Audit Report on the Economic Development Corporation’s Oversight of Turner Construction Company’s Contract for Facility and Construction Management Services

We performed an audit on the New York City Economic Development Corporation’s (Corporation) oversight of Turner Construction Company’s contract for facility and construction management services. The Corporation is a local development corporation responsible for carrying out economic development services for the City. Services are provided under two contractual agreements with the City known as the Master and Maritime contracts. Under the auspices of the Master and Maritime contracts, the Corporation awarded a $7,500,000 contract (No. 16850005) to Turner Construction Company (Turner) on July 1, 2008, to provide facility management and construction management services for various properties in New York City.

The contract requires Turner to perform three types of services, which must be authorized by the Corporation in written ‘approval’ letters: 1) General Services (site evaluation; maintenance and repair; capital improvements emergency services; and site operations assessment); 2) Administrative Services (prepare and distribute reports, and administer and oversee subcontracts); and 3) Construction Management Services (competitively procure contracts; monitor, inspect, and approve work; and prepare overall progress schedules and budgets).

Contract services are carried out in connection with specific projects (e.g., Bush Terminal Capital Improvements, Essex Street Market Building C Rehabilitation), which are initiated by the Corporation and whose work scopes and budgets are prepared by Turner and approved by the Corporation. Turner is required to solicit and procure engineering consultants and subcontractors to carry out the actual design and construction work. After a project is substantially complete, Turner prepares a ‘punch list’ of outstanding work items that is reviewed and approved by the Corporation.

Audit Findings and Conclusions

The Corporation is not effectively monitoring Turner Construction Company contract No. 16850005. Although much of the contract work was apparently complete and satisfactory, there were significant weaknesses in the Corporation’s oversight of work performed under the contract (and certain work that was carried over from a previous Turner contract.) Consequently, of ten sampled projects we examined with expenditures totaling $16,972,757, we identified $2,700,800 in inappropriate and questionable payments to Turner and its subcontractors. Moreover, we identified an additional $664,161 in questionable payments that pertained to work that was carried over from the prior contract. The total of the dubious payments was $3,344,961. Some of the costs would not have been incurred had the work been effectively monitored.

Furthermore, the Corporation’s lack of oversight may have jeopardized public safety and placed the City at financial risk through its inability to ensure that repairs to Corporation facilities were carried out in a timely manner.

Overall, our review indicated that the Corporation’s utter reliance on Turner to carry out construction and associated management tasks has contributed to the Corporation’s lax oversight of the contract’s management. Although Turner is clearly responsible for undertaking the management of the Corporation’s construction projects, it is our conclusion that the Corporation has granted Turner far too much leeway in this regard. As the Corporation is ultimately responsible for ensuring that work is performed appropriately and payments are substantiated, the Corporation must strengthen its own management system to provide a greater degree of oversight over Turner and all similar facility management and construction management services contracts.

Audit Recommendations

This report makes a total of 31 recommendations. The major recommendations are that the Corporation should:

• Establish a management system to monitor the work of facility management and construction management services contracts such as Turner’s.
• Review the work deficiencies and questionable payments cited in this report and recoup any payments for work that was not properly carried out. Additionally, ensure that payments that cannot be adequately substantiated are readjusted and then recoup any overpayments from Turner.
• Maintain adequate documentation to substantiate the development and authorization of appropriate work scopes, and ensure that vendor proposals are consistent with work scopes.
• Develop procedures to identify and remediate environmental hazards before commencing project work.
• Require project and property managers to perform frequent inspections of work and to maintain inspection reports and logs and ensure that project and property managers participate in final work inspections and the development of punch-lists.
• Develop procedures for ensuring that required project documentation, including schedules and meeting minutes, are submitted and approved in a timely manner.
• Ensure that the cost of change orders is based on appropriate labor and material rates, and that the cost reasonableness of subcontractor proposals is reviewed. Furthermore, audit change orders before authorizing payment if required, and ensure that all payments for change orders are substantiated with supporting documentation such as time and material tickets.
• Cease its practice of shifting contract funds to pay for change order work.
• Require that facility management and construction management service contractors, including Turner, produce evidence to substantiate the reasonableness of work hours expended by its personnel.
• Ensure that facility management and construction management services contractors, including Turner, provide the Corporation with an estimate– before commencing work– of the number of hours its personnel are expected to be employed on that project.
• Review all payment requests to ensure that payroll expenses comply with contract provisions and the staff and fee schedule and ensure that payments for overhead personnel are contained in the overhead and profit ‘multiplier.’
• Ensure that hazardous conditions are identified and promptly addressed, and that facility repairs are carried out in a timely manner.

Corporation Response

Corporation officials contended that it was already complying with 19 recommendations. The Corporation disagreed with seven other recommendations, agreed with three recommendations, and partially agreed with two recommendations. The Corporation also disagreed with many of our findings.

The Corporation’s specific comments regarding the audit recommendations and our rebuttals are contained in the relevant sections of this report. The Corporation’s specific comments regarding the audit findings and our rebuttals are contained in Appendix III. The Corporation’s full response is included as an addendum to this report.

Due to the extent of disagreement and amount of opposing detail now included in this report, we wish to conclude by repeating our overall point. The Corporation is responsible for millions of dollars of development projects on the public’s behalf. While it has the right to contractually delegate some of this responsibility to, in this case, Turner, it cannot absolve itself from its overall responsibility. The Corporation therefore needs to be more actively involved in overseeing Turner and in documenting this oversight.