change order

Document Sample
change order Powered By Docstoc
					OFFICE   OF THE   NEW YORK STATE COMPTROLLER
                  D IVISION OF LOCAL GOVERNMENT
                      & SCHOOL ACCOUNTABILITY




 Enlarged City School
District of Middletown
    Internal Controls Over
     Construction Project
        Change Orders
           Report of Examination
                   Period Covered:
           July 1, 2007 — October 30, 2009
                      2010M-15




               Thomas P. DiNapoli
                                Table of Contents



                                                                                Page

AUTHORITY LETTER                                                                 2


INTRODUCTION                                                                     3
           Background                                                            3
           Objective                                                             3
           Scope and Methodology                                                 4
           Comments of District Officials and Corrective Action                   4


CHANGE ORDERS                                                                    5
           Recommendations                                                       7


APPENDIX    A   Response From District Officials                                  8
APPENDIX    B   Audit Methodology and Standards                                 11
APPENDIX    C   How to Obtain Additional Copies of the Report                   12
APPENDIX    D   Local Regional Office Listing                                    13




                       DIVISION OF LOCAL GOVERNMENT AND SCHOOL ACCOUNTABILITY          1
                                                                                       1
                                                 State of New York
                                    Office of the State Comptroller


Division of Local Government
and School Accountability

May 2010

Dear School District Officials:

A top priority of the Office of the State Comptroller is to help school district officials manage their
districts efficiently and effectively and, by so doing, provide accountability for tax dollars spent to
support district operations. The Comptroller oversees the fiscal affairs of districts statewide, as well
as districts’ compliance with relevant statutes and observance of good business practices. This fiscal
oversight is accomplished, in part, through our audits, which identify opportunities for improving
district operations and Board of Education governance. Audits also can identify strategies to reduce
district costs and to strengthen controls intended to safeguard district assets.

Following is a report of our audit of the Enlarged City School District of Middletown, entitled Internal
Controls Over Construction Project Change Orders. This audit was conducted pursuant to Article V,
Section 1 of the State Constitution and the State Comptroller’s Authority as set forth in Article 3 of the
General Municipal Law.

This audit’s results and recommendations are resources for district officials to use in effectively
managing operations and in meeting the expectations of their constituents. If you have questions about
this report, please feel free to contact the local regional office for your county, as listed at the end of
this report.

Respectfully submitted,


Office of the State Comptroller
Division of Local Government
and School Accountability




   2         OFFICE OF THE NEW YORK STATE COMPTROLLER
                          Introduction
Background        The Enlarged City School District of Middletown (District) is
                  located in the City of Middletown, Orange County. The District is
                  governed by the Board of Education (Board), which comprises
                  nine elected members. The Board is responsible for the general
                  management and control of the District’s financial and educational
                  affairs. The Superintendent of Schools (Superintendent) is the chief
                  executive officer of the District and is responsible, along with other
                  administrative staff, for the day-to-day management of the District
                  under the direction of the Board.

                  There are seven schools in operation within the District. According
                  to information filed with the State Education Department (SED), the
                  District had a student enrollment of over 7,200 as of October 31, 2009
                  and 1,287 employees. The District’s 2009 operating expenditures
                  totaled $123 million for the General Fund, $3.4 million for the School
                  Food Service Program, $9.4 million for the Special Aid Fund and
                  $17 million for the Capital Fund. These expenditures were funded
                  primarily with revenues from State sources, real property taxes, and
                  other tax items.

                  In 2007, the District began a substantial capital improvement project
                  (CIP) that involved repairs, renovations, and additions to seven
                  schools at a maximum budgeted cost of $32 million. The District
                  segregated these capital projects into Phase I and II, and provided
                  a contingency allowance of 7 percent for Phase I and 9 percent for
                  Phase II. The District expended approximately $26 million on Phase
                  I of the CIP during the audit period, of which about $1.8 million (6.9
                  percent) was for change orders.

                  The District contracted with an architect to design and manage the
                  construction project’s two phases. In addition, the District hired a
                  Clerk of the Works to serve as the District’s on-site representative to
                  monitor the project’s progress.

Objective         The objective of our audit was to evaluate internal controls over
                  construction project change orders. Our audit addressed the following
                  related question:

                     •   Are internal controls over construction project change
                         orders appropriately designed and operating effectively to
                         adequately safeguard District assets?




             DIVISION OF LOCAL GOVERNMENT AND SCHOOL ACCOUNTABILITY                 3
                                                                                    3
Scope and                  At the request of the Board members, we examined the District’s
Methodology                controls over construction project change orders for the period July
                           1, 2007 to October 30, 2009.

                           We conducted our audit in accordance with generally accepted
                           government auditing standards (GAGAS). More information on
                           such standards and the methodology used in performing this audit is
                           included in Appendix B of this report.

Comments of District       The results of our audit and recommendations have been discussed
Officials and Corrective    with District officials and their comments, which appear in Appendix
Action                     A, have been considered in preparing this report. District officials
                           generally agreed with our recommendations and indicated that they
                           planned to initiate corrective action.

                           The Board has the responsibility to initiate corrective action.
                           Pursuant to Section 35 of the General Municipal Law, Section 2116-
                           a (3)(c) of the Education Law and Section 170.12 of the Regulations
                           of the Commissioner of Education, a written corrective action plan
                           (CAP) that addresses the findings and recommendations in this report
                           must be prepared and provided to our office within 90 days, with
                           a copy forwarded to the Commissioner of Education. To the extent
                           practicable, implementation of the CAP must begin by the end of
                           the next fiscal year. For more information on preparing and filing
                           your CAP, please refer to our brochure, Responding to an OSC Audit
                           Report, which you received with the draft audit report. The Board
                           should make the CAP available for public review in the District
                           Clerk’s office.




  4        OFFICE OF THE NEW YORK STATE COMPTROLLER
           Change Orders

     The Board is responsible for the District’s fiscal management and has
     a fiduciary responsibility for District assets and finances. To carry out
     this responsibility, the Board must develop policies that direct how
     decisions will be made and how monies can be expended, and then
     regularly monitor the extent to which the Superintendent and other
     District officials have implemented those policies. Board policies, if
     properly implemented by District officials, provide for a system of
     internal controls that helps account for District resources.

     The District uses change orders to officially authorize revisions to
     capital construction contracts. A change order is a written agreement
     between the District, the Architect and the contractor about a change
     in the work and any related adjustment in contract sum and/or time.
     A change order may be required to adjust for a discovered job
     condition, to add or delete certain portions of the work, or otherwise
     change a condition or the amount of the contract. Change orders
     can accommodate unforeseen circumstances and allow work on
     construction projects to continue in a logical sequence. A construction
     change directive (change directive) is prepared by the Architect prior
     to initiating a change order. It is a written order signed by the Architect
     and the District directing the contractor to make a change in the work,
     and stating the basis for any adjustment in cost and/or time. If the
     District and the contractor agree on the cost and/or time adjustments
     required by the change directive, the contractor will commence the
     work and later prepare and submit a change order to the District for
     approval.

     Internal controls over capital project change orders were not
     appropriately designed and operating effectively to adequately
     safeguard District assets. Because the Board did not develop a
     comprehensive change order policy, authorize change directives or
     designate an official to authorize change directives on its behalf, and
     because the Board approved approximately half of the change orders
     after work was completed, the District has limited assurance that the
     $1.8 million expended on change orders during Phase I was within
     the scope and necessary.

     Approval − A change order policy establishes guidelines for changing
     or canceling an existing construction contract. The Board may
     establish a change order committee and delegate the committee the
     authority to act on its behalf to approve change orders. According to
     the District’s construction contract general specifications, a change
     directive requires the signatures of the District and the Architect. The

DIVISION OF LOCAL GOVERNMENT AND SCHOOL ACCOUNTABILITY                     5
                                                                           5
                    Architect’s contract gives the Architect significant responsibilities
                    for monitoring the actual construction, certifying the amounts due
                    to contractors, and rejecting work that does not conform to contract
                    documents.

                    The Board did not establish a change order committee and did not
                    adopt a change order policy during Phase I of construction. The Board
                    initially thought that the District already had a change order policy.
                    When it became aware that a policy did not exist, it adopted a change
                    order approval/procedure policy in September 2009. The change
                    order policy grants the Superintendent the authority to approve
                    individual change orders – if the change in the contract sum does
                    not exceed $50,000 – after consulting appropriate professionals and
                    informing the Board. The policy is silent regarding:

                       •   Timeliness of informing the Board

                       •   How change orders in excess of $50,000 are processed

                       •   Change directives and who approves the commencement of
                           work.

                    Because the Board did not adopt a comprehensive change order
                    policy, District officials did not have sufficient guidelines for
                    processing change orders. We found that, although the District hired
                    the Clerk of the Works to be the District’s on-site representative to
                    monitor construction, the Board did not designate an individual to
                    be responsible for authorizing change directives on the District’s
                    behalf. As a result, the District’s signature was missing from change
                    directives authorizing the contractors to initiate change orders. The
                    District’s change directive process only included the following:

                       •   The contractor notified the District indicating a necessary
                           change outside of the agreed-upon contract work.

                       •   The Clerk of the Works reviewed the proposed change and
                           contacted the Architect with the necessary information for the
                           change directive.

                       •   The Architect then prepared and signed the change directive
                           authorizing the commencement of the work and forwarded it
                           to the contractor.

                       •   The contractor then started the work, later prepared an
                           official change order detailing the work to be completed, and
                           submitted the change order to the District for approval.


6   OFFICE OF THE NEW YORK STATE COMPTROLLER
                       Because the Board had not adopted a comprehensive change order
                       policy, District officials were unaware that the District’s signature
                       was required on change directives. District officials stated that the
                       Architect prepared and signed change directives without first
                       obtaining the District’s signature to avoid impeding the logical
                       sequence of work flow. As a result, the Architect committed the
                       District to changes in the work and authorized contractors to initiate
                       change orders without written District approval.

                       As of June 30, 2009, contractors submitted 102 change orders to
                       the District totaling about $1.8 million. We found that the work on
                       approximately $969,000, or half of the $1.8 million expended on
                       change orders, was completed prior to receiving Board approval.
                       These change orders may not have been acceptable to the Board and,
                       therefore, the Board should have reviewed and approved them prior
                       to completion of the work.

                       District officials explained that the contractors did not prepare and
                       submit the change orders to the District in a timely manner. Officials
                       stated that the work to be done was on a tight timeline, and it was
                       more important for the contractors to get the work done than to
                       complete the paperwork, which was why some of the work had been
                       completed prior to the Board’s review and approval. Therefore, the
                       contractors relied on the signed change directive from the Architect
                       authorizing the work to be performed as approval to start the work.

                       Allowing a third party (in this case, the Architect) to enter the District
                       into change directives without Board authorization increases the
                       risk that taxpayer funds could be overspent or misused. Because
                       the Board did not develop a comprehensive change order policy,
                       authorize change directives or designate an official to authorize
                       change directives on its behalf, and because the Board approved
                       approximately half of the change orders after work was completed,
                       the District has limited assurance that the $1.8 million expended on
                       change orders during Phase I was within the scope and necessary.

Recommendations        1. The Board should amend the District’s change order policy to
                          address change directives, timely notification to the Board, and
                          delegated authorities. The Board should monitor the District’s
                          change order process to ensure compliance with its policy and/or
                          procedures.

                       2. All change directives should be distributed to the Board in a
                          timely manner. The Board or its designee should approve and
                          sign all construction change directives.

                       3. The Board should review and approve all construction change
                          orders prior to the completion of the work.
                  DIVISION OF LOCAL GOVERNMENT AND SCHOOL ACCOUNTABILITY                    7
                                                                                            7
                                          APPENDIX A

                      RESPONSE FROM DISTRICT OFFICIALS

The District officials’ response to this audit can be found on the following pages.




  8         OFFICE OF THE NEW YORK STATE COMPTROLLER
DIVISION OF LOCAL GOVERNMENT AND SCHOOL ACCOUNTABILITY   9
                                                         9
10   OFFICE OF THE NEW YORK STATE COMPTROLLER
                                           APPENDIX B

                     AUDIT METHODOLOGY AND STANDARDS

Our overall goal was to assess the adequacy of the internal controls put in place by officials to
safeguard District assets in relation to capital projects. To accomplish this, we performed the following
procedures:

   •   We interviewed the School Business Administrator, Assistant Superintendant of Buildings
       and Grounds, Clerk of the Works, Architect, the previous Board President, and other relevant
       District officials and employees to obtain an understanding of the internal controls in place at
       the District with regard to change orders.

   •   We conducted tests of transactions related to change orders including but not limited to: a
       review of Board minutes, change orders, payment vouchers and invoices. We compared
       change order information such as number, contractor and cost to contractor invoices, District
       check stubs and Board minute approval dates and amounts to determine whether the District
       paid each change order before or after the Board approved it.

   •   We recorded change order information from change order documents and SED change order
       certification and compared them to approval dates from Board minutes. We reviewed change
       order descriptions and reasons to determine if the District created change orders for an
       unforeseen event, a requested modification, or planning inadequacy.

   •   We viewed videos from Board meetings to document information that the Architect supplied
       to the Board and change order information exchanged during the Board meetings that was not
       included in the written Board minutes.

We conducted this performance audit in accordance with generally accepted government auditing
standards (GAGAS). 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
objective. We believe that the evidence obtained provides a reasonable basis for our findings and
conclusions based on our audit objective.




                           DIVISION OF LOCAL GOVERNMENT AND SCHOOL ACCOUNTABILITY                  11
                                                                                                   11
                                           APPENDIX C

           HOW TO OBTAIN ADDITIONAL COPIES OF THE REPORT


To obtain copies of this report, write or visit our web page:




                                    Office of the State Comptroller
                                    Public Information Office
                                    110 State Street, 15th Floor
                                    Albany, New York 12236
                                    (518) 474-4015
                                    http://www.osc.state.ny.us/localgov/




  12        OFFICE OF THE NEW YORK STATE COMPTROLLER
                                                    APPENDIX D
                             OFFICE OF THE STATE COMPTROLLER
                              DIVISION OF LOCAL GOVERNMENT
                               AND SCHOOL ACCOUNTABILITY
                                            Steven J. Hancox, Deputy Comptroller
                                            John C. Traylor, Assistant Comptroller

                                      LOCAL REGIONAL OFFICE LISTING
BUFFALO REGIONAL OFFICE                                      GLENS FALLS REGIONAL OFFICE
Robert Meller, Chief Examiner                                Karl Smoczynski, Chief Examiner
Office of the State Comptroller                               Office of the State Comptroller
295 Main Street, Suite 1032                                  One Broad Street Plaza
Buffalo, New York 14203-2510                                 Glens Falls, New York 12801-4396
(716) 847-3647 Fax (716) 847-3643                            (518) 793-0057 Fax (518) 793-5797
Email: Muni-Buffalo@osc.state.ny.us                          Email: Muni-GlensFalls@osc.state.ny.us

Serving: Allegany, Cattaraugus, Chautauqua, Erie,            Serving: Clinton, Essex, Franklin, Fulton, Hamilton,
Genesee, Niagara, Orleans, Wyoming counties                  Montgomery, Rensselaer, Saratoga, Warren, Washington
                                                             counties

ROCHESTER REGIONAL OFFICE                                    ALBANY REGIONAL OFFICE
Edward V. Grant, Jr., Chief Examiner                         Kenneth Madej, Chief Examiner
Office of the State Comptroller                               Office of the State Comptroller
The Powers Building                                          22 Computer Drive West
16 West Main Street – Suite 522                              Albany, New York 12205-1695
Rochester, New York 14614-1608                               (518) 438-0093 Fax (518) 438-0367
(585) 454-2460 Fax (585) 454-3545                            Email: Muni-Albany@osc.state.ny.us
Email: Muni-Rochester@osc.state.ny.us
                                                             Serving: Albany, Columbia, Dutchess, Greene,
Serving: Cayuga, Chemung, Livingston, Monroe,                Schenectady, Ulster counties
Ontario, Schuyler, Seneca, Steuben, Wayne, Yates
counties

SYRACUSE REGIONAL OFFICE                                     HAUPPAUGE REGIONAL OFFICE
Rebecca Wilcox, Chief Examiner                               Ira McCracken, Chief Examiner
Office of the State Comptroller                               Office of the State Comptroller
State Office Building, Room 409                               NYS Office Building, Room 3A10
333 E. Washington Street                                     Veterans Memorial Highway
Syracuse, New York 13202-1428                                Hauppauge, New York 11788-5533
(315) 428-4192 Fax (315) 426-2119                            (631) 952-6534 Fax (631) 952-6530
Email: Muni-Syracuse@osc.state.ny.us                         Email: Muni-Hauppauge@osc.state.ny.us

Serving: Herkimer, Jefferson, Lewis, Madison,                Serving: Nassau, Suffolk counties
Oneida, Onondaga, Oswego, St. Lawrence counties

BINGHAMTON REGIONAL OFFICE
Patrick Carbone, Chief Examiner                              NEWBURGH REGIONAL OFFICE
Office of the State Comptroller                               Christopher Ellis, Chief Examiner
State Office Building, Room 1702                              Office of the State Comptroller
44 Hawley Street                                             33 Airport Center Drive, Suite 103
Binghamton, New York 13901-4417                              New Windsor, New York 12553-4725
(607) 721-8306 Fax (607) 721-8313                            (845) 567-0858 Fax (845) 567-0080
Email: Muni-Binghamton@osc.state.ny.us                       Email: Muni-Newburgh@osc.state.ny.us

Serving: Broome, Chenango, Cortland, Delaware,               Serving: Orange, Putnam, Rockland, Westchester
Otsego, Schoharie, Sullivan, Tioga, Tompkins                 counties
counties



                                  DIVISION OF LOCAL GOVERNMENT AND SCHOOL ACCOUNTABILITY                            13
                                                                                                                    13

				
DOCUMENT INFO
Categories:
Tags:
Stats:
views:3372
posted:6/9/2010
language:English
pages:14