DENVER – The city needs to improve contract competitiveness and enforce formal policies during the bidding process when working on some on-call contracts, according to an examination commissioned by Denver Auditor Timothy M. O’Brien, CPA.
“It’s in the best interest of the taxpayers to keep a close eye on the new construction projects going on with all the new bond money,” Auditor O’Brien said. “I decided it was important to start auditing on-call construction contracts in a way we hadn’t before, to make sure we’re getting what we pay for and that we’re using a truly competitive process.”
The Auditor’s Office worked with CliftonLarsonAllen LLP to complete a third-party examination with limited scope of the Halcyon Construction Inc. on-call contract with Denver Public Works. Halcyon had an agreement with Public Works for up to $3 million to cover work between May 1, 2015, and April 30, 2018. The examination provided four recommendations for Public Works to improve its internal controls over its small business enterprise contractors.
According to the examination, Public Works should expand its pool of contractors to allow for a more competitive environment and for more opportunities for other contractors to be considered for work. Public Works should also make sure to follow the requirements of its mini-bid process, which was not used at all on some projects.
Public Works staff noted there was a policy in place that exempts the city from using the mini-bid process on small work and emergency repairs. However, the examiners found there was no formal policy in place that allowed for using Halcyon for any project without the mini-bid process.
The examination also found significant increases in project costs due to change orders from Halcyon. The company had a considerably higher percentage of change orders than the other small business enterprise contractors in the bidding pool. In some projects tested, the change order amounts plus the original work order resulted in the total project cost being higher than other contractors’ bids submitted during the mini-bid process. Halcyon’s percentage of change orders through November 2018 was 27 percent, compared to other contractor percentages of 3.5 percent, 8.3 percent, and 8.2 percent.
Further, for three of the projects tested, the project managers could not locate any formal documentation evidencing that inspections were performed during these projects that could identify when performance was not in line with the work order.
“Public Works has not been doing enough project monitoring of the Halcyon on-call contract,” Auditor O’Brien said. “We need competitive bids and contractors who will not be able to increase costs later by adding foreseeable change orders to the projects.”
The examination also found Public Works has weak internal controls over project costs. These safeguards should be in place to keep the cost of construction projects on track and to avoid abuse of the change order process. Currently, Public Works does not require detailed invoices from subcontractors to support amounts Halcyon said it pays.
For the projects reviewed in the examination, the team was unable to determine if Halcyon properly classified direct labor, materials and equipment costs. The examination found the city was overcharged $23,113 on seven projects because the invoices the subcontractors submitted to Halcyon did not match the amounts Halcyon charged Public Works. On the other hand, the examination found two instances when the subcontractors were shown as paid by Halcyon but the amounts were not billed to Public Works. The examination team also noted dollar amounts submitted to Public Works for direct costs were round numbers, which is unusual due to the nature of construction projects and costing structures.
The examination recommends Public Works require all subcontractor invoices as supporting documents for payment processing. Detailed invoice support should also be required from Halcyon for direct charges to further support amounts certified for payment.
“I intend to continue doing these construction contract examinations and audits,” Auditor O’Brien said. “This is an important issue, and we hear from the people of Denver a lot about their concerns. I plan to help those people by doing our best to keep an eye on this process.”