Audit Report on the New York City Transit Authority’s Oversight of Its Agreement with Bombardier Transit Corporation for the Design, Production, and Delivery of the R179 Subway Cars

Executive Summary

In 2012, the New York City Transit Authority (NYCT) entered into a $599 million contract (the Contract) with Bombardier Transit Corporation (Bombardier) for the design, production, and delivery of 300 R179 subway cars as part of the effort to modernize New York City’s aging subway system.

The scope of work and the technical requirements for the supply of subway cars and associated equipment are set forth in the Technical Specifications section of the Contract. The Contract imposed a milestone payment structure, which dictated that Bombardier received payments after it substantially completed each milestone. The milestones each represent a major advancement in the project, such as submission and approval of design documents; approval of test plans; submission of schedules and prototype components; completion of all inspections and tests; and delivery and acceptance of prototype cars. Under the Contract, Bombardier was required to substantially complete certain milestones before it could begin the actual delivery of the subway cars.

Pursuant to the Contract, delivery of prototype subway cars was set to begin January 12, 2015, and the delivery of all 300 cars to NYCT property was to be completed by January 30, 2017. However, due to multiple issues, including manufacturing defects related to the welding and casting of train components, and delays in passing qualification tests, Bombardier failed to meet its delivery deadlines. The project is currently 35 months behind schedule.

As a result of these delays, as of September 2019 NYCT had assessed approximately $36 million in liquidated damages. Pursuant to a settlement agreement and mutual release entered into between NYCT and Bombardier dated December 23, 2017 (the Settlement Agreement), a total of $1.27 million in liquidated damages were withheld; a new delivery schedule was established for the 300 cars required by the Contract; and Bombardier was required to provide 16 additional cars in lieu of the $28.7 million in assessed liquidated damages that had previously been assessed as of the date of the Settlement Agreement. The Settlement Agreement also provided that additional liquidated damages could be assessed against Bombardier in the event that it failed to meet a new February 2019 delivery schedule and that NYCT could request additional subway cars in lieu of liquidated damages.

As of the end of January 2019, Bombardier had again failed to meet the new delivery deadline having delivered only 162 of 316 cars pursuant to the Settlement Agreement. Based on NYCT’s current forecast, completion of delivery is now expected by December 2019. As a result of this additional delay, NYCT exercised its right in accordance with the Settlement Agreement to request two additional cars at no cost. Thus, NYCT is presently entitled to receive a total of 318 subway cars from Bombardier. As of December 2019, NYCT reported that 298 subway cars had been delivered and of these, 278 were in service, and 20 were still going through acceptance testing.

In this audit, we examined whether NYCT adequately managed the Contract with Bombardier to ensure that it provided the deliverables within prescribed milestones and the approved schedule. The audit also examined whether Bombardier complied with the provisions of the R179 Contract.

Audit Findings and Conclusion
The audit found that from the commencement of work under the Contract in 2012, Bombardier failed to provide required deliverables that met Contract specifications within scheduled milestone dates. As a result, completion of the Contract has been substantially delayed from the outset and is currently more than 35 months behind schedule.

Overall, the audit found that Bombardier’s failure to perform under the Contract was the result of its poor project management, which led to performance issues and the significant Contract delays that have occurred to date. In 2012, Bombardier did not comply with the contract requirements by failing to submit the welding procedures, a prioritization plan, and other required documents. Beginning in 2013, Bombardier failed to consistently produce acceptable work during the design stage which caused project delays. Subsequently, welding defects were found in critical structural components, which were not fully resolved until July 2015, approximately 18 months after their discovery in December 2013. These welding defects further led to substantial production delays. In addition, Bombardier failed to adequately oversee one subcontractor’s operations, which led to shipments of defective truck frame castings, which in turn further slowed production. Finally, Bombardier did not conduct independent tests of the subway car components prior to the official tests witnessed by NYCT. As a result, Bombardier failed numerous mandated systems qualification tests, which led to further delays.

In addition, the audit found that notwithstanding Bombardier’s early and repeated failures, NYCT did not take actions that effectively enforced the Contract schedule. We found that NYCT did not enforce its contractual authority clearly and promptly. Among other things, it failed to enforce contractually mandated schedule requirements when Bombardier did not meet milestones and fell behind the subway car delivery schedule. Further, notwithstanding persistent schedule delays beginning as early as 2013, NYCT senior management did not request adequate assurance pursuant to Article 701(B) of the Contract until July 2016. Due to the delayed and inconsistent production by Bombardier from the outset of the Contract, NYCT’s failure to exercise this Contract enforcement tool earlier compounded the schedule delays.

The audit found that NYCT’s Project Manager and Louis T. Klauder and Associates (LTK), NYCT’s engineering consultants, rigorously enforced the contract’s Technical Specifications to ensure that only train cars that meet NYCT’s standards are put in service. Although we found that NYCT conducted thorough inspections and tests of the finished products, and that it held monthly meetings with Bombardier, those efforts did not ensure the timely production of acceptable deliverables in accordance with Contract specifications.

The audit also found that NYCT did not follow LTK’s specific recommendation that it participate in future First Article Inspections for the casting supplier, for which a significant percentage of castings were found to have been improperly made. Additionally, NYCT failed to formally evaluate Bombardier in 2013, 2014, 2015, and 2017, as required by internal NYCT vendor guidelines. Finally, in connection with the 2016 evaluation in which NYCT gave Bombardier a marginal rating, NYCT failed to notify Bombardier in a timely manner of its marginal rating. NYCT informed Bombardier in 2018, almost two years later and only after our audit inquired about the notification. The NYCT evaluation guidelines require that NYCT notify vendors of marginal or unsatisfactory ratings.

Audit Recommendations

This report makes a total of 20 recommendations, 15 to NYCT and 5 to Bombardier, including the following:

NYCT should:

• Enforce its contractual authority by effectively utilizing all of the mechanisms afforded under its contract, including requests for adequate assurance and declarations of default when the contractor fails to abide by contractual requirements, such as adhering to Technical Specifications and missing early design milestones.
• Institute written guidance and procedures for NYCT management to follow on the timing and the steps to be taken when requesting adequate assurance and/or declaring default.
• Modify the condition for default in future contracts to include that repeated failure to comply with the requirement to submit all technical procedures prior to start of work, will result in default.
• Conduct annual vendor evaluations in accordance with internal guidelines.
• Document high-level communications such as executive level meetings with the vendor through minutes.

Bombardier should:

• Strictly adhere to the requirements of the Contract and all subsequent settlement and other agreements with NYCT for the production of the R179 subway cars.
• Promptly and completely provide all information required under the Contract to NYCT, otherwise confidential.
• Institute an effective inspection and oversight program, including properly overseeing its quality assurance component, over subcontractors and sub-subcontractors.

NYCT’s Response

NYCT agreed with 1 of 15 audit recommendations, disagreed with 4 recommendations, and stated that the remaining 10 recommendations were existing practices. NYCT specifically stated in its response that it “fundamentally disagrees with the audit conclusions in several respects. It is dramatically short-sighted of the audit to conclude that the completion of the Contract had been substantially delayed from the outset of the Contract in 2012. Further, in measuring the quality of Bombardier’s performance and NYCT’s oversight primarily on the basis of the original milestone dates, the audit fails to recognize the complexity of the typical rail vehicle design and manufacturing process and the valid reasons for delays that occurred including unforeseeable technical issues.”

Bombardier’s Response

Bombardier agreed with each of the audit’s five recommendations addressed to it. It further stated in its response that “[a]lthough Bombardier disagrees with certain statements contained in the draft audit report FP18-091A which contains numerous inaccuracies and subjective statements, we have decided to focus on the Comptroller’s recommendations only.”