A Compilation of Audits of Three City Agencies Efforts to Recoup Change Order Costs

Audit Report In Brief

Given the amount of taxpayer money spent on capital construction projects—$9.1 billion in Fiscal Year 2011 and $8.4 billion  in Fiscal Year 2012—the Comptroller’s Office has dedicated a portion of the resources of the Audit Bureau to conduct audits that examine the way that City agencies carry out construction and engineering work.  One topic that the Audit Bureau examined was the effort by City agencies to recoup the cost of change orders that were necessitated by design error and design omissions.  Various City agencies such as the Departments of Design and Construction, Environmental Protection, and Parks and Recreation are involved in the design and construction of capital projects.

According to the City’s Procurement Policy Board Rules, change orders are “any alteration, change, amendment, or modification to any contract or agreement approved as required by law or rule.”  Contract changes are classified in various categories that include changes that are brought about by errors and omissions by project designers and consultants.  If a construction contractor executes work based on an erroneous design by a design consultant, the contractor may be asked to subsequently remedy the deficient work under a change order.  In these cases, the City’s Directive 47 and internal agency procedures require that an agency seek recoupment from the design consultant for any additional costs that individually exceed $3,000 due to design errors or omissions.  This requirement is intended to ensure that the City is not held liable for these costs.  (Officials of the three City agencies examined challenged Directive 47’s $3,000 threshold as inadequate and outdated.)

Audits conducted by the Comptroller’s Office engineering audit division between Fiscal Years 2011 and 2012 have documented instances in which three City agencies (the Department’s of Design and Construction, Environmental Protection, and Parks and Recreation) did not adhere to procedures for recovering the cost of these types of change orders.

Report Findings and Conclusions

For this compilation report we reviewed the results of audit reports for three City agencies that examined the recoupment of change order costs that were necessitated by design errors and omissions.  Based on our evaluation, we conclude that the three audited agencies did not adhere to procedures for recovering over $13 million in change orders that were necessitated by design consultant errors and omissions.

Additionally, we identified problems pertaining to reducing the frequency of design errors and omissions, ensuring that change order classification and amount information is accurately transcribed and recorded in agency computer systems, and establishing and complying with guidelines which require that change orders be categorized with a single classification.

Report Recommendations

To address these issues we make seven recommendations for improvement.   Agencies should:

• Consult with the Mayor’s Office of Contract Services to revise and update Directive 47’s threshold amount by which individual change orders necessitated by consultant design errors and omissions  be referred to an agency’s General Counsel for review and possible recoupment.
• Ensure that all appropriate change orders necessitated by consultant design errors and omissions be referred to an agency’s General Counsel for review and possible recoupment.  If the General Counsel believes that recoupment should be sought, the change order should be sent to the Law Department
• Implement and strengthen internal policies and procedures that govern the process of referring change orders to the General Counsel.
• Review all applicable change orders identified in these audit reports that were classified as design errors and omissions and immediately transmit these items to the agency’s General Counsel.
• Take steps to reduce the frequency of design errors and omissions.
• Implement procedures to ensure that change order classification and amount information is accurately transcribed and recorded in agency computer systems.
• Establish and comply with guidelines which require that change orders be categorized with a single classification.