Board Report: 2014-AE-B-007 March 31, 2014
The $179.9 million Martin Building project conceptual construction cost estimate that was presented to the CBA in 2012 contained errors and inconsistencies. Further, elements of this estimate were not in conformance with industry standards, such as GSA P-120. The current project team informed us that these errors and inconsistencies occurred because (1) the members of the project team who prepared the estimate lacked experience in preparing construction estimates and did not follow industry best practices; (2) the Board does not have policies or procedures specific to the development of construction cost estimates; (3) the project underwent multiple scope changes, during which time there was significant turnover of project team membership and management; and (4) the estimate was prepared under significant time constraints and when the project was in flux. As a result, the estimate for the project that was incorporated into the Board’s budget and was approved as part of the Board’s strategic planning process contained errors and was not formatted to facilitate effective cost management for this project.
The Martin Building $179.9 million conceptual construction cost estimate included a separate, and redundant, $5.3 million line item for estimated design costs for the VC/CC. As shown in table 1 on page 2, the project team estimated $15.4 million for design services for the entire Martin Building project, and this amount is accounted for separately from the $179.9 million. Industry best practices, embodied in GSA P-120, state that the estimator must check all cost-estimate calculations for accuracy and completeness, including assessing whether estimates completely and accurately represent design features and quantities. The project team informed us that this $5.3 million line item was included in case the CBA approved the VC/CC construction separately from the Martin Building renovation. However, when the CBA approved the VC/CC construction as a part of the overall Martin Building project, this line item was not deleted from the VC/CC estimate, resulting in a $5.3 million error. The project team could not explain why this amount was not deleted from the estimate.
The Martin Building project team’s 2011 conceptual construction cost estimate of $179.9 million included escalation of earlier estimates to 2014, which was the planned beginning point of construction when this estimate was prepared and thus the incorrect point in time. GSA P-120, as well as the 2004 URS study and the 2007 and 2010 estimates submitted to the Board by KCCT, indicate that escalation should be calculated to the midpoint of construction, not the start. In addition, by the time the project team presented this estimate to the CBA in September 2012, the planned beginning of construction had been delayed to 2015, pushing the construction midpoint to 2016. Therefore, an additional two years of escalation should have been included in the estimate. The current project team members informed us that those responsible for the incorrect escalation lacked construction estimation experience. Had the project team applied 3 percent15 annual escalation to the known midpoint of construction, which was 2016, the $179.9 million estimate presented to the CBA in September 2012 would have been higher by as much as $13.8 million.
The Martin Building project team applied contingencies, mark-ups, and escalations to several line items as well as to the subtotal for the estimated construction cost. GSA P-120 indicates that contingencies, mark-ups, and escalations are not applied to specific line items, but are applied only to the subtotal for the estimated construction cost. The URS study and the KCCT estimates follow this industry standard. The project team told us that the team members who applied the contingencies, mark-ups, and escalations to individual line items lacked construction estimation experience. By embedding contingencies, mark-ups, and escalations in specific line items and then applying an overall contingency, the project team hindered its ability to reconcile changes in the underlying costs of the individual line items and manage these costs throughout the various stages of the project.
The Martin Building conceptual construction cost estimate was not developed in CSI format16 and did not include quantities or unit prices for each line item; however, the current contract between the Board and the A/E firm requires KCCT to prepare preliminary estimates of construction costs in accordance with CSI and to include quantities and unit prices for each line item. GSA P-120 emphasizes the importance of using consistent construction estimate formats. In addition, the current project team management stated that it is important for the Board to develop its cost estimate in the same format as the contractor. The Board did not develop its estimate in CSI format because the Board does not have policies or procedures in place that address developing construction cost estimates. In addition, the current project team management stated that the project team at the time did its best to prepare the estimate for the CBA, but the members lacked experience in developing construction estimates. An estimate that is not in CSI format or is not consistent with the contractor’s format hinders the Board’s ability to
Since 2011, the Board has hired personnel with construction experience and has dedicated a member of its procurement staff to the project. In addition, the project team now meets on a biweekly basis with the A/E firm, the commissioning agent,17 and the construction administrator to discuss the project’s progress, upcoming developments, the project’s schedule, and pending contract items. KCCT is contractually obligated to submit updated construction cost estimates to the Martin Building project team at various design submission points. The Board’s construction administrator is also required to submit construction cost estimates through the design process.
Subsequent to our fieldwork, KCCT and the construction administrator submitted updated estimates in December 2013, and these estimates were within the anticipated range of the overall conceptual cost estimate. These estimates include requirements developed during programming, are in CSI format, and contain contingencies, mark-ups, and escalations. In addition, the Board has hired a senior project manager with significant construction experience who is dedicated to this project.
The Martin Building project team developed its $179.9 million conceptual construction cost estimate with selected information from earlier contractor studies and estimates, supplemented by information from previous Board projects. This conceptual cost estimate contained errors and inconsistencies and was not developed in a standard format. As such, we had concerns about the integrity of the conceptual cost estimate and its utility as a cost management tool and as a basis for budgetary decisions. While a conceptual cost estimate can vary by as much as ±25 percent to account for changes in material and labor costs, we believe this variance is not intended to compensate for the types of errors we found in the estimate.
The updated cost estimates the project team received from the A/E firm and construction administrator in December 2013, subsequent to completion of our fieldwork, include needed information and are in a format to use as a tool to facilitate complete coverage of project scope and cost management.
We recommend that the Director of the Management Division
In its response, management stated the following:
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:
- 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%.
- All redundant costs were eliminated in the recently completed baseline cost estimates.
- 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.
- 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.
- 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.
Management’s full response is included as appendix D.
We agree that the professionally prepared estimates submitted by the A/E firm and construction administrator to the project team in December 2013, after we had completed our fieldwork, address all of the elements included in recommendation 2. However, our recommendation is forward looking and also requires the evaluation of all future estimates that the construction administrator and A/E firm submit for this project. We plan follow up activities to ensure that the recommendation is fully addressed.
As noted in our report, we found sizable errors in the $179.9 million conceptual cost estimate that was used as a basis for a proposed budget figure for insertion into the Board’s strategic plan. These errors in the conceptual cost estimate included $5.3 million in redundant design costs and as much as $13.8 million in miscalculated escalation costs. As such, our report highlighted concerns about the integrity of the conceptual cost estimate and its utility as a cost management tool and as a basis for budgetary decisions. In addition, it should be noted that the comparison prepared by RBOPS in April 2012 was based on 2008 dollars and did not consider the estimated costs of escalation or note inclusion of any design costs, areas where we noted large errors.
The actions described by the Management Division in response to recommendation 3 appear responsive to our recommendations. Subsequent communication with a Management Division official confirmed that the Management Division concurs with this recommendation and plans to develop and implement written policies and procedures. The OIG intends to follow up on the development and implementation of the policies and procedures to ensure that the recommendation is fully addressed.
