dia hotel and transit center audit report
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Dennis J. Gallagh
Auditor
Office of the Audit
Audit Services Divis
City and County of De
Denver International Airport
Hotel and Transit CenterPerformance Audit
November 2014
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The Auditor of the City and County of Denver is independently elected by the citizens of Denver.
He is responsible for examining and evaluating the operations of City agencies for the purpose
of ensuring the proper and efficient use of City resources and providing other audit services and
information to City Council, the Mayor and the public to improve all aspects of Denvers
government. He also chairs the Citys Audit Committee.
The Audit Committee is chaired by the Auditor and consists of seven members. The Audit
Committee assists the Auditor in his oversight responsibilities of the integrity of the Citys finances
and operations, including the integrity of the Citys financial statements.The Audit Committee is
structured in a manner that ensures the independent oversight of City operations, thereby
enhancing citizen confidence and avoiding any appearance of a conflict of interest.
Audit Committee
Dennis Gallagher, Chair Robert Bishop
Maurice Goodgaine Jeffrey Hart
Leslie Mitchell Timothy OBrien, Vice-Chair
Rudolfo Payan
Audit Staff
John Carlson, Deputy Director, JD, MBA, CIA, CGAP, CRMA
Sonia Montano, Internal Audit Supervisor, CGAP, CRMA
Robyn Lamb, Internal Audit Supervisor
Kelsey Yamasaki, Lead Internal Auditor, MPP
Griffin Zigrang, Senior Internal Auditor, MA
You can obtain copies of this report by contacting us at:
Office of the Auditor
201 West Colfax Avenue, Department 705 Denver CO, 80202
(720) 913-5000
Fax (720) 913-5247
Or download and view an electronic copy by visiting our website at:
www.denvergov.org/auditor
A2014-010
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To promote open, accountable, eff ici ent and effective government by perf ormi ng imparti al r eviews and other audi t servi ces
that provide objective and usefu l inf ormati on to improve decision maki ng by management and the people.
We will moni tor and report on recommendations and progress towards their implementation.
City and County of Denver201 West Colfax Avenue, Department 705 Denver, Colorado 80202 720-913-5000
FAX 720-913-5247 www.denvergov.org/auditor
Dennis J. GallagherAuditor
November 20, 2014
Kim Day, Chief Executive Officer
Department of Aviation
City and County of Denver
Dear Ms. Day:
Attached is our second audit of the Denver International Airport (DIA) South Terminal
Redevelopment Program (STRP), now referred to as the Hotel and Transit Center (HTC) project .The purpose of our audit was to provide an update and report on the work DIA has taken to
enhance its project management structure and construction schedule. The expansion of DIA
and construction of the on-site hotel, in connection with a commuter rail link to downtown
Denver, offers many benefits for the traveling public and the region. Denver has a rich
transportation history, beginning in 1869 when Denver was determined to have its own rail
connection to the transcontinental line passing through Cheyenne, Wyoming. The desire to be
linked to commerce fostered a movement to organize a Board of Trade and build a home town
railroad. The Denver Pacific Railroad laid track from Denver to Cheyenne. This was a starting
point for Denvers transportation future. Now, with our Union Station redeveloped, the commuter
rail link to DIA affords the opportunity for Denver to be connected to the world and further
propel our City onto the global stage.
As the result of the loss of the original HTC architect, the release of our 2012 HTC audit findings,
and a directive from the Mayor, DIA established additional project oversight in August 2013;
shortly before that, the budget for HTC had ballooned from $500 to $544 million. While I
commend DIA for improving project management, I remain troubled that costs continue to
climb. It appears that DIA was willing to pay handsomely for a promise of certainty from its
primary contractors. While I appreciate assurances from the program management team that
HTC will be finished on time and on budget, we offer several observations and
recommendations for steps that can be taken to review the construction work upon completion
and recoup potential cost overruns pursuant to the arrangement DIA has made with its
contractors. While there may not be another project at DIA of this scale for some time, there areimportant lessons to be learned from HTC.
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To promote open, accountable, eff ici ent and effective government by perf ormi ng imparti al r eviews and other audi t servi ces
that provide objective and useful i nf ormati on to impr ove decision mak ing by management and the people.
We will moni tor and report on recommendations and progress towards their implementation.
If you have any questions, please call Kip Memmott, Director of Audit Services, at 720-913-5000.
Sincerely,
Dennis J. GallagherAuditor
DJG/jac
cc: Honorable Michael Hancock,Mayor
Honorable Members of City Council
Members of Audit Committee
Ms. Cary Kennedy, Deputy Mayor, Chief Financial Officer
Ms. Janice Sinden, Chief of Staff
Mr. David P. Edinger, Chief Performance Officer
Ms. Beth Machann, Controller
Mr. Scott Martinez, City Attorney
Ms. Janna Young, City Council Executive Staff Director
Mr. L. Michael Henry, Staff Director, Board of Ethics
Mr. Eric Hiraga, DIA Chief of Staff
Mr. Stuart Williams, DIA HTC Program Manager
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To promote open, accountable, eff ici ent and effective government by perf ormi ng imparti al r eviews and other audi t servi ces
that provide objective and useful i nf ormati on to improve decision maki ng by management and the people.
We will moni tor and report on recommendations and progress towards their impl ementation .
City and County of Denver201 West Colfax Avenue, Department 705 Denver, Colorado 80202 720-913-5000
FAX 720-913-5247 www.denvergov.org/auditor
Dennis J. GallagherAuditor
AUDITORS REPORT
We have completed our second in a series of audits of the Denver International Airport (DIA)
South Terminal Redevelopment Program (STRP). The project has been rebranded and is now
referred to as the Hotel and Transit Center (HTC) project after its two largest scope elements. The
purpose of the audit was to examine and assess the governance of HTC, including project
management and change order review processes, and to identify possible inefficiencies and
opportunities for improvement.
This performance audit is authorized pursuant to the City and County of Denver Charter, Article
V, Part 2, Section 1, General Powers and Duties of Auditor, and was conducted in accordance
with generally accepted government auditing standards. 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 our audit objectives. We believe that the evidence
obtained provides a reasonable basis for our findings and conclusions based on our audit
objectives.
The audit revealed that the HTC budget has increased since the inception of the project and
may continue to increase before the project is complete. Based on our assessment, many
factors have contributed to the cost increases, including DIAs failure to hire an independentconstruction consultant during the initial phases of developing contract terms. Further, we
believe that DIA agreed to generous contract terms benefiting its prime contractors in an effort
to complete the HTC project on time. From the initial $500 million to the current $544 million, we
cannot provide assurance that the HTC budget will not ultimately increase to $599 million.
Although DIA has made efforts to address risks to the HTC projects schedule and budget by
creating a Project Management Team (PMT) and change management process, these efforts
may not be effective enough to control costs. We recommend that DIA take advantage of its
contractual terms with its primary contractors and conduct, as a management activity, a
construction close-out review using a specialized cost recovery firm. This is standard practice in a
capital construction project of this scale.
As a result of DIA leaderships focus on HTC, it is possible that funding of other essential projects
and maintenance not related to HTC is being affected. Specifically, we note in the report that
the budget for DIAs capital improvement program has increased but potentially not at the rate
required to meet the needs of the aging existing facility. Further, DIA leadership does not have
operations maintenance plans in place, which are essential for managing and maintaining the
existing facility. These plans will also be crucial for the ongoing maintenance of the new facility.
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We appreciate the personnel who assisted us during the audit.
Audit Services Division
Kip Memmott, MA, CGAP, CRMA
Director of Audit Services
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For a complete copy of this report, visit www.denvergov.org/auditor
or contact the Auditors Office at 720.913.5000
BackgroundIn 2011, Denver International Airport
(DIA) leadership set the budget for
the Hotel and Transit Center (HTC) at
$500 million. By 2013, DIA leadership
increased the budget to $544 to
more accurately reflect the probable
cost to complete HTC. Currently, HTC
Program Managers estimate that it
will cost as much as $599 million to
complete HTC. In addition to the costof completing the project, DIA
leadership estimates that it will cost
as much as $138 million to complete
other capital projects that are being
constructed by HTC contractors.
PurposeThe objective of the audit was to
determine whether DIA leadership
has an adequate project
management structure in place to:
Identify and mitigate current and
future risks that may impact the
projects budget
Ensure that costs related to HTC
are properly accounted for
Ensure that DIA is strategically
prepared for future capital
planning and maintenance
City and County of Denver Office of the Auditor
Audit Services Division
REPORT HIGHLIGHTS
Denver International Airport Hotel and Transit Center
November 2014
The audit assessed Denver International Airports management of the construction of the Hotel and Transit
Center and its preparedness for future capital projects and maintenance.
HighlightsOur review of the HTC project yielded the following findings:
The HTC budget has increased and will increase again.
oIn 2011, the budget was set at $500 million, increased in 2013 to $544
million, and may increase up to $599 million or more.
oThe process DIA put in place to control cost-inducing project changes is
not sufficient to keep costs from rising.
oBudget increases may have resulted from:
DIA not having an independent construction consultant on staff; and
Costly contract terms that were negotiated to incentivize on-time
project completion. We cannot provide assurance that the budget will not exceed $599 million.
oThis was due in part to lack of documentation.
oFurther, the HTC invoice review process is insufficient to assess whether
all project costs have been reasonable and in compliance with contract
terms.
Additional costs will add $130 million to the overall cost of the redevelopment
program, including:
o$75 million for other related capital projects;
o$53 million for RTD infrastructure; and
o$2 million that has not been captured by any established budget.
DIA leaderships focus on HTC may have reduced focus on the funding of non-
HTC-related projects and maintenance of the existing facility.oCapital investments in the airfield have fluctuated and budget reductions
made to specific projects raise some concerns.
oCapital investments in the terminal complex have decreased.
oDIA does not have operations maintenance plans in place, despite the fact
that DIA is an aging facility.
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TABLE OF CONTENTS
INTRODUCTION BACKGROUND 1
Growth and Expansion of Denver International Airport 1
Hotel and Transit Center Project Funding Sources 3
Chronology of Hotel and Transit Center Governance and
Management 3
Change Management Controls 8
DIA HTC Construction Records Retention and Payment
Management Systems 11
SCOPE 12
OBJECTIVE 12
METHODOLOGY 12
FINDING 14
DIA Leadership Has Taken Action to Improve Project
Management of the Hotel and Transit Center but These Efforts
Have Not Been Fully Effective in Mitigating Risks 14
RECOMMENDATIONS 41
APPENDICES 43
Appendix A Types of Contract Delivery Methods for Airport
Projects 43
Appendix B HTC Change Management Review Process
Flowchart 47
Appendix C HTC Invoice Review Process Flowchart 48
AGENCY RESPONSE 49
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INTRODUCTION
BACKGROUND
Growth and Expansion of Denver International Airport
Denver International Airport (DIA), which opened in February 1995, is the largest
airfield of any U.S. airport, encompassing fifty-three square miles located
approximately twenty-four miles northeast of Denvers central business district. DIA was
designed to incorporate the latest technology and safety and has developed an
accomplished record for on-time performance, safety, and convenience.1 In 2000,
the U.S. Department of Transportation granted $21.5 million to DIA for the construction
of a sixth runway to increase the number of international flights that the airport can
accommodate, as well as to ensure that the airport is operating efficiently. In 2011,
DIA ranked as the fifteenth-busiest airport worldwide. Recently, DIA ranked as the fifth-
busiest airport nationwide.2
The City initiated the South Terminal
Redevelopment Program (STRP) to
improve services at DIA and to create
convenient intermodal transportation
options between the airport and
downtown. Further, according to DIA
leadership, STRP helps to complete the
original vision for DIA when initially
constructed in the 1990s. STRP consists of
three primary projects: a public transitcenter, an airport hotel, and an open-air
plaza.
Public Transit Center This aviation commuter rail station will serve trains
connecting DIA with downtown Denvers Union Station as part of the Regional
Transportation Districts (RTDs) East Rail Line, under construction by Denver
Transit Partners.
Hotel and Conference Center The new 519-room Westin hotel will feature
conference center space for meetings, banquets, conventions, and trade
shows, as well as a restaurant, fitness center, and indoor pool. The hotel will
1Among Colorado commercial service airports, DIA is the busiest of fourteen Colorado airports in terms of the number of
enplaned passengers in 2012. Colorado Springs Airport, a small hub airport south of DIA, principally serves local demand
and ranks second in the State of Colorado after DIA. For rough comparison, in 2012, approximately 822,000 passengers
were enplaned at Colorado Springs compared with 26.6 million passengers at DIA. CITY AND COUNTY OF DENVER,
COLORADO, DEPARTMENT OF AVIATION, Airport System Subordinate Revenue Bonds, SERIES 2013A and SERIES 2013B,
Bond Report, July 10, 2013.2Market Demand and Financial Analysis. The Westin Denver International Airport Denver, CO, PFK Consulting, September
18, 2012.
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allow business travelers to conduct meetings close to DIA, saving them time
and offering a convenient alternative to traveling downtown.
Public Plaza An open-air plaza will connect the transit center and hotel to
the existing Jeppesen Terminal and will feature a large open area partially
covered by a glass canopy. The plaza will provide a venue for programs and
events where passengers and visitors can find entertainment, relaxation, art,
and restaurants.
The program also includes an extension
of the Automated Ground
Transportation System (AGTS), which is
the train that currently serves the
concourses, as well as an expansion of
the existing baggage system.
2012 STRP Audit In January 2012, the
Denver Auditors Office released a
performance audit of STRP, through
which our office sought to understand
and report on STRPs organizational
structure, financing, and task schedule,
as well as to identify any significant
risks.3 The audit revealed that there was some risk that the projects components
would not be completed on time or on budget. Specifically, projections developed in
October 2011 showed that STRP, barring any changes, would be completed six to
eight months beyond the scheduled timeframe and approximately $9 million over
budget; the train station was not projected to be completed until several months after
the agreed-upon delivery date of January 1, 2014. We noted that DIA leadership had
made efforts to address these risks to the schedule and budget by requesting a review
by other City personnel, such as the City Engineer, and implementing an
organizational change that would centralize responsibility and accountability under a
program manager employed by the City. DIA leadership also worked to address other
risk areas, including how invoices are reviewed prior to payment and how
maintenance needs are reflected in facility design.
This audit of the DIA Hotel and Transit Center is a continuation of the STRP audit and
assesses the efficiency and effectiveness of the governance of the project. STRP is
now commonly referred to as the Hotel and Transit Center (HTC) project.
Hotel and Transit Center Budget and Schedule DIA leadership originally set the
budget for HTCincluding design and construction costsat $500 million, to be
funded using airport bonds. As reported in our January 2012 audit, the project was on
track to be completed at $509 million. DIA has since established a revised budget for
the three HTC project elements of approximately $544 million. This represents a $44
million (9 percent) increase over the October 2012 budget for the project. In April
3The Department of Aviations South Terminal Redevelopment Program Performance Audit, City and County of Denver
Auditors Office, January 2012,www.denvergov.org/auditor/DenverAuditor/AuditServices/AuditReports.
http://www.denvergov.org/auditor/DenverAuditor/AuditServices/AuditReportshttp://www.denvergov.org/auditor/DenverAuditor/AuditServices/AuditReportshttp://www.denvergov.org/auditor/DenverAuditor/AuditServices/AuditReportshttp://www.denvergov.org/auditor/DenverAuditor/AuditServices/AuditReports -
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2014, DIA leadership announced that overall project costs could grow an additional 5
to 10 percent, raising the cost of the project to as much as $599 million.4
The program schedule comprises work for the transit center, hotel, and plaza. DIA
entered into an intergovernmental agreement with RTD to substantially completekey
transit center components by January 1, 2014.5 In addition, the original schedule for
the hotel and plaza called for construction completion of both elements in November
2014. In our January 2012 audit, we reported that the transit center components
would not likely be completed until August 2014 and the hotel would not likely be
completed until July 2015 as was estimated by DIA leadership at that time. However,
the transit center components were completed in January 2014 and most recently,
the hotel component and plaza were projected to be completed in August 2015.
Material changes to the size and scope of the hotel are not anticipated. The hotel is
expected to be financially self-sustaining when it opens.6
Hotel and Transit Center Project Funding Sources
HTC is being funded through the issuance of general aviation revenue bonds (GARBs),
which are commonly issued for airport infrastructure projects. GARBs can be backed
by various types of revenue, such as airline rates and charges, parking revenues,
terminal concessionaire revenues or other lease revenues, and, in some cases, grant
revenues. According to a DIA finance official, HTC bonds will not have any specific
source of revenue, which means that revenue to back the GARBs can come from
different sources, including non-HTC revenues. Although DIA already holds a
significant amount of bond-related debt, DIA leadership anticipates that when HTC is
complete, the hotel will provide an important new revenue stream generated by
room reservations, conferences, and retail space. In 2012 and 2013, DIA sold nearly
$1.6 billion in bonds to help fund $1.4 billion of DIAs six-year capital improvement plan,
which includes HTC.
Chronology of Hotel and Transit Center Governance andManagement
DIA has changed the HTC program management structure numerous times. Such
changes include those related to architectural services and design, contracted
project management roles and responsibilities, and internal DIA leadership and
oversight practices.
Parsons Transportation Group (Parsons) was selected by DIA in 2009 to act as the
program manager for HTC.7As the program manager, Parsons was granted complete
4State of DIA 2014, Going from Great to Greater, April 29, 2014,http://business.flydenver.com/info/news/index.asp
5Substantially completeis the specific contractual term used in the IGA. Substantially complete does not indicate the
project is entirely complete, but that the space can be utilized by RTD. Achieving substantial completion by January 1, 2014,
will allow RTD to begin installing elements of the PTC that need to be in place prior to commuter service beginning in
December 2014.6Market demand analysis performed for DIA by PKF Consulting, October 12, 2011,
http://business.flydenver.com/stats/financials/documents/hotelreport2012.pdf.
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P a g e 4City and County of Denver
oversight of the project including planning management, project management,
design management, design services, and construction management. Parsons was
also responsible for hiring and overseeing subcontractors used in the conception,
design, and construction phases. Under its contract with DIA, Parsons had a fiduciary
responsibility to deliver an effective project design and to oversee the design process
to ensure that it was efficient and that costs were managed appropriately. DIAPlanning & Development was directly responsible for hiring and overseeing the Kiewit
prime contract for enabling construction excavation. As shown in Figure 1, DIA
retained executive oversight for strategy development and control over Parsons.
Additionally, the original lead architectural design for HTC was the product of
renowned Spanish architect Santiago Calatrava.
Figure 1: Hotel and Transit Center Project Management Structure, April 2010
Source:Graphic developed by the Auditors Office based on source information from the HTCProgram Managers.
In November 2010, DIA increased its oversight of HTC by placing a Director of Program
Oversight and Integration, who works for DIA, in the HTC management structure.
Following, in April 2011, the South Terminal Expansion Partnership (STEP), which
included Hunt Construction Group and Saunders Construction, Inc., was selected as
the prime contractor for the construction of the Public Transit Center portion of the
HTC project. The resulting organizational structure is reflected in Figure 2.
7When Parsons was selected in 2009, the HTC project was referred to as the South Terminal Redevelopment Program or
STRP.
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Figure 2: Hotel and Transit Center Project Management Structure, November 2010
April 2011
Source:Graphic developed by the Auditors Office based on source information from the HTC
Program Managers.
In the fall of 2011, a fundamental change occurred to the organizational structure
shown in Figure 3. In August the lead manager from Parsons left the project and in
September Santiago Calatravas firm withdrew from the project, citing irreconcilable
differences with DIA leadership regarding funding and schedule. According to two
individuals with access to internal DIA discussions for which documentary records were
not available, Parsons had been spending money on HTC at a rate that was
unsustainable. Parsons contract with DIA called for it to receive a maximum of $160
million, including monies paid for all Parsons subcont ractors. In September 2011,Parsons had already spent $50 million, including money paid to its subcontractors.
Approximately $13 million of that $50 million had been paid to Calatrava. Multiple
interviews suggested that Parsons HTC burn rateor the rate at which it spent
moneywas faster than was appropriate for the project, prompting Parsons
management to remove several staff members from the DIA project.
These departures created an environment in which DIA officials decided to re-
evaluate the effectiveness of the projects organizational structure. In collaboration
with the City Engineer and a third-party consultant, DIA conducted an internal
assessment and identified changes to be made. First, DIA leadership decided to
further increase its direct oversight of HTC by removing Parsons from its role as project
manager, replacing them with a new program manager who is a City employee that
reports to the DIA Chief Executive Officer. Parsons was retained to help provide staff
resources and technical expertise, as shown in Figure 3. In addition, an executive
committee within the City was developed to provide a broader range of experience
to and oversight of the project.
In November 2011, officials from DIA and the City Attorneys Office announced a final
agreement with Calatrava, which allowed the City to use a significant portion of the
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P a g e 6City and County of Denver
Calatrava concept going forward. In exchange for the use of the concept, the City
agreed not to use some Calatrava signature elementslittle touches that made the
concept uniquely a Calatrava design. In addition, the City agreed to pay Calatravas
firm approximately $850,000, including previously submitted invoices and a $250,000
licensing-related payment. Gensler, the architectural firm that formerly served as the
public transit center architect reporting to Parsons, was given the role of overall designcoordinator, overseeing all aspects of the projects design process and directly
reporting to DIA leadership.
As we described in our 2012 audit of the project, this model had two distinct
advantages.8First, by no longer contracting out for the project management role, DIA
leadership had the opportunity to save money. Parsons remained on the project, but
because they would no longer be responsible for procuring or overseeing
subcontractors, its contract was amended to reflect these changes, and the originally
contracted amount of $160 million was reduced to $100 million.9 Second, DIA
leadership could enhance program reporting. According to the HTC Program
Manager, one of his first goals at the time was to improve program reporting,
including developing a report that is easy to understand, and to meet more regularly
with City Council to provide updates on HTC progress.
Following this re-structuring, in March 2012, City Council approved a contract that
merged M. A. Mortenson Co., which was building the hotel, and STEP (Hunt and
Saunders), which was working on the transit center, into a single unit, collectively
referred to as MHS (Mortenson, Hunt, and Saunders). The resulting integrated tri-
venture is serving as the Construction Manager/General Contractor (CM/GC) for the
hotel and public transit center.10 The contract covers construction of the hotel; the
public transit center that includes the RTD transit station and platform, conference
center, security screening area, baggage-handling tunnels, and concourse train
extension; and the interface with the terminal.11According to HTC Program Managers,Mortenson and Hunt and Saunders were merged into the MHS tri-venture to ensure
that HTC does not deviate from its original cost estimate and timeline.
8The Department of Aviations South Terminal Redevelopment Program Performance Audit, City and County of Denver
Auditors Office, January 2012,www.denvergov.org/auditor/DenverAuditor/AuditServices/AuditReports.9Parsons scope of services includes broad program management support services for the planning, design and construction
support of the project. This may include services for which support is requested such as program control services, contracts
management services, and construction support.10
SeeAppendix A for more information on different types of contract delivery methods for airport projects, including
Construction Manager/General Contractor.11
Ann Schrader, 3 DIA redevelopment contracts merged into 1, Denver Post, March 7, 2012, accessed September 22,
2014,http://www.denverpost.com/ci_20123511/3-dia-redevelopment-contracts-merged-into-1.
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Figure 3: Hotel and Transit Center Project Management Structure, November 2011
March 2012
Source:Graphic developed by the Auditors Office based on source information from the HTC
Program Managers.
Note:While Parsons supports the HTC Program Managers as part of the Project Management
Team in project management responsibilities, it is contractually equivalent to the other prime
contractors.
Since the implementation of these changes, management of HTC has changed
further. As shown in Figure 4, DIAs internal project management role has grown fromone to three program managers, including a Deputy Program Manager of
Administrative Oversight and a Deputy Program Manager of Technical Oversight. The
Deputy Program Manager of Administrative Oversight oversees Parsons and Kiewit
while the Deputy Program Manager of Technical Oversight is responsible for issues
pertaining to MHS and Gensler. These three individuals are collectively referred to as
HTC Program Managers throughout the report.
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Figure 4: Hotel and Transit Center Project Management Structure, as of September
2014
Source: Graphic developed by the Auditors Office based on source information from HTC
Program Managers.
Note: The individual who currently serves as Deputy Program Manager of Administrative
Oversight was formerly titled Director of Program Oversight and Integration. The Director of
Program Oversight and Integration is shown in Figures 2 and 3.
In addition to changes in project management, there have been several changes toDIA senior leadership over the lifespan of the project. Most recently, for example, the
Chief Financial Officer, who had worked at DIA in executive-level roles for more than
six years, announced his resignation and left the airport on September 12, 2014.
However, according to a DIA executive, the leadership team has some oversight of
HTC but very little control over it. Specifically, the day-to-day operations and
decisions, including HTC budget decisions, are made by the HTC Program Managers.
The HTC Program Managers are DIA employees who have been tasked with
managing the project. The Project Management Team includes the HTC Program
Managers and various Parsons personnel.
Change Management ControlsIn response to the HTC project budget increasing from $500 million to $544 million, in
2013 DIA leadership implemented various controls over change management,
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including creating a change management committee and developing a change
management process.12
Development of a Change Management Committee In March 2013, DIA leadership
updated City Council on the HTC project, which included an explanation of reasons
the project budget increased by $44 million and that a Change Management
Committee (CMC) was being developed.13 The CMC is charged with overseeing all
significant change orders, including those that will affect the projects scope,
schedule, and contingency. The former DIA CFO indicated that it would be important
not to exceed the increased project budget of $544 million, and that the CMC was a
vital tool for success in that regard. In addition, the CMC was created to promote
oversight, understanding, and transparency of the Citys change management
process. Table 1 lists the composition of the CMC members, who are independent of
the Project Management Team (PMT).
Table 1.Change Management Committee Members
Members
DIA CFO, Chair
DIA Chief of Staff
DIA ContractorParsons Brinkerhoff
Department of Finance Debt Administrator
Department of Public Works Chief Operating Officer
Department of Finance Consultant
Source: March 27, 2013, Denver City Council, Business, Workforce and
Sustainability Committee meeting PowerPoint developed by DIA.
Note:DIAs CFO resigned effective September 12, 2014. Until a replacement CFO is hired, theCFOs duties are being reassigned to DIAs current Director of Financial Planning and Analysis
and Director of Business Management Services. The HTC Program Manager stated on
September 16, 2014, that the interim plan is to have both Directors sit on the Change
Management Committee and that a determination would be made at a later date who would
chair the committee.
Consultant Hired to Assist with Developing a Change Management Process DIA
leadership further discussed with City Council in March 2013 hiring an outside
consultant to assist with developing the CMC and a change management review
process. In May 2013, the City executive administration entered into a consulting
contract with i3 Integration LLC (i3) for $450,000 to provide program financial
assurance consulting services for HTC and related infrastructure and capital projects.
New Change Management Process Implemented The i3 consultant helped design a
change management process to assist HTC Program Managers with containing costs
12Change management is a process implemented to effectively manage and control changes to a contract that can
ultimately increase a projects costs.13
The update occurred during the March 27, 2013, meeting of the Business, Workforce and Sustainability Committee of the
Denver City Council. The project update was delivered by DIAs Chief Executive Officer, former Chief Financial Officer (CFO),
and HTC Program Manager.
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and keeping within the project budget. The new HTC change management process
starts when a proposed change order (PCO) is submitted by a contractor through
DIAs electronic record-keeping system, whether it is a City-initiated change or
contractor-initiated change. The PCO is evaluated by the PMT for merit and funding,
including reviewing cost and price elements, technical elements, contract scope and
performance requirements, and budget and schedule impact. The PMT engages infact-finding, such as questioning cost elements, obtaining actual documentation to
substantiate pricing, and obtaining bids from subcontractors. During this fact-finding
process, the PCO is negotiated with the contractor. Once negotiations cease, the
PCO may be resubmitted by the contractor, if necessary. The signed PCO is then
routed through DIA for approval and the contractor begins the work. The PCO is then
presented to the CMC, which meets on a monthly basis, for final approval resulting in
an official change order issued through DIAs electronic record-keeping system.14
The i3 consultant works with the PMT and project contractors to identify and assess
proposed change orders and other potential risks and their financial impact. The i3
consultant compiles these observations monthly for presentation by himself and the
HTC Program Manager to the CMC. The monthly CMC meetings began in August 2013
and include three main agenda items:
An overview of the prior months meeting, which is presented by the i3
consultant
A project status update, including schedule and percent complete, which is
presented by the HTC Program Manager
Any MHS contract changes to be approved by the CMC, which are
presented by the i3 consultant and the HTC Program Manager
As of July 2014, the CMC had approved MHS contract changes totaling $4.1 million, of
which $1.4 million was hotel related, $2.6 million was public transit center related, and
$114,000 was RTD related. All of the approved changes were within the existing
owners contingency; therefore, the contract Guaranteed Maximum Price (GMP) of
$365 million has not yet been exceeded.15The majority of the changes were due to
design evolution (44 percent), regulatory issues (15 percent), design errors and
omissions (14 percent), and owner-requested items (10 percent).
In addition, the i3 consultant projects the magnitude of the potential increases in the
MHS and Kiewit contracts, which include work to be performed on the hotel, public
transit center, other related capital improvement projects, and the RTD projects. The
potential increases are determined by identifying and estimating four types of
changes and risks related to the project as follows:
1. Change orders that have already been approved
14SeeAppendix B for a detailed flowchart of the change management process.
15A contingency is an amount included in a projects budget to address risks within the projects scope such as unknown
conditions, design growth or changes, and pricing errors or escalation. The contingency fund balance should be reviewed
along with project risks continuously throughout the project. KPMG Global Energy Institute, KPMG Major Projects Advisory
Leadership Series: Budgeting, Estimating, and Contingency Management for Construction Projects, 2012. The owners
contingency can fluctuate throughout the project as savings are realized in other aspects of the project.
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2. Potential change orders the contractor has identified and presented to the
PMT and that are being reviewed and negotiated
3. Potential change orders identified by the contractor that have not yet been
presented to the PMT for review and negotiation
4. Issues independently identified by the PMT and i3 consultant
These four categories of changes and risks are combined together to determine the
total potential changes to the contract amounts.
Further, the i3 consultant projects the magnitude of the potential contractors
increases by scope element budget, including the HTC project, other related capital
improvement projects, and RTD projects.
DIA HTC Construction Records Retention and PaymentManagement Systems
DIA utilizes two systems to manage the records and payments for the HTC project.
Aconex Aconex is a cloud-based construction project management
software system that can be utilized by many users, from project managers to
subcontractors, throughout the duration of a project. When documents are
properly coded into the system, they can then be retrieved with relative ease.
This allows a multitude of documents to be retrieved and sorted, then sent to a
desired user. There are over 300,000 unique HTC documents in Aconex and
more than 3,000 program users over the life of the project.
TexturaTextura is another web-based system that was implemented by DIA in
2013 to manage invoices and payments for construction contracts. The system
provides standardization to the construction payment process and enhances
the visibility of a project for all participants. With regard to the HTC project,
Textura is currently being used to manage invoices and payments related to
the MHS contract.
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SCOPE
The audit assessed the efficiency and effectiveness of the governance of the Denver
International Airport (DIA) Hotel and Transit Center (HTC) project, which included an
evaluation of the budget, Capital Improvement Plans (CIPs) and maintenance plans.We attempted to determine whether costs charged to HTC were in accordance with
the terms and conditions of applicable contracts, and to ensure labor and materials
are properly billed and received.
OBJECTIVE
The objective of the audit was to determine whether DIA has an adequate project
management structure in place to:
Identify and mitigate the risks associated with additional budget increases
Ensure that costs related to HTC are properly accounted for
Ensure that DIA is strategically prepared for future capital planning and
maintenance of the entire airport
METHODOLOGY
We utilized several methodologies to achieve the audit objective. These evidencegathering techniques included, but were not limited to:
Reviewing all applicable City rules and regulations and DIA policies and
procedures
Reviewing DIA bond documents
Interviewing DIA leadership and personnel
Interviewing DIA HTC Project Management personnel
Reviewing DIA Capital Improvement Plans
Reviewing DIA budget documents and financial reports
Reviewing relevant internal and external audits
Evaluating the invoice review and payment process
Interviewing former DIA employees with knowledge about CIPs and HTC
Reviewing Federal Aviation Administration annual reports
Reviewing HTC monthly reports and dashboards
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The Auditors Office contracted with a third-party construction auditing firm, R. L.
Townsend & Associates, Inc., to perform a detailed analysis of various contracts
and associated subcontracts, invoices, and change orders. Additionally, the
Auditors Office Construction Monitor was tasked with reviewing contracts,
invoices, and change orders.
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FINDING
DIA Leadership Has Taken Action to Improve Project Managementof the Hotel and Transit Center but These Efforts Have Not BeenFully Effective in Mitigating Risks
Denver International Airport (DIA) is undergoing significant changes to improve
services at DIA and to create convenient intermodal transportation options. The Hotel
and Transit Center (HTC) project consists of three primary elements: a public transit
center, which will serve trains connecting DIA to downtown Denver; an on-site hotel
and conference center; and an open-air plaza connecting the transit center and
hotel to the existing Jeppesen Terminal. Our audit of the project assessed the HTC
project management structure, specifically with regard to the budget and future
capital planning and maintenance. We found that, despite changes made to the
governance and management of the project, the HTC budget has continued to rise,and we cannot provide assurance that the budget will not exceed current
projections.
Since its inception, the projected cost to complete HTC has changed. In 2011, HTCs
original budget was set at $500 million but was increased in 2013 to $544 million. HTC
project management has stated that the budget may increase between 5 and 10
percent, which would bring the cost of the project up to as much as $599 million.
Although DIA leadership and HTC project management instituted a change
management process to manage and control project changes that could further
increase costs, we found that the process is not sufficient to keep costs from rising. We
determined that budget increases may have been the result of the HTC project not
having an independent construction consultant on staff from the beginning of the
project as well as costly contract terms that were negotiated to incentivize on-time
completion of the project.
We sought to determine whether the $599 million projected maximum budget for HTC
was accurate. However, we could not verify this estimate due to lack of
documentation. Further, we found the HTC invoice review process to be insufficient to
assess whether all project costs have been reasonable and in compliance with
contract terms. In addition to the HTC-specific budget, we determined that additional
costs will add $130 million to the overall cost of the redevelopment program.
Specifically, this includes $75 million for other related capital projects, $53 million for
transportation-related infrastructure, and an additional $2 million that have not beencaptured by any established budget. We did find, however, that the $75 million in
other related capital projects need to be completed, regardless of HTC.
In assessing DIAs capital investments and maintenance plans, which are necessary to
rehabilitate, upgrade, and maintain DIAs existing aging infrastructure, we found that
DIA leaderships focus on HTC may have reduced focus on the funding of non-HTC-
related projects and maintenance of the existing facility. Although capital investments
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in the airfield have increased in recent years, budget reductions made to specific
projects from 2012 to 2013 raise some concerns. Further, capital investments in the
terminal complex have decreased, and DIA does not have operations maintenance
plans in place, despite the fact that DIA is an aging facility. DIA will have a difficult
time managing the HTC facility in the absence of well-structured maintenance plans
for the current facility.
HTCs Budget Has Increased, and Will Increase Again
Since its inception, the projected cost to complete HTC has changed. Originally
conceived as a two-phase $900 million project, in 2011 HTCs original budget was set
at $500 million with on ly one phase funded. In 2013, HTCs budget was revised to $544
million. It is currently projected that it will cost DIA as much as $599 million to
complete.16The key reasons why costs have increased, in addition to the increase in
cost of labor and materials, is the fact that effective project management controls,
including a change management process and the use of an independent
construction consultant, were not implemented at the initiation of the project. Further,
favorable terms were provided to contractors to complete the project on time.
HTCs Budget Increased from $500 Million to $544 Million
In July 2010, DIA leadership envisioned HTC to be a two-phase project estimated to
cost $900 million. Phase I was to include the construction of a hotel, terminal plaza,
and transit center, as well as a signature bridge to carry the new commuter train into
the terminal. Phase II was to include the construction of a parking structure and
renovation of the Jeppesen Terminal Great Hall.17
To ensure the financial feasibility of HTC, and to chart a path forward for the airport, in
late 2010 and early 2011, an analysis of airport finances was conducted to develop a
ten-year strategic plan. Based on the analysis and the adopted strategic plan, DIA
leadership reduced the size and scope of the HTC project, eliminating Phase II and
the signature bridge that was to be included in Phase I. DIA leadership at this time also
established a $500 million budget for HTC and identified other capital projects that
would be included within the scope of the project. The key components of HTC were
not fully designed at this time, thus an accurate price estimate was not available.
The other capital projects, commonly referred to as other related projects, were
included in the scope of HTC for two primary reasons: one, DIA leadership expected
them to be completed by HTC contractors because it was more cost-effective for DIA
to pursue such projects at the same time as the primary HTC projects, and two, these
projects were needed due to the natural growth of DIA operations, the HTC-relatedgrowth of DIA operations, and the general aging of infrastructure. These projects
include the expansion of the airport baggage system, expansion of the airport
automated guided train system, realignment of certain existing on-airport roadways,
16Business Workforce and Sustainability Committee Meeting, May 14, 2014. City and County of Denver SIRE Public Access
System, accessed on September 19, 2014. www.denvergov.org/sirepub/mtgviewr.aspx?meetid=1952&doctype=MINUTES.17
Denver International Airport Unveils Conceptual Design of the South Terminal Redevelopment Program. Denver
International Airport, accessed on September 19, 2014.http://business.flydenver.com/pr/DIAPR_1007290.pdf.
http://business.flydenver.com/pr/DIAPR_1007290.pdfhttp://business.flydenver.com/pr/DIAPR_1007290.pdfhttp://business.flydenver.com/pr/DIAPR_1007290.pdfhttp://business.flydenver.com/pr/DIAPR_1007290.pdf -
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and relocation of certain utilities. Table 2 provides a history of the projects budget
and projected cost to complete by year.
Table 2.History of HTC Project Budget
YearHTC Budget(in millions)
Other RelatedProjects Budget
(in millions)Total Budget(in millions)
Projected Cost AtCompletion(in millions)
2010 N/A N/A N/A $900
2011 $500 N/A $500 $500
2012 $500 $75 $575 $600
2013 $544 $128 $672 $672
2014 $544 $128 $672 $737
Source:Developed by the Auditors Office based on source information from the HTC Project
Management Team. Projected costs at completion are higher because the budget has not yet
been adjusted.
In January 2012, our office released an audit of HTC, which found that the projects
components were not forecasted to be completed on-time or on-budget.
Specifically, based on projections developed in late 2011 by Parsons, the then project
manager, the project was estimated to be completed six to eight months behind
schedule and approximately $9 million over budget.18
In October 2012, DIA issued $870 million in bonds, the proceeds from which were to be
used in part to finance the cost of HTC.19 In the 2012 Official Bond Statement, DIA
leadership noted that such factors as labor and materials may cause the actual cost
of completing the project to exceed the established budget of $500 million. DIA
leadership also communicated to City Council in October 2012 that the project was
currently estimated to be completed 5 percent over budget. 20Additionally, in 2012,
DIA leadership again redefined the scope of HTC. While the project still included the
key elements of the hotel, public plaza, and transit center, the other related projects
that had been included in the scope in 2011 were removed from the scope and
classified as their own separate project. A budget of $75 million was set for these
projects, which were to still to be completed by HTC contractors. HTC Program
Managers explained that Parsons should not have included these projects in the
original budget. However, DIA leadership did not question Parsons inclusion of these
projects until budget duress occurred. Therefore, HTC Program Managers set a
separate budget for these other capital projects to stay within the $500 million budget
that was set for HTC.
18The Department of Aviations South Terminal Redevelopment Program Performance Audit, City and County of Denver
Auditors Office, January 2012,www.denvergov.org/auditor/DenverAuditor/AuditServices/AuditReports.19
Revenue Bond Series 2012 A-C. Denver International Airport, accessed on September 19, 2014.
http://business.flydenver.com/stats/financials/reports/2012_seriesA-B-C.pdf.20
Business Workforce and Sustainability Committee Meeting, October 31, 2012. City and County of Denver SIRE Public
Access System, accessed on September 19, 2014,
www.denvergov.org/sirepub/mtgviewer.aspx?meetid=1274&doctype=MINUTES.
http://www.denvergov.org/auditor/DenverAuditor/AuditServices/AuditReportshttp://www.denvergov.org/auditor/DenverAuditor/AuditServices/AuditReportshttp://www.denvergov.org/auditor/DenverAuditor/AuditServices/AuditReportshttp://business.flydenver.com/stats/financials/reports/2012_seriesA-B-C.pdfhttp://business.flydenver.com/stats/financials/reports/2012_seriesA-B-C.pdfhttp://www.denvergov.org/sirepub/mtgviewer.aspx?meetid=1274&doctype=MINUTEShttp://www.denvergov.org/sirepub/mtgviewer.aspx?meetid=1274&doctype=MINUTEShttp://www.denvergov.org/sirepub/mtgviewer.aspx?meetid=1274&doctype=MINUTEShttp://business.flydenver.com/stats/financials/reports/2012_seriesA-B-C.pdfhttp://www.denvergov.org/auditor/DenverAuditor/AuditServices/AuditReports -
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In the 2012 Official Bond Statement, DIA leadership communicated to investors that
they budgeted $180 million to complete the hotel, another $320 million to complete
all other aspects of HTC, including the plaza and transit center, and $75 million to
complete other related capital projects. These budget elements are presented in
Table 3.
Table 3. October 2012 Budget for HTC and Other Related Projects
Scope ElementBudget
(in millions)
Hotel $180
Non-Hotel $320
HTC Project Total $500
Other Capital Projects $75
HTC and Other RelatedProjects Total
$575
Source:2012 Official Bond Statement.
In July 2013, DIA issued $726 million in bonds, the proceeds from which again were to
be used in part to finance the cost of HTC. 21 DIA leadership had also recently
increased HTCs budget from $500 million to $544 million, representing a 9-percent
increase in the budget. One reason DIA leadership increased the budget by $44
million was because the designs of key components of the project were finally
completed. This enabled HTC Program Managers to obtain a more accurate estimate
of what the final cost of the project would be. No changes to the project scope were
made at this time. However, the scope of the other related projects did change to
include the costs related to two RTD projects. With the addition of these two projects,
DIA leadership increased the budget for other related projects from $75 million to $128
million. Table 4 provides a breakdown of the budget by project.
Table 4.July 2013 Budget for HTC and Other Related Projects
Scope ElementBudget
(in millions)
Hotel $177
Public Transit Center $298
Enabling $63
Owners Costs $6
HTC Project Total $544
Other Capital Projects $75RTD Costs $53
HTC and Other Related Projects Total $672
Source: HTC Project Management Teams July 2013 Monthly
Dashboard.
21Revenue Bonds Series 2013 A-B. Denver International Airport, accessed on September 19, 2014.
http://business.flydenver.com/stats/financials/reports/bonds_2013A-B.pdf.
http://business.flydenver.com/stats/financials/reports/bonds_2013A-B.pdfhttp://business.flydenver.com/stats/financials/reports/bonds_2013A-B.pdfhttp://business.flydenver.com/stats/financials/reports/bonds_2013A-B.pdf -
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Since the inception of HTC, DIA leadership and HTC Program Managers have
communicated changes to the scope and budget of the project to City Council,
stakeholders, and the public through regular presentations and bond offering official
statements. City Council members did not voice any concerns or ask any questions
about the budget overruns. The changes to the project have also been
communicated by the Denver Auditors Office. As noted in our January 2012 audit ofHTC, we found that the project was likely to exceed the $500 million budget set in
2011.22
Regular communication by DIA leadership and HTC Program Managers with City
Council and key stakeholders, including airline partners, about the changes to the
scope and budget of HTC is a best practice. According to the Project Management
Institute, regular communication with stakeholders is a key process to keep
stakeholders engaged and project teams motivated, which help ensure that projects
are delivered on-time and within budget.23
Potential Issues May Cause the Project to Exceed its $544 Million Budget
and May Eventually Cost As Much As $599 Million or More
According to the HTC Program Manager and a consultant for the City, i3 Integration
LLC (i3), it is definite that the HTC project will exceed the current $544 million budget,
but unlikely to increase more than 10 percent. As such, the project is now estimated to
cost between $571 and $599 million. DIA will need to rely on cash on hand or
additional bond issuances to cover the costs of the overruns. Significant capital
improvement cost overruns leading to increased debt or spending cash on hand can
negatively affect DIAs bond ratings.24General reasons provided by the consultant for
the projected increase include an accelerated schedule to accommodate RTD, rising
labor and materials costs, and unanticipated existing conditions, such as the 2013
flood. However, while we believe that these reasons have validity, we also determinedthat the newly implemented change management process is not sufficient, the
project lacked an independent construction consultant from the beginning, and
generous contract terms have been negotiated for on-time completion. These
combined factors either contribute to or fail to mitigate risks related to rising project
costs.
Change Management Process Is Not Sufficient to Keep Costs from Rising
In response to the 2013 increase in the HTC project budget from $500 million to $544
million, a Change Management Committee (CMC) and change management
review process were developed to manage and control project changes that could
further increase costs. As stated in the Introduction and Background section of thisreport, the City hired i3 to assist the CMC and PMT with establishing the change
management review process. Members of i3 work with the PMT and contractors to
22See The Department of Aviations South Terminal Redevelopment Programatthe Denver Auditor's website.
23Communication: The Message Is Clear. Project Management Institute, accessed on September 19, 2014.
www.pmi.org/~/media/PDF/Knowledge%20Center/Communications_whitepaper_v2.ashx.24
Fitch Affirms Denver, COs Sr. Airport Revs at A+; Subs at A; Outlook Stable, September 26, 2014,
http://finance.yahoo.com/news/fitch-affirms-denver-cos-sr-194600862.html.
http://www.denvergov.org/auditor/DenverAuditor/tabid/442986/Default.aspxhttp://www.denvergov.org/auditor/DenverAuditor/tabid/442986/Default.aspxhttp://www.denvergov.org/auditor/DenverAuditor/tabid/442986/Default.aspxhttp://www.pmi.org/~/media/PDF/Knowledge%20Center/Communications_whitepaper_v2.ashxhttp://www.pmi.org/~/media/PDF/Knowledge%20Center/Communications_whitepaper_v2.ashxhttp://finance.yahoo.com/news/fitch-affirms-denver-cos-sr-194600862.htmlhttp://finance.yahoo.com/news/fitch-affirms-denver-cos-sr-194600862.htmlhttp://finance.yahoo.com/news/fitch-affirms-denver-cos-sr-194600862.htmlhttp://www.pmi.org/~/media/PDF/Knowledge%20Center/Communications_whitepaper_v2.ashxhttp://www.denvergov.org/auditor/DenverAuditor/tabid/442986/Default.aspx -
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identify and analyze potential risks and their financial impact to the project, and
determine strategies to mitigate or minimize the risks. The PMT has weekly contractor
meetings to discuss potential changes and risks associated with the project. The
outcome of the PMT and contractor meetings, any relevant supporting documents,
and risks identified by the PMT, exclusive of contractors, are reported to i3, which then
uses the observations to assess remaining work and risks. The assessment is presentedin various forms, including monthly reports by contract and scope element as well as a
monthly presentation to the CMC. These status updates promote oversight,
understanding, and transparency within the City.
In addition, the CMC was developed to oversee all significant change orders, an
important tool for ensuring that the total HTC project cost remains within the $544
million budget.25 However, members review and approve only significant changes
proposed by MHS; other contractors proposed changes are not afforded this same
scrutiny. According to the i3 consultant, the change order review process was
implemented in this limited capacity because the MHS contract was in its infancy at
the time the CMC was developed, whereas the other contracts were further along. A
management decision was made at that time to focus the CMCs resources on the
contract deemed the highest riskthe MHS contract.
In addition to reviewing only significant change orders, a proposed change order
(PCO) is sometimes submitted to the CMC for final approval after a change directive
has already been issued by the PMT to the contractor to proceed with the changes
immediately (see Appendix B for an
overview of the process). An example of
this is when scope modifications are
necessary to work imminently being
performed. For instance, between
January 2014 and April 2014, threechange directives were issued to MHS
related to work being performed at that
time. However, these changes, totaling
approximately $680,000, were not
brought before the CMC until May 28,
2014. According to HTC Program
Managers, the change management review process was implemented in this way to
facilitate the timeliness of the project, as the CMC only meets on a monthly basis. The
CMC is a major control designed to help ensure that the project remains within the
$544 million budget but it is less effective as work on the changes may already have
begun or been completed before the CMC has the opportunity to review andapprove the proposed change. Accordingly, the CMC should develop a process by
which change orders can be approved timely to ensure that all significant
contractors changes are approved by the CMC prior to work commencing.
25Significant change orders are defined by the PMT and the i3 consultant. For example, all MHS proposed change orders of
$50,000 or more.
The CMC is a major control
designed to help ensure the
project remains within the $544
million budget but it is less
effective as work on the changes
may already have begun or been
completed.
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P a g e 20City and County of Denver
In pursuing a successful construction project, DIA leadership assumes the initial
responsibility for assembling a team of firms or individuals that can work together to
meet the needs of the project. Generally speaking, the earlier in the process the team
is created, the greater the benefit received.26For future airport construction projects,
DIA executive leadership should establish a management structure that includes
change management early in the process in order to meet DIAs needs and providethe greatest opportunity for budgetary success.
The HTC Project Did Not Have an Independent Construction Consultant During Initial
Contract Development
During the initial phase of the project, DIA did not retain an independent construction
consultant to assist in developing the contract terms. When conducting large
construction projects such as HTC, it is a sound practice to retain an independent
construction audit consultant to provide guidance on effective construction cost
control.27DIA leadership does not have this type of consultant for the HTC project and,
therefore, there was no one acting in this capacity to provide advice during the initial
phase of the project when contract terms were developed and negotiated.Construction audit consultants review the construction activities of an organization for
efficiencies and can assist in avoiding excessive charges and recovering costs. Their
work can include providing pre-contract advisory services, on-going project cost
control and related construction cost verification services, and comprehensive
construction contract close-out cost control reviews.
Even if a project is on budget and on schedule or completed under budget, that
does not necessarily mean that all costs were appropriate; a construction audit
consultant can provide some assurance in this area. In the construction industry, it is a
good business practice to have a construction audit consultant involved throughout
the projects life cycle when the project contains the following risks:
Is large in size
Classifies as high profile or high risk
Is being completed on a fast-track schedule
Includes complex contract terms and types of contracts
With large construction projects being as costly as they are, it is imperative to have
sound processes and procedures in place as well as sufficient independence in the
project management function to prevent loss of funds, fraud, and negative impact to
operations. Cost avoidance when an independent construction audit consultant is
retained for a project can be up to 5 percent of total project cost.Contracts for the HTC project and related invoices and change orders were reviewed
by the Auditors Offices independent construction auditing consultant and
construction monitor for compliance and reasonableness. The analysis found that the
26CM/GC Guidelines for Public Owners, Associated General Contractors of and National Association of State Facilities
Administrators, second edition, 2007.27
We consulted with an independent construction audit consultant and the Construction Monitor from the Auditors Office
about this practice.
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MHS contract is a CM/GC construction contract agreement, which allows a
retroactive review of costs to ensure pricing accuracy.28If inaccuracies are identified,
DIA can recoup costs. Therefore, the DIA Chief Executive Officer should make specific
plans to engage a qualified resource to conduct a construction close-out review of
the project records maintained by the City, MHS, and as necessary any applicable
subcontractors, to assist DIA leadership in the determination that there have been nomaterial third-party overbillings to the airport. Additionally the DIA Chief Executive
Officer should ensure that the recommended construction close-out review begin no
later than three months before substantial completion of the project and continue
until the final change order and invoice is submitted by MHS.
Contract Terms Were Negotiated To Incent On-Time Completion at a Premium
When the MHS tri-venture contract was amended in March 2013, the contract terms
were negotiated to incent on-time completion of the project. The contract included
several elements that incentivized on-time completion: a generous CM/GC fee, a
high labor rate, and the establishment of base contract amounts for certain
subcontractors through change orders rather than a request for bid. We found thatthese terms are favorable to the contractor and may have been less favorable to DIA
with regard to overall cost.
CM/GC Fee Percentage and Labor Rate The MHS contract includes a
CM/GC fee, which will be paid to MHS as a percentage of the total project
cost or Cost of Work. This fee, representing MHSs profit, was established at 4.25
percent, which is regarded as being at the high end of what is typical in a
large capital project. The HTC Program Manager indicates that CM/GC fees
typically range from 2 percent to 5.25 percent.
The analysis performed by our independent
construction auditing consultant alsoidentified concerns related to billable costs
for MHS labor and the impact that has on
the profit paid to MHS. In the MHS contract,
DIA agreed to a supervisory labor rate of
140 percent for both preconstruction and
construction activities. Typically the labor
rate is lowered when moving from the
preconstruction phase into the construction
phase, since the owner is able to provide
field office space and equipment for the contractor. However, in the MHS
agreement, the rate remained the same for both phases. When calculatingthe labor rate, the hourly wage of an MHS contractor is multiplied by the labor
rate to derive the amount HTC will be billed. Currently, the total estimated
charges by MHS for both preconstruction-phase and construction-phase labor
could total approximately $26 million.
28CM/GC projects are characterized by a contract between an owner and a CM who will be at risk for the final cost and time
of construction. SeeAppendix A for additional details.
Contract terms were
negotiated favorably for
the tri-venture to
incentivize on-time
project completion, at a
cost to the HTC budget.
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leadership and personnel in reviewing and negotiating contract terms on any future
unique and large scale construction projects to ensure that DIA and the City obtain
fair or favorable contract terms.
DIA Lacks a Sufficient Control Environment To Forecast and Assure
Project Costs Will Not Exceed Established BudgetsAuditors could not conclude whether the potential cost to complete HTC will or will
not exceed the estimated maximum of 10 percent noted by HTC Program Managers
or whether any additional costs are reasonable. This was due to inefficiencies found in
the projects control environment, including document retention, invoice review, and
project reporting. With limited controls, we question the quality of due diligence DIA
can provide in attempting to project future costs with reasonable assurance. We also
determined that other related project elements, including capital projects and RTD
infrastructure, are adding to the total cost to complete the redevelopment program.
Auditors Could Not Verify that HTC Will Not Exceed $599 Million
The audit team sought to determine whether the $599 million projected maximum
budget for HTC was accurate. However, we could not verify this estimate due to lack
of documentation, both based on i3 reporting and HTC document retention
practices. In addition, the HTC invoice review process could be further improved to
mitigate rising costs.
The PMT and i3 Final Project Cost Estimates Lack Full Supporting Documentation
Due to a lack of documentation supporting the PMT and i3 consultants projected
maximum project cost of $599 million, auditors were unable to conclude whether the
potential HTC budget increase of 10 percent is accurate, and we cannot provide
assurance that the budget will not increase more than that amount. To try andvalidate the potential HTC budget increase of up to $599 million, auditors tested
multiple project changes and risks identified in the i3 consultants May 2014 monthly
reports by contract.29During this test, auditors determined that limited documentation
is available to support many of the potential changes and risks identified in the
reports. For example, the PMT and i3 consultant did not have documentation for the
potential changes and their estimated amounts identified by the contractors that
have not yet been presented to the PMT for review and negotiation. In addition, there
was no documentation supporting the amounts assigned to risks independently
identified by the PMT and i3 consultant since these risks were developed in
brainstorming sessions. Furthermore, documentation obtained for review of various
estimated changes and amounts identified by the contractors that since had been
reviewed and approved, or submitted and in negotiation with the PMT, sometimes
varied greatly from the original amount carried on the report. Finally, we noted three
instances of differences between the amounts presented in the May 2014 report and
29SeeIntroduction and Background for information detailing the four types of changes and risks identified in monthly
reports generated by i3.
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amounts provided in the supporting documentation, resulting in a net understatement
of approximately $138,000.
Document Retention Is Insufficient To Assess Whether All Costs Were Reasonable and
in Compliance with Contract Terms
DIA uses two systems to provide construction records retention and payment
management for the HTC project: Aconex and Textura. We were informed by DIA
leadership that Aconex, the HTC records retention system, contains all documentation
related to the HTC project. However, we discovered that Aconex does not contain all
contracts, invoices, and change orders. As a result, we needed to make multiple
requests for supporting documentation and in many cases the documentation was
incomplete or in some cases, missing. Following are examples of the difficulties we
encountered using Aconex, which delayed and complicated the completion of our
audit work:
Some contracts, invoices, and change orders are not in Aconex but are
located on a shared network drive.
Some contracts, invoices, and change orders are in Aconex but are not easily
found using the Aconex search function.
Some documents in Aconex are inadvertently marked confidential, preventing
direct auditor access until additional requests for access were made.
Documents were not provided in logical order, which caused complexities in
determining whether required contract documentation was submitted timely
and accurately.
These limitations exist since there are no formal Aconex guidelines regarding what
documents should be uploaded into the system, when, and how they should be
classified, including whether or not a document should be marked confidential.Compounding this issue of incomplete documentation is the PMTs lack of
subcontract documentation in Aconex or elsewhere, which will be discussed later in
this section.
Aconex was purchased only for the HTC project but Textura was implemented in 2013
for all DIA construction projects. For HTC, Textura is being used by DIA Business
Management Services (BMS) and PMT staff to manage invoices and payments related
to the MHS contract only.30Auditors learned that Textura does not contain supporting
documentation for MHS invoices, but rather only the invoice and schedule of values,
which DIA personnel compare to ensure that the two align. However, Textura was not
built to hold supporting documentation, but rather seems to serve as a one-stopdocumentation storage center for high level review.
30Textura is a web-based system that was implemented by DIA to manage invoices and payments for construction
contracts.
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The lack of organization and full project documentation in Aconex and Textura makes
it difficult for third parties, such as auditors, and non-project personnel to review key
project documents such as monthly dashboards, invoices, change orders,
subcontracts, and budgets. The disorganized records may have resulted in less than
high quality reviews of invoices and therefore, errors may not have been identified. As
such, HTC may have improperly paidcontractors for items not allowed under the
contract, paid more than the amount
allowed under the contract, or paid for work
that had yet to be completed. Turnover in
personnel and improper recordkeeping also
leave a gap in the institutional knowledge
that may be beneficial to auditors
conducting a close-out audit. More
importantly, due to the inadequate
recordkeeping it would be difficult for auditors to conduct a close-out audit and for
DIA to ensure that it is adhering to the City's record retention policy.
The City has a Citywide Records Management Program, which specifies that all City
agencies must retain all City records, including financial documents such as invoices,
for seven years.31Aconex will be used until the end of the HTC project, including the
close-out phase, at which time the records will either be placed in a static cloud-
based environment or on a drive for retention. We recommend that DIA Executive
Management take the necessary steps to ensure records related to the HTC project
are properly maintained and organized, which includes assurance that all supporting
documentation for invoices and change orders are included in Aconex. In addition,
these records should be retained in accordance with the Citys retention schedule.
Invoice Review Process Is Insufficient ToAssess Whether All Costs Were Reasonableand in Compliance with Contract Terms
To address concerns from our 2012 audit, DIA leadership agreed to dedicate more
resources to HTC invoice reviews and perform bi-annual comprehensive reviews of
invoices. However, during our follow-up work to assess the implementation of
recommendations from the original audit, and through our work conducting this audit,
we found that the changes DIA leadership and HTC management have made to the
invoice review process were incomplete and remain ineffective.32
HTC Program Managers further developed and defined the invoice review process,
which required an increase in Parsons staff to assist with reviews. However,
implementing detailed invoice reviews has not been made a priority by HTCmanagement. This has resulted in a continued lack of resources, limited supporting
documents, and staff turnover and has reduced the effectiveness of the process.
31Executive Order 64 governs the Citys Records Management Program. In addition, the Denver General Records Retention
Schedules includes references to the latest regulatory environment and best practices and defines the minimum retention
period.32
The Department of Aviations South Terminal Redevelopment Program Follow -up Report, City and County of Denver
Auditors Office, October 2013,www.denvergov.org/auditor/DenverAuditor/AuditServices/AuditReports.
Disorganized records may
have resulted in lower
quality reviews of invoices
and therefore, errors may
not have been identified.
http://www.denvergov.org/auditor/DenverAuditor/AuditServices/AuditReportshttp://www.denvergov.org/auditor/DenverAuditor/AuditServices/AuditReportshttp://www.denvergov.org/auditor/DenverAuditor/AuditServices/AuditReportshttp://www.denvergov.org/auditor/DenverAuditor/AuditServices/AuditReports -
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Further, the PMT has not been conducting periodic comprehensive audits of randomly
selected invoices to ensure that monthly reviews were appropriate.
Current Invoice Review ProcessThe current invoice review process contains six steps
that are designed to ensure that all invoices submitted by the prime contractors are in
alignment with contract terms. Figure 5 provides a summary of the current invoice
review process.
Figure 5.HTC Invoice Review Process
Source:Developed by the Auditors Office based on source information from the HTC Project
Management Team.
As outlined in Figure 5 and illustrated in detail in Appendix C, the invoice review
process begins when a prime contractor submits an invoice to members of the PMT for
review. Prior to submittal, the prime contractor receives its subcontractors invoices for
labor, reimbursable expenses, and deliverables. These invoices are reviewed by the
prime contractor and combined to create the consolidated invoice submitted to the
PMT. Members of the PMT, specifically Parsons staff, review the invoice to ensurecompliance with contract terms and mathematical accuracy and to validate
completed work with the schedule of values in the Guaranteed Maximum Price
(GMP).33 The PMT also reviews necessary supporting documentation such as
inspection reports and timesheets. If discrepancies regarding materials, work
33The schedule of values is used for establishing the cash flow of a project. It is a listing of elements, systems, items, or
other subdivisions of the work, establishing a value for each, the total of which equals the contract sum.
6) DIA Finance and Administration and City Controller's Office Process Payment
5) DIA Business Management Services Provides Final Review and Approval
4) HTC Program Managers Review and Approve Invoice
3) DIA Business Management Services Reviews and Approves Invoice
2) Project Management Team Reviews Invoice and Reconciles with Prime Contractors
1) Prime Contractor Submits Monthly Invoice
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performed, and other direct costs billed are identified during the invoice review, the
PMT is responsible for reconciling these issues with the prime contractor.
Once issues are sufficiently reconciled, the PMT forwards the invoice to the BMS HTC
Contract Administrator (CA) for review. The CA performs a high-level review of the
invoice to ensure compliance with contract terms and other legal guidelines, rules,
and requirements, and works with members of the PMT to address any concerns
related to this review. The CA then ensures that the invoice is allocated to the
appropriate funds, all required funds are encumbered, and adequate funds remain to
pay the invoice.
After the CA approves the invoice, it is routed to the HTC Program Managers for
review