Florida Department of Transportation

OFFICE OF INSPECTOR GENERAL

CONSTRUCTION CONTRACT CLAIM SETTLEMENTS

REPORT 04G-9005 JUNE 2000

Florida Department of Transportation

JEB BUSH GOVERNOR

605 Suwannee Street Tallahassee, Florida 32399-0450

THOMAS F. BARRY, JR. SECRETARY

June 30, 2000 Mr. Thomas F. Barry, Jr., P.E., Secretary Florida Department of Transportation 605 Suwannee Street, MS 59 Tallahassee, Florida 32399-0450 Re: Construction Contract Claim Settlements Report 04G-9005 Dear Secretary Barry: The report on our audit of Construction Contract Claim Settlements is attached. The objective of this audit was to determine whether the Department has an adequate claims management system that includes reasonable evidence that claims are 1) settled for amounts that were clearly established and adequately documented to be fair and equitable and 2) adequately tracked and monitored and accurately reported. We concluded that the Department has made recent improvements, but more are needed to mitigate the risks associated with managing claims. Essentially, the Department cannot adequately demonstrate its accountability for managing claims because claim settlement amounts often were not clearly established or sufficiently documented to be fair and equitable, and they were not adequately tracked and monitored or accurately reported. The Departments senior staff agrees with our recommendations to appoint a cross-functional task team to develop a coordinated process for managing and resolving claims, for developing procedures and guidelines relating to the General Counsels evaluations and advice, and for identifying the minimum requirements for tracking and monitoring claims. If we can be of further assistance, please let me know. Sincerely,

(Original Signed by) Cecil T. Bragg, Jr., CPA Inspector General CTB/ecb Attachment

www.dot.state.fl

CONSTRUCTION CONTRACT CLAIM SETTLEMENTS

AUDIT REPORT NUMBER 04G-9005

June 2000

OFFICE OF INSPECTOR GENERAL

Audit Team Members

Audit Manager Audit Team Eldon Blaxton, CIA, CFE Bob Anderson Kim Smith, CPA John Greene Jim Maxwell, CIA

Sections 20.055 and 20.23, Florida Statutes, require the Florida Department of Transportation's Inspector General to review, evaluate and report on policies, plans, procedures and other operations of the Department and recommend improvements. This audit was conducted to assist management in the effective implementation of transportation programs by the Department. This audit was conducted in accordance with applicable Government Auditing Standards issued by the Comptroller General of the United States (1994 revision, as amended) and Standards for the Professional Practice of Internal Auditing published by the Institute of Internal Auditors. We included such tests and other auditing procedures as were considered necessary under the circumstances.

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TABLE OF CONTENTS

Page

EXECUTIVE SUMMARY BACKGROUND and INTRODUCTION OBJECTIVES, SCOPE and METHODOLOGY FINDINGS and RECOMMENDATIONS I. Determining and Documenting Settlements II. Tracking, Monitoring, and Reporting Settlements

4 7 11 13 14 18

EXHIBITS 1. Claims Referred to the FDOT Office of General Counsel 2. Claim Settlements by Fiscal Year 3. Summary of Large Claim Settlements 8 9 13

APPENDIX Large Claim Settlements 23

ATTACHMENTS 1. 2. Management Responses Distribution 25 28

Report No. 04G-9005 ! 3

EXECUTIVE SUMMARY
Contract Changes Contracts to construct roads and bridges often require modification to accommodate such issues as unforeseen conditions, plan errors, or adjustments to satisfy changing local needs and concerns. While these contracts are competitively bid, the cost of changes to them must be established by other means. Most contract changes are agreed to and paid with supplemental agreements (SA) that modify the contract. Occasionally, however, the Department and the contractor cannot agree on the scope or cost of the change. This dispute, then, provides the contractor the opportunity to file a contract claim. Resolving Claims Few claims are filed with the courts because districts typically negotiate settlements to disputes. When contractors do file for legal proceedings, the Departments Office of General Counsel (OGC) becomes involved. Even then, most of the claims filed with the courts are ultimately settled through negotiations by the districts or by arbitration with the OGC involved in an advisory capacity. Claims Payment Trend The Departments annual reports to the Legislature indicate that the total dollars spent on claim settlements is increasing. Totals reported for the 3 fiscal years ending 1998-99 were $20.9, $41.3, and $65.4 million, respectively. 1 Two risks the Department faces in managing these claims are the risks that they may be settled for amounts that have not been clearly established and adequately documented to be fair and equitable and that claim settlements may not be adequately tracked and monitored and accurately reported. Objectives The objective of this audit was to determine whether the Department has an adequate claims management system that includes reasonable evidence that claims were: ! Settled for amounts that were clearly established and sufficiently documented to be fair and equitable, and Adequately tracked and monitored and accurately reported.

Overall Conclusion The Department has made recent improvements, 2 but more are needed to mitigate the risks associated with managing claims. The Department cannot

As a percentage of total completed construction contracts each year, these amounts reflected represented 2.5 percent, 3.2 percent, and 4.8 percent, respectively. For example, effective with contracts let in February 2000, a revised claim specification should generate more timely and detailed contract claims, enabling Department or consultant CEI staff to perform more thorough and timely claim analyses. 4 ! Report No. 04G-9005
2

adequately demonstrate its accountability for managing claims because claim settlement amounts often were not clearly established or sufficiently documented to be fair and equitable, and they were not adequately tracked and monitored or accurately reported. While the Department can legitimately contend that it settled the claims reviewed in this audit for about 43 percent of the $124.3 million claimed, the audit team could find analytical support of entitlement for about 29 percent of the $53.6 million paid out.

I.

Claim settlement files generally did not include supporting documentation establishing the entitlement to, or the fair value of, settlement amounts.

District staff generally did not comply with the Departments Construction Project Administration Manual (CPAM) Section 4.4 procedures for documenting claims. For over half the settlements represented in the random sample of 50, the audit team could not locate the contractors written Notice of Intent to file a claim. Moreover, the team did not find the Forwarding Memorandum, defined in CPAM Section 4.4.11.1, for any of the settlements in the random sample, for any of the 29 in the expanded judgmental sample, or any of the 14 settlement files reviewed in the OGC. Finally, although not required by the CPAM, most of the settlement documentation reviewed for large claim settlements did not explain how the settlement amount evolved from the claim analysis prepared by the Department or consultant CEI, assuming such an analysis was prepared.

II.

Claim settlements were not always adequately tracked and monitored or accurately reported.

In assessing these responsibilities, the audit team established that the definition of claim was somewhat elusive, procedures and processes for effectively tracking and monitoring claims were lacking, and annual reports to the Legislature contained errors.

Report No. 04G-9005 ! 5

Recommendations !

We recommend that:

The Assistant Secretaries jointly appoint a cross-functional task team to develop a coordinated process for managing and resolving claims. The task team should propose improved policies, procedures and guidelines governing the claim settlement process, The Departments General Counsel establish procedures or guidelines to govern activities relating to evaluating claims and advising the districts, and The Assistant Secretaries charge the cross-functional task team to identify the minimum requirements for monitoring claims from their inception to their resolution and establish who is responsible for each. The State Construction Engineer should use those requirements as a basis for designing a simplistic system to track and report contract claims.

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BACKGROUND AND INTRODUCTION

Contract Changes Contracts to construct roads and bridges often require modification to accommodate such issues as unforeseen conditions, plan errors, or adjustments to satisfy changing local needs and concerns. While these contracts are competitively bid, the cost of changes to them must be established by other means. Most contract changes are agreed to and paid with SAs that modify the contract. Occasionally, though, the Department and the contractor cannot agree on the scope or cost of the change. This dispute, then, provides the contractor an opportunity to file a contract claim.

Standard Specifications The Departments Standard Specifications for Road and Bridge Construction (Specifications) is a document published by the Florida Department of Transportation (FDOT) and included by reference in all construction contracts. Among other things, the Specifications address contract changes and claims. Section 4-3 of the Specifications (1999 edition) governs changes to the contract (Alteration of Plans or Character of Work). This section states, If the Engineer makes alterations or changes in quantities that significantly change the character of the work under the Contract, the Engineer will make an adjustment, excluding loss of anticipated profits, to the Contract. The Contractor and the Department shall agree to the basis for the adjustment prior to the performance of the work. If the parties cannot agree to the basis, then the Department will direct the work to be performed or deleted and make an adjustment either for or against the Contractor in such amount as the Engineer may determine to be fair and equitable.3 Section 5-12 of the Specifications governs contract claims (Claims by Contractor). Since at least the 1986 edition, this section has required the contractor to provide a written Notice of the Intent to file a claim before beginning the work on which the company based the claim. This section further states that if such notification is not given, the contractor waives the right to claim extra compensation.

Section 4-3.2.3 of the Standard Specifications includes criteria for establishing the value of contract

changes. Report No. 04G-9005 ! 7

Revision to Standard Specifications In February 2000, the Department modified the Specifications to require that changes to contracts be based on contractor costs plus specified markups. The revised Specifications also specify the information to be included in contract claims and require contractor certification of the claim. Prior versions of the Specifications did not require specific content or certification of the claim and, prior to 1999, did not include criteria for pricing contract changes.

Resolving Claims Typically, the districts negotiate settlements to disputes, so claims are not normally filed with the courts. When contractors do file for legal proceedings, the Departments OGC becomes involved. Even then, most claims filed with the courts are ultimately settled through negotiations by the districts or by arbitration with the OGC involved in an advisory capacity. Few cases actually go to trial. Exhibit 1 reflects the manner of resolution for cases referred to the OGC in FY1997-98 and 1998-99:

Claims Referred to the FDOT Office of General Counsel

Type of Settlement Arbitrated Negotiated Offer of Judgment4 Dismissed Taken to Trial Total Cases
Exhibit 1

1997-98 4 16 0 1 1 22

1998-99 7 16 1 4 2 30

For the five cases dismissed, the Department is considered to have prevailed; in one
of the three cases taken to trial, the verdict was considered to be favorable.

Claims Payment Trend Annual reports the Department submitted to the Legislature indicate that the total dollars spent on claim settlements is increasing. Totals reported for the past 3 fiscal years were as follows:

An offer of judgment is an offer to settle prior to trial. If the offer is rejected and verdict exceeds the offer by more than 25 percent, the plaintiffs attorney fees must be paid in addition to the verdict. 8 ! Report No. 04G-9005

Claim Settlements
(By Fiscal Year) 5
$65.4

$41.3

$20.9

1996-97

1997-98 1998-99 (Millions of $)

Exhibit 2

Claims Risks !

Two risks the Department faces in managing claims are the risks that: Claims may be settled for amounts that have not been clearly established and adequately documented to be fair and equitable, and Claim settlements may not be adequately tracked and monitored and accurately reported.

Mitigating Risks To help mitigate those risks, procedures for administering construction contracts and their attendant claims are contained in the CPAM. Section 4.3 of the CPAM provides guidance and outlines requirements for contract changes (SAs and unilateral payments),6 and Section 4.4 provides guidance and outlines requirements for documenting and analyzing contract claims. Section 4.4.11 specifically addresses the preparation of claim review packages and requires a Forwarding Memorandum, a document intended to transmit critical information regarding the claim to the next level of review. The Forwarding Memorandum is supposed to include specific statements, analyses, recommendations and attachments essential to understanding the disputed issues. This Memorandum should provide subsequent reviewers sufficient information to determine the legitimacy of claim issues as well as the strength of the Departments position to defend itself against the claim.

As a percentage of total completed construction contracts each year, these amounts represented 2.5 percent, 3.2 percent, and 4.8 percent, respectively. A unilateral payment is used to effect a contract change and a timely payment when the contractor either refuses to timely execute an SA or the Department and the contractor cannot agree on the cost of the work. Report No. 04G-9005 ! 9
6

Payments All contract payments are processed through the Central Office. To initiate payment, the districts submit authorization to the Departments Office of Comptroller. The Office of Comptroller reviews the authorization, and when complete, forwards the information to the State Comptroller for payment. SAs, including those settling claims not filed with the courts, are paid as part of the monthly progress estimate for the project. If a lawsuit is filed, the claim is paid using a Contract Invoice Transmittal (CIT) and processed in accordance with specific procedures for that type of payment.

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OBJECTIVES, SCOPE and METHODOLOGY

Objectives The objective of this audit was to determine whether the Department has an adequate claims management system that includes reasonable evidence that claims are: ! Settled for amounts that had been clearly established and sufficiently documented to be fair and equitable, and Adequately tracked and monitored and accurately reported.

Scope and Methodology The survey phase of this audit began with interviews of district and Central Office personnel involved with managing and processing claims.7 The audit team also reviewed written procedures pertaining to claims as well as payment processing techniques to understand how claim settlement information was accumulated and reported. As an initial audit step, the team selected a random sample of 50 claim settlements paid by SAs in FY1998-99.8 Because of anomalies involving six claim settlements greater than $250,000, the team selected a judgmental sample of 29 more claim-settlement SAs issued from January 1, 1998, through October 31, 1999.9 SAs selected were those for which the amount was greater than $250,000 and that also met at least two of the following four conditions:

The audit team interviewed the General Counsel in six districts and the District Construction Engineers, and two Resident Engineers (or their respective designees) in each of the eight districts. The team also interviewed the State Construction Engineer and the Office of General Counsels Chief, Civil Litigation Counsel. The SA Tracking System included 387 claim issues settled with SAs totaling $45,316,499 in FY1998-99. The audit team eliminated all SA claim settlement issues of $5,000 or less, reducing the universe to 286 claim settlement issues with a cumulative amount representing 99.5 percent of the total reported. The random sample accounted for $10,845,433 (24 percent) of this total. For perspective, the claim settlement SAs accounted for 26.7 percent of the total dollars represented by SAs for the year. The cumulative settlement amount of these 29 SAs was $26,790,033. For ease of reference, this report will refer to settlements of $250,000 or more as large claim settlements. Report No. 04G-9005 ! 11
9 8

! ! ! !

The SA was written after final acceptance of the contract, The SA was the last one written for that contract, The previous SA was written more than 6 months prior to this SA, or The SA was assigned a reason code 851 or was coded C, identifying it as a claim issue.

The focus of the review of large claim settlements was to determine whether the claim was supported by a Department or consultant claim analysis for both entitlement and financial issues, to see if the settlement amount was reconcilable to a fair-value analysis amount, and to see if the supplemental agreement or claim file included a Forwarding Memorandum as specified in CPAM Section 4.4.11. The team then reviewed documentation supporting a third sample of 14 large claim settlements that had been referred to the OGC. 10 The contract files reviewed for these 14 settlements were those maintained by the OGC. The focus was to determine if the OGC was provided adequate claim analyses to establish a fair-value or risk exposure for the claim and if the OGC prepared documentation to establish the basis for the settlement amount. Throughout the audit, the team assessed internal controls associated with the two risks mentioned in the Background and Introduction section. The results of these reviews follow in the Findings and Recommendations section.

10

The team selected a sample of settlements of $250,000 or more from the FY1997-98 and FY1998-99 Reports

to the Legislature. The cumulative settlement amount of these was $15,107,604. 12 ! Report No. 04G-9005

FINDINGS AND RECOMMENDATIONS

Overall Conclusion The Department has made recent improvements, 11 but more are needed to mitigate the risks associated with managing claims. The Department cannot adequately demonstrate its accountability for managing claims because claims often were not: ! Settled for amounts that were clearly established and sufficiently documented to be fair and equitable, and Adequately tracked and monitored or accurately reported.

Exhibit 3, below, summarizes the audit teams observations with respect to the large claim settlements associated with the three samples reviewed:

Summary of Large Claim Settlements

(49 Settlements; See Appendix)
Nbr Claims 9 2 7 31 Total Claimed $ 18,846,292 Unknown 29,615,353 75,886,585 Claim Analysis None None -0$ 15,580,168 Total Settlements $ 10,506,672 1,393,860 10,637,555 31,052,442

Observation No claim analysis in file No claim and no claim analysis No entitlement per analysis Some entitlement per analysis

Total
Exhibit 3

49

$124,348,230

$15,580,168

$ 53,590,529

For example, effective with contracts let in February 2000, a revised claim specification should generate more timely and detailed contract claims, enabling Department or consultant CEI staff to perform more thorough and timely claim analyses. Report No. 04G-9005 ! 13

11

While the Department can legitimately contend that it settled these claims for about 43 percent of the $124.3 million claimed, the team could find analytical support of entitlement for about 29 percent of the $53.6 million paid out.

I.

Claim settlement files generally did not include supporting documentation establishing the entitlement to, or the fair value of, settlement amounts.

Section 337.221, Florida Statutes (F.S.), requires the Department to establish a process to resolve claims and to document its final decision on all claims, including reasonable support for its decision. Section 337.11(8), F.S., authorizes the use of SAs to effect contract changes, including the settlement of contract claims. The Departments procedures are outlined in CPAM Section 4.4. District staff generally did not comply with CPAM Section 4.4 procedures for documenting claims. Specifically, in over half the settlements represented in the random sample of 50, the audit team could not locate the contractors written Notice of Intent to file a claim. Moreover, the team did not find the Forwarding Memorandum, defined in CPAM Section 4.4.11.1, for any of the settlements in the random sample, for any of the 29 in the expanded judgmental sample, or any of the 14 settlement files reviewed in the OGC. Finally, although not required by the CPAM, most of the settlement documentation that was available for large claim settlements did not explain how the settlement amount evolved from the claim analysis prepared by the Department or consultant CEI, assuming such an analysis was prepared. Notice of Intent Since at least 1986, the Specifications have required that a contractor provide written notice of the intention to file a claim for extra compensation before beginning the work on which the claim is based. The purpose of this notice is to afford the Department the opportunity to keep strict account of actual costs. The Specifications further provide that the contractor waives the right to claim extra compensation if such written notice is not provided. Department staff stated that the written Notice of Intent was not particularly important in dealing with claims and that the absence of a written notice would not stand in court as a basis for withholding payment to the contractor. Whether that be the case or not, the Specifications are contractually binding, and the requirement for a written notice is the first step in the claim process. An analysis of settlements in the random sample indicated the Department effectively signaled it would be lenient in enforcing contractual provisions for resolving
14 ! Report No. 04G-9005

claims by not enforcing the requirement for a written notice. The random sample of 50 claim settlement issues included 27 claims (54 percent) for which no Notice of Intent was on file, although other documentation in those files indicated the Department was aware of the claim issues for 15. The statistical probability, then, is that at least 118 of the 286 claims over $5,000 had no written Notice of Intent, and in at least 37 instances, the Department did not know about the claims until they were filed.12

Forwarding Memoranda None of the 29 large claim settlements in the judgmental sample was supported by a Forwarding Memorandum as described in CPAM 4.4.11.1. Moreover, 8 of the 29 lacked evidence of any analysis of the claim, and 3 lacked the contractors claim document. The purpose of the Forwarding Memorandum is to document the Departments assessment of the contractors entitlement to the claim and to document the Departments assessment of a fair and equitable settlement. 13 Two examples illustrate the inadequacy of the documentation explaining the rationale for the settlement:14 1) In one claim settlement, the sum of the consultant CEIs claim analyses for direct costs amounted to $108,931. At the conclusion of this project, the contractor submitted a claim for $5,925,256 based on alleged total costs plus 15 percent profit, return of liquidated damages, adjustment of asphalt overrun, additional subcontractor costs (which were not yet paid), overhead and interest. The consultant CEI had kept detailed records of the impact of numerous changes in the storm water drainage for the project. The consultant CEI also indicated the contractor left the job for 6 months to pursue hurricane-related work, thus contributing to the delays and additional costs. The audit team found no details to explain the basis of the claim, nor did it find any documentation that explained how the Department moved from the consultants analyses to the settlement amount. The settlement was negotiated by telephone for the amount of $2,400,000 on the condition that the contractor send in back up documentation. This settlement was documented on a sheet of scratch pad paper.

Calculations were made using software developed by James A. Faughn, Jr., Consultant-Lecturer, Statistical Sampling for Auditors. Projections are based on a confidence level of 95 percent. Projections above are lower limits; the upper limits are 190 and 99, respectively.
13

12

Several files included summaries that were called memoranda of some sort, but they were after-the-fact

summaries of the negotiated settlement. The audit scope did not include an assessment of whether the settlement amounts were justifiable; the examples illustrate how the Department risks criticism that it cannot adequately demonstrate its accountability for managing claims. Report No. 04G-9005 ! 15
14

2) In another case, the team found documentation indicating some Department liability but found virtually no Department or consultant analysis indicating the extent, or fair-value, assigned to that liability. This contract included incentives and bonuses for meeting milestone dates and completing the project early. District staff indicated additional work was given to the contractor, and the contractor performed the work. However, no agreement was reached on payment, and the consultant did not maintain records of the contractors labor, materials, and equipment with the exception of one claim issue for hauling embankment (valued at $395,699 in the settlement). The contractor filed a claim for $4,132,611 at the conclusion of the job. In negotiations between the district and the contractor, the contractor agreed to reductions totaling $189,115 for 16 claim issues and the elimination of Home Office Overhead ($938,689) that was already accounted for in the various labor, equipment and material markups on the 16 claim issues. The district ultimately settled for $3,004,807. The audit team was told that no Department records were available to substantiate the value of work claimed by the contractor and paid for by the district.

Recommendation 1 We recommend that the Assistant Secretaries jointly appoint a cross-functional task team to develop a coordinated process for managing and resolving claims. The task team should propose improved policies, procedures and guidelines governing the claim settlement process. At a minimum, the process employed should address critical elements of managing claims, including the following: ! Establishing and enforcing a consistent definition of claim that clearly addresses the dispute element, Enforcing the requirement that the contractor provide a written Notice of Intent to file a claim prior to beginning the work on which the claim is based, Requiring a predetermined, minimum standard of training in negotiation skills for all Department or consultant staff who are involved in analyzing claims and negotiating settlements, Requiring that all claims be supported by a determination of entitlement and an analysis of fair price before entering into any negotiations and requiring that the analysis serve as the basis for negotiating a settlement, Requiring that all claims be supported by a Forwarding Memorandum thats meets the Departments CPAM requirements,

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Including provisions for project-level and higher managers to request realtime assistance from the Office of General Counsel or the Office of Inspector General in assessing entitlement or establishing fair price, Including language in each settlement agreement advising the contractor that the settlement is subject to audit of the companys records and that the Department may pursue civil or criminal sanctions in the event the claim was falsely presented, and Periodically monitoring claim settlements as part of the Departments formal Quality Assurance Review Program.

Management Response: The State Highway Engineer stated, We agree to the need for a cross-functional team to review the process for managing and resolving claims. The team will include district representatives, General Counsel staff, member(s) from the OIG Audit staff, and Central Office Construction. Greg Xanders, State Construction Engineer, will establish the team and lead its initial meeting. The teams efforts will include addressing the 7 bullets listed under this recommendation. However, some of the bullets (2 and 7) have already been addressed by the new claims specification. Bullet 4 will need to be addressed in a manner to look for a way to keep such determinations and analysis as confidential information to prohibit use against the Department in legal actions.

Claims Involving OGC The team reviewed 14 claim settlements for which the Departments OGC had some involvement. None included a Forwarding Memorandum. Of the claims for which analyses were on file, the analyses often indicated the claim had little or no merit; yet, the Department agreed to substantial settlements. As one example: Both OGC files and district files included multiple claim analyses that generally refuted the major issues raised in a contractors claim totaling $5,887,170. The Department had made unilateral payments totaling $586,596 to resolve issues for which the Department believed it had some responsibility. According to the documentation available, the contractor waited until filing suit to provide details of some of the major portions of their claim. The OGCs Case Closing Report references claim analyses that
Report No. 04G-9005 ! 17

stated the contractor and subcontractor caused their own problems. The first indication of a settlement was in the OGCs Case Closing Report. According to that report, the district settled all claim issues with the contractor ...the day before trial was to start. Documentation in files reviewed at both the OGC and in the district did not explain how the settlement amount was established. Negotiations were conducted by telephone. The record of negotiations consisted only of names written on a sheet of paper along with the agreed upon settlement amount of $4,200,000.

Recommendation 2 We recommend that the Departments General Counsel establish procedures or guidelines to govern activities relating to evaluating claims and advising the districts. At a minimum, these guidelines should establish a framework for evaluating claims and specify minimum requirements for documenting the basis for them. Advice given to the districts should include the parameters within which they believe a settlement would be in the Departments best interest. If such documentation poses a legitimate threat to the Departments litigation position, the Department should seek an exemption from the public records law.

Management Response: The General Counsel responded, Agree. The Office of General Counsel will set up guidelines for attorneys to document settlement advice in a fashion which will not adversely affect the departments ability to litigate or settle future construction claims. Although the extent of this documentation may need to vary on a case by case basis, the OGC agrees improved documentation is needed and desireable. It is not advisable to seek any Chapter 119 amendment at this time.

II.

Claim settlements were not always adequately tracked and monitored or accurately reported.

Section 20.23, F.S., provides that the Department of Transportation is to be a decentralized agency with a Central Office to establish and monitor the implementation of policies, rules, procedures and standards. Section 334.048, F.S., specifies that the policies, rules, procedures and standards are to establish accountability for all aspects of the Departments operation. Further, Section 337.221, F.S., requires the Department to report all claim settlements to the Legislature annually. In assessing these responsibilities,
18 ! Report No. 04G-9005

the audit team determined that the definition of claim was somewhat elusive, procedures and processes for tracking and monitoring claims were lacking, and annual reports to the Legislature contained errors.

Definition of Claim A construction contract is unique among the various types of contracts because of the changes clause. This clause is essential because changes are inevitable. A claim is an unresolved, or disputed, change.15 Prior to December 1999, the Departments CPAM defined a claim as, A written demand submitted to the Department by the contractor in compliance with contract documents and seeking additional monetary compensation, time, or other adjustments to the contract, the entitlement or impact of which is disputed by the Department.16 The Federal Highway Administrations definition, which is consistent with the CPAM definition, further specifies that a claim exists when the disputed demand goes beyond project-level staff. 17 In practice, the concepts included in these definitions were not consistently and uniformly applied within the Department. In one district, an issue was not considered to be a claim if district staff could agree to a settlement amount for the issue. In another district, staff considered a claim to exist if the additional work and the cost thereof could not be agreed to before work was performed. These varying definitions resulted in substantial differences in the claim settlements reported from the districts.

Revised Definition In the December 1999 CPAM Update, the State Construction Office changed the definition of claim. As presently defined in CPAM 4.4, a contractors written demand seeking additional money, time, or other contract adjustments only becomes a claim when ...the entitlement or impact of which is disputed by the Department and which cannot be resolved by negotiations between the contractor and the Departments Districtlevel personnel. (Emphasis added.)

15

Trauner, Jr., Theodore J.; Reviewing, Auditing, and Resolving Construction Claims, November 1991. CPAM 4.4, April 2, 1997.

16

Contract Administration Core Curriculum, U.S. Department of Transportation, Federal Highway Administration, 1997. Report No. 04G-9005 ! 19

17

The revised definition essentially does not recognize the dispute element of a claim until it has passed through all levels of district review. The definition, itself, tends to obviate the requirement for some person or position near the source of the dispute to begin documenting contractors activities. In turn, the Department reduces its ability to defend itself against baseless or exaggerated claims. Except for those referred to the OGC, none of the SA claim settlements reviewed in this audit would have been identifiable as a claim because they would have been treated as though no dispute existed. Moreover, those referred to the OGC may not have had records kept to serve as a basis for refuting the claim.

Managing Claims !

To properly manage claims, Project Managers need to:

Acknowledge and respond to alleged instances of extra work, delay, disruption, and inefficiencies and establish the Departments initial position as to entitlement; Act to mitigate the impacts of claim issues alleged by the contractor; Document information relative to the alleged claim issue and the labor, materials, equipment and contract time expended by the contractor; Attempt to reach agreement with the contractor and establish and document the specific points of disagreement; and, Summarize the claim issues and critical information for transmittal to higher levels in the organization for resolution.

! !

To manage and control this process, district staffs need a method of tracking, monitoring and reporting on pending and settled claims. The absence of this information hinders the management of claims and the claims process.

Claims Tracking The Departments only means of identifying and locating claim files for review is through the SA Tracking System and the Construction Offices Annual Reports to the Legislature. The SA Tracking System provides little information useful for managing claims as it records only payments and provides for only a single, three-character field to identify the cause of the claim. The Annual Report offers little more than the dollar amounts of the settlements. The Department once maintained a Claims Tracking System but terminated it during 1999. Central Office staff explained that the system was unreliable and was burdensome to maintain. Hence, the Department has no central source of

20 ! Report No. 04G-9005

meaningful information on pending or potential claims, nor does it have complete information on claims that were successfully refuted by the Department.

Claims Monitoring The absence of some system or process to monitor claims also means the absence of any oversight of district successes or failures in resolving contractor claims. Because Central Office monitoring of claims was limited to the SA Tracking System, the Department had no means to identify and review claim issues that had been denied by the Department or consultant project engineer and for which no SA was ever written. Therefore, any review of claim settlement issues may be unintentionally biased to worst-case examples. Other than the SA Tracking System, the audit team found no evidence of Central Office oversight of the districts negotiation and settlement of claims. Generally, Central Office oversight revolves around the Quality Assurance Review (QAR) process; however, claims negotiation and settlement were not addressed in the QARs performed.

Claims Reporting Our review indicated the FY1998-99 Report of Claims to the Legislature was inaccurate. Claim settlements totaling over $3 million were not reported, and approximately $7 million of SA claim settlements included in the 1998-99 report had been reported in the prior years report. Those SAs that were included in the FY1998-99 report were dummy SAs intended only to record the payment against the contract 18. The process used to accumulate and report claim settlements was an informal process of extracting information from the SA Tracking System, combined with a compilation of Case Closing Reports from the OGC. Department staff made no attempt to reconcile the data to the Departments accounting records.

Recommendation 3 We recommend that the Assistant Secretaries charge the cross-functional task team to identify the minimum requirements for monitoring claims from their inception to their resolution and establish who is responsible for each. The State Construction Engineer should use those requirements as a basis for designing a simplistic system to track and report contract claims to facilitate the districts management of claims and the Central Offices oversight and reporting of claim settlements.

A dummy SA is created to force a claim paid with a Contract Invoice Transmittal to post to the Contract Reporting System. Report No. 04G-9005 ! 21

18

Management Response: The State Highway Engineer agreed and stated, This will also be looked at by the team. If a program is determined to be beneficial and needed by the districts, it must be simple to use and provide useful information. Such a program would be primarily for district use in their management of claims. Central Office can then access as necessary for process reviews. The districts do have a handle on typically what their major claims are. Also, the new specification has tightened the process on a contractor filing a claim with all the details in a more timely way.

22 ! Report No. 04G-9005

APPENDIX

Large Claim Settlements

$ Amount Per

Contract How SA Number Selected District Number

18858 18949 19198 19211 19388 19456 18349 18462 18551 18626 18746 18758 18768 18887 18903 18929 18960 18969 19011 19113 19114 19129 19171 19183 19281 19343 19410 19485 19754 19757 19758 19782 19839 R R R R R R J J J J J J J J J J J J J J J J J J J J J J J J J J J 7 5 3 6 Tpk Tpk 7 5 3 5 5 Tpk 7 4 5 3 7 5 4 6 6 7 3 6 6 4 3 4 2 2 2 7 2 50 7 6 12 20 37 16 9 16 17, 19 19 13 10 5 19 14 11 8 43, 44 26 9 5 5 26 9 16, 17 6 2 10 6 6 16 9

Claim
1,606,269 10,373,745 5,925,255 734,000 4,996,000 1,141,076 1,108,902 2,907,202 1,019,498 1,442,829 2,488,177 2,000,000 1,554,850 543,182 3,053,381 5,501,000 1,432,894 10,742,266 1,707,125 2,954,162 1,773,951 882,121

Claim Analysis Settlement

1,335,112 819,384 108,931 260,000 551,273 115,634 119,728 105,867 646,681 428,752 329,539 1,450,000 195,000 835,242 1,011,214 1,038,482 574,639 476,513 1,335,112 2,959,507 2,400,000 280,000 387,000 551,273 436,905 1,850,000 481,833 445,000 1,400,000 900,000 689,633 495,000 1,450,000 1,900,000 581,865 3,025,821 1,370,735 1,200,000 497,000 519,516 528,860 865,000 113,532 430,000 743,783 495,000 260,000 525,000 240,057 525,836 0 325,000 1,050,000 525,836 525,000

Note

4 1

1 4

2 2 3

1,049,595 2,651,685 519,478 1,129,150 517,545 1,038,226 658,186 597,117

133,182 0 162,810

1 1

Report No. 04G-9005 ! 23

APPENDIX (Cont.)

Large Claim Settlements

$ Amount Per

Contract How SA Number Selected District Number

19926 19945 E3539 17765 17799 17826 17932 18378 18401 18411 18819 18884 18924 19204 19329 19608 J J G G G G G G G G G G G G G G 1 7 3 4 6 3 2 6 6 7 2 6 5 3 2 7 25 7 CIT CIT CIT CIT CIT CIT CIT CIT CIT CIT CIT CIT CIT CIT

Claim
4,132,611 335,573 597,270 3,493,400 1,500,000 1,236,538 2,188,269 15,877,417 3,295,550 816,126 4,900,000 1,850,829 2,084,065 5,887,170 1,177,157 927,388

Claim Analysis Settlement

3,004,807 268,439 507,626 199,844 0 0 0 2,101,060 259,768 448,627 83,289 0 0 134,107 268,439 290,000 1,750,000 411,571 400,000 1,296,666 3,000,889 2,486,000 480,000 2,375,000 477,478 450,000 4,200,000 720,000 550,000

Note
1

1 5

Totals

49 Settlements

$124,348,230 $15,580,168 $53,590,529

Abbreviations CIT - Contract Invoice Transmittal OGC - Office of General Counsel Tpk - Turnpike District How Selected G - Files reviewed in Office of General Counsel J - Judgmental sample based on anomalies in random sample R - Initial random sample Notes 1 2 3 4 No claim analysis was found in the files reviewed. Neither a claim analysis nor the contractor's claim was found in the files reviewed. The claim was not found in the files reviewed. Files included multiple analyses done by multiple consultants. Audit team used what appeared to be "best supported." Total entitlement per that analysis was allocated to the two contracts in proportion to the contractor's claims for them. Claims Review Committee recommended $260,132.

24 ! Report No. 04G-9005

Attachment 1

Management Response

Report No. 04G-9005 ! 25

Attachment 1 (Cont.)

Management Response

26 ! Report No. 04G-9005

Attachment 1 (Cont.)

Management Response

Report No. 04G-9005 ! 27

Attachment 2
Thomas F. Barry, Jr., Secretary Ken Morefield, Assistant Secretary for Transportation Policy Nancy Houston, Assistant Secretary for District Operations Cris Speer, Assistant Secretary for Finance and Administration John Browning, Jr., Chairman, Florida Transportation Commission Attention: Bill Ham (2) William Monroe, Auditor General Attention: L. R. Weathermon (2) David Twiddy, Secretary, District 1 Huey Hawkins, Secretary, District 2 Edward Prescott, Secretary, District 3 Rick Chesser, Secretary, District 4 Michael Snyder, Secretary, District 5 Jose Abreu, Secretary, District 6 Ken Hartmann, Secretary, District 7 Jim Ely, Secretary, Turnpike District Freddie Simmons, State Highway Engineer Bill Albaugh, Highway Operations Director Greg Xanders, State Construction Engineer Pamela Leslie, General Counsel Dick Kane, Public Information Administrator Sarah Porter, Legislative Programs Administrator Bill Kynoch, Budget Officer Robin Naitove, Comptroller Nelson Hill, Chief Information Officer Carolyn Runyan, Procedures Administrator Marcia Cooke, Governor's Chief Inspector General Attention: James Thomas Chairman, Senate Transportation Committee Attention: Reynold Meyer Chairman, House Committee on Transportation Attention: John Johnston Chairman, Senate Budget Committee Attention: Tom Barrett Chairman, House Transportation and Economic Development Appropriations Committee Attention: Eliza Hawkins Chairman, Joint Legislative Auditing Committee Attention: Terry Shoffstall John Turcotte, Director, Office of Program Policy Analysis and Government Accountability (3 copies) James E. St. John, Division Administrator, FHWA
28 ! Report No. 04G-9005

Distribution

For further information call (850) 488-2501 / Suncom 278-2501 or Fax (904) 488-4417 Suncom 278-4417. For a copy of the report, please call, write or e-mail:

Ms. Nancy Moon nancy.moon@dot.state.fl.us (IA906NM) Office of Inspector General Florida Department of Transportation 605 Suwannee Street, Mail Station 44 Tallahassee, Florida 32399-0450

Permission is granted to reproduce this report.

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