Maricopa County
Internal Audit Department
301 West Jefferson St Suite 1090 Phx, AZ 85003-2143 Phone: 602-506-1585 Fax: 602-506-8957 www.maricopa.gov
June 30, 2006 Don Stapley, Supervisor, Chairman, Board of Supervisors Fulton Brock, Supervisor, District I Andrew Kunasek, Supervisor, District III Max W. Wilson, Supervisor, District IV Mary Rose Wilcox, Supervisor, District V As part of the annual audit plan approved by the Board of Supervisors, we reviewed Maricopa County's $12 million Public Health/Environmental Services facility construction contract. All costs incurred from the start of construction through August 31, 2005 were examined by Jefferson Wells International, an external firm that we engaged to perform this audit. Jefferson Wells International's examination of contract billings, supporting documentation, and resulting payments concluded that the construction company may have overcharged Maricopa County $57,031, as of August 31, 2005. The potential overcharges were for various items including medical insurance. Several control weaknesses in the construction contract process were also noted. These include the lack of a definitive contract audit clause, which increases Maricopa County's risk of fraud, waste, and abuse due to the inability to access the construction company's records. This report contains specific audit findings, our recommendations, and a response to those recommendations by the Facilities Management Department, the office that oversees Maricopa County's vertical construction projects. We reviewed this information with the Facilities Management Director, the construction company, and Project Manager. We appreciate the excellent cooperation provided by management and staff. If you have any questions, or wish to discuss the information presented in this memo, please contact Eve Murillo at 602-506-7245. Sincerely,
Ross L. Tate County Auditor C: David Smith, County Manager Joy Rich, Deputy County Manager
Executive Summary Contract billing documentation for construction of the new Maricopa County (County) Public Health/Environmental Services facility appears to be in good order. However, we found that the construction company billed, and was reimbursed by the County, $57,031 for potentially nonallowable procurement and medical insurance costs. The Facilities Management Department (FMD), which oversees vertical (building) construction projects, should make every effort to recover the $57,031 from the construction company. Introduction The County is in the process of expanding several facilities, including the recently constructed Public Health/Environmental Services building located at 1645 E. Roosevelt Street in Phoenix. The construction contract was awarded to Holder Construction Company, LLC (Holder) based in Atlanta (GA) with an office in Phoenix. Holder performed the work under a Guaranteed Maximum Price (GMP) contract for approximately $11.7 million. Under this type of contract, the pre-construction (design) phase of the contract is a lump sum and the construction phase is GMP, cost reimbursable with a not-to-exceed amount. The contract work was completed in June 2005. This contract is managed and monitored, for the County, by FMD. We engaged an outside firm, Jefferson Wells International, to conduct a compliance audit of the construction costs associated with this contract. Scope and Methodology The objectives of this audit were to: � � � Determine if the method used to establish the GMP was contractually valid. Determine if the work was performed in accordance with contract specifications. Validate payments to subcontractors and verify contractors licensing to ensure payments were made to a legal entity.
The auditors reviewed the three objectives above and found no exceptions. The report addresses the following objectives. � � Verify if the contractor's billings did not exceed actual costs or the GMP not-to-exceed amount. Ascertain if project costs including labor, materials, equipment, equipment rentals, disposable tools, and overhead costs represented value received and were justifiably charged to the project.
This audit was performed in accordance with generally accepted government auditing standards. Audit Test Results Industry standards state that a contract's general conditions should identify allowable and unallowable costs. We found that contract attachment "Exhibit A", provided by Holder, identified only allowable contract costs and omitted unallowable costs, which may be
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unfavorable for the County. Industry standards also recommend that a contract contain a definitive "right to audit" clause. This contract contains a provision that the Construction Manager must preserve records for three years; however, its provision to "afford" access to records by the Owner (County and FMD) and its accountants is weaker than the recommended industry standards. Contract billing documentation showed that Holder incurred and invoiced costs in accordance with contract terms and conditions. The total actual costs were $11,527,818. An additional contractor fee of $563,438 increased this total to $12,091,256. At the time of our review, FMD had paid $12,098,691 for the facility construction, an amount $7,435 above the total contract costs plus the fee. Holder also charged certain items that did not appear to be billable to the County, according to contract provisions. The $49,596 of potential overcharges pertain to procurement and medical insurance costs consisting of: � � � $25,860 greater than the not-to-exceed procurement allowance. $21,632 for Blue Cross medical premiums. $2,104 for 215 shirts.
Contract Value and Fee Amount Paid to Holder Less: Amount Supported by Actual Cost including Fee Equals Variance (Contract Value less Actual Cost) Plus Overcharges Total Amount Due from Vendor (Variance + Overcharges) = + =
$12,098,691 - $12,091,256 $7,435 $49,596 $57,031
We also found that changes were made to the contract regarding the allowance and contingency language. At the time of our review, executed change orders that authorized these changes were not yet available. Recommendations FMD should: A. Make every effort to recover the $57,031 overpaid to Holder. B. Define specific allowable and unallowable cost provisions for inclusion in similar future contract agreements. Agreements may be modified to address other costs such as incentive compensation. C. Incorporate a definitive "right to audit" clause in all future contracts, subject to the County Attorney's Office review. D. Execute formal change orders whenever a necessary change is made to the contractual amount and/or status of an allowance or contingency.
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Department Response
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