Cost overruns at MnDOT are on the rise

01/20/2008

In seven years, over-budget costs on road work projects totaled $140 million, an internal audit found.


By PAUL McENROE and TONY KENNEDY,
Star Tribune
January 20, 2008


Cost overruns on MnDOT construction projects are escalating, costing taxpayers a total of $140 million over seven years, an internal MnDOT audit shows.

The 2007 audit, which has not been released publicly, attributes the problem to ineffective management and insufficient controls. It found that MnDOT managers have often expanded construction contracts without written justification or itemization, a violation of state contract regulations. In addition, the audit warned that the agency's accounting reviews of supplemental contracts could increase the risk for fraud.

"We believe our concerns are significant, as they also involve complying with requirements, maintaining the public trust, and maintaining good public relations," Auditor Daniel Kahnke wrote in a cover letter last March to Lt. Gov. Carol Molnau, MnDOT commissioner.

The audit, which reviewed projects from 1999 through mid-2006, shows that contractors and consultants are increasingly being paid millions beyond their original bids at a time when the agency is delaying many projects because of a lack of funding -- $85 million short this fiscal year alone.

The audit was obtained by the Star Tribune under the Minnesota Data Practices Act.

MnDOT said Friday that it is addressing the situation and is training managers to be more vigilant.

Almost always, the audit found, supplemental contracts are arranged by MnDOT without competitive bids because managers are under time pressure to complete jobs.

The internal review was sparked by a road resurfacing job south of Hastings on Hwy. 316 in fiscal 2005 that morphed into a reconstruction and realignment project. The job's original contract was for $5.5 million. Three supplemental agreements later, the cost had risen to more than $8.6 million. A third of the project's value never went to competitive bids, the audit said.

Costs could be even higher

Kahnke recommended nearly 10 months ago that MnDOT create a task force to address the agency's lack of controls.

The task force has yet to complete its work, but the agency plans on training managers to be more precise in planning projects and more vigilant after they start, said Lisa Freese, deputy commissioner of MnDOT.

"We feel like we are working hard with a process of continuous improvement," Freese said Friday.

Meanwhile, Kahnke has warned that the supplemental costs uncovered in the audit could be even greater than estimated because 40 percent of the projects he examined were still going on when he completed the audit.

Molnau, who originally requested the audit, did not respond to multiple requests for an interview.

The report has yet to be distributed to legislators, who will convene in less than a month for a new session, which is expected to be dominated by debate on transportation funding. Rep. Ron Erhardt, R-Edina, vice chairman of the House Transportation Finance Division, said legislators should examine the overruns.

"The decision-making process on the money that they have might not be going in the right direction," Erhardt said.

MnDOT officials downplayed the overruns in an e-mail to the Star Tribune.

"The findings indicate that MnDOT supplemental agreements amount to approximately $20 million per year ... a relatively small amount, given the agency's $550 million annual construction budget," the e-mail said. "We're constantly striving to make MnDOT work better."

But the audit found that supplemental contracts are a "significant percentage of total construction costs," and represent an ever-increasing percentage of total construction costs.

For example, in fiscal 2002, MnDOT paid contractors about $7 million for supplemental contract work. By fiscal 2006, those costs had climbed to $28 million. Over the seven years tracked by the auditor, the trend of annual overruns was upward for all but one year, fiscal 2005.

Errors in project plans costly

The audit deliberately selected 193 supplemental contracts -- each worth more than $100,000. Those 193 contracts totaled $88.6 million. Overall, MnDOT had 2,805 supplemental contracts that cost a total of $141.3 million during the seven-year period.

The three main reasons for supplemental overruns are errors in the original project plans, inaccurate soil-site estimations and "add-ons'' -- additional work ordered by MnDOT once a job begins.

Errors in plans cost $30.8 million, and more than half of that amount was due to design errors made by consultants, according to the sampled contracts that were reviewed. "The consultants' share of the contract change costs is significant,'' the auditor wrote.

The audit criticized MnDOT for not tracking the accuracy of consultants' plans and for not considering past poor performance when awarding future consulting contracts. When contractors are at fault for overruns, MnDOT managers should seek compensation from a firm's insurance policy covering "errors and omissions," the report said.

The Federal Highway Administration and Minnesota Legislative Auditor Jim Nobles received copies of the audit, and Nobles said he is investigating the cost overruns.

"MnDOT recognizes right there in black and white that they have a problem," Nobles said.

For months, MnDOT officials refused requests from the Star Tribune to release the report, saying it was still in draft form and could be withheld under provisions outlined in the Minnesota Data Practices Act. But the audit cover letter to Molnau, dated March 26, 2007, states, "We have completed an audit ... ."

In a second cover letter to Molnau, dated Dec. 20, 2007, the audit director wrote, "The reason for the delay in issuing this report is because we wanted to include further information about the accomplishments of the task force. Their work is not yet complete."