A Review of the Management of the State Construction Process
Executive Summary
Introduction
In response to a legislative request, the PEER Committee reviewed the state construction process, including the Department of Finance and Administration’s management of state construction projects through its Bureau of Building (hereafter called the bureau).
The purpose of this review was to determine whether the state’s construction process yields quality facilities on time at the lowest possible cost.
Background
In most cases, the Department of Finance and Administration’s Bureau of Building serves as the construction program manager for state construction projects in Mississippi. The Bureau of Building represents the interests of the entity and exercises independent oversight of the professional contractor and constructor team (i.e., general contractor and sub-contractors).
The Bureau of Building, professional team, constructor team, and a building commissioning agent, when applicable, enter a contractual relationship for a project. The Bureau of Building exercises direct oversight of architects, engineers, building commissioning agents and other contract professionals, while it performs indirect supervision of the construction contractors through the primary professional contractor and the building commissioning agent. Because the bureau does not have the in-house capability to perform some of the design and construction tasks that some private construction program managers can provide, it may employ engineers, contract analysts, architects, or construction project administrators to manage and monitor projects.
The bureau has authority to compel adherence to contract specifications and schedules, applying sanctions to firms or individuals within the constructor team that do not fulfill their responsibilities.
Components of Managing the State Construction Process
Although the construction process involves multiple tasks within each phase, PEER identified five major components of the state construction process, or ones that will have the biggest effect throughout several phases and on the overall outcome of the projects. These are:
Recent Attempts to Improve the State Construction Process
Statutory Change Affecting the State Construction Process
In 2000, the Legislature established a two-phase funding and approval process for construction projects (codified in MISS. CODE ANN. Section 31-11-30 [1972]). The goal was to establish a more accurate budgeting and funding process for new construction projects and proposed major repair and renovation projects. The two-step process incorporates the bureau’s staff in preplanning for projects, including making site visits and determining the most precise project estimates possible. The Legislature then has the opportunity to review and consider the project twice before final authorization.
Improvements in the Bureau of Building’s Evaluation of Proposed Projects
Before FY 2004, the Bureau of Building did not clearly identify in the annual Needs Assessment those projects it recommended. The bureau also did not show any estimated debt service for each project submitted. In the FY 2004 annual Needs Assessment provided to the Legislature, the Bureau of Building began identifying the projects it recommends for construction. The bureau also now shows the estimated annual debt service cost of each project.
Implementation of the Building Commissioning Concept
Building commissioning is a quality assurance process the Bureau of Building began implementing on November 24, 2004, for all new state construction projects estimated to cost three million dollars or more. In his role of providing quality assurance, the building commissioning agent serves as a communications link between the professional team, constructor team, and Bureau of Building to ensure that building projects meet the need of the agency or institution in the most efficient manner. Fees for this service range from 1.25% to 2.25% of total project cost. The ultimate success of this concept must take cost into consideration, along with quality outcomes.
The Effect of Exceptions and Inconsistencies on Management of the State Construction Process
Exceptions to the Two-Phase Funding and Approval Requirement
MISS. CODE ANN. Section 31-11-30 (1972) provides an exception to the two-phase funding and approval requirement for emergency and critical need projects. However, because neither the law nor the Bureau of Building has standards or criteria for determining critical need, this exception could provide a “loophole” for avoiding the accountability imposed by the two-phase funding requirement.
Also, community and junior colleges’ construction projects are not held to the requirements of MISS. CODE ANN. Section 31-11-30 (1972) because these buildings are not considered to be state-owned buildings. However, these projects utilize funds from general obligation bonds repaid by the taxpayers of Mississippi and should be subject to some form of accountability review such as the two-phase funding and approval process.
Statutory Inconsistencies
While most legislation that authorizes issuance of bonds for construction projects lists those projects and the amount of bond funds to be used for each project, some bond legislation (such as that for community and junior colleges) does not tie bond funds to specific projects, thus reducing accountability for spending.
Conditions That Impair Management of the State Construction Process
Mississippi’s construction process for state buildings generally functions well, but needs refinement in the following areas to protect the state’s best interests in construction and renovation of its buildings: additional, more precise information for considering projects for selection and approval; consistency in documenting selection of contractors; more appropriate use of bond financing; improved change order management; and proof of implementation of quality assurance.
Need for Additional, More Precise Information When Considering Projects for Selection and Approval
Although the Bureau of Building now includes estimates of the annual debt service costs for each construction project in its annual capital improvements needs assessment provided to the Legislature, it does not provide estimates on the long-term debt service costs of each project. Also, the method the bureau uses to estimate debt service is not the most precise method available for estimating the debt service costs of a project. Thus legislative decisionmakers are not receiving the most precise information possible with which to decide how the state’s limited resources are to be used.
Need for Consistency in Documenting Selection of Professional Contractors
Although the Bureau of Building has improved its documentation of the contractor selection process since the changeover in administrations, the bureau still is not consistent in documenting individual steps in the process.
Since FY 2004, the Bureau of Building has revised its practices to include documentation for both pre-selection grading/evaluation and final selection grading/evaluation. PEER sampled the bureau’s project files and found that although the bureau is making attempts to ensure that files contain proper documentation of requests for proposals and grading/evaluation, the bureau still is not consistent in ensuring that the entire contractor selection evaluation process is documented in project files. When proper documentation is not present in the files, the bureau cannot ensure and defend that it used an objective decisionmaking process to select the best-qualified professionals to construct state buildings.
Need for More Appropriate Use of Bond Financing
When bond funds are expended, over the course of the bond the state pays not only the cost of the item, but also the cost of financing that item over the life of the bond. Because of this, the use of bond funds should be limited as much as possible.
The state has routinely used bond financing, the purpose of which is to fund capital projects with a life expectancy of twenty years or more, to purchase furniture and equipment when the life expectancy of those items does not meet or exceed the term of the bonds used to purchase them. This practice increases debt service costs.
Preplanning of construction projects most likely increases their cost-effectiveness. However, Mississippi has also used bond funds to cover preplanning costs, which incurs additional long-term debt for an administrative expense.
Recent bond legislation has allowed funds left unspent at the end of a project to be used to fund repair and renovation projects. As a result, the state’s long-term debt has increased unnecessarily and opportunities to retire debt early have been lost.
Need for Improvement of Change Order Management
In 2002, PEER identified weaknesses in the Bureau of Building’s management of change orders, including problems with the review of change orders, with overhead and profit paid for change orders, and with paying for errors and omissions. PEER followed up on these issues in the 2005 review and found that many of the same problems still exist with the bureau’s management of change orders. PEER found:
These deficiencies could lead to costs that would contribute to significant increases in the long-term debt liability of the state.
Need to Ensure Implementation of Quality Assurance Methods
The Bureau of Building does not include specific language in its contracts requiring professionals to implement quality assurance methods because the bureau expects these professionals to implement quality assurance as part of their professional responsibilities. However, the bureau does not require professionals to document any quality assurance methods that they voluntarily implement or report any cost savings. This documentation is necessary to assure that every effort was made to execute the project at the lowest possible cost without sacrificing quality.
Managing Workload of the Bureau of Building’s Staff
The workload of the Bureau of Building’s professionals hinders them from devoting the necessary amount of management attention to each project. To reduce the workload of the bureau’s professional staff, the Legislature could implement one or more of the following options: authorize para-construction specialist positions to perform clerical and administrative duties; allow agencies to manage construction projects under $250,000; allow the Department of Archives and History to manage historic preservation projects.
Workload of the Bureau of Building’s Staff
As of February 2005, the bureau’s staff managed approximately 636 active projects with twenty staff members. The Bureau of Building’s staff architects manage from seventy to ninety projects each. This heavy workload hinders the architects from devoting the necessary amount of management attention to each project. Also, according to the bureau’s director, each staff architect and project administrator spends at least two hours a day performing clerical or administrative tasks. This situation could affect the quality and quantity of state construction projects because these individuals’ expertise is not being properly utilized.
Legislative Options for Reducing the Workload of the Bureau of Building’s Staff
PEER offers three options for reducing the workload of the Bureau of Building’s professional staff.
The Legislature and the bureau could choose one or any combination of these options to reassign the bureau’s workload or could choose not to reassign the workload. PEER also offers recommendations 22 through 25 to help in implementing these options.
Recommendations
Legislative Action
1. The Legislature should amend MISS. CODE ANN. Section 31-11-30 (1972) to define critical need construction projects in order to reduce the potential for state entities claiming a particular project as a critical need project to bypass the two-phase project funding and approval process required by that section.
2. The Legislature should amend MISS. CODE ANN. Section 31-11-30 (1972) to subject projects of the community and junior colleges to the two-phase funding and approval requirement in order to ensure that community and junior colleges projects compete with other state projects for funding and are in the best financial interest of the state.
3. The Legislature should require all professional contractors, such as building commissioning agents, with the Bureau of Building or local governmental entities to be independent of all professional and construction firms working on a state or local governmental construction project. This would eliminate a possible conflict of interest situation.
4. In future bond legislation for capital improvement projects, the Legislature should include a list specifying approved projects with an amount of bond funds designated for each project.
5. The Legislature should eliminate the use of bond funds for preplanning and replace these with appropriated funds of approximately $300,000 per legislatively approved project for the bureau’s preplanning revolving fund so that the state can pay all preplanning costs from appropriated funds and not use bond proceeds.
6. The Bureau of Building should develop a method for assessing fees against state entities and the institutions to fund the bureau’s preplanning. Such method should be presented in a report to the Legislature by January 1, 2006. The Legislature should determine at that time whether to use fee assessments of general funds to fund the bureau’s preplanning. Fees from user entities would allow the state to recoup some of the pre-planning costs from programs that use state facilities and are funded by federal grants or special funds.
7. The Legislature should fund moveable furniture and equipment purchases for most capital improvement projects from general fund appropriations to the occupying entities. The Bureau of Building’s staff and/or a professional contractor for the project should assist agencies with the planning, selection, and delivery of this furniture. For a newly constructed or renovated building that will be used by more than one state agency, the bureau should purchase the furniture by pooling the agencies’ appropriated funds so that the state can take advantage of bulk buying discounts and the furniture design can be consistent throughout the building.
8. The Legislature should require that any funds not spent by the close of a project be used to retire part of the bond debt that financed the project.
Administrative Action
9. The Bureau of Building should establish a consistent method of documenting project proposals of the interested professional contract candidates in each pre-planning project file.
10. The Bureau of Building should include a list of evaluation standards in each request for project proposal in order to clearly define and advise all potential professional contractors, including building commissioning agents, of the bureau’s standards used to make professional selection decisions.
11. If the Legislature chooses to continue allowing the use of unspent bond funds for general repair and renovation projects, the Bureau of Building should track the instances in which funding is moved from one project to another. The new construction management system (that will replace the current PATS) should be designed to extract information that shows the number and times and the amount of unspent bond funds spent for other repair or renovation projects. In the alternative, the bureau should maintain a list of when these funds are used, including the project the money is being moved from, the project the money is being moved to, and the amount of this transaction.
Also, if the Legislature chooses to continue the use of unspent funds from one project for other general repair and renovation projects, the Legislature should provide time limits for completely spending the funds in the enabling legislation for the project in order to eliminate the possibility of federal arbitrage penalties.
12. Using existing resources, the Bureau of Building should estimate:
-- annual and total long-term debt service costs of projects in the need assessment presented to the Legislature: and,
-- total debt service for change orders to determine their total cost prior to the bureau’s approving them.
The bureau should utilize software that uses current rates at the time the debt service is estimated and that projects the debt service costs over the life of the bond, taking into account compounding and payments toward interest and principal.
13. The Bureau of Building should create a step-by-step evaluation process for professionals and bureau staff to evaluate and document the necessity and cost reasonableness of each change order and should formalize this process in the bureau’s policies. The bureau could use Georgia as a model for change order review.
14. The Bureau of Building should require the standardized, itemized cost information on each change order recommended in the 2002 PEER report (see Appendices E and F in the full report). The bureau should use the forms from Illinois as a model for this aspect of change order review.
15. Before the start of construction for a project, the Bureau of Building should require that construction contractors provide documentation substantiating all aspects of the overhead and profit and labor burden cost rates that they will charge throughout the construction project, including on change orders. Upon receipt, the bureau’s staff should verify the information, making sure there is no duplication of costs between these rates.
16. The Bureau of Building should determine what overhead and profit rate is fair and optimal for paying contractors’ overhead costs and profit costs while keeping the state’s cost to a minimum. The bureau should then adjust the maximum cost rate for overhead and profit for change orders accordingly.
17. The Bureau of Building should not pay both the contractor and subcontractor the same amount of overhead cost when the subcontractor mainly completes the work.
18. The Bureau of Building should change its standard design professional contract to state that the bureau’s policy will be to file insurance claims for all change order work that is caused by the professional’s design errors, omissions, or documentation deficiencies and file claims accordingly, unless the professional chooses to pay the contractor directly. Further, the bureau should not pay any additional fees to the professional team for such change orders.
19. The Bureau of Building should clearly identify change orders that contain items that are the result of design errors and omissions on its standard approval form for change orders.
20. In planning for the purchase of a new project management system, the Bureau of Building should ensure that the system will measure planned versus actual construction performance and produce both on-demand and periodic management reports. The bureau should consider relevant recommendations from PEER’s 2002 reports (see Appendices E and F in the full report).
21. The Bureau of Building should include all projects costing $1 million or more in the building commissioning process to ensure that the state has a consistent process for obtaining quality assurance on all building construction projects that require pre-planning.
If the Bureau of Building chooses to not implement building commissioning on projects costing from $1 million to $2.9 million, the bureau should require the professional contractors:
-- to perform appropriate quality assurance methods; and,
-- to submit a documented cost savings report for all project savings generated through these methods at appropriate times in the project.
This process would help protect the best interest of the state by ensuring buildings are being constructed in the most cost efficient and effective way.
Actions to Implement Legislative Options on Managing the Bureau’s Workload
To implement Option One (Authorizing Para-Construction Specialist Positions to Perform Clerical and Administrative Duties):
22. The Legislature should authorize and fund two full-time para-construction specialist positions for the Bureau of Building as discussed on page xiii. These positions should perform clerical duties and responsibilities that are currently performed by the staff architects and construction project administrators.
To implement Option Two (Allowing Agencies to Manage State Construction Projects Under $250,000):
23. The Legislature should amend MISS. CODE ANN. Section 31-11-3 (1972) to authorize the Department of Finance and Administration Bureau of Building to permit institutions of higher learning and state agencies to manage capital improvement or repair and renovation projects with a total cost of $250,000 or less.
24. If the Legislature authorizes institutions of higher learning and state agencies to manage capital improvement or repair and renovation projects with a total cost of $250,000 or less, the Bureau of Building should:
To implement Option Three (Allowing the Department of Archives and History to Manage Historic Preservation projects):
25. The Legislature should write future bond legislation for historic preservation grant projects that are not state-owned buildings or on state-owned property in such a way as to authorize the Department of Archives and History to manage those funds. Such bond legislation language could be modeled after the language that allows the Mississippi Arts Commission to manage the Building Fund for the Arts (House Bill 1637, 2001 Regular Session).