Audit Report on the Recoupment of Change Order Costs by the Department of Design and Construction

The Department of Design and Construction (Department) manages the design and construction of new and renovated City facilities that are designed by either Department personnel or architectural and engineering 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 other cases, a change order may be necessitated to include work that was originally omitted by the design consultant. In these cases, the Department’s procedures require that the agency seek recoupment from the design consultant for any additional costs due to the design error or omission. This requirement is intended to ensure that the city is not held liable for these costs. In Fiscal Years 2009 and 2010, the Department issued 1,560 change orders totaling $230,525,580. Of these, 51 totaling $980,633 were classified as design errors, and 121 totaling $5,752,452 were classified as design omissions in the Department’s Standardized Change Order Record-Contract Overrun Request Entry (SCORE) system.

Audit Findings and Conclusions

The Department of Design and Construction has appropriate standards and procedures to reduce consultant design errors and omissions and recoup from consultants the cost of change order work that results from design errors and omissions. However, the Department did not adhere to the standards for recouping from consultants the cost of change order work that resulted from design errors. Consequently, the Department has foregone an opportunity to recoup from consultants in Fiscal Years 2009 and 2010, up to $702,580 in costs for change orders that were necessitated by design errors. Moreover—although recovering the costs of design omission change orders may be less likely—the Department did not follow procedures for recouping costs for $2.2 million in change order work that was necessitated by design omissions. Furthermore, the Department did not always adhere to standards to preclude design errors and omissions from occurring in the first place.

Additionally, we identified problems with classifying change orders and with accurately recording information about change order classifications in the SCORE system.

Audit Recommendations

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

• Ensure that all applicable change orders necessitated by consultant design errors and omissions be referred to the agency’s General Counsel for review. If the General Counsel believes that recoupment should be sought, the change order should be sent to the Law Department.
• Immediately transmit to the General Counsel for its review all existing change orders classified as design errors and omissions.
• Ensure that it carries out all required steps in accordance with its system for reducing design errors and omissions.
• Implement procedures to ensure that classification information is accurately transcribed and recorded in the SCORE system

Department Response

The Department agreed with four recommendations and partially agreed with two recommendations. The Department noted in its response that “. . . a change order regarding a design omission would have been paid under the contract had the work been included in the original design.” Additionally, the Department stated that, “. . . the dollar threshold of $3,000 has not been adjusted in more than 19 years to match the realities of the costs of litigation and is no longer an appropriate dollar trigger to require a review by legal counsel for potential referral to the Law Department’s Affirmative Litigation Division.”

In regard to the Department’s first point, we note that change order costs are often established through negotiations with a contractor without the benefit of price competition. Consequently, although work would have been paid under a contract had it been included in the original design, the City may pay higher prices for omitted work included in change orders.

Regarding the Department’s second point, the Department’s General Counsel did not receive any of the sampled change orders, regardless of the dollar threshold.