The Department of Public Works' Construction Cost Estimates and Bids

The Department of Public Works project engineers and architects develop construction cost estimates when preparing construction project plans, specifications, and documents. The Department's Bureau of Architecture and Bureau of Engineering design staff prepare cost estimates on many of the Department's construction projects, although the Department will use consultants to prepare cost proposals for complex projects. According to interviews, the Department's staff lack sufficient construction cost estimating experience but consultants often underestimate or fail to understand the costs of the City's contracting practices.

The Bureau of Engineering's cost estimation policy aims for actual construction bids to be equal to or less than 105 percent of the project's estimated construction cost. The Bureau measures construction contract awards that are 105 percent or less than construction cost estimates, and reports the information as part of the Department's performance measures. Over the past three fiscal years, the percent of the Bureau of Engineering's contract awards that exceeded 105 percent of construction cost estimates increased from 6 percent of contracts in FY 2003-2004 to 45 percent of contracts in FY 2005-2006.

Table 7.1
The Bureau of Engineering's Construction Contract Award Amounts as a Percentage of the Construction Cost Estimates
FY 2003-2004 through FY 2005-2006

Source: Bureau of Engineering

The Bureau of Architecture measures and reports construction contract awards that do not exceed the construction cost estimate by more than 10 percent. In FY 2005-2006, the percent of the Bureau of Architecture's contract awards that exceeded 110 percent of construction cost estimates was 42 percent, compared to 25 percent in FY 2003-2004.

Table 7.2
The Bureau of Architecture's Construction Contract Award Amounts as a Percentage of the Construction Cost Estimates
FY 2003-2004 through FY 2005-2006

Source: Bureau of Architecture

The Bureau of Engineering's FY 2005-2006 performance target was 75 percent of all construction contract awards were to be less than 105 percent of the construction contract estimate. However, only 55 percent of construction contract awards were less than 105 percent.

The Bureau of Architecture's FY 2005-2006 performance target was 75 percent of all construction contract awards were to be less than 110 percent of the construction contract estimate. However, only 58 percent were less than 110 percent.

Standardizing Measures

The process of planning, designing and estimating the costs of construction projects is comparable for the Bureau of Engineering and the Bureau of Architecture. The Bureaus should determine the best measure of cost estimation performance and standardize measuring and reporting of cost estimates and contract award amounts, to ensure that the measures are a meaningful tool for the Department of Public Works and others with an interest in the Department's performance.

Evaluating Cost Estimation Performance

The types of projects that received high bids compared to the construction cost estimates covered the spectrum of construction projects, including street, sewer, park, and building projects. The Department of Public Works staff, along with other City departments that manage capital projects, considers the high bid amounts compared to cost estimates to result from the low number of bids rather than problems with the design and cost estimating process.

Evaluating the Cost Estimating Process

Although the low number of construction bids may contribute to the Department of Public Works' underestimation of construction costs, the Department also needs to assess its cost estimating procedures. Construction cost estimating takes place at different stages of the planning and design process. The initial conceptual estimate is used to determine the feasibility of the project and the preliminary estimate is used to request project funding or compare alternatives. The engineer's estimate is used to prepare the construction bid documents.

The construction bid estimates consist of direct construction costs for labor, materials, supplies, and equipment, and indirect costs for the contractor's and subcontractors' overhead and profit, insurance, and other administrative or support costs. According to the Bureau of Engineering's cost estimating policies and procedures, several variables make up cost estimates, including market and economic trends, availability of skilled labor and supply sources, and other factors. Cost estimation accuracy depends on experience, consultation with contractors and other designers, current knowledge of cost data, and sound knowledge of the project requirements.

Accurate cost estimates are important to ensure that a capital project can be achieved with available funds. The Department of Public Works has had to re-bid or re-define projects when the construction bid amounts have significantly exceeded the construction cost estimates and available funds.

According to the Bureau of Engineering, project designers are continuing to make adjustments to reflect the market situation. As noted in Section 6 of this report, the Department of Public Works has previously established a task force to assess capital project quality assurance procedures, including producing construction contract documents. The Department of Public Works needs to continue to evaluate the components of construction cost estimates and the construction cost estimate process to identify areas for improvement or increased efficiency.

The City Attorney's Task Force

Citywide, the number of construction contractors that bid on each project has declined and the contract bids and awards have increased. The City Attorney's Office has taken the lead in forming a task force, bringing together capital project staff from the Airport, Port, Public Utilities Commission, Municipal Transportation Agency, and the Department of Public Works to address the issues. One of the task force's goals has been to improve the bidding environment. The City Engineer, who oversees the Department of Public Works Bureaus of Engineering, Architecture, and Construction Management has participated in the task force, along with other Department of Public Works staff.

According to the City Attorney's Office, the task force findings and recommendations will probably be released in the fall of 2006. The task force has looked at a variety of issues that impact construction bidding and contracting and recommendations will most likely address departments' procedures as well as interdepartmental practices and City policies. The Department of Public Works should develop a plan and formal process to review, consider, and implement appropriate task force recommendations once the City Attorney's Office releases the report.

Managing Risks in Awarding Contracts

The Administrative Code requires the Department of Public Works to select the responsible construction contractor submitting the lowest responsive bid. According to interviews, this low-bid requirement can result in the selection of inexperienced contractors or poor performing contractors.

Some Department of Public Works staff expressed concern that contractors underbid projects and then drive up the costs through change orders. A review of construction projects completed in 2004 and 2005 does not show a strong correlation between contract awards that were less than the construction cost estimate and change orders. Of the ten projects that were completed in 2004 and 2005, in which the bid was less than the construction cost estimate, only two resulted in final construction contract costs that exceeded the original construction cost estimate. The contract for Davies Symphony Hall system upgrades resulted in final contract costs that were 9 percent higher than initial cost estimates and the contract for Helen Wills Park resulted in final contract costs that were one percent higher than initial cost estimates.

Managing Problematic Contract Awards

The Department of Public Works can experience and identify problems with the construction contractor early in the contract award process. The Department awarded the construction contract for the Fourth Street Bridge seismic retrofit and rehabilitation project to the lowest of five qualified bidders, Mitchell Engineering/ Obayashi Corporation, Joint Venture, in January 2003 with an expected construction start date in April 2003. The Joint Venture submitted a bid of $16.98 million, which was less than the construction estimate of $22.7 million. The Department awarded the contract to the Joint Venture despite concerns at the beginning of the project that the contractor lacked sufficient experience in bridge building, experience in completing complex projects, and the ability to appropriate staff the project.

According to Department of Public Works' documents, the contractor delayed in submitting the necessary insurance certificates, contractors' licenses, and business licenses. Although the contractor had failed to submit these insurance documents within the contractually required timeframe, the Department chose not to cancel the contract.

The expected construction start date was April 1, 2003, but the contractor was late in procuring materials, submitting shop drawings, and having sufficient staff in place to perform the job. At the same time, the contractor expressed concern about the impact of delays that the contractor considered to be caused by the Department of Public Works. Department's documents show that the Department was prepared to release the contractor from the contract, return the bid bond, and re-issue the bid.

The Fourth Street Bridge project has continued to have significant problems, delays and cost overruns. The original project scope anticipated an 18-month project but the project was not substantially complete until May 2006. The City and contractor are currently in Dispute Review Board hearings. The contractor is seeking a total claim of $22 million. Previously, the contractor filed nine claims against the City for a total of $7 million. The Department is seeking liquidated damages of $8.6 million.

Several Department of Public Works projects have resulted in large cost overruns, significant delays and litigation. Although project delays and cost overruns can result from numerous causes, the Department needs to identify potential problems and develop strategies to avert problems early in the project. The Department should work with the City Attorney's Office to develop risk management protocols, allowing the Department to promptly identify and address potential problems with contractors, and make decisions on the best course of action.

Conclusion

Accurate construction cost estimates are important to ensure that a capital project can be achieved with available funds. The Department of Public Works has had to re-bid or re-define projects when the construction bid amounts have significantly exceeded the construction cost estimates and available funds. The Department needs to continue to evaluate the components of construction cost estimates and the construction cost estimate process to identify areas for improvement or increased efficiency.

Further, the Department of Public Works has incurred significant construction project and litigation costs due to problems with construction contractors. Although the Administrative Code requires that the Department select the lowest qualified bidder for construction contracts, the Department does have options to identify and address potential problems with contractors early in the process. The Department needs to work with the City Attorney's Office to develop risk management protocols to reduce the incidence and costs of construction project delays, cost overruns, and litigation.

Recommendations

The Deputy Director for Engineering should:

Costs and Benefits

By implementing these recommendations, the Department of Public Works could better ensure that a capital project can be achieved with available funds and reduce the need to re-bid or re-define projects when the construction bid amounts have significantly exceeded the construction cost estimates and available funds.

The City faces significant legal and other costs when major construction problems occur. For example, the City could incur legal and construction costs for the Fourth Street Bridge project of several million dollars. Developing better risk management procedures would help to avoid such costs.