Executive Summary:
Internal Audit Report # 08-13
Railroad Engineering Services Contract Audit
October 27, 2008
Organization Impact:
Overall Conclusions:
Contract Solicitation
Did the contract solicitation comply with the Texas Professional Services Procurement
Act? The Texas Professional Services Procurement Act requires a two-step, qualifications-
based, selection and price negotiation process.1 As such, it prohibits the Authority from making
a selection or awarding a professional services contract (i.e., such as architecture or engineering)
on the basis of competitive bids. Instead, cost is discussed only after the Authority has selected,
on the basis of demonstrated competence, the most highly-qualified professional firm. The
audit confirmed that all proposing vendors were evaluated based upon their qualifications, which
is in accordance with the Texas Professional Services Procurement Act. Price negotiations were
only initiated with URS Corporation, the most highly qualified firm.
Was the contract executed without any potential conflict-of-interest? One of the five
voting members of the vendor selection committee was a previous employee (within the
preceding five years) of a firm that was proposing on the railroad engineering services contract.
This former relationship can create an actual or perceived conflict-of-interest (COI) and should
have resulted in a disqualification of this member from the evaluation committee. Normally, a
signed COI form is obtained from each evaluator. In this case, the signed form was missing
from the contract file. A review of each voting member’s vendor scores did not, however,
indicate that the evaluation was improperly influenced by this former relationship. In the future,
greater case should be taken to obtain and review signed COI forms from all evaluation
committee members.
Was adequate due diligence exercised during contract negotiations and when exercising
contract options? A cost analysis of labor wages, overhead, and/or profit rates is required for
every procurement action for professional services, including modifications, change orders, and
extensions. The contractors’ fully burdened labor rates were reviewed by the Contracts
Administrator and found to be “fair and reasonable” at the contract’s inception and when
1 See http://tlo2.tlc.state.tx.us/statutes/docs/GV/content/htm/gv.010.00.002254.00.htm for details.
exercising Option Year #1. However, supporting documentation for these reviews was not
prepared or was not able to be located. As a result, Internal Audit cannot provide an assessment
regarding the adequacy of these reviews. Though, nothing came to the auditor’s attention which
suggests that contractual labors rates were unreasonable.2 An analysis of overhead or profit rates
for the prime and subcontractors was not performed prior to executing the contract.
Documentation supporting a full cost analysis of labor, overhead, and profit rates should be
maintained as a part of the procurement file/record and should provide the rationale that
supports the final negotiated price. Authority acquisition procedures for competitive
procurements will be expanded to specify minimum performance requirements for cost and
price analysis.
Contract Administration & Monitoring
Has adequate due diligence been exercised when authorizing contract task-orders?
Controls and processes for authorizing task orders should be strengthened. First, independent
cost estimates have not been be prepared prior to authorizing task orders for the railroad
engineering contract. Contract task orders are, in essence, “mini-contracts,” each with a
separate scope of services and associated costs. Because URS was already awarded the
contract and there is no other competition for the work, due-diligence exercised prior to
authorizing a task order should be comparable to that of a “sole source” procurement. Capital
Metro Acquisition Policy 100.023 requires that independent cost estimates be prepared
whenever adequate price competition is lacking.
In practice, URS prepared and submitted task order fee proposals for the Capital Metro Project
Manager’s review and authorization. The fee proposals generally break out estimated labor
hours, labor rates and classifications, and direct costs for URS and each subcontractor who
would perform under the task order. The proposed total for the task order is then calculated
based upon these inputs.
Second, internal reviews of task order fee proposals should be strengthened. Based upon the
auditor’s review of documentation supporting each task order issued from contract inception
through July 31, 2008, 80 percent of the authorized work, ($4,066,255 out of $5,087,115) was
supported by evidence that the Rail Project Manager performed some level of “reasonableness
review” or a Level of Effort analysis. Internal Audit examined all task orders and which had
been authorized as of July 31, 2008. Approximately $81,000 of unallowable labor charges were
incurred as a result of using labor rates which exceeded the agreed-upon contractual rate when
developing task order fee proposals. In addition, computational errors in 2 of 31 fee proposals
also resulted in overpayments of $36,921.84. These amounts should be reimbursed to the
Authority.
2 Internal Audit reviewed several labor rate sources in order to determine if contractual rates were within a general
market range. However, this high-level review was not intended to identify an “ideal” reasonable rate or range of rates.
3 Capital Metro Acquisition Policy 100.02 adopts by reference FTA Circular 4220.1E, Third Party Contracting
Requirements. Per these requirements, a cost analysis much be performed when the offeror is required to submit the
elements (i.e., labor hours, overhead, materials, etc.) of the estimated costs, such as under a professional architectural or
engineering services contract. A cost analysis will also be necessary when adequate price competition is lacking, such as
with the URS task order contract.
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October 27, 2008
Lastly, there five outstanding, unpaid fee proposals totaling $389,557 which represent additional
service requests that URS asserts are due for additional work they performed. The Procurement
Department and the Capital MetroRail Project Team are working jointly with the contractor to
resolve this matter.
Are controls utilized by the contractor, Project Manager, and/or Contract
Administrator adequate to 1) monitor contractor payment applications to ensure that
expenditures are allowable and appropriate, and 2) ensure compliance with key
contractual terms and conditions? Strengthening formal contract monitoring processes will
enable the Authority to ensure that the contractor provides timely documentation and
complies with the terms of the contract. To date, contractor payments for labor and direct
costs have been made based upon a “percentage of completion” for each task order.4
However, direct costs such as material and travel expenses require supporting documentation
in order to be payable to the contractor. Over $222,000 of direct costs have been paid by the
Authority without any supporting documentation, such as backup receipts. URS is currently
gathering the receipts to support incurred direct costs. The Authority should seek
reimbursement for any previously paid direct costs which cannot be documented or do not
meet contractual requirements. (Future recoveries will be updated and reported in Internal
Audit’s semi-annual implementation status reports.)
Aside from payment terms, two other contract terms and conditions which are generally
incorporated in Authority contracts include required security background checks for contract
staff assigned to Capital Metro and minimum insurance requirements. The contractor supplied
timely evidence that they satisfied minimum insurance requirements throughout the
performance period. Security background checks on URS personnel assigned to the Capital
Metro contract were performed at the inception of the contract. However, background checks
for personnel assigned to the contract at a later time were not performed prior the audit. URS
is in the process of performing these checks and will supply evidence to the Authority once
complete.
Audit Highlights—Major Issues and Action Plans:
Each audit issue was significant and has been included in the executive summary. For further
details, please refer to the detailed audit report.
1. Prepare and document a full cost analysis for professional service contracts.
Qualifications-based criteria must be used when selecting a professional services contractor. 5
For these procurements (such as the railroad engineering design and consulting contract) price
cannot be used as an evaluation factor. Instead, once the preferred vendor is identified, they are
required to submit the cost elements, (labor rates, overhead rates, other direct costs and profit)
for the Authority’s review and approval. These individual elements are then negotiated with the
most qualified offeror only. For the URS contract, the rates negotiated and established at the
contract’s inception are should be used to price all subsequent task orders.
4 Direct costs have been grouped with fixed fee labor costs to come up with a total cost for the task order. As such,
direct costs are not billed based upon documentation of actual costs.
5 Architectural and engineering services are procured pursuant to the requirements in the Texas Professional Services
Procurement Act.
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October 27, 2008
At the contract’s inception, the contractors’ “fully burdened”6 labor rates) were deemed to be
“fair and reasonable.” However, documentation supporting the review could not be located.7
Similarly, while labor rates were reviewed again prior to exercising Option Year #1; no details of
the analysis were retained. While the labor “base rate” is the largest cost factor, all pricing
elements must be individually reviewed in a cost analysis. The remaining required pricing
elements (overhead rates, other direct costs, and profit) were not examined by the Authority.
To strengthen and reinforce requirements pertaining to cost and price analysis, Acquisition
Procedure 101.05, Competitive Proposal Procurements, will be updated by December 31, 2008,
to include performance and documentation requirements which mirror federal Third Party
Contracting Guidelines. Documentation to support the analysis of required elements (price or
labor, overhead, and profit) will retained as part of the permanent procurement file.
In addition, the Procurement Director will order the 2008 PSMJ A/E Management Salary Survey
to help Contract Administrators evaluate the reasonableness of proposed labor rates. To
facilitate assessment of labor rates, the template for contract Exhibit A-1, Schedule of Rates, will
be expanded by August 31, 2009, to require descriptions of standard labor classifications/titles
which would be used in the contract.
The URS contract will be modified by October 31, 2008, to specify new and/or replacement
subcontractors who are currently working under this contract. In the future, whenever new
subcontractors are added, the Contracts Administrator will initiate a contract modification
after negotiating and/or verifying that the subcontractor’s labor, overhead, and profit rates are
fair and reasonable.
2. Perform an independent cost estimate for each task order.
Contrary to Authority policy, independent cost estimates have not been prepared for task orders
issued under the URS contract.8 Instead, URS provides a detailed fee proposal for each task order
for the Rail Project Manager’s review and approval. Per a review of all task orders authorized
through July 31, 2008, Internal Audit found that 80 percent of all authorized work, ($4,066,255 out
of $5,087,115) was supported by evidence that the Rail Project Manager performed at least a
minimal “reasonableness review” or “Level of Effort” analysis. Detailed fee proposals for
$179,626.65 of subcontracted work were missing and, therefore, could not be reviewed by Internal
Audit.
Preparing an independent cost estimate helps ensure that the Authority does not pay unreasonably
high prices for services provided. This is especially critical in architectural and engineering (A/E)
6
Fully burdened rates are adjusted to include an appropriate percentage of corporate overhead and profit.
7 Auditor performed a high-level review of several labor rate sources in order to determine if labor rates were at “in line”
with general market. Nothing came to the auditor’s attention which contradicted original assertion by the Procurement
Department that rates were “fair and reasonable.”
8 Capital Metro Acquisition Policy 100.02 adopts by reference FTA Circular 4220.1E, Third Party Contracting
Requirements. Federal requirements require a cost analysis whenever adequate price competition is lacking and for sole
source procurements, including contract modifications or change orders, unless price reasonableness can be established
on the basis of a catalog or market price of a commercial product sold in substantial quantities to the general public or
on the basis of prices set by law or regulation.
Capital Metro Railroad Engineering Services Contract Audit #08-13—Page 4 of 6
October 27, 2008
service task orders where there are no competing proposals to provide a valid comparison.
Similarly, if prices are unreasonably low, it can also be detrimental to the project if it indicates that
the offeror has made a mistake or does not understand the work to be performed.
Effective immediately, the Rail Project Manager will prepare, prior to receiving the contractor’s fee
proposal, an independent cost estimate of all task orders issued under the railroad engineering design
services contract. In addition, Effective immediately, the Capital MetroRail Project Team will
prepare independent cost or price estimates and a supporting record of negotiations for all new
procurement actions.
3. Strengthen contract monitoring and administration.
Contractor labor rates used to prepared fee proposals were not verified to ensure compliance with
agreed upon contractual rates. Internal Audit reviewed 100% of task orders issued through July 31,
2008, and identified approximately $81,0009 of unallowable labor charges which arose as a result of
using a labor rate in excess of the contract labor rate. Incorrect mathematical calculations in two of
the fee proposals submitted by URS also resulted in contractor overpayments totaling $36,922.
Direct costs such as material and travel expenses require supporting documentation in order to be
payable to the contractor.10 In practice, these costs have been added to fixed fee labor costs and the
resulting Task Order total has then been billed on a “percentage of completion” basis. As a result,
over $222,000 of unsupported direct costs have been paid as of July 31, 2008. The contractor has
been instructed to submit all supporting receipts to the Authority by October 31, 2008. Any
remaining unsupported or unallowable costs will be addressed with URS by January 31, 2009.
Monitoring on non-financial contractual requirements was somewhat better. Required insurance
coverage was obtained timely and maintained throughout life of contract. Insurance certificates
demonstrating compliance are maintained in the contract file. However, although security
background checks on URS personnel were performed at the inception of the contract, they were
not updated when new contract staff was added. URS is in the process of completing these checks
and will supply evidence to Internal Audit when complete.
To address these conditions, contract monitoring responsibilities have been clarified. The Rail
Project Manager is responsible for reviewing contractor invoices, including supporting
documentation for reimbursable costs, to ensure compliance with contractual terms. To prevent
similar lapses in future contracts, the Procurement Director will develop a “Contract Monitoring
Plan” template which captures contractual requirements, monitoring responsibility/frequency, and
location(s) of required contract documentation. Beginning March 31, 2009, a customized Contract
Monitoring Plan will then be prepared for each new contract executed and maintained as a part of
the official contract file.
9 Internal Audit was unable to test six subcontractor task orders totally $179,626.65 because supporting documentation
was not provided by either the Rail Project Manager or URS. This figure would likely change if documentation was
received.
10 Exhibit E. (46) (g) Ordering and Pricing Limitations, “All material/travel/other reimbursable costs (including
subcontractor costs) shall be reimbursed to the Contractor by task and at actual cost with no administrative or other
markups… In no event may the total of these costs by task exceed the total in the task order…”
Capital Metro Railroad Engineering Services Contract Audit #08-13—Page 5 of 6
October 27, 2008
ACCEPTED:
Signature on File Signature on File
Margaret Gomez, Fred M. Gilliam
Chair, Planning Finance & Audit Committee President/CEO
cc: Capital Metro Board of Directors
Sallie Crosby, Chief Counsel
Kerri Davidson, Deputy Counsel
Andrea Lofye, Interim EVP & Chief Operating Officer
Doug Allen, EVP & Chief Development Officer
John Almond, Commuter Rail Project Director
Shanea Davis, Director Contracts & Procurement
Muhammad Abdullah, Contracts Administrator
King Kaul, Manager, Design & Construction
Capital Metro Railroad Engineering Services Contract Audit #08-13—Page 6 of 6
October 27, 2008