Audit Report on the Department of Environmental Protection’s Recoupment of Change Order Costs for the Bowery Bay Water Pollution Control Plant Upgrade

The Department of Environmental Protection (Department) is responsible for operating and managing 14 Citywide water pollution control plants, which treat 1.3 billion gallons of wastewater daily. In September 2000, the Department awarded a $128.19 million construction contract (No. 20010011921 [BB-57G]) to a joint venture between Frontier-Kemper/Durr/Perini (Frontier JV) to upgrade the Bowery Bay Water Pollution Control Plant (Plant) in Queens. The contract schedule was extended from May 2004 to December 2010. Additionally, the Department awarded associated construction contracts to Lafata Corallo P&H, Inc. (No. 20010009200 [BB-57P]) totaling $1.5 million, CDE Air Conditioning Co., Inc. (No. 20010008896 [BB-57H]) totaling $27.45 million, and Lipco Electrical Corp. (No. 20010008879 [BB-57E]) totaling $56.31 million ¹ . Information from the Department indicated that there were 295 change orders associated with the construction contracts of which 222 totaled $68,323,733: 73 were credit change orders totaling ($62,834,663).

In connection with the construction contracts, the Department awarded two contracts (Nos. 9571691 totaling $10.5 million and 20000021900 totaling $13 million) to Hazen and Sawyer, P.C. to provide engineering design and construction management services.

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 a design that was done in error by a design consultant, the contractor may remedy the deficient work under a change order. In these cases, City procedures require that agencies take steps to be reimbursed for the cost of the work by seeking recoupment from the design consultant. This requirement is intended to ensure that the City is not held liable for these costs. Regarding the contracts for the Plant upgrade, the Department classified four change orders totaling $89,410 as design errors and 44 change orders totaling $6,501,782 as design omissions. The combined value of these change orders was $6,591,192.

Audit Findings and Conclusions

The Department did not adhere to procedures for recouping from consultants the cost of change order work that was categorized as a design error or design omission. Our review found that the combined value of change orders that should have been considered for possible recoupment but were not totaled $6,591,192. Additionally, the Department improperly categorized certain change orders with multiple classifications that included design error or omission. Consequently, portions of change orders totaling an additional $9,923,875 that were partly attributable to design errors and design omissions should have been considered for possible recoupment. We attribute the Department’s compliance problems to a lack of written standards and internal controls governing the recoupment of change orders costs necessitated by design errors and omissions.
Department officials advised us in August 2012 that they recently established an Errors and Omissions Panel to oversee implementation of a policy to review change orders related to design errors and omissions and the recoupment of associated costs

Audit Recommendations

This report makes a total of four recommendations, including that the Department:

• Ensure that applicable change orders necessitated by consultant design errors and omissions—including those identified in this report—be referred to the agency’s Errors and Omissions Panel for review and possible recoupment.
• Avoid multiple change order classifications.

Department Response

The matters covered in this report were discussed with Department officials during and at the conclusion of this audit. A preliminary draft report was sent to Department officials on September 17, 2012, and discussed at an exit conference held on October 2, 2012. On October 5, 2012, we submitted a draft report to Department officials with a request for comments. We received a written response from the Department on October 29, 2012.
In their response, Department officials stated, “In general, the Department does not dispute the findings or the recommendations of the Draft Report.” The Department agreed with three recommendations and disagreed with one recommendation.