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Board Report: 2014-AE-B-007 March 31, 2014

Opportunities Exist for the Board to Improve Recordkeeping, Cost Estimation, and Cost Management Processes for the Martin Building Construction and Renovation Project

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Appendix D: Management's Response

March 19, 2014
Melissa Heist, Associate Inspector General for Audits and Evaluations
Michell Clark, Director, Management Division  /signed/
Management’s Response to OIG review of the Martin Building Cost Estimate

Finding 1: The Martin Building Project Team Did Not Properly Maintain Supporting Documentation for Its Conceptual Construction Cost Estimate

Management’s Response: The Management Division concurs with the finding and has resolved issues related to the centralized filing system for the project. Baseline cost estimates include citations cataloguing resources used to prepare the estimates, and all resource documents are captured and are available in the new project file management system. This file management software was purchased, installed, and in use prior to the issuance of this report.

Prior to the initiation of the audit, leadership within the Management Division had established a working group consisting of Facilities and Budget and Administration staff whose task was to review and consolidate, as necessary, a historical file of all of the factors and decision-making that had led to the pre-programming conceptual cost estimate. It was known that this type of file was essential for enabling the project team to reflect back on cost elements and values as new information became available. The responsibility to maintain supporting documentation is assigned to the Chief Project Manager who is a seasoned senior registered architect with considerable experience in managing large and complex construction projects.

The OIG notes that it took four weeks for the project team to consolidate and provide requested estimate documentation. The Management Division believes the lag time was reasonable considering the volume of information requested; the lack of clear instructions on the level of detail required; the need to review all materials prior to providing them to the OIG to ensure they were responsive to the request; and the amount of time spent duplicating, packaging, scanning, and uploading all materials while concurrently maintaining the ongoing operations of the organization and managing other large projects.

In summary, the Management Division concurs with the finding and has resolved the cited deficiencies.

Finding 2: The Martin Building Project Conceptual Construction Cost Estimate Contained Errors and Inconsistencies

Management’s Response: The Management Division continues to believe that this audit was premature to take place during the pre-programming phase of this project.

The pre-programming, conceptual cost estimate did result in a proposed budget figure provided through the CBA for insertion into the Board’s strategic plan. Prior to CBA submission, the conceptual estimate was compared to bank renovation costs on an overall cost-per-square-foot basis by the Board’s Division of Reserve Bank Operations and Payment Systems. This analysis served as a high-level verification that the conceptual estimate for the project was appropriate. In addition, most of the conceptual estimate relied on underlying documents prepared by professionals, such as URS and KCCT, who likely did follow customary conceptual cost estimating practices based on specific design submissions. Furthermore, any errors and inconsistencies were completely resolved when the Board received two professional, independently prepared, baseline construction cost estimates in December 2013. It is noteworthy that these two estimates are within 3.5% of the construction budget. The major variations between the two estimates and between the estimates and budget are attributed to the values of the design and construction contingencies.

The Management Division was in compliance with recommendation 2 prior to the issuance of this report. The baseline cost estimates are organized and presented in a manner supportive of recommendation 2, sub-items a through e. Specifically, in response to each sub-item:

  1. Prior to the receipt of the recently completed baseline cost estimates, it was impossible to ensure that all programming elements were included since the program document had not yet been substantially completed. Again, this is one reason why a conceptual cost estimate at this phase of a project is ± 25%.
  2. All redundant costs were eliminated in the recently completed baseline cost estimates.
  3.  Escalation in the recently completed baseline cost estimates is calculated at the proper value to the scheduled mid-point of construction, as the schedule currently exists.
  4. The recently completed baseline cost estimates do provide for contingencies, mark-ups, and escalations in conformance with industry standards and the professional opinions of the two professional estimating teams involved.
  5. The recently completed baseline cost estimates were completed in the CSI format. All future construction estimates will be also completed in this same format.

In reference to recommendation 3, the Management Division will require that all large and/or complex construction projects undertaken comply with industry procedures and standards. Smaller projects may not necessarily require a full-scale and detailed cost estimate.

Finding 3: Opportunities Exist to Improve Cost-Management Controls

Management’s Response: The Management Division concurs with the recommendations. However, in reference to recommendation 4, independent of an OIG audit, the Management Division would have elected to issue a stated cost limitation at the start of the 30% construction document (CD) activity, rather than defer issuance to the specified contract date after completion of the 30% CD submission. These actions are particularly prudent considering that the baseline cost estimates are within a close tolerance of the budget and the programming 

documents will soon be completed. The report notes that this action should be taken “as quickly as practical.” Management agrees with this, and intends to issue such guidance accordingly.

In reference to recommendation 5, the Management Division will brief the CBA, the Executive Oversight Group, and senior management at the time of the 30%, 60%, and 95% design phase cost estimates. These briefings were in the project plan, independent of OIG audit recommendations.

In reference to recommendation 6, KCCT is contractually obligated to provide a continuum of value engineering, cost estimating, analysis, and re-design, as necessary, to achieve compliance with the stated cost limitation. These responsibilities are inherent in the contract with KCCT, and have always been anticipated, though a specific deliverable – as in “submit a list of cost-savings items with the remainder of … design submissions” – may not have been cited.

The project team’s guidance to KCCT had already included initial value engineering areas for consideration and initial thoughts on additive and deductive alternatives for KCCT to consider incorporating in the work, as a best practice. Cost management meetings to discuss value engineering opportunities and incorporation of additive and deductive alternate strategies are anticipated at the start of the 30% CD activity and at the start of each subsequent phase, following the review future cost estimates. Those meetings can result in lists of cost savings strategies considered and resultant disposition.

c. Don Hammond