We have conducted a performance audit of the Department of Public Work’s construction contracts, change orders, and supplemental agreements and found gaps in DPW’s management and operational practices.

The purpose of this engagement was twofold: First, to verify the effective management of construction and consultant contracts to minimize unnecessary changes and help ensure on-time and on-budget project deliverables.  Secondly, to verify compliance of construction and consultant contracts with applicable regulations.

This audit is not the first conducted by the Office of the County Auditor (OCA) for this department on this subject matter.  In 2008, OCA, formerly the Office of the Legislative Auditor, performed a limited-scope performance audit on CIP Contracts, Change Orders, and Supplements for FY2006-2007.  The audit identified several areas for improvement.  Due to the passage of time and significant operational changes, we decided to conduct a separate audit from the initial one.  However, we will refer to its results as they relate to our findings since specific key issues have persisted for at least the last 15 years.  Some of those critical issues include:

Auditor Note: It is crucial to comprehend the historical record as it provides context, history, and reasoning for the current audit.  Additionally, it emphasizes the importance of prioritizing longstanding issues that have been neglected for a significant period.  Our findings are exclusively derived from the information we have independently obtained, without reliance on the previous audit report.

Management is responsible for the performance of its operations, including the design, implementation, and monitoring of programs and activities.  Management is also responsible for establishing and maintaining internal controls and performance measurement systems that enable the department to achieve its objectives.

Our responsibility is to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions.  We believe that our audit provides a reasonable basis for findings and conclusions, which are expressed solely for the purpose of this report and should not be used for any other purpose.

Based on the evidence, the performance of DPW’s Engineering Division was effective in achieving its objectives during the audit period, while the Building Division continues to face significant challenges.

Based on our audit findings, we offer the following seven recommendations:

Conclusion

Complete Contract Specifications

 1.  Completing contract specifications can help identify and address any unaddressed concerns and requirements before the construction phase begins.  Additionally, identifying existing issues that may arise within aging County facilities may help to avoid costly change orders during construction.

Conduct Onsite Inspections Regularly

 2.  Hiring construction inspectors or contract construction inspectors who report directly to the County’s Building Division increases the assurance that County assets are being protected.

Certified Payroll and Invoice Discrepancies

3.  Processing, managing, and centrally storing documentation for invoices and certified payroll will ensure all appropriate information has been processed and documented in the event the Building Division’s Design and Engineering group needs to access and retrieve information.

Use Project Management Software

4.  Implementing this recommendation will provide DPW management and project teams the opportunity to track projects at the aggregate and project level.  It would also provide the management teams with the ability to provide additional management oversight.

Establish Written Policies and Procedures

5.  Implementing policies and procedures will provide a logical way to:

• Manage projects
• Maintain consistency across projects
• Manage documentation
• Assume responsibility for projects that were started by other staff members.
• Use policies and procedures can also be used for training and guidance of new staff.

 Develop Lessons Learned Process

6.  The benefits of implementing this Recommendation are that the project teams can identify their strengths and weaknesses and use the information gained from the lessons-learned process to continuously improve their weaknesses and strengthen areas where they are already performing well.

Increase Work Force Outreach

Recruiting and retaining positions consistent with the merit principle enhances the overall value perceived by employees in their employment with the County.

We thank the Department of Public Works for their cooperation and efforts to improve internal controls over their process for contracts, change orders, and supplemental agreements. 

To improve government accountability and ensure audit recommendations are implemented or resolved, we will continuously monitor the status of pending recommendations using our remediation tracker. To view the status, visit us at: https://www.Hawaiʻicounty.gov/our-county/legislative/office-of-the-county-auditor.

Mission

It is our mission to serve the Council and citizens of Hawaiʻi County by promoting accountability, fiscal integrity, and openness in local government. Through performance and/or financial audits of County agencies and programs, the Office of the County Auditor examines the use of public funds, evaluates operations and activities, and provides findings and recommendations to elected officials and citizens in an objective manner. Our work is intended to assist County government in its management of public resources, delivery of public services, and stewardship of public trust.

Audit Authority

Hawaiʻi County Charter §3-18 establishes an independent audit function within the Legislative Branch through the Office of the County Auditor.

Purpose

The purpose of this engagement is to verify if the department’s construction and consultant contracts and contractual processes are effectively managed and comply with state and local regulations.

Performance Audit Definition

Performance audits provide objective analysis, findings, and conclusions to assist management and those charged with governance and oversight with, among other things, improving program performance and operations, reducing costs, facilitating decision-making by parties responsible for overseeing or initiating corrective action, and contributing to public accountability.

Our objective in performance auditing is to improve public services provided by county government. We do this by recommending specific actions that will address the issues we raised and by providing valuable information to the public, the administration, program leadership, the county council, and the mayor.

Objective

To evaluate if the Department of Public Works (DPW) effectively initiates and manages contracts, change orders, and supplemental agreements to completion promptly and within budget.

Scope

The scope of this audit included a review of construction and consultant contracts, change orders, and supplemental agreements managed by the Department of Public Works for Fiscal Years July 2017 through June 2022.

The audit was conducted from November 2021 to May 2023, with gaps in the audit process to perform other audit work and attend audit training courses.

We randomly sampled 20 out of 94 contracts (21%). We also reviewed nine Consultant contracts. Our review included contracts at various stages, from the pre-bid process to project closure.

Methodology

To accomplish our objective, we:

• Reviewed the department’s written policies and procedures
• Developed an understanding of the department’s internal control system, the bidding process, and applicable processes, practices, and document flows.
• Reviewed contracts, associated change orders, and supplemental agreements and reviewed a sampling of contracts and all related documents
• Assessed if contracts, change orders, and supplementals were in compliance with State statutes, County codes and policies, and other internal controls
• Determined when change orders or contract supplements were created, how costs to the contract were monitored, and cost documentation was provided
• Determined why change orders or contract supplements were added to the project schedule and identified the overall impact on the project
• Determined if management received periodic reports/information that provided the leadership the ability to view and track the performance of active contracts and construction schedules
• Referenced A Guide to the Project Management Body of Knowledge (PMBOK), Sixth Edition
• Reviewed OCA 2008 CIP audit report
• Noted any exceptions and identified opportunities/areas for improvements
• Was mindful of potential fraud, waste, and abuse during the audit

We conducted this performance audit in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objective.

What is the primary function of the Department of Public Works?

The Department of Public Works (DPW) directs and administers departmental functions, programs, and activities for the public's health, safety, and environment through planning, design, construction, operation, and maintenance of the County's infrastructure.  DPW also administers applicable Federal, State, and local laws and rules governing public works programs.  Their mission is to build, operate, and maintain public infrastructure for the success and growth of Hawaiʻi County.  

DPW is composed of six divisions:

What does the Department of Public Works’ six divisions do?

The construction and consultant contract process involves a series of steps that ensure the successful completion of projects undertaken by County departments.  DPW’s Administration Contracts Group holds the responsibility of setting up the construction contract bid process.  To ensure a systematic and organized approach, they utilize a checklist document to monitor the progression of contracts, starting from the pre-bid phase all the way through to the contract closeout process.  This checklist serves as a comprehensive tool for tracking and managing the various stages of contract development and execution.  The following is the contract process as described by the department:

Contract Specifications

In the construction industry, consultant contracts are a crucial part of projects. The process of selecting consultants is regulated by state law, and it involves a selection committee that reviews all the applicants' submissions. The selected consultants are ranked based on project criteria, and the highest-scoring consultant is offered the contract.

Consultant Contract Selection Process

According to Hawaiʻi Revised Statutes, Section 103D-304 Hawaiʻi Public Procurement Code, consultants must apply to the County stating their services and experience. Then, a county selection committee reviews all the applicant submissions for their discipline.  Once approved, the applicants are added to a list of disciplines for which they applied.  When a department is looking for a consultant for one of its projects, the head of the purchasing agency will select three members from the selection committee, who will then select consultants from the discipline and associated list based on project criteria.  The consultants are ranked based on their qualifications, experience, and expertise.  The highest-scoring consultant is offered the contract, and if they decline, the next highest-ranked consultant is offered the contract.

Pre-Bid

The DPW Administration Contract Group receives a request to post a contract bidding opportunity on the Public | Purchase website.  They sign a Statement of Attestation before posting the bid package, which includes the bid specifications and plans, bid deadline, intent to bid deadline, bid opening date, or if necessary, the bid opening date may be extended.

For contracts over $500,000, a pre-bid conference must be held.  After the conference, contractors can post comments or questions on the County site as an addendum.  The project team reviews and decides on the addendum's validity and the County's position, and the project engineer or contract supervisor/technician posts the information.

Bid Selection

Once all bids are received, they are logged to the bid results, and preselected witnesses review the results to select the winning bid, typically the lowest bidder.  However, if a bidder uses unlicensed or suspended subcontractors or fails to provide a complete subcontractor list, they may not be selected.  Disqualified bidders can protest, and the department reviews and responds to protests.

The Administration Contracts Group creates a line item in their contracts tracking database and begins creating a file folder in the County’s document library (Laserfiche), adding key documentation.  They continue adding documentation to Laserfiche throughout the project.

Contract Assignment

Before the beginning of construction, contracts must be assigned to contractors who have successfully bid on the project.  It is imperative that the contracts are routed and approved timely and accurately, and the awarding process is done correctly.  A Certificate of Liability Insurance is also required to ensure that contractors have valid insurance.

Notice to Proceed

Once the contract is signed off and preconstruction activities are completed, the Notice to Proceed letter is issued to the contractor.

Project Inspections

Project inspections ensure construction work is done according to the contract's specifications, plans, and codes.

Invoice Processing

When the contractor invoices are received, the Engineering Inspectors and Building Project Coordinators ensure that the charges for the billing period are correct.  The charges are verified based on the percentage of work performed or actual costs depending on the origin of the invoice.

Certified Payroll

Certified Payroll is monitored by Engineering Inspectors and Building Project Coordinators during the construction phase to ensure that contractors and subcontractors are paying the correct wages for hours worked.  The wage rates are checked against the State's Prevailing Wages - Wage Rate Schedule.

Change Orders

Project change orders can be positive or negative and occur for a variety of reasons, including but not limited to:

• Errors in scoping or missed specifications
• Funding for bid alternatives or improvements
• Changes in equipment or materials needs
• Unforeseen issues

An acceptable range for change order costs is currently 10% to 15% of the original contract cost.  Change orders can have a positive effect at times.  For example, when federal funds become available to make unplanned but needed improvements where current projects are underway.

Project Management

Currently, the contractors develop project schedules, and both divisions use hardcopy project schedules. Project Managers, Engineers, and Project Coordinators track the project's progress and meet with the contractor as necessary. 

Construction Closeout

The Administration Contracts Group oversees the closeout activities process and ensures all necessary closing documents are added to Laserfiche. The construction close-out documents include items such as draft letters, warranties, employment of residents, waivers of lien, and closing document acceptance, among others.  Depending on the project type, documentation varies.  Overall, the Contracts Administration Group plays a crucial role in the closeout activities.

Policies and Procedures

• The Engineering Division has established processes and procedures that assist both new and experienced engineers in navigating the engineering processes required for setting up and completing different types of projects they handle.  However, the construction inspection teams lack policies and procedures.
• The Building Division project coordinators do not have policies and procedures.

Audit Activity Continued:

The Department of Public Works (DPW) leveraged change orders in at least two projects, saving the County $3,990,857.23. While an accepted industry standard recognizes acceptable change orders from 10 - 15%, contract change orders reviewed ranged from -12.23% to 417.23% of the original contract amount.

During the 2008 audit, similar shortcomings were identified, highlighting the importance of thorough scoping to minimize the necessity for contract supplements and change orders.  The department did not address this crucial aspect which has contributed to increased costs and project delays for the County.

Cause of the Condition

Insufficient collaboration between the Building Division and other stakeholders during the project's design phase resulted in unaddressed concerns and requirements.  Additionally, inspections of existing facilities could have been enhanced to identify issues.

Effect of the Condition

Inaccurate contract specifications resulted in additional costs, delays, and disruptions to the construction projects.

Finding 1: Inconsistent Contract Specifications

Recommendation 1: Complete Contract Specifications

We recommend Building Division allocate more time for collaboration between the clients and consultants during the project's design phase. Building Division should also review its contract specifications to ensure that they include all necessary details to decrease the need for change orders. Additionally, inspections should be enhanced to identify issues associated with aging facilities.

Overview

According to Project Management Body of Knowledge (PMBOK) 12.3.2.4 Inspection - An inspection is a structured review of the work being performed by the contractor.  This may involve a simple review of the deliverables or an actual physical review of the work itself. On a construction/engineering/infrastructure project, inspections involve walkthroughs of the site by both the buyer and the contractor to ensure a mutual understanding of the work in progress.

Onsite inspections allow for quality assurance by verifying that the construction work meets the required standards and specifications.  Inspectors can assess the materials used, construction techniques employed, and adherence to safety regulations.  By conducting inspections, potential issues or defects can be identified early on, ensuring that the project is built to the desired quality.

Audit Activity

To verify this section, we interviewed personnel and examined a sampling of 20 out of 94 contracts (21%).  Our review included contracts at various stages, including bidding, construction contract award, approvals, certificate of liability insurance, invoicing, certified payroll, change orders, and project close-outs. It included contracts with open, closed, and canceled statuses.

We identified the following:

• Onsite Inspections - Project Coordinators within the Building Division cannot perform their onsite inspection tasks adequately because the assigned tasks do not allow them enough time to complete required inspections for multiple assigned projects.  As a result, contractors are allowed to perform field inspections on their behalf.  This increases the County’s risk exposure because contractors may have compromised objectivity, limited accountability, and potential conflicts of interest.

• Project Coordinators - Building Division is inconsistent with conducting onsite inspections regularly. 

Project Coordinators depend on onsite inspectors' reports to confirm completed work.  Construction contractors have a vested interest in the contractor’s profit margin.  Consultant contractors have a vested interest in protecting their reputations.  In either case, there is an increased risk that the contractor will have undue influence on the construction inspectors, and reports may be biased or inaccurate.  

• Construction Inspectors -

•  The Building Division does not have Construction Inspectors.
•  Although Engineering Division Construction Inspectors have work processes to demonstrate they perform inspections properly, they do not have written policies and procedures. See Recommendation 5: Establish Written Policies and Procedures for more information regarding this finding.

The department has grappled with the persistent issue of relying on non-County inspectors or contractors to track progress since at least 2008.  This reliance has resulted in issues that continue to affect the department, including:

This reliance hampers the department's ability to ensure efficient and effective project progress, affecting timely completion, quality control, and overall project outcomes.

Cause of the Condition

The Building Division’s Project Coordinators do not perform field inspections regularly. 

Effect of the Condition

The Building Division depends on onsite inspectors who report to the primary contractor, increasing the risk that the county's assets may be jeopardized, and the work may not be done correctly.

Finding 2: Onsite Inspections not Performed Regularly

Recommendation 2: Conduct Onsite Inspections Regularly

We recommend that the Building Division hire construction inspectors and/or outsource to contract inspectors, requiring them to report directly to the County’s Building Division.

Overview

Project management software is a digital tool designed to assist individuals, teams, and organizations plan, organize, track, and collaborate on projects.  It provides a centralized platform where project managers and team members can define project goals, create task lists, assign responsibilities, set deadlines, and track progress.  Project management software typically offers features such as task management, scheduling, resource allocation, document sharing, communication tools, and reporting capabilities.  Project management software helps to streamline project workflows, facilitate effective communication, helps optimize productivity, enhance coordination, and ensure successful project execution.

Audit Activity

To determine if DPW has a process of monitoring and tracking the status of projects and contracts, we corroborated with the appropriate staff and found the following:

• DPW does not have project management software.
• DPW has no management software tools that allow the Director and other designated staff to track department-wide activities and projects simultaneously.
• The lack of such software makes it hard to easily track key activities across the entire department.  The administrative staff has the various division heads send manual reports with updates for all their projects.

The lack of a project management system has persisted as a challenge since at least 2008, further complicating the department’s workload management.

Cause of the Condition

DPW management has not actively pursued project management software to meet the needs of management and staff.

Effect of the Condition

The lack of project management software at DPW makes it difficult to track activities and projects, which results in an inefficient reporting process that requires manual updates from various department heads.

Finding 4: No Project Management Software

Recommendations 4: Use Project Management Software

We recommend DPW acquire project management software to improve tracking and managing the status of all their projects.

Engineering Division:

As-of April 2023, the Engineering Division has challenges filling various hard-to-fill positions as noted below:

The Engineering Division has had recruitment, retention, and funding challenges, including eight positions and six vacancies.  As a result of these challenges, they have had to rely on creative and less conventional recruitment methods.

Building Division

Given their time constraints, the Building Division’s Design and Engineering (D&E) Group’s Projects Coordinators (PC) have a demanding job with unreasonable expectations.

We reviewed of Building and Engineering Divisions' position descriptions and job classifications.  The Project Coordinator's specifications are much more extensive, including but not limited to inspection and administrative work that is typically assigned to different classifications.  The Project Coordinator's job responsibilities are too numerous and complex to be completed within the allocated time.  As a result, the Project Coordinators have had to resort to developing creative ways to expedite their work, which is not a sustainable, long-term solution.

As of April 2023, the Building Division operates at 68% workforce capacity with 23 vacancies.

Cause of the Condition

The Building and Engineering Divisions have yet to thoroughly explore and execute strategies to attract and retain candidates for open positions.

Department of Public Works Human Resources representative has not reviewed the Project Coordinators position description since 2007.

Effect of the Condition

The lack of thorough exploration and execution of strategies to attract and retain candidates for positions has resulted in a persistent shortage of qualified personnel and prolonged vacancies.  Further, the absence of a review of the Project Coordinator’s position has led to outdated job requirements and responsibilities, hindering the efficiency and effectiveness within the divisions.

Finding 7: Ineffective Workforce Strategy

Recommendation 7: Increase Workforce Outreach

We recommend the Building and Engineering Divisions work with the Department of Human Resources to recruit and retain positions consistent with the merit principle (HRS §76-1), including but not limited to evaluating:

Some items, such as compensation and benefits, are covered under collective bargaining agreements.  This recommendation is not meant to suggest that the County of Hawaiʻi should exceed its legal authorities, but rather that it should work to holistically bolster the initial and ongoing overall value an employee perceives from their employment, referred to as “Total Compensation.”

Additionally, we recommend the Building Division work with Human Resources to review the Project Coordinators' position description and make changes where necessary.

As a practice, we remain mindful and document instances of fraud, waste, and abuse within the scope of the audit objective and not specifically Countywide.

Management reported no fraud, ongoing investigations, and pending litigation that may impact this audit.

During the Audit, we did not observe the Department of Public Works deliberately engaged in wasteful practices. However, our findings indicate that inefficiencies within the department have resulted in the discovery of wasteful practices, as duly identified and documented throughout the report.   

The Office of the County Auditor has concluded its audit with the Department of Public Works’ (DPW) Building and Engineering Division’s construction contracts, change orders, and supplements. Our review has led us to make seven recommendations.

When our recommendations are implemented in good faith, the department can expect the following benefit:

Complete Contract Specifications

1.  Completing contract specifications can help identify and address any unaddressed concerns and requirements before the construction phase begins.  Additionally, identifying existing issues that may arise within aging County facilities may help to avoid costly change orders during construction.

Conduct Onsite Inspections Regularly

2.  Hiring construction inspectors or contract constructions inspectors who report directly to the County’s Building Division increases assurance that our assets are being protected.

Review Certified Payroll and Invoices

3.  Processing, managing, and centrally storing documentation for invoices and certified payroll will ensure all appropriate information has been processed and documented in the event the Building Division’s Design and Engineering group needs to access and retrieve information for any issues.

Use Project Management Software

4.  Implementing this recommendation will provide DPW management and project teams the opportunity to track projects at the aggregate and project level.  It would also provide the management teams with the ability to provide additional management oversight.

Establish Written Policies and Procedures

5.  Implementing policies and procedures will provide a logical way to: 

• Manage projects
• Maintain consistency across projects
• Manage documentation
• Assume responsibility for projects that were started by other staff members
• Use policies and procedures can also be used for training and guidance of new staff. 

Develop Lessons Learned Process

6.  The benefits of implementing this recommendation are that the project teams can identify their strengths and weaknesses and use the information gained from the Lessons Learned process to continuously improve their weaknesses and strengthen areas where they are already performing well.

Increase Workforce Outreach

7.  Recruiting and retaining positions consistent with the merit principle enhances overall value perceived by employees in their employment with the County.

In closing, to improve government accountability and ensure audit recommendations are implemented or resolved, we will continuously monitor the status of recommendations using our remediation tracker. To view the department’s status, visit us at: https://www.Hawaiʻicounty.gov/our-county/legislative/office-of-the-county-auditor.

Management has verbally committed to providing a response as a supplemental after publication of this report.