Performance audit, Arizona Department of Transportation, A+B bidding

              State of Arizona
Office
of the
Auditor General
PERFORMANCE AUDIT
Report to the Arizona Legislature
By Debra K. Davenport
Auditor General
November 1999
Report No. 99-22
ARIZONA
DEPARTMENT
OF
TRANSPORTATION
A + B BIDDING
The Auditor General is appointed by the Joint Legislative Audit Committee, a bipartisan committee
composed of five senators and five representatives. His mission is to provide independent and impar-tial
information and specific recommendations to improve the operations of state and local government
entities. To this end, he provides financial audits and accounting services to the state and political
subdivisions and performance audits of state agencies and the programs they administer.
The Joint Legislative Audit Committee
Senator Tom Smith, Chairman
Representative Roberta Voss, Vice-Chairman
Senator Keith Bee Representative Robert Burns
Senator Herb Guenther Representative Ken Cheuvront
Senator Darden Hamilton Representative Andy Nichols
Senator Pete Rios Representative Barry Wong
Senator Brenda Burns Representative Jeff Groscost
(ex-officio) (ex-officio)
Audit Staff
Dale Chapman—Manager
and Contact Person (602) 553-0333
Lois Marks—Staff
Copies of the Auditor General’s reports are free.
You may request them by contacting us at:
Office of the Auditor General
2910 N. 44th Street, Suite 410
Phoenix, AZ 85018
(602) 553-0333
Additionally, many of our reports can be found in electronic format at:
www.auditorgen.state.az.us
2910 NORTH 44th STREET • SUITE 410 • PHOENIX, ARIZONA 85018 • (602) 553-0333 • FAX (602) 553-0051
DEBRA K. DAVENPORT, CPA
AUDITOR GENERAL
STATE OF ARIZONA
OFFICE OF THE
AUDITOR GENERAL
November 22, 1999
Members of the Legislature
The Honorable Jane Dee Hull, Governor
Ms. Mary Peters, Director
Arizona Department of Transportation
Transmitted herewith is a report of the Auditor General, A Performance Audit of the
Arizona Department of Transportation—A+B Bidding. This report was completed
pursuant to the provisions of Laws 1998, Chapter 278, Section 4.
This report focuses on the Department’s use of A+B bidding, an alternative contracting
method for highway construction projects. A+B bidding differs from traditional
contracting in that it considers the time to complete a highway construction project in
addition to a project’s cost. This bidding method is particularly advantageous if
completing a project quickly is desirable or project construction is anticipated to
seriously impact and cause inconvenience to road users and the surrounding
community. Under legislative authorization, the Department and Transportation Board
issued 6 A+B contracts, 3 of which have been completed. Even with this limited
experience, A+B bidding has shown to significantly reduce construction times and
construction-related impacts. For example, the reconstruction of the Bethany Home
bridge over Interstate 17 in Phoenix was completed 110 days ahead of the Department’s
time estimate and 35 days ahead of the contractor’s time estimate. Additionally, in
states with more A+B experience than Arizona, A+B bidding results are generally
favorable, particularly with regard to shortened construction times.
The experience of Arizona and other states suggests that A+B bidding offers an effective
bidding alternative for highway construction projects, especially where accelerated
construction and reduced public impact is desired. Therefore, the Legislature should
consider amending statute to allow the Department and Transportation Board to use
A+B bidding for appropriate state highway construction projects.
November 22, 1999
Page -2-
This report also addresses Department compliance with statutory limits for changes to
highway construction contracts and the increasing costs for these changes. According
to statute, these changes (commonly referred to as supplemental agreements), cannot
exceed 10 percent of the contract amount, or $50,000, whichever is greater. Based on a
review of over 1,300 supplemental agreements, the Department generally complies with
these statutory limits. Fewer than 3 percent of the supplemental agreements exceeded
these limits. However, the cost for these changes has increased from 2.9 percent over
original contract amounts in 1993 to 9.7 percent for the first 6 months of 1999. Based on
the Department’s current rate of completion for highway construction projects, each 1
percent of cost increase could add over $3 million annually to final construction costs.
In an effort to reduce its need for supplemental agreements and reduce cost increases,
the Department should continue to analyze supplemental agreement data and make
appropriate changes to its highway construction projects.
As outlined in its response, the Arizona Department of Transportation agrees with all of
the findings and recommendations.
My staff and I will be pleased to discuss or clarify items in the report.
This report will be released to the public on November 23, 1999.
Sincerely,
Debbie Davenport
Auditor General
Enclosure
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OFFICE OF THE AUDITOR GENERAL
SUMMARY
The Office of the Auditor General has conducted a performance
audit of the Arizona Department of Transportation (Depart-ment).
This audit was completed pursuant to the provisions of
Laws 1998, Chapter 278, Section 4, which required the Office to
review two issues: (1) implementation of a new bidding alterna-tive
for highway construction projects; and (2) the Department’s
compliance with statutory limits for changes to highway con-struction
contracts. As part of the second issue, the Office also
conducted follow-up work on a 1997 performance audit exam-ining
cost increases in highway construction projects.
A+B bidding provides an alternative method of contracting for
and completing highway construction projects. Currently used
by many other states, it is designed to address situations in
which completing a project quickly is desirable. Instead of rely-ing
solely on project cost estimates as a basis for awarding a
highway construction contract, A+B bidding requires prospec-tive
contractors to also submit time completion estimates. Both a
contractor’s project cost and time completion estimate then serve
as the basis for project award. The Legislature authorized the
Department and Transportation Board to pilot A+B bidding for
up to 20 highway construction contracts between October 1,
1997, and October 1, 1999.
Also beginning October 1, 1997, the Legislature set parameters
for changes (commonly referred to as supplemental agreements),
to construction contracts. These changes cannot exceed 10 per-cent
of the contract amount, or $50,000, whichever is greater.
A+B Bidding Presents Beneficial
Alternative to Traditional Bidding
(See pages 9 through 20)
Arizona’s experience with A+B bidding, while limited, indicates
that this approach can accelerate highway construction and re-duce
construction impacts and costs to road users and the sur-rounding
communities. These impacts cause inconvenience to
Summary
ii
OFFICE OF THE AUDITOR GENERAL
motorists and may cause loss of revenue for abutting businesses.
The Department used A+B bidding on 6 projects, 3 of which
have been completed.1 Even with this limited experience, A+B
bidding has been shown to substantially reduce construction
times and construction-related impacts on road users by reduc-ing
traffic delays and associated inconveniences. For example,
the public was saved more than 100 days of construction-related
traffic delays when the Bethany Home bridge reconstruction
over Interstate 17 in Phoenix was completed 110 days ahead of
the Department’s time estimate and 35 days ahead of the con-tractor’s
estimate. Department officials have found the quality of
work under the compressed time schedules to be acceptable, and
contractors have cited additional benefits of using the approach,
such as the opportunity to use equipment more efficiently.
In states with more A+B experience than Arizona, results are
generally favorable, particularly with regard to shortened con-struction
times. Reviews of 13 separate studies on A+B bidding
show that relative to traditional contracting, A+B accelerates
construction and reduces construction impacts on road users.
Despite these benefits, current research remains inconclusive as
to the impact of A+B bidding on project cost and quality. Specifi-cally,
the Texas Transportation Institute (Institute) reports that
bids received for the cost portion (A) of A+B were usually 2 to 5
percent higher than traditionally bid contracts, but in almost all
cases, lower than the state’s cost estimate. However, the Institute
further indicates that A+B project data must continue to be col-lected
and tracked to determine the effect of A+B bidding on
project costs. Additionally, project quality could potentially suf-fer
as a result of the increased pressure to meet a shortened time
schedule. However, other states report that quality is better since
contractors want to construct projects properly the first time to
avoid delays and not incur disincentives for late completion.
1 The Transportation Board issued a seventh A+B contract for recon-struction
of a segment of U.S. Highway 191 between Clifton and
Morenci. While bids on this project were opened and the low bidder
announced to the public on September 30, 1999, the Transportation
Board did not make its determination of lowest responsible bidder
and award the project until October 15, 1999. As the Department and
Transportation Board’s authority to use A+B bidding expired on
October 1, 1999, and under advice from the Attorney General, the
Department rescinded the contract on October 28, 1999.
Summary
iii
OFFICE OF THE AUDITOR GENERAL
The combined experience of Arizona and other states indicates
that A+B bidding can be an effective tool, especially for projects
where completion time and public impact are major factors.
Because of the benefits offered by A+B bidding, the Legislature
should consider amending statute to allow the Department and
Transportation Board to use A+B bidding for appropriate state
highway construction projects. However, while the Department
is still learning how to effectively use A+B bidding, a review of
the Department’s procedures showed that additional actions are
needed if A+B bidding is to be used effectively. For example, the
Department currently lacks formal guidelines for selecting proj-ects
appropriate for A+B bidding, and as a result, it has missed
opportunities to use A+B bidding for several projects. In addi-tion,
Department staff express uncertainty about using the
method, and no process is in place for assessing the results of
A+B bidding. To ensure that the Department appropriately uses
and takes full advantage of this contracting method, it needs to
develop and implement guidelines to identify appropriate A+B
projects, enhance its efforts to educate Department personnel
about A+B bidding, and develop a written process for assessing
the results of A+B bidding.
Department Complies with Statute for
Supplemental Agreements, but Needs
to Assess Reasons for Cost Increases
(See pages 21 through 26)
The Department generally complies with new statutory limits on
changes to construction projects made through the use of sup-plemental
agreements. Based on a review of the 1,309 supple-mental
agreements the Department entered into between Janu-ary
1, 1998, and May 21, 1999, only 32 agreements (or 2.44 per-cent)
surpassed the contract amount by more than 10 percent. A
majority of the 32 agreements that exceeded the 10 percent re-quirement
were entered into to correct project design oversights
or omissions that should have been in the original plans, or to
perform extra work deemed desirable for satisfactory completion
of the project.
While the Department generally adheres to supplemental
agreement requirements, it could potentially reduce its need for
Summary
iv
OFFICE OF THE AUDITOR GENERAL
these agreements through additional analysis of the reasons for
construction cost increases. Follow-up analysis of state engineer
reports that document completed highway construction con-tracts
revealed that while completed highway construction proj-ects
exceeded their original contract amounts by 2.9 percent an-nually
in 1993, contract overruns have increased to 9.7 percent
for the first 6 months of 1999. Based on the Department com-pleting
close to $340 million and $185 million in highway con-struction
projects for 1998 and the first 6 months of 1999, each 1
percent of cost increase could add over $3 million annually to
final construction costs. The Department has so far been unable
to overcome past problems that kept it from adequately captur-ing
and analyzing information about construction cost increases.
While the Department is now taking steps do so, it should en-sure
that it implements all appropriate measures to collect and
assess supplemental agreement data to improve the design and
construction of future Arizona highway construction projects.
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OFFICE OF THE AUDITOR GENERAL
TABLE OF CONTENTS
Page
Introduction and Background ..................... 1
Finding I: A+B Bidding Presents
Beneficial Alternative to
Traditional Bidding................................... 9
Arizona’s Limited Experience
with A+B Bidding Has
Been Generally Positive............................................ 9
Experience of Other States Also Points to
the Benefit of Using A+B Bidding............................ 13
Department Can Enhance
Use of A+B Bidding.................................................. 15
Legislature Should Consider
Renewing Department and Board’s
Ability to Use A+B Bidding ..................................... 19
Recommendations .................................................... 20
Finding II: Department Complies with
Statute for Supplemental Agreements,
But Needs to Further Assess
Reasons for Cost Increases.................... 21
Few Supplemental Agreements
Exceed Statutory Thresholds ................................... 21
Final Contract Costs
Continue to Exceed Original
Contract Bid Amounts.............................................. 22
Recommendation..................................................... 26
Table of Contents
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OFFICE OF THE AUDITOR GENERAL
TABLE OF CONTENTS (Concl’d)
Page
Appendix ....................................................... a-i
Agency Response
Tables
Table 1 Arizona Department of Transportation
A+B Project Awards
As of November 1, 1999
(Unaudited)............................................. 10
Table 2 Arizona Departmentof Transportation
Completed Construction Projects
Years Ended or Ending
December 31, 1993 through 1999
(Unaudited)............................................. 24
1
OFFICE OF THE AUDITOR GENERAL
INTRODUCTION AND BACKGROUND
The Office of the Auditor General (Office) has conducted a per-formance
audit of the Arizona Department of Transportation
(Department). This audit was completed pursuant to the provi-sions
of Laws 1998, Chapter 278, Section 4, which required the
Office of the Auditor General to review two issues: (1) imple-mentation
of a new bidding alternative for highway construction
projects, and (2) the Department’s compliance with statutory
limits for changes to highway construction contracts. As part of
the second issue, the Office also conducted follow-up work on a
1997 performance audit examining cost increases in highway
construction projects.
Legislature Authorized Test of
New Bidding Method and Set New
Requirements for Contract Changes
The Department’s Intermodal Transportation Division is respon-sible
for building and maintaining Arizona’s highway transpor-tation
system. Highway construction represents a substantial
expenditure. During fiscal years 1998 and 1999, the Department
completed 287 highway construction projects at a cost of almost
$600 million. The design, project management, and construction
administration of highway projects is carried out by the State-wide
Project Management Group, Valley Project Management
Construction Group, and District offices, units within the De-partment’s
Intermodal Transportation Division.
The Department has typically employed a traditional contracting
system that focuses on project construction costs. Once Statewide
or Valley Project Management develops and designs a highway
construction project, the Department advertises the project and
invites contractors to bid on it. Contractors estimate the cost to
build that project and then submit sealed bids to the Department.
The Department then forwards the bids along with an award
recommendation to the Transportation Board, which awards the
Introduction and Background
2
OFFICE OF THE AUDITOR GENERAL
The Legislature authorized
the Department and Board
to pilot the A+B contracting
method for highway con-struction
projects, a method
that requires contractors to
estimate both the project
cost and construction time.
construction project to the lowest responsive bidder who meets
specific conditions of responsibility as outlined in the contract.
Effective October 1, 1997, the
Legislature authorized the De-partment
and Transportation
Board (Board) to pilot an innova-tive
highway construction
contracting method commonly re-ferred
to as A+B bidding. A+B
bidding differs from traditional
contracting in that the bid takes
into account not only the project’s construction cost, but also the
time required to complete the project. This authorization, con-tained
in A.R.S. §28-6923(I), permits the Department and Board
to issue up to 20 highway construction contracts under A+B by
October 1, 1999, if the Department and the Transportation Board
determined that this contracting method best served the public
interest. After October 1, 1999, the Department and Board have
no further statutory authority to use this method.
Also beginning October 1, 1997, the Legislature set new pa-rameters
for changes (commonly referred to as supplemental
agreements), to construction contracts. Specifically, statute allows
the Department to make a change to a construction contract by
means of a supplemental agreement under the following condi-tions:
n For changes falling within the existing scope of work under
the contract, if the cost of the change does not exceed 10 per-cent
of the contract amount, or $50,000, whichever is greater.
n For changes that alter the scope of work on a construction
contract, if the cost of the change does not exceed 10 percent
of the contract amount or $50,000, whichever is greater, and
the amount of the changed work is within 20 percent of the
total project length.
Introduction and Background
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OFFICE OF THE AUDITOR GENERAL
Daily road user cost is a
Department-calculated
amount that attempts to
capture the daily “cost” of
traffic delays through a
highway construction proj-ect
to the traveling public,
businesses, and surround-ing
community; and serves
as a cost basis for deter-mining
any savings that
result from reduced con-struction
time.
A+B Bidding
The use of A+B bidding by state highway administrations was
initiated by the Federal Highway Administration (FHWA),
which is part of the U.S. Department of Transportation. In Feb-ruary
1990, the FHWA approved the A+B bidding method for
use by state highway administrations. After a trial period, the
FHWA declared A+B operational in May 1995 and over 38 states
have since employed this contracting method.
The A+B bidding method consists
of two components. In the first
part, A, the contractor bids prices
similar to the traditional con-tracting
system. If the contractor
is awarded the project, its prices
will serve as the basis for cost
reimbursement. In the second
part, B, the contractor estimates
the total number of days required
to complete the project and
multiplies this estimate by a
“daily road user cost” figure that
is included in the bid documents.
When determining the daily road user cost, the Department may
consider such items as traffic speed; the number of lanes open
before, during, and after a highway construction project; the
number of commercial and non-commercial vehicles passing
through a construction area; the number of individuals riding in
those vehicles; and the value of these people’s time.
To determine the lowest cost bid for an A+B project award, the
Department requires prospective contractors to submit both
project cost and time completion estimates. The time estimate is
then multiplied by the Department’s road user cost calculation
and added to the bidder’s cost estimate to arrive at the bidder’s
estimate. For example, if the prospective contractor bids a project
cost of $13,000,000 and a project completion time of 350 days,
and the Department calculates an $8,000 daily road user cost, the
bid would equal $15,800,000. However, the submitted project
cost of $13 million would serve as the basis for contractor pay-ment.
Introduction and Background
4
OFFICE OF THE AUDITOR GENERAL
In addition, if the Department advertises a project as A+B, it can
include an incentive/disincentive (I/D) provision for early or
late completion. This allows the Department to compensate a
contractor for each day that the project is completed ahead of
schedule, and penalize a contractor for each day work exceeds
the contract time.
For instance, on a contract recently completed using A+B bid-ding,
the contractor completed the project 35 days early. This
project had an I/D provision attached that allowed the contrac-tor
to earn $20,000 for every day the project was completed
ahead of the time estimate, up to a maximum of $600,000.1 Of
the 6 A+B projects awarded by the Department and Board, 4
have an I/D provision, while 2 have a provision related only to
disincentives.
Supplemental
Agreements
A supplemental agreement is a written agreement made be-tween
the Department and a contractor covering work not oth-erwise
provided for in the contract, or for adjustments to the
contract time. These agreements address revisions in, or
amendments to, the terms of the contract or conditions specifi-cally
prescribed in the contract. The Department’s supplemental
agreements fall into three categories:
1 For 3 of the 4 A+B projects awarded with an incentive provision, the
Department capped the incentive at 20 percent of the contractor’s
time estimate for the project, which is then multiplied by the daily
value to arrive at the maximum incentive. However, this formula for
maximizing the incentive did not provide sufficient incentive to en-tice
potential contractors for the Bethany Home bridge project, and
the Department had to increase the maximum incentive to $600,000.
A+B bidding can include
monetary rewards for
completing a construction
project early.
The Department calculates the Incentive (up to the
cap)/Disincentive by:
Daily Road User Number of Days Contractor
Costs of Project X Is Ahead/Behind Contract
Time Schedule
Introduction and Background
5
OFFICE OF THE AUDITOR GENERAL
1. Change orders—A contract modification in which the De-partment
and the contractor agree to an amount to complete
the modification.
2. Force accounts—Contract alteration is needed, but the
Department and the contractor cannot agree on a price for
the new items of work. As a result, the contractor maintains
daily records of the labor, materials, and equipment used to
perform the additional work and submits these records and
invoices to the Department for review, approval, and pay-ment.
Payment is then based on pre-approved hourly rates
and material costs.
3. Letter agreements—A contract change under $5,000.
Audit Scope and
Methodology
This audit focused primarily on the Department’s implementa-tion
of statutory mandates as they relate to A+B bidding and
supplemental agreements.
The methodologies used to conduct this audit included:
n Reviewing the bid results, including project cost and time
estimates; final completion costs and construction time; and
the daily road user costs for the six A+B contracts awarded
by the Department and Transportation Board between Octo-ber
1, 1997, and October 1, 1999, and a seventh A+B contract
awarded on October 15, 1999, but rescinded by the Depart-ment
on October 28, 1999;
n Analyzing 1,309 supplemental agreements pertaining to 271
highway construction contracts received by the Department’s
Field Reports section between January 1, 1998, and May 21,
1999, to assess the Department’s adherence to statutory man-date;
n Reviewing State Engineer Reports from fiscal years 1998 and
1999 that document 287 completed construction projects to
Introduction and Background
6
OFFICE OF THE AUDITOR GENERAL
assess the Department’s management of construction cost in-creases;
n Reviewing 13 separate studies on the merits of A+B bidding
(see Appendix, page a-i through a-ii, for listing of studies);
n Interviewing the following to assess their knowledge and use
of A+B bidding and to obtain their perspectives on the bene-fits
and drawbacks of its use: the Arizona Transportation
Board Chairman, two highway construction contractors
awarded A+B contracts by the Department, two contractors
that bid A+B projects but were not the low bidder, officials
from the Federal Highway Administration (FHWA), the
American Association of State Highway Transportation Offi-cials
(AASHTO), the Association of General Contractors
(AGC), and the Utah Technology Transfer Center at Utah
State University; and
n Contacting seven state highway administrations that have
had significant experience using A+B bidding to compare
and contrast the Department’s implementation efforts.1
This report presents findings and recommendations in two areas:
n The Legislature should consider reauthorizing the use of
A+B bidding for highway construction projects; and to en-sure
that A+B bidding is used appropriately and effectively,
the Department should establish guidelines for applying
A+B, educate Department personnel about its use, and
evaluate its results.
n The Department needs to evaluate causes for cost increases
on construction contracts and use this information to mini-mize
future construction cost increases and the need for sup-plemental
agreements.
1 State highway administrations in Missouri, New York, North Caro-lina,
and Texas were contacted because of their significant experi-ence
using A+B bidding. In addition, state highway administrations
in California, Colorado, and Utah were contacted because of their
proximity to Arizona.
Introduction and Background
7
OFFICE OF THE AUDITOR GENERAL
This audit was conducted in accordance with government
auditing standards.
The Auditor General and staff express appreciation to the Di-rector
and staff of the Department of Transportation and mem-bers
of Arizona’s Transportation Board for their cooperation and
assistance throughout the audit.
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OFFICE OF THE AUDITOR GENERAL
(This Page Intentionally Left Blank)
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OFFICE OF THE AUDITOR GENERAL
FINDING I A+B BIDDING PRESENTS
BENEFICIAL ALTERNATIVE TO
TRADITIONAL BIDDING
Arizona’s experience with A+B bidding, while limited, indicates
this approach can accelerate highway construction and reduce
construction impacts and costs to road users and the surround-ing
community. States with more A+B experience likewise re-port
that it shortens construction time and reduces the negative
impact on the public. Although A+B’s effect on project cost and
quality is still inconclusive, on balance the results suggest that
the Legislature should consider renewing the Department and
Transportation Board’s ability to use it as a bidding alternative.
However, to ensure that A+B bidding is used appropriately, the
Department needs to develop guidelines to identify appropriate
A+B projects, enhance its efforts to educate Department person-nel
on A+B bidding, and develop a process to assess the results
of this innovative contracting method.
Arizona’s Limited Experience
with A+B Bidding Has
Been Generally Positive
The Department’s experience with A+B bidding has been limited
to six projects, three of which have been completed. However,
even with this limited experience, the A+B approach has been
shown to substantially trim the length of construction-related
traffic delays. Much less is known about A+B’s effect on project
costs. Department inspectors have found the quality of work
under the compressed schedules to be acceptable, and contrac-tors
have cited additional benefits of using the approach, such as
the opportunity to use equipment more efficiently.
Six projects conducted under A+B bidding—The Legislature
authorized the Department and Transportation Board (Board) to
issue a maximum of 20 contracts under A+B bidding between
A+B bidding can accelerate
highway construction and
reduce construction-related
impacts and costs to road
users.
Finding I
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OFFICE OF THE AUDITOR GENERAL
October 1, 1997, and October 1, 1999. The Department and Board
issued six contracts using A+B during that time, a much smaller
number than authorized.1 According to various Department
officials, three reasons contributed to the low number of A+B
projects awarded: unfamiliarity with the A+B bidding process,
an inefficient method for identifying appropriate projects for
A+B, and a three-month period in 1998 when ADOT manage-ment
put A+B bidding on hold to focus on awarding several
traditionally bid projects. Three of the six contracts have been
completed and three A+B projects are currently under construc-tion.
Table 1 illustrates the six projects, including location, bid
1 The Transportation Board awarded a seventh A+B contract for re-construction
of a segment of U.S. Highway 191 between Clifton and
Morenci. While bids on this project were opened and the low bidder
announced to the public on September 30, 1999, the Transportation
Board did not make its determination of lowest responsible bidder
and award the project until October 15, 1999. As the Department and
Transportation Board’s authority to use A+B bidding expired on
October 1, 1999, and under advice from the Attorney General, the
Department rescinded the contract on October 28, 1999.
Although the Legislature
authorized the Depart-ment
and Board to issue
20 A+B projects, they
issued only 6.
Table 1
Arizona Department of Transportation
A+B Projects Awarded
As of November 1, 1999
(Unaudited)
Project
Description
Project
Cost
A
Total
Days
B
Daily Road
User Cost
C
Bid
Estimate
A+(B x C)
Days
Early
Maximum
Incentive
I-17 (Phoenix) $79,729,000 609 $16,000 $89,473,000 NA1 No incentive2
Bethany Home
Bridge (Phoenix)
I-40 (Holbrook)
S.R. 89A (Cottonwood)
11,465,728
5,272,000
4,494,190
225
385
200
20,000
1,300
4,800
15,965,728
5,772,500
5,454,190
35
77
NA1
$600,000
100,100
192,000
S.R. 143 (Phoenix) 3,031,785 120 2,700 3,355,785 0 No Incentive2
I-8 (Yuma) 1,447,079 60 3,000 1,627,079 NA1 36,000
__________________________________
1 Under construction.
2 Disincentive only with no maximum.
Source: Arizona Department of Transportation list of A+B highway construction projects awarded.
Finding I
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OFFICE OF THE AUDITOR GENERAL
Using A+B on the Bethany
Home bridge reconstruc-tion
saved the public more
than 100 days of construc-tion-
related traffic delays
and associated costs.
amount, possible incentive award, and status as of November 1,
1999.
A+B bidding’s effect on construction time, project cost, and
project quality differs—Although the Department and
Board have awarded only six A+B projects and completed
three of these projects to date, the State has seen a decrease
in project duration and a savings in road user costs, while
maintaining project quality. However, A+B’s effect on proj-ect
costs is inconclusive at this time. Specifically:
n Construction times and impact on public reduced—Cur-rent
results demonstrate A+B’s potential to reduce construc-tion
time and minimize effects on road users. The clearest il-lustration
is the completed
Bethany Bridge Project over
Interstate 17 in Phoenix. The
Department bid the Bethany
Home project A+B to ensure
that the reconstruction of the
bridge was completed prior to
the Department’s expansion of
Interstate 17. While the Department estimated that this proj-ect
would take 300 days to complete, the contractor who had
been awarded this project completed the Bethany Home con-struction
in 190 days, 110 days ahead of the Department’s es-timate,
and 35 days ahead of the contractor’s own bid. By
using A+B bidding in this instance, the Department saved
the public more than 100 days of construction-related traffic
delays. Additionally, the contractor for the Holbrook Inter-state
40 construction project recently completed the project 77
days ahead of its and the State’s estimate of 385 days, saving
the public many more days in traffic delays. The other com-pleted
A+B project, a pavement replacement project on State
Route 143 in Phoenix, was bid and completed at the State’s
estimate of 120 days. Finally, for the remaining 3 A+B proj-ects
under construction, the contractor’s time estimate for
project completion is a combined 351 days less than the De-partment’s
contract time estimate, potentially saving road
users hundreds of days in construction-related traffic delays.
Finding I
12
OFFICE OF THE AUDITOR GENERAL
Although a contractor is not deterred from completing proj-ects
as quickly as possible under traditional contracting ap-proaches,
A+B’s advantage in this respect is that it builds
time competition into the contract. Under the “B” portion of
the A+B formula, a contractor’s bid must include a time esti-mate
for completing the project. Keeping that time as low as
possible is part of what determines the winning bid. Tradi-tional
contracting approaches do not take this factor into ac-count
as part of the competitive bidding process.
n Impact on project costs not yet determined—The De-partment
has not engaged in a sufficient number of A+B
projects to determine its impact on project costs. With only
six projects awarded and two completed, A+B’s impact on
project costs is inconclusive at this time. Additionally, the
Department has not attempted to estimate what the cost of
the completed projects would have been if traditionally bid,
and then compared that estimate to the project’s final cost.
However, there is some evidence suggesting that the travel-ing
public may accept higher costs if projects are completed
sooner. This subject was covered at a focus group of the trav-eling
public that the Department convened in July 1999. This
group indicated that it would rather pay a little more in tax
dollars for highway construction projects if these projects
could be completed more quickly in order to decrease traffic
delays and driving inconveniences.
n Project quality judged acceptable by the Department—
One concern voiced about A+B contracting is that project qual-ity
could suffer as a result of the increased pressure to meet a
shortened time schedule. However, according to Department
officials, the quality of work on A+B projects has so far met
construction standards. Additionally, a Department engineer
noted that the recently completed Bethany Home Bridge A+B
project met all quality standards.
Contractors cite other potential benefits—Arizona contractors
reported several other potential benefits of using the A+B ap-proach.
Those who commented favorably included a represen-tative
of a contracting association and individual contractors
involved with A+B contracting. They cited the following bene-fits:
Finding I
13
OFFICE OF THE AUDITOR GENERAL
n Better use of resources—One Arizona contractor noted
that A+B allows contractors to be creative in scheduling proj-ects
and thus better utilize their resources. Another contractor
indicated that contractors might rent highway construction
equipment for eight-hour-day fees, but operate two shifts of
construction workers and use the rental equipment 24 hours
per day.
n Improved relationships with the public—The incoming
President of the Arizona Association of General Contractors
indicated that A+B allows the contractor to show to the road
user and surrounding community how the State and the
contractor are working on their behalf to reduce the impact of
construction projects.
One contractor with a current A+B contract remained very posi-tive
about this approach even though there are some difficulties
on the current project. The contractor indicated that he would
like the Department to continue using A+B bidding and would
anticipate bidding on future A+B projects.
Experience of Other States
Also Points to the Benefit
of Using A+B Bidding
In states with more A+B bidding experience than Arizona, re-sults
have been generally favorable, particularly with regard to
shortening construction times. Because Arizona’s experience
with A+B bidding was limited, Auditor General staff contacted
other states, research institutes, and others who had more expe-rience
with the approach. Reviews of 13 separate studies of A+B
contracting showed that relative to traditional contracting ap-proaches,
the A+B approach accelerates construction. Results are
more mixed with regard to cost and quality.
Construction times are accelerated, reducing traffic delays—
Based on a review of 13 separate studies of A+B bidding, this
method allows state highway administrations to accelerate
highway construction times, which in turn reduces traffic delays
and associated inconveniences for road users (see Appendix,
pages a-i through a-ii for listing of studies). For example, a 1999
Studies indicate that A+B
bidding can reduce con-struction-
related inconven-iences
to the community.
Finding I
14
OFFICE OF THE AUDITOR GENERAL
study by the Federal Highway Administration (FHWA) found
that states had positive results with A+B bidding because:
1) Highway construction times are accelerated as compared to
traditionally bid contracts; and
2) In most instances, contractors complete the work ahead of
schedule.
As a result of accelerated construction times, the impact of high-way
construction on the public and the surrounding community
is reduced. Both a 1997 FHWA study and a 1998 Virginia Trans-portation
Research Council study agree that A+B bidding re-duces
construction impacts and costs to road users by reducing
traffic delays and inconveniences to the surrounding commu-nity,
including local businesses. The Virginia study also agrees
that costs to motorists are reduced in these major areas: travel
cost times, vehicle operating cost, and accident cost, as compared
to traditionally bid contracts.
States report the following benefits from using A+B bidding:
n New York reports that it has saved 5,900 contract days for the
54 A+B projects it has completed. New York also estimates
that this reduction in contract time has saved the traveling
public $59.3 million in costs associated with construction-related
delays.
n In an A+B study completed by Zohar Herbsman and pub-lished
in the Journal of Construction Engineering and Manage-ment,
California reports using A+B bidding to quickly re-build
part of the freeway system in 1994 following the earth-quake
in Northridge. The contractor was able to complete the
highway construction 74 days earlier than the state’s esti-mate,
saving the public millions in construction-related de-lays.
For instance, the California Trucking Association re-ported
that commercial truck operators saved $500,000 for
each day the freeway was opened early.
Costs results are mixed—Despite these benefits, current research
remains inconclusive as to the impact of A+B bidding on project
cost. For example, an April 1999 draft final report by the Texas
Because states report mixed
results, A+B’s impact on
project cost and quality is
inconclusive.
Finding I
15
OFFICE OF THE AUDITOR GENERAL
Transportation Institute indicates that bids received for the cost
portion (A) of A+B contracts were usually 2 to 5 percent higher
than traditionally bid contracts, but in almost all cases, lower
than the state’s cost estimate.1 Yet, the report states that A+B
project data must continue to be collected and tracked to deter-mine
the effect of A+B bidding on project costs as compared to
traditionally bid contracts. Additionally, New York reported that
for the 94 A+B projects it has awarded, the contractor’s bid esti-mates
were $25 million less than the state’s cost estimate. Finally,
an operations manager at the Utah Technology Transfer Center,
which is conducting research on A+B bidding practices, likewise
indicated that although data is being gathered from states and
highway construction groups, no conclusionary research has
been developed to determine whether A+B bidding reduces or
increases highway construction costs.
Effect on project quality is also mixed—The Texas Transporta-tion
Institute report indicates that quality of work, according to
the majority of states interviewed, is either the same or worse
when compared to that of a traditionally bid project. In some
cases, state highway administrations must accept minimum or
lower quality work or face costly time delays. However, the
opinion of other states is that quality is better, since the contrac-tor
wants to do the construction properly the first time and not
incur disincentives for late completion of the project, which
might result from poor quality construction.
Department Can Enhance
Use of A+B Bidding
Taken together, the experience of Arizona and other states indi-cates
that A+B bidding can be an effective contracting tool, par-ticularly
for projects in which completion time and public impact
are major factors. However, the Department needs to take sev-
1 The Texas Transportation Institute, a state agency which is part of the
Texas A&M University System, engages in research pertaining to all
forms of transportation. The Texas Transportation Institute conducts in-terdisciplinary
and multi-modal research extending into the planning,
design, construction, operation, maintenance, enforcement, economic,
environmental, and social aspects of transportation.
Finding I
16
OFFICE OF THE AUDITOR GENERAL
eral steps if it is to maximize the effective use of A+B bidding.
Specifically, the Department needs to:
1) Develop guidelines to assist with the timely and appropriate
identification of highway construction projects for A+B bid-ding;
2) Enhance efforts to educate its design, contracting, and con-struction
personnel regarding A+B bidding; and
3) Develop a process for assessing the results of A+B bidding.
Department should develop formal guidelines to identify proj-ects
appropriate for A+B bidding—The Department currently
has no formal guidelines to select projects that may be appropri-ate
for A+B bidding. Instead, the Department has relied primar-ily
on two individuals within the Construction Group, with as-sistance
from District Engineers (these engineers help identify
and supervise highway construction projects) to select A+B proj-ects
just prior to the bid process. As a result, the Department has
potentially missed opportunities to use A+B bidding or has not
ensured the appropriateness of a project for A+B through thor-ough
project planning and design. For example, Department
officials indicate that several projects that would have been ap-propriate
for A+B were not identified as such because the De-partment
lacked a defined process for identifying and selecting
these projects. Additionally, the Department identified and is-sued
one project that appeared appropriate for A+B, but a sig-nificant
project design error and subcontractor problems have
put this project behind schedule and may negate any time sav-ings
the Department hoped to realize.
Other state highway administrations and the Texas Transporta-tion
Institute have created written guidelines to assist with the
identification and selection of projects suitable for A+B bidding.
Specifically:
n Texas and New York guidelines—Both Texas and New
York have adopted guidelines for A+B project selection. The
Texas Department of Transportation’s guidelines specify the
types of highway construction projects that are best suited for
A+B bidding, including projects that add driving lanes, proj-
Finding I
17
OFFICE OF THE AUDITOR GENERAL
ects that expect to have an economic impact on local com-munities
and businesses, or projects located in high-traffic ar-eas.
Additionally, the New York State Department of Trans-portation’s
guidelines indicate that it is essential that a proj-ect’s
suitability for A+B bidding be identified during the
early stages of project development to allow for proper plan-ning,
design, and coordination.
n Texas Transportation Institute recommends guidelines—
The Texas Transportation Institute formally recommended
the use of guidelines as a means for starting or formalizing a
state highway administration’s A+B selection process. In ad-dition
to those items identified by Texas and New York, the
Texas Transportation Institute recommends that guidelines
include provisions for considering third-party influences, es-pecially
utilities relocation and right-of-way issues, which can
potentially delay highway construction; and for providing
for the safety of the traveling public and highway construc-tion
workers.
These existing guidelines can serve as a starting point for Ari-zona’s
efforts. The Department should develop formal guide-lines
to assist with the identification and selection of appropriate
A+B projects. These guidelines should incorporate the Texas
Transportation Institute’s selection criteria as well as any guide-lines
specific to Arizona’s highways. In fact, Department person-nel
believe such guidelines should be developed with input from
its design, contract, and construction groups.
Department should enhance A+B education efforts—In addition
to developing guidelines, the Department needs to better edu-cate
its construction, design, and contracting personnel on A+B
bidding. After A+B was approved for use in 1997, the Depart-ment’s
Construction group compiled an A+B educational packet
and distributed this packet to its nine District Engineers (DE) for
their review. These District Engineers help identify future high-way
construction projects, as well as supervise current highway
construction projects in their respective regions throughout Ari-zona.
Despite this educational packet, a recent survey of all nine
DEs indicated that the majority of them were uncertain as to the
appropriateness of designating a highway construction project
for A+B bidding. One DE mentioned that experiences on current
The Department needs to
develop and implement
formal guidelines for A+B
bidding.
Finding I
18
OFFICE OF THE AUDITOR GENERAL
A+B projects are not shared in any formal manner with other
DEs. Another indicated that he would like to see more education
on A+B as there is a “fear factor” among district engineers re-garding
its use. As a result, many engineers do not know when it
is appropriate to suggest potential projects within their regions
for A+B bidding. In addition, officials indicate that design and
contracting staff also have a limited understanding of A+B bid-ding
and how it relates to their respective responsibilities, which
therefore may affect their ability to appropriately plan and de-sign
A+B projects or appropriately prepare project bid requests
and contracts.
To further maximize its use of A+B bidding, the Department
should develop an ongoing education program to ensure per-sonnel
from its design, contracts and specifications, and con-struction
sections understand this bidding method. This educa-tion
effort should inform Department personnel about such
items as what types of highway construction projects are candi-dates
for A+B bidding, when in the design process projects
should be identified as A+B, and how the Department deter-mines
the low bidder using this method. Additionally, Depart-ment
personnel should be trained on how to watch for and man-age
the potential pitfalls of A+B bidding. This effort follows the
Texas Transportation Institute’s suggestion that state highway
administrations must have agency personnel with appropriate
levels of A+B bidding skills and expertise.
Department should develop a process for assessing A+B bid-ding—
While the Department has taken some initial steps to track
A+B project results, it should develop a more comprehensive
written process for assessing the results of A+B bidding. Devel-oping
such a process will allow the Department to evaluate what
succeeded or failed with its A+B projects and apply this knowl-edge
to future projects. To encourage states to evaluate A+B
bidding, the Texas Transportation Institute provides guidelines
to help state highway administrations examine the differences
between the A+B bidding method and the traditional method of
contracting. Specifically, the Texas Transportation Institute’s
report suggests that state highway administrations consider the
following assessment parameters when evaluating A+B projects:
The Department needs to
educate its staff on how to
best apply A+B bidding.
Finding I
19
OFFICE OF THE AUDITOR GENERAL
n Compatibility with the low bid system—Was the lowest
responsible bidder awarded the contract?
n Reduction of project bid cost—Was the amount of the
contractor bid lower than, or equal to, the state’s estimate of
cost?
n Impact on open competition—Was equal opportunity pro-vided
to all bidders?
n Reduction of project completion time—Was the time re-quired
to complete the project reduced as compared to the
state highway administration’s time estimate and the con-tractor’s
time bid?
n Shifting of risk from agency to contractor in terms of
cost, time, and quality—Did the contractor assume in-creased
responsibility for control of cost, time, and quality?
Did the contractor maintain a high standard of quality and
prevent workers from taking shortcuts on project construc-tion?
Did the contractor meet the construction schedule?
n Ease of implementation with respect to agency re-sources,
data, systems, and expertise—Did the state
highway administration have the resources necessary to
properly plan, design, and administer the contract without
causing counterproductive situations, such as stretched
manpower, overtime needs, or cutbacks on state highway
administration inspections of construction projects?
Legislature Should Consider
Renewing Department and Board’s
Ability to Use A+B Bidding
Because of the benefits associated with A+B bidding, the Legis-lature
should consider amending statute to allow the Depart-ment
and Transportation Board to continue using A+B bidding
for appropriate highway construction projects. Since A.R.S. §28-
6923(I) authorized the Department and Transportation Board to
award 20 A+B contracts only through October 1, 1999, new leg-
Finding I
20
OFFICE OF THE AUDITOR GENERAL
islation would be required to extend their authority to engage in
A+B bidding.
Recommendations
1. The Legislature should consider amending A.R.S. §28-6923(I)
to adopt A+B bidding as a permanent contracting method for
state highway construction.
2. The Department should develop and implement written
guidelines, similar to those created by the Texas Department
of Transportation, the New York State Department of Trans-portation,
and the Texas Transportation Institute, to assist
with the identification and selection of appropriate highway
construction projects for A+B bidding.
3. The Department should develop and implement an ongoing
education program about A+B bidding for its design, con-tracts
and specifications, and construction personnel.
4. The Department should develop and implement a written
process for assessing the impacts of A+B bidding on highway
construction projects.
21
OFFICE OF THE AUDITOR GENERAL
FINDING II DEPARTMENT COMPLIES WITH
STATUTE FOR SUPPLEMENTAL
AGREEMENTS, BUT NEEDS TO
FURTHER ASSESS REASONS
FOR COST INCREASES
The Department has generally adhered to the new statutory
requirements that limit the size of supplemental agreements, but
it could potentially reduce its need for such agreements through
additional analysis of the reasons for construction cost increases.
Although nearly all supplemental agreements fall within the
new limits, the extent to which final contract costs exceed origi-nal
estimates has continued to rise. The Department can mini-mize
future construction cost increases and the need for supple-mental
agreements by analyzing factors that cause these in-creases
and using this information to improve the design and
construction of future projects.
Few Supplemental Agreements
Exceed Statutory Thresholds
According to legislative changes that took effect on October 1,
1997, changes to construction contracts are now limited to the
following:
n For changes falling within the existing scope of the contract
plans and specifications, the cost of the change cannot exceed
$50,000, or 10 percent of the contract amount, whichever is
greater.
n For changes that alter the scope of work in the contract plans
and specifications, the cost of the changes cannot exceed
$50,000, or 10 percent of the contract amount, whichever is
greater, and the amount of the changed work must be within
20 percent of the total project length.
Finding II
22
OFFICE OF THE AUDITOR GENERAL
Should a contract change exceed these statutory requirements,
the Department must solicit competitive bids for the change in
the scope of work.
Since this legislation took effect in 1997, slightly over 2 percent of
the supplemental agreements the Department has entered into
have exceeded these monetary thresholds. Based on a review of
1,309 supplemental agreements the Department received be-tween
January 1, 1998, and May 21, 1999, 32 (or 2.44 percent)
surpassed the contract amount by more than 10 percent. These
32 supplemental agreements exceeded their original contract
amounts by a median of 15.7 percent, ranging from a low of 10.8
percent to a high of 70 percent of their original contract amounts.
Most of the 32 agreements that exceeded the 10 percent require-ment
were entered into due to errors of omission on the project
plans or specifications, extra project work, or changed site condi-tions.
For example:
n Two agreements that exceeded their original project amounts
by 56 and 70 percent (reflecting dollar increases of $300,000
and $57,095, respectively, over original contract amounts),
were entered into to correct project design oversights or
omissions that should have been in the original plans.
n Three agreements that exceeded their original contract
amounts by 20, 25, and 47 percent (reflecting increases of
$46,101, $382,302, and $134,057 respectively, over original
contract amounts), were entered into to perform extra work
deemed desirable for satisfactory completion of these proj-ects,
but not provided for in their original scope.
Final Contract Costs
Continue to Exceed Original
Contract Bid Amounts
In a 1997 performance audit report (Report No. 97-17), the
Auditor General examined a closely related issue: cost overruns
on highway construction projects. Since this issue closely relates
to statutory requirements governing supplemental agreements, a
review of the Department’s progress in reducing cost overruns
Only a small percentage
of supplemental agree-ments
reflecting changes
to construction contracts
exceed statutory thresh-olds.
Finding II
23
OFFICE OF THE AUDITOR GENERAL
was performed. This review found that final costs on highway
construction projects continue to exceed their original contract
amounts at an increasing rate. Incomplete and poorly classified
project information impedes the Department’s ability to under-stand
and evaluate the factors impacting cost increases. While
the Department is taking steps to better collect and assess sup-plemental
agreement information, it needs to take additional
action to ensure these plans are implemented.
Final construction costs continue to increase—Since the Auditor
General’s 1997 audit, construction cost overruns have not only
continued, but have increased. The 1997 report found that com-pleted
highway construction projects exceeded their original
contract amounts by 7.6 percent annually as of June 1997, more
than double the 2.9 percent figure for 1993. Based on a review of
state engineer reports documenting 287 highway construction
projects completed between July 1997 and June 1999, the De-partment’s
contract overruns have increased. As illustrated in
Table 2 (see page 24), final contract amounts exceeded original
contract amounts by 8.5 percent for the construction projects
completed during 1998. Similarly, for the first 6 months of 1999,
final contract amounts exceeded original contract amounts by 9.7
percent for the construction projects completed during that time.
Based on the Department completing close to $340 million and
$185 million in highway construction projects for 1998 and the
first 6 months of 1999, respectively, each 1 percent of cost in-crease
could equate to more than $3 million annually.
Final construction costs have continued to increase beyond
original contract amounts despite a Department goal to limit cost
changes to construction contracts to 5 percent of the contract
amount. As outlined in its construction manual, the Department
attempts to limit cost changes to 5 percent of the contract
amount, realizing that unavoidable cost increases or changes can
occur on highway construction projects. Additionally, to help
ensure that project cost increases are limited to 5 percent, the
Department adopted a process in May 1998 that requires the
State Construction Engineer to approve supplemental agree-ments
to construction projects if the agreement causes the cu-mulative
cost of contract changes to exceed 2 percent. To its
credit, the Department’s 5 percent target differs from the stan-dards
of the industry or other states. According to the Arizona
Final highway construc-tion
costs continue to
increase as compared to
original contract amounts.
Finding II
24
OFFICE OF THE AUDITOR GENERAL
Association of General Contractors and other states, a standard
of 10 percent for project increases is used, as it allows more flexi-bility
to accommodate and account for unanticipated and/or
unavoidable project cost increases or changes. However, De-partment
officials view their 5 percent target as a management
tool to retain control over cost changes to construction contracts
and prevent these changes from becoming excessive.
Deficient information about supplemental agreements hinders
analysis—Similar to the 1997 performance audit, inadequate
supplemental agreement information and analysis prohibit the
Department from identifying trends to make construction proc-ess
changes. The 1997 audit found that the Department relied on
very broad categories to classify the reason for supplemental
agreements, which limited the Department’s ability to measure
trends in contract changes. In addition, the 1997 audit found that
Table 2
Arizona Department of Transportation
Completed Construction Projects
Years Ended or Ending December 31, 1993 through 1999
(Unaudited)
Year
Number
of
Projects
Original
Contract
Amount
Final
Amount
Paid
Dollar
Increase
Percentage
Increase
1999a 83 $ 168,591,050 $ 184,903,177 $ 16,312,127 9.7%
1998 146 311,679,642 338,254,487 26,574,845 8.5
1997 134 219,822,952 236,190,156 16,367,204 7.5
1996 151 248,765,709 262,608,295 13,842,586 5.6
1995 131 262,261,453 278,579,773 16,318,320 6.2
1994 97 178,015,778 188,531,146 10,515,368 5.9
1993 115 324,429,088 333,880,371 9,451,283 2.9
Total 857 $1,713,565,672 $1,822,947,405 $109,381,733
a Only projects completed in January through June 1999 are included.
Source: Auditor General Performance Audit of the Arizona Department of Transportation, Construc-tion
Management Function (Report No. 97-17) and Auditor General staff summary of data
presented in Arizona Department of Transportation State Engineer Reports for July 1997
through June 1999.
Finding II
25
OFFICE OF THE AUDITOR GENERAL
incomplete and poorly classified supplemental agreement in-formation
impeded the Department’s ability to fully understand
and evaluate the factors impacting construction cost increases.
These same problems persist. For instance, many supplemental
agreements reviewed during the audit were not categorized, or
included multiple classifications. Specifically, of the 1,309 sup-plemental
agreements reviewed by auditors, 344 (or 26.3 per-cent)
of the agreements either failed to identify a reason for the
change or contained multiple classifications. An additional 160
agreements were categorized as “other,” which effectively re-duces
the quality of this data for analysis. As a result, for nearly
40 percent of its supplemental agreements, the Department does
not have the data it would need to assess reasons for these
agreements and institute appropriate changes to reduce the use
of these agreements. The Department’s analysis of construction
cost increases resulting from supplemental agreements is also
still limited. While the Department did attempt to group reasons
for supplemental agreements, the Department has not conducted
further analysis of this information or instituted any corrective
actions.
Department making changes to remedy deficiencies—The De-partment
has recently taken steps to improve its management of
construction cost increases. For instance, the Department has
modified its classification of supplemental agreements into
fewer, better-defined categories. Implemented into the Depart-ment’s
supplemental agreement database on July 1, 1999, these
better-defined categories for supplemental agreements should
help the Department better track and determine trends for
highway construction cost overruns. In addition, the Department
has further stressed to its Resident Engineers the need to classify
every supplemental agreement and use only one classification
category per agreement.
In addition to creating more measurable and complete data, the
Department has taken steps to better ensure supplemental
agreement information is analyzed. Specifically, the Depart-ment’s
Construction and Statewide Project Management (design)
sections are developing systems to collect and evaluate supple-mental
agreements in an effort to identify trends in changes to
original contracts. With this information, the Department intends
Finding II
26
OFFICE OF THE AUDITOR GENERAL
to identify problem areas in the design, planning, or construction
of highway projects and institute corrective action. However,
these process changes are not finalized and the Department
should take measures to ensure such information is indeed col-lected
and analyzed. As noted in the 1997 audit, patterns may
emerge that suggest the need for review or closer scrutiny in
future projects.
Recommendation
1. The Department should ensure that it collects and evaluates
supplemental agreement information to identify trends in
changes to original contracts and to determine if it needs to
make changes to improve the design and construction of fu-ture
Arizona highway construction projects.
OFFICE OF THE AUDITOR GENERAL
APPENDIX
OFFICE OF THE AUDITOR GENERAL
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a-i
OFFICE OF THE AUDITOR GENERAL
APPENDIX
National Studies on A+B Bidding
1. American Association of State Highway and Transportation Officials. Primer on Contract-ing
2000: A Report of the Contract Administration Task Force of the AASHTO, Subcommittee on
Construction of the AASHTO Standing Committee on Highways, Sept. 1997.
2. American Association of State Highway and Transportation Officials. Primer on Contract-ing
2000: A Report of the Contract Administration Task Force of the AASHTO Subcommittee on
Construction of the AASHTO Standing Committee on Highways, Second Edition, Oct. 1998.
3. Anderson, Stuart D. and Jeffery S. Russell. Texas Transportation Institute, NCHRP 10-49
Improved Contracting Methods For Highway Construction Projects Draft Final Report. The
Texas A&M University System: April 1999.
4. Anderson, Stuart D. and Jeffery S. Russell. Texas Transportation Institute, NCHRP 10-49
Implementation Guidelines for Warranty, Multi-Parameter, and Best Value Contracting Prelimi-nary
Draft. The Texas A&M University System: April 1999.
5. Ellis, Ralph D. and Zohar J. Herbsman. Cost-Time Bidding Concept: An Innovative Approach.
Transportation Research Record 1282. 1990.
6. Federal Highway Association. Contract Management Techniques for Improving Construction
Quality, FHWA-RD-97-067. July 1997.
7. Federal Highway Association. FHWA Initiatives to Encourage Quality Through Innovative
Contracting Practices Special Experimental Projects No. 14–(Sep-14). July 1999.
8. Federal Highway Administration. 1998 National Strategic Plan. 1998.
9. Federal Highway Association. Road User Cost Determination Methods In Use for Innovative
Contracting Projects, March 4, 1996.
10. Herbsman, Zohar J. A+B Bidding Method-Hidden Success Story For Highway Construc-tion.
Journal of Construction Engineering and Management, ASCE, Vol. 121, No. 4. December
1995.
a-ii
OFFICE OF THE AUDITOR GENERAL
APPENDIX (Concl’d)
11. Herbsman, Zohar J., Wei tong Chen, and William C. Epstein. Time is Money: Innovative
Contracting Methods in Highway Construction. Journal of Construction Engineering and
Management, ASCE, Vol.121, No. 3. Sept. 1995.
12. Utah Technology Transfer Center, Utah State University. Executive Summary on A+B
Bidding. 2 July, 1999.
< www.utaht2.usu.edu/projects/InnovativeContracting/Bestpractices/A…/A+Bbidding>
13. Virginia Transportation Research Council. Estimating User Costs as a Basis for Incen-tive/
Disincentive Amounts in Highway Construction Contracts, VTRC 98-R12. Feb. 1998.
OFFICE OF THE AUDITOR GENERAL
AGENCY RESPONSE
OFFICE OF THE AUDITOR GENERAL
(This Page Intentionally Left Blank)
November 16, 1999
Debbie Davenport
Auditor General
Office of the Auditor General
2910 N 44th St
Phoenix Arizona, 85018
Re: Response to the A+B Contracting Audit
Dear Ms. Davenport:
We are pleased to respond to the above audit dated November 1, 1999. The response is
in the format of 1) Response to Recommendations, and 2) General Comments.
RESPONSE TO RECOMMENDATIONS: PAGE 20
1. The Legislature should consider amending A.R.S. No. 28-6923(1) to adopt A+B
bidding as a permanent contracting method for state highway construction.
Proposed legislation has been prepared for the legislature to consider in
accomplishing this action. ( See applicable attachment in hard copy version of report)
2. The Department should develop and implement written guidelines similar to
those created by the Texas Department of Transportation, the New York State
Department of Transportation, and the Texas Transportation Institute, to assist
with the identification and selection of appropriate highway construction
projects for A+B bidding. The finding is agreed to and the audit recommendation
will be implemented. All three documents referred to in the recommendation will be
reviewed and ADOT is developing appropriate similar guidelines. (See Attachment 1)
3. The Department should develop and implement an ongoing education about
A+B bidding for its design, contracts and specifications, and construction
personnel. The finding is agreed to and the audit recommendation will be
implemented. The appropriate guidelines developed in Recommendation #2 will be
conveyed, reviewed and discussed with Design, Contract and Specifications and
construction personnel at their respective staff meetings and through special training
sessions.
4. The Department should develop and implement a written process for assessing
the impacts of A+B bidding on highway construction projects. The finding is
agreed to and the audit recommendation will be implemented. This process is already
being developed.
RESPONSE TO RECOMMENDATIONS: PAGE 26
1. The Department should ensure that it collects and evaluates supplemental
agreement information to identify trends in changes to original contracts and to
determine if it needs to make changes to improve the design and construction of
future Arizona highway construction projects. The finding is agreed to and the
audit recommendation will be implemented. A new process is being implemented at
the present time. The Department is currently tracking time, incentive/disincentive
earned and user savings on the 6 projects that have been bid using “a+b”
specifications. (Attachment 2). Additional data stated in pages 18 and 19 of this
report will also be incorporated in our new reporting system, as it becomes available.
GENERAL COMMENTS:
Footnote 1 on page ii and page 10 refers to a U.S. 191 project between Clifton and
Morenci. This “a+b” project never was started and is not pertinent to the purpose of the
audit, which was to evaluate effectiveness of “a+b”contracting. The project bid was
opened by ADOT on September 30, 1999 and awarded by the Transportation Board on
October 15, 1999. As contract approval activities occurred before and after October 1,
based upon legal advice from the Attorney General, the contract was rescinded.
Related to the 1 st paragraph on page iii: The guidelines presented in “Primer on
Contracting 2000” prepared by American Association of State Highway &Transportation
Officials, were used to develop our initial program.
Comments on page 21, Few Supplemental Agreements Exceed Statutory Thresholds.
Page 22 of the report refers to five supplemental agreements that exceeded the 10 per
cent allowable variance. These agreements all occurred for special reasons as detailed
below:
Change Order No. 1, Project F-026-1-525, Globe Show Low Highway, had a value of
$300,000 creating a 56 per cent overrun. This was a rock slope stabilization project.
When the planned design slope ratio was obtained, another geologic fault was discovered
and a very large amount of unstable rock slipped out onto the roadway requiring clean up.
This supplemental agreement is classed as and emergency, changed condition, which
could not be anticipated. Contract Value $ 540,896
Change Order No. 1, Project No. I-8-1-518, Mohawk Canal Overpass, Yuma Casa
Grande Highway, had a value of $57,095, creating a 70 per cent overrun. This was a
bridge structural steel repair project. Field conditions and measurements did not match
plans dimensions and an additional six cracks were found requiring additional welding.
The costs were incurred to pay for the additional work required in repairing the bridge.
The construction contract was not changed. Contract Value $81,594
Change Order No. 1, Project No. S 315-511, SR. 286 had a value of $46,101 and added
1.3 miles to an asphalt roadway overlay creating a 20 per cent overrun. Maintenance
funds were used to take advantage of the economic availability of asphalt in this remote
area. This change Order should not have been counted as a construction contract
overrun. Contract Value $225,670
Change Order No.6, Project No. IM 40-1(84), Topock Kingman Highway, had a value of
$382,302 creating a 25 per cent and was needed to pay the cost of emergency repairs
when a new pavement failed upon opening to traffic. This contract contained new
specifications, new materials, and new processes and a fair and equitable repair cost in
the above amount was reached with the contractor by ADOT. Contract Value
$1,499,716.
Change Order No. 4, Project No. TEA-WKL-0 (1)P, Winkleman, Gila River Bridge had a
value of $134,057 which created a 47 per cent overrun. These costs were caused by
additional, sidewalk, depressed curbs, needed to meet American Disabilities Act
requirements which were not known at time of design. Some additional landscape items
included in the Change Order were paid out of local enhancement funds and should not
have been counted as construction contract changes. Contract Value $285,954.
In all cases the scope of work in the contract was not changed and the work was required
to complete the contract and provide a safe usable facility.
Comments on Final Contract Costs Continue to Exceed Original Contract Bid
Amounts Page 22
Beginning in 1997 the Department began paying incentives to contractors for superior
quality and workmanship. These incentives are paid in the area of materials quality
control, asphalt pavement smoothness, asphalt mix consistency, concrete pavement
smoothness and concrete pavement pavement thickness. This program is resulting in
longer pavement life and lower maintenance costs. Arizona is gaining national
recognition as having the smoothest pavement in the nation. One of the customers (the
motorists) major requests is also to have smoother pavements and their needs are being
met.
The current emphasis in the transportation construction industry is to lessen motorist
inconvenience. ADOT now uses incentive payments for early completion of contract
work. These incentives are resulting in 3-4 % increase in cost over the original contract
bid amounts. The bidding process is being re-evaluated at this time with the
consideration of including this cost due to incentive payments in the estimated contract
bid amounts.
Additionally the new Supplemental Agreement Process (Attachment No. 3) currently
being implemented will allow ADOT to determine the areas causing cost increases and
establish methods and procedures to improve plans and document quality and cost
overruns should decrease.
A letter from the Attorney General is attached to this report explaining their legal opinion
on the “a+b” decision and their interpretation on contract changes.
We appreciate the opportunity to review this report and are pleased your findings show
we are complying with established requirements. We furthermore appreciate the
recommendations which upon implementation will allow us to provide improved service
to our customers, the motorists of Arizona
Sincerely,
Mary E. Peters
Director
Attachments
G:constadm/a+baudit992
ATTACHMENT 1
A+B Project Selection Guidelines - DRAFT
1. Type of Project
The following type of projects can be ruled out:
Projects where most of work is limited to outside the shoulder
(landscape, fencing, signing, etc).
2. Project should meet at least one of the following criteria:
· Time Restraint:
Weather limitations
Upcoming major event
· Current level of service below “C”
· Major bridge or roadway out of service
· Large impact to local businesses
· Safety Considerations:
School zone in project
Impairment of emergency vehicles (hospital, police or fire)
High accident area
Heavy pedestrian usage
· Road User Cost for duration of project exceeds $3000
3. Resource Availability
Although the number of man-hours for an A+B project is about the same
as one bid conventionally the district needs to be aware that the contractor
will likely work longer hours. This will require an increase in ADOT
man-hours per day; overtime, weekend work, multi-shifts should be
expected.
4. Project Restrictions
· It is important the contractor be creative in how he goes about
constructing the project. A+B bidding lends itself to new ideas and
methods and therefore restrictions of the contractor should be kept to a
minimum.
· In order to accelerate the work the contractor may want to work at night
and during weekends in addition to his normal daytime work. Weekend
and nighttime restrictions established in the contract will defeat the
purpose.
· When possible minimize traffic control restraints. (It may be necessary
to include a traffic control plan in the contract to demonstrate one possible
method to construct the project.)
· Restrictions are sometimes necessary and should not necessarily deter
us from using A+B bidding. However it is critical that whatever
restrictions are required, that they be clearly defined in the contract.
ATTACHMENT 2
PROJECT DESCRIPTION DAILY ADT DAYS INCENTIVE MAX. POSSIBLE
NO. VALUE "a" days "b" "a+b" "a" days "b" "a+b" EARLY EARNED INCENTIVE
H304601C Holbrook TI $1,300.00
SR77=10,800
I-40=14,200
$4,994,000.00 385 $500,500.00 $5,494,500.00 $5,272,000.00 385 $500,500.00 $5,772,500.00 77 $100,100 $100,100
H391201C Hohokam $2,700.00 47,000 $2,005,002.00 120 $324,000.00 $2,329,002.00 $3,031,785.00 120 $324,000.00 $3,355,785.00 0 $0 N/A*
H461801C Bethany TI $20,000.00
Beth=39,000
I-17=184,600
$11,061,300.00 300 $6,000,000.00 $17,061,300.00 $11,465,727.50 225 $4,500,000.00 $15,965,727.50 35 $600,000 $600,000
H447801C I-17 Design Bld. $16,000.00
Glen=43,000
Camel=48,000
I-17=185,000
$64,749,450.00 910 $14,560,000.00 $79,309,450.00 $79,729,000.00 609 $9,744,000.00 $89,473,000.00 $0 N/A*
H441301C I-8B, Ave 3E to 7E $3,000.00 10,000 $1,350,000.00 100 $300,000.00 $1,650,000.00 $1,447,079.00 60 $180,000.00 $1,627,079.00 NOT COMPLETE $36,000
H274101C Cottonwood $4,800.00 22,000 $4,417,910.44 210 $1,008,000.00 $5,425,910.44 $4,494,190.12 200 $960,000.00 $5,454,190.12 NOT COMPLETE $192,000
A+B PROJECTS, DETAILS & RESULTS
* no incentive specified
STATE ESTIMATE BID AMOUNT
Page 1
ATTACHMENT 2
A+B PROJECTS, USER SAVINGS
STATE ESTIMATE BID ACTUAL
H304601C Holbrook TI 385 385 308 77 $100,100
H391201C Hohokam 120 120 120 0 $0
H461801C Bethany TI 300 225 190 110 $2,200,000
H447801C I-17 Design Bld. 910 609 NOT COMPLETE
H441301C I-8B, Ave 3E to 7E 100 60 NOT COMPLETE
H274101C Cottonwood 210 200 NOT COMPLETE
USER
SAVINGS
PROJECT NO. DESCRIPTION
COMPLETION TIME DAYS AHEAD
OF ESTIMATE
Page 2
ATTACHMENT 3
A NEW SUPPLEMENTAL AGREEMENT PROCESS
The following changes are proposed for the Supplemental Agreement process.
The Supplemental Agreement Cover Sheet described in the Construction Manual will be
eliminated and replaced with an electronic template form. The RE’s will use the
electronic template form to prepare and submit a Prior Approval Letter. The form will
make the prior approval process more consistent, easier, and more defined. It should be
E-Mailed to Field Reports where the input fields will be downloaded to an Excel
spreadsheet automatically. Analysis of the data may allow us to control and understand
some of the overrun that we are experiencing.
The Prior Approval Letterform is now being tested in some orgs. After testing
and final approval of the new Supplemental Agreement Process, the Construction Manual
will be updated so that all orgs will have the same information and documentation. The
new Change order types are already approved and the orgs can use the new types when
classifying new Supplemental Agreements.
The following pages include drafts of the new change order types, a flow diagram
for choosing change order types, the verbal approval instructions, and the prior approval
letter.
ATTACHMENT 3
General Change Order Types
I. Changed Condition: Std. Spec. 104.02
Use this reason when an unusual and unknown condition occurs on the project
after award of the contract.
Examples: Unknown utility conflicts or other subsurface conditions, unknown or unusual
material characteristics, unusual acts of nature, vandalism.
Comment: This type is a hidden condition that could not be known at contract award.
This change cannot be controlled, estimated, or decreased. This category will allow us to
explain that a certain percentage of our construction budget must be spent to fix
construction conditions that cannot be predicted.
II. Value Engineering: Std. Spec. 104.13
Use this reason when a Value Engineering proposal is accepted.
Comment: These changes should be examined so that future designs include the Value
Engineering improvements.
III. Quantity Omissions: Std. Spec. 104.02 D(4) and 101.42
Use this reason when an item was shown on the plans, but was not included on
the bid tab or when a major item quantity is increased or decreased more than 25 percent
of the plan quantity.
Comment: These changes should be examined to determine if improvements could be
made to the estimating process.
IV. Plans Revisions and Oversights: Std. Spec. 104.02
Use this reason when the plans did not accommodate existing visible field
conditions, at the time of construction, and a change to the design is desirable.
Examples: Obvious design oversight or omissions.
Comment: These changes are within the original scope and should have been on the
original plans. These changes should be examined to determine if improvements could
be made to the design process.
V. Penalties-Bonus: Std. Spec. 104.02 (D) (1)
Use this reason when paying for items where construction quality or time was
modified and the change was not included in the contract documents.
Examples: ADOT chooses to accept a substandard product at a reduced price or wants to
accelerate the contractors schedule with a bonus, or accepts a different product at a
penalty or bonus when the plans materials are unavailable.
ATTACHMENT 3
VI. Additional or Extra Work out of Scope: Std. Spec. 104.02 D(4)
Work for which a price is not included in the original contract, but where the work is
deemed necessary or desirable for satisfactory completion of the contract.
A. ADOT funded
B. Other Jurisdiction funding.
Examples: Visual walls, sound walls, additional landscaping, and intergovernmental
agreements are some of the items that can be extra work.
VII. Other:
Write in any items not included in the above categories and explain in detail.
Examples: Negotiated settlements should be included in any of the above categories that
the change order fits if there is agreement that a contract change has occurred and the
price is being negotiated. When a contract change is debated and a settlement is reached,
the change order should be included in this category and the negotiated settlement should
be explained in detail.
COMMENTS: Each of the change order types defined above can better define
and categorize the reason for overruns. With any system, overlap and redundancy may
occur so the supplied flow diagram for choosing the change order type should be used.
The Resident Engineer should make a conscious effort to not lump types of contract
changes within one change order.
ATTACHMENT 3
Flow Diagram for Choosing a Change Order Type
Note a: An example of type VII (Other) here would be when the Resident Engineer changes the design because he or she feels that the change would
improve their project. These changes should be approved by the responsible ADOT authority and fully explained in the comments.
Note b:An example of type VII (Other) here is when ADOT feels the contract did not need to be modified, but the contractor did and a negotiated
settlement is reached. These changes should be fully explained in the comments.
Was this a Value Engineering
Change order?
Use change
order type II
Yes
No
Use change
order type VI
Was the cause or reason for the
change predictable by ordinary
civil engineering design practice?
No
DESIGN CONDITIONS
Yes
PROJECT CONDITIONS
Was there an error or
omission in the contract
documents?
Did an error or omission in
the Bid Tab quantities cause
the change?
Error or omission is in the plans, special
provisions, or other contract document.
Use change order type IV
Was the intent of the
contract modified by
ADOT due to project
specific conditions?
Yes
Yes
Yes
No
No
No
Use change
order type I
Use change
order type V
Use change
order type VII
See note b
Use change
order type VII
See note a
Use change
order type III
Did project specific
conditions require extra
work to satisfy the intent
of the contract?
Yes
No
Was this change order for
additional or extra work out
of scope?
No
Yes
ATTACHMENT 3
Draft Verbal Approval Instructions
The following draft (Exhibit 1) is a new description of the prior approval process
and will replace the current description of the prior approval process in the Construction
Manual.
Exhibit 1
Verbal Approval Requirements for Supplemental Agreements (Prior Approval Letters)
The purpose of Prior Approval Letters is to provide a written document that details
ADOT verbal approvals and Contractor acceptance of contract changes. This document
shall be prepared and distributed within 48 hours of a verbal authorization to proceed
with a contract change. The contractor can not start work on a contract change without
an authorized verbal contract. The Prior Approval Letter is important because it
documents that authorized approvals for contract changes have been obtained so that
work and payment can proceed before a detailed Supplemental Agreement is signed as
the official contract document. In cases where exact costs cannot be determined, the
contractor and the Resident Engineer shall prepare a cost estimate for the Prior Approval
Letter and the Resident Engineer shall document the work as if it were a force account
until an exact cost can be agreed upon. A completed formal detailed Supplemental
Agreement with exact cost shall be submitted within 45 calendar days following the date
of verbal authorization.
The Resident Engineer shall use the Microsoft Word template form that was provided to
prepare the prior approval letter. The following contacts will be made.
1. The person authorizing the change. (See “Authorization Levels” above)
2. The Assistant State Engineer – Construction and the Project Manager if the
Supplemental Agreement cost warrants. (See “Authorization Levels” above)
3. If the design was modified, the name of the registrant that was contacted as specified
under “Sealing Change Orders”.
4. The person contacted within the appropriate ADOT technical section if ADOT
Standard Specifications, Special Provisions, or Standard Drawings were altered.
(See “Technical Contacts for Supplemental Agreements” above)
5. Contractor’s Agent.
6. Federal Highway Administration and local government contacts.
The original will be filed with the District Engineer, with additional copies distributed to
the:
1. Contractor
2. Field Reports
3. Local Government and/or FHWA as applicable (FHWA must be contacted for
Interstate projects > 1 Million)
4. All other contacts specified in the Prior Approval Letter.
ATTACHMENT 3
Draft Prior Approval Template
ARIZONA DEPARTMENT OF TRANSPORTATION
Prior Approval Letter
11/22/99
TO: DE Engineer
District Engineer Signature:
FROM: RE Engineer
Resident Engineer Signature:
Tracs Number Project Number Project Name
HC00101C FA3124301C MY Project
Contractor Contract Amount $ Contingency
My contractor $4,000,000.00 $200,000.00
Supplemental Agreement Amount $ / % Accumulated Amount $ / %
$19,000.00 0.47% $338,000.00 8.45%
SUPPLEMENTAL AGREEMENT TYPE Change Order NUMBER 1
DESCRIPTION: The subgade was unstable and had to be replaced with stable
material.
REASON: 1. Changed Condition
COMMENTS OR PROCESS IMPROVEMENT SUGGESTIONS:
This item could not have been anticipated.
CHECK BOX FOR PROJECT MEMORY SAVE
CHECK BOX FOR SPELL CHECK DOWNLOAD TO EXCEL
NAME TITLE DATE COMMENTS
Resident Engineer ADOT’s Authorizing Agent
Contractor’s Agent
Asst. State Eng.(Const)
Project Manager
Will be added to accumulated
amount and percentages are
calculated.
1. Change Order
2. Force Account
3. Letter of Agreement
Dropdown listboxes 1. Changed Condition
2. Value Engineering
3. Quantity Omissions
4. Plans Revisions and Oversights
5. Penalties – Bonus
6A. Additional or Extra Work (ADOT)
6B. Additional or Extra Work ( Other Jurisdiction)
7. Other (Explain in comments)
Enter one paragraph for the
description and comments
Project information is saved.
Spellcheck is done.
Project info is
downloaded to
an Excel
spreadsheet.
Contacts are automatically inserted based on the
Supplemental Agreement and Accumulated
amounts and percentages.
When changed the
project Info is changed
When contract amount is
entered the contingency
is automatically calculated
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