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Audit: ‘Potential’ for recovery money

Review also states utility management billing was ‘in accordance to the terms of the contract;’ legal action not advised

March 20, 2014
Fort Myers Beach Bulletin, Fort Myers Beach Observer

An audit of a management services contract between the city and the firm that oversaw the utilities expansion has found $8.5 million in potential cost recovery dollars, the city said in a news conference Thursday.

The word "potential" is important, because the city auditor conceded that the odds of recovering even a small portion of that money would be a long, arduous task.

"There is no pot of gold waiting for us to grab," city spokesperson Connie Barron said.

In 1999, the city entered into an agreement with MWH Americas, which oversaw the water and sewer expansion, which included construction of the North Reverse Osmosis (RO) plant.

The contract expired in September 2011. Some members of the then-sitting city council believed the contractor was overcharging and misleading the city.

Rich Townsend was contacted to do an independent audit, first on the RO plant, then on the entire project.

Fact Box


1. What was being audited?

The management services contract between the City of Cape Coral and MWH Americas, which originally began in 1999 and was modified in 2004.

2. Why was the contract being audited?

Some members of the prior City Council thought that MWH was misleading and overcharging the City. They engaged Rich Townsend to conduct an audit on the North RO Plant, which he expanded to encompass the entire project.

3. Is the contract still active?

No, the contract expired in September 2011.

4. What did the auditor find?

The auditor found that "MWH billed the City in accordance with the terms of the contract as amended from time to time during the term of the agreement."

5. Did the auditor identify any monies the City could recover?

Yes, the auditor identifies about $8.5 million in "potential" cost recovery dollars (total project value was $780 million).

6. How did the auditor determine this recovery amount?

The MWH contract was a complex contract with many components. While the auditor confirms that billing and payment was done according to the contract as written and agreed upon by both parties, the auditor suggests that the City re-evaluate the contract and change some of the labor components of the contract. By changing certain components, the auditor generates potential recovery amounts.

7. Can the City re-evaluate a contract that has expired?

In our Management Response, you will see the City does not agree with changing a contract that has been negotiated in good faith by both parties. The City also does not agree that one can focus on only one component of the total compensation equation, change this single component and calculate a potential recovery amount without considering that other components of the compensation equation might change as well.

8. Can the City recover any of the potential $8.5 million identified in the audit?

This is a 10-year-old contract that expired in September 2011. Much of the potential recovery amount identified by the auditor ($3.675 million) rests on the application of the "Truth in Negotiation" or Chapter 287.055 of the Florida Statutes, which requires that any requests for adjustments be made within one year following expiration of the contract. Even if the City agreed with the auditor's findings, which we do not, the contract expired 2 years ago.

9. When the auditor suggests acquiring the expertise of construction management specialists, does that mean he thinks the City should hire an attorney to seek recovery of the funds?

The auditor has indicated he does not suggest the City spend taxpayer dollars to hire an attorney to attempt recovery. The auditor has suggested the City might try to find an attorney who would take the case on a "contingent fee" basis only.

10. Will the City try to find an attorney to take the case on "contingent fee" basis?

The City contacted Aaron A. Haak, a board-certified construction law attorney with Knott, Ebelini and Hart to ascertain if his firm would accept the case on contingent fee agreement. After reviewing the audit materials, Mr. Haak declined to prosecute a claim on a contingent fee basis.

11. Can the City look for another attorney?

The City Council can decide if they want to do a broad search for a firm specializing in construction law. Any continuing legal action will have an impact on the City's efforts to close out the MWH contract.

12. What does the City need from MWH?

The City has outstanding warranty work and outstanding invoices that need to be completed to close out the contract. MWH also has the CAD information from the North 1-8 water project, which was designed and paid for in 2008. This information is needed to assist with the upcoming design work for the North 2 and North 1 utilities projects. MWH has not made this available to City staff as they await the outcome of the audit and the City's future intent. If the City has to redo this work, it could cost tens of thousands of dollars.

13. What is City management's recommendation?

This is a 10-year-old contract that expired in September 2011. The City has moved forward and is using a different project delivery method than the contract with MWH.

History Note

Why did the City use the "Construction Manager/Program Manager at Risk" contract with MWH?

In the 1990s, the City had one of the largest utilities expansion projects in the United States. Water, sewer and irrigation lines were being extended throughout much of the southeast Cape. This was a $200-million project. Three of the four contractors sued the City, and the City ended up settling these lawsuits for $17 million.

When the City began planning the next project, City administration wanted to minimize the City's risk and avoid a potential for lawsuits. The contract with MWH was a newer management method, which placed all of the risk for any potential construction problems on MWH. There was a cost associated with having MWH take on the risk. However, the contract was written to protect the City from multi-million dollar lawsuits, which it did. In addition, MWH provided the City with a 3-year warranty on all work performed, which exceeded the industry standard of one year. Even with these additional costs for "risk" and "warranty," the assessments for property owners in Cape Coral always compared favorably to other utility projects throughout the country at the same time.

The information provided in the audit may be useful in negotiating future contracts, especially contracts using "design/bid/build" methodology rather than the "design/build" or "construction manager at risk" contracts. The City already incorporated several of the audit recommendations and has taken proactive steps to safeguard the City within other contracts for goods and professional services.

The audit found that "MWH billed the city in accordance to the terms of the contract as amended from time to time during the term of the agreement."

City Auditor Margaret Krym said that one sentence pretty much framed the report and might be its most understandable item, as the contract is complicated, the issues complex, so much so that it changed the way the city does such contracts.

It also recommended that the city consider the applicability of Section 287.055 of The Florida Statutes which require "the firm receiving the award to execute a truth-in-negotiation certificate stating that wage rates and other factual unit costs supporting the compensation are accurate, complete, and current at the time of contracting."

Article PDFs

"According to information provided to the city over the life of the contract and summarized by our audit, the average wages rates used to bill the city for labor provided by MWH were overstated by an average of approximately 5 percent over the life of the contract."

Townsend also found $8.5 million in potential cost recovery dollars on a project that cost $780 million.

There were five issues, in laymen's terms, where Townsend found potential cost recovery the city council should further examine:

1.) Reconciliation of contractually agreed upon labor refunds and the impact on amounts billed for program management;

2.) Analysis of labor rates used by MWH for billings by the hour for construction phase engineering, construction management and program management;

3.) Analysis of labor rates used to price lump sum contracts for pre-construction engineering services;

4.) Analysis of construction costs incurred that were funded by authorized contingency amounts included in the construction work authorizations;

5.) Analysis of amount paid to North RO plant electrical subcontractor for performance and payment bond costs

The $8.5 million question is can any of the money be realistically recovered? Krym said not without litigation, adding that Townsend verbally advised against using taxpayer money to hire an attorney.

City Manager John Szerlag said the city contacted Aaron A. Haak, a board-certified construction law attorney to see if his firm, Knott, Ebelini and Hart would take the case on a contingent fee basis. Haak declined.

And even if the city won the entire amount, city Business Manager Mike Ilczyszyn said the city would end up with far less than $8.5 million in hand.

"Even if you cleared that hurdle, after paying attorneys you're looking at, maximum, $5 million," Ilczyszyn said. "And you still have to pay court costs, expert witness fees, and, after three or four years, maybe, you're left with $4 million."

"The hurdles to overcome are huge, even insurmountable," Krym said. "That's a decision the city council would have to address."

The city council has received the report and will decide whether to bring it forward. City management has recommended the city move forward, since it uses a different project delivery method (design/bid/build) from the "Construction Manager/ Program Manager at Risk" method used with MWH.

In its response to the audit, MWH said "MWH concurs with the report's finding that MWH billed the city in accordance with the master agreement, as amended through the course of the work. MWH made substantial efforts to assure that detailed records were maintained throughout the program and the report properly reflects that the amounts billed were appropriate for the services. However MWH disagrees with many of the particular observations."

Besides, Jeff Pearson, the city's public works director, said the RO plant, which opened in 2010, has been an "excellent facility."

"Visitors from all over the world have come to see what we do and some of the cost-saving ideas we've implemented; we are the third-lowest utility in operation and maintenance in the state," Pearson said.

Krym said citizens can take comfort on two points; that Townsend was motivated to find recoverable monies and due diligence was done, and that the potential risks have been addressed in current projects, with contract language more clearly articulated.

"A thorough job was done, the outcome did not find huge smoking guns in the significant issues," Krym said. "The city has learned a lot and improved processes to create better contracts."



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