f y

d o l l a r a m o u n

t t h r e s h o l d b e l o w

, i f a p p l i c a b l e )

C h a n g e O r d e r s

( p l e a s e s p e c i f y

d o l l a r a m o u n t t h r e s h o l d

b e l o w , i f a p p l i c a b l e )

O t h e r

( p l e a s e s p e c i f y )

N o

Y e s

( P l e a s e d e s c r i b e )

I f Y e s , p l e a s e s p e c i f y

P l e a s e e x p l a i n

b e l o w , i f n e c e s s a r y .



e r a l a i r p o r t

p l a n n i n g

tr u c t i o n ,

i f

a r y u s t o

w - u p

.

Appendix B



i n g s i g n a t u r e s

r e q u i r e d f o r c h a n g e o r d e r s .

I f d o l l a r

a t e .

D o c u m e n

t s R e q u e s t

I n a d d

i t i o n , w e r e q u e s t t h a t y o u p r o v i d e

t h e f o l l o w i n g d o c u m e n t s v i a e m a i l :

1 . A v a i l a b l e o r g a n i z a t i o n c h a r t s

f o r a l l a i r p o r t d e p a r t m e n t s a n d

d i v i s i o n s , i n c l u d i n g t h e g e n e

g o v e r n a n c e a n d m a n a g e m e n t s t r u c t u r e ,

k e y a d m

i n i s t r a t i v e d i v i s i o n s , b u d g e t a n d f i n a n c e , p

a n d d e v e l o p m e n t , a n d a i r p o r t o p e r a t i o n s

2 . C o p i e s o f t h e p o l i c i e s a n d p r o c e d u r e s

f o r a i r p o r t a n d

f a c i l i t y p l a n n i n g ,

d e s i g n , a n d c o n s t r

a v a i l a b l e e l e c t r o n i c a l l y .

O t h e r w i s e , c o p i e s o f t h e

t a b l e o f c o n t e n t s w o u l d

b e s u f f i c i e n t .

3 . M o s t r e c e n t a i r p o r t s t r a t e g i c p l a n ,

i f a v a i l a b l e e l e c t r o n i c a l l y .

O t h e r w i s e , a n o f f i c i a l s u m m a

s t a t e m e n t o f s t r a t e g i c g o a l s a n d o b j e c t i v e s w o u l d

b e s u

f f i c i e n t .

4 . M o s t r e c e n t a i r p o r t c a p i t a l p l a n

5 . A i r p o r t c a p i t a l b u d g e t s

f o r t h e p a s t f i v e y e a r s

6 . A i r p o r t c a p i t a l p r o j e c t f i n a n c i a l r e p o r t s


T h e s e

d o c u m e n t s w

i l l h e l p u s u n d e r s t a n d c a p i t a l d e v e l o p m e n t a t y o u r a i r p o r t a n d w

i l l a l l o w

a n s w e r

f u r t h e r q u e s t i o n s

b y r e f e r r i n g

t o t h e d o c u m e n t s .

W e

h o p e t o a v o i d o r m

i n i m i z e f o l l o w

q u e s t i o n s .

P l e a s e s u b m

i t t h e s e d o c u m e n t s e l e c t r o n i c a l l y

t o M s .

K a t i e S h o r t a t k s h o r t @ h a r v e y r o s e . c o m .

Appendix B



f i n a l r e p o r t . W e

h o p e t h i s w

i l l b e a

Dallas-Fort Worth International Airport John F. Kennedy International AirportHartsfield-Jackson Atlanta International

Airport McCarran International Airport Miami International Airport San Francisco International Airport

1. For which of the following is Boardapproval required?

Airport Master Plan No No No - The City Council "adopts" the Master Plan. No Yes Yes

Airport Master Plan Amendments No No No No Yes Yes

Capital Plan/Budget No Yes Yes No Yes Yes



Project Definition and Budget No No No No No No

Individual Contracts Yes Yes Yes Yes Yes Yes

Change Orders Yes No Yes Yes Yes No

Other

DFW Airport Board approval required for:Professional Services (A/E) – New contracts over $50K, change orders over $40K, and Construction

– New contracts over $50K, change orders over $25K.

N/A N/A

The airport director has been authorized by theBoard of County Commissioners to executechanges orders not to exceed 10% of the awarded contract amount. There is no dollar limit on anysingle change order, just the total amount per contract. Any change orders which would exceed this 10% limit must be approved by the Board, nomatter the amount. As a practical matter, a verylarge change order will be taken to the board to

preserve the 10% authority for the normal courseof business. We also include a special allowancein each contract for items which develop duringthe course of the project. This special allowancecovers permits, fees, and any changes directed bythe owner which adds to the scope of the contract

(as opposed to design errors, design omissions, anunforeseen conditions). By way of example, for the Terminal 3 project, a $1.2 billion contract byaward, the special allowance was $50 million and the change order authority by board policy was$120 million. There were approximately $45 inchanges on this project and none of those changeswent to the board for approval.

All construction contracts must be approved by thBoard of County Commissioners. Change ordersmust be approved by the Board of CountyCommissioners. If the CO is below 15% of thecost of the contract cam be approved administratively by the Aviation Director, butneeds to be ratified by the Board of CountyCommissioners.

The dollar amount threshold requiring AirportCommission approval for contracts is anyconstruction contract over $400,000 and any

professional services contract over $50,000.

A p p e n d i x

C

C-1



P a g e

2

m o

d e

l , r e p a i r a n

d u p g r a

d e p r o

j e c

t s

p r e s e n

t c o s t e

s t i m a

t e o

f d e

f e r r e

d

n d i t u r e s

f o r t h e s e

t y p e s o

f p r o

j e c

t s

d o r g a n

i z a t i o n s g e n e r a

l l y i n v o

l v e d i n

e s s .

P l e a s e i n c

l u d e

t h e n u m

b e r o

f

n t i t i e s

d e v e l o p

t h e e s t i m a

t e s , a n

d

l . e e n g

i n e e r i n g p r o c e s s ?

I f s o , p

l e a s e

e s

b y w

h i c h m a n a g e r s o

b t a i n a n

d

a s s u r a n c e s y s t e m s

i n p

l a c e

t o o v e r s e e

Appendix D



P a g e

1

g S u r v e y

g S u r v e y

g S u r v e y

g S u r v e y

s C i t y C o n t r o l l e r a s p a r t o f a n a u d i t o f t h e c a p i t a l d e v e l o p m e n t p r o g r a m

a t t h e L o s

2 1 , 2 0 1 2 . A l t e r n a t i v e l y ,

i f i t w o u l d

b e m o r e c o n v e n i e n t f o r y o u

t o p r o v i d e y o u r

@ h a r v e y r o s e . c o m o r (

4 1 5 ) 5 5 3 - 4 6 3 8 . S h o u l d y o u

h a v e a n y o t h e r q u e s t i o n s , p l e a s e

d o

p r o c e s s

f o r p r

i o r i t i z i n g p o

t e n

t i a l c a p

i t a l p r o j e c

t s a n

d

? a r t m e n

t g e n e r a

l l y u s e s

f o r

t h e c a

t e g o r i e s o f p r o

j e c

t s

je c t s

R e n o v a t i o n

/ R e h a b i l i t a t i o n

P r o j e c t s

O t h e r P r o j e c

t s

L . A . D

e p a r t m e n t s

B e n c h m a r

k i n g S u r v e y

L . A . D

e p a r t m e n t s

B e n c h m a r

k i n g S u r v e y

L . A . D

e p a r t m e n t s

B e n c h m a r

k i n g S u r v e y

L . A . D

e p a r t m e n t s

B e n c h m a r

k i n g S u r v e y

3 . P l e a s e

d e s c r i b e y o u r c a p

i t a l e x p e n

d i t u r e s

f o r r e m

( v e r s u s e x p a n s i o n

) o v e r

t h e

l a s t 1

5 y e a r s a n

d y o u r p

m a i n t e n a n c e . I f

p o s s i b

l e , p

l e a s e p r o v i d e

t o t a l e x p e n

d u r i n g

t h i s p e r i o

d .

4 . P l e a s e

l i s t t h e

D e p a r t m e n

t a l o f f i c e s o r a s s o c

i a t e d

t h e

f o l l o w

i n g s t a g e s o

f p r o

j e c

t d e v e

l o p m e n

t .

5 . P l e a s e

d e s c r i b e

t h e p r o

j e c

t c o s

t e s t i m a

t i o n p r o c e

e s t i m a

t e s

d e v e

l o p e

d f o r a n y g

i v e n

p r o

j e c

t , w

h i c h e n

w h i c h e n

t i t y ' s e s t i m a

t e u

l t i m a

t e l y r e c e

i v e s a p p r o v a

l

6 . D o e s y o u r

D e p a r t m e n

t e m p

l o y a s t r u c

t u r e

d v a

l u e

s p e c

i f y t h e m a n a g e m e n

t r e p o r t s ,

t o o

l s , o r p r o c e s s e

e v a

l u a

t e p r o g r a m

a n

d f i n a n c

i a l s t a

t u s

i n f o r m a

t i o n .

7 . P l e a s e

d e s c r i b e

t h e

k e y q u a

l i t y c o n

t r o l o r q u a

l i t y

c o n

t r a c

t o r p e r f o r m a n c e .

D e f i n i t i o n o f p r o j e c t s c o p e

D e s

i g n

E n v

i r o n m e n t a l r e v i e w

P r o j e c t C o s t E s t i m a t i n g

Y e s

N o

P l e a s e

d e s c r i b e

P a g e

4

e , k e y a d m

i n i s t r a t i v e d i v i s i o n s , b u d g e t a n d f i n a n c e , p l a n n i n g

a v a i l a b l e e l e c t r o n i c a l l y .

O t h e r w i s e , c o p i e s o f t h e

t a b l e o f

n o f f i c i a l s u m m a r y s t a

t e m e n t o f s t r a t e g i c g o a l s a n d o b j e c t i v e s

w i l l a l l o w u s

t o

i z e f o l l o w u p

r o s e . c o m .

Appendix D



P a g e

3

g S u r v e y

g S u r v e y

g S u r v e y

g S u r v e y

u a

l i t y a s s u r a n c e e m p

l o y e e s

( R e s i d e n

t / P r o j e c

t

e r s )

h a v e

t h e a u

t h o r i t y

t o s t o p p a y m e n

t t o

t r a c

k i n g c

h a n g e o r d e r s ?

i n g s i g n a

t u r e s r e q u

i r e d f o r c

h a n g e o r d e r s .

I f d o

l l a r

a t e

.

L . A . D

e p a r t m e n t s

B e n c h m a r

k i n g S u r v e y

L . A . D

e p a r t m e n t s

B e n c h m a r

k i n g S u r v e y

L . A . D

e p a r t m e n t s

B e n c h m a r

k i n g S u r v e y

L . A . D

e p a r t m e n t s

B e n c h m a r

k i n g S u r v e y

I n a d d i t i o n , w e r e q u e s t t h a t y o u p r o v i d e

t h e f o l l o w i n g d o c u m e n t s v i a e m a i l :

1 . A v a i l a b l e o r g a n i z a t i o n c h a r t s

f o r g e n e r a l g o v e r n a n c e a n d m a n a g e m e n t s t r u c t u r e

a n d d e v e l o p m e n t , a n d o p e r a t i o n s

2 . C o p i e s o f t h e p o l i c i e s a n d p r o c e d u r e s

f o r p l a n n i n g ,

d e s i g n , a n d c o n s t r u c t i o n ,

i f a

c o n t e n t s w o u l d

b e s u f f i c i e n t .

3 . M o s t r e c e n t d e p a r t m e n t a l s t r a t e g i c p l a n ,

i f a v a i l a b l e

e l e c t r o n i c a l l y . O t h e r w i s e , a n

w o u

l d b e s u f f i c i e n t .

4 . M o s t r e c e n t c a p i t a l p l a n

5 . C a p i t a l b u d g e t s


6 . C a p i t a l p r o j e c t f i n a n c i a l r e p o r t s


T h e s e

d o c u m e n t s w

i l l h e l p u s u n d e r s t a n d c a p i t a l d e v e

l o p m e n t a t y o u r a i r p o r t a n d

a n s w e r

f u r t h e r q u e s t i o n s

b y r e f e r r i n g

t o t h e d o c u m e n t s . W

e h o p e t o a v o i d o r m

i n i m

q u e s t i o n s .

P l e a s e s u b m

i t t h e s e d o c u m e n t s e l e c t r o n i c a l l y

t o M s .

K a t i e

S h o r t a t k s h o r t @ h a r v e y r

Port of Los Angeles Bureaus of Engineering and Sanitation

1. Do you have a formal and systemicspruces for prioritizing potential capitalprojects and selecting those that will bedeveloped?

Yes – and specifyYes - All capital projects greater than 150k are approved by the Project Development Committee (PDC). The PDC is comprised of senior management and severaldivision heads.

Yes



No N/A N/A

2. Select the delivery model(s) theDepartment generally uses for thecategories of projects shown below.

Facility Construction Projects Design-Bid-Build Design-Bid-Build

Renovation/Rehabilitation Projects No dominant model or varies depending on project Design-Bid-Build

Other Projects No dominant model or varies depending on project Design-Bid-Build

Other, please specify. Projects are executed by outside contractors, other City Departments, or our own construction forces.The wastewater program has used design-build three times, but design-bid-build is the normal

process.

3. Please describe your capitalexpenditures for remodel, repair, andupgraded projects over the last 15 yearsand your present cost estimate of deferred maintenance. If possible, pleaseprovide total expenditures for these typesof projects during this period.

Our deferred maintenance budget is $5 million per year. We do not categorize projects as remodel, repair, upgrade, or expansion so can not provide a break down.

From B.o.S.: We do not track costs separately between expansion and rehab. From B.o.E: Thereare projects generally delivered over the 3-4 year window and

A

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4. Please list the Departmental officesgenerally involved in the following stagesof project development.

Definition of Project Scope Engineering, Real Estate, Marketing, Port tenants, PublicBOE and client department; BOS Wastewater Engineering Services, WW Collection System, and the treatment plants



Design Engineering, Environmental, ConstructionBOE and any consultant; BOE Environmental EngDiv and Wastewater Collection Eng Div

Environmental Review Environmental, Engineering, Construction, City Attorney, Real Estate, Planning BOE and any consultant

Project Cost Estimating Engineering BOE and any consultant

5. Please describe the project costestimation process. Please include thenumber of estimates developed for anygiven project, which entities develop theestimates, and which entity's estimateultimately receives approval.

For capital construction projects initial estimates are developed by the Engineering Division based on a conceptual design. This estimate is used to obtain projectapproval by the PDC. Estimates are updated at various stages of design (40%, 80%, 100%). If estimates at these stages exceed the approved budget the project isreturned to PDC for a project update. The budget is baselined after approval of the environmental process. This usually occurs at the 80% design. All estimates are

prepared by the Engineering Division.

The project manager is responsible for presenting anestimate to the client department for approval.

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6. Does your Department employ astructured value engineering process? If so, please specify the managementreports, tools, or processes by whichmanagers obtain and evaluate programand financial status information.



Yes - describe

Yes - Projects control reports are updated on a monthly bases. All projects are reported in the Project Information Control System (PICS) directly by our projectmanagers and costs are verified and checked by our Financial Control section. Project review meetings are held on a regular basis to review project status and issueswith management.

Various reports are generated to report actual and projected cash flows, milestones, and status. Reports generated include:

- 10 year Cash Expenditure- Monthly 2 year Cash Expenditure- 5 Year Cash Expenditure- 12 Month Projected Construction Costs- Quarterly Cash Expenditure- Budget versus Current Projections- Radar Report (tracks budget project and FY budget and schedule)In addition to the above reports a CIP Dashboard is available to drill down to more specific project information.

Yes, though it is not as structured as suggested inthe question. It is a helpful tool for the process.

No N/A N/A

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8. Do your construction engineeringquality assurance employees(Resident/Project Engineers, Inspectors,

or Field Engineers) have the authority tostop payment to contractors?

YesYes - Monthly construction progress payments are initiated by construction management representatives, discussed wi th contractors, and processed based on the

percentage of acceptable work completed.Yes - Bureau of Inspection



No N/A N/A

Other - please specify N/A N/A

9. Is there an established process fortracking change orders?

Yes YesYes there are two processes for tracking changeorders.

No N/A N/A

10. Please list the titles of the authorizingsignatures required for change orders. If dollar amount thresholds apply, pleaseindicate.

Less than $150,000 - Executive Director Over $150,000 - Board of Harbor Commissioners

A list was provided that outlines the signaturesrequired for the different dollar thresholds.

A p p e n d

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Audit of the Los Angeles World Airports' Capital Development Program

Documents

Transcript of Audit of the Los Angeles World Airports' Capital Development Program