1. Audit of Capital Projects Administration: Construction ABSTRACT
Controls over construction contract procurement
compliance and invoice verification procedures
should be improved. In addition, formalization of
some project monitoring processes would provide
,., greater quality assurance and potentially increase
efficiency.
City Auditor's Office
AUDIT OF CAPITAL
PROJECTS ADMINISTRATION
Construction
I
crry
OF
DENTON
The City of Denton Internal Audit Report April 2020
Audit of Capital Projects Administration: Construction
Table of Contents
ExecutiveSummary............................................................................................................................3
Introduction ......................................................................................................................................5
ManagementResponsibility.....................................................................................................................5
Audit Objectives, Scope, and Methodology..............................................................................................5
Background...............................................................................................................................................6
WhatWorks Well...............................................................................................................................8
The City Has Adopted Appropriate Construction Standards....................................................................8
All Reviewed Pay Estimates were Adequately Approved.........................................................................8
Opportunities for Improvement.......................................................................................................10
Construction Contract Procurement Did Not Always Comply with State Law.......................................10
Construction Contract Terms Were Not Always Followed.....................................................................12
Construction Discrepancies' Resolution Process Needs To Be Improved ..............................................14
Inspection Activities Should Be Further Detailed ...................................................................................16
Additional Construction Testing Would Increase Assurance..................................................................18
Appendix A: Management Response Summary.................................................................................19
Appendix B: Reviewed Projects........................................................................................................21
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The City of Denton Internal Audit Report April 2020
Audit of Capital Projects Administration: Construction
Executive Summary
Honorable Mayor and members of the City Council,
The City Auditor's Office has completed a performance audit of the Capital Projects Administration Planning
& Design processes. The objective of this audit is to provide assurance that the City's resources are being
used economically and efficiently by evaluating the existence and adequacy of controls over the capital
project construction processes.
Salient Findings
• The City has adopted the Public Works Construction Standards promulgated by the North
Central Texas Council of Governments (NCTCOG) for the construction of general government
construction projects. The City's Public Works Inspections (PWI) staff is currently responsible
for ensuring that construction activities are being performed in accordance with these
standards as well as the project-specific plans and specifications. Currently,the City is working
on developing its own standards based in NCTCOG standards.
• Six of the seven reviewed construction projects' original contracts were appropriately solicited
in accordance with Texas Local Government Code 252 or Texas Government Code 2269.
Procurement discrepancies of the remaining project— McKinney Phase I —were investigated
by the City Auditor's Office and disclosed to the City Council in a separate communication on
February 21, 2020.
• Texas Local Government Code §252.048 requires that the governing body of a municipality
approve any contract change orders that cumulatively decrease or increase the contract value
by more than $50,000. Change orders that cumulatively valued less than $50,000 may be
approved by the City Manager,whose authority effectively resets after Council approves the
change orders. Three of the thirteen executed change orders were approved inappropriately
by staff.
• More than $1 million work was performed prior to receiving the City Council's required
approval of the corresponding change orders. Allowing contractors to perform work before
approval of relevant change orders may create an inappropriate obligation to pay. If this
obligation is not ratified,the City may be in violation of state procurement regulations or could
be at risk of legal action.
• In general,contracts provide duties and obligations of the parties as well as remedies forfailure
to abide by contract terms.We found three instances in records pertaining to the Bonnie Brae
Phase I and Mayhill Phase I contracts where contract terms were not adhered to as follows:
o Calculation error in a pay estimate resulted in underpayment of about$18,000 to the
Bonnie Brae Phase I contractor.
o The Mayhill Phase I construction contract stated that only complete and in place items
will be paid for and no payment will be made for materials on hand. Despite this clause,
multiple pay estimates included materials on hand statements resulting in the City pre- m
paying the contractor almost $267,000. The Mayhill I materials on hand payments
appear to have been credited back to the City as part of the pay estimate process.
The City of Denton Internal Audit Report April 2020
Audit of Capital Projects Administration: Construction
However, specific attention should be paid to the reconciliation of these payments to
avoid paying the contractor for materials that were not used during the project.
o In construction contracts, retainage is generally held to ensure proper performance.
The contract stated that 5% retainage shall be held by the City. However, the City
released about$1 million of the Mayhill Phase I retained amount prematurely leaving
only 1.8% retainage. According to the City Engineer, this practice is not uncommon in
the construction industry; however, the City should comply with the terms of its
contracts.
• The assigned PWI Inspector physically inspects the construction site daily and records site
conditions,general details of construction activities,and any unusual occurrences in their Daily
Work Report. The Daily Work Reports provide the basis for the City's construction quality
acceptance function; however, the inspection tests performed, and the results recorded are
largely at the discretion of the assigned Inspector. Without a documented, formal inspection
process or well-defined inspection activity requirements, it is difficult to ensure that all
construction activities were performed appropriately.Similarly,there is no system to track and
resolve any recorded unusual occurrences or non-conforming inspection results. Without a
tracking system, it may be difficult to ensure that these issues were appropriately resolved.
Without formally established procedures for conducting daily inspection activities, there is a
risk that non-conforming inspection results will not be observed. Similarly, implementing a
tracking system for inspection tests and unusual occurrences would provide further assurance
that all construction activities were appropriately inspected. This would not only facilitate
supervisory review but may also help Inspectors prevent potential project delays.
• For capital improvement projects, independent assurance of quality control includes testing of
construction materials, compaction reports, density tests, water tests, etc. Materials and
compaction tests are generally performed in compliance with NCTCOG standards and project
specifications. Tests are overseen by Public Works Inspectors when performed. Based on our
review, construction testing may be performed by firms hired by the City, the design
consultant, or the construction contractor without consistency.
The City has the ability to retest any construction tests to verify their accuracy. However,
currently there is no set process to determine when a retest should occur. Allowing the
construction contractor to hire a construction testing firm increases the chance that test
results may be skewed or falsified. Developing a random retesting program would provide
increased assurance that this risk has not manifested.
We appreciate Engineering Services staff for their co-operation. We made eleven recommendations in this
report. Engineering Services has concurred or partially concurred with all eleven recommendations.
Sincerely,
a�
Umesh Dalal, City Auditor
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The City of Denton Internal Audit Report April 2020
Audit of Capital Projects Administration: Construction
Introduction
The City Auditor is responsible for providing: (a) an independent appraisal' of City operations to
ensure policies and procedures are in place and complied with, inclusive of purchasing and
contracting; (b) information that is accurate and reliable; (c) assurance that assets are properly
recorded and safeguarded; (d) assurance that risks are identified and minimized; and (e) assurance
that resources are used economically and efficiently and that the City's objectives are being
achieved.
The City Auditor's Office has completed a performance audit of the Capital Projects Administration
Construction processes. We conducted this performance audit 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.
Management Responsibility
City management is responsible for ensuring that resources are managed properly and used in
compliance with laws and regulations; programs are achieving their objectives; and services are
being provided efficiently, effectively, and economically.
Audit Objectives, Scope, and Methodology
This report is intended to provide assurance that the City's resources are being used economically
and efficiently by evaluating the existence and adequacy of controls over capital project
construction processes.
Audit fieldwork was conducted during November and December of 2019 and January of 2020.The
scope of review varied depending on the procedure being performed. The following list
summarizes major procedures performed during this time:
• Reviewed documentation to develop criteria including industry standards, best practices,
policies, and procedures;
• Developed a process narrative to identify current control activities that was certified by
the City Engineer, Deputy City Engineer, Public Works Inspections Manager, the Assistant
Controller, and Engineering Service's Contract Control Specialist;
• Verified procurement law compliance for a selection of construction contracts and
associated change orders executed as part of the general government capital projects
delivery process;
• Compared submitted construction invoices to contract terms; and
• Reviewed Daily Work Reports and Requests for Information for under-construction
projects. Ln
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'The City of Denton Internal Auditor's Office is considered structurally independent as defined by generally accepted government auditing
standard 3.56.
The City of Denton Internal Audit Report April 2020
Audit of Capital Projects Administration: Construction
Background
As of December 2017, The City of Denton's Engineering Services had established and
formalized general project management and delivery procedures in the Project Management
Manual, which is based on the Project Management Institute's Project Management Body of
Knowledge (PMBOK). This Manual generally divides the capital improvement project (CIP)
management process into six phases as shown below.
1. Initiation 4. Bid
2. Planning 5. Construction
3. Design 6. Close out
This audit report generally covers Engineering Services' processes and controls in the Bid and
Construction phases, as no projects in our scope had gone through the close out process as of
January 2020.Z The Initiation, Planning, and Design phases were covered in our separate audit
reports on Planning & Design and Property Acquisition. In this context, the report focuses on the
administration of four major general government CIP programs as outlined in Appendix B.
At the City of Denton, major capital improvement projects are generally funded through the
issuance of debt such as general obligation (GO) bonds and certificates of obligation (CO), which
are backed by the full faith and credit of the issuing jurisdiction,3 or revenue bonds, which are
secured by a specific revenue stream. In addition, the City may receive additional monies from
regional partners such as Denton County, Denton Independent School District, the Texas
Department of Transportation, and the North Central Texas Council of Governments (NCTCOG)for
certain transportation projects. The budgeted funds for each of the four selected capital
improvement programs in our scope as of March 2020 are broken out by source in Figure 1:
Figure 1: Select CIP Budgeted Funding Source as of March 2020 (In Millions)
$90 ■Regional Partners ■GO Bonds Cos Other
o $80
$70
$60
$50
$40
$30
$20
$10 -
$0
Bonnie Brae Hickory Creek Mayhill McKinney
The four major CIP programs under review in our audit are typically broken into multiple phases
resulting in 16 unique projects.Table 1 shows the status of each of these projects and expected
completion date as of March 2020: lD
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z The Initiation,Planning,and Design phases were covered in a separate audit report.
3 While both types are backed by the full faith and credit of the issuing jurisdiction,GO Bonds require voter approval before issuance whereas
Cos do not.
The City of Denton Internal Audit Report April 2020
Audit of Capital Projects Administration: Construction
Table 1: Select CIP Schedule Summary
Project Phase Construction Start Exp.Completion
Bonnie Brae I Construction Jul. 2017 Jun.2020
Bonnie Brae II Construction Jan. 2020 May 2021
Bonnie Brae III 90% Design Aug. 2020 Sep. 2022
Bonnie Brae IVA Construction Jun. 2019 Mar. 2020
Bonnie Brae IVB 100%Design Jul. 2020 Oct.2022
Bonnie Brae V 60% Design May. 2021 Aug.2022
Bonnie Brae VI 30% Design Jan. 2021 Aug.2022
Bonnie Brae VII Initiation TBD TBD
Hickory Creek I Bid May 2020 May 2021
Hickory Creek II Construction Jan. 2020 Apr. 2021
Hickory Creek III 60% Design Aug. 2020 Apr.2022
Hickory Creek IV On Hold NA NA
Mayhill Road I Construction Sep.2017 Apr.2020
Mayhill Road II (DCTA Bridge) 30% Design Dec. 2020 Dec.2022
McKinney I Close Out Jul. 2019 Mar. 2020
McKinney 11 Construction Dec. 2019 Mar. 2022
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The City of Denton Internal Audit Report April 2020
Audit of Capital Projects Administration: Construction
What Works Well
The City Has Adopted Appropriate Construction Standards
Standard construction specifications provide minimum standards for materials, methods of
construction, and repair or alteration of improvements located within public right of way. These
improvements include but are not limited to, streets, sanitary sewer facilities, storm drainage
facilities, water distribution facilities, landscape, and other improvements.The auditors found the
following:
• The City has adopted the Public Works Construction Standards promulgated by the North
Central Texas Council of Governments (NCTCOG) for the construction of general government
construction projects. The City's Public Works Inspections (PWI) staff is currently responsible
for ensuring that construction activities are being performed in accordance with these
standards as well as the project-specific plans and specifications.
• In addition, the City is currently in the process of preparing and implementing City of Denton-
specific construction standards based on NCTCOG's standards. Tailoring the NCTCOG
standards to fit the City should allow for increased consistency between construction projects,
potentially improving both City staff efficiency and overall construction quality.
All Reviewed Pay Estimates were Adequately Approved
When processing invoices, it is important to substantiate the City's obligation to pay the invoiced
amount by verifying that the stated quantities were received and that the prices are accurate based
on the agreement. While this responsibility typically falls on the City's Accounts Payable Division,
the nature of construction contract pay estimates (i.e. construction invoices) requires that
Engineering Services staff be more directly involved.The auditors found the following:
• The project's Inspector—typically from the City's Public Works Inspections Division—certify on
the pay estimate that all invoiced quantities were constructed.This responsibility is codified in
the Project Management Manual.
According to the Project Management Manual, the project's Project Manager then approves
the pay estimate. Engineering Services' Management stated that this approval should include
a review of the invoiced prices to ensure that they match the contract terms.This responsibility
is not codified in the Project Management Manual.
Engineering Services administrative staff is responsible for verifying that the appropriate
signatures are in place before forwarding the certified invoice to the Accounts Payable Division.
According to the information received from the Deputy City Engineer,these responsibilities are
illustrated in Table 2.
Table 2: Pay Estimate Verification Responsibilities
Role Responsibility
Inspector Verify Quantities
Project Manager Verify Prices 00
Administrative Staff Verify Certifications
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The City of Denton Internal Audit Report April 2020
Audit of Capital Projects Administration: Construction
• A total of 56 pay estimates had been processed for the four projects within our scope as
summarized in Table 3. All 56 pay estimates had adequate approval.
Table 3: Project Pay Estimates Summary (As of November 2019)
Project No.of Pay Estimates Retained Value Total Paid
Bonnie Brae 1 21 $509,792 $9,684,969
Bonnie Brae IVA 6 $164,076 $3,117,445
Mayhill1 26 $563,087 $30,686,485
McKinney 1 3 $64,406 $1,223,713
All: 56 $1,301,361 $44,712,612
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The City of Denton Internal Audit Report April 2020
Audit of Capital Projects Administration: Construction
Opportunities for Improvement
Construction Contract Procurement Did Not Always Comply with State Law
Of the sixteen projects under review, seven had executed construction contracts with thirteen
associated change orders at the end of March 2020 (see Table 4).
Table 4: Construction Contract Summary (March 2020)
Total Construction Construction Project Estimate
Project Value Change Orders at Completion
Bonnie Brae 1 $12,436,200 $625,980 $19,147,000
Bonnie Brae 11 $11,638,323 $0 $19,592,000
Bonnie Brae IVA $3,490,847 $585,310 $6,600,000
Hickory Creek II $5,320,870 $0 $6,600,000
Mayhill1 $35,603,590 -$273,824 $57,294,999
McKinney 1 $2,021,041 $49,980 $3,000,000
McKinney II $10,471,822 $0 $13,683,000
Total Construction Contract Value: $80,982,693 $987,446 $125,916,999
While the procurement function significantly impacts and is initiated by Engineering Services,
compliance with procurement laws and regulations is the primary responsibility of the Purchasing
Division. This being said, Engineering Services is also responsible for in ensuring that their
construction projects are procured according to law—this includes the procurement of the original
contract as well as the processing of any change orders.
What We Found?
• Six of the seven construction projects original contracts were appropriately solicitated in
accordance with Texas Local Government Code 252 or Texas Government Code 2269.
o Procurement discrepancies of the remaining project — McKinney Phase I — were
investigated by the City Auditor's Office and disclosed to the City Council in a separate
communication.
• Texas Local Government Code §252.048 requires that the governing body of a municipality
approve any contract change orders that cumulatively decrease or increase the contract value
by more than $50,000. Change orders that cumulatively value less than $50,000 may be
approved by the City Manager,4 whose authority effectively resets after Council approves the
change orders. Three of the thirteen executed change orders were approved inappropriately
as illustrated in Table 5.
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4 Ordinance 2009-034(executed on 2/3/2009)granted the City Manager authority to approve change orders up to$50,000 as specified in
Texas Local Government Code 252.048 and the Materials Management and Payment Procedures Manual delegates this authority to Purchasing.
The City of Denton Internal Audit Report April 2020
Audit of Capital Projects Administration: Construction
Table 5: Construction Change Order Analysis
Project Value Cumulative CMO Value Approval Appropriate?
Bonnie Brae 1 $11,810,220 $0 Council Yes
CO#1 $564,500 $0 Council Yes
CO#2 $47,559 $47,559 Purch. Yes
CO#3 $13,920 $61,479 Purch. No
Bonnie Brae II $11,638,323 $0 Council Yes
Bonnie Brae IVA $2,905,537 $0 Council Yes
CO#1 $585,310 $0 Council Yes
Hickory Creek II $5,320,870 $0 Council Yes
Mayhill1 $35,877,415 $0 Council Yes
CO#1 $13,291 $13,291 Purch. Yes
CO#2 $18,695 $31,986 Purch. Yes
CO#3 $35,104 $67,090 CMO No
CO#4 -$667,848 $0 Council Yes
CO#5 $76,185 $76,185 CMO No
CO#6 $137,836 $0 Council Yes
CO#7 $112,912 $0 Council Yes
McKinney I NA NA NA NA'
McKinney 11 $10,471,822 $0 Council Yes
• In addition, some construction work was performed before the change order was approved.6
This situation is summarized in Table 6.
Table 6: Summary of Construction Work Performed Before Authorization
CO Change Order Work Performed Value Performed Total Project
Project No. Approval Date Before Before Approval Construction Cost
Bonnie Brae 1 #1 2/06/2018 1/31/2018 $137,908 $12,436,200
Bonnie Brae IVA' #1 9/10/2019 9/11/2019 $864,130 $3,490,847
o Allowing contractors to perform work before approval of relevant change orders may
create an inappropriate obligation to pay. If this obligation is not ratified, the City may
be in violation of state procurement regulations or could be at risk of legal action.
Why Does It Matter?
The City must comply with state procurement laws and regulations as non-compliance may subject
the City to judicial challenge. Section 252.061 of the Texas Local Government Code states that "if
[a] contract is made without compliance with [Chapter 252], it is void and the performance of the
contract, including the payment of any money under the contract, may be enjoined ..." In addition,
Section 252.062 of the Texas Local Government Code states that"a municipal officer or employee
commits an offense if the officer or employee intentionally or knowingly violates [Chapter 252];"
such an offense could result in a Class B or Class C misdemeanor.
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5 The McKinney I project was not performed under a project-specific contract;potential issues with this procurement method were
investigated by the City Auditor's Office and disclosed to the City Council in a separate communication.
6 This determination was based on work conducted in the construction invoice period as submitted by the contractor.
'Unauthorized Bonnie Brae IVA construction work was investigated by the City Auditor's Office which is further detailed in a separate report.
The results of this investigation were presented to the City Council on February 251h,2020.
The City of Denton Internal Audit Report April 2020
Audit of Capital Projects Administration: Construction
Recommendations:
1. Review construction contracts to ensure that procurement regulations are followed and
consult with the City Attorney's Office if compliance with the regulations is in question.
Engineering Services Comments:
Procurement& Compliance Comments: Procurement will continue to follow Local Government
Code 252 and Texas Government Code 2269 for public works construction procurements in
consultation with the City Attorney's Office. These procedures will be formally documented in
the updated Purchasing Manual.
2. Clarify procurement change order authorization practices with guidance from the City
Attorney's Office to ensure compliance with state procurement regulations.
Procurement& Compliance Comments:Procurement is working with the City Attorney's Office
to clarify the change order authorization procedures and ensure compliance with procurement
statutes. These procedures will be formally documented in the updated Purchasing Manual.
Moving forward, change orders over$50,000 will require City Council approval.
3. Consult with City Administration to identify methods to expedite the authorization of change
orders when delays might significantly impact a construction project's schedule.
Engineering Services Comments: Capital Projects staff is working with the City Attorney's office
to develop and implement methods for expediting the authorization of change orders, especially
when the delays may significantly impact construction projects schedule. The proposed changes
will be included in the new construction contract documents that staff is currently working on
updating.
Construction Contract Terms Were Not Always Followed
A construction contract provides important protections for the parties to the contract. In general,
contracts provide duties and obligations of the parties as well as remedies for failure to abide by
contract terms. Construction contracts typically include details of the project scope, work to be
accomplished and payment procedures. In case of a breach of contract terms by one of the parties,
the other party may have a right to legal remedies.
What We Found?
• In general, payments made to the contractor as part of the Bonnie Brae Phase I project were
made in accordance with the contract terms; however, some invoices contained errors that
resulted in the contractor being under paid as follows:
o Pay estimate #16 of this project contained a calculation error that seemingly resulted
in the City underpaying the contractor by$17,864.53.
• All payments made to the construction contractor as part of the Bonnie Brae Phase IVA project
appear to have been made in accordance with the contract terms. N
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• The Mayhill Phase I construction contract contains the following provisions:
The City of Denton Internal Audit Report April 2020
Audit of Capital Projects Administration: Construction
o "Only complete and in place items will be paid for and no payment will be made for
materials on hand."
Despite this clause, multiple pay estimates included materials on hand statements
resulting in the City pre-paying the contractor $266,557.98. According to the City
Engineer, this practice is not uncommon in the construction industry; however, the
City should comply with the terms of its contracts.
The Mayhill I materials on hand payments appear to be credited back to the City as
part of the pay estimate process; however, specific attention should be paid to the
reconciliation of these payments to avoid paying the contractor for materials that were
not used during the project.
o Another provision contained in the contract is, "A five percent (5%) retainage will be
held by the City, calculated using the total work complete to date of the partial
payment. No partial release of retainage will be permitted before Final Payment."
Despite this clause, $1,032,559.72 was paid to the contractor in August of 2019 as a
partial retainage payment leaving a balance of $563,087 (1.8% retainage). According
to the City Engineer, this practice is not uncommon in the construction industry;
however, the City should comply with the terms of its contracts. Retainage payments
are intended to provide an incentive for contractors to complete construction as
agreed in the contractor; partial retainage payments reduce this incentive.
• Due to the unique procurement method for the McKinney Phase I project, 21 of the project's
40 line items are not covered under a contract. Still, Engineering Services and the contractor
appear to have come to an agreement on the price of these line items using a project pricing
proposal.
o All three pay estimates incorrectly listed the prices of these non-contracted line items,
seemingly resulting in an overpayment of$9,058.25.This being said,the City may have
little recourse when attempting to recover these costs since these prices were not
contractually established.
Why Does It Matter?
This audit report makes no conclusions about the materiality of the contractual infringements
described previously. A material breach of contract may result in the City undergoing litigation.
Recommendations:
4. Consult with the City Attorney's Office to determine if the City has breached the concerned
construction contracts.
Engineering Services Comments:Capital Projects staff has been working with the CityAttorney's
office to determine if any of the construction contracts were materially breached. Based on the
response received from the City Attorney's office, the City has not materially breached any
construction contracts.
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The City of Denton Internal Audit Report April 2020
Audit of Capital Projects Administration: Construction
5. Review pay estimates for the concerned projects to ensure payments have been made
according to the contract terms.
Engineering Services Comments: Capital Projects staff has reviewed all pay estimates for the
concerned projects and have provided a detailed response. In the past six months staff has
implemented a new invoice approval process along with new invoicing form which addresses
the issues that were identified during this Audit.
6. Develop procedures to ensure that materials on hand payments and partial retainage
payments are handled consistently in future projects to provide assurance that all payments
have been processed correctly.
Engineering Services Comments:Capital Projects staff will work with Procurement and Legal to
develop a process/procedure for handling retainage payments which will be included in the new
construction contract that staff is currently working on updating.
Construction Discrepancies' Resolution Process Needs To Be Improved
During construction projects, the standards, contract, plans, and specifications do not always
adequately address every issue that may arise on site. The purpose of a Request for Information
(RFI) is to resolve conflicts,or discrepancies, early in the construction process to eliminate the need
for costly measures subsequently. According to a study conducted by the Navigant Construction
Forum,$ "Average reply times for RFIs can range from 6.4 days to 10 days based on region, project
size, and duration." In order to address these discrepancies, the City — like many organizations —
has developed a standardized, automated (RFI) process.This process is illustrated in Figure 2.
Figure 2: Request for Information Process
Contractor Inspector Project Manager
•Identifies •Creates RFI •Gathers
Discrepancy •Sets Response Information from
•Requests Deadline Stakeholders
Information •Prepares and
Submits RFI
Response
The Project Manager is responsible for responding to the RFI based on communication with the
involved stakeholders, such as the design consultant, other City departments, franchise utilities,
etc. Once the response is prepared it is forwarded back to the Inspector and Contractor via the
work management software.
What We Found?
• Request for Information documentation was reviewed for four under-construction projects
including:
8 Navigant is the leading provider of expert services in the construction and engineering industries.It aims to provide best practices on the
avoidance and resolution of construction project disputes globally.
The City of Denton Internal Audit Report April 2020
Audit of Capital Projects Administration: Construction
➢ Bonnie Brae I ➢ Bonnie Brae IVA
y Mayhill I ➢ McKinney I
o The Bonnie Brae I project was managed by City staff but inspected by the design
consultant. For this reason, the City's standard RFI process was not used; however,
there was evidence that Engineering Services staff, the design contractor, and the
construction contractor communicated via e-mail to resolve discrepancies.
o The Bonnie Brae IVA project was managed and inspected by City staff. All RFIs were
properly recorded and resolved using the process illustrated in Figure 1. The majority
of RFIs were responded to within three days.
o The McKinney I project was managed and inspected by City staff. No RFIs were created
during construction.There is evidence that PWI staff were on site during construction.
o The Mayhill I project was managed and inspected by the design consultant. One
hundred and six RFIs were issued and resolved by the consultant with a response rate
that varied from 1 to 378 days(see Figure 3 for further detail).The reasonableness and
impacts of RFI response delays could not be examined based on the available RFI
documentation.
Figure 3: Mayhill Phase I RFI Response Rate
Greater than 30 Days
24%
Btw 15 and 30 Days
10% Less than 15 Days
0 66%
Despite outsourcing the project management of Mayhill I,the City should still monitor
construction activity to ensure the project is progressing appropriately.There was little
evidence of City involvement in the resolution of RFI's for a substantial period of the
project. Engineering Services staff stated that a City Project Manager could not be
involved in the monitoring of this project due to understaffing at the time.
• The "Project Management Methodology Guidelines" adopted by the Engineering Services
Department in December 2017, provides some examples on when an RFI should be used,
however, it does not:
o Specifically outline the process to create and respond to RFIs; or
o Establish responsibility and timelines for resolving RFIs.
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The City of Denton Internal Audit Report April 2020
Audit of Capital Projects Administration: Construction
Why Does It Matter?
Discrepancies were not resolved using a consistent method in all of the reviewed projects. This
being said, Engineering Services appears to have developed an automated request for information
system. Codification of this process would facilitate consistency and help retain institutional
knowledge. Similarly, developing standard response timelines for different types of RFIs may aid
both Public Works Inspectors and Project Managers in prioritizing RFIs — further improving
response timeliness and minimizing construction project delays.
Recommendations:
7. Formalize the process for RFI creation in a policy or standard operating procedure.
Engineering Services Comments:Staff has developed a Standard Operating Procedure(SOP)for
the Request For Information (RFI) which is currently used by the Capital Projects department.
The SOP specifically outlines how to create the RFI through Smartsheet and provides a timeline
for responding and automatic reminders. These RFI's are tracked every week and a report is
submitted to the leadership team.
8. Develop criteria or guidelines to ensure the timely resolutions of discrepancies observed by
contractors during construction projects.
Engineering Services Comments:See previous response.
Inspection Activities Should Be Further Detailed
In general, the quality assurance process includes three key components as shown below:
1. Quality Control performed by the contractor to ensure their processes are performed
effectively;
2. Quality Acceptance performed by the owning agency to verify that the construction
complies with the applicable standards, specifications, and plans; and
3. Independent Assurance performed by a third party to provide an independent assessment
of the construction quality.
The City's Public Works Inspections (PWI) Division performs the quality acceptance function and is
responsible for inspecting construction projects to ensure that they meet the specified standards,
plans, and specifications. PWI's construction project documentation was reviewed for four under-
construction projects including:
➢ Bonnie Brae I Bonnie Brae IVA
➢ Mayhill I Y McKinney I
What We Found?
• PWI Inspectors do not provide the "means or methods" for performing construction work.
Essentially, this means that they do not instruct the contractor on how to perform a
construction activity,allowing PWI staff to remain independent and provide quality acceptance Q0
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The City of Denton Internal Audit Report April 2020
Audit of Capital Projects Administration: Construction
• The assigned PWI Inspector physically inspects the construction site daily and records site
conditions,general details of construction activities,and any unusual occurrences in their Daily
Work Report.
o The Daily Work Reports provide the basis for the City's construction quality acceptance
function; however, the inspection tests performed, and the results recorded are
largely at the discretion of the assigned Inspector. Without a documented, formal
inspection process or well-defined inspection activity requirements, it is difficult to
ensure that all construction activities were performed appropriately.
o Similarly,there is no system to track and resolve any recorded unusual occurrences or
non-conforming inspection results. Without a tracking system, it may be difficult to
ensure that these issues were appropriately resolved.
Why Does It Matter?
Without formally established procedures for conducting daily inspection activities, there is a risk
that non-conforming inspection results will not be observed. This is specifically a risk for new or
less experience PWI Inspectors who may or may not take a significant time to understand the
Division's inspection methods.
Similarly, implementing a tracking system for inspection tests and unusual occurrences would
provide further assurance that all construction activities were appropriately inspected.This would
not onlyfacilitate supervisory review but may also help Inspectors prevent potential project delays.
Recommendations:
9. Create standard inspection guidance for Public Works Inspections staff to provide greater
assurance that construction activities are properly inspected.
Public Works Inspections Comments:Public Works Inspections has created and implemented a
Standard Operating Procedure for the information that will be recorded on Daily Work Reports.
The SOP outlines a more standardized approach to recording and observing construction
activities on a daily basis.
10. Develop a system to track non-conforming inspection results to ensure they are corrected
appropriately.
Public Works Inspections Comments:Public Works Inspections has created an Excel spreadsheet
that will be used for recording and tracking the status of issues and non-conforming inspections.
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The City of Denton Internal Audit Report April 2020
Audit of Capital Projects Administration: Construction
Additional Construction Testing Would Increase Assurance
As discussed previously, independent assurance is a key component of the quality assurance
process that is typically performed by an independent, third party. For capital improvement
projects, these activities generally include the testing of construction materials, compaction
reports, density tests, water tests, etc.
What We Found?
• Materials and compaction tests are generally performed in compliance with NCTCOG
standards and project specifications. Tests are overseen by Public Works Inspectors when
performed. Based on our review, construction testing may be performed by firms hired by the
City, the design consultant, or the construction contractor without consistency.
• The City has contracted with a construction testing firm and has the ability to retest any
construction tests to verify their accuracy. Based on our discussions with Public Works
Inspections staff, there is currently no set process to determine when a retest should occur.
Why Does It Matter?
Allowing the construction contractor to hire a construction testing firm increases the chance that
test results may be skewed or falsified. Developing a random retesting program would provide
increased assurance that this risk has not manifested.
Recommendation:
11. Develop a process to randomly retest materials and compaction tests ordered by the
construction contractor.
Public Works Inspections Comments: Public Works Inspections has created a Standard
Operating Procedure for material testing that includes testing and retesting of materials and
compaction tests conducted/submitted by the contractor. Public Works Inspections has
developed a log that tracks testing and retesting for each Capital Improvement Project.
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The City of Denton Internal Audit Report April 2020
Audit of Capital Projects Administration: Construction
Appendix A: Management Response Summary
The following summarizes the recommendations issued throughout this report. The auditors found that
staff and the Department were receptive and willing to make improvements to controls where needed.
Management has provided their response to each recommendation.
Review construction contracts for the concerned projects to Expected
ensure procurement regulations were followed and consult Completion:
1 with the City Attorney's Office on potential remedies if Concur June 2020
compliance with the regulations is in question.
Engineering Services Comments: Responsibility:
Procurement&Compliance Comments: Procurement will continue to follow Local
Government Code 252 and Texas Government Code 2269 for public works
construction procurements in consultation with the City Attorney's Office.These
procedures will be formally documented in the updated Purchasing Manual.
Clarify procurement change order authorization practices with Expected
2 guidance from the City Attorney's Office to ensure compliance Concur Completion:
with state procurement regulations. June 2020
Procurement&Compliance Comments: Procurement is working with the City Responsibility:
Attorney's Office to clarify the change order authorization procedures and ensure
compliance with procurement statutes.These procedures will be formally
documented in the updated Purchasing Manual. Moving forward, change orders
over$50,000 will require City Council approval.
Consult with the City Attorney's Office to identify methods to Expected
3 expedite the authorization of change orders when delays Concur Completion:
might significantly impact a construction project's schedule. Six months
Engineering Services Comments: Capital Projects staff is working with the City Responsibility:
Attorney's office to develop and implement methods for expediting the Capital Projects
authorization of change orders, especially when the delays may significantly impact a
construction projects schedule.The proposed changes will be included in the new
construction contract documents that staff is currently working on updating.
Consult with the City Attorney's Office to determine if the City Expected
4 Concur Completion:
has materially breached the concerned construction contracts. Completed
Engineering Services Comments: Capital Projects staff has been working with the City Responsibility:
Attorney's office to determine if any of the construction contracts were materially
breached. Based on the response received from the City Attorney's office,the City
has not materially breached any construction contracts.
Review pay estimates for the concerned project to ensure Expected
5 payments have been made according to the contract terms. Concur Completion:
Completed
Engineering Services Comments: Capital Projects staff has reviewed all pay estimates Responsibility:
for the concerned projects and have provided a detailed response. In the past six
months staff has implemented a new invoice approval process along with new CY)
invoicing form which addresses the issues that were identified during this Audit.
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The City of Denton Internal Audit Report April 2020
Audit of Capital Projects Administration: Construction
Develop procedures to ensure that materials on hand Expected
6 payments and partial retainage payments are handled Concur Completion:
consistently in future projects to provide assurance that all Six months
payments have been processed correctly.
Engineering Services Comments: Capital Projects staff will work with Procurement Responsibility:
and Legal to develop a process/procedure for handling retainage payments which
will be included in the new construction contract that staff is currently working on
updating.
Formalize the process for RFI creation in a policy or standard Expected
7 Concur Completion:
operating procedure.
Completed
Engineering Services Comments: Staff has developed a Standard Operating Responsibility:
Procedure (SOP)for the Request For Information (RFI)which is currently used by the
Capital Projects department.The SOP specifically outlines how to create the RFI
through Smartsheet and provides a timeline for responding and automatic
reminders.These RFI's are tracked every week and a report is submitted to the
leadership team.
Develop criteria or guidelines to ensure the timely resolutions Expected
8 of discrepancies observed by contractors during construction Concur Completion:
projects. Completed
Engineering Services Comments: See previous response. Responsibility:
Capital Projects
Create standard inspection guidance for Public Works Expected
9 Inspections staff to provide greater assurance that Concur Completion:
construction activities are properly inspected. Completed
Public Works Inspections Comments: Public Works Inspections has created and Responsibility:
implemented a Standard Operating Procedure for the information that will be
recorded on Daily Work Reports. The SOP outlines a more standardized approach to
recording and observing construction activities on a daily basis.
Develop a system to track non-conforming inspection results
Expected
10 Concur Completion:
to ensure they are corrected appropriately.
Completed
Public Works Inspections Comments: Public Works Inspections has created an Excel Responsibility:
spreadsheet that will be used for recording and tracking the status of issues and non-
conforming inspections.
Develop a process to randomly retest materials and Expected
11 compaction tests ordered by the construction contractor. Concur Completion:
Completed
Public Works Inspections Comments: Public Works Inspections has created a Responsibility:
Standard Operating Procedure for material testing that includes testing and retesting
of materials and compaction tests conducted/submitted by the contractor. Public
Works Inspections has developed a log that tracks testing and retesting for each
Capital Improvement Project.
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The City of Denton Internal Audit Report April 2020
Audit of Capital Projects Administration: Construction
Appendix B: Reviewed Projects
The following list details the project reviewed as part of this audit:
• Bonnie Brae Street roadway improvements;
o Phases I, II, and III comprises improvements to Bonnie Brae from Vintage Boulevard
to Interstate 35E, including improvements on Vintage from Fort Worth Drive (US 377)
to Interstate 35W;
o Phases IV and V comprises improvements from 1-35E to University Drive (US 380);
and
o Phases VI and VII comprises improvements from University Drive to Loop 288.
Picture 1: Bonnie Brae Blvd CIP
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• Hickory Creek Road roadway improvements and realignment;
o Phases I comprises improvements from Barrel Strap to Teasley Lane;
o Phase II comprises improvements from Teasley Lane to Riverpass Drive;
o Phase III comprises the improvement and realignment of Hickory Creek from
Riverpass straight to Country Club Road (FM 1830); and
o Phase IV comprised of improvements from Country Club to Fort Worth Drive.9
Picture 2: Hickory Creek Rd. CIP
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• Mayhill Road roadway improvements from University Drive to Colorado Boulevard; and w
9 As of December 2019,Hickory Creek Road Phase IV appears to have been put on hold.
The City of Denton Internal Audit Report April 2020
Audit of Capital Projects Administration: Construction
Picture 3: Mayhill Rd. CIP
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• McKinney Street roadway improvements from Loop 288 to Grissom Road.
Picture 4: McKinney Street CIP
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