Responses to the Audit
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- Department of Water Resources
Department of Water Resources
September 28, 2017
The Honorable Elaine M. Howle
California State Auditor
621 Capitol Mall, Suite 1200
Sacramento, California 95814
California WaterFix Audit, State Audit Report No. 2016-132
Dear Ms. Howle:
On behalf of the Department of Water Resources (DWR), I am writing to address Draft Audit Report No. 2016-132 (Report) regarding the project that eventually developed into, and was recently approved, as the California WaterFix.1 DWR appreciates the professionalism of the Bureau of State Audit staff and their openness to hearing DWR perspectives.
DWR is pleased that after 10 months of investigation, the Report validates that no General Fund money has been used for the planning and design for WaterFix. (Report p. 4.) All activities for the planning and design of the project were supported and paid for by the public water agencies that will benefit from the project.
The Report also finds the project’s complexity resulted in unforeseen expenses and schedule extensions. We appreciate this acknowledgement. WaterFix is unprecedented both in the scale of its complexity and the extent of its public and stakeholder engagement. DWR has worked diligently to address concerns as they emerged and has made significant changes to the project in direct response to input from the public and regulatory agencies, including analyses of additional alternatives, additional species evaluations and optimization of the project. These changes required additional time and funding to implement.
The Report’s primary concern involves the way DWR documented project decisions and selected the program manager. DWR agrees that decisions should be documented. We also agree that a governance structure is critical for a project of this scope, and one has been in development and will be ready for implementation at the appropriate stage of the project.
In addition, DWR agrees that a financial analysis is important, and is prepared to complete a final economic analysis when each potential participant in WaterFix has made its decision to opt into the project.
We must respectfully disagree with the Report’s conclusion that DWR did not follow state law in selecting the project manager. As project needs changed, DWR reassigned the project management task consistent with the terms of the contract and pursuant to DWR and state policies. The facts demonstrate the high value that DWR and the project have received from the project manager’s performance.
WaterFix is a science-driven project that will upgrade the state’s outdated water delivery system and maintain a reliable source of water for 25 million Californians and more than 3 million acres of farmland in the San Francisco Bay Area, Central Valley and Southern California. It is a critical element of the state’s overall strategy to address climate change and ensure a reliable water supply for the future, as outlined in Governor Brown’s California Water Action Plan.
The extensive outreach and responsiveness to stakeholder and public input described above resulted in what many considered unachievable: the issuance of permits from state and federal agencies to move forward with a viable and achievable long-term solution to decades-old problems in the Bay-Delta. Consistent engagement with the local public agencies funding the project has allowed for close scrutiny of any increased costs and changes to the project, affecting the scope and schedule. These local agencies have found the additional work on the project to be reasonable and necessary.
DWR’s response to the Report’s findings is summarized here, followed by detailed discussion of each, and concludes with our comments on the Report’s recommendations.
1. DWR Received Excellent Value and Quality for Services Under the Hallmark Group Contract
2. The URS Contract Authorized Multiple Tasks; Only One Task was
3. Requiring a Subcontractor to Provide Program Management Services to URS
was Necessary and was Appropriately Defined
4. DWR Followed Proper and Lawful Procedures in the Necessary and
Appropriate Replacement of the Program Manager
5. The Structure of The McKinsey Contract was Beneficial to Both DWR and
the Public Water Agencies that Will Ultimately Pay for the Project,
6. DWR Developed a Governance Structure for Implementation at the
Appropriate Project Stage
7. DWR Will Prepare a Financial Analysis and Economic Analysis When
WaterFix Participants are Identified
8. DWR Has Performed Significant Planning During the Planning Stage and Has Maintained and Provided Extensive Documentation
Our comments will address the Report’s specific findings, and then address the Report’s recommendations.
1. DWR Received Excellent Value and Quality For Services Under The Hallmark Group Contract
The Report devotes a full one-fourth of its length to DWR’s hiring and subsequent utilization of the Hallmark Group (Hallmark) to provide program management services for what has become California WaterFix. In these sections, the Report finds that Hallmark’s program manager did not appear to possess the qualifications DWR required when it selected contractor URS, and that the failure to ensure Hallmark possessed these qualifications was contrary to the letter and spirit of the law, which is intended to create competition to ensure that the state obtains a competent and qualified contractor at a fair and reasonable price. Finally, the Report notes that DWR “potentially” did not receive “the best value for the contracted services.” (Report p. 27-29.) DWR addresses the contracting issues later in this response, but here, we note the facts about Hallmark’s performance are contrary to the above statements in the Report. The state received excellent value and a high work product for the services Hallmark provided.
When URS was hired for WaterFix, the project was conceived as an engineering enterprise, to be staffed and managed by engineers. After little more than a year, it became apparent to DWR and its stakeholders that engineering expertise alone would not be sufficient to manage the project; efficiency and management expertise would be essential in successfully moving the project forward.
As described by former DWR Director Lester Snow, the almost exclusive motivator to bring the Hallmark Group on as program manager was cost control. The entities funding WaterFix, the water contractors, were impressed by Hallmark’s work managing the $500 million UC Merced campus construction project and presented a united front in urging Hallmark be utilized to increase efficiencies on the project. Hallmark’s job was to scrutinize costs, monitor schedules and ensure that tasks were completed on time. Hallmark’s task did not include performing engineering work, such as deciding what approach (canals, tunnels, or levies) should be used.
Hallmark was not a substitute for URS expertise in large water infrastructure management. Rather, when added as a subcontractor, the Hallmark Group augmented URS’ engineering expertise by providing proven project management skills. Later in the program, the contract was divided, with program management being assigned to Hallmark, and URS retaining engineering tasks.
Addition of a specialized program management team made sense. Not all engineers make great managers. Management excellence transcends the field in which one is trained: many exceptional managers succeed in overseeing work in specialized fields not because of their particular scholarly training, but because of the strength of their leadership and management abilities.
Hallmark has succeeded in the task which it was originally brought on board to provide, cost control. As stated repeatedly by the participating public water agencies and DWR, Hallmark has done an outstanding job managing WaterFix. For example, within a year of being hired, Hallmarkreduced staffing on the project by 40 percent,reduced monthly burn rate costs by 44 percent, and within two years costs were reduced by 65 percent. Further, Hallmark dramatically increased program efficiency, enabling WaterFix to take a budget projection intended to last for three years through an initial projected project approval of April 2012, and extend it to cover nearly five years of unanticipated additional work through project approval (the California Environmental Quality Act Notice of Determination) in July 2017.
Over time, WaterFix evolved, transitioning from a Habit Conservation Plan to an Endangered Species Act section 7 process, resulting in further revisions to the schedule. On two different occasions in 2013 and 2014 Hallmark developed ramp down plans to further contain costs allowing the project to continue the environmental process. Beyond its obvious cost control success, Hallmark provided excellent leadership by keeping the teams organized, the stakeholders completely informed and an unflagging focus on resolution of issues as they developed.
California water law and policy is extremely complicated, making all water development projects protracted and therefore challenging—not least of which a project like WaterFix. There will be many more challenges to overcome in the future. The Hallmark Group has provided indispensable assistance to DWR, enabling the Department to reach this point of the process.
2. The URS Contract Authorized Multiple Tasks; Only One Task Was
The Report characterizes the URS contract as one for “construction project management, which a licensed engineer or general contractor must perform under state law.” (Report, p. 24.) This is a misunderstanding of the URS contract, which can be readily understood by reviewing the contract’s scope of work which states the services contracted for included:
[E]ngineering support services and the program management of the planning, coordination and oversight of the programs, environmental engineering and construction phases, strategic program development, risk assessment and oversight of program costs and schedules of DWR's Delta Habitat Conservation and Conveyance Program (DHCCP).
(Contract 46-00008104, p. 1, attached hereto as Exh. 1.)
Thus, the contract DWR made with URS authorized a number of tasks to be performed, including strategic program development, planning, coordination and oversight among other tasks. It is inaccurate to summarize the above services as “construction project management.” Rather, construction is one element of a multi-element program where oversight of environmental engineering, strategic program development, risk assessment and oversight of program costs and schedules are equally or more important. At the time the contract was made, comparatively little environmental analyses was performed for the project, there was no overall project plan, and no environmental permits had been obtained. The Report’s incomplete characterization of the URS contract appears to undermine the Report’s conclusions.
3. Requiring A Subcontractor To Provide Program Management Services To URS Was Necessary And Was Legally Justified
The Report criticizes the manner in which DWR utilized Hallmark, a subcontractor, to provide project management services for the prime contractor. It asserts that this 2008 subcontract “does not appear to be a contractor-subcontractor arrangement” and is different from what the Report believes to be a “traditional contractor-subcontractor relationship.” The Report further criticizes sections of the subcontract that details how DWR expected Hallmark to work as program manager with DWR and with URS staff. (Report p. 28.)
The URS amendment made clear the uniqueness of the program management function, performed as a subcontract, and provided clear specific provisions to prevent any conflict. (Contract No. 4600008104, Am. 1, Exhibit E, Attachment 6, attached hereto as Exh. 2.) The subcontract to Hallmark was to provide a specific service – program management. In order to accomplish this function it was essential that Hallmark, as the program manager, exercise the functions typically performed by that position, including general direction and reporting, tasks which are essential for a program manager to perform in order to successfully manage WaterFix.
The URS amendment provided comprehensive details, “… in order to avoid the appearance of or any actual conflicts that might arise from such an arrangement ….” (Ibid, page 1.) For example, the contract required Hallmark to submit all invoices to URS, whereupon URS would submit the invoice to DWR for approval while Hallmark was to provide program management functions by communicating and coordinating with URS. The roles and responsibilities of the parties to the agreement were clearly defined by the amendment. The amendment proved successful to the program, as demonstrated by the high level of performance for the three years duration in which the amendment was in effect.
4. DWR Followed Proper Procedures in Replacing the Program Manager for the Conservation and Conveyance Program.
a. The URS Subcontracting of Program Manager Responsibilities to Hallmark was Both Necessary and Lawful.
The Report’s finding that DWR “… later used other methods to select a replacement program manager, and these methods did not follow the competitive process required under the law” does not take into account applicable statutes, regulations and contract terms permitting the replacement. DWR’s replacement of the WaterFix program manager was in full compliance with the law.
As explained above, the URS contract expressly permitted subcontracting, the terms of which DWR followed in selecting the Hallmark firm. (Contract No. 4600008104, Exhibit D, paragraph 6, attached hereto as Exh. 3.) Architectural and Engineering (“A&E”) contracts are frequently amended to subcontract for specialized services, replacement personnel, program changes, and for other reasons. Such amendments permit DWR to accomplish cost effective, specialized services as program needs change or require. The original URS contract was for a term of 7.5 years for a project that the Report recognizes presented “unexpected complexity.” A contract for such a lengthy term for such a complex project will by necessity require modifications and changes consistent with law. When it became apparent that the assigned URS program manager was not able to devote himself full-time to the project, and that the program required a stronger emphasis on cost containment, it became essential for DWR to subcontract for a program manager to ensure effective continued progress of the contract.
The Legislature intended that the A&E process be liberally construed to accomplish its purposes. (Gov’t Code § 4529.19.) Specific legal authority permitting modification of A&E contracts is provided by DWR regulation:
Where the Director determines that a change in the contract is necessary during the performance of the services, the parties may, by mutual consent, in writing, agree to modifications, additions or deletions in the general terms, conditions and specifications for the services involved, including extensions of time, with a reasonable adjustment in the firm's compensation.
(23 Cal.Code Regs § 387.)
Lester Snow, DWR Director in 2008, determined that a change in the contract was necessary and effected a change. There is no indication that Director Snow failed to sufficiently assess the qualifications of Hallmark in doing so.
The Report narrowly focuses on the Request for Qualifications (RFQ) process as the sole mechanism to replace the WaterFix program manager. But the contract itself, as well as DWR’s regulations, provides another equally appropriate path.
Indeed, the circumstances on the ground indicate why DWR’s approach to
contract amendment was appropriate. For example, as the contract
performance was already in its 13th month, an RFQ selection process, even
when given a high priority, would have required at least five months to
obtain a new program manager. The program could not afford the absence of
the program manager for such a lengthy period of time. Had an RFQ been
utilized, it would likely have significantly delayed the project and
incurred higher costs while waiting five months for a replacement program
manager. Given the authorized alternative approach that DWR took, a
“competitive” RFQ selection process for replacing the program manager was
simply not a realistic or optimal option.
b. It Was Not Necessary That Hallmark As A Subcontractor Be An Engineer or Licensed Contractor.
The Report faults Hallmark for not having engineering expertise, but the
contractor team as a whole provides all necessary expertise. As a
subcontractor, Hallmark was a member of the URS team. The team, including
URS, retained all the engineering/licensed contractor knowledge that was
required to perform the services required under the contract. As the
contract itself stated, the contract had many purposes well beyond just
Government Code section 4529.5 requires any individual or firm to have requisite experience to provide construction project management services. 2 The firm, URS, had engineering expertise before Hallmark was assigned to provide program management services and afterwards. All requisite engineering qualifications were retained within the URS contract to be performed by URS personnel after Hallmark was added to the team.
The URS contract’s terms make clear that “… the various areas of expertise required of the successful Program Management team include planning and implementation of . . . engineering and construction program phases.” (Exh. A, attached hereto at at p 1, emphasis added.) No one person has all of the qualifications necessary to perform all of the services under the contract. It is a team approach, here contained within URS and its subcontractor Hallmark.
c. Assignment of Program Management Responsibilities to Hallmark Was Appropriate and Legally Supportable
DWR respectfully submits that the Report incorrectly concludes that the 2013 contract assignment to Hallmark violated the law and, instead, should have been accomplished through a competitive RFQ process. (Report pp. 29-30.) With the essential engineering expertise firmly in place, DWR determined that to improve workflow efficiencies and to
save the 5 percent subcontractor markup costs imposed by URS, it was necessary to assign program manager responsibilities directly to Hallmark.
The Hallmark assignment was for the initial planning, coordination, and oversight of WaterFix. The engineering, environmental and construction management functions remained separately as a continuing part of the URS contract. The program manager responsibilities had already been performed by Hallmark for the three preceding years prior to the assignment. DWR management was satisfied with Hallmark’s performance and Hallmark was experienced and successful in managing the program. Given Hallmark’s success, there appeared to be no benefit from introducing a new less-experienced program manager to replace the successful incumbent and disrupt the continuity of the program. DWR determined that given Hallmark’s experience and demonstrated performance, it was clearly the most qualified contractor to perform the assignment function.
Nor did it make any sense to adjust the timeline for the program for five months in order to submit an RFQ to replace the successful program manager not to mention the additional time required for a new untested program manager to become knowledgeable of the program’s requirements. For the success of the WaterFix program, it was important to keep the existing program manager and maintain continuity.
The contract assignment was accomplished lawfully. As previously mentioned, DWR’s regulations permit the Director to make a change in an A&E contract when necessary. (See 23 Cal.Code Regs § 387 [“Where the Director determines that a change in the contract is necessary during the performance of the services, the parties may, by mutual consent, in writing, agree to modifications, additions or deletions in the general terms, conditions and specifications for the services involved. . .”].) The Director appropriately determined that a change was necessary, for the reasons stated above, to help ensure the success of the program.
Finally, the URS contract contained a specific provision regarding contract assignments:
GTC 307, 3. ASSIGNMENT: This agreement is not assignable, either in whole or in part, without the consent of the State in the form of a written amendment.
(Contract 4600008104, Exhibit C, paragraph 3, attached hereto as Exh. 4.)
Further, state law allows contracts to be assigned without a new competitive bidding process. DWR followed state law, its own regulations and the contract terms in the January 2013 contract assignment of program management responsibilities to Hallmark.
5. The Structure of the McKinsey Contract Was Beneficial to Both DWR and the Public Water Agencies That Will Ultimately Pay for the Project
The Report finds that DWR did not ensure that the price paid for work product produced by subcontractor McKinsey & Company (McKinsey) was fair and reasonable. (Report, p. 31.) It may be difficult to appreciate today, but when DWR authorized the work performed by McKinsey in 2012, it was widely believed by DWR and its stakeholders that the WaterFix (then the BDCP) project would be approved in 2013, and construction would commence shortly thereafter. Even after substantial prior work by DWR and its WaterFix program manager there was still no consensus among stakeholders about how the project would be managed during construction. In June 2012, DWR and its WaterFix stakeholders determined to retain highly specialized consultants tasked with resolving these fundamental issues, and to resolve them in an expeditious manner to match the perceived tight time schedule.
DWR initially contemplated six consultants, McKinsey, Bain, Boston Consulting, Monitor, Booz/Allen/Hamilton, AT Kearney, and KPMG. In July 2012 multiple prospective qualified consultants were interviewed by phone, reducing the number of candidates to two, McKinsey and KPMG. These candidates were interviewed by a DWR/water contractor panel, and McKinsey emerged as the top ranked firm. References provided by McKinsey were interviewed, with interviewees reporting outstanding consultant performance and extraordinary results on projects with similar challenges. A fee for the work plan was established.
DWR determined the work required to produce the product was appropriately valued at $2.6 million. Due to the expedited timeline, a fixed price contract task order was utilized to establish a time frame and to control costs. DWR maintained control of the final product and the value derived. As the amendment to the contract authorizing this work noted, “The structure of the contract, fixed fee based on deliverables, is beneficial to both DWR and the stakeholders that will ultimately pay the costs for this consultant, since the consultant is only authorized to bill the fixed price for deliverables that have been accepted and approved, as opposed to hourly labor each month.” (Contract 4600008104, Am. 5, Std 215, p. 3, attached hereto as Exh. 5.)
6. DWR Developed a Construction Governance Structure For Implementation at the Appropriate Project Stage
The Report (pp. 37-38) implies no governance structure exists and that lack
of a governance structure for implementation of the WaterFix is somehow
contrary to DWR’s legal requirements. This implication is not supported by
the facts. DWR has always had the legal authority to carry out the project
itself. There is no legal requirement that it have a governance structure
in place prior to approval of a project. Based on recommendations by
McKinsey, DWR developed a governance structure in the last quarter of 2012.
DWR posted the governance structure on the BDCP website and it has been
publicly available since January 2016. When a decision is made regarding
public water agency participation, a structure will be ready for
implementation at the appropriate time and will be able to draw on the
substantial materials already prepared during the work with McKinsey.
DWR Will Prepare a Financial Analysis and Economic Analysis When
WaterFix Participants Are Identified
As the Report noted, DWR cannot complete a final economic analysis until
individual water agencies define their level of involvement in WaterFix. We
are pleased the Report reflects this consideration. (Report, p. 35.)
With regard to the WaterFix financial analysis, the Report appears to
suggest that DWR must assess each water agency’s needs and provide a final
financial analysis before the decision to opt in to WaterFix is made.
(Report, pp. 36-37.) This is not correct: DWR’s contractor Public Finance
Management has already provided a wide range of financing options to water
contractor governing boards as tools to enable each contractor to determine
what financing option would best work for them. To date, we have received
no requests for additional information. Once individual agencies decide to
participate, financing will be tailored to meet each agency’s needs. There
is no need to prepare a full financial analysis for each potential
participant in WaterFix before the decision is made to opt in to the
DWR Has Performed Significant Planning During The Planning Stage and
Has Maintained and Provided Extensive Documentation
The Report states DWR failed to update its Program Management Plan (PMP)
and suggests that the absence of a PMP meant there was little or no
documented WaterFix planning effort. Although DWR did not update the PMP
itself, DWR has maintained an extensive record of program management
documents meeting the same planning function. DWR has provided State
Auditor full access to all of the program management and planning documents
on the program manager’s database, Acononex, and on multiple occasions
provided them with physical samples. These documents included but were not
limited to documentation for the Business Committee, Core Policy, DCE,
EIR/S, Biological Opinion, Project Manager, Finance, engineering, Request
for Qualifications, major agreements, budget reports, invoices, and
deliverables. Maintaining the critical project documentation throughout the
program has been performed.
Although DWR experienced management changes, as an industry best practice,
DWR required that the program manager maintain all work plans and
associated documents to provide continuity for the project. This practice
provided seamless transitions without loss of institutional knowledge. This
proved to be a successful strategy as the project continued to make
consistent progress throughout management changes.
As evidenced in the program documents, as early as 2012 DWR anticipated
project approvals by the federal and state participants and began preparing
to transition to the design and construction phase. DWR began the update to
the PMP for the design stage, but unexpected complexities of the project
forced a delay in implementing the design stage and the PMP update effort
was put on hold. Given the constantly changing nature of the planning
process, DWR managed the project from workplans that could quickly be
developed and implemented to react to changing conditions, which proved to
more efficient than constantly updating the planning PMP.
In this section of DWR ‘s comments, DWR provides a response to the
Auditor’s recommendations made throughout the report. Since the
recommendations are not consecutively numbered, DWR identifies them by the
page on which they appear. DWR’s response to the recommendation is provided
in italicized text.
(Report, p. 21) To improve management of large and complex infrastructure
projects, the Legislature should enact legislation requiring agencies to
publicly report significant changes in the cost or schedule of such
projects if they are expected to exceed their established budgets by 10
percent or schedules by 12 months.
The Department will continue to abide by any existing or new laws, and
takes no position on this general recommendation to the Legislature.
(Report, p. 21) To better manage large infrastructure projects, DWR should
develop and implement a project reporting policy requiring its management
staff to document and justify decisions to proceed with such projects if
they are expected to exceed their established budgets by 10 percent or
schedules by 12 months. DWR should make these documented decisions and
justifications publicly available and submit them to the Resources Agency
for review and approval.
This recommendation does not make a distinction between the planning phase of a project and the design and construction phase. DWR believes this is an important distinction, as evidenced in the Report’s findings for the planning phase of the WaterFix. The recommendation presupposes that an extension of time during a project planning phase is something that has a negative consequence. This recommendation has limited applicability here, since decisions regarding this project were made in response to stakeholder input and public comments to increase the range and scope to better meet the needs of the state. The planning process for large infrastructure projects is complex and subject to changing requirements and scope from a variety of sources including regulating agencies, project proponents, stakeholders, and the public at large. As seen with WaterFix, this results in increases in scope and schedules that are beyond the control of DWR. Limiting the Department’s ability to be responsive to stakeholder input during complex “planning” efforts would be counterproductive.
(Report, p. 22) To ensure it makes appropriate use of its growing surplus revenue balance, by December 2017 DWR should develop a detailed plan describing how it intends to use these funds.
The Department is already in the process of preparing this plan related
to Water Code section 12937(b)(4) funds.
(Report, pp. 32-33) To fully comply with state contracting law, DWR should
ensure that it competitively selects architectural and engineering
consultants based on demonstrated competence and professional
qualifications. In addition, DWR should document in the contract file its
evaluation of the competence and professional qualifications of all
contractors and any subcontractors that are added to the contract
subsequent to the competitive selection process.
The Department will continue to comply with state contracting law
including the process outlined above.
(Report, p. 33.) To ensure that only qualified subcontractors are added to
contracts after the initial award is made, DWR should make sure that
contractors select their own subcontractors and that DWR subsequently
approves the selection after it verifies their qualifications.
It is essential that DWR work with a contractor to identify the
specific tasks for which a subcontractor will be required.
Additionally, it is important to convey to the contractor the expertise
and qualifications necessary of the subcontractor in order to ensure
the most highly qualified subcontractor is chosen to accomplish the
specified tasks. The Report’s Recommendation, above, isolates DWR from
such consultation. Without these communications, time is unnecessarily
expended while the contractor attempts to obtain a suitable
sub-contractor without the benefit of input from DWR. The recommended
edit below allows for the indispensable communications necessary to
successfully obtain, and approve, subcontractors.
Proposed Revision: To ensure that only qualified subcontractors are
added to contracts after the initial award is made, DWR should make
sure that contractors select their
subcontractors in consultation with DWR and that DWR
subsequently approves the selection after it verifies their
qualifications (Report, p. 33).
(Report, p. 33) DWR should ensure that it retains documentation in its
contract files to support that contract prices are fair and reasonable.
The Department agrees to adopt the above recommendation.
(Report, p. 41) To ensure that DWR manages WaterFix in an effective manner,
DWR should complete both the economic analysis and financial analysis and
make the analyses publicly available as soon as possible.
As planned, the Department will release completed versions of these
reports as soon as practicable. This will necessarily follow the
determinations currently being contemplated by the public water
agencies regarding level of participation.
(Report, p. 41.) In order to prepare for the potential approval of WaterFix
and to ensure that the project is managed properly during the design and
construction phase, DWR should do the following:
• Develop an appropriate governance structure so that it is prepared to
oversee the design and construction of WaterFix in the event it is
A governance structure will be ready to be implemented to oversee the
design and construction of WaterFix in the event it is ultimately
• Develop and update when necessary the associated program management plan
for the design and construction phase of the project.
The Department agrees to adopt the above recommendation.
We appreciate this formal opportunity to respond to the Draft Audit Report No. 2016-132. If new evidence presents itself in the finalizing of this draft Report, DWR requests the opportunity to respond to such new information, which the Auditor may send to Deputy Director Taryn Ravazzini at email@example.com .
1. URS Contract, Exhibit A (Scope of Work)
2. URS Contract, Amendment 1, Exh. E, Attachmt 6 ( Covenants)
3. URS Contract, Exhibit D (Special Terms and Conditions)
4. URS Contract, Exhibit C (General Terms and Conditions)
5. URS Contract, Amendment 5, Std. 215 (Agreement Summary)
1 For convenience, we refer to the project variously known as Delta Habitat Conservation and Conveyance Program, the Bay Delta Conservation Plan, and California WaterFix as “WaterFix” throughout these comments.Go back to text
2 Section 4529.5 states the following:
Any individual or firm proposing to provide construction project management services pursuant to this chapter shall provide evidence that the individual or firm and its personnel carrying out onsite responsibilities have expertise and experience in construction project design review and evaluation, construction mobilization and supervision, bid evaluation, project scheduling, cost-benefit analysis, claims review and negotiation, and general management and administration of a construction project. Go back to text
CALIFORNIA STATE AUDITOR’S COMMENTS ON THE RESPONSE FROM DWR
To provide clarity and perspective, we are commenting on DWRs’ response to our audit. The numbers below correspond to the numbers we have placed in the margin of DWR’s response.
While preparing our draft report for publication, some page numbers shifted. Therefore, the page numbers DWR cites in its response do not correspond to the page numbers in our final report.
DWR incorrectly asserts that all activities for the planning of the project were paid for by the public water agencies. In Figure 5 we show that $81.2 million of the funding for the conservation and conveyance program, or 31 percent—the largest portion of funding—came from the U.S. Bureau of Reclamation.
We stand by our conclusion that DWR did not follow state law in selecting the program manager. As described in our second main point, and in exhibit 2 in DWR’s response, it directed URS to “subcontract” with the president of Hallmark without demonstrating DWR assessed his qualifications, including that he was a licensed engineer. The purported “subcontract” created operational inefficiencies that led DWR to eventually award Hallmark a direct contract through an assignment.
We address the issues in this summary in the “Findings” section of DWR’s response.
Although DWR states that it received excellent value from Hallmark, the fact remains that the current program manager that DWR directed URS to hire as a subcontractor does not possess the qualifications DWR sought when it initially awarded the contract to URS. Furthermore, the cost of Hallmark’s contract increased from $4.1 million to $13.8 million.
We disagree that the project was conceived as just an engineering enterprise. DWR’s request for qualifications and its contract with URS included more than just engineering; they also required program management services for which URS initially identified an individual as its program manager. DWR’s statement seems to indicate that URS’ program manager did not have the management expertise requisite for the scale and complexity of the project. However, that statement contradicts the letter we reviewed that DWR sent to URS disapproving the program manager. In our second main point, DWR replaced the URS program manager apparently because he was not working full‑time on the project, not because he lacked the necessary expertise.
DWR mischaracterizes the services for which Hallmark was “subcontracted.” DWR and the former director attempt to narrowly define the responsibilities of Hallmark, when, in fact, the “subcontract” made Hallmark responsible for the entire scope of work for program management services. Further, the description of Hallmark’s role provided by the former director was based on assertions that neither he nor DWR was able to support. In addition, nowhere in DWR’s exhibit 2 contract language directing URS to subcontract with Hallmark’s president to fill the position of program manager, or in the scope of work in DWR’s exhibit 1—its agreement with URS describing the tasks it expected the project manager to perform—does it specify that Hallmark or its president was hired exclusively to provide cost control as DWR claims. For example, as stated in item 7 of exhibit 1, Hallmark was also responsible for coordinating, overseeing, and monitoring other contractors including, but not limited to, environmental, engineering and construction services.
DWR states that Hallmark was hired to provide its “proven management skills.” However, DWR was unable to demonstrate that it assessed Hallmark’s qualifications. As we state in our second main point, our review of DWR’s contract file for Hallmark found no evidence that DWR evaluated Hallmark’s qualifications for the program manager role.
It is unclear to us what budget projection DWR is referring to. As we state in our second main point, in 2012 DWR signed agreements with water contractors for an additional $100 million—a 71 percent increase to the initial $140 million budget—to fund the remaining planning phase activities. Additionally, as we also state in our second main point, DWR ultimately exhausted this $100 million augmentation and had to contribute $15 million in surplus revenues in 2015 and 2016 along with an extra $6.8 million contribution from Reclamation and the Authority to fund additional planning costs.
We do not misunderstand the contract. Although we agree that the scope of work included multiple elements, one of the main elements was construction project management services, which include services like those included in exhibit 1 in DWR’s response and many of the deliverables listed in our exhibit 1. By law these services must be performed by a licensed architect, registered engineer, or licensed general contractor; and DWR’s request for qualifications required the program manager to have a professional engineering license.
While we do not dispute that subcontracting is permitted, as we explain in our second main point, and as shown in exhibit 2 in DWR’s response, the arrangement DWR created was not a true contractor-subcontractor arrangement. Specifically, URS was not overseeing Hallmark’s work products, it was not determining payment to Hallmark, and it was not legally responsible for Hallmark’s work. Additionally, we expected DWR to require URS to provide an equally qualified replacement program manager or for DWR to have used a competitive process to select a replacement program manager. Finally, because the program management services DWR was seeking included construction project management, state law requires the program manager to be a licensed architect, registered engineer, or licensed general contractor.
DWR describes in its response the inherent conflict the unusual arrangement created, and the contract terms it had to include to protect against this precarious situation. As we describe in our second main point, DWR also eventually changed this arrangement to address the inefficient workflow that resulted from the subcontract. Furthermore, the asserted success of the arrangement does not justify the manner in which DWR procured Hallmark’s services as program manager.
Our report does not narrowly focus on the request for qualifications process. We state that because of the size, cost, complexity, and significance to the State of WaterFix, we expected DWR to have required URS to provide an equally qualified replacement program manager. Because DWR included a requirement in its request for qualifications that the program manager work full-time on the project it is unclear to us why DWR did not enforce this requirement, but instead directed URS to “subcontract” with Hallmark who lacked some of these qualifications. By requiring URS to provide a qualified program manager who is able to work full-time on the project, as required by the request for qualifications, DWR would have avoided the 5-month delay it asserts would have occurred if it had used a competitive process to replace its program manager.
Despite DWR’s assertion, the “subcontract” makes it clear that Hallmark is the firm responsible for the entire scope of program management services. The “subcontract” did not identify any overlap between Hallmark and URS in the work of the program management services to be provided by Hallmark that would suggest a “team” approach. In fact, in DWR’s exhibit 2 on page 69 directing URS to subcontract with Hallmark and its president specifies that “Hallmark is an independent contractor and is not the agent or employee of DWR or URS”.
We stand by our conclusion. As described, the relationship established between URS and Hallmark was not truly a “subcontract,” and Hallmark did not have the required qualifications or license to provide the services. Further, assigning the work, although provided for by the contract, avoids the competitive process that is favored in state contracting law. In addition, by assigning the contract to Hallmark, DWR contradicts its earlier assertion that it used a team approach for program management. Finally, Hallmark and URS do not operate as a team if URS is no longer a party to the contract for program management services.
As we state in our second main point, when we asked for its rationale, DWR told us that the assignment provided its staff direct access to Hallmark while saving the 5 percent markup URS charged under the subcontract. However, we question this reasoning because DWR created the difficulties in the first place, and we are not convinced DWR is saving money because Hallmark has had to subcontract many of its program management functions and DWR is generally paying a 5 percent markup for invoices from these subcontractors.
DWR has not provided evidence describing how the fee was established or that it was fair and reasonable with price comparisons or a market survey. As we state in our second main point, DWR did not justify adequately the $2.69 million cost. Further, we also explain that DWR staff raised the same concern because the justification from Hallmark simply stated that the price “is worth it because McKinsey has such a great track record,” which we do not consider to be adequate assurance the price was fair and reasonable.
Contrary to DWR’s assertion, our report does not imply that no governance structure exists or that a lack of such a structure is contrary to legal requirements. Our report states that DWR has not fully implemented a governance structure for the design and construction phase of WaterFix. In addition, we conclude that it is essential that DWR develop an appropriate governance structure so that it is prepared to oversee the design and construction of WaterFix in the event the project is ultimately approved. This conclusion parallels DWR’s perspective as shown in exhibit 5 of the contract amendment that added $10 million dollars to the contract and added McKinsey as a subcontractor. The amendment language states that the “conservation and conveyance program has progressed to a phase where the organizational structure and governance have become increasingly critical to the future success for design and construction of the project.” This section of our report is intended to inform the reader that the governance structure for which DWR paid $2.69 million has not been fully implemented.
DWR misunderstands the report. We do not suggest that DWR must assess each water agency’s needs and provide a final financial analysis before the decision to opt into WaterFix is made. We include the statement from DWR officials that the final financial analysis report cannot be prepared until the contractors desiring to participate in WaterFix are identified. We also include DWR officials’ statement that its contractor, Public Finance Management, modeled a wide range of financing options for WaterFix that were shared with water contractor boards. Finally, these officials stated that once individual agencies decide to participate, the financing will be tailored to meet each agency’s needs.
We disagree that the documents DWR has maintained serve the same planning function as the program management plan. As the text box shows, the management plan includes staffing requirements, reporting relationships, and participant roles and responsibilities, among other things. Additionally, the management plan incorporates that information together in one cohesive document. Our review of Aconex found a document repository (essentially a digital filing cabinet) with numerous, disparate, historical and current documents that DWR staff had to pour through in an effort to locate something that was responsive to our request for the management plan.
Our recommendation does not presuppose that time delays have a negative consequence, rather that they should be thoroughly justified and vetted. The recommendation does not limit DWR’s ability to be responsive to stakeholder input, but would require DWR to consciously and transparently consider that input before making decisions that affect project cost and schedule, whether during planning or other phases of the project.
We disagree with DWR’s revision to the recommendation because it introduces the risk that DWR will direct contractors to select specific subcontractors, which undermines the intent of the recommendation to have the contractor put forth the subcontractor it believes will best perform the work required by the contract and require DWR to verify the qualifications of the subcontractor before approving the selection.