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Federal Task Force on the
Boston Central Artery/Tunnel Project
Review of Project Oversight and Costs
Table of Contents
Executive Summary
Introduction
Objectives:
Conclusion
Glossary of Abbreviations
EXECUTIVE SUMMARY
The Federal Government's role in the Central Artery/Tunnel (CA/T) Project is
one of oversight. Costing billions of Federal and State dollars, the CA/T Project
is often referred to as "the largest public works project in American history."
More Federal funding-$5.8 billion and growing-has been allocated to the CA/T
Project than to any other construction project of its kind. As stewards of these
tax dollars, the Federal Highway Administration (FHWA) is responsible for ensuring
Federal funds are used responsibly and lawfully.
To fulfill this fiduciary duty to the American people, the FHWA is governed
by many statutes, regulations, and policies. As made clear by these legislative
and administrative directives, the FHWA's oversight role is intended to be independent
of the State's management of the Project. The FHWA Division Office is expected
to evaluate critically the State's programs and provide technical assistance as needed.
The FHWA has a long history of relying on a strong Federal/State partnership
in carrying out its oversight role. Begun at the start of the Federal-aid highway
program in 1916, the concept of a "partnership" reflects the FHWA's
unique oversight approach to State transportation departments, whereby relationships
are based on mutual trust, fairness, respect, cooperation, and communication.
Although the FHWA makes Federal-aid highway funds available to the States, each
State is responsible for managing and developing its projects, subject to Federal oversight.
In the case of the CA/T Project, the FHWA's long history of strong Federal/State
partnerships failed. On the one hand, the FHWA failed to maintain an independent
enough relationship with the State to adequately fulfill its oversight role.
On the other hand, the State breached its trust with the FHWA and others by
intentionally withholding knowledge of the Project's potential cost overrun.
In October 1999, the CA/T Project Director began a "bottom-up" review
of all construction contracts to identify all future cost exposures on a contract
by contract basis. The CA/T Project undertook this comprehensive cost review
out of concern that costs would substantially exceed the $10.8 billion cost
referred to repeatedly by Project managers in recent years.
Although the FHWA Division Office did not receive complete information from
the CA/T Project, it had received a draft of the U.S. Department of Transportation's
Office of Inspector General (OIG) report dated October 7, 1999. In that draft,
the OIG pointed out that the Project was experiencing significant construction
cost increases, and if the trends continued the Project could need up to $942
million more in offsets or additional funding. The OIG draft report also pointed
out that the Project's 1998 Finance Plan did not disclose significant cost information
about the Project, such as construction cost increases or that contract awards
were exceeding budget. These warnings should have caused the Division Office
to scrutinize the information being provided by the Project more closely. However,
the Division Office chose instead tocontinue to rely on assertions from the
State that future cost increases were unlikely. Had FHWA independently reviewed
the data provided by the OIG, it most likely would not have approved the finance
plan presented by the CA/T Project in January 2000.
On January 7, 2000, the Director of the CA/T Project submitted to the FHWA
Massachusetts Division Office an "Annual Finance Plan" (Plan) that
had been due in October 1999. According to Title 23, United States Code, Section
106, the Plan must provide a detailed estimate of the "cost to complete"
the remaining elements of the CA/T Project, including reasonable assumptions
of future cost increases. There was no indication in this Plan of a potential cost overrun.
On February 1, 2000, the Division Administrator conditionally accepted the
Finance Plan for the CA/T Project. Having discussed the potential for likely
cost increases in the range of $500 million with State officials, the Division
granted conditional acceptance and required the State to submit a revised Plan
in April 2000 after the full extent of the increase became clear.
Later in the day, the Chairman of the Massachusetts Turnpike Authority (MTA)
informed the media of a potential $1.4 billion cost overrun, bringing the total
CA/T Project cost to $12.2 billion. The MTA Chairman informed the Task Force
that he acted in response to an anticipated inaccurate press account of cost
exposures expected later that week. According to the FHWA Division Administrator,
the State had not directly forewarned the FHWA of a potential cost overrun of
such magnitude in any document provided to the Division Office, in the Plan,
or in discussions prior to the conditional acceptance of the Plan.
Because of the failure of the Federal/State partnership in Massachusetts, a
change in FHWA's oversight role is needed. Specifically, in response to the
failure of the CA/T Project management, the Federal Highway Administrator established
a multi-disciplinary Federal Task Force to analyze the oversight process for
the CA/T Project, review the structure of the FHWA's Division Office, determine
the effectiveness of reporting documents, and recommend changes to the FHWA
policy or procedures.
The Task Force reviewed documents, conducted interviews with key State and
Federal officials and staff, and developed criteria for assessing the adequacy
of the FHWA CA/T Project oversight processes. The Task Force gathered information
from February 28 through March 10, 2000, in Boston. Additional analyses and
follow-up interviews were conducted coincident with report preparation through March 31, 2000.
Information obtained during this review indicated that prior to submitting
their Plan on January 7, 2000, senior management of the CA/T Project had sufficient
evidence of the potential $1.4 billion cost overrun. The CA/T Project officials
deliberately, however, chose to withhold that information. The review also indicated
that information necessary to conduct an independent validation of the CA/T
Project costs was available to the Division Office.
The Task Force reached conclusions in each of the seven objectives established for the review:
- Assess the FHWA oversight process, including the knowledge of the FHWA
staff and others, of the potential cost increases and recommend suggested
changes to the current process.
The FHWA oversight is based on enhanced requirements in the Transportation
Equity Act for the 21st Century (TEA-21) and on the long-held
concept of "partnership," the central element of which is mutual
trust. The FHWA failed to meet its enhanced oversight requirements under
TEA-21. Additionally, a failure by the CA/T Project leadership to honor
its partnership obligations with the FHWA and others delayed full knowledge
of the potential cost overrun.
- Review the FHWA management structure and determine if changes in leadership,
reporting relationships, and delegated authority are necessary.
The Task Force recommends a change in the State CA/T Project leadership
to restore public confidence in stewardship of the CA/T Project parallel
to recently announced changes in the FHWA's CA/T Project leadership. The
Task Force also recommends that the role of the MTA in the day-to-day management
and control of the CA/T Project be reevaluated.
The existing management structure of the FHWA, reporting relationships,
and delegations of authority, if exercised with initiative equal to the
extraordinary nature of the CA/T Project, are generally adequate to permit
appropriate oversight of the CA/T Project. However, FHWA leadership did
not take advantage of available financial expertise in review of the October
1999 Finance Plan. Therefore, the Task Force recommends changes in the financial
review process and delegation of authority for acceptance of the Finance Plan.
- Determine the effectiveness of the Project Management Monthly (PMM) and
the annual Finance Plan as information resources for management.
Neither the PMM report nor the Finance Plan, in their current form, provides
a clear, accurate, and timely picture of the total potential CA/T Project
cost exposure or cash flow needs.
- Validate the $1.4 billion potential cost overrun.
The methodology used by the CA/T Project staff to identify the potential
$1.4 billion cost overrun is a realistic approach and consistent with normal
industry practice. However, there are risks that could lead to additional
cost exposures in the range of $300 to $480 million. The Task Force estimated
that a realistic cost estimate for the CA/T Project is now $13.4 billion
to $13.6 billion.
- Determine the soundness of the State's financial options for covering the $1.4 billion overrun.
The revised Finance Plan Update, submitted on March 15, 2000, for financing
the potential $1.4 billion cost overrun does not provide a sound source
of revenue to cover the identified potential exposures. Several of the proposed
revenue sources have questionable legislative support. The Commonwealth
of Massachusetts does appear to have adequate funds to finance the overrun
but has not yet specifically identified which of those revenue sources will be applied.
- Identify potential new indicators for better predicting cost increases.
The indicators used by the CA/T Project staff to predict cost increases
are appropriate, but are not being used properly by the CA/T Project management.
The current practice of constraining cost indicators to equal a predetermined
budget amount must end. A new report must be developed that regularly and
accurately predicts the potential cost exposure of all program work elements.
- Identify potential cost saving measures.
There are limited opportunities for significant savings on the remaining
major construction projects. The cost containment initiatives in place should
be aggressively continued.
As a result of the Task Force's observations, research, and analysis, 34 recommendations
have been offered. The recommendations can be found at the end of each section.
The recommendations can be summarized by saying that FHWA must move beyond the
failed "partnership" approach, which the State betrayed by its actions,
to achieve independent and critical oversight of the CA/T Project.
Back To Table of Contents
INTRODUCTION
Background
The Central Artery/Tunnel (CA/T) Project in Boston, Massachusetts, is the largest
federally funded public works project in recent history, involving the reconstruction
of I-93 (i.e., the Central Artery) and the extension of I-90 (i.e., the Ted
Williams Tunnel). The I-93 reconstruction includes a new eight-lane highway
beneath the existing elevated Central Artery through downtown Boston. The I-90
extension involves placement of a four-lane immersed tube tunnel beneath Boston
Harbor. The CA/T Project is approximately 7.5 miles long and includes approximately
160 lane-miles of new and reconstructed highway. The majority of the CA/T Project is below ground.
Although the Massachusetts Highway Department (MHD) is the nominal recipient
of Federal-aid highway funds, State legislation in 1997 creating the Metropolitan
Highway System transferred responsibility for the CA/T Project from the MHD
to the Massachusetts Turnpike Authority (MTA). The Central Artery/Tunnel Project
Management Agreement, setting out each agency's responsibilities, is included
as Attachment 1. The State's CA/T Project Management Team is a blend of MTA
staff and personnel representing Bechtel/Parsons-Brinckerhoff (B/PB), the joint
venture overseeing day-to-day operations. This approach, combining the two entities
to form an integrated team, may have assisted in the delivery of the CA/T Project,
but also contributed to problems in oversight at the Federal and State levels
and raises serious questions about the acceptability of such private/public management teams.
The cost to complete the CA/T Project has increased tremendously from the initial
estimate of $2.3 billion in 1984. It is not the purpose of this report to explore
why the costs increased over the years. However, prior to February 1, 2000,
the total CA/T Project cost was reported to be $10.8 billion. The Task Force
estimated that a realistic cost estimate for the CA/T Project is now $13.4 billion to $13.6 billion.
In response to the MTA's announcement on February 1, 2000, and the report of
the U.S. Department of Transportation's (DOT) Office of Inspector General (OIG)
critical of CA/T Project financing, U.S. Secretary of Transportation Rodney
E. Slater, on February 17, 2000, endorsed a six-part action plan presented by
Federal Highway Administrator Kenneth R.Wykle. The plan included establishing
a task force to conduct a complete review of the Federal Highway Administration's
(FHWA) oversight process. This report presents the work of the Task Force.
Mission
The Task Force was charged with the mission to assess the circumstances leading
to the $1.4 billion potential cost overrun, evaluate the effectiveness of the
Finance Plan for addressing such costs, and review the overall management and
oversight processes. Specifically, the Task Force was to:
- Assess the FHWA oversight process, including the knowledge of the FHWA staff
and others, of the potential costs increases and recommend suggested changes to the current process.
- Review the FHWA management structure and determine if changes in leadership,
reporting relationships, and delegated authority are necessary.
- Determine the effectiveness of the Project Management Monthly (PMM) report
and annual Finance Plan as information resources for management.
- Validate the $1.4 billion potential cost overrun.
- Determine the soundness of the State's financial options for covering the $1.4 billion overrun.
- Identify potential new indicators for better predicting cost increases.
- Identify potential cost saving measures.
The Charter of the Task Force, including a list of Task Force members, is included as Attachment 2.
Methodology
In approaching its mission, the Task Force organized into two teams (Finance
and Construction). Action plans were developed by each team and coordinated
with legal advisors to address the seven objectives identified for the Task
Force. Specific actions taken by the Task Force included review of pertinent
CA/T Project documents and interviews with the Division Office staff, CA/T Project
staff, and State officials. General briefings were also provided by the Division
Office and the MTA.
It should be noted that the Task Force did not analyze, in detail, the costs
included in the Financial Plan Update forwarded to the FHWA on March 15, 2000.
While the Task Force report discusses the Plan, in part, a more comprehensive
analysis of the Plan is being conducted by FHWA and will be transmitted to the
CA/T Project Director. The Task Force charter also did not include the development
of an ultimate final cost for the CA/T Project.
This report contains findings, conclusions, and recommendations based on information
the Task Force obtained in documents, interviews, and briefings.
Back To Table of Contents
OBJECTIVES
| Objective 1. |
Assess
the FHWA oversight process, including the knowledge of the FHWA staff
and others, of the potential cost increases and recommend suggested
changes to the current process. |
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| Conclusion
The FHWA oversight is based on enhanced requirements in the Transportation
Equity Act for the 21st Century (TEA-21) and on the long-held
concept of "partnership," the central element of which is mutual
trust. The FHWA failed to meet its enhanced oversight requirements under
TEA-21. Additionally, a failure by the CA/T Project leadership to honor
its partnership obligations with the FHWA and others precluded full knowledge
of the potential cost overrun. |
Discussion:
- Enhanced Oversight Activities
The role of the FHWA traditionally has been to: 1) review and approve individual
projects for reasonableness and conformance with Federal requirements and
approved standards; and 2) make eligibility determinations regarding the
use of Federal-aid funds on individual projects. Under Title 23, United
States Code (U.S.C), Section 145, the sovereign rights of the States are
recognized when determining the selection of projects. As long as a State
complies with the FHWA's planning, environmental, and fiscal policies, it
has the right to choose which projects will receive Federal-aid funds.
Prior to the enactment of TEA-21 in 1998, the role of the FHWA did not
include a review of the aggregate construction cost of projects. As the
owner of the facility, the State had full responsibility for managing and
directing its projects, subject to Federal requirements. In addition, the
State had full responsibility for ensuring that all matching funds necessary
to complete a project were available when needed.
In the case of the CA/T Project, the FHWA imposed an administrative requirement
for an annual Finance Plan beginning in 1995. Because of the multi-billion
cost of the Project and the need to limit possible demands for additional
Federal funding, the FHWA wanted to be certain the State would be able to
meet its cash flow needs. The FHWA also wanted to ensure the State had sufficient
funding to maintain a balanced statewide transportation program beyond the
CA/T Project in Boston. The FHWA accepted the first Finance Plan on April 30, 1996.
Each year's Plan was reviewed by field and FHWA Headquarters staff prior
to acceptance. The FHWA did not assume responsibility for conducting its
own separate review of project costs. Rather, it accepted the State's cost
estimate and ensured the State's summary of reasonably available resources
indicated funding would be sufficient to complete the Project.
Under TEA-21, the FHWA's role on larger projects was enhanced. The requirement
for a Finance Plan became mandatory under TEA-21, Section 1305(b)-Financial Plan, which states:
FINANCIAL PLAN-A recipient of Federal financial assistance for a project
under this title with an estimated total cost of $1,000,000,000 or more
shall submit to the Secretary an annual financial plan for the project.
The plan shall be based on detailed annual estimates of the cost to complete
the remaining elements of the project and on reasonable assumptions, as
determined by the Secretary, of future increases in the cost to complete the project.
Under this provision, the FHWA's responsibility to review and accept the
State's Plan for meeting cash flow needs through project completion became
statutory and, therefore, mandatory instead of administrative. Thus, beginning
with the enactment of TEA-21 in 1998, the FHWA was required by law to review
"detailed" estimates of the "cost to complete" the CA/T
Project and to review "reasonable assumptions" of "future
cost increases."
Preliminary guidance on how to fulfil this requirement was issued by the
FHWA in 1998 and is included as Attachment 3. It retained the basic process
in place for reviewing Finance Plans, with the State remaining responsible
for preparing the cost portion of the document.
The preliminary guidance, which was based on experience with Finance Plans
developed under the partnership concept of the CA/T Project, was not sufficiently
strong in view of the statutory nature of the Finance Plan requirement in
TEA-21. The FHWA continued to rely on State cost estimates, without independent
verification, and to consider CA/T Project annual reports as a routine matter.
The practice of accepting the Project's cost estimates continued even after
the OIG's October 1999 draft report warned the Division Office that the
FHWA's guidance on Finance Plans was inadequate to ensure complete and accurate
reporting of project costs.
The FHWA's Massachusetts Division Office, despite having 15 technical specialists
and support staff dedicated to the CA/T Project, was not staffed in expectation
of conducting a detailed annual analysis of the cost to complete the CA/T
Project. Further, the financial and planning experts in the Division Office
were excluded from the Division's review of the Finance Plans. For example,
the Finance Specialist on the CA/T team has not reviewed any of the Finance
Plans since the initial Plan in 1995. The Financial Specialist is primarily
involved in audits. The FHWA's failure to involve its own CA/T Project Financial
Specialist in review of the Plans raises serious questions about the FHWA's
understanding of its independent oversight role.
The Planning and Research Program Manager does not review the Plans even
though one portion of the document discusses the adequacy of the State's
commitment to a balanced Statewide Transportation Improvement Program (STIP).
The Task Force concluded that future Division Office reviews of Finance
Plans (or other significant project financial or status reports) should
make use of the expertise needed to provide the most complete technical
analysis possible.
Since the Task Force review of the potential $1.4 billion overrun began
the week of February 27, 2000, the Division Office has conducted an independent
estimate of total CA/T Project cost to complete. The methodology used and
the resulting estimates (discussed under Objective 4 in this report) are
considered by the Task Force to be adequate. However, such an independent
validation required a concentrated effort and the diversion of the entire
CA/T Project Team from other oversight activities.
Recommendations:
- The Division Office should make an annual, independent cost-to-complete
estimate to be used as a primary source of information for decision
making regarding the adequacy and acceptability of all future Finance
Plans submitted for the CA/T Project.
- The process used by the Division Office staff in developing the
independent cost estimate should be fully documented and refined
with assistance from other elements of the FHWA. It should be published
as a best practice for use in other mega-projects.
- The FHWA must establish monitoring practices and procedures for mega-projects.
- The Division Office should expand the roles of current staff to
include a review of the Finance Plan by the Financial Specialist
and the Division Planning & Research Program Manager. This will
provide a technical analysis of the information presented in the
Finance Plan, and provide additional assurances on the adequacy
of data contained in the document.
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- Breach of Partnership Obligation
In addition to its statutory oversight duty, the FHWA has a long history
of relying on a strong Federal/State partnership in carrying out its oversight
role. The "partnership" concept reflects the FHWA's unique oversight
approach to State transportation departments. This approach was based on
mutual trust, leaving the States to manage and develop their projects subject
to Federal oversight. For the CA/T Project, this oversight approach was
formalized in a "Project OversightAgreement" signed by the MHD
Director and the FHWA Division Administrator. A copy of the agreement is
include as Attachment 4.
The Task Force concluded that this partnership approach to oversight failed.
While the FHWA failed to exercise independent critical oversight of project
costs, the CA/T Project staff and MTA leadership failed to disclose information
necessary for the FHWA to carry out its oversight responsibilities.
It was evident throughout the Task Force's review that the CA/T project
staff did not keep the Division Office informed of all potential cost exposures
or the magnitude of the potential overrun. As indicated in the FHWA's conditional
acceptance of the October 1999 Finance Plan on February 1, 2000, the Division
Office was aware of additional cost exposures, exclusive of credits, on
the CA/T Project of approximately $500 million. Although there were numerous
opportunities to acknowledge concerns in achieving the zero-sum-gain budget
goal of $10.8 billion, the CA/T Project management deliberately failed to
inform the FHWA of the magnitude of the potential overrun prior to the public
announcement on February 1, 2000. In fact, in discussions with the FHWA
Division Administrator, CA/T Project management dismissed the $500 million
overrun as manageable, rather than admitting the true potential size of the overrun.
This was a serious breach of the Federal/State partnership commitment by
the CA/T Project leadership. Since the MHD is the designated recipient of
Federal-aid highway funds, and the MTA has project oversight, both organizations
share in the failure by the CA/T Project management to inform Federal officials
of the size of the potential cost overrun. Moreover, the Task Force believes
that MTA's responsibility for day-to-day management and control over the
CA/T Project must be evaluated.
Although there were numerous discussions between the CA/T Project and the
Division Office staff on the adequacy of the Finance Plan, the CA/T Project
leadership deceived the FHWA Division Office by permitting it to believe
that the document the FHWA was reviewing contained the most recent financial
data. In fact, in the FHWA's acceptance letter dated February 1, 2000, Division
Administrator Peter C. Markle advised CA/T Project Director Patrick J. Moynihan:
Based on our recent discussions with you and the CA/T Project staff concerning
the identification of additional cost exposure, our acceptance of this
updated finance plan and continued use of AC authorizations is until April 15, 2000.
This sentence clearly shows that there were discussions between the two
managers, but that the CA/T Project leadership chose to be silent on the
results of their cost to complete activities until confronted by the media.
Despite the nondisclosure by CA/T Project leadership, the FHWA Division
Office clearly knew of at least $500 million in additional cost exposures
and had received warnings in the OIG's October 1999 draft report about cost
trends which could haveadded $942 million to the cost of the Project. Nonetheless,
the Division Office did not conduct any independent cost verification, but
continued to rely on the State's cost reporting.
The following are additional examples of the CA/T Project leadership's
breach of the partnership agreement:
- The CA/T Project staff did not share many of their forecast documents
with the FHWA. In 1998, the CA/T Project staff started preparing a trending
assessment document referred to as the "Up/Down" chart. The
CA/T Project management viewed the cost exposures in the Up/Down chart
as too speculative and, therefore, did not disclose them to the FHWA.
- A time-phased plan was started for the CA/T Project in the spring of
1999 to ensure that all potential cost increases were offset by corresponding
cost decreases and/or revenue. The results of this review caused the CA/T
Project Director to become concerned with achieving a zero-sum-gain budget
goal for the CA/T Project. Again, the CA/T Project Director did not share
these concerns with the FHWA.
- The results of an October 1999 review completed to ascertain all anticipated
additional costs to the CA/T Project through its completion were never
shared. Although the FHWA was asked for its input on certain aspects of
this exercise (e.g., comments were requested from the FHWA regarding the
templates developed for the Program Management portion of the $1.4 billion
overrun), the FHWA was never informed of this bottom-up effort or its
results before the February 1, 2000, announcement.
- The FHWA was not informed of the contents of a briefing for the MTA
Chairman in December 1999. The results of the efforts of the CA/T Project
staff to identify the total cost exposure for the CA/T Project were discussed at this briefing.
- The FHWA was not informed that the MTA Chairman would announce the $1.4
billion potential cost increase on the same day the Division Administrator
would conditionally accept the Finance Plan.
Senior CA/T Project management informed the Task Force that they made was
a conscious decision to exclude the Division Office from the cost exposure
exercises. The reasons most commonly heard were:
- Finding additional funds to cover any cost overruns would not involve
Federal-aid highway funds and was solely a State issue;
- The CA/T Project Director wanted to know the estimated total project costs and offsets first;
- The MTA leadership had to be briefed before the cost figures went public; and
- There was no doubt that the CA/T Project would be completed, in spite of the overruns.
As discussed previously, this lack of communication by the CA/T Project's
leadership contributed to the FHWA's failure to fulfill its federally mandated
oversight duty. The Project's lack of candor has also seriously jeopardized
the long-held partnership commitment between Massachusetts and the FHWA.
One constant theme that echoed during interviews with external monitoring
agencies was the difficulty of working with the CA/T Project management
(the B/PB joint venture and MTA personnel) in obtaining information and
records. All requests for information must be coordinated through the MTA
legal representatives. Direct access to information is not permitted. The
State Auditor and the OIG stated it is very difficult and frustrating to
obtain records and documents from the CA/T Project managers. It reportedly
takes weeks or months to obtain the information requested. All records are
required by regulation to be available for inspection. In Title 49, Code
of Federal Regulations (CFR), Section 18.42(e), the Uniform Grant Regulations provide:
Access to records--(1) Records of grantees and sub grantees. The
awarding agency and the Comptroller General of the United States, or any
of their authorized representatives, shall have the right of access to
any pertinent books, documents, papers, or other records of grantees and
sub grantees which are pertinent to the grant, in order to make audits,
examinations, excerpts, and transcripts.
Therefore, once Federal funds are used for a project, the information supporting
that project, including financial and programming data, must be available
for audit purposes. The OIG, as the audit representative of the Secretary
of Transportation, must have direct access to all information concerning
the project, including the database used to generate that information.
Additionally, external monitoring agencies have been denied access (via
a read only password) to the Oracle database of the CA/T Project information.
This database contains all financial and schedule information and is the
basis for all reporting by MTA management. This access has reportedly been
denied to the OIG. The MTA, a State agency, has also denied direct access
to information by auditors for the Commonwealth of Massachusetts, on the
grounds of proprietary ownership.
The Task Force was also concerned about the close ties between CA/T Project
management and the B/PB joint venture private consultants. As the CA/T Project
moved toward construction, itwas clear that the MHD was not equipped to
manage a project of this scope. All parties, including the FHWA, agreed
to use the joint venture to manage the project, thus taking advantage of
the expertise available from two contracting firms, Bechtel and Parsons
Brinckerhoff, with excellent international reputations. In practice, CA/T
Project management and the joint venture became one entity. The joint venture
did not maintain an independent, objective role, but rather became part
of the management team committed to the zero-sum-gain budget goal of $10.8
billion. The joint venture's loyalty was to its MHD/MTA partners, not to the FHWA.
During the limited available review time, the Task Force could not fully
explore the relationship between CA/T Project management and the joint venture.
However, the Task Force is not aware of instances where the B/PB joint venture
questioned either the CA/T Project's costs or management's decision to withhold
information on potential cost increases from the FHWA. Answers to these
questions are particularly important to the Federal Government because of
the enormous number and value of ongoing contracts between private construction/development
firms and the FHWA or its State transportation partners. Specifically, the
Task Force would like to have had time to explore whether the joint venture's
relationship with the CA/T Project is an anomaly or characteristic of how
the two companies do business nationally when called on to form a joint
venture with a State transportation department. The FHWA will consider changes
in its contractual relationships with these and other private consulting
firms depending on the answer to these questions.
Recommendations:
- The Task Force recommends that the FHWA determine that the MHD
and the MTA are "high risk" grantees as defined in 49
CFR Section 18.12, with respect to the CA/T Project. As high risk
grantees, these agencies must provide more detailed financial and
project management reports, as recommended in other sections of this report.
- The U.S. Secretary of Transportation should request that the Governor
of Massachusetts reevaluate the appropriateness of the MTA's continuing
role in day-to-day management and control over the CA/T Project.
- It is recommended that the CA/T Project management take whatever
steps are necessary to ensure that all requests from external monitoring
agencies for information, records, or access to records are met
in a responsive and timely fashion. A failure to provide this access
should be considered a violation of 49 CFR Section 18.42(e), which
will impact the reimbursement and further availability of Federal funds.
- Require B/PB to submit a certified letter to the Federal Highway
Administrator describing their role in the management of the CA/T
Project, including whether either company raised questions regarding
escalating cost exposure and/or the decision to withhold material
information from the FHWA.
- It is recommended that the FHWA Office of Chief Counsel review
the circumstances surrounding the failure to disclose information
concerning the potential $1.4 billion overrun and recommend whether
to take action under 49 CFR Part 29-Governmentwide Debarment And
Suspension (Nonprocurement) And Governmentwide Requirements For
Drug-free Workplace (Grants).
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- Other Oversight Activities:
The FHWA Headquarters has initiated several oversight activities as a result
of the failures in oversight of the CA/T Project. Specifically, the FHWA
is updating its August 1998 guidance on Finance Plans. While the FHWA's
1998 guidance was adequate to initiate the provisions of TEA-21, Section
1305, the OIG recommendations made it clear that more definitive guidance
was necessary. The revised guidance (due April 25, 2000) will:
- Define the content and format of the Finance Plan data in terms of accepted accounting standards.
- Provide example charts and tables to promote uniformity.
- Require a commitment and acceptance of the plan by the leader of the State transportation agency
- Standardize the FHWA's procedure for reviewing Finance Plans and annual updates
In addition, considering the congressional and public attention surrounding
the FHWA's oversight role on the CA/T Project, the FHWA has elected to establish
a Headquarters Major Projects Team for review of all Federal-aid mega-projects.
It is envisioned that this team will call on individuals with skills similar
to the CA/T Task Force Team - financial specialists, attorneys, engineers
and other program specialists on an "as-needed" basis. While the
FHWA Division Offices will remain responsible for traditional Federal-aid
oversight responsibilities, the Major Projects Team will assist the Division
Office with risk assessment and oversight decisions in the areas of finance,
public relations, environment, and program development.
The Major Projects Team will support the Division Offices during the review
of the Finance Plans and in the independent verification of financial data.
This will include reviewing and managing the implementation of recommendations
from government audits or reviews such as those by the OIG. The responsibility
for staffing and implementing the Major Projects Team lies with the Director
of the Office of Program Administration, Infrastructure Core Business Unit.
The Massachusetts Division Office has instituted activities beyond those
normally required for full oversight projects. Some of the initiatives are:
- Organization:
The current CA/T Project and Division organizational charts are, for
the most part parallel. This was done so that the levels of authority
within each organization are consistent. The organization charts (as
of February 27, 2000) found in Table A show the management levels of
the FHWA and their CA/T Project counterparts.
In general, the Area Engineers and the CA/T Project Area Managers have
similar delegations for implementing small changes within each contract.
The greater the dollar size of the change or impacts to the CA/T Project,
the farther up the management levels the change has to be approved.
This layering of management and authority levels within construction
contract administration is common for highway construction. Problems
during construction are resolved at the lowest level possible so that
the contractor is not delayed. Contractor delays present time and money
costs to the CA/T Project.
- Meetings:
Numerous meetings with the CA/T Project personnel are scheduled on
a regular basis. These meetings are conducted to provide information
on schedule, cost concerns, and other issues. They range in scope from
the review of construction issues to overall briefings of top FHWA and
CA/T Project management. A complete description of these meetings is
contained in Attachment 5.
TABLE A FHWA DIVISION AND CA/T PROJECT MANAGEMENT ORGANIZATION
(As of February 21, 2000)
P. Markle
Division Administrator |
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J. Kerasiotes
MTA Chairman
P. Moynihan
Project Director |
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| |
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B. Keazer
CA/T Project Administrator |
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W. Flynn
Asst. Proj. Dir. |
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M. Lewis
Deputy Project Director
J. Allegro
Director of Construction
A. Lancellotti
Deputy Program Manager
(B/PB) |
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A. Almeida
Proj. Delivery Team Leader |
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T. White
CA/T Senior Area Engineer |
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P. Goguen
SBI Area Manager |
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J. McVann
CA/T Area Engineer |
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D. Leslie
CA/T Area Engineer |
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J. Wright
Downtown Area Manager |
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M. Keamy
CA/T Area Engineer |
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J. Hughes
EB Area Manager |
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W. Rogers
ANOC Area Manager |
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FHWA Massachusetts
Division CA/T Project Team |
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CA/T Project
Management Team |
- Cost Containment Activities:
The Division Office has fully participated in the CA/T Project activities
to contain costs. Methods for containing costs include:
- Value Engineering (VE)-a systematic review process that uses a multi-disciplinary
team to analyze a project design and develop recommendations to improve
the design and/or reduce the overall construction cost of a project.
A VE program was established for the CA/T Project in 1991 as the Project
was entering the construction phase.
- The Division Office encouraged the CA/T Project staff to recover
costs associated with consultant design errors and omissions.
- Constructability Reviews were performed during the preliminary design
phase to ensure the elements of the design concepts could actually
be constructed or be constructed without causing an increase in cost.
This effort continues through the final design process. By means of
the continuous involvement by the FHWA in the CA/T Project development
process, the Division Office engineers have been in a position to
recommend numerous design changes that have led to significant savings
and improvements in the quality of the constructed product.
- The Potential Change Allowance program has realized a cost savings.
This program was initiated to capture all potential changes and associated
costs for review and implementation by upper management of the CA/T
Project and the FHWA.
A more detailed discussion of cost containment efforts is included as Attachment 6.
Recommendation:
- The Division Office should continue its oversight and coordination
efforts to ensure that the containment of costs and the mitigation
of delays and conflicts remain a primary CA/T Project focus.
|
Back To Table of Contents
| Objective 2. |
Review the FHWA management
structure and determine if changes in leadership, reporting relationships,
and delegated authority are necessary. |
|
| Conclusion
The FHWA leadership relied, to their detriment, upon the partnership
with State agencies to oversee the CA/T Project and provide information
in an accurate and timely manner. The public trust in the FHWA has been
compromised and as a result the FHWA needs to seek new leadership. |
Discussion:
In fiscal year (FY) 1999, the FHWA completed a major reorganization. The FHWA
Headquarters was restructured along functional lines into "core business
units" (CBU), including Planning and Environment, Infrastructure, Operations,
and Federal Lands Highways. The Headquarters structure also includes "service
business units" (SBU), including Policy, Administration, Professional Development,
Corporate Management, Chief Counsel, Civil Rights, Public Affairs, and Research,
Development, and Technology. Nine Regional Offices, which had served as overseers
of FHWA's Division Offices, were abolished and four Resource Centers were established
across the country to provide specialized services and expertise in support
of the field organization. The authority of the former Regional Administrators
was delegated, for the most part, to the Division Administrator in each State.
The Massachusetts Division Administrator is supervised by the Director of the
Eastern Resource Center (ERC), in Baltimore, Maryland. The Director, however,
has no program authority over the Division Administrator. Rather, program direction
is exercised by the Headquarters CBU Program Managers in their respective areas
of responsibility. The ERC Director consults with the CBU Directors and others
for the annual evaluation of the Division Administrator's performance. The Infrastructure
CBU has lead responsibility for coordinating CA/T Project matters in FHWA Headquarters.
The Massachusetts Division Office is authorized to have 30 Full Time Equivalent
(FTE) positions. Of these, 15 positions are assigned directly to the CA/T Project,
including a CA/T Project Director. This represents a 50-percent increase over
the 10 positions reflected in the 1995 process review of CA/T oversight, which
found the FHWA's CA/T staffing level to be higher than for any other major Federal-aid
project in the Nation. The CA/T staff is divided into two teams: Project Delivery
and Technical Services. The Team Leaders, who have statewide program responsibilities,
supervise Area Engineers and technical support engineers, in addition to the
CA/T teams. The Division Office Organization Chart is included as Attachment 7.
Given the relative size and scope of the CA/T Project compared with the remaining
statewide program, the distribution of FTE within the Massachusetts Division
Office appears appropriate.
The Task Force concluded that the existing management structure of the FHWA,
including the reporting relationships and delegations of authority, did not
preclude appropriate oversight of the CA/T Project. The failure of oversight
occurred because FHWA Headquarters and Division Office managers did not institute
monitoring commensurate with the task, as discussed below.
Leadership Changes
Public confidence in the Federal and State partnership administering the CA/T
Project has been seriously compromised. The most immediate cause of FHWA management's
failure to anticipate the magnitude of the $1.4 billion potential cost overrun
can be traced directly to the decision of the MTA's CA/T Project Director to
withhold material information. It had been the State's practice to undertake
detailed cost reviews and provide the information to the Division Office. The
CA/T Project Director knew the Finance Plan submitted on January 7, 2000, excluded
information regarding the potential $1.4 billion overrun, but he did not disclose
this fact to the FHWA prior to February 1, 2000. The Task Force found this failure
of communication noteworthy because the FHWA Division Administrator had talked
with the CA/T Project Director about a potential overrun that appeared to be
in the range of $500 million on the basis of PMM reports.
However, a second cause of FHWA management's failure to anticipate the $1.4
billion cost overrun was the failure to undertake an independent review of the
MTA's financial forecasts. This management failure is particularly noteworthy
given the magnitude of the CA/T Project, the fact that the Division Administrator
had knowledge of at least a $500 million cost overrun, and the fact that information
necessary to conduct an independent validation was available to the Division
Office. With respect to the $500 million cost overrun, he accepted the CA/T
Project management's assertions that the overrun was manageable and could be
offset by savings that had not yet been identified, which led to the February
1 conditional acceptance of the October 1999 Finance Plan.
In recognition of the need to restore public confidence in FHWA's stewardship
of the project, the leadership of the Massachusetts Division Office has been
changed. This change provides a fresh opportunity to establish strong oversight
based on vigilance rather than trust. Although recommendations on personnel
decisions to the State are beyond the authority of this Task Force, the Task
Force believes that restoration of public confidence in Federal and State management
of the CA/T Project requires consideration of a comparable change in State CA/T
Project leadership. Failure to take positive action would be strong evidence
of a continued lack of commitment by the State to a full and open partnership
approach on this project.
Reporting Relationships
Interviews with staff in the Massachusetts Division Office reflect a clear
understanding of internal delegations and reporting relationships. Senior Division
Office staff also have a clear understanding of the relationships between the
Division Office, Resource Center, and FHWA Headquarters officials.
Because of the longstanding agreement with the State that CA/T Project officials
would conduct detailed cost reviews, no system exists in the Division Office
for aggregating information concerning financial progress of the CA/T Project
as a whole. Instead, information collected by CA/T team members (such as the
Area Engineers and the Realty Specialist) is used for their independent purposes.
Thus, while information that would assist in an independent validation of CA/T
Project costs is routinely collected, no mechanism existed prior to February
1, 2000, for capturing that data to monitor overall financial management of the CA/T Project.
Delegations of Authority
The FHWA policy is that authority be delegated to the maximum extent compatible
with effective direction and control and as close as possible to the point where
functions are performed and decisions actually made.
Accordingly, the Division Administrator has been delegated full authority to
manage the FHWA's role in the CA/T Project as well as the statewide program.
Similarly, the Division Administrator has redelegated sufficient authority to
the CA/T team members to oversee progress of the work and to ensure all work
is consistent with approved plans, specifications, and related Federal requirements
and thus, is eligible for Federal reimbursement. The Massachusetts Division
Delegation of Authority, as of August 23, 1999, is included as Attachment 8.
The October 1999 Finance Plan was submitted to the Infrastructure CBU for review.
Even though the OIG had warned in October 1999 that the financial disclosure
in the Project's previous finance plan was inadequate, no other financial experts
within the FHWA or the DOT reviewed the Plan. Thus, the decision of the Division
Administrator with respect to the Finance Plan was not based on an adequate
analytical review and in fact ignored prior warnings of cost trends and inadequate
cost reporting. Notwithstanding, as reflected in the Division Administrator's
letter of February 1, 2000, he was aware of significant problems of potential
cost exposures on the project and had taken steps to ensure the CA/T Project
would address the issue.
As subsequent events have shown, the Division Administrator's trust in his
CA/T Project counterparts was misplaced, as demonstrated by the State's actions
before and after the Finance Plan was accepted conditionally. Had the Division
Administrator taken other steps within his delegated authority, consistent with
the unique nature of the CA/T Project, the FHWA might have avoided the resulting
embarrassment and loss of public confidence in its stewardship.
Recommendations:
- The U.S. Secretary of Transportation should consult with the Governor
of Massachusetts to seek changes in the State CA/T Project leadership
consistent with the recently announced change in Federal CA/T Project leadership.
- Documentation of the Massachusetts Division Office's process for independent
validation of CA/T Project costs should include a system for aggregation
of cost and schedule related data routinely accumulated in the normal
course of project oversight by FHWA CA/T staff.
- The delegation of authority to accept annual Finance Plans for the
CA/T Project should be withdrawn to FHWA Headquarters.
- The FHWA Division Office should obtain written assurance from the
State that all data with respect to the independent audits of the CA/T
Project (e.g., O'Brien Kreitzberg and Deloitte Touche) will be provided
to the FHWA. The FHWA should independently and objectively review this
and other external reviews of the Project (such as by the OIG, state
auditors, etc.), and must not accept assurances provided by Project officials.
|
Back To Table of Contents
| Objective 3. |
Determine
the effectiveness of the Project Management Monthly (PMM ) report
and annual Finance Plan as information resources for management. |
|
| Conclusion
Neither the PMM nor the Finance Plan, in their current form, provides
a clear, accurate, and timely picture of the total potential CA/T Project
cost exposure or cash flow needs. |
Discussion:
- Project Management Monthly
The PMM report is periodically issued by the CA/T Project to the FHWA and
other oversight agencies. According to CA/T Project personnel, the PMM is
designed to report on the current schedule status and the effectiveness
of MTA management in containing program costs within the 1995 approved $10.4
billion budget amount. This 1995 budget figure was contained in the Cost/Schedule
Update, Revision 6 (C/SU Rev. 6), which has been the basis for all budget
information. This figure was later adjusted to $10.8 billion. An example
of a PMM is included as Attachment 9.
The PMM includes an Executive Summary and four schedules:
- Significant Schedule Trends:
The Significant Schedule Trends provide data on the eight key CA/T
Program milestones (see Attachment 10 for an example of the Significant
Schedule Trends report). The trends are measured as projected deviations
from the original milestone completion dates established in 1995. In
the PMM of June 30, 1999, the six remaining milestones show projected
delays of up to 6 months. However, a trend arrow for each milestone
indicates the MTA anticipates improvements to these schedule variances.
In general, this June 1999 PMM would lead the reader to conclude the
program will experience some delay in achieving its planned milestones.
The amount of the delay is unknown.
- Total Costs:
The Budget, Cost, Commitment and Forecast report is based on data from
Oracle. An example of this report may be found in Attachment 11. This
report, which provides the basis for much of the financial information
contained in the PMM, shows the Current Budget (CB) and Potential Forecast
(PF) figures for each major cost category. On the surface it appears
this data should indicate any potential cost exposures to the current
budget. That conclusion would be wrong.
To understand the reported figures, it is necessary to understand the
MTA Chairman's mandate that drives the cost data being reported. The
mandate was "zero-tolerance" for growth in total CA/T Project
costs. For every identified cost increase on the CA/T Project, the CA/T
Project staff was directed to identify offsetting cost savings in other
work elements. As a result, the use of the term "Potential Forecast"
is misleading since both the CB and PF totals always equal the $10.8
billion target amount.
- Significant Cost Trends:
The Significant Cost Trends portion of the PMM is a summary of the
status of the effectiveness of the MTA's balancing of cost increases
against cost savings. The Significant Cost Trends schedule lists the
potential increases and decreases to the $10.8 billion budget. Potential
increases that are firm changes with firm values are indicated with
solid bars. These changes have been approved by the MTA management.
The solid bar increases have to be equal to the solid bar decreases
so the PF does not exceed the $10.8 billion budget. The PF figures included
in the CA/T Project's primary reporting document, therefore, do not
include potential costs, but only those that will require an offset
to meet the final budget figure. The CA/T Project management has stated
that the PMM was designed to identify circumstances that were putting
pressure on the CA/T Project schedule and not as a budget forecast document.
The Significant Cost Trends schedule contains a second category of
changes that are open or "soft bars." The soft bars are early
indicators of potential changes that do not have firm values assigned
to them. These potential changes have not yet been approved by the CA/T
Project Director and are considered too speculative to be included as
potential costs to the CA/T Project.
- Progress Report:
The $10.8 billion original budget figure was the result of a bottom-up
review of the CA/T Project costs by the CA/T Project management in March
1995, as later adjusted. This effort was done in association with the
C/SU Rev. 6. Subsequent to the bottom-up review, the CA/T Project's
major cost categories were periodically updated to reflect recent "hard
bar" or firm increases or decreases in project costs. These updates
were not the result of a bottom-up approach and basically just made
adjustments among the major budgeted categories while maintaining the
C/SU Rev 6 budget total of $10.8 billion.
The CA/T Project management did not perform another bottom-up analysis
of costs until late 1999. Management believed that performing additional
cost reviews would provide no benefit since they "had their figure"
(i.e., $10.8 billion). It was the 1999 bottom-up review that identified
the potential $1.4 billion cost overrun.
Management's zero tolerance approach may have contributed to containing
costs on this project, but over time it hindered the ability of the
CA/T Project staff to identify true potential cost exposure. The Task
Force believes more frequent bottom-up reviews would have resulted in
earlier identification and depiction of all potential exposures.
Recommendations:
- CA/T Project should perform an annual bottom-up review for the
remaining years of the CA/T Project, beginning with the last quarter
of 2000. The results of these efforts should be incorporated into the PMM.
- The data contained in the PMM should be modified to show potential
project cost exposures identified in the separate document referred
to as the Up/Down chart. The PMM or similar vehicle should include
such items as: (1) anticipated cost exposures in design and/or construction
activities; (2) projected labor rate increases; (3) anticipated
petroleum price increases or decreases; (4) expected increases in
operational costs such as insurance premiums, consultant support
services, and materials; and (5) potential and settled claims.
- The Significant Schedule Trends Report shows possible delays to
all six remaining key milestones. The PMM should indicate why the
projected delays have occurred and what measures are being considered
by MTA management to remedy this deficiency.
|
- The Annual Finance Plan
In 1996, as part of the overall oversight for the CA/T Project, the MHD
completed the initial Finance Plan. The goal of the Plan was to show the
total funding needs of the CA/T Project and anticipated revenue sources,
and to outline the commitment by Massachusetts to a balanced statewide transportation
program. This initial Finance Plan was based on information provided by
a bottom-up analysis of CA/T Project costs, the implementation of a very
aggressive cost containment program by CA/T Project management, and the
projection of revenue sources anticipated through multiple highway bills.
The first Plan established four key cost containment assumptions for developing cost information:
- The first was a design-to-cost program that assumed no growth in design costs;
- The second established an escalation value to illustrate the effects
of inflation onremaining costs of 4 percent;
- The third addressed construction contract changes that included a 7
percent construction contingency in all construction contracts; and
- The fourth assumed a continuation of the trend that actual bids will
be below the engineer estimates.
At the time, these assumptions were found to be acceptable by the FHWA
as basic cost containment assumptions.
The first Finance Plan following enactment of TEA-21 was the October 1999
Plan submitted by the MTA in January 2000 that was conditionally accepted
by the FHWA on February 1, 2000. The Task Force review of the Finance Plan
highlighted several key elements of the Plan:
- Funding Sources
The Plan uses only the most optimistic figures when determining the
revenue sources for the CA/T Project. For example, Federal funds shown
in the Plan are based on apportionment amounts, although Congress routinely
establishes an annual obligation limitation less than the apportionment
amounts (the FHWA's conditional acceptance letter for the 1999 Plan
addressed this issue). In fact, the 1999 Plan shows Federal funding
available for the CA/T Project in FY 2000 as $362 million, but the Plan
Update dated March 2000 shows a reduced amount of $314 million. It is
likely that Federal funds shown in the 1999 Plan were overstated for
FY 2000. If reductions in obligation authority continue during the next
3 years, the 1999 Plan will have overstated Federal revenues by more
than $100 million.
The Plan contains no discussion of contingencies should funding sources
fail to produce the anticipated revenues. In fact, the Plan states:
"Without a fully authorized GANs program, an alternate funding
source will need to be identified to support the Project schedule and
cash flow." (GANs are Grant Anticipation Notes, a financing mechanism
discussed in Objective 5.) A comprehensive Plan should identify alternative
funding sources should revenues decrease or costs increase.
- Project Costs:
There has been much discussion on the "cost" of the CA/T
Project. The method in which the "cost of the project" is
shown in the Plan has contributed to the inaccurate projection of the
CA/T Project cost. Two basic principles should be applied when establishing
the cost of the project. First, interest costs, project revenues, and
project credits occurring after construction is completed should not
be included in the calculation of project cost. Second, the source of
funding should not be a factor in determining project cost.
While neither interest costs nor project revenues and credits should
be included in the "cost of the project," they should be included
in the cash flow models. These items affect the amount of money needed
to pay for the project and its related debt. The way in which these
items are reflected in the Plan is discussed in more detail in the sections that follow.
While funding levels are optimistic, so are the expectations of the
CA/T Project management for controlling project costs as shown by the
$1.4 billion projected overrun. If the Plan were based on a more realistic
scenario (i.e., most likely to occur scenario), a different picture
of the budget requirements and cash flow needs would have been indicated
in the Plan. The use of overly optimistic scenarios driven by a zero-sum-gain
budget total proved to be misleading and not indicative of true project cost exposures.
The description of the CA/T Project's costs does not include all costs
associated with the CA/T Project. Costs borne by a State agency, such
as the MTA or the MHD, are not recognized as part of total CA/T Project
costs. For example, part of the $1.4 billion overrun includes a $260
million increase in program management costs. This amount covers the
funds needed to pay the B/PB joint venture for additional operating
costs incurred under the present contract, and to fund an extension
of the contract to 2002. Of this $260 million increase, a portion ($100
million) is attributable to the discarded assumption that the project
management function would be staffed entirely by MTA employees after
2002 and, therefore, not counted as a CA/T Project cost. Since this
assumption is no longer deemed feasible, the $100 million becomes a
project cost and is included in the estimated overrun. The Finance Plan
should fairly represent the true costs of the CA/T Project, regardless
of the source of funding or support.
With the adoption of a "To Go" funding status in the 1999
Plan, there is no clear picture presented of the total costs of the
CA/T Project. The Plan should describe amounts obligated and expended
to date, as well as the "To Go" activities.
- Advance Construction:
The use of advance construction is a key component in the overall funding
of the CA/T Project. Under this concept, a project is authorized by
the FHWA without the obligation of Federal funds and no commitment by
the FHWA that funds will be available in the future. The State then
uses its own funds to pay project costs. When Federal funds become available,
the State may decide to convert the project and request that Federal
funds be obligated. There is no obligation of Federal funds until the
project is converted, at which time the State may be reimbursed for
the Federal share of costs incurred on the project from the original
date of authorization.
The FHWA allows the incremental conversion of advance construction
projects, providing States the opportunity to manage their limited Federal-aid
funding while accelerating the delivery of projects through the use
of their own funds. The Plan discusses the anticipated need for advance
construction that goes from a high of $2.8 billion in FY 1999 (the height
of construction) to a low of $1.8 billion in FY 2004. The incremental
conversion of these funds will take place well past the 2004 completion
date. (Because TEA-21 authorized Federal-aid highway funding only through
FY 2003, future legislation will determine the pace of Federal-aid funding
for Massachusetts and, therefore, the amount available for conversion
of advanced construction projects.)
The extensive use of advance construction on the CA/T Project raises
questions regarding the State's plans for claiming Federal funds to
convert advance construction projects. Although the Division Office
indicates the State does not plan to convert all advance construction
projects to traditional Federal-aid funding, the approval of advance
construction exposes the Federal Government to cash outlays far into
the future. The Division Office stated that, although the Finance Plan
indicates a $1.8 billion balance of advance construction at the end
of FY 2004, only the dollar amount needed to retire the GANs balance
($1.5 billion) will be converted.
In addition, the March 2000 Update Plan indicates the use of advance
construction for the $1.4 billion potential cost overrun, increasing
the exposure by another $900 million. The advance construction conversions
beyond FY 2004 should be reflected in the Plan. The inclusion of this
information will provide a better picture of the total costs of the
CA/T Project and how the State plans to address its overall funding requirements.
- Cash Flow Charts:
The annual budget needs of the Plan cover only the years to FY 2004
and cash flow needs are shown through FY 2005. The remaining amounts
are shown as lump sums. A more accurate picture of the true funding
requirements of the CA/T Project will necessitate that the charts contained
in the Plan show cash needs past the completion date of 2004. Since
a significant portion of the CA/T Project has used advance construction
or has been financed with GANs, the cash flow needs should address the
post-construction years. This schedule should not only address the repayment
of the principal but also the interest payments on the GANs and other debt issuances.
- Statewide Funding Commitment:
Although the Plan indicates the State is committed to a balanced statewide
transportation program, the basis for this commitment appears to be
State internal policy without a binding agreement. This commitment has
two parts. First, the State agreed to commit at least $400 million annually
to the statewide program (i.e., excluding the CA/T Project). Second,
the State limited Federal funds on the CA/T Project to 71 percent of
the amount it receives from the FHWA through 2002, and thereafter, 50
percent. This commitment to a balanced statewide program has been referenced
in past Finance Plans accepted by the FHWA as well as the Plans submitted
in October 1999 and March 2000.
The FHWA's ability to enforce this internal policy is limited under
23 U.S.C. 145, which ensures the State has sovereignty to decide which
projects are developed. We have relied, instead, on the State's own
commitment to its county and municipal partners. However, interpretation
of the commitment is subject to debate. This has been evidenced by recent
discussions between State and local officials, with FHWA involvement,
about how the State will honor its $400 million annual commitment and
how it will calculate the Federal-aid funding split between the CA/T
Project and other projects. Moreover, as funding pressures on the CA/T
Project mount, local officials have expressed concern that the State
will not honor the commitment or will change the definition of its terms
in a way that reduces Federal and State funding for projects around the State.
Given recent events, the Task Force believes the commitment to a balanced
statewide program should be memorialized in a formal manner that gives
the FHWA an enforcement mechanism. The Task Force believes this could
be accomplished by incorporating it explicitly into the STIP of projects
the MHD develops in cooperation with local officials. The FHWA and the
Federal Transit Administration (FTA) are responsible for joint review
and approval of the STIP. By conditioning approval of the STIP on compliance
with the formal agreement between the MHD and local officials for a
balanced statewide program, the FHWA would have the enforcement mechanism
it needs to ensure compliance. If the MHD does not comply with the agreement,
the FHWA and the FTA could halt project approvals and/or withdraw approval
of the STIP until compliance is achieved.
The Task Force expects the State to take the lead in engaging its partners
and constituents in building a consensus on how to define and measure
a balanced statewide program. The FHWA would be willing to participate
in the discussions and, if necessary, to facilitate them. The end result
must be a State/local agreement that is satisfactory to all parties
and can be enforced if not satisfied.
- Project Credits:
The Plan includes potential project cost offsets (such as insurance
credits and air rights revenue) that have been determined to be outside
the scope of the CA/T Project. Therefore, actual costs of the CA/T Project
are understated, and will continue to be so as long as the Plan uses
these types of credits as potential cost overrun offsets. For example,
it is inappropriate to include an insurance credit against total Project
costs when it may not be realized, if ever, until 2017. Air rights revenues
and the sale of a building should not be credited to the CA/T Project
unless they will occur before project completion. Under the FHWA's policy,
revenues from air rights and the sale or lease of property are not credited to projects.
The largest credit involves the OCIP, which provides contractors with
certain types of insurance coverage. On a traditional project, each
contractor provides its own insurance coverage. On large projects, OCIPs
are generally believed to be less expensive and provide more efficient
insurance coverage than contractor-controlled insurance. The CA/T Project
management has reported significant savings resulting from its OCIP.
The primary coverage provided through the OCIP is workers compensation
and general liability. Coverage is purchased from a private firm, AIG,
with the CA/T Project funds covering claims that fall within specified
deductibles. The CA/T Project management has established trust accounts
where funds are maintained to pay claims. Federal and State funds are
used to pay insurance premiums and fund the trust accounts. Trust account
balances are invested, with the earnings retained in the accounts and
used to pay claims.
The CA/T Project management has determined that the insurance program
should remain in place until 2017, at which time any funds remaining
in the trust accounts will be credited to the CA/T Project. The Federal
share of any amount credited will be applied to the Federal accounts
originally charged and will be available to Massachusetts for obligation
on Federal-aid projects.
To date, approximately $450 million of Federal funds have been paid
to the OCIP in addition to State funds. After premiums are paid to AIG,
and other expenses, such as a contractor safety incentive program, are
deducted, the remaining amounts are deposited in the trust accounts
and used to pay claims for which the State is responsible. On January
31, 2000, the trust account balances totaled $274 million.
While the OCIP appears to be an effective method for providing insurance
coverage on the CA/T Project, the Plan also presents the OCIP as an
innovative method for controlling total CA/T Project cost. Since the
CA/T Project has enjoyed a good safety record, the reduced loss ratios
(claims paid compared with premiums paid) are identified as savings.
For example, the PMM report dated June 30, 1999, shows $163 million
in savings resulting from reduced loss ratios. These savings are used
as offsets against cost increases to maintain the target amount of $10.8 billion.
Actually, the $163 million does not exist and may never exist. The
$163 million is calculated based on its value in 2017; it does not exist
today. The value at that time is speculative. If safety problems occur,
the loss ratio would increase, resulting in additional payments from
trust accounts. As a result, all funds must remain in the trust accounts.
They cannot be used to cover current cost increases.
If these savings were to occur, the State has projected the balance
in the OCIP trust account to be $826 million in 2017. The 1999 Plan
shows this $826 million as a credit to the project cost. The Task Force
believes it is inappropriate to apply the OCIP credit against the CA/T
Project costs for the following reasons:
- Credits (or expenses) occurring after project completion are generally
not applied to project costs. It was noted that no interest payments
associated with the OCIP or other bonds are identified as a project
expense. In fact, the OCIP credit will occur in 2017, while the Federal
payments associated with the CA/T Project are expected to end in 2015
when the GANs are repaid.
- The $826 million trust account balance is unlikely to exist. The
OIG stated that the current amount in the trust account is excessive
and should be reduced by $150 million. The CA/T Project management
has argued strongly that, considering the remaining risks associated
with the CA/T Project, the current balances are reasonable. However,
a memorandum on March 14, 2000, from the CA/T Project's insurance
consultant stated "... that $150 million could be made available
in November 2002 if the better than expected loss experience continues
and the investment earnings assumptions stay consistent between now and then."
- The FHWA has advised the CA/T Project management that it will require
periodic risk assessments to determine the amounts needed in the trust
accounts and deduct any amounts considered to be excessive. As a result,
one of two events will occur. First, significant claims occur that
reduce the account balances. Second, no significant claims event occurs
during construction, reducing the likelihood of post-construction
claims, resulting in a reduction in the trust account balances. In
either case, the reduced balances will result in reduced investment
earnings and smaller amounts will become available as credits to the CA/T Project.
Recommendations:
- The Finance Plan should be based on more realistic cost and revenue
scenarios, and include contingency plans to cover potential revenue
shortfalls or cost overruns. Inclusion of contingency plans will
minimize the surprises inherent in an overly optimistic forecast
scenario and provide for an earlier discussion of how potential
circumstances would be addressed.
- The Finance Plan, since it is a picture of the funding revenues
and outlays for a project, should include all costs associated with
the project, regardless of the source of funding. Since this project
does not recognize costs borne by the State, such as personnel expenses
for MTA employees, the total CA/T Project cost figures are inherently
low. A more realistic picture would include such costs, since they
are directly attributable to the CA/T Project, although they would
not be included in a budget for the B/PB joint venture.
- By showing post-construction funding as lump-sum amounts, the
annual budget and cash flow needs through the conclusion of the
project financing are not clear. For example, funds needed for the
GANs repayments and the conversion of advance construction should
be shown annually.
- Although the financing requirements are intended to accurately
depict the future needs of the CA/T Project, it is recommended that
future Finance Plans include a short discussion of past costs and
the impact these have had on the initial assumptions. This permits
the reader to gain a full understanding of the finances for the
Project, past, present, and future.
- The Federal Highway Administrator should require the MHD to reach
agreement with local officials on the terms of a balanced statewide
program. By making the agreement a formal condition of STIP approval,
the FHWA and the FTA would have a means of ensuring the commitment is satisfied.
- The Finance Plan contains potential project offsets that have
been determined to be outside the scope of the CA/T Project. These
include the OCIP credits, air space leases, and the sale of the
CA/T Project management building. While post-construction credits
and revenues may be included in cash flow models, the Task Force
recommends that they not be allowed as offsets to reduce the cost
of the CA/T Project.
- The FHWA should require the CA/T Project management to obtain
an independent certification as to the accuracy of the information
contained in the Finance Plan. This certification would accompany
the Plan upon submission to FHWA for review and acceptance.
- The FHWA should retain the services of an independent contractor
to conduct a review of the OCIP and the risks associated with the
CA/T Project, and to assist the FHWA in the development of a National policy on OCIPs.
|
Back To Table of Contents
| Objective 4. |
Validate
the $1.4 billion potential cost overrun. |
|
| Conclusion
The methodology used by the CA/T staff to identify the $1.4 billion
overrun is a realistic approach and is consistent with normal industry
practice. However, there are risks that could lead to additional cost
exposures in the range of $300 to $480 million. |
Discussion:
As stated in the Finance Plan Update dated March 15, 2000, the MTA believes
the $1.4 billion potential cost overrun constitutes a realistic and reliable
estimate of additional cash needs for the CA/T Project. This estimate falls
within an identified range between $1.277 billion and $1.669 billion.
The following table is a breakdown of the potential $1.4 billion cost overrun,
taken from information in the Finance Plan Update. A more detailed summary is
included as Attachment 12.
Table B-Breakdown of Potential $1.4 Billion Cost Overrun
| Category |
$ (millions) |
| Construction |
|
$915 |
| Scheduled
Maintenance |
$292 |
|
| Potential
Change Allowance |
$302 |
|
| Exposures
to Unawarded Contracts |
$321 |
|
| Force Accounts |
|
$90 |
| Right-of-Way Settlements/Judgments |
|
$72 |
| Design |
|
$60 |
| Project Management |
|
$260 |
| Insurance Premiums |
|
- |
| Total |
$1,397 |
Independent Validation
The MTA assessment of additional cash needs for the CA/T Project was validated
by the independent firm of O'Brien-Kreitzberg (OK). In December 1999, the CA/T
Project management requested OK to review and comment on the validity of the
method and process used by the CA/T staff to estimate the design and construction
portions of the cost to complete forecast. The review by OK was conducted during
a 4 week period that ended on March 10, 2000. The review focused on estimation
methodology used by the CA/T Project staff. It also evaluated the reasonableness
and completeness of the assumptions, procedures, and calculations used. A summary
of the review is presented below in Table B. The full report by OK, taken from
the Finance Plan Update of March 15, 2000, is included in this report as Attachment 13.
Table C. O'Brien Kreitzburg Report of Review of the CA/T Project
Cost Increase of $1.4 Billion
| CATEGORY |
CA/T Estimate |
OK Low Estimate |
OK High Estimate |
| Construction |
|
|
|
| Schedule
Maintenance |
$292.0 |
Not Quantified |
Not Quantified |
| Change
in Awarded Work |
$302.0 |
$187.0 |
$502.0 |
| Unawarded
Contracts |
$321.0 |
$321.0 |
$381.0 |
| Design Firms |
$60.0 |
$60.0 |
$80.0 |
| Force Account |
$90.0 |
Not Reviewed by OK |
Not Reviewed by OK |
| Right-of-Way |
$72.0 |
Not Reviewed by OK |
Not Reviewed by OK |
| Management Consultant * |
$260.0 |
Not Reviewed by OK |
Not Reviewed by OK |
| Total |
$1,397.0 |
$1,282.0 |
$1,677.0 |
Note: Dollars in Millions
* This Management Consultant Increase was reviewed by Price Waterhouse
Coopers but no change in this cost was recommended. |
The Division Office, as directed by the Federal Highway Administrator, also
prepared an independent cost estimate that identified a potential cost overrun
ranging from $1.713 to $1.878 billion. A summary of the Division Office analysis
is shown in Table D:
Table D. RESULTS OF FHWA MASSACHUSETTS DIVISION'S INDEPENDENT FUTURE COST ESTIMATE
| CATEGORY |
COLUMN (1) Budget Cost Containment Funding as of SEPT. '99 |
COLUMN (2) CA/T UPDATE (DELTA) |
COLUMN (3) CA/T EST. (CURRENT) (1)+(2) |
COLUMN (4) FHWA EST. LOW (DELTA) |
COLUMN (5) FHWA EST. HIGH (DELTA) |
COLUMN (6) FHWA EST. LOW (CURRENT) (1)+(4) |
COLUMN (7) FHWA EST. LOW (CURRENT) (1)+(5) |
| Construction Contracts Complete & Active |
$7,055.9 |
$594.0 |
$7,646.5 |
$798.9 |
$939.7 |
$7,854.8 |
$7,995.6 |
| Construction Contracts Unawarded |
$564.9 |
$321.0 |
$917.5 |
$380.6 |
$380.6 |
$945.5 |
$945.5 |
| Force Account |
$461.1 |
$90.0 |
$551.1 |
$90.0 |
$90.0 |
$551.1 |
$551.1 |
| Geotechnical |
$31.1 |
$0.0 |
$31.1 |
$0.0 |
$0.0 |
$31.1 |
$31.1 |
| Right-of-Way |
$506.4 |
$72.0 |
$578.4 |
$78.8 |
$78.8 |
$585.2 |
$585.2 |
| Design Firms |
$875.0 |
$60.0 |
$935.0 |
$92.0 |
$106.0 |
$967.0 |
$981.0 |
| Management Consultant |
$1,589.4 |
$260.0 |
$1,849.4 |
$250.0 |
$260.0 |
$1,839.4 |
$1,849.4 |
| Insurance |
($250.7) |
$0.0 |
($250.7) |
$23.0 |
$23.0 |
($227.7) |
($227.7) |
| |
|
|
|
|
|
|
|
| Total with Insurance Credit |
$10,833.1 |
$1,397.0 |
$12,230.1 |
$1,713.3 |
$1,878.1 |
$12,546.4 |
$12,711.2 |
| |
|
|
|
|
|
|
|
| Insurance Credit |
$824.0 |
|
$824.0 |
|
|
$824.0 |
$824.0 |
| |
|
|
|
|
|
|
|
| Total without Insurance Credit |
$11,657.1 |
|
$13,054.1 |
| `
|
$13,370.4 |
$13,535.2 |
| Note: Dollars in Millions |
Federal Task Force Assessment
The Task Force did not conduct a full analysis of the additional cost requirements
for the CA/T Project, which would have been beyond the resources available in
the short period of the review. Observations of the Task Force, however, are as follow:
- Schedule Initiatives:
The Task Force concurs with the concepts forwarded by the CA/T Project
staff and reflected in the OK report. Pursuing initiatives to keep the CA/T
Project on schedule, though costly, will be less expensive than not pursuing
them. However, individual contracts were routinely advertised with many
amendments to follow, prior to receipt of bids. This is an indicator that
contracts were advertised prior to being complete as a method of maintaining
schedules, and bidders were given incomplete packages to prepare bids. According
to the OK report, the cost of pursuing these initiatives ($292 million plus
$65 million in costs authorized prior to the bottom-up estimate) is less
than the cost of delays that would occur ($416 million) if the initiatives
were not pursued.
- Range of Costs:
The Division Office report indicates its estimated range of the CA/T Program
construction costs for complete and awarded contracts (comparable with the
CA/T Project staff's figure of $594 million listed above) is $799 to $940
million, pushing the upper, pessimistic end of the CA/T Project cost range
higher. The analysis figures developed by the Division Office suggest cost
can rise from $205 to $346 million more than the CA/T Project estimate indicates.
In a similar vein, the estimate by the Division Office for higher than anticipated
costs of unawarded contracts is about $60 million more than the CA/T Project
staff's estimate.
Taken as a whole, this would lead to the conclusion that the CA/T Project
staff's estimate for construction is likely low by $300 to $480 million.
If site conditions, bidding atmosphere, escalation or other factors are
worse than the aggressively optimistic assumptions of the CA/T Project staff,
higher construction costs in this range ($300 to $480 million) could occur.
- Inflation:
The construction controls group of the CA/T Project staff uses 2.35 percent
to account for inflation. While this figure is appropriate to date, significant
changes in the economy in the next 4 years could cause this rate to rise,
affecting labor, materials and many other construction costs. This would
cause the $1.4 billion figure to rise.
- Estimate Discounting:
According to the CA/T Project staff, estimates for unawarded construction
contracts are discounted by 13 percent in projecting future costs. This
means that after the engineers estimate is prepared for pending construction
contracts, the CA/T Project staff assumes the contract will be awarded for
approximately 13 percent below that amount because of competitive pressure.
This discount rate of 13 percent was valid in the past, but appears excessive
based on recent bids, which are coming in under the engineers estimate,
but not as much as expected. For example, the low bid on contract C08A1,
received on February 28, 2000, was 6.5 percent below the engineers estimate,
not the projected 13 percent. In fact, the OK report confirms the trend
toward a lower "discount rate," with the average discount (amount
below the engineers estimate) on recent contracts being 6.5 percent. The
Task Force agrees with OK's conclusion. Continuation of this trend will
cause the bid price of future contracts to climb for the CA/T Project's
current projection ($321 million). According to OK, this trend could add
$40 to $60 million to the total construction cost. This trend is also reflected
in the Division Office's estimate range referred to previously.
- Potential Change Allowance (PCA):
The CA/T Project staff indicated trend studies show change orders are generally
being finalized at between 14 percent and 19 percent over original contract
prices. (Change orders are requests for approval for changes in the project
scope or extra work, after the initial contract is executed.) Yet the CA/T
Project management continues to use a 7 percent contingency factor over
bid price for newly awarded contracts. This has been adjusted to 10 percent
for unawarded contracts. Given the 14 percent to 19 percent trend, these
higher figures should be used in estimating the final cost of work. The
OK report, on page 4-2, indicates that the CA/T Project's pessimistic figures
(higher end of their range of possible construction costs) reflect acceptance
of a 14 percent change order rate for unawarded contracts. If a 14 percent
or higher contingency rate were applied to the elements in the schedule
initiative, the CA/T Project's pessimistic figures would be closer to those
of the Division Office estimates, as well as to recent experience.
- Construction Phase Services:
Construction Phase Services (CPS) are activities required to ensure contracts
follow in a logical pattern. As an example, hiring a concrete paving contractor
before excavation of the project site takes place would not be cost effective.
On large multiple-contract projects such as the CA/T Project, the final
cost for CPS activities is difficult to predict. As a result, for budgeting
purposes, a flat percentage of the estimated construction value is used
to set estimated CPS budget needs. The MTA appears to have used an initial
rate of 1.25 percent to estimate CPS needs as part of the Rev. 6 budget.
However, experience on such projects has been that CPS activities cost in
the range of 1 to 4 percent ofconstructed cost. This somewhat higher amount
results from such factors as project construction complexities, local site
conditions, and the number of owner-directed changes.
Based on subsequent experience, the initial budgets of the MTA for CPS
using 1.25 percent were inaccurate. Recent information suggests actual and
projected rates for some projects are considerably higher than 1.25 percent.
The Task Force believes a CPS estimate of 2 percent of total constructed
value of remaining CA/T Project contracts would be more realistic.
Recommendation:
- The CA/T Project figures for extra construction costs are optimistically
low. The bid discount rate of 13 percent and PCA rates of 7 percent
to 10 percent should be changed to properly reflect recent trends. If
this is done, the likely cost of the remaining construction work will
be estimated at $300 million to $480 million higher than reflected in
the bottom-up CA/T Project estimate. A more realistic estimate would
be $1.7 to $1.88 billion in potential project cost overruns. This increases
the potential total project cost to the range of $13.4 to $13.6 billion.
(The $13.4 billion figure is the total of the $10.8 billion pursuant
to the C/SU Rev. 6 estimate, plus $900 million in allowable credits,
plus the $1.7 billion project overrun). In addition, if inflation rates
rise, as is the present trend, the estimate should be further adjusted
to reflect this trend. Finally, further adjustments should be anticipated
for litigation, vulnerability, environmental contingencies, and other
unforeseen events likely in a project of this magnitude.
|
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| Objective 5. |
Determine
the soundness of the State's financial options for covering the $1.4 billion overrun. |
|
| Conclusion
The revised Finance Plan Update, submitted on March 15, 2000, for
financing the potential $1.4 billion cost overrun does not provide a sound
source of revenue to cover the identified potential exposures. Several
of the proposed revenue sources have questionable legislative support.
The Commonwealth of Massachusetts does appear to have adequate funds to
finance the overrun but has not yet specifically identified which of those
revenue sources will be applied. |
Discussion:
The Task Force objective was to determine the soundness of the State's proposal
to pay for the overrun. While State officials from the Office of the Governor
and the Legislature stated that funds will be made available to cover the CA/T
Project costs, the Task Force evaluated only the specific Plan submitted to
the FHWA by the State. The evaluation is based on the soundness of the Plan,
that is, whether the funds identified are considered secure or reliable. A more
comprehensive analysis of this Plan is being conducted by the FHWA.
The Finance Plan Update, dated March 15, 2000, provides the following sources
for financing the $1.4 billion potential cost overrun:
| MTA Cash |
$200 million |
| Metropolitan Highway System (MHS) Bonds |
150 million |
| Insurance Reserves |
150 million |
| Extension of Maximum MHS Bond Maturity to 50 Years |
100 million |
| Annual Contract Assistance Agreement |
600 million |
| Massport Contribution |
50 million |
| Additional Grant Anticipation Notes |
150 million |
| |
|
| Total: |
$1,400 billion |
The following items do not require action by the State Legislature:
MTA Cash: The Plan states that the MTA has $200 million of reserves
to finance the overrun and is committed to making those funds available. The
Task Force considers these funds as being reasonably available to cover a
portion of the overrun.
MHS Bonds: The Plan states that the MTA expects to raise funds from
the issuance of additional MHS Bonds. The MTA has additional debt capacity
and could realize as much as $150 million of additional proceeds from the
issuance of these bonds without raising tolls beyond the levels stipulated
in the MTA Official Statement, dated March 11, 1999. Based on the conditional
language of the Plan, the Task Force does not consider these funds to be reasonably
available to cover the CA/T Project costs.
Insurance Reserves: The Plan proposes withdrawing $150 million from
the OCIP Trust as early as November 2002. In recent discussions relating to
the amount of funds in the OCIP Trust, CA/T Project officials made strong
arguments to the FHWA and OIG that all funds in the OCIP Trust were needed
to cover the potential risk exposure on the CA/T Project. Considering the
CA/T Project's strong arguments to maintain the OCIP Trust, the Task Force
does not consider these funds to be reasonably available to cover the CA/T
Project costs. Consistent with the OIG recommendation to determine proper
funding levels for the insurance program, the FHWA is seeking an independent
actuarial assessment of the level of funding required to properly capitalize
the insurance fund.
The remaining items require approval by the State legislature. Based on discussions
with State and legislative officials, the Task Force believes the legislature
is not likely to endorse all of the State's proposals. As a result, the Task
Force does not consider the following funds to be reasonably available to cover
CA/T Project costs:
Extension of Maximum MHS Bond Maturity to 50 Years: Extending the
bond maturity would be an expensive source of revenue considering the long-term
nature of the bonds. Legislative approval may be difficult to obtain.
Annual Contract Assistance Agreement: Legislation is required to retain
license renewal fees, which will provide approximately $45 million annually
to the Highway Fund. These revenues over a 30-year period would allow the
MTA to finance $600 million of the CA/T Project costs.
Massport Contribution: The Governor has proposed a $50 million contribution
from Massport, which in return would acquire additional roadway assets from
the CA/T Project.
Additional GANs: In addition to $1.5 billion of authorized GANs, the
Governor will seek legislation authorizing another $150 million to help finance
the CA/T Project.
Recommendations:
- The Finance Plan should include revenue sources that are likely to
be available to the CA/T Project. If a revenue source requires legislation,
legislative support needs to be demonstrated. If the revenue is to be
provided by another State agency, agreement or concurrence from that
agency needs to be obtained.
- Another option, pending legislative action on the above proposals,
is for the State to commit its general funds to the CA/T Project. The
general funds would serve as surety until other funding sources are
established. State officials advised the Task Force that funds may be
available from budget surpluses or other reserve funds.
|
Back To Table of Contents
| Objective 6 |
Identify
potential new indicators for better predicting cost increases. |
|
| Conclusion
The indicators used by the CA/T Project staff to predict cost increases
are appropriate, but are not being used properly by the CA/T Project management.
The current practice of constraining cost indicators to equal a predetermined
budget amount must end. A new report must be developed that regularly
and accurately predicts the potential cost exposure of all program work elements. |
Discussion
The CA/T Project's financial and reporting database (the Oracle System) contains
basic forecast and budget information for every work element of the program.
The PF, when compared with the budget, should be the basic indicator of the
cost of a project. Common management practice on large projects such as the
CA/T Project requires that forecasts truly reflect a best estimate of the final
cost of every element. This was not done on the CA/T Project. Specifically,
the PF total was constrained at the $10.8 million level, regardless of actual
costs. Further, there apparently was no requirement that the managers of the
many CA/T Project elements regularly prepare an estimate-at-completion cost
for their elements. Consequently, there was no adequate early warning report,
or even solid predictive trends, that would have alerted the parties interested
in the completion of the CA/T Project to the emerging $1.4 billion project cost
increase. To prevent a reoccurrence of this reporting deficiency, the current
MTA policy regarding the handling of the PF should be revised.
However valid the prediction capability may be, it is of limited value to the
FHWA if the MTA and the CA/T Project officials chose not to share the information.
As documented in earlier sections of this report, the PMMs enabled the FHWA
to detect a potential increase in project costs, but CA/T Project management
chose not to inform the FHWA Division Office of the full extent of the increase.
Given this breach of partnership obligations, the recommendations of the Task
Force are designed to ensure the FHWA has access to all information needed to
make independent predictions of potential cost increases.
Recommendations:
- The PF for all project elements should be a best estimate of the completion cost.
- The PF should be maintained on a current basis for all project elements.
- The PF total for all project elements should not be constrained by
MTA policy directives.
- On a quarterly basis, an overall CA/T Project Budget vs Potential
Forecast Variance Report should be furnished to the FHWA. This report
would contain an explanation of all significant variances, by project
element, segregated into the following categories:
- The components of the reported variances that are deemed to be
firm to the point of requiring a corresponding revision to the budget
of the affected project element. These kinds of changes include,
but are not limited to, the value of actual contract awards (or
executed change orders), approved scope changes to be incorporated
during design, and expected settlement amounts for asserted differing
site condition claims.
- The components of the reported variances that are deemed by the
CA/T Project management to be subject to further adjustment by future
management corrective action, or other alternative remedies.
- The components of the reported variances that are deemed by the
CA/T Project management as being speculative in nature. These include
reported potential forecast variances that are difficult to quantify
and price but which could have a positive or adverse effect on the
future cost of the program.
|
Back To Table of Contents
| Objective 7. |
Identify
potential cost saving measures. |
|
| Conclusion
There are limited opportunities for significant savings on the remaining
major construction projects. The cost containment initiatives in place
should be aggressively continued. |
Discussion:
On the CA/T Project, several initiatives were established to promote cost savings.
These cost containment initiatives are detailed in Attachment 14.
Value Engineering Change Proposals (VECP) have been used to produce a reduction
in total project construction costs of $13 million to date, with projected additional
savings of $8 million not yet realized. These proposals have been successful
since they include the contractors in the solution of design challenges. In
addition, the design phase of the CA/T Project has realized a savings of $480
million in potential project budget overrun costs. This program is well established
as a corporate philosophy and should be continued for the remaining contracts.
To protect against fuel price volatility, a fuel price adjustment clause could
be used as an additional measure. The price adjustment clauses are incorporated
into contracts to reduce the contractor's risk of bidding on speculative price
trends. This type of clause provides for adjusted compensation for specific
materials and supplies used in performance of the work. Price adjustment clauses
have been used in the industry for materials such as asphalt, fuel, and concrete.
They may also be warranted for regional fuel shortages or where the price of
fuel is escalating rapidly.
The scope changes have not led to reductions in total CA/T Project costs. Decisions
relative to scope and schedule adjustments have already been implemented and
their effects on the overall cost of the CA/T Project have been realized.
As the end of the CA/T Project approaches, the effectiveness of the cost containment
programs is diminished. There are fewer opportunities to promote cost containment
initiatives as the final contracts are awarded. At this point in the CA/T Project,
most decisions relative to changes and deletions have been incorporated into
the two remaining major contracts. Deleting work at this point is not expected
to be an option that would realize savings large enough to offset the current
projected CA/T Project overrun of $1.4 billion.
The MHD has a price adjustment provision but the MTA has chosen not to include
it in the CA/T Project contracts. The Task Force believes the MTA should consider
the use of such a clause on the remaining two large construction contracts,
which have estimates of approximately $150 million and $400 million.
Recommendations:
- CA/T Project management and the Division Office should continue with
the cost containment initiatives to achieve the greatest savings by:
- A pro-active and aggressive change negotiation and claims defense;
- Rigorous controls to prevent scope change for remaining construction work;
- The encouragement of VECPs to simplify construction logistics
and staging on construction contracts;
- Limiting changes in scope and minimizing scope transfers between projects; and
- Adding a construction contract clause for price adjustment for
fuel prices to the remaining construction contracts.
|
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CONCLUSION
FHWA's "partnership" approach to oversight failed to achieve independent
and critical oversight of the CA/T Project in Boston, Massachusetts. On the
one hand, this failure was due to FHWA's over reliance on trust between itself
and the State. The FHWA had available to it the information necessary to critically
analyze the CA/T Project's costs, including an OIG report and other documentation.
Rather than scrutinize the information about the CA/T Project costs more closely,
the FHWA continued to rely on assertions from the State that future cost increases
in the magnitude of $1.4 billion were unlikely.
While FHWA exhibited a lack of diligence, the State, on the other hand, demonstrated
disrespect for the Federal oversight process by intentionally withholding knowledge
of the CA/T Project's potential cost overrun. The State and its joint venture
jeopardized the integrity and future success of the Federal/State partnership
by repeatedly and deliberately failing to disclose the full scope of the CA/T
Project's finances. It was the surprise announcement on February 1, 2000, of
a potential $1.4 billion overrun that Secretary of Transportation Rodney E.
Slater told Chairman Frank R. Wolf of the House Subcommittee on Transportation
was "unconscionable." It stands as one of the most flagrant breaches
of the integrity of the Federal/State partnership in the history of the nearly
85-year old Federal-aid highway program.
The recommendations in this report attempt to restore the FHWA's oversight
role and to establish new reporting and verification procedures necessary to
ensure the State's accurate and full financial disclosures in the future. To
establish this new oversight, the Task Force recommends that the FHWA and the
MHD enter into a formal agreement implementing all recommendations relevant
to their working relationship. Given the breach of trust, the Task Force also
recommends establishing means of ensuring a balanced statewide program is satisfied.
The FHWA is fully committed to completing the CA/T project. The Task Force
firmly believes it will not only be an asset to Boston for years to come, but
will be hailed as one of the engineering marvels of the 21st century.
But, the Task Force also notes something that John A. Volpe, a former three-term
Governor of Massachusetts, a former Federal Highway Administrator, and a former
U.S. Secretary of Transportation, used to say:
I submit that as we live in times of change, we must be the architects of
that change or we will most certainly be its victims.
The FHWA must ensure it is an architect of change with regard to the CA/T Project.
Recommendation:
- The Task Force recommends the FHWA and the MHD enter into an agreement
to formalize recommendations contained in this report which are relevant
to the working relationship between the parties.
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Glossary of Abbreviations
| B/PB |
|
Bechtel/Parsons-Brinckerhoff |
| CA/T |
|
Central Artery/Tunnel |
| CB |
|
Current Budget |
| CBU |
|
Core Business Unit (FHWA) |
| CPS |
|
Construction Phase Services |
| C/SU Rev. 6 |
|
Cost/Schedule Update, Revision 6 |
| ERC |
|
Eastern Resource Center (FHWA) |
| FY |
|
Fiscal Year |
| FTA |
|
Federal Transit Administration |
| FTE |
|
Full-Time Equivalents (Employees) |
| FHWA |
|
Federal Highway Administration |
| GANs |
|
Grant Anticipation Notes |
| ISTEA |
|
Intermodal Surface Transportation
Efficiency Act of 1991 |
| MHD |
|
Massachusetts Highway Department |
| MHS Bonds |
|
Metropolitan Highway System Bonds |
| MTA |
|
Massachusetts Turnpike Authority |
| OCIP |
|
Owner-Controlled Insurance Program |
| OIG |
|
Office of the Inspector General |
| OK |
|
O'Brien Kreitzburg |
| PCA |
|
Potential Cost Analysis |
| PF |
|
Potential Forecast |
| PMM |
|
Project Management Monthly |
| STIP |
|
Statewide Transportation Improvement Program |
| TEA-21 |
|
Transportation Efficiency Act for
the 21st Century |
| USDOT |
|
United States Department of Transportation |
| VE |
|
Value Engineering |
| VECP |
|
Value Engineering Change Proposal |
|
Former Big Dig chief James Kerasiotes.
New Big Dig chief Andrew S. Natsios.
