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HomeMy WebLinkAboutStaff Report 2405-3107CITY OF PALO ALTO Policy & Services Committee Special Meeting Tuesday, June 11, 2024 7:00 PM     Agenda Item     4.Office of the City Auditor Presentation of the Public Safety Building Construction Audit Report Late Packet Report, Presentation Policy & Services Committee Staff Report Report Type: ACTION ITEMS Lead Department: City Auditor Meeting Date: June 11, 2024 Report #:2405-3107 TITLE Office of the City Auditor Presentation of the Public Safety Building Construction Audit Report BACKGROUND This will be released as a late packet report. APPROVED BY: Kate Murdock Policy & Services Committee Staff Report From: City Manager Report Type: ACTION ITEMS Lead Department: City Auditor Meeting Date: June 11, 2024 Report #:2405-3084 TITLE Recommend the City Council Approve the Office of the City Auditor Presentation of the Public Safety Building Construction Audit Report RECOMMENDATION The City Auditor recommends that the Policy & Services Committee review and recommend that the City Council Approve the Public Safety Building Construction Audit Report BACKGROUND Baker Tilly US, LLP (Baker Tilly), in its capacity serving as the Office of the City Auditor (OCA) for the City of Palo Alto (the City) performed construction audit services on the Public Safety Building project. The objectives of this audit were to verify that billings to the City from the Architect, Engineer, Inspector of Record, Construction Manager, Contractor, and Waterproofing Inspector were compliant with the terms of the applicable contracts. DISCUSSION The new Public Safety Building will house the Police Department, 911 Emergency Dispatch Center, the Emergency Operations Center, the Office of Emergency Services, and the administration needs of the Fire Department. The Public Safety Building is part of the Capital Improvement (Infrastructure) Plan introduced in 2014. Non-compliance with contract terms related to project billings can result in cost overruns that impact the overall project budget. FISCAL/RESOURCE IMPACT The Office of the City Auditor worked primarily with the Public Works Department and engaged with additional stakeholders, as necessary. The attached report summarizes the analysis, audit findings, and recommendations, if any. ATTACHMENTS Attachment A: Public Safety Building Construction Audit Report, May 21, 2024 APPROVED BY: Kate Murdock, City Auditor 1 May 21, 2024 City of Palo Alto Office of the City Auditor Public Safety Building Construction Audit Report Contents Baker Tilly US, LLP, trading as Baker Tilly, is an independent member of Baker Tilly International. Baker Tilly International Limited is an English company. Baker Tilly International provides no professional services to clients. Each member firm is a separate and independent legal entity, and each describes itself as such. Baker Tilly US, LLP is not Baker Tilly International’s agent and does not have the authority to bind Baker Tilly International or act on Baker Tilly International’s behalf. None of Baker Tilly International, Baker Tilly US, LLP nor any of the other member firms of Baker Tilly International has any liability for each other’s acts or omissions. The name Baker Tilly and its associated logo is used under license from Baker Tilly International Limited. EXECUTIVE SUMMARY ................................................................................................. 1 INTRODUCTION ............................................................................................................. 2 AUDIT RESULTS ............................................................................................................ 4 APPENDICES ................................................................................................................. 5 1 Executive Summary Purpose of the Audit Baker Tilly US, LLP (Baker Tilly), in its capacity serving as the Office of the City Auditor (OCA) for the City of Palo Alto (the City) performed construction audit services on the Public Safety Building project. The objectives of this audit were to verify that billings to the City from the Architect, Engineer, Inspector of Record, Construction Manager, Contractor, and Waterproofing Inspector were compliant with the terms of the applicable contracts. Report Highlights Baker Tilly reviewed documentation provided by the Public Works Department for each of the selected scopes on a monthly basis through March 2024 and found project billings were compliant with the terms of the respective contracts. The billings, change orders, and additional services related to each scope had the proper supporting documentation and authorizations. During the audit, we identified several immaterial billing errors (see Finding 1 and Appendix A); however, these are considered minor when compared to the overall value of the costs reviewed. The results of this audit indicate the City’s implemented controls with respect to the review and approval of project billings are operating as intended. 2 Introduction 1 Invoiced amount includes design and construction administration services for the California Avenue Garage project. 2 Invoiced amount includes project development and construction management services for the Fire Station No. 3 and California Avenue Garage projects. Objective The objectives of this audit were to verify billings from the Architect, Engineer, Inspector of Record, Construction Manager, Contractor, and Waterproofing Inspector were contractually compliant, adequately supported, and authorized by the City. Background The new Public Safety Building will house the Police Department, 911 Emergency Dispatch Center, the Emergency Operations Center, the Office of Emergency Services, and the administration needs of the Fire Department. The Public Safety Building is part of the Capital Improvement (Infrastructure) Plan introduced in 2014. Non-compliance with contract terms related to project billings can result in cost overruns that impact the overall project budget. Scope Our testing scope encompassed billings and cost documentation provided by the Public Works Department through March 2024. This included the Swinerton Builders payment application dated December 31, 2023, and billings for the other scopes through February 2024. At that time, billings reviewed for each of the contract scope subject to audit were as follows: Scope Contractor Invoiced Amount Architect Ross Drulis Cusenbery (RDC) $ 9,497,8501 Engineer Romig Engineers 92,976 Inspector of Record 4Leaf, Inc. 546,534 Construction Manager Nova Partners, Inc. 9,264,4272 Contractor Swinerton Builders 86,888,316 Waterproofing Inspector Consolidated Engineering Laboratories (CEL) 106,317 Total $ 106,396,420 Methodology and Analysis To achieve the audit objectives, Baker Tilly performed the following procedures and analysis: • Inspected the contract to identify the key terms related to project billings for each scope subject to audit • Analyzed billings for each scope subject to audit on a monthly basis as follows: o Created control schedules for billings and payment applications o Footed and recalculated amounts billed to test for mathematical accuracy o Rolled forward previous billed amounts to ensure reported totals were accurate o Verified lien waivers were collected where applicable 3 INTRODUCTION 3 Government auditing standards require an external peer review at least once every three (3) years. The last peer review of the Palo Alto Office of the City Auditor was conducted in 2017. The Palo Alto City Council approved a contract from October 2020 through June 2022 with Baker Tilly US, LLP (Baker Tilly) and appointed Kyle O’Rourke, Senior Consulting Manager in Baker Tilly's Public Sector practice, as City Auditor. Given the transition in the City Audit office, a peer review was not conducted in 2020 and will be conducted after the third year of Baker Tilly’s contract. o Verified monthly invoices were submitted with a description of services performed and the applicable charges (identification of personnel, hours worked, hourly rates, and reimbursable expense) o Where applicable, verified hourly rates reconciled to agreed upon rates o Where applicable, reconciled support for reimbursable expenses to third party cost support o Verified aggregate billings did not exceed contractual limitations o Verified billings and payment applications had the appropriate authorizations • Analyzed change orders, amendments, and additional services in scope as follows: o Reconciled the amounts reflected on change orders to supporting documentation o Verified the change order costs were contractually compliant and reconciled to agreed upon rates where appliable o Recalculated any markups and insurance amounts to ensure the applicable rates adhered to the contract terms o Verified change orders and additional services had the required authorization • Communicated the testing results to the Public Works Department on a monthly basis: o Verified any identified billing errors were corrected (see Appendix A) o Requested additional documentation as necessary to complete testing Compliance Statement This audit activity was conducted from March 2021 to March 2024 in accordance with generally accepted government auditing standards, except for the requirement of an external peer review3. 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. Organizational Strengths During this audit activity, we observed that the controls implemented by the City related to the review of billings and change orders were operating as intended. This is evidenced based on the low occurrence of findings and immaterial values thereof. All parties were accommodating during the audit process and were forthcoming with answers to questions and requests for additional documentation. The Office of the City Auditor greatly appreciates the support of the Public Works Department in conducting this audit activity. Thank you! 4 Audit Results Finding 1: Immaterial billing errors Baker Tilly identified nine billing errors totaling $10,122 throughout the audit engagement. These errors were mostly related to labor billing rate errors where the contractor in question billed for services at rates that were not compliant with the agreed upon rates. Each of the identified errors was resolved on a subsequent billing from the applicable contractor. See Appendix A for additional detail related to the specific billing errors identified. Recommendation No additional action is required. All billing errors have been resolved. In addition, the errors in question occurred during the early months of our audit and the occurrence of findings decreased as the audit progressed. Recommended follow-up activities As of the report date the project was not yet complete. Baker Tilly recommends performing a closeout audit upon final completion of the project. The current substantial completion is anticipated on July 31, 2024. The closeout audit would kick off in August 2024 and conclude upon receipt of the documentation required to complete closeout testing. The primary objectives of the closeout audit would include: • Analyze billings and change orders for the selected audit scopes received by the Public Works Department from March 2024 through project completion (Swinerton Payment applications subsequent to December 31, 2023, and billings from the other selected scopes subsequent to February 2024). • Verify the allowances included in the construction contract are reconciled and closed out per the contract terms • Verify final lien waivers are collected from subcontractors • Confirm final amounts paid to each contractor in the scope of the audit does not exceed the contractual limitations 5 Appendices Appendices 6 Appendix A: Public Safety Building – Construction Audit Issues Log The following audit issues totaling $10,122 were identified during monthly testing. Each of these issues were communicated to the Public Works Department when identified. All audit issues have been resolved. AI ID No. Audit Issue AI Date Response Date Status Result Amount 001 Swinerton Builders - COR #25 which was included in Change Order #4 included a duplicate charge for equipment markup totaling $356.77 (see RFI #7). 9/23/2021 11/15/2021 Closed Public Works provided Change Order #8 reflecting the credit. Baker Tilly reviewed Change Order #8 and confirmed credit. $ 356.77 002 Nova Partners - Invoices from June 2017 to December 2017 billed an Estimator at a rate of $175 per hour rather than the agreed-upon rate of $160 per hour. This resulted in a billing rate overcharge totaling $6,975 (see RFI #1). 10/15/2021 1/12/2022 Closed Public Works provided Invoice #104376 reflecting the credit. Baker Tilly reviewed Invoice #104376 and confirmed credit. $ 6,975.00 003 Consolidated Engineering Laboratories - Invoice #191863 billed overtime at a rate of $161.25 and double-time at a rate of $215.00 rather than the agreed upon rates of $142.50 for overtime and $190 for double time. This resulted in a billing rate overcharge totaling $400 (see RFI #24). 3/16/2022 4/13/2022 Closed Public Works provided Invoice #195679 reflecting the credit. Baker Tilly reviewed Invoice #195679 and confirmed credit. $ 400.00 004 Romig Engineers - Invoice #27139 and #28131 billed the position "Engineering Technician Prevailing Wage" at a rate of $150 per hour rather than the agreed-upon rate of $144 per hour. This resulted in a billing rate overcharge totaling $473.40 (see RFI #27). 4/21/2022 5/31/2023 Closed Public Works provided Invoice #31394 and #31569 reflecting the credit. Baker Tilly reviewed Invoice #31394 and #31569 and confirmed credit. $ 473.40 Appendix A: Public Safety Building – Construction Audit Issues Log (cont.) 7 AI ID No. Audit Issue AI Date Response Date Status Result Amount 005 Romig Engineers - Invoice #28131 billed overtime at a rate of $225 rather than the agreed upon rate of $216. This resulted in a billing rate overcharge totaling $63.00 (see RFI #28). 4/21/2022 5/31/2023 Closed Public Works provided Invoice #31569 reflecting the credit. Baker Tilly reviewed Invoice #31569 and confirmed credit. $ 63.00 006 Romig Engineers - Invoice #27784B billed the position "Engineering Technician Prevailing Wage" at a rate of $150 per hour rather than the agreed-upon rate of $144 per hour. Overtime was also billed at a rate of $225 rather than the agreed upon rate of $216. This resulted in a billing rate overcharge totaling $333.00 (see RFI #26). 4/21/2022 5/31/2023 Closed Public Works provided Invoice #31394 reflecting the credit. Baker Tilly reviewed Invoice #31394 and confirmed credit. $ 333.00 007 Consolidated Engineering Laboratories (CEL) Invoice #196433 billed the position "Waterproof Inspector" at rate of $99.28 per hour rather than the agreed-upon rate of $96.90 per hour. This resulted in a billing rate overcharge totaling $310.59 (see RFI #31). 6/27/2022 7/26/2022 Closed Public Works provided Invoice #198423 reflecting the credit. Baker Tilly reviewed Invoice #198423 and confirmed credit. $ 310.59 008 Consolidated Engineering Laboratories (CEL) Invoice #197348 billed the position "Waterproof Inspector" at rate of $99.28 per hour rather than the agreed-upon rate of $96.90 per hour. This resulted in a billing rate overcharge totaling $166.60 (see RFI #35). 7/26/2022 7/26/2022 Closed Public Works provided Invoice #198423 reflecting the credit. Baker Tilly reviewed Invoice #198423 and confirmed credit. $ 166.60 Appendix A: Public Safety Building – Construction Audit Issues Log (cont.) 8 AI ID No. Audit Issue AI Date Response Date Status Result Amount 009 4 Leaf, Inc - Invoice #J3909W billed time for Traci Craton at $169.95 per hour rather than the agreed-upon rate of $54 per hour. This resulted in a billing rate overcharge totaling $1,043.64 (See RFI #42). 7/28/2023 8/29/2023 Closed Public Works provided Invoice #J309X-REV reflecting the correct rates. Baker Tilly reviewed Invoice #J309X-REV and confirmed. $ 1,043.64 9 10 Baker Tilly Advisory Group, LP and Baker Tilly US, LLP, trading as Baker Tilly, are members of the global network of Baker Tilly International Ltd., the members of which are separate and independent legal entities. Baker Tilly US, LLP is a licensed CPA firm that provides assurance services to its clients. Baker Tilly Advisory Group, LP and its subsidiary entities provide tax and consulting services to their clients and are not licensed CPA firms. City of Palo AltoOffice of the City Auditor (OCA) Policy & Services Committee Meeting Public Safety Construction Audit, May 21, 2024 Audit Manager: Robert Zellmer June 11, 2024 2 Objective Verify billings from the Architect, Engineer, Inspector of Record, Construction Manager, Contractor and Waterproofing Inspector were contractually compliant, adequately supported and authorized by the City 3 Finding: Immaterial billing errors Baker Tilly identified 9 billing errors totaling $10,122 •Labor billing rate errors •Immaterial compared to the overall value billings reviewed •Errors were resolved on subsequent bills from the applicable contractor Recommendation: No Additional Action is Required City Auditor recommends the Policy and Services Committee review and recommend that the City Council approve: •Public Safety Construction Audit report, May 21, 2024. No additional action is recommended. •Possible follow-up activity: perform closeout audit upon final completion of the project. RECOMMENDATION 4 Questions? Baker Tilly Advisory Group, LP and Baker Tilly US, LLP, trading as Baker Tilly, operate under an alternative practice structure and are members of the global network of Baker Tilly International Ltd., the members of which are separate and independent legal entities. Baker Tilly US, LLP is a licensed CPA firm that provides assurance services to its clients. Baker Tilly Advisory Group, LP and its subsidiary entities provide tax and consulting services to their clients and are not licensed CPA firms. The name Baker Tilly and its associated logo is used under license from Baker Tilly International limited. The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. © 2024 Baker Tilly Advisory Group, LP