Overview
MBTA staff members did not always maintain documents for contract change orders. If all the supporting documentation is not present in the final change order package retained to support each change order, there is an increased risk of inaccurate payments to contractors.
The MBTA executed 356 change orders, totaling $79.4 million, on contracts that were active during the audit period. Of these 356, we selected a nonstatistical, random sample of 40, totaling $4.3 million paid to contractors. Our review determined that $3.3 million of change orders lacked at least one form of supporting documentation. We identified the following issues:
- Three out of 40 change order packages reviewed did not contain the Explanation of Necessity (EON), which documents a detailed scope of work to be performed and the reason the extra work is required. Change orders paid without evidence of an EON totaled $276,091.
- Two out of 40 change order packages reviewed did not contain the Record of Negotiation (RON), which documents that the contractor’s proposal was reviewed in detail, correct rates were used, the final price was fair and reasonable, and variances between the proposed cost and the negotiated cost were explained. Change orders paid without evidence of a RON totaled $201,172.
- Four out of 40 change order packages reviewed did not contain the Independent Cost Estimate (ICE), which documents pricing details for the work to be performed and is used by the MBTA to analyze the contractor’s proposal during negotiations. Change orders paid without evidence of an ICE totaled $237,172.
- Nineteen out of 40 change order packages reviewed did not contain the Contractor’s Change Order / Risk Reallocation Check-Off List. Change orders paid without evidence of this checklist totaled $3,010,494.
Authoritative Guidance
The MBTA’s Construction Contract Change Order / Risk Reallocation Guidelines for Costs and Supporting Documents, last updated in October 2015, states,
The final change order/risk reallocation package must present a clear scope of work [EON], a cost proposal from the contractor, an independent cost estimate [ICE] and a cost analysis that demonstrates how the final price was established [RON], providing clear definition of the elements of cost and the rates applied. . . .
An Independent Cost Estimate (ICE) . . . is required for ALL change orders/risk reallocations and extra work orders regardless of nature or size. There is no exception to this requirement. Time and material change orders/risk reallocations and credit change orders/risk reallocations include this requirement. . . . Differences between the ICE and the Contractor’s Proposal and the final settlement should be documented in the Record of Negotiation.
Regarding the inclusion of the Contractor’s Change Order / Risk Reallocation Check-Off List, the guidelines state,
Contractor’s change order/risk reallocation Check-Off List is a standard tool to ensure that each change order/risk reallocation is well supported and in compliance with the MBTA Change Order/Risk Reallocation Guideline. It is best practice to fill out and include the Check-Off List with each change order/risk reallocation.
The MBTA’s response to its 2011 external audit indicated that the Contractor’s Change Order / Risk Reallocation Check-Off List was required by its Construction Contract Change Order Guidelines for Costs and Supporting Documents (Revision 4, dated February 2010). According to Revision 7 of the guidelines, dated October 2015, the checklist is no longer required, but using it is considered a best practice.
Reasons for Noncompliance
Although the MBTA has established a Contractor’s Change Order / Risk Reallocation Check-Off List to ensure that change orders are properly documented before they are paid, it does not require its contractors to use the list. This creates a lack of consistency in the use of the check-off list by the MBTA’s contractors and a risk that certain documents may not be properly completed and retained when a contractor elects not to use the list, which is a control to prevent this problem from happening.
Recommendation
The MBTA should codify its Contractor’s Change Order / Risk Reallocation Check-Off List as a required piece of supporting documentation for all change orders and should implement monitoring controls to ensure that its contractors complete this document.
Auditee’s Response
In a response to this finding dated June 18, 2018, the MBTA stated,
The missing documents in the first three bullets [of Finding 3] of the audit all relate to the Salem Station and Parking Garage or the Beverly Station Parking Garage Projects. These two contracts were procured as part of a . . . project delivery method that the MBTA does very infrequently.
The final bullet is specific to the Contractor’s Change Order/Risk Reallocation Check-Off List. This document is located within the Construction Contract Change Order Guidelines for Cost and Supporting Documents. . . . This is a suggested document to be prepared by the Contractor not MBTA Staff. Page 6 of 75 of the Guidelines states the following:
“Contractor’s change order/risk reallocation Check-off List is a standard tool to ensure that each change order/risk reallocation is well supported and in compliance with the MBTA Change Order/Risk Reallocation Guidelines. It is best practice to fill out and include the Check-Off list with each change order/risk reallocation. However, if the list is not provided with the change order/risk reallocation, it will not constitute a hold in processing the change. This is a tool meant to assist the contractor in providing a complete proposal, which will expedite the change and payment process. Incomplete proposals will not be processed and payments for extra work may be delayed if the contractor’s proposal is incomplete.”
This language indicates that it is the Contractor and not the MBTA that is responsible for the checklist. The guidance even acknowledges that this is a best practice and not a requirement. The purpose of the checklist is to help reduce the amount of time it takes to review and process a change order/risk reallocation. The MBTA reviews the documentation for completeness and appropriateness regardless of whether or not the contractor submits a checklist. Therefore, this finding is not appropriate to include in the audit as a finding since there is no requirement that a checklist be submitted and the MBTA does not rely upon the information contained in the checklist even when submitted.
In a subsequent response, dated July 26, 2018, the MBTA stated,
It is important to note that although the Draft Audit states that certain change orders lacked at least one form of supporting documentation, the documentation noted was either not required per the MBTA Construction Contract Change Order Guidelines or upon review of the Draft Audit Report the MBTA was able to find the majority of the missing documents and did provide that information to the State Auditor prior to the issuance of the Final Audit Report. . . .
The MBTA is committed to ensuring that change order packages are prepared according to MBTA procedures as outlined in the current MBTA Construction Contract Change Order Guidelines. The MBTA has recently created and filled a new position within the Capital Delivery Department, Director of Contractor Change Management, who is responsible for the completeness and quality of the change order package, including all supporting documentation. The MBTA is also in the process of finalizing the MBTA Construction Contract Change Order Manual, which is an update of and will replace the current MBTA Construction Contract Change Order Guidelines.
Lastly, the MBTA is proud of its commitment and level of review and documentation required prior to issuing any change order and would like to note that as part of the recent 2018 [Federal Transit Administration] Triennial Review, construction change order documentation was a noted area of performance.
Auditor’s Reply
As noted above, during our audit, we found that the MBTA processed more than $3 million in change orders without adequate documentation. With its written response to our draft report, the MBTA provided copies of the following documents:
- the three missing EONs
- one of the two missing RONs
- two of the four missing ICEs
However, despite repeated requests, this information was not provided to OSA during our audit fieldwork, so we could not perform the testing necessary to verify its accuracy and authenticity. It should be noted that if OSA had been able to test and verify the accuracy of this information, the $3.3 million in inadequately documented change orders that we questioned could have been reduced to a balance of approximately $3 million.
Since the MBTA agrees that the purpose of the checklist is to help reduce the amount of time it takes to review and process a change order / risk reallocation and help contractors provide complete proposals, which will expedite the change and payment process, we again urge the MBTA to codify its Contractor’s Change Order / Risk Reallocation Check-Off List as a required piece of supporting documentation for all change orders and implement monitoring controls to ensure that its contractors complete this document.
| Date published: | September 28, 2018 |
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