· The Airfield Development Bureau has funded, or continues to fund, more than 100 subcontractors through its prime contractors, and this number continues to grow.

· Airfield Development Bureau management of subcontractors relies on (a) individual project managers' oversight of the prime contractors allocated to them, (b) Human Rights Commission (HRC) and Disadvantaged Business Enterprise (DBE) Liaison Officer review, and (c) Controller's Office monitoring of payments. The Airport is concerned to ensure that individual project managers do not disrupt the contractual relationship between prime contractors and their subcontractors, and thereby inadvertently expose the Airport to liability for subcontractors' work.

· Individual Airfield Development Bureau project managers, the HRC, the Airport DBE Liaison Officer, and the Controller's Office all have important subcontractor monitoring roles. However, the Airfield Development Bureau has a responsibility to centrally monitor the subcontractor component of the Bureau's large contractual program. Airfield Development Bureau staff disavowed knowledge about individual subcontractors which they should have known if the Airfield Development Bureau project managers were appropriately monitoring prime contractors' compliance with the legislative and contractual requirements related to subcontractors.

· The HRC assumes that Airport bureaus are ensuring the accuracy of the subcontractor data provided by the prime contractors. The HRC believes that the Airfield Development Bureau should be responsible for monitoring the accuracy of the information provided by prime contractors about their subcontractors.

· The prime contractors are not objective parties and should not be delegated sole authority and responsibility for monitoring subcontractors.

· To rectify these deficiencies, the Budget Analyst recommends that the Airfield Development Bureau (a) holds copies of all subcontracts, (b) compiles an inventory of all subcontractors funded by the Runway Reconfiguration Project, and (c) reviews all HRC documentation for accuracy.

· Assuming Minority and Women Business Enterprise (MBE/WBE) and DBE subcontractor participation goals of 20 percent, implementing greater scrutiny of subcontractors will ensure that the Airfield Development Bureau more closely monitors the expenditure of 20 percent of its payments to prime contractors. Based on 20 percent participation levels to date, this represents an estimated expenditure on subcontractors of $17.9 million.

Inventory of Contractors

Baseline Data

The Budget Analyst audit team found that the Airfield Development Bureau did not have a single, comprehensive inventory that integrated baseline financial and non-financial information (such as the Airport Commission and Board of Supervisors approvals, timeframes, and key deliverables) about all of its prime contractors, subcontractors, seconded subconsultants, and seconded personnel.¹ Therefore, the Budget Analyst audit team attempted to compile such an inventory to ensure that the Budget Analyst audit team and the Airfield Development Bureau shared an accurate understanding as to the scope, timing, and cost of the Bureau's contracting program.

The Budget Analyst audit team, in collaboration with Airfield Development Bureau staff, successfully compiled a comprehensive inventory of prime contractors, as shown in Appendix A to this audit report. Airfield Development Bureau staff compiled the inventory of seconded subconsultants and seconded personnel shown in Appendix B to this audit report. The inventories in Appendices A and B comprise information extracted directly from the Airfield Development Bureau's comprehensive files. However, the Budget Analyst audit team was unable to compile a comparable inventory of subcontractors solely from information held by the Airfield Development Bureau. In order to develop a comparable inventory for subcontractors, the Budget Analyst audit team would have had to collect subcontractor information directly from the prime contractors. This reflects the Airfield Development Bureau's much more "hands off" approach to subcontractors, compared with its monitoring of prime contractors, seconded subconsultants, and seconded personnel. Airport staff repeatedly stated to the Budget Analyst audit team that the selection and deployment of Airfield Development Bureau subcontractors was solely the responsibility of the prime contractors, and that the Airfield Development Bureau could not attest to the utilization, cost, or payment of specific subcontractors. According to Airfield Development Bureau staff, only the prime contractors and the Human Rights Commission (HRC) hold that information.

Extent of Subcontracting

All of Airfield Development Bureau's prime contractors have used, or continue to use, subcontractors (a) for specialized expertise, (b) to meet the City's Minority-owned Business Enterprise and Women-owned Business Enterprise (MBE/WBE) Program participation goals, and/or (c) to meet the Federal Government's Disadvantaged Business Enterprise (DBE) Program participation goals.² The extent to which prime contractors use subcontractors varies significantly, from one or two firms under smaller prime contracts, to more than 30 firms under Contract 4240.1 between the Airport and the URS Corporation for the preparation of the draft Environmental Impact Report and the draft Environmental Impact Statement. Based on a review of the HRC Forms 6 and 7,³ the subcontractor participation reports prepared by prime contractors and held on file by the Airfield Development Bureau and the only subcontractor lists held centrally by the Airfield Development Bureau, the Budget Analyst audit team has determined that the Airfield Development Bureau has funded, or continues to fund, the participation of more than 100 subcontractors through the Airfield Development Bureau's prime contracts. The number of subcontractors continues to grow.⁴ These subcontractors include companies with whom the Airfield Development Bureau also has prime contracts (for example, Wildlands, Inc.) and companies who are subcontractors to more than one prime contractor (for example, Olivia Chen Consultants, Inc. has subcontracted with five separate prime contractors at different times during the Runway Reconfiguration Project to provide engineering services, particularly in relation to water and seismic safety issues).

Legislative and Contractual Obligations

A prime contractor's utilization of subcontractors is subject to:

· Written agreement, either contained in the prime contract itself, or in a separate authorization from the Airport Director, of the subcontractors to be used by the prime contractor. A number of Airfield Development Bureau contracts specify that prime contractors cannot substitute subcontractors unless approved by the Airport in writing. According to Airport staff, such contractual specifications represent enforceable provisions which provide the Airport with extra control over prime contractors' performance.

· HRC monitoring of subcontractors who contribute to a prime contractor's MBE/WBE goals. As required by San Francisco Administration Code Section 12D.A.7(C), each prime contractor invoice submitted to the Airport for payment must include the subcontractor participation information required by HRC Forms 6 and 7. Airport staff advise that MBE/WBE goals have not been set for the Runway Reconfiguration Project as a whole, only for individual prime contracts.

· The San Francisco Administrative Code Section 12D.A.7(E) requirement that a prime contractor file an affidavit with the Controller that it has paid all its MBE/WBE subcontractors. This affidavit must be filed within ten working days following the prime contractor's receipt of payment from the Airport. Failure to provide such an affidavit can result in the Controller withholding 20 percent of the Airport's payment to the prime contractor until the affidavit is provided.

· The Airport's DBE Program requirement that a prime contractor must pay all its subcontractors (both DBE and non-DBE) within ten days of the prime contractor's receipt of an Airport payment. The prime contractor must file an affidavit with the Controller that it has paid all its subcontractors. Failure to provide such an affidavit can result in the Controller withholding 20 percent of the Airport's payment to the prime contractor until the affidavit is provided. Individual contracts can require a prime contractor to pay its subcontractors more promptly, within three working days of receipt of a payment from the Airport.

· The Airport's DBE Program requirement that prime contractors file an affidavit with the Controller (with copies sent to the Airfield Development Bureau project manager and the Airport DBE Liaison Officer) within five working days following receipt of payment from the Airport that the prime contractor has paid all its DBE subcontractors.

· The Airport's DBE Program's requirement that a prime contractor must release any retainage payments⁵ to a subcontractor (whether DBE or non-DBE) within 30 days of satisfactory completion of all work required of that DBE subcontractor.

· The Airport's DBE Program's requirement that all DBE subcontractors inform the Airport, in a written affidavit, of any change in their circumstances, or provide an annual "no change" affidavit.

· The Airport DBE Liaison Officer's scrutiny through (a) monthly DBE participation reports, (b) audits of the payments made to DBE subcontractors, (c) site visits, and (d) exit reports prepared after completion of DBE contracts.

Management Responsibility

Compliance with the above legislative and contractual obligations requires the Airport, through both its project management staff and it's the Airport DBE Liaison Officer, to have close oversight of subcontractors. However, Airport staff repeatedly stated to the Budget Analyst audit team that the selection and deployment of Airfield Development Bureau subcontractors was solely the responsibility of the prime contractors, and that the Airfield Development Bureau could not attest to the utilization, cost, or payment of specific subcontractors. According to Airfield Development Bureau staff, only the prime contractors and the HRC hold that information.

Airfield Development Bureau monitoring of prime contractor compliance with the legislative and contractual requirements listed above relies on:

· Individual project managers.

· The Human Rights Commission.

· The Airport DBE Liaison Officer.

· The Controller's Office.

Airfield Development Bureau Project Managers

Airfield Development Bureau project managers are responsible for managing the prime contractors, monitoring prime contractor performance, evaluating the work product, reviewing the deliverables schedule, and reviewing invoices.

Airfield Development Bureau project managers are responsible solely for the prime contractors allocated to them. The Airport is concerned to ensure that individual project managers do not disrupt the "privity of contract" between prime contractors and their subcontractors, and thereby inadvertently transfer liability for the subcontractors' work from prime contractors to the Airport. By "privity of contract," Airport staff are referring to the relationship between the parties participating in a legal contract. The Airport has privity of contract with its prime contractors, and those prime contractors in term have privity of contract with their subcontractors. The Airport holds the prime contractors responsible for the performance of their subcontractors and, therefore, prime contractors carry the liability for their subcontractors' performance. If Airport project managers were to intercede between prime contractors and their subcontractors by directly managing a subcontractor, they would interfere in the privity of contract between those parties and potentially expose the Airport to liability for that subcontractor's work performance.

Human Rights Commission (HRC)

The HRC reports quarterly to the Board of Supervisors on prime contractors' utilization of MBE/WBE subcontractors, conducts annual audits of prime contractors' compliance with their MBE/WBE goals, performs exit reviews at the conclusion of prime contracts (which captures the changes in the scope of subcontractor services throughout the life of the prime contract), monitors prime contractors' monthly affidavits to the Controller's Office that the prime contractors have paid their subcontractors in a timely fashion, and monitors prime contractors' monthly HRC Forms 6 and 7.

While the Airfield Development Bureau is not legislatively or contractually obligated to hold copies of its prime contractors' subcontract agreements, and therefore does not do so, the Bureau does receive and file each HRC Form 6 or 7 submitted by a prime contractor about subcontractor participation. The HRC advised the Budget Analyst audit team that City departments have a responsibility to review the HRC Forms 6 and 7 they receive, even though that responsibility is not explicitly stated in the San Francisco Administrative Code or in the HRC's Rules and Regulations. The HRC based its opinion on:

· San Francisco Administrative Code Section 12D.A.7(C) which requires HRC Forms 6 and 7 to "contain information that the [Human Rights] Commission has determined is necessary to enable the Commission and the [HRC Executive] Director (1) to monitor compliance by City departments and their prime contractors with their obligations under this ordinance, [and] (2) to determine whether City departments are achieving their prime and subcontracting goals under this ordinance ..." This requirement assumes that City departments will ensure that prime contractors provide the HRC with accurate, comprehensive information so that the HRC can determine whether or not City departments are meeting their subcontractor participation goals.

· HRC 12D.A Rules and Regulations, Section XIII.A which requires that "Each payment request for a City prime contractor/consultant submitted to the contract awarding authority shall be accompanied by HRC Form 7." This requirement assumes that the information provided in HRC Forms 6 and 7 will be accurate and support the payment request. While the HRD 12D.A Rules and Regulations do not specify what actions a department should take with respect to HRC Forms 6 and 7, the Budget Analyst audit team determined that two of the City's other large enterprise departments, the Port and the Public Utilities Commission, review the HRC Forms 6 and 7 for accuracy before sending a payment request to the Controller's Office.

The Airfield Development Bureau receives HRC Forms 6 and 7 along with each prime contractor invoice and then forwards HRC Forms 6 and 7 to the Airport's Accounting Department to ensure that the Controller can pay the invoice. The Bureau holds file copies of all HRC Forms 6 and 7 completed by its prime contractors. However, Airfield Development Bureau staff state that they do not:

· Verify the accuracy of the data contained in HRC Forms 6 and 7. Airfield Development Bureau staff neither audit the information provided in the forms, nor obtain independent verification from the subcontractors.

· Use the data contained in HRC Forms 6 and 7 to allow or disallow payments to prime contractors.

· Reconcile the financial data contained in HRC Forms 6 and 7 with the Bureau's own cost reports. There are differences between prime contractors in the way they provide financial data in HRC Forms 6 and 7.

· Perform any other review of that data.

· Have any relationship with subcontractors, only with prime contractors.

The Airfield Development Bureau views the data contained in HRC Forms 6 and 7 as being solely under the purview of the prime contractors and the HRC. Airport staff advise that the Airport has an annual memorandum of understanding with the HRC to perform such monitoring on its behalf. However, it is unclear to Budget Analyst audit staff how this memorandum of understanding releases the Airport from the obligation to review the accuracy and comprehensiveness of information provided by prime contractors in their monthly HRC Forms 6 and 7. The memorandum of understanding does not explicitly release the Airport from such an obligation, nor does it specifically charge HRC staff with the obligation to review the accuracy and comprehensiveness of the information provided each month by the prime contractors. The Airport DBE Liaison Officer advised the Budget Analyst audit team that such reviews are an understood part of an HRC contract compliance officer's role and, therefore, did not need to be specified in the memorandum of understanding. According to the Airport DBE Liaison Officer, the Airport would only have requested this responsibility specifically if it was not already being performed by HRC contract compliance officers. However, as stated above, the Budget Analyst audit team notes that the HRC considers that City departments have a responsibility to review HRC Forms 6 and 7.

If the Airfield Development Bureau wished to verify the accuracy of subcontractor participation data or the accuracy of the subcontractor costs presented by prime contractors, the Bureau states that it would do so as part of a formal audit. To date, the Airfield Development Bureau has not performed any audits of the accuracy of subcontractor participation data or the accuracy of the subcontractor costs presented by prime contractors. Since most Airfield Development Bureau contracts only require the prime contractors to hold their records for three years after the City's final payment to the subcontractor, the opportunity to audit certain subcontractors has already passed.

Airport DBE Liaison Officer

The Airport DBE Liaison Officer reports to the Airport Commission quarterly on prime contractors' utilization of DBE subcontractors, conducts annual audits of prime contractors' compliance with their DBE goals, reviews monthly DBE participation reports, audits of the payments made to DBE subcontractors, undertakes subcontractor site visits, and performs exit reviews at the conclusion of prime contracts (which captures the changes in the scope of subcontractor services throughout the life of the prime contract). Prime contractors are required to provide the Airport DBE Liaison Officer with copies of all DBE subcontracts.

The Controller's Office

The Controller's Office monitors all Airfield Development Bureau payment data for Airport authorization and the monthly affidavits from prime contractors that they have paid their subcontractors in a timely fashion. The Controller's Office advises that the Airport is primarily responsible for reviewing invoices for accuracy. The Controller's Office approves or rejects the Airport's payment requests on-line, only requesting to see the original documentation if the Controller's Office identifies a reason to see those documents, or for subsequent audit purposes. The Controller's Office system does not record subcontractors at all, because the Controller's Office only reviews invoices from prime contractors.

Airport staff advise that the Airfield Development Bureau is not resourced to certify the accuracy of the payments made by prime contractors to subcontractors (by, for example, checking cancelled checks). Airport staff further advise that the responsibility for certifying the accuracy of the payments made by prime contractors lies with the prime contractor themselves, through their certification of the information they present in the HRC forms submitted with each invoice. Airfield Development Bureau project managers review those prime contractors' invoices for reasonableness and approve reasonable invoices for payment. However, Airfield Development Bureau project managers do not verify the accuracy of the information provided by prime contractors in the HRC forms. In an interview, the Airport's Internal Auditor attested that the Airfield Development Bureau's system of invoice control is "reasonably functional and working as intended," based on his observance of project managers' due diligence in reviewing invoices.

Issues of Concern

The Budget Analyst audit team acknowledges that individual Airfield Development Bureau project managers, the HRC, the Airport DBE Liaison Officer, and the Controller's Office all have important subcontractor monitoring roles. However, the Budget Analyst audit team considers that the Airfield Development Bureau has a management responsibility to centrally assess the status of its subcontractors through closer monitoring of the prime contractors' use of subcontractors, and the collection of documentation supporting the payments made to subcontractors for the work they performed.

In response to information requests by the Budget Analyst audit team, Airfield Development Bureau staff disavowed knowledge about individual subcontractors which they should have known if the Airfield Development Bureau project managers were appropriately monitoring prime contractors' compliance with the legislative and contractual requirements related to subcontractors. All requests for information about subcontractors were referred to the responsible prime contractors, even when the Budget Analyst audit team requested basic subcontractor information which the Airfield Development Bureau should have had, such as subcontractor names, commencement and termination dates, and the amounts paid to individual subcontractors.

One tool for ensuring centralized, detailed knowledge of subcontractors would be a central inventory of all subcontractors funded by the Runway Reconfiguration Project. The Airfield Development Bureau considers such an inventory to be unnecessary because:

· Prime contractors are responsible for their subcontractors.

· MBE/WBE goals are set for each prime contract, rather than for the Runway Reconfiguration Project as a whole.

· The Controller's Office is responsible for certifying the accuracy of payments.

· There is considerable variation in the ways that subcontracts are structured (for example, some are paid on a lump sum basis, while others are paid according to detailed formulas). Therefore, there is considerable variation in the most appropriate ways of measuring subcontractors' performance.

In response to these concerns, the Budget Analyst audit team notes that it is not recommending that the Airport intercede in prime contractors' management of their subcontractors. Rather, the Budget Analyst audit team is recommending that the Airport more closely monitor prime contractors' use of, and payments to, subcontractors in light of the legislative and contractual obligations under which the prime contractors operate.

Conclusions

The Airfield Development Bureau has funded, or continues to fund, more than 100 subcontractors through its prime contractors, and this number continues to grow.

Prime contractor utilization of specific subcontractors is subject to significant legislative and contractual requirements. Airfield Development Bureau monitoring of prime contractors' compliance with these legislative and contractual requirements relies on individual Airfield Development Bureau project managers, the HRC, the Airport DBE Liaison Officer, and the Controller's Office.

The Airport is so concerned not to interfere in the privity of contract between the prime contractors and their subcontractors, and thereby inadvertently expose the Airport to liability for subcontractors' work performance, that it has adopted a very "hands off" approach to monitoring the subcontractor component of its contractual program.

While the HRC has a key monitoring role in relation to prime contractors' compliance with their MBE/WBE goals, the HRC considers that the Airfield Development Bureau also has a role in ensuring the accuracy of the subcontractor information provided by the prime contractors to the HRC. This would require the Airfield Development Bureau to monitor closely the prime contractors' use of subcontractors. Such monitoring would need to include verification of the actual subcontractor work performed and the collection of documentation supporting the payments made to subcontractors for their work.

The Airfield Development Bureau has a responsibility to centrally monitor the subcontractor component of the Bureau's large contractual program. A centralized, detailed knowledge about the subcontractor component of the Airfield Development Bureau's large contractual program is warranted to ensure that Airfield Development Bureau staff have a detailed knowledge about the Bureau's contractual program as a whole.

Recommendations

The Airport Commission should:

4.1 Require the Airfield Development Bureau to maintain copies of all subcontracts.

4.2 Require the Airfield Development Bureau to compile a central inventory of all subcontractors funded by the Runway Reconfiguration Project.

4.3 Require prime contractors to provide supporting documentation for all billings they submit on behalf of subcontractors, including documentation of actual, specific work performed by such subcontractors.

4.4 Require the Airfield Development Bureau to review all applicable HRC Forms sent to the Airport's Accounting Department for accuracy, comprehensiveness, and standardization.

Costs and Benefits

Any additional staff time spent obtaining and filing the subcontracts, preparing an inventory of subcontractors, and reviewing the HRC Forms 6 and 7 submitted by prime contractors should be absorbed by existing Airport staff.

Assuming MBE/WBE and DBE subcontractor participation goals of 20 percent, implementing greater scrutiny of subcontracts will ensure that the Airfield Development Bureau more closely monitors the expenditure of 20 percent of its expenditures on prime contractors. To date, based on the $89.6 million total expenditures on prime contractors contained in Appendix A, 20 percent represents an expenditure of $17.9 million on MBE/WBE and DBE subcontractors.

¹ The Airport uses two forms of secondments defined as follows:

· Seconded subconsultants refer to those consultants who are (a) specifically selected by the Airport to perform the work of an entire task, and (b) paid through a prime contractor with whom they had no prior contractual connection. Such consultants are responsible for their work product, and the cost of correcting any errors or deficiencies.

· Seconded personnel (a) are the employees of a prime contractor, or one of their subcontractors, and therefore have a prior contractual connection with that contractor, (b) are physically located at the Airfield Development Bureau, (c) work under the direction of Airfield Development Bureau staff, and (d) provide a direct work product to Airfield Development Bureau staff. Their work products are the responsibility of the Airfield Development Bureau.

² The Airport's DBE Program is established under the Code of Federal Regulations, Title 59, Part 26, Participation by Disadvantaged Business Enterprises in Department of Transportation Financial Assistance Programs (49 CFR Part 26). Grant recipients must comply with 49 CFR Part 26 as a condition of receipt of more than $250,000 in Federal funds, from sources such as (in the Airport's case) FAA AIP grants. Among its many requirements, 49 CFR Part 26 specifies the establishment of a DBE Liaison Officer (Section 25) and prompt payment of DBE subcontractors (Section 29). The Airport's DBE Liaison Officer is an Airport employee.

³ HRC Forms 6 and 7 are two versions of the HRC form requesting prime contractors to provide monthly contract information about their subcontractors, including the number of hours worked and the amounts charged for their services.

⁴ In March of 2003, the Airport Director approved a new subcontract with an independent consultant, Michael McGowan, to perform a fish study under the Airfield Development Bureau's contract with the URS Corporation. The URS Corporation has set aside a budget of $15,000 for this subcontract.

⁵ Prime contractors can hold a percentage of a subcontractor's payments as security for completion of the subcontractor's work. Once the subcontractor's work has been satisfactorily completed, the prime contractor is required to release any withheld payments.