Legislative Analyst's Office Analysis of the 2002-03 Budget Bill

Capital Outlay Project Management Fees

We recommend that the Legislature ask the Bureau of State Audits to conduct a performance audit of the Department of General Services relative to its project management activities to evaluate (1) the appropriateness of fees charged, (2) the method of determining fee levels, and (3) the quality control process in place for budget development.

Under the provisions of the Government Code, the Department of General Services (DGS) is the primary state department responsible for project planning, project management, and construction management of state capital outlay projects. Only five departments--the University of California, California State University, Department of Water Resources, Department of Corrections, and the Department of Parks and Recreation are statutorily permitted to manage their own capital outlay projects. These state entities may contract for project management services, including from DGS, or use their own departmental personnel, when overseeing their capital outlay projects. All other state agencies are required to use DGS as their project/construction manager. Figure 1 provides an abbreviated overview of the capital outlay process for a department using DGS project/construction management services.

In its role as the state's capital outlay project manager, DGS is currently managing in excess of 350 major capital outlay projects with a total value of approximately $4 billion. In order to provide such services, DGS assesses client agencies various project management fees. The DGS project/construction management services include the following:

• Preparing and reviewing environmental documents.
• Reviewing construction documents.
• Clarifying construction documents during construction, including change order analysis and estimating.
• Coordination among designers, contractors, inspectors, and facilities operations.
• Monitoring schedules.
• Generally overseeing daily on-site construction operations.

In providing project/construction services, DGS charges client departments the project-related fees shown in Figure 2. These fees are intended to allow DGS to recoup the full cost of providing project/construction management services from the client agency. These fees can range from one-fifth to over one-third of total project costs.

Concerns With DGS Project Management Fees

The Appropriateness of Fees Charged. Our review of the capital outlay program proposals for 2002-03 has revealed many instances where the fees assessed to a project appeared to be either excessive, unnecessary, or inconsistently applied. For example, we note the following:

• Travel costs totaling $110,000 for a project at a prison in Folsom with an 18-month construction period. (At over $6,000 a month for travel expenses at the state mileage reimbursement rate, this appears to indicate about 18,000 miles per month of travel by the construction inspector from the nearest DGS field office.)
• $374,000 was budgeted for travel from the nearest DGS field office for a Department of Transportation office building in Marysville (approximately $20,000 a month for an 18-month construction period).
• $2,000 for environmental documents to replace lighting fixtures at a prison in Chino.

We also examined project cost estimates from prior years to determine if similar project budgeting issues existed, and we found the following:

• $6,200 was included for school checking to verify Field Act compliance of an apparatus building at a forest fire station (the act applies only to school facilities and there is no school on the site).
• A total of $58,700 was included for school, hospital, and essential services checking for a replacement forest fire station (the facility does not include a school or a hospital, nor is it an essential services facility).
• $1,100 for handicapped checking for a project to install a perimeter and roofline security fence at a state mental hospital.
• No funds were budgeted for travel to a major new state hospital under construction in Coalinga and yet $11 million is budgeted for DGS construction inspection and project management at the site for a 30-month construction period.

We find it questionable that an office building project in Marysville would require $374,000 for travel and yet a major state hospital project in Coalinga has no travel budget. Yet, DGS indicates that travel fees are budgeted based on round-trip travel time and distance from the nearest DGS district office. However, this does not appear to be consistent with our review. Furthermore, we question the need for handicapped accessibility checking for a security fence intended to prevent escapes from a state hospital roofline, or the need for environmental documents to replace aging lighting fixtures in an existing state prison. In conclusion, we believe the above-mentioned examples clearly demonstrate inappropriate or excessive fees that are being included in DGS project cost estimates.

The Methodology of Determining Fees. Based on discussions with DGS staff, we also question the method by which various fees are calculated. We were informed that the overall DGS project/construction management fee is calculated by estimating the amount needed to recover the full-year costs of DGS Project Management Branch (PMB) and dividing that amount by the number of "billable" hours of assigned project management work. While this method provides full cost recovery for PMB, we believe this method of calculating project management costs is inaccurate from a project cost accounting perspective. This is because it does not reflect the actual PMB hours, services, or costs specifically attributable to a given project. In addition, under DGS existing methodology it is possible that, for any given project, a department could end up paying for PMB services not used by its project and even paying for budgeted but vacant PMB positions. We believe a more accurate and acceptable method would be to charge a project the hourly rate, staff benefits, and departmental overhead rate for each PMB staff member and/or service assigned to a particular project.

Another example of a questionable fee methodology is the cost assessed to notify disabled veteran and minority owned businesses of state capital outlay projects. The DGS staff indicate that this PMB fee is actually a surcharge assessed by the DGS Office of Procurement, which is responsible for notifying and encouraging bidding on state contracts by businesses owned by disabled veterans and minorities. According to DGS staff, PMB merely provides the Office of Procurement with the estimated construction cost for a given project and the Office of Procurement then provides PMB with the surcharge amount to be included in the project estimate. It is our understanding that there is no further validation of this fee by PMB staff.

Quality Control Process. As noted earlier, our review of DGS project fees has uncovered--such items as school and hospital checking for fire stations, handicap accessibility checking for security fences, excessive travel budgets for nearby projects and, in some cases, no travel budgets for distant projects. The inclusion or omission of these costs in the DGS project estimates reveals (1) the weakness of the current method of assessing fees to projects and (2) an overall lack of quality control and review prior to the issuance of the project cost estimates. According to DGS, there is a review process that occurs prior to the issuance of project estimates to the client departments and the Department of Finance. Given the problems noted above, we have serious concerns about the quality of this review process.

LAO Recommendation

Based on our review, we believe there is a lack of justification and accountability for the methods used to calculate the fees included in the project cost estimate. While we are in agreement on the concept of full cost recovery of PMB project/construction management services provided to client agencies, there is currently no way to accurately determine, or evaluate, the cost of a given project using the DGS method of assessing project fees. We also believe that the current method of assessing fees--based on averaging PMB full-year costs against estimated billable hours2002-03 Analysis--allows for the excesses and omissions shown in the earlier examples of DGS fees.

In light of the above, we recommend that the DGS method for cost estimating be reviewed by the Bureau of State Audits to determine (1) if the methodologies used for cost estimating are appropriate, (2) if the level of fees being charged is appropriate and consistent with industry standards, and (3) the adequacy of any quality control process currently in place. Once the bureau has reported its findings to the Legislature, we will review the information and provide recommendations as appropriate.