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- DTSC Is Behind Schedule on Its Cleanup and Has Yet to Address Contaminated Properties That Pose a High Risk to Residents
- The Cleanup Project Is Likely to Cost Hundreds of Millions of Dollars More Than the State Has Provided DTSC to Date
DTSC Is Behind Schedule on Its Cleanup and Has Yet to Address Contaminated Properties That Pose a High Risk to Residents
- As of June 2020, DTSC had not cleaned 31 out of 50 lead-contaminated childcare centers, parks, and schools in the cleanup site, even though it identified contamination at these properties as early as 2014. Its failure to use the options available to it to clean these properties quickly has unnecessarily put the children who may visit them at higher risk of negative effects to their mental and physical development from lead poisoning.
- Because of a slower-than-expected cleanup pace, DTSC will likely miss its target date of June 2021 to clean the 3,200 most contaminated properties in the cleanup site.
- DTSC does not have a timeline or planned approach for cleaning the remaining 4,600 contaminated properties. Because it has not planned for the cleanup of these properties, stakeholders and the Legislature lack critical information about the time and funding DTSC will need to complete the cleanup effort.
As a Result of Its Missteps, DTSC Has Not Cleaned Properties That Pose a Significant Threat to Residents
DTSC has not yet cleaned a high percentage of 50 of the 3,200 most contaminated properties where it has identified lead contamination as disproportionately affecting the residents who are at the greatest risk. DTSC’s cleanup plan identifies childcare centers, parks, and schools as particularly sensitive-use properties because these are property types where a large number of individuals sensitive to lead poisoning—particularly young children—may be exposed to lead-contaminated soil. However, as Figure 3 shows, DTSC had still not cleaned 31, or 62 percent, of these properties as of June 2020. Further, with the exception of a single childcare center that it cleaned in May 2020, the department has not cleaned any childcare centers, parks, or schools since May 2018. As a result, it has continued to put the children and other at-risk individuals who spend time at these properties at unnecessary risk of the serious consequences of lead poisoning.
Certain Sensitive-Use Properties Remain Contaminated Years After DTSC Learned About Dangerous Levels of Lead
DTSC allowed this delay to occur despite the fact that it learned about the contamination levels on these properties from 2014 through 2017, when it conducted soil sample testing. DTSC’s assistant deputy director stated that schedule conflicts have prevented DTSC from cleaning some properties, and other records it shared with us show that some property owners were unsure about whether they wanted to proceed with the cleaning. However, we identified several other factors that explain the department’s lack of progress. Most significantly, its program staff did not act to amend existing contracts or engage new contractors to expedite the cleanup of these properties.
Types of Bonds
Performance Bond: A bond that guarantees the contractor’s performance of required work.
Payment Bond: A bond that covers the costs of labor and/or materials in the event that the contractor fails to make those payments.
Source: State Contracting Manual.
The assistant deputy director stated that because some of these properties are publicly owned, state law requires DTSC to use contractors that have 100 percent payment and performance bonding, which neither of DTSC’s existing contractors has. The text box describes these types of bonds. State law requires every contractor that directly contracts with a state agency for a public works contract to file a payment bond for 100 percent of the contract price, if that price exceeds $25,000. Under state law, the contracting state agency must require the contractor to provide the bond and must determine whether that bond is legally and financially sufficient. If the state agency fails in these duties and the contractor does not pay its subcontractors or suppliers, the subcontractors or suppliers may sue the state agency. Because DTSC’s existing contractors do not have this level of bonding, it could not use its existing contracts to clean childcare centers, parks, and schools in the cleanup site. However, despite the limits of its existing agreements, it has not amended those contracts or found new contractors to perform this essential work.
When we asked why DTSC did not address the risk that these publicly owned properties pose to children by promptly seeking another contractor who could perform the work, the assistant deputy director stated that the department had intended to use a new contractor to clean the properties. According to the assistant deputy director, in May 2018, DTSC created a list of publicly owned properties by grouping all schools, parks, childcare centers, and properties with five or more residential units. However, the assistant deputy director stated that DTSC never secured the necessary contract because its resources for contract solicitation and procurement were limited. Further, she indicated DTSC was focusing on other priorities at the time, including ramping up its residential cleanup efforts at the cleanup site and renegotiating an existing cleanup agreement. However, by failing to prioritize contracting for these properties to be cleaned, DTSC placed children and other at-risk individuals in unnecessary danger of continued exposure to lead contamination.
Moreover, DTSC misidentified the ownership of some of these properties, thus unnecessarily delaying their cleanup. In December 2019, DTSC staff identified that 24 childcare centers on its May 2018 list were actually private, residential childcare centers. Given its new understanding of their ownership status, DTSC assigned these properties to one of its existing cleanup contractors in December 2019. Nonetheless, its error in identifying property ownership meant that for over a year and a half DTSC incorrectly believed these 24 properties could not be cleaned by its existing contractors.
Finally, DTSC has not used all available options to ensure that it quickly cleans childcare centers, parks, and schools. Before it substantively stopped cleanup of these types of properties in May 2018, DTSC cleaned several under a process called a time critical removal action (TCRA). Under a TCRA, DTSC can take action to reduce or prevent an ISE to the public health or welfare or to the environment resulting from the release or threatened release of a hazardous substance. When DTSC makes a determination about implementing a TCRA, it considers certain factors established under federal regulation, such as the actual or potential exposure of a hazardous substance to nearby people. If it decides a TCRA is warranted, it can expedite the process to clean properties.
Early in the cleanup effort, DTSC cleaned three schools and 11 childcare centers using the TCRA process. When we asked DTSC’s assistant deputy director why it did not use the TCRA process to clean all contaminated childcare centers, parks, and schools, she indicated that the average cost of cleaning these initial properties had been above $95,000 per property, which would be greater than the cost of a property that was cleaned without using a TCRA. She also stated that once DTSC approved a cleanup plan in July 2017, it decided that it was prudent to clean the remaining properties in accordance with its plan and that it would use a TCRA only under emergency circumstances because of the higher cost of a TCRA. However, nearly a year after DTSC’s approved cleanup plan, DTSC has only used a TCRA to clean 12 additional properties from March through May 2018 after it failed to receive any bids to perform the cleanup of these properties. Contractor A cleaned the 12 properties for $53,000 per property—44 percent less than the earlier cleanup. Using a TCRA is thus a viable option for DTSC to clean properties so that it can expeditiously address the ongoing risks lead contamination poses.
DTSC believes it can complete the cleanup of the remaining childcare centers, parks, and schools by June 30, 2021—more than four years after it identified the last of these properties as contaminated in April 2017. After completing preliminary work, such as creating property design plans and conducting confirmation soil sampling, DTSC anticipates soliciting a cleanup contractor in late 2020. However, given the significant risks these properties pose, we would expect DTSC to use every option available—including using the TCRA process—to prioritize and complete the cleanup of these schools, parks, and childcare centers as quickly and safely as possible. By delaying the cleanup of these properties, even for a short time period, DTSC may be unnecessarily continuing to endanger children and at-risk individuals.
DTSC established a target of June 30, 2021, to clean the 3,200 most contaminated properties it identified by soil sampling at the cleanup site, but it will not meet this target at its current cleanup pace. As we describe in the Introduction, DTSC’s cleanup plan prioritizes cleaning properties that have the highest levels of lead and pose the greatest health risk to sensitive individuals. The cleanup plan, finalized in July 2017, indicates that after an initial two-month period during which it would clean 10 to 15 properties per week, DTSC expected its average pace would increase to 25 to 35 properties per week. However, its average pace from March 2019 through February 2020 was only 20 properties per week. At this pace, we estimate that it would take DTSC until December 2021 to clean up all of the 3,200 most contaminated properties, causing it to miss its target date by six months.
Moreover, DTSC is highly unlikely to maintain even its 20 properties-per-week pace because of two significant and recent developments. The first is the COVID-19 pandemic, which caused DTSC to temporarily stop its contractors’ work at the cleanup site in spring 2020 for about six weeks. Contractor A resumed work in May 2020. The second is DTSC’s efforts to limit cost overruns. In mid-April 2020, DTSC ordered Contractor B to cease all new cleanup efforts in an attempt to control costs—a decision we describe in detail later in this report. Without two contractors working simultaneously, DTSC has been unable to maintain the pace of 20 properties per week. Instead, as of mid-August 2020 it has averaged only 16 properties per week, 20 percent slower than its prior pace. Figure 4 shows DTSC’s actual cleanup pace compared to its target.
DTSC Will Likely Miss Its Targeted Completion Date for Cleaning 3,200 Highly Contaminated Properties
Source: DTSC’s cleanup plan and property cleanup records.
* Pace is based on actual pace and a 12-month period through February 2020 projected forward.
† Pace is based on Contractor A’s current average pace projected forward.
In addition to the pandemic and its cease-work order, DTSC’s assistant deputy director identified several factors that have contributed to the cleanup’s slow pace. She explained that if property owners do not keep their appointments, DTSC’s contractors must delay the cleanup of those properties. In addition, if property owners do not remove personal items from the excavation area, such as nonoperating vehicles or debris, the contractor may need to move the items or reschedule the cleanup. The assistant deputy director stated that when DTSC must reschedule a cleanup appointment, it must coordinate with other property owners to fill the empty appointment and reassign contractor operations to other properties, steps that slow the pace of cleanup. Finally, she also identified that weather and difficult terrain have slowed down the cleanup pace because they require contractors to adjust their schedules or make changes to continue cleaning. For example, rain may necessitate that contractors stop the cleanup activities or excavate in small sections that can be easily covered. In addition, if property is not accessible to equipment because of structures or trees, crews may need to manually remove contaminated soil using shovels, which can be time-intensive.
However, all of these explained reasons for delays are issues that DTSC should have been able to anticipate and factor into its cleanup pace estimates. For example, DTSC should have been aware that certain times of year have greater rainfall, and thus it should have accounted for weather when determining its target cleanup pace. Moreover, problems such as uncooperative property owners and difficult terrain would likely affect similar cleanup efforts and should have been possible to anticipate. The cleanup plan states that DTSC calculated its expected pace based on its prior experiences cleaning properties within the cleanup site and its consultations with the U.S. Environmental Protection Agency (EPA) about similar projects in other states. However, when we asked the assistant deputy director for the data from prior DTSC cleanup efforts, she stated that her department did not have any such data and that the prior cleanup efforts had progressed at a slower pace than 25 to 35 properties per week. Further, DTSC shared multiple examples of the correspondence it had with the EPA. The correspondence related to cleanup pace was limited to a handbook on lead contamination at residential sites that contained only a single reference to the pace at which a cleanup effort could potentially progress. Specifically, the handbook indicates a pace of 800 properties per year—an average of 15 properties per week—is possible. That pace is far below DTSC’s published estimate of how fast it could clean properties. DTSC’s lack of evidence for its estimated cleanup pace leads us to conclude that it had little basis for publicizing that it could clean 25 to 35 properties per week.
In addition to its failure to anticipate the predictable factors that would slow the progress of its cleanup, DTSC also did not enforce its requirement that contractors maintain a minimum cleanup pace. DTSC publicly estimated that it could achieve a pace of 25 to 35 properties per week before contracting with either of its two major cleanup contractors. Those cleanup contracts require each contractor to employ a project manager whose responsibilities include ensuring the use of sufficient staff and cleanup crews to achieve the expected pace. However, DTSC has not enforced this requirement. According to the assistant deputy director, DTSC does not want to dictate the time necessary for a contractor to clean a property because it considers the contractor the field expert that is best situated to make such determinations. However, without enforcing the required performance standard, DTSC’s options for ensuring that the overall cleanup project remains on schedule are limited. When it does not use all available options to ensure that cleanup of lead contamination progresses as quickly as possible, DTSC places all residents in the cleanup site at risk of the negative effects of prolonged exposure to lead. As we describe in the Introduction, these effects can include serious and debilitating health conditions.
Unless it significantly increases its cleanup pace, DTSC will leave many properties contaminated for a longer period of time than it originally projected. The continued presence of high concentrations of lead threatens the health of these properties’ residents and visitors. To increase its cleanup pace, DTSC will need to make two key changes to its approach to the cleanup effort. Most importantly, it will need to ensure that it has sufficient contracted staff working on the project. Before DTSC ordered Contractor B to cease work, the contractor had cleaned an average of 14 properties per week. DTSC will need to find an alternative way to clean these properties, such as hiring another contractor or ordering Contractor A to use additional crews. It also needs to hold Contractor A and any future contractors to an expected pace of properties cleaned per week.
The assistant deputy director acknowledged that DTSC has the authority to monitor whether contractors meet the expected cleanup pace. However, she indicated that the pace may be affected by factors unrelated to contractor performance, such as DTSC’s responsibility to ensure that properties are scheduled and prepared for excavation and a lack of cooperation from property owners. She also asserted that as the list of contaminated properties becomes shorter, DTSC will find it harder to maintain a pool of available properties to clean. These factors are poor reasons for failing to enforce a performance standard. For example, DTSC could ensure that its contracts clearly explain what factors are beyond a contractor’s control with regard to the pace of cleanup. Further, our analysis—described in more detail here——shows that it is likely to be many years before the list of contaminated properties would grow so short as to make it difficult to keep a contractor busy. By monitoring its contractors, DTSC can better ensure that they provide sufficient staff and crews to clean contaminated properties in a timely manner.
Finally, after we informed DTSC of our conclusion that it would be unable to meet its targeted deadline for cleaning the most contaminated properties, DTSC provided us with a comparison it made between this cleanup effort and cleanup efforts in other states that it considered most comparable. DTSC asserted that this comparison showed that its cleanup effort has progressed at fast rates when compared to those other projects. DTSC acknowledged that it only very recently compiled this comparison to other projects and that it was not considered when it originally developed its pace estimate of at least 25 properties cleaned per week. However, this comparison does not provide an explanation for why DTSC has not achieved its anticipated cleanup pace. When considering the largest comparable project in DTSC’s analysis, the comparison shows that DTSC has cleaned more total properties than the other cleanup project when compared at similar points in their project lifetime. The comparison also shows that—over the course of a longer period of time—the other large cleanup project cleaned more properties on average per month than DTSC’s cleanup project has achieved over its shorter lifetime.
DTSC Has No Timeline or Planned Approach for Cleaning an Additional 4,600 Contaminated Properties
DTSC does not yet have a timeline or planned approach to clean all of the properties contaminated with lead. Its cleanup plan states that DTSC will identify the soil lead concentration levels at all properties in the cleanup site and then clean each that has a soil lead concentration level above 80 ppm. A cleanup based on this level would protect the health of children and other at-risk individuals. However, DTSC’s current cleanup efforts—which we describe in the previous two sections here and here—have been focused only on 3,200 of the most contaminated properties, which generally have either an average lead concentration of 300 ppm or greater based on a representative soil sampling or a lead concentration of 1,000 ppm or greater based on a single sample. We estimate an additional 4,600 properties have a lead concentration of 80 ppm to 299 ppm that will require cleanup.DTSC has identified an additional 4,199 properties with lead concentrations of 80 ppm to 299 ppm. However, it has not yet sampled 1,604 properties in the cleanup site. DTSC has permission to sample 454 of these properties, while the owners of the remaining 1,150 properties have not provided access. In the past, DTSC has determined that about 10 percent of the properties it tests do not require cleanup. Therefore, we estimate that 410 of 454 properties will require cleanup, for a total of about 4,600 properties. We did not include an estimate for the remaining 1,150 properties because it is unknown whether the property owners will ever provide access to sample their soil to determine whether it is contaminated. These properties will remain contaminated at the end of DTSC’s initial effort.
According to the assistant deputy director, DTSC has not developed a financial plan or a timeline for cleaning the remaining 4,600 properties. Its failure to complete these tasks has reduced the transparency of the cleanup effort. Without such plans, the Legislature and the public lack the information necessary to easily understand the full scope of the cleanup effort. In fact, we found only one instance when DTSC publicly indicated that more than 7,000 properties have a soil lead concentration level above 80 ppm—a legislative committee hearing in 2018. Other than that acknowledgement, DTSC has focused its public statements on the initial 3,200 properties that it prioritized for cleanup. By concentrating its focus on these properties only, DTSC has restricted the discussion about the speed of its cleanup efforts to a subset of the entire cleanup site. In reality, full remediation of the cleanup site is likely to extend for many years beyond the period DTSC has emphasized.
Our calculations show that if DTSC maintains its current pace of 16 properties per week, it will not complete its cleanup of the 3,200 properties in its initial cleaning effort until August 2022. At that same pace, it will take until February 2028 to clean the additional 4,600 contaminated properties. We are concerned that if DTSC does not take action now to increase the pace of its cleanup efforts and to plan for cleaning all contaminated properties, lead poisoning will continue to pose a danger to children and other at-risk individuals in the cleanup site for many years to come.
To ensure that it minimizes the exposure of children and other at-risk individuals to lead contamination, DTSC should immediately solicit a contractor to clean the 31 remaining childcare centers, parks, and schools. It should use the TCRA process to expedite this cleanup if necessary.
To ensure its ability to clean as many lead-contaminated properties as possible in a timely manner, DTSC should immediately begin soliciting an additional contractor to clean properties within the cleanup site. It should include performance standards for the pace of cleanup in its existing and future cleanup contracts.
To ensure that the public and policy makers have the information they need to make informed decisions, DTSC should, by no later than April 2021, identify and publicize a date by which it expects to complete cleanup for all properties that meet or exceed the standard for lead contamination of 80 ppm identified in DTSC’s cleanup plan. It should post this information on its website and, at least every six months, publish an update that indicates whether it is on track to meet that expected completion date based on its rate of progress.
The Cleanup Project Is Likely to Cost Hundreds of Millions of Dollars More Than the State Has Provided DTSC to Date
- Without additional funding, DTSC will be unable to clean about 8 percent—269 out of 3,200—of the properties it estimated it could clean with the existing $260 million in funding the Legislature has provided for the cleanup efforts. At current spending rates, we estimate DTSC will need to spend $650 million to completely clean all of the 7,800 contaminated properties.
- DTSC used outdated and inaccurate data when initially estimating its cleanup costs. Because of the flaws in its approach to creating this estimate, the Legislature and public have not received from DTSC accurate information about the likely cost of the project.
- DTSC’s costs to clean properties have been higher than it expected in part because it did not establish adequate protections when it entered into its largest cleanup contract. As a result, it paid $17 million more than it anticipated to clean the first 768 properties under this contract.
DTSC Will Likely Need an Additional $390 Million to Complete the Cleanup Project
The funding that DTSC has received to date from the State will not allow it to clean as many properties as it projected. In August 2015, the State provided $7 million to DTSC to analyze soil samples and perform emergency cleanup activities. In July 2017, DTSC estimated it could clean 2,500 of the most contaminated properties using the funding available to it at the time, which consisted of $176.6 million the Legislature lent it from the General Fund. Since then, at DTSC’s request, the Legislature provided an additional $24.5 million to clean these same 2,500 properties because of greater-than-anticipated costs. Further, in 2019 the State lent DTSC $50 million to clean an additional 700 properties. These allocations and estimates bring the total amount of funding the State has provided to DTSC to about $260 million, and the total number of properties that DTSC has estimated it can clean to 3,200. Nonetheless, our analysis indicates DTSC will lack the funding to clean 269 of the properties it planned to clean, as Figure 5 shows.
DTSC Will Not Have Enough Funding to Clean 269 Properties It Planned to Clean
Source: Analysis of DTSC cleanup plan, budget change proposals, and property cleanup data.
We project that DTSC will require an additional $21 million to finish cleaning the 3,200 properties it estimated it could clean. DTSC’s assistant deputy director agrees that DTSC will lack the funding necessary to clean all these properties. In fact, the calculations she shared with us suggest that it will require even more additional funding than our estimate of $21 million. However, she stated that she based her method for determining how many properties DTSC will be able to clean with existing funding on information that is subject to change.
The additional $21 million to complete the cleaning of the 3,200 properties is small compared to the cost to clean the full number of properties that remain contaminated. Using DTSC’s actual costs to date, we calculated that total cleaning costs will be $630 million, as Figure 6 shows. In this report, the total number of properties we discuss and the related cost calculations do not include two types of properties: parkways—narrow strips of land typically found between sidewalks and streets—and industrial facilities. As of June 2020, DTSC did not have sufficient information to enable us to calculate cost estimates for these types of properties. Moreover, the soil sampling costs brings the total project cost to almost $650 million. As we discuss previously, the Legislature has provided $260 million to DTSC for cleaning the lead‑contaminated properties and performing related activities. As of May 2020, DTSC had spent $139 million of this funding on cleaning and other related activities, such as sampling soil for lead contamination and operating a statutorily mandated jobs program to help local residents gain employment assisting with the lead cleanup, leaving DTSC with $121 million in remaining funding. Pending any action by a court that requires Exide to pay for cleanup costs, we estimate that the State will need to provide approximately an additional $390 million to DTSC to complete the cleanup project.
DTSC Cleaning the Entire Cleanup Site Will Cost About $630 Million
Source: Analysis of DTSC’s financial reports and property cleanup data.
* Cost figures include DTSC’s costs to clean properties along with its administrative costs, operating a statutorily mandated jobs program, and cost recovery efforts. It does not include soil sampling costs, which will total $18 million and bring total project cost, to almost $650 million.
DTSC Based Its Cleanup Cost Estimates on Outdated and Inaccurate Data
In 2016 DTSC believed that each lead-contaminated property would cost $50,000 to clean. However, it significantly underestimated its actual cleanup costs. That same year, the State lent DTSC $176.6 million for activities related to the cleanup, including the cleaning of lead-contaminated properties. By 2018 DTSC’s per-property estimate had risen to $60,000 to $80,000, depending on the property type. As of June 2020, DTSC’s actual average per-property cost was almost $64,000.
DTSC’s initial method for estimating the project’s likely costs was flawed and shortsighted. It based its estimate on fiscal year 2015–16 contractor costs, including cleanup work Exide paid for under a 2014 legal agreement between DTSC and Exide in which Exide agreed to clean 39 properties. However, although DTSC is the State’s toxic cleanup oversight entity, it did not verify that its own costs would be similar to Exide’s. Moreover, it did not account for predictable costs it would incur, such as payment of prevailing wages to contracted laborers, inflation, and the need to store soil samples so that the State could effectively recover its costs from Exide.
According to DTSC’s deputy director for its Site Mitigation and Restoration Program, no one at the department knew how long the project would take, and it gave its best cost estimate available at the time. However, we expect that as the State’s lead agency for toxic cleanup activities, DTSC would have the expertise to know the cost of these activities and that its cleanup cost estimate would take these activities into consideration. DTSC’s failure to do so is a significant lapse in judgment. Because it failed to accurately estimate per-property costs in 2016, it had to ask for additional funding in 2019, which the State provided. The table shows the factors that DTSC used to explain why it needed additional funding in 2019 and our assessment as to whether it could have reasonably anticipated them when developing its original estimated cost.
|FACTORS DTSC USED IN 2019 TO JUSTIFY ADDITIONAL FUNDING||FORESEEABLE IN 2016?|
|1||Prevailing wages under the project labor agreement (PLA), a collective bargaining agreement with the Los Angeles/Orange Counties Building and Construction Trades Council. The PLA increased wage rates for project work.||YES. DTSC’s cleanup contracts are subject to certain statutory provisions that require paying prevailing wages.|
|2||Inflation.||YES. DTSC knew the project would last for multiple years.|
|3||Change in anticipated contract type, from fixed-price to time-and-materials.||No. DTSC was anticipating a fixed-price contract. After an extended solicitation process, it agreed to an $82 million time-and-materials contract. Fixed-price contracts pay vendors a specified amount for work performed, whereas vendors charge for actual labor and materials used with time-and-materials contracts.|
|4||Performance and payment bonds.||YES. DTSC should have been aware that payment bonds were required by law for certain public works contracts.|
|5||Soil sample storage costs||YES. DTSC knew that the State would likely be pursuing cost recovery and should have known that retaining evidence of contamination would be integral to that effort.|
|6||Project manager||YES, given the size and scope of the project.|
|7||Financial auditor||YES, given the size and scope of the project.|
Source: Analysis of DTSC’s 2019 budget change proposal (approved).
Because it did not independently verify whether its cleanup costs were likely to be similar to Exide’s, DTSC inaccurately estimated both the cost it would incur to clean each property and the overall cost of the cleanup. As we indicate previously, DTSC is certain to need additional money to finish the cleanup project. Further, in light of the State’s recent budgetary constraints associated with the COVID-19 pandemic, it will be important for DTSC to provide decision makers a range of options for funding additional cleanup activities. Providing accurate estimates of its remaining costs is critical to informing the Legislature’s decision on whether to approve this additional funding. If DTSC currently lacks the necessary expertise, it should contract for assistance in making accurate and complete cost estimates.
DTSC Did Not Ensure That Its Largest Cleanup Contract Included Adequate Protections Against Cost Overruns
As we previously explain here and here, DTSC’s costs to clean properties have been higher than it expected. This increase in costs is partially attributable to the structure of DTSC’s largest cleanup contract, which is the project’s only active cleanup contract that is over budget. In October 2018, DTSC entered into an $82 million agreement with Contractor B to clean up to 1,610 residential properties for an average expected per-property cost of about $51,000. However, by April 2020—over a year after it began work—Contractor B’s per-property costs averaged about $73,000, more than 40 percent higher than it originally estimated. DTSC projects the per-property cost to increase to $81,000 because Contractor B’s billing for the properties has not yet been finalized. In contrast, Contractor A’s per-property costs have averaged about $53,000. As a result of Contractor B’s high costs, DTSC paid $17 million more than it anticipated to clean the first 768 properties under this contract.
We find it troubling that DTSC awarded this large cleanup contract to Contractor B given that Contractor B had already shown it could not clean properties within expected costs. In 2015 DTSC entered into an agreement with Contractor B for work related to the Exide cleanup that, after two amendments, totaled $5 million to clean 100 properties, for an average expected per-property cost of $50,000. However, Contractor B ultimately cleaned only 76 properties for the $5 million, with an average per-property cost of $66,000—a 32 percent increase over what DTSC had expected. Nonetheless, three years later, DTSC awarded Contractor B an $82 million contract for an estimated per-property cost that was essentially the same as in its previous contract.
According to the assistant deputy director, she did not think Contractor B’s bid to clean properties at an average of $51,000 per property was achievable, but DTSC awarded the contract because Contractor B submitted the lowest bid for the job. She also stated that because Contractor B had already done some cleanup work and knew more about the project than the other bidders, DTSC concluded its bid was likely to be more informed. However, under its ISE authority, DTSC was not bound to offer the contract to the lowest responsible bidder; in fact, the State does not require any agencies to do so in all procurement situations. If DTSC had used other criteria for its selection, such as selecting the vendor offering the best value rather than the lowest price, it would have provided itself greater flexibility in choosing a contractor.
Types of Contracts
- Fixed-price contract: Provides a total price for all work to be performed under a contract. This price is not subject to adjustment based on a contractor’s cost to perform the work.
- Time-and-materials contract: Provides for actual labor hours at specified fixed hourly rates plus actual cost for materials.
Source: Federal Acquisition Regulations.
Once DTSC decided to use Contractor B for a second contract, an alternate contract cost structure could have helped the department control costs. The agreement DTSC entered into allows Contractor B to charge the department for the full costs of its hourly labor and the materials it uses to clean properties. This structure—called a time-and-materials contract—requires an agency to pay for any greater-than-expected resources a contractor uses, as the text box shows. Best practices for managing public contracts indicate that a fixed-price contract—in which an agency pays a contractor a specified amount for work performed—is preferable to a time-and-materials contract, which an agency should use only when no other contract type is suitable. Under a fixed-price contract, a contractor is responsible for paying greater-than-anticipated costs, which would have protected DTSC against Contractor B’s cost overruns.
DTSC’s time-and-materials agreement allowed Contractor B to use techniques to complete its tasks that were not cost‑effective. According to the assistant deputy director, one example of an unnecessary but allowable cost is the manner in which Contractor B stored excavated soil before hauling it from a work site. Contractor B stored the excavated soil in a container that had to be moved around a property several times by a forklift operator—who incurred labor wages each time—rather than placing a container on the street for the duration of the cleanup. According to the assistant deputy director, DTSC’s Contractor A uses the latter approach, but DTSC’s contract did not prohibit Contractor B’s more labor-intensive and costly method. She asserted that Contractor B’s approach is an acceptable industry technique for cleaning properties even though it adds to the labor cost of a property’s cleanup.
A fixed-price contract would have encouraged Contractor B to take steps to control the cost of its cleanup activities. DTSC realized within a few months that Contractor B’s costs were problematic and took several steps to try to control its costs. According to the assistant deputy director, DTSC anticipated higher-than-average costs in Contractor B’s first few months on the job because of start-up costs. However, these costs did not flatten out as DTSC expected. In April 2019, DTSC first raised the higher-than-expected costs as a problem with Contractor B, and over the next six months, DTSC repeatedly asked Contractor B to reduce its costs. Further, in March 2019, DTSC hired a consultant for $5.4 million to help control Contractor B’s costs by, among other tasks, providing technical assistance in reviewing its invoices and assisting the DTSC field oversight staff with overseeing its work on-site. Finally, in July 2019, DTSC attempted to renegotiate with Contractor B the contract’s time-and-materials cost structure. However, following its efforts to introduce fixed price elements, DTSC abandoned its negotiation effort in February 2020. In April 2020, DTSC instructed Contractor B to cease cleanup work and focus only on completing administrative tasks for the properties it had already cleaned.
DTSC explained that the time-and-materials agreement was the best possible contract agreement it could sign when it needed a contractor to clean properties. Before entering into an agreement with Contractor B, the department attempted to negotiate with potential vendors for a price structure that would have included more fixed-price elements. However, these negotiations failed. According to an attorney for DTSC, potential contractors were hesitant to accept a fixed-price structure without several conditions that—in DTSC’s estimation—effectively undermined the fixed‑price elements of the proposed contracts. For example, one vendor told DTSC that it would not submit a bid because of DTSC’s requirement for a maximum total price. In light of these failed negotiations, DTSC’s solicitation for the agreement it obtained with Contractor B did not propose a fixed-price agreement. Rather, the cost sheet that DTSC asked bidders to complete indicates that it was seeking a contract that was primarily based on a time‑and‑materials cost structure.
If DTSC was unable to enter into a fully fixed-price contract, other alternatives were available to it. Specifically, two months before it executed the time-and-materials agreement with Contractor B, the department entered into a smaller contract with Contractor A that includes a mix of fixed and unit prices. If vendors were unwilling to enter into a fixed-price agreement, DTSC could have considered a hybrid structure that included fixed costs for some elements—such as the administrative documentation steps required to finalize a property as cleaned—and time-and-materials costs for other elements. The assistant deputy director agreed that it would make sense to use such a hybrid contract structure. Alternatively, DTSC could have sought a smaller agreement to clean fewer properties. Doing so may have limited the risk that potential contractors perceived in entering into a cleanup agreement with so many unknowns.
Because its agreement with Contractor B did not include adequate cost protections, DTSC has spent more than it expected to clean fewer properties than it had planned. As a result, DTSC now has less funding to secure another contractor to continue the cleanup. If DTSC does solicit for a new contract, it will be essential for it to negotiate an agreement that includes strong controls on per‑property cleaning costs.
To ensure that it has sufficient funding to clean up all lead‑contaminated properties in the cleanup site, DTSC should do the following:
- Identify the full amount of funding it needs to complete the cleanup of the 3,200 most contaminated properties and the remaining 4,600 contaminated properties. It should submit a request for funding in time for spring 2021 budget discussions that includes a range of funding options that spans from funding for the full cleanup to funding for only a portion of the remaining contaminated properties.
- Immediately revise its cost estimation methods to encompass the factors that it now knows will affect its overall costs. If needed, it should contract for expertise in determining accurate and complete estimates of the remaining cleanup cost.
To protect against the unsustainably high costs it has incurred thus far in the cleanup project, DTSC should structure its future cleanup contracts to at least partially incorporate fixed prices.
We conducted this performance audit in accordance with generally accepted government auditing standards and under the authority vested in the California State Auditor by Government Code 8543 et seq. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on the audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives.
ELAINE M. HOWLE, CPA
California State Auditor
October 27, 2020