Florida Department of Transportation
OFFICE OF INSPECTOR GENERAL
CONSTRUCTION CONTRACT CLAIM SETTLEMENTS
REPORT 04G-9005 JUNE 2000
Florida Department of Transportation JEB BUSH GOVERNOR
605 Suwannee Street Tallahassee, Florida 32399-0450
THOMAS F. BARRY, JR. SECRETARY
June 30, 2000 Mr. Thomas F. Barry, Jr., P.E., Secretary Florida Department of Transportation 605 Suwannee Street, MS 59 Tallahassee, Florida 32399-0450 Re: Construction Contract Claim Settlements Report 04G-9005 Dear Secretary Barry: The report on our audit of Construction Contract Claim Settlements is attached. The objective of this audit was to determine whether the Department has an adequate claims management system that includes reasonable evidence that claims are 1) settled for amounts that were clearly established and adequately documented to be fair and equitable and 2) adequately tracked and monitored and accurately reported. We concluded that the Department has made recent improvements, but more are needed to mitigate the risks associated with managing claims. Essentially, the Department cannot adequately demonstrate its accountability for managing claims because claim settlement amounts often were not clearly established or sufficiently documented to be fair and equitable, and they were not adequately tracked and monitored or accurately reported. The Department’s senior staff agrees with our recommendations to appoint a cross-functional task team to develop a coordinated process for managing and resolving claims, for developing procedures and guidelines relating to the General Counsel’s evaluations and advice, and for identifying the minimum requirements for tracking and monitoring claims. If we can be of further assistance, please let me know. Sincerely,
(Original Signed by) Cecil T. Bragg, Jr., CPA Inspector General CTB/ecb Attachment
www.dot.state.fl
CONSTRUCTION CONTRACT CLAIM SETTLEMENTS
AUDIT REPORT NUMBER 04G-9005
June 2000
OFFICE OF INSPECTOR GENERAL
Audit Team Members Audit Manager
Eldon Blaxton, CIA, CFE
Audit Team
Bob Anderson Kim Smith, CPA John Greene Jim Maxwell, CIA
Sections 20.055 and 20.23, Florida Statutes, require the Florida Department of Transportation's Inspector General to review, evaluate and report on policies, plans, procedures and other operations of the Department and recommend improvements. This audit was conducted to assist management in the effective implementation of transportation programs by the Department. This audit was conducted in accordance with applicable Government Auditing Standards issued by the Comptroller General of the United States (1994 revision, as amended) and Standards for the Professional Practice of Internal Auditing published by the Institute of Internal Auditors. We included such tests and other auditing procedures as were considered necessary under the circumstances.
2 ! Report No. 04G-9005
TABLE OF CONTENTS
Page
EXECUTIVE SUMMARY
4
BACKGROUND and INTRODUCTION
7
OBJECTIVES, SCOPE and METHODOLOGY
11
FINDINGS and RECOMMENDATIONS
13
I. Determining and Documenting Settlements II. Tracking, Monitoring, and Reporting Settlements
14 18
EXHIBITS 1. Claims Referred to the FDOT Office of General Counsel 2. Claim Settlements by Fiscal Year 3. Summary of Large Claim Settlements
8 9 13
APPENDIX Large Claim Settlements
23
ATTACHMENTS 1. 2.
Management Responses Distribution
25 28
Report No. 04G-9005 ! 3
EXECUTIVE SUMMARY Contract Changes Contracts to construct roads and bridges often require modification to accommodate such issues as unforeseen conditions, plan errors, or adjustments to satisfy changing local needs and concerns. While these contracts are competitively bid, the cost of changes to them must be established by other means. Most contract changes are agreed to and paid with supplemental agreements (SA) that modify the contract. Occasionally, however, the Department and the contractor cannot agree on the scope or cost of the change. This “dispute,” then, provides the contractor the opportunity to file a “contract claim.” Resolving Claims Few claims are filed with the courts because districts typically negotiate settlements to disputes. When contractors do file for legal proceedings, the Department’s Office of General Counsel (OGC) becomes involved. Even then, most of the claims filed with the courts are ultimately settled through negotiations by the districts or by arbitration with the OGC involved in an advisory capacity. Claims Payment Trend The Department’s annual reports to the Legislature indicate that the total dollars spent on claim settlements is increasing. Totals reported for the 3 fiscal years ending 1998-99 were $20.9, $41.3, and $65.4 million, respectively. 1 Two risks the Department faces in managing these claims are the risks that they may be settled for amounts that have not been clearly established and adequately documented to be fair and equitable and that claim settlements may not be adequately tracked and monitored and accurately reported. Objectives The objective of this audit was to determine whether the Department has an adequate claims management system that includes reasonable evidence that claims were: !
Settled for amounts that were clearly established and sufficiently documented to be fair and equitable, and
!
Adequately tracked and monitored and accurately reported.
Overall Conclusion The Department has made recent improvements, 2 but more are needed to mitigate the risks associated with managing claims. The Department cannot
1
As a percentage of total completed construction contracts each year, these amounts reflected represented 2.5 percent, 3.2 percent, and 4.8 percent, respectively. 2
For example, effective with contracts let in February 2000, a revised claim specification should generate more timely and detailed contract claims, enabling Department or consultant CEI staff to perform more thorough and timely claim analyses. 4 ! Report No. 04G-9005
adequately demonstrate its accountability for managing claims because claim settlement amounts often were not clearly established or sufficiently documented to be fair and equitable, and they were not adequately tracked and monitored or accurately reported. While the Department can legitimately contend that it settled the claims reviewed in this audit for about 43 percent of the $124.3 million claimed, the audit team could find analytical support of entitlement for about 29 percent of the $53.6 million paid out.
I.
Claim settlement files generally did not include supporting documentation establishing the entitlement to, or the “fair value” of, settlement amounts.
District staff generally did not comply with the Department’s Construction Project Administration Manual (CPAM) Section 4.4 procedures for documenting claims. For over half the settlements represented in the random sample of 50, the audit team could not locate the contractor’s written “Notice of Intent” to file a claim. Moreover, the team did not find the “Forwarding Memorandum,” defined in CPAM Section 4.4.11.1, for any of the settlements in the random sample, for any of the 29 in the expanded judgmental sample, or any of the 14 settlement files reviewed in the OGC. Finally, although not required by the CPAM, most of the settlement documentation reviewed for large claim settlements did not explain how the settlement amount evolved from the claim analysis prepared by the Department or consultant CEI, assuming such an analysis was prepared.
II.
Claim settlements were not always adequately tracked and monitored or accurately reported.
In assessing these responsibilities, the audit team established that the definition of “claim” was somewhat elusive, procedures and processes for effectively tracking and monitoring claims were lacking, and annual reports to the Legislature contained errors.
Report No. 04G-9005 ! 5
Recommendations
We recommend that:
!
The Assistant Secretaries jointly appoint a cross-functional task team to develop a coordinated process for managing and resolving claims. The task team should propose improved policies, procedures and guidelines governing the claim settlement process,
!
The Department’s General Counsel establish procedures or guidelines to govern activities relating to evaluating claims and advising the districts, and
!
The Assistant Secretaries charge the cross-functional task team to identify the minimum requirements for monitoring claims from their inception to their resolution and establish who is responsible for each. The State Construction Engineer should use those requirements as a basis for designing a simplistic system to track and report contract claims.
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BACKGROUND AND INTRODUCTION Contract Changes Contracts to construct roads and bridges often require modification to accommodate such issues as unforeseen conditions, plan errors, or adjustments to satisfy changing local needs and concerns. While these contracts are competitively bid, the cost of changes to them must be established by other means. Most contract changes are agreed to and paid with SAs that modify the contract. Occasionally, though, the Department and the contractor cannot agree on the scope or cost of the change. This “dispute,” then, provides the contractor an opportunity to file a “contract claim.”
Standard Specifications The Department’s Standard Specifications for Road and Bridge Construction (Specifications) is a document published by the Florida Department of Transportation (FDOT) and included by reference in all construction contracts. Among other things, the Specifications address contract changes and claims. Section 4-3 of the Specifications (1999 edition) governs changes to the contract (“Alteration of Plans or Character of Work”). This section states, If the Engineer makes alterations or changes in quantities that significantly change the character of the work under the Contract, the Engineer will make an adjustment, excluding loss of anticipated profits, to the Contract. The Contractor and the Department shall agree to the basis for the adjustment prior to the performance of the work. If the parties cannot agree to the basis, then the Department will direct the work to be performed or deleted and make an adjustment either for or against the Contractor in such amount as the Engineer may determine to be fair and equitable.3 Section 5-12 of the Specifications governs contract claims (“Claims by Contractor”). Since at least the 1986 edition, this section has required the contractor to provide a written “Notice of the Intent” to file a claim before beginning the work on which the company based the claim. This section further states that if such notification is not given, the contractor waives the right to claim extra compensation.
3
Section 4-3.2.3 of the Standard Specifications includes criteria for establishing the value of contract
changes. Report No. 04G-9005 ! 7
Revision to Standard Specifications In February 2000, the Department modified the Specifications to require that changes to contracts be based on contractor costs plus specified markups. The revised Specifications also specify the information to be included in contract claims and require contractor certification of the claim. Prior versions of the Specifications did not require specific content or certification of the claim and, prior to 1999, did not include criteria for pricing contract changes.
Resolving Claims Typically, the districts negotiate settlements to disputes, so claims are not normally filed with the courts. When contractors do file for legal proceedings, the Department’s OGC becomes involved. Even then, most claims filed with the courts are ultimately settled through negotiations by the districts or by arbitration with the OGC involved in an advisory capacity. Few cases actually go to trial. Exhibit 1 reflects the manner of resolution for cases referred to the OGC in FY1997-98 and 1998-99:
Claims Referred to the FDOT Office of General Counsel Type of Settlement
1997-98
1998-99
Arbitrated
4
7
Negotiated
16
16
Offer of Judgment4
0
1
Dismissed Î
1
4
Taken to Trial Î
1
2
22
30
Total Cases Exhibit 1
Î For the five cases dismissed, the Department is considered to have prevailed; in one of the three cases taken to trial, the verdict was considered to be favorable.
Claims Payment Trend Annual reports the Department submitted to the Legislature indicate that the total dollars spent on claim settlements is increasing. Totals reported for the past 3 fiscal years were as follows:
4
An “offer of judgment” is an offer to settle prior to trial. If the offer is rejected and verdict exceeds the offer by more than 25 percent, the plaintiff’s attorney fees must be paid in addition to the verdict. 8 ! Report No. 04G-9005
Claim Settlements (By Fiscal Year) 5 $65.4
$41.3
$20.9
1996-97
1997-98 1998-99 (Millions of $)
Exhibit 2
Claims Risks
Two risks the Department faces in managing claims are the risks that:
!
Claims may be settled for amounts that have not been clearly established and adequately documented to be fair and equitable, and
!
Claim settlements may not be adequately tracked and monitored and accurately reported.
Mitigating Risks To help mitigate those risks, procedures for administering construction contracts and their attendant claims are contained in the CPAM. Section 4.3 of the CPAM provides guidance and outlines requirements for contract changes (SAs and unilateral payments),6 and Section 4.4 provides guidance and outlines requirements for documenting and analyzing contract claims. Section 4.4.11 specifically addresses the preparation of claim review packages and requires a Forwarding Memorandum, a document intended to transmit critical information regarding the claim to the next level of review. The Forwarding Memorandum is supposed to include specific statements, analyses, recommendations and attachments essential to understanding the disputed issues. This Memorandum should provide subsequent reviewers sufficient information to determine the legitimacy of claim issues as well as the strength of the Department’s position to defend itself against the claim.
5
As a percentage of total completed construction contracts each year, these amounts represented 2.5 percent, 3.2 percent, and 4.8 percent, respectively. 6
A unilateral payment is used to effect a contract change and a timely payment when the contractor either refuses to timely execute an SA or the Department and the contractor cannot agree on the cost of the work. Report No. 04G-9005 ! 9
Payments All contract payments are processed through the Central Office. To initiate payment, the districts submit authorization to the Department’s Office of Comptroller. The Office of Comptroller reviews the authorization, and when complete, forwards the information to the State Comptroller for payment. SAs, including those settling claims not filed with the courts, are paid as part of the monthly progress estimate for the project. If a lawsuit is filed, the claim is paid using a Contract Invoice Transmittal (CIT) and processed in accordance with specific procedures for that type of payment.
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OBJECTIVES, SCOPE and METHODOLOGY
Objectives The objective of this audit was to determine whether the Department has an adequate claims management system that includes reasonable evidence that claims are: !
Settled for amounts that had been clearly established and sufficiently documented to be fair and equitable, and
!
Adequately tracked and monitored and accurately reported.
Scope and Methodology The survey phase of this audit began with interviews of district and Central Office personnel involved with managing and processing claims.7 The audit team also reviewed written procedures pertaining to claims as well as payment processing techniques to understand how claim settlement information was accumulated and reported. As an initial audit step, the team selected a random sample of 50 claim settlements paid by SAs in FY1998-99.8 Because of anomalies involving six claim settlements greater than $250,000, the team selected a judgmental sample of 29 more claim-settlement SAs issued from January 1, 1998, through October 31, 1999.9 SAs selected were those for which the amount was greater than $250,000 and that also met at least two of the following four conditions:
7
The audit team interviewed the General Counsel in six districts and the District Construction Engineers, and two Resident Engineers (or their respective designees) in each of the eight districts. The team also interviewed the State Construction Engineer and the Office of General Counsel’s Chief, Civil Litigation Counsel. 8
The SA Tracking System included 387 claim issues settled with SAs totaling $45,316,499 in FY1998-99. The audit team eliminated all SA claim settlement issues of $5,000 or less, reducing the universe to 286 claim settlement issues with a cumulative amount representing 99.5 percent of the total reported. The random sample accounted for $10,845,433 (24 percent) of this total. For perspective, the claim settlement SAs accounted for 26.7 percent of the total dollars represented by SAs for the year. 9
The cumulative settlement amount of these 29 SAs was $26,790,033. For ease of reference, this report will refer to settlements of $250,000 or more as “large claim settlements.” Report No. 04G-9005 ! 11
!
The SA was written after final acceptance of the contract,
!
The SA was the last one written for that contract,
!
The previous SA was written more than 6 months prior to this SA, or
!
The SA was assigned a reason code “851” or was coded “C,” identifying it as a claim issue.
The focus of the review of large claim settlements was to determine whether the claim was supported by a Department or consultant claim analysis for both entitlement and financial issues, to see if the settlement amount was reconcilable to a “fair-value” analysis amount, and to see if the supplemental agreement or claim file included a Forwarding Memorandum as specified in CPAM Section 4.4.11. The team then reviewed documentation supporting a third sample of 14 large claim settlements that had been referred to the OGC. 10 The contract files reviewed for these 14 settlements were those maintained by the OGC. The focus was to determine if the OGC was provided adequate claim analyses to establish a fair-value or “risk exposure” for the claim and if the OGC prepared documentation to establish the basis for the settlement amount. Throughout the audit, the team assessed internal controls associated with the two risks mentioned in the Background and Introduction section. The results of these reviews follow in the Findings and Recommendations section.
10
The team selected a sample of settlements of $250,000 or more from the FY1997-98 and FY1998-99 Reports
to the Legislature. The cumulative settlement amount of these was $15,107,604. 12 ! Report No. 04G-9005
FINDINGS AND RECOMMENDATIONS
Overall Conclusion The Department has made recent improvements, 11 but more are needed to mitigate the risks associated with managing claims. The Department cannot adequately demonstrate its accountability for managing claims because claims often were not: !
Settled for amounts that were clearly established and sufficiently documented to be fair and equitable, and
!
Adequately tracked and monitored or accurately reported.
Exhibit 3, below, summarizes the audit team’s observations with respect to the large claim settlements associated with the three samples reviewed:
Summary of Large Claim Settlements (49 Settlements; See Appendix) Nbr Claims
Total Claimed
No claim analysis in file
9
No claim and no claim analysis
2
No entitlement per analysis
7
29,615,353
Some entitlement per analysis
31
75,886,585
$ 15,580,168
31,052,442
Total
49
$124,348,230
$15,580,168
$ 53,590,529
Observation
Claim Analysis
Total Settlements
$ 18,846,292
None
$ 10,506,672
Unknown
None
1,393,860
-0-
10,637,555
Exhibit 3
11
For example, effective with contracts let in February 2000, a revised claim specification should generate more timely and detailed contract claims, enabling Department or consultant CEI staff to perform more thorough and timely claim analyses. Report No. 04G-9005 ! 13
While the Department can legitimately contend that it settled these claims for about 43 percent of the $124.3 million claimed, the team could find analytical support of entitlement for about 29 percent of the $53.6 million paid out.
I.
Claim settlement files generally did not include supporting documentation establishing the entitlement to, or the “fair value” of, settlement amounts.
Section 337.221, Florida Statutes (F.S.), requires the Department to establish a process to resolve claims and to document its final decision on all claims, including reasonable support for its decision. Section 337.11(8), F.S., authorizes the use of SAs to effect contract changes, including the settlement of contract claims. The Department’s procedures are outlined in CPAM Section 4.4. District staff generally did not comply with CPAM Section 4.4 procedures for documenting claims. Specifically, in over half the settlements represented in the random sample of 50, the audit team could not locate the contractor’s written Notice of Intent to file a claim. Moreover, the team did not find the Forwarding Memorandum, defined in CPAM Section 4.4.11.1, for any of the settlements in the random sample, for any of the 29 in the expanded judgmental sample, or any of the 14 settlement files reviewed in the OGC. Finally, although not required by the CPAM, most of the settlement documentation that was available for large claim settlements did not explain how the settlement amount evolved from the claim analysis prepared by the Department or consultant CEI, assuming such an analysis was prepared. Notice of Intent Since at least 1986, the Specifications have required that a contractor provide written notice of the intention to file a claim for extra compensation before beginning the work on which the claim is based. The purpose of this notice is to afford the Department the opportunity to keep strict account of actual costs. The Specifications further provide that the contractor waives the right to claim extra compensation if such written notice is not provided. Department staff stated that the written Notice of Intent was not particularly important in dealing with claims and that the absence of a written notice would not stand in court as a basis for withholding payment to the contractor. Whether that be the case or not, the Specifications are contractually binding, and the requirement for a written notice is the first step in the claim process. An analysis of settlements in the random sample indicated the Department effectively signaled it would be lenient in enforcing contractual provisions for resolving 14 ! Report No. 04G-9005
claims by not enforcing the requirement for a written notice. The random sample of 50 claim settlement issues included 27 claims (54 percent) for which no Notice of Intent was on file, although other documentation in those files indicated the Department was aware of the claim issues for 15. The statistical probability, then, is that at least 118 of the 286 claims over $5,000 had no written Notice of Intent, and in at least 37 instances, the Department did not know about the claims until they were filed.12
Forwarding Memoranda None of the 29 large claim settlements in the judgmental sample was supported by a Forwarding Memorandum as described in CPAM 4.4.11.1. Moreover, 8 of the 29 lacked evidence of any analysis of the claim, and 3 lacked the contractor’s claim document. The purpose of the Forwarding Memorandum is to document the Department’s assessment of the contractor’s entitlement to the claim and to document the Department’s assessment of a fair and equitable settlement. 13 Two examples illustrate the inadequacy of the documentation explaining the rationale for the settlement:14 1) In one claim settlement, the sum of the consultant CEI’s claim analyses for direct costs amounted to $108,931. At the conclusion of this project, the contractor submitted a claim for $5,925,256 based on alleged total costs plus 15 percent profit, return of liquidated damages, adjustment of asphalt overrun, additional subcontractor costs (which were not yet paid), overhead and interest. The consultant CEI had kept detailed records of the impact of numerous changes in the storm water drainage for the project. The consultant CEI also indicated the contractor left the job for 6 months to pursue hurricane-related work, thus contributing to the delays and additional costs. The audit team found no details to explain the basis of the claim, nor did it find any documentation that explained how the Department moved from the consultant’s analyses to the settlement amount. The settlement was negotiated by telephone for the amount of $2,400,000 on the condition that the contractor “send in back up documentation.” This settlement was documented on a sheet of scratch pad paper.
12
Calculations were made using software developed by James A. Faughn, Jr., Consultant-Lecturer, “Statistical Sampling for Auditors.” Projections are based on a confidence level of 95 percent. Projections above are “lower limits;” the “upper limits” are 190 and 99, respectively. 13
Several files included summaries that were called “memoranda” of some sort, but they were after-the-fact
summaries of the negotiated settlement. 14
The audit scope did not include an assessment of whether the settlement amounts were justifiable; the examples illustrate how the Department risks criticism that it cannot adequately demonstrate its accountability for managing claims. Report No. 04G-9005 ! 15
2) In another case, the team found documentation indicating some Department liability but found virtually no Department or consultant analysis indicating the extent, or “fair-value,” assigned to that liability. This contract included incentives and bonuses for meeting milestone dates and completing the project early. District staff indicated additional work was given to the contractor, and the contractor performed the work. However, no agreement was reached on payment, and the consultant did not maintain records of the contractor’s labor, materials, and equipment with the exception of one claim issue for hauling embankment (valued at $395,699 in the settlement). The contractor filed a claim for $4,132,611 at the conclusion of the job. In negotiations between the district and the contractor, the contractor agreed to reductions totaling $189,115 for 16 claim issues and the elimination of “Home Office Overhead” ($938,689) that was already accounted for in the various labor, equipment and material markups on the 16 claim issues. The district ultimately settled for $3,004,807. The audit team was told that no Department records were available to substantiate the value of work claimed by the contractor and paid for by the district.
Recommendation 1 We recommend that the Assistant Secretaries jointly appoint a cross-functional task team to develop a coordinated process for managing and resolving claims. The task team should propose improved policies, procedures and guidelines governing the claim settlement process. At a minimum, the process employed should address critical elements of managing claims, including the following: !
Establishing and enforcing a consistent definition of “claim” that clearly addresses the dispute element,
!
Enforcing the requirement that the contractor provide a written “Notice of Intent” to file a claim prior to beginning the work on which the claim is based,
!
Requiring a predetermined, minimum standard of training in negotiation skills for all Department or consultant staff who are involved in analyzing claims and negotiating settlements,
!
Requiring that all claims be supported by a “determination of entitlement” and an “analysis of fair price” before entering into any negotiations and requiring that the analysis serve as the basis for negotiating a settlement,
!
Requiring that all claims be supported by a “Forwarding Memorandum” thats meets the Department’s CPAM requirements,
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!
Including provisions for project-level and higher managers to request realtime assistance from the Office of General Counsel or the Office of Inspector General in assessing entitlement or establishing fair price,
!
Including language in each settlement agreement advising the contractor that the settlement is subject to audit of the company’s records and that the Department may pursue civil or criminal sanctions in the event the claim was falsely presented, and
!
Periodically monitoring claim settlements as part of the Department’s formal Quality Assurance Review Program.
Management Response: The State Highway Engineer stated, We agree to the need for a cross-functional team to review the process for managing and resolving claims. The team will include district representatives, General Counsel staff, member(s) from the OIG Audit staff, and Central Office Construction. Greg Xanders, State Construction Engineer, will establish the team and lead its initial meeting. The team’s efforts will include addressing the 7 bullets listed under this recommendation. However, some of the bullets (2 and 7) have already been addressed by the new claims specification. Bullet 4 will need to be addressed in a manner to look for a way to keep such “determinations” and “analysis” as confidential information to prohibit use against the Department in legal actions.
Claims Involving OGC The team reviewed 14 claim settlements for which the Department’s OGC had some involvement. None included a Forwarding Memorandum. Of the claims for which analyses were on file, the analyses often indicated the claim had little or no merit; yet, the Department agreed to substantial settlements. As one example: Both OGC files and district files included multiple claim analyses that generally refuted the major issues raised in a contractor’s claim totaling $5,887,170. The Department had made unilateral payments totaling $586,596 to resolve issues for which the Department believed it had some responsibility. According to the documentation available, the contractor waited until filing suit to provide details of some of the major portions of their claim. The OGC’s Case Closing Report references claim analyses that Report No. 04G-9005 ! 17
stated the contractor and subcontractor caused their own problems. The first indication of a settlement was in the OGC’s Case Closing Report. According to that report, the district settled all claim issues with the contractor “...the day before trial was to start.” Documentation in files reviewed at both the OGC and in the district did not explain how the settlement amount was established. Negotiations were conducted by telephone. The record of negotiations consisted only of names written on a sheet of paper along with the agreed upon settlement amount of $4,200,000.
Recommendation 2 We recommend that the Department’s General Counsel establish procedures or guidelines to govern activities relating to evaluating claims and advising the districts. At a minimum, these guidelines should establish a framework for evaluating claims and specify minimum requirements for documenting the basis for them. Advice given to the districts should include the parameters within which they believe a settlement would be in the Department’s best interest. If such documentation poses a legitimate threat to the Department’s litigation position, the Department should seek an exemption from the public records law.
Management Response: The General Counsel responded, Agree. The Office of General Counsel will set up guidelines for attorneys to document settlement advice in a fashion which will not adversely affect the department’s ability to litigate or settle future construction claims. Although the extent of this documentation may need to vary on a case by case basis, the OGC agrees improved documentation is needed and desireable. It is not advisable to seek any Chapter 119 amendment at this time.
II.
Claim settlements were not always adequately tracked and monitored or accurately reported.
Section 20.23, F.S., provides that the Department of Transportation is to be a decentralized agency with a Central Office to establish and monitor the implementation of policies, rules, procedures and standards. Section 334.048, F.S., specifies that the policies, rules, procedures and standards are to establish accountability for all aspects of the Department’s operation. Further, Section 337.221, F.S., requires the Department to report all claim settlements to the Legislature annually. In assessing these responsibilities, 18 ! Report No. 04G-9005
the audit team determined that the definition of “claim” was somewhat elusive, procedures and processes for tracking and monitoring claims were lacking, and annual reports to the Legislature contained errors.
Definition of “Claim” A construction contract is unique among the various types of contracts because of the “changes clause.” This clause is essential because changes are inevitable. A claim is an unresolved, or disputed, change.15 Prior to December 1999, the Department’s CPAM defined a claim as, “A written demand submitted to the Department by the contractor in compliance with contract documents and seeking additional monetary compensation, time, or other adjustments to the contract, the entitlement or impact of which is disputed by the Department.”16 The Federal Highway Administration’s definition, which is consistent with the CPAM definition, further specifies that a claim exists when the disputed demand goes beyond project-level staff. 17 In practice, the concepts included in these definitions were not consistently and uniformly applied within the Department. In one district, an issue was not considered to be a claim if district staff could agree to a settlement amount for the issue. In another district, staff considered a claim to exist if the additional work and the cost thereof could not be agreed to before work was performed. These varying definitions resulted in substantial differences in the claim settlements reported from the districts.
Revised Definition In the December 1999 CPAM Update, the State Construction Office changed the definition of “claim.” As presently defined in CPAM 4.4, a contractor’s written demand seeking additional money, time, or other contract adjustments only becomes a claim when “...the entitlement or impact of which is disputed by the Department and which cannot be resolved by negotiations between the contractor and the Department’s Districtlevel personnel.” (Emphasis added.)
15
Trauner, Jr., Theodore J.; Reviewing, Auditing, and Resolving Construction Claims, November 1991.
16
CPAM 4.4, April 2, 1997.
17
Contract Administration Core Curriculum, U.S. Department of Transportation, Federal Highway Administration, 1997. Report No. 04G-9005 ! 19
The revised definition essentially does not recognize the “dispute” element of a claim until it has passed through all levels of district review. The definition, itself, tends to obviate the requirement for some person or position near the source of the dispute to begin documenting contractors’ activities. In turn, the Department reduces its ability to defend itself against baseless or exaggerated claims. Except for those referred to the OGC, none of the SA claim settlements reviewed in this audit would have been identifiable as a claim because they would have been treated as though no dispute existed. Moreover, those referred to the OGC may not have had records kept to serve as a basis for refuting the claim.
Managing Claims
To properly manage claims, Project Managers need to:
!
Acknowledge and respond to alleged instances of extra work, delay, disruption, and inefficiencies and establish the Department’s initial position as to entitlement;
!
Act to mitigate the impacts of claim issues alleged by the contractor;
!
Document information relative to the alleged claim issue and the labor, materials, equipment and contract time expended by the contractor;
!
Attempt to reach agreement with the contractor and establish and document the specific points of disagreement; and,
!
Summarize the claim issues and critical information for transmittal to higher levels in the organization for resolution.
To manage and control this process, district staffs need a method of tracking, monitoring and reporting on pending and settled claims. The absence of this information hinders the management of claims and the claims process.
Claims Tracking The Department’s only means of identifying and locating claim files for review is through the SA Tracking System and the Construction Office’s Annual Reports to the Legislature. The SA Tracking System provides little information useful for managing claims as it records only payments and provides for only a single, three-character field to identify the cause of the claim. The Annual Report offers little more than the dollar amounts of the settlements. The Department once maintained a Claims Tracking System but terminated it during 1999. Central Office staff explained that the system was unreliable and was burdensome to maintain. Hence, the Department has no central source of
20 ! Report No. 04G-9005
meaningful information on pending or potential claims, nor does it have complete information on claims that were successfully refuted by the Department.
Claims Monitoring The absence of some system or process to monitor claims also means the absence of any oversight of district successes or failures in resolving contractor claims. Because Central Office monitoring of claims was limited to the SA Tracking System, the Department had no means to identify and review claim issues that had been denied by the Department or consultant project engineer and for which no SA was ever written. Therefore, any review of claim settlement issues may be unintentionally biased to “worst-case” examples. Other than the SA Tracking System, the audit team found no evidence of Central Office oversight of the districts’ negotiation and settlement of claims. Generally, Central Office oversight revolves around the Quality Assurance Review (QAR) process; however, claims negotiation and settlement were not addressed in the QARs performed.
Claims Reporting Our review indicated the FY1998-99 Report of Claims to the Legislature was inaccurate. Claim settlements totaling over $3 million were not reported, and approximately $7 million of SA claim settlements included in the 1998-99 report had been reported in the prior year’s report. Those SAs that were included in the FY1998-99 report were “dummy” SAs intended only to record the payment against the contract 18. The process used to accumulate and report claim settlements was an informal process of extracting information from the SA Tracking System, combined with a compilation of Case Closing Reports from the OGC. Department staff made no attempt to reconcile the data to the Department’s accounting records.
Recommendation 3 We recommend that the Assistant Secretaries charge the cross-functional task team to identify the minimum requirements for monitoring claims from their inception to their resolution and establish who is responsible for each. The State Construction Engineer should use those requirements as a basis for designing a simplistic system to track and report contract claims to facilitate the district’s management of claims and the Central Office’s oversight and reporting of claim settlements.
18
A dummy SA is created to force a claim paid with a Contract Invoice Transmittal to post to the Contract Reporting System. Report No. 04G-9005 ! 21
Management Response: The State Highway Engineer agreed and stated, This will also be looked at by the team. If a program is determined to be beneficial and needed by the districts, it must be simple to use and provide useful information. Such a program would be primarily for district use in their management of claims. Central Office can then access as necessary for process reviews. The districts do have a handle on typically what their major claims are. Also, the new specification has tightened the process on a contractor filing a claim with all the details in a more timely way.
22 ! Report No. 04G-9005
APPENDIX
Large Claim Settlements $ Amount Per
Contract How SA Number Selected District Number
Claim
Claim Analysis
Note Settlement
18858
R
7
50
1,606,269
1,335,112
1,335,112
18949
R
5
7
10,373,745
819,384
2,959,507
19198
R
3
6
5,925,255
108,931
2,400,000
19211
R
6
12
734,000
19388
R
Tpk
20
4,996,000
260,000
387,000
19456
R
Tpk
37
1,141,076
551,273
551,273
18349
J
7
16
1,108,902
115,634
436,905
18462
J
5
9
2,907,202
119,728
1,850,000
18551
J
3
16
1,019,498
105,867
481,833
18626
J
5
17, 19
1,442,829
18746
J
5
19
2,488,177
646,681
1,400,000
18758
J
Tpk
13
2,000,000
428,752
900,000
18768
J
7
10
1,554,850
329,539
689,633
18887
J
4
5
543,182
18903
J
5
19
3,053,381
1,450,000
1,450,000
18929
J
3
14
5,501,000
195,000
1,900,000
18960
J
7
11
1,432,894
18969
J
5
8
10,742,266
19011
J
4
43, 44
19113
J
6
19114
J
19129
280,000
445,000
495,000
4 1
1
1
581,865
1
835,242
3,025,821
4
1,707,125
1,011,214
1,370,735
26
2,954,162
1,038,482
1,200,000
6
9
1,773,951
574,639
497,000
J
7
5
882,121
476,513
519,516
19171
J
3
5
528,860
2
19183
J
6
26
865,000
2
19281
J
6
9
113,532
430,000
3
19343
J
4
16, 17
1,049,595
133,182
743,783
19410
J
3
6
2,651,685
0
495,000
19485
J
4
2
519,478
162,810
260,000
19754
J
2
10
1,129,150
19757
J
2
6
517,545
19758
J
2
6
1,038,226
19782
J
7
16
658,186
525,836
525,836
19839
J
2
9
597,117
0
525,000
525,000 240,057
1
325,000 1,050,000
1
Report No. 04G-9005 ! 23
APPENDIX (Cont.)
Large Claim Settlements $ Amount Per
Contract How SA Number Selected District Number
Claim
Claim Analysis
Note Settlement
19926
J
1
25
4,132,611
19945
J
7
7
335,573
268,439
268,439
E3539
G
3
CIT
597,270
507,626
290,000
17765
G
4
CIT
3,493,400
17799
G
6
CIT
1,500,000
199,844
411,571
17826
G
3
CIT
1,236,538
0
400,000
17932
G
2
CIT
2,188,269
0
1,296,666
18378
G
6
CIT
15,877,417
0
3,000,889
18401
G
6
CIT
3,295,550
2,101,060
2,486,000
18411
G
7
CIT
816,126
259,768
480,000
18819
G
2
CIT
4,900,000
18884
G
6
CIT
1,850,829
448,627
477,478
18924
G
5
CIT
2,084,065
83,289
450,000
19204
G
3
CIT
5,887,170
0
4,200,000
19329
G
2
CIT
1,177,157
0
720,000
19608
G
7
CIT
927,388
134,107
550,000
Totals
49 Settlements
3,004,807
1,750,000
2,375,000
1
1 5
1
$124,348,230 $15,580,168 $53,590,529
Abbreviations CIT - Contract Invoice Transmittal OGC - Office of General Counsel Tpk - Turnpike District How Selected G - Files reviewed in Office of General Counsel J - Judgmental sample based on anomalies in random sample R - Initial random sample Notes 1 2 3 4
5
No claim analysis was found in the files reviewed. Neither a claim analysis nor the contractor's claim was found in the files reviewed. The claim was not found in the files reviewed. Files included multiple analyses done by multiple consultants. Audit team used what appeared to be "best supported." Total entitlement per that analysis was allocated to the two contracts in proportion to the contractor's claims for them. Claims Review Committee recommended $260,132.
24 ! Report No. 04G-9005
Attachment 1
Management Response
Report No. 04G-9005 ! 25
Attachment 1 (Cont.)
26 ! Report No. 04G-9005
Management Response
Attachment 1 (Cont.)
Management Response
Report No. 04G-9005 ! 27
Attachment 2 Thomas F. Barry, Jr., Secretary Ken Morefield, Assistant Secretary for Transportation Policy Nancy Houston, Assistant Secretary for District Operations Cris Speer, Assistant Secretary for Finance and Administration John Browning, Jr., Chairman, Florida Transportation Commission Attention: Bill Ham (2) William Monroe, Auditor General Attention: L. R. Weathermon (2) David Twiddy, Secretary, District 1 Huey Hawkins, Secretary, District 2 Edward Prescott, Secretary, District 3 Rick Chesser, Secretary, District 4 Michael Snyder, Secretary, District 5 Jose Abreu, Secretary, District 6 Ken Hartmann, Secretary, District 7 Jim Ely, Secretary, Turnpike District Freddie Simmons, State Highway Engineer Bill Albaugh, Highway Operations Director Greg Xanders, State Construction Engineer Pamela Leslie, General Counsel Dick Kane, Public Information Administrator Sarah Porter, Legislative Programs Administrator Bill Kynoch, Budget Officer Robin Naitove, Comptroller Nelson Hill, Chief Information Officer Carolyn Runyan, Procedures Administrator Marcia Cooke, Governor's Chief Inspector General Attention: James Thomas Chairman, Senate Transportation Committee Attention: Reynold Meyer Chairman, House Committee on Transportation Attention: John Johnston Chairman, Senate Budget Committee Attention: Tom Barrett Chairman, House Transportation and Economic Development Appropriations Committee Attention: Eliza Hawkins Chairman, Joint Legislative Auditing Committee Attention: Terry Shoffstall John Turcotte, Director, Office of Program Policy Analysis and Government Accountability (3 copies) James E. St. John, Division Administrator, FHWA 28 ! Report No. 04G-9005
Distribution
For further information call (850) 488-2501 / Suncom 278-2501 or Fax (904) 488-4417 Suncom 278-4417. For a copy of the report, please call, write or e-mail:
Ms. Nancy Moon
[email protected] (IA906NM) Office of Inspector General Florida Department of Transportation 605 Suwannee Street, Mail Station 44 Tallahassee, Florida 32399-0450
Permission is granted to reproduce this report.
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