DIA Hotel and Transit Center Audit Report

8/10/2019 DIA Hotel and Transit Center Audit Report

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Dennis J. Gallagh

Auditor

Office of the Audit

Audit Services Divis

City and County of De

Denver International Airport

Hotel and Transit CenterPerformance Audit

November 2014


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The Auditor of the City and County of Denver is independently elected by the citizens of Denver.

He is responsible for examining and evaluating the operations of City agencies for the purpose

of ensuring the proper and efficient use of City resources and providing other audit services and

information to City Council, the Mayor and the public to improve all aspects of Denvers

government. He also chairs the Citys Audit Committee.

The Audit Committee is chaired by the Auditor and consists of seven members. The Audit

Committee assists the Auditor in his oversight responsibilities of the integrity of the Citys finances

and operations, including the integrity of the Citys financial statements.The Audit Committee is

structured in a manner that ensures the independent oversight of City operations, thereby

enhancing citizen confidence and avoiding any appearance of a conflict of interest.

Audit Committee

Dennis Gallagher, Chair Robert Bishop

Maurice Goodgaine Jeffrey Hart

Leslie Mitchell Timothy OBrien, Vice-Chair

Rudolfo Payan

Audit Staff

John Carlson, Deputy Director, JD, MBA, CIA, CGAP, CRMA

Sonia Montano, Internal Audit Supervisor, CGAP, CRMA

Robyn Lamb, Internal Audit Supervisor

Kelsey Yamasaki, Lead Internal Auditor, MPP

Griffin Zigrang, Senior Internal Auditor, MA

You can obtain copies of this report by contacting us at:

Office of the Auditor

201 West Colfax Avenue, Department 705 Denver CO, 80202

(720) 913-5000

Fax (720) 913-5247

Or download and view an electronic copy by visiting our website at:

www.denvergov.org/auditor

A2014-010
http://www.denvergov.org/auditorhttp://www.denvergov.org/auditor


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To promote open, accountable, eff ici ent and effective government by perf ormi ng imparti al r eviews and other audi t servi ces

that provide objective and usefu l inf ormati on to improve decision maki ng by management and the people.

We will moni tor and report on recommendations and progress towards their implementation.

City and County of Denver201 West Colfax Avenue, Department 705 Denver, Colorado 80202 720-913-5000

FAX 720-913-5247 www.denvergov.org/auditor

Dennis J. GallagherAuditor

November 20, 2014

Kim Day, Chief Executive Officer

Department of Aviation

City and County of Denver

Dear Ms. Day:

Attached is our second audit of the Denver International Airport (DIA) South Terminal

Redevelopment Program (STRP), now referred to as the Hotel and Transit Center (HTC) project .The purpose of our audit was to provide an update and report on the work DIA has taken to

enhance its project management structure and construction schedule. The expansion of DIA

and construction of the on-site hotel, in connection with a commuter rail link to downtown

Denver, offers many benefits for the traveling public and the region. Denver has a rich

transportation history, beginning in 1869 when Denver was determined to have its own rail

connection to the transcontinental line passing through Cheyenne, Wyoming. The desire to be

linked to commerce fostered a movement to organize a Board of Trade and build a home town

railroad. The Denver Pacific Railroad laid track from Denver to Cheyenne. This was a starting

point for Denvers transportation future. Now, with our Union Station redeveloped, the commuter

rail link to DIA affords the opportunity for Denver to be connected to the world and further

propel our City onto the global stage.

As the result of the loss of the original HTC architect, the release of our 2012 HTC audit findings,

and a directive from the Mayor, DIA established additional project oversight in August 2013;

shortly before that, the budget for HTC had ballooned from $500 to $544 million. While I

commend DIA for improving project management, I remain troubled that costs continue to

climb. It appears that DIA was willing to pay handsomely for a promise of certainty from its

primary contractors. While I appreciate assurances from the program management team that

HTC will be finished on time and on budget, we offer several observations and

recommendations for steps that can be taken to review the construction work upon completion

and recoup potential cost overruns pursuant to the arrangement DIA has made with its

contractors. While there may not be another project at DIA of this scale for some time, there areimportant lessons to be learned from HTC.


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that provide objective and useful i nf ormati on to impr ove decision mak ing by management and the people.

We will moni tor and report on recommendations and progress towards their implementation.

If you have any questions, please call Kip Memmott, Director of Audit Services, at 720-913-5000.

Sincerely,


DJG/jac

cc: Honorable Michael Hancock,Mayor

Honorable Members of City Council

Members of Audit Committee

Ms. Cary Kennedy, Deputy Mayor, Chief Financial Officer

Ms. Janice Sinden, Chief of Staff

Mr. David P. Edinger, Chief Performance Officer

Ms. Beth Machann, Controller

Mr. Scott Martinez, City Attorney

Ms. Janna Young, City Council Executive Staff Director

Mr. L. Michael Henry, Staff Director, Board of Ethics

Mr. Eric Hiraga, DIA Chief of Staff

Mr. Stuart Williams, DIA HTC Program Manager


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that provide objective and useful i nf ormati on to improve decision maki ng by management and the people.

We will moni tor and report on recommendations and progress towards their impl ementation .

City and County of Denver201 West Colfax Avenue, Department 705 Denver, Colorado 80202 720-913-5000

FAX 720-913-5247 www.denvergov.org/auditor


AUDITORS REPORT

We have completed our second in a series of audits of the Denver International Airport (DIA)

South Terminal Redevelopment Program (STRP). The project has been rebranded and is now

referred to as the Hotel and Transit Center (HTC) project after its two largest scope elements. The

purpose of the audit was to examine and assess the governance of HTC, including project

management and change order review processes, and to identify possible inefficiencies and

opportunities for improvement.

This performance audit is authorized pursuant to the City and County of Denver Charter, Article

V, Part 2, Section 1, General Powers and Duties of Auditor, and was conducted in accordance

with generally accepted government auditing standards. Those standards require that we plan

and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis

for our findings and conclusions based on our audit objectives. We believe that the evidence

obtained provides a reasonable basis for our findings and conclusions based on our audit

objectives.

The audit revealed that the HTC budget has increased since the inception of the project and

may continue to increase before the project is complete. Based on our assessment, many

factors have contributed to the cost increases, including DIAs failure to hire an independentconstruction consultant during the initial phases of developing contract terms. Further, we

believe that DIA agreed to generous contract terms benefiting its prime contractors in an effort

to complete the HTC project on time. From the initial $500 million to the current $544 million, we

cannot provide assurance that the HTC budget will not ultimately increase to $599 million.

Although DIA has made efforts to address risks to the HTC projects schedule and budget by

creating a Project Management Team (PMT) and change management process, these efforts

may not be effective enough to control costs. We recommend that DIA take advantage of its

contractual terms with its primary contractors and conduct, as a management activity, a

construction close-out review using a specialized cost recovery firm. This is standard practice in a

capital construction project of this scale.

As a result of DIA leaderships focus on HTC, it is possible that funding of other essential projects

and maintenance not related to HTC is being affected. Specifically, we note in the report that

the budget for DIAs capital improvement program has increased but potentially not at the rate

required to meet the needs of the aging existing facility. Further, DIA leadership does not have

operations maintenance plans in place, which are essential for managing and maintaining the

existing facility. These plans will also be crucial for the ongoing maintenance of the new facility.


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We appreciate the personnel who assisted us during the audit.

Audit Services Division

Kip Memmott, MA, CGAP, CRMA

Director of Audit Services


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For a complete copy of this report, visit www.denvergov.org/auditor

or contact the Auditors Office at 720.913.5000

BackgroundIn 2011, Denver International Airport

(DIA) leadership set the budget for

the Hotel and Transit Center (HTC) at

$500 million. By 2013, DIA leadership

increased the budget to $544 to

more accurately reflect the probable

cost to complete HTC. Currently, HTC

Program Managers estimate that it

will cost as much as $599 million to

complete HTC. In addition to the costof completing the project, DIA

leadership estimates that it will cost

as much as $138 million to complete

other capital projects that are being

constructed by HTC contractors.

PurposeThe objective of the audit was to

determine whether DIA leadership

has an adequate project

management structure in place to:

Identify and mitigate current and

future risks that may impact the

projects budget

Ensure that costs related to HTC

are properly accounted for

Ensure that DIA is strategically

prepared for future capital

planning and maintenance

City and County of Denver Office of the Auditor

Audit Services Division

REPORT HIGHLIGHTS

Denver International Airport Hotel and Transit Center

November 2014

The audit assessed Denver International Airports management of the construction of the Hotel and Transit

Center and its preparedness for future capital projects and maintenance.

HighlightsOur review of the HTC project yielded the following findings:

The HTC budget has increased and will increase again.

oIn 2011, the budget was set at $500 million, increased in 2013 to $544

million, and may increase up to $599 million or more.

oThe process DIA put in place to control cost-inducing project changes is

not sufficient to keep costs from rising.

oBudget increases may have resulted from:

DIA not having an independent construction consultant on staff; and

Costly contract terms that were negotiated to incentivize on-time

project completion. We cannot provide assurance that the budget will not exceed $599 million.

oThis was due in part to lack of documentation.

oFurther, the HTC invoice review process is insufficient to assess whether

all project costs have been reasonable and in compliance with contract

terms.

Additional costs will add $130 million to the overall cost of the redevelopment

program, including:

o$75 million for other related capital projects;

o$53 million for RTD infrastructure; and

o$2 million that has not been captured by any established budget.

DIA leaderships focus on HTC may have reduced focus on the funding of non-

HTC-related projects and maintenance of the existing facility.oCapital investments in the airfield have fluctuated and budget reductions

made to specific projects raise some concerns.

oCapital investments in the terminal complex have decreased.

oDIA does not have operations maintenance plans in place, despite the fact

that DIA is an aging facility.


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TABLE OF CONTENTS

INTRODUCTION BACKGROUND 1

Growth and Expansion of Denver International Airport 1

Hotel and Transit Center Project Funding Sources 3

Chronology of Hotel and Transit Center Governance and

Management 3

Change Management Controls 8

DIA HTC Construction Records Retention and Payment

Management Systems 11

SCOPE 12

OBJECTIVE 12

METHODOLOGY 12

FINDING 14

DIA Leadership Has Taken Action to Improve Project

Management of the Hotel and Transit Center but These Efforts

Have Not Been Fully Effective in Mitigating Risks 14

RECOMMENDATIONS 41

APPENDICES 43

Appendix A Types of Contract Delivery Methods for Airport

Projects 43

Appendix B HTC Change Management Review Process

Flowchart 47

Appendix C HTC Invoice Review Process Flowchart 48

AGENCY RESPONSE 49


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P a g e 1OOffffiicceeoofftthheeAAuuddiittoorrOffice of the Auditor

INTRODUCTION

BACKGROUND

Growth and Expansion of Denver International Airport

Denver International Airport (DIA), which opened in February 1995, is the largest

airfield of any U.S. airport, encompassing fifty-three square miles located

approximately twenty-four miles northeast of Denvers central business district. DIA was

designed to incorporate the latest technology and safety and has developed an

accomplished record for on-time performance, safety, and convenience.1 In 2000,

the U.S. Department of Transportation granted $21.5 million to DIA for the construction

of a sixth runway to increase the number of international flights that the airport can

accommodate, as well as to ensure that the airport is operating efficiently. In 2011,

DIA ranked as the fifteenth-busiest airport worldwide. Recently, DIA ranked as the fifth-

busiest airport nationwide.2

The City initiated the South Terminal

Redevelopment Program (STRP) to

improve services at DIA and to create

convenient intermodal transportation

options between the airport and

downtown. Further, according to DIA

leadership, STRP helps to complete the

original vision for DIA when initially

constructed in the 1990s. STRP consists of

three primary projects: a public transitcenter, an airport hotel, and an open-air

plaza.

Public Transit Center This aviation commuter rail station will serve trains

connecting DIA with downtown Denvers Union Station as part of the Regional

Transportation Districts (RTDs) East Rail Line, under construction by Denver

Transit Partners.

Hotel and Conference Center The new 519-room Westin hotel will feature

conference center space for meetings, banquets, conventions, and trade

shows, as well as a restaurant, fitness center, and indoor pool. The hotel will

1Among Colorado commercial service airports, DIA is the busiest of fourteen Colorado airports in terms of the number of

enplaned passengers in 2012. Colorado Springs Airport, a small hub airport south of DIA, principally serves local demand

and ranks second in the State of Colorado after DIA. For rough comparison, in 2012, approximately 822,000 passengers

were enplaned at Colorado Springs compared with 26.6 million passengers at DIA. CITY AND COUNTY OF DENVER,

COLORADO, DEPARTMENT OF AVIATION, Airport System Subordinate Revenue Bonds, SERIES 2013A and SERIES 2013B,

Bond Report, July 10, 2013.2Market Demand and Financial Analysis. The Westin Denver International Airport Denver, CO, PFK Consulting, September

18, 2012.


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P a g e 2City and County of Denver

allow business travelers to conduct meetings close to DIA, saving them time

and offering a convenient alternative to traveling downtown.

Public Plaza An open-air plaza will connect the transit center and hotel to

the existing Jeppesen Terminal and will feature a large open area partially

covered by a glass canopy. The plaza will provide a venue for programs and

events where passengers and visitors can find entertainment, relaxation, art,

and restaurants.

The program also includes an extension

of the Automated Ground

Transportation System (AGTS), which is

the train that currently serves the

concourses, as well as an expansion of

the existing baggage system.

2012 STRP Audit In January 2012, the

Denver Auditors Office released a

performance audit of STRP, through

which our office sought to understand

and report on STRPs organizational

structure, financing, and task schedule,

as well as to identify any significant

risks.3 The audit revealed that there was some risk that the projects components

would not be completed on time or on budget. Specifically, projections developed in

October 2011 showed that STRP, barring any changes, would be completed six to

eight months beyond the scheduled timeframe and approximately $9 million over

budget; the train station was not projected to be completed until several months after

the agreed-upon delivery date of January 1, 2014. We noted that DIA leadership had

made efforts to address these risks to the schedule and budget by requesting a review

by other City personnel, such as the City Engineer, and implementing an

organizational change that would centralize responsibility and accountability under a

program manager employed by the City. DIA leadership also worked to address other

risk areas, including how invoices are reviewed prior to payment and how

maintenance needs are reflected in facility design.

This audit of the DIA Hotel and Transit Center is a continuation of the STRP audit and

assesses the efficiency and effectiveness of the governance of the project. STRP is

now commonly referred to as the Hotel and Transit Center (HTC) project.

Hotel and Transit Center Budget and Schedule DIA leadership originally set the

budget for HTCincluding design and construction costsat $500 million, to be

funded using airport bonds. As reported in our January 2012 audit, the project was on

track to be completed at $509 million. DIA has since established a revised budget for

the three HTC project elements of approximately $544 million. This represents a $44

million (9 percent) increase over the October 2012 budget for the project. In April

3The Department of Aviations South Terminal Redevelopment Program Performance Audit, City and County of Denver

Auditors Office, January 2012,www.denvergov.org/auditor/DenverAuditor/AuditServices/AuditReports.
http://www.denvergov.org/auditor/DenverAuditor/AuditServices/AuditReportshttp://www.denvergov.org/auditor/DenverAuditor/AuditServices/AuditReportshttp://www.denvergov.org/auditor/DenverAuditor/AuditServices/AuditReportshttp://www.denvergov.org/auditor/DenverAuditor/AuditServices/AuditReports


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2014, DIA leadership announced that overall project costs could grow an additional 5

to 10 percent, raising the cost of the project to as much as $599 million.4

The program schedule comprises work for the transit center, hotel, and plaza. DIA

entered into an intergovernmental agreement with RTD to substantially completekey

transit center components by January 1, 2014.5 In addition, the original schedule for

the hotel and plaza called for construction completion of both elements in November

2014. In our January 2012 audit, we reported that the transit center components

would not likely be completed until August 2014 and the hotel would not likely be

completed until July 2015 as was estimated by DIA leadership at that time. However,

the transit center components were completed in January 2014 and most recently,

the hotel component and plaza were projected to be completed in August 2015.

Material changes to the size and scope of the hotel are not anticipated. The hotel is

expected to be financially self-sustaining when it opens.6

Hotel and Transit Center Project Funding Sources

HTC is being funded through the issuance of general aviation revenue bonds (GARBs),

which are commonly issued for airport infrastructure projects. GARBs can be backed

by various types of revenue, such as airline rates and charges, parking revenues,

terminal concessionaire revenues or other lease revenues, and, in some cases, grant

revenues. According to a DIA finance official, HTC bonds will not have any specific

source of revenue, which means that revenue to back the GARBs can come from

different sources, including non-HTC revenues. Although DIA already holds a

significant amount of bond-related debt, DIA leadership anticipates that when HTC is

complete, the hotel will provide an important new revenue stream generated by

room reservations, conferences, and retail space. In 2012 and 2013, DIA sold nearly

$1.6 billion in bonds to help fund $1.4 billion of DIAs six-year capital improvement plan,

which includes HTC.

Chronology of Hotel and Transit Center Governance andManagement

DIA has changed the HTC program management structure numerous times. Such

changes include those related to architectural services and design, contracted

project management roles and responsibilities, and internal DIA leadership and

oversight practices.

Parsons Transportation Group (Parsons) was selected by DIA in 2009 to act as the

program manager for HTC.7As the program manager, Parsons was granted complete

4State of DIA 2014, Going from Great to Greater, April 29, 2014,http://business.flydenver.com/info/news/index.asp

5Substantially completeis the specific contractual term used in the IGA. Substantially complete does not indicate the

project is entirely complete, but that the space can be utilized by RTD. Achieving substantial completion by January 1, 2014,

will allow RTD to begin installing elements of the PTC that need to be in place prior to commuter service beginning in

December 2014.6Market demand analysis performed for DIA by PKF Consulting, October 12, 2011,

http://business.flydenver.com/stats/financials/documents/hotelreport2012.pdf.
http://business.flydenver.com/info/news/index.asphttp://business.flydenver.com/info/news/index.asphttp://business.flydenver.com/info/news/index.asphttp://business.flydenver.com/stats/financials/documents/hotelreport2012.pdfhttp://business.flydenver.com/stats/financials/documents/hotelreport2012.pdfhttp://business.flydenver.com/stats/financials/documents/hotelreport2012.pdfhttp://business.flydenver.com/info/news/index.asp


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oversight of the project including planning management, project management,

design management, design services, and construction management. Parsons was

also responsible for hiring and overseeing subcontractors used in the conception,

design, and construction phases. Under its contract with DIA, Parsons had a fiduciary

responsibility to deliver an effective project design and to oversee the design process

to ensure that it was efficient and that costs were managed appropriately. DIAPlanning & Development was directly responsible for hiring and overseeing the Kiewit

prime contract for enabling construction excavation. As shown in Figure 1, DIA

retained executive oversight for strategy development and control over Parsons.

Additionally, the original lead architectural design for HTC was the product of

renowned Spanish architect Santiago Calatrava.

Figure 1: Hotel and Transit Center Project Management Structure, April 2010

Source:Graphic developed by the Auditors Office based on source information from the HTCProgram Managers.

In November 2010, DIA increased its oversight of HTC by placing a Director of Program

Oversight and Integration, who works for DIA, in the HTC management structure.

Following, in April 2011, the South Terminal Expansion Partnership (STEP), which

included Hunt Construction Group and Saunders Construction, Inc., was selected as

the prime contractor for the construction of the Public Transit Center portion of the

HTC project. The resulting organizational structure is reflected in Figure 2.

7When Parsons was selected in 2009, the HTC project was referred to as the South Terminal Redevelopment Program or

STRP.


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Figure 2: Hotel and Transit Center Project Management Structure, November 2010

April 2011

Source:Graphic developed by the Auditors Office based on source information from the HTC

Program Managers.

In the fall of 2011, a fundamental change occurred to the organizational structure

shown in Figure 3. In August the lead manager from Parsons left the project and in

September Santiago Calatravas firm withdrew from the project, citing irreconcilable

differences with DIA leadership regarding funding and schedule. According to two

individuals with access to internal DIA discussions for which documentary records were

not available, Parsons had been spending money on HTC at a rate that was

unsustainable. Parsons contract with DIA called for it to receive a maximum of $160

million, including monies paid for all Parsons subcont ractors. In September 2011,Parsons had already spent $50 million, including money paid to its subcontractors.

Approximately $13 million of that $50 million had been paid to Calatrava. Multiple

interviews suggested that Parsons HTC burn rateor the rate at which it spent

moneywas faster than was appropriate for the project, prompting Parsons

management to remove several staff members from the DIA project.

These departures created an environment in which DIA officials decided to re-

evaluate the effectiveness of the projects organizational structure. In collaboration

with the City Engineer and a third-party consultant, DIA conducted an internal

assessment and identified changes to be made. First, DIA leadership decided to

further increase its direct oversight of HTC by removing Parsons from its role as project

manager, replacing them with a new program manager who is a City employee that

reports to the DIA Chief Executive Officer. Parsons was retained to help provide staff

resources and technical expertise, as shown in Figure 3. In addition, an executive

committee within the City was developed to provide a broader range of experience

to and oversight of the project.

In November 2011, officials from DIA and the City Attorneys Office announced a final

agreement with Calatrava, which allowed the City to use a significant portion of the


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Calatrava concept going forward. In exchange for the use of the concept, the City

agreed not to use some Calatrava signature elementslittle touches that made the

concept uniquely a Calatrava design. In addition, the City agreed to pay Calatravas

firm approximately $850,000, including previously submitted invoices and a $250,000

licensing-related payment. Gensler, the architectural firm that formerly served as the

public transit center architect reporting to Parsons, was given the role of overall designcoordinator, overseeing all aspects of the projects design process and directly

reporting to DIA leadership.

As we described in our 2012 audit of the project, this model had two distinct

advantages.8First, by no longer contracting out for the project management role, DIA

leadership had the opportunity to save money. Parsons remained on the project, but

because they would no longer be responsible for procuring or overseeing

subcontractors, its contract was amended to reflect these changes, and the originally

contracted amount of $160 million was reduced to $100 million.9 Second, DIA

leadership could enhance program reporting. According to the HTC Program

Manager, one of his first goals at the time was to improve program reporting,

including developing a report that is easy to understand, and to meet more regularly

with City Council to provide updates on HTC progress.

Following this re-structuring, in March 2012, City Council approved a contract that

merged M. A. Mortenson Co., which was building the hotel, and STEP (Hunt and

Saunders), which was working on the transit center, into a single unit, collectively

referred to as MHS (Mortenson, Hunt, and Saunders). The resulting integrated tri-

venture is serving as the Construction Manager/General Contractor (CM/GC) for the

hotel and public transit center.10 The contract covers construction of the hotel; the

public transit center that includes the RTD transit station and platform, conference

center, security screening area, baggage-handling tunnels, and concourse train

extension; and the interface with the terminal.11According to HTC Program Managers,Mortenson and Hunt and Saunders were merged into the MHS tri-venture to ensure

that HTC does not deviate from its original cost estimate and timeline.


Auditors Office, January 2012,www.denvergov.org/auditor/DenverAuditor/AuditServices/AuditReports.9Parsons scope of services includes broad program management support services for the planning, design and construction

support of the project. This may include services for which support is requested such as program control services, contracts

management services, and construction support.10

SeeAppendix A for more information on different types of contract delivery methods for airport projects, including

Construction Manager/General Contractor.11

Ann Schrader, 3 DIA redevelopment contracts merged into 1, Denver Post, March 7, 2012, accessed September 22,

2014,http://www.denverpost.com/ci_20123511/3-dia-redevelopment-contracts-merged-into-1.
http://www.denvergov.org/auditor/DenverAuditor/AuditServices/AuditReportshttp://www.denvergov.org/auditor/DenverAuditor/AuditServices/AuditReportshttp://www.denvergov.org/auditor/DenverAuditor/AuditServices/AuditReportshttp://www.denverpost.com/ci_20123511/3-dia-redevelopment-contracts-merged-into-1http://www.denverpost.com/ci_20123511/3-dia-redevelopment-contracts-merged-into-1http://www.denverpost.com/ci_20123511/3-dia-redevelopment-contracts-merged-into-1http://www.denverpost.com/ci_20123511/3-dia-redevelopment-contracts-merged-into-1http://www.denvergov.org/auditor/DenverAuditor/AuditServices/AuditReports


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Figure 3: Hotel and Transit Center Project Management Structure, November 2011

March 2012

Source:Graphic developed by the Auditors Office based on source information from the HTC

Program Managers.

Note:While Parsons supports the HTC Program Managers as part of the Project Management

Team in project management responsibilities, it is contractually equivalent to the other prime

contractors.

Since the implementation of these changes, management of HTC has changed

further. As shown in Figure 4, DIAs internal project management role has grown fromone to three program managers, including a Deputy Program Manager of

Administrative Oversight and a Deputy Program Manager of Technical Oversight. The

Deputy Program Manager of Administrative Oversight oversees Parsons and Kiewit

while the Deputy Program Manager of Technical Oversight is responsible for issues

pertaining to MHS and Gensler. These three individuals are collectively referred to as

HTC Program Managers throughout the report.


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Figure 4: Hotel and Transit Center Project Management Structure, as of September

2014

Source: Graphic developed by the Auditors Office based on source information from HTC

Program Managers.

Note: The individual who currently serves as Deputy Program Manager of Administrative

Oversight was formerly titled Director of Program Oversight and Integration. The Director of

Program Oversight and Integration is shown in Figures 2 and 3.

In addition to changes in project management, there have been several changes toDIA senior leadership over the lifespan of the project. Most recently, for example, the

Chief Financial Officer, who had worked at DIA in executive-level roles for more than

six years, announced his resignation and left the airport on September 12, 2014.

However, according to a DIA executive, the leadership team has some oversight of

HTC but very little control over it. Specifically, the day-to-day operations and

decisions, including HTC budget decisions, are made by the HTC Program Managers.

The HTC Program Managers are DIA employees who have been tasked with

managing the project. The Project Management Team includes the HTC Program

Managers and various Parsons personnel.

Change Management ControlsIn response to the HTC project budget increasing from $500 million to $544 million, in

2013 DIA leadership implemented various controls over change management,


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including creating a change management committee and developing a change

management process.12

Development of a Change Management Committee In March 2013, DIA leadership

updated City Council on the HTC project, which included an explanation of reasons

the project budget increased by $44 million and that a Change Management

Committee (CMC) was being developed.13 The CMC is charged with overseeing all

significant change orders, including those that will affect the projects scope,

schedule, and contingency. The former DIA CFO indicated that it would be important

not to exceed the increased project budget of $544 million, and that the CMC was a

vital tool for success in that regard. In addition, the CMC was created to promote

oversight, understanding, and transparency of the Citys change management

process. Table 1 lists the composition of the CMC members, who are independent of

the Project Management Team (PMT).

Table 1.Change Management Committee Members

Members

DIA CFO, Chair

DIA Chief of Staff

DIA ContractorParsons Brinkerhoff

Department of Finance Debt Administrator

Department of Public Works Chief Operating Officer

Department of Finance Consultant

Source: March 27, 2013, Denver City Council, Business, Workforce and

Sustainability Committee meeting PowerPoint developed by DIA.

Note:DIAs CFO resigned effective September 12, 2014. Until a replacement CFO is hired, theCFOs duties are being reassigned to DIAs current Director of Financial Planning and Analysis

and Director of Business Management Services. The HTC Program Manager stated on

September 16, 2014, that the interim plan is to have both Directors sit on the Change

Management Committee and that a determination would be made at a later date who would

chair the committee.

Consultant Hired to Assist with Developing a Change Management Process DIA

leadership further discussed with City Council in March 2013 hiring an outside

consultant to assist with developing the CMC and a change management review

process. In May 2013, the City executive administration entered into a consulting

contract with i3 Integration LLC (i3) for $450,000 to provide program financial

assurance consulting services for HTC and related infrastructure and capital projects.

New Change Management Process Implemented The i3 consultant helped design a

change management process to assist HTC Program Managers with containing costs

12Change management is a process implemented to effectively manage and control changes to a contract that can

ultimately increase a projects costs.13

The update occurred during the March 27, 2013, meeting of the Business, Workforce and Sustainability Committee of the

Denver City Council. The project update was delivered by DIAs Chief Executive Officer, former Chief Financial Officer (CFO),

and HTC Program Manager.


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and keeping within the project budget. The new HTC change management process

starts when a proposed change order (PCO) is submitted by a contractor through

DIAs electronic record-keeping system, whether it is a City-initiated change or

contractor-initiated change. The PCO is evaluated by the PMT for merit and funding,

including reviewing cost and price elements, technical elements, contract scope and

performance requirements, and budget and schedule impact. The PMT engages infact-finding, such as questioning cost elements, obtaining actual documentation to

substantiate pricing, and obtaining bids from subcontractors. During this fact-finding

process, the PCO is negotiated with the contractor. Once negotiations cease, the

PCO may be resubmitted by the contractor, if necessary. The signed PCO is then

routed through DIA for approval and the contractor begins the work. The PCO is then

presented to the CMC, which meets on a monthly basis, for final approval resulting in

an official change order issued through DIAs electronic record-keeping system.14

The i3 consultant works with the PMT and project contractors to identify and assess

proposed change orders and other potential risks and their financial impact. The i3

consultant compiles these observations monthly for presentation by himself and the

HTC Program Manager to the CMC. The monthly CMC meetings began in August 2013

and include three main agenda items:

An overview of the prior months meeting, which is presented by the i3

consultant

A project status update, including schedule and percent complete, which is

presented by the HTC Program Manager

Any MHS contract changes to be approved by the CMC, which are

presented by the i3 consultant and the HTC Program Manager

As of July 2014, the CMC had approved MHS contract changes totaling $4.1 million, of

which $1.4 million was hotel related, $2.6 million was public transit center related, and

$114,000 was RTD related. All of the approved changes were within the existing

owners contingency; therefore, the contract Guaranteed Maximum Price (GMP) of

$365 million has not yet been exceeded.15The majority of the changes were due to

design evolution (44 percent), regulatory issues (15 percent), design errors and

omissions (14 percent), and owner-requested items (10 percent).

In addition, the i3 consultant projects the magnitude of the potential increases in the

MHS and Kiewit contracts, which include work to be performed on the hotel, public

transit center, other related capital improvement projects, and the RTD projects. The

potential increases are determined by identifying and estimating four types of

changes and risks related to the project as follows:

1. Change orders that have already been approved

14SeeAppendix B for a detailed flowchart of the change management process.

15A contingency is an amount included in a projects budget to address risks within the projects scope such as unknown

conditions, design growth or changes, and pricing errors or escalation. The contingency fund balance should be reviewed

along with project risks continuously throughout the project. KPMG Global Energy Institute, KPMG Major Projects Advisory

Leadership Series: Budgeting, Estimating, and Contingency Management for Construction Projects, 2012. The owners

contingency can fluctuate throughout the project as savings are realized in other aspects of the project.


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2. Potential change orders the contractor has identified and presented to the

PMT and that are being reviewed and negotiated

3. Potential change orders identified by the contractor that have not yet been

presented to the PMT for review and negotiation

4. Issues independently identified by the PMT and i3 consultant

These four categories of changes and risks are combined together to determine the

total potential changes to the contract amounts.

Further, the i3 consultant projects the magnitude of the potential contractors

increases by scope element budget, including the HTC project, other related capital

improvement projects, and RTD projects.

DIA HTC Construction Records Retention and PaymentManagement Systems

DIA utilizes two systems to manage the records and payments for the HTC project.

Aconex Aconex is a cloud-based construction project management

software system that can be utilized by many users, from project managers to

subcontractors, throughout the duration of a project. When documents are

properly coded into the system, they can then be retrieved with relative ease.

This allows a multitude of documents to be retrieved and sorted, then sent to a

desired user. There are over 300,000 unique HTC documents in Aconex and

more than 3,000 program users over the life of the project.

TexturaTextura is another web-based system that was implemented by DIA in

2013 to manage invoices and payments for construction contracts. The system

provides standardization to the construction payment process and enhances

the visibility of a project for all participants. With regard to the HTC project,

Textura is currently being used to manage invoices and payments related to

the MHS contract.


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SCOPE

The audit assessed the efficiency and effectiveness of the governance of the Denver

International Airport (DIA) Hotel and Transit Center (HTC) project, which included an

evaluation of the budget, Capital Improvement Plans (CIPs) and maintenance plans.We attempted to determine whether costs charged to HTC were in accordance with

the terms and conditions of applicable contracts, and to ensure labor and materials

are properly billed and received.

OBJECTIVE

The objective of the audit was to determine whether DIA has an adequate project

management structure in place to:

Identify and mitigate the risks associated with additional budget increases

Ensure that costs related to HTC are properly accounted for

Ensure that DIA is strategically prepared for future capital planning and

maintenance of the entire airport

METHODOLOGY

We utilized several methodologies to achieve the audit objective. These evidencegathering techniques included, but were not limited to:

Reviewing all applicable City rules and regulations and DIA policies and

procedures

Reviewing DIA bond documents

Interviewing DIA leadership and personnel

Interviewing DIA HTC Project Management personnel

Reviewing DIA Capital Improvement Plans

Reviewing DIA budget documents and financial reports

Reviewing relevant internal and external audits

Evaluating the invoice review and payment process

Interviewing former DIA employees with knowledge about CIPs and HTC

Reviewing Federal Aviation Administration annual reports

Reviewing HTC monthly reports and dashboards


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The Auditors Office contracted with a third-party construction auditing firm, R. L.

Townsend & Associates, Inc., to perform a detailed analysis of various contracts

and associated subcontracts, invoices, and change orders. Additionally, the

Auditors Office Construction Monitor was tasked with reviewing contracts,

invoices, and change orders.


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FINDING

DIA Leadership Has Taken Action to Improve Project Managementof the Hotel and Transit Center but These Efforts Have Not BeenFully Effective in Mitigating Risks

Denver International Airport (DIA) is undergoing significant changes to improve

services at DIA and to create convenient intermodal transportation options. The Hotel

and Transit Center (HTC) project consists of three primary elements: a public transit

center, which will serve trains connecting DIA to downtown Denver; an on-site hotel

and conference center; and an open-air plaza connecting the transit center and

hotel to the existing Jeppesen Terminal. Our audit of the project assessed the HTC

project management structure, specifically with regard to the budget and future

capital planning and maintenance. We found that, despite changes made to the

governance and management of the project, the HTC budget has continued to rise,and we cannot provide assurance that the budget will not exceed current

projections.

Since its inception, the projected cost to complete HTC has changed. In 2011, HTCs

original budget was set at $500 million but was increased in 2013 to $544 million. HTC

project management has stated that the budget may increase between 5 and 10

percent, which would bring the cost of the project up to as much as $599 million.

Although DIA leadership and HTC project management instituted a change

management process to manage and control project changes that could further

increase costs, we found that the process is not sufficient to keep costs from rising. We

determined that budget increases may have been the result of the HTC project not

having an independent construction consultant on staff from the beginning of the

project as well as costly contract terms that were negotiated to incentivize on-time

completion of the project.

We sought to determine whether the $599 million projected maximum budget for HTC

was accurate. However, we could not verify this estimate due to lack of

documentation. Further, we found the HTC invoice review process to be insufficient to

assess whether all project costs have been reasonable and in compliance with

contract terms. In addition to the HTC-specific budget, we determined that additional

costs will add $130 million to the overall cost of the redevelopment program.

Specifically, this includes $75 million for other related capital projects, $53 million for

transportation-related infrastructure, and an additional $2 million that have not beencaptured by any established budget. We did find, however, that the $75 million in

other related capital projects need to be completed, regardless of HTC.

In assessing DIAs capital investments and maintenance plans, which are necessary to

rehabilitate, upgrade, and maintain DIAs existing aging infrastructure, we found that

DIA leaderships focus on HTC may have reduced focus on the funding of non-HTC-

related projects and maintenance of the existing facility. Although capital investments


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in the airfield have increased in recent years, budget reductions made to specific

projects from 2012 to 2013 raise some concerns. Further, capital investments in the

terminal complex have decreased, and DIA does not have operations maintenance

plans in place, despite the fact that DIA is an aging facility. DIA will have a difficult

time managing the HTC facility in the absence of well-structured maintenance plans

for the current facility.

HTCs Budget Has Increased, and Will Increase Again

Since its inception, the projected cost to complete HTC has changed. Originally

conceived as a two-phase $900 million project, in 2011 HTCs original budget was set

at $500 million with on ly one phase funded. In 2013, HTCs budget was revised to $544

million. It is currently projected that it will cost DIA as much as $599 million to

complete.16The key reasons why costs have increased, in addition to the increase in

cost of labor and materials, is the fact that effective project management controls,

including a change management process and the use of an independent

construction consultant, were not implemented at the initiation of the project. Further,

favorable terms were provided to contractors to complete the project on time.

HTCs Budget Increased from $500 Million to $544 Million

In July 2010, DIA leadership envisioned HTC to be a two-phase project estimated to

cost $900 million. Phase I was to include the construction of a hotel, terminal plaza,

and transit center, as well as a signature bridge to carry the new commuter train into

the terminal. Phase II was to include the construction of a parking structure and

renovation of the Jeppesen Terminal Great Hall.17

To ensure the financial feasibility of HTC, and to chart a path forward for the airport, in

late 2010 and early 2011, an analysis of airport finances was conducted to develop a

ten-year strategic plan. Based on the analysis and the adopted strategic plan, DIA

leadership reduced the size and scope of the HTC project, eliminating Phase II and

the signature bridge that was to be included in Phase I. DIA leadership at this time also

established a $500 million budget for HTC and identified other capital projects that

would be included within the scope of the project. The key components of HTC were

not fully designed at this time, thus an accurate price estimate was not available.

The other capital projects, commonly referred to as other related projects, were

included in the scope of HTC for two primary reasons: one, DIA leadership expected

them to be completed by HTC contractors because it was more cost-effective for DIA

to pursue such projects at the same time as the primary HTC projects, and two, these

projects were needed due to the natural growth of DIA operations, the HTC-relatedgrowth of DIA operations, and the general aging of infrastructure. These projects

include the expansion of the airport baggage system, expansion of the airport

automated guided train system, realignment of certain existing on-airport roadways,

16Business Workforce and Sustainability Committee Meeting, May 14, 2014. City and County of Denver SIRE Public Access

System, accessed on September 19, 2014. www.denvergov.org/sirepub/mtgviewr.aspx?meetid=1952&doctype=MINUTES.17

Denver International Airport Unveils Conceptual Design of the South Terminal Redevelopment Program. Denver

International Airport, accessed on September 19, 2014.http://business.flydenver.com/pr/DIAPR_1007290.pdf.
http://business.flydenver.com/pr/DIAPR_1007290.pdfhttp://business.flydenver.com/pr/DIAPR_1007290.pdfhttp://business.flydenver.com/pr/DIAPR_1007290.pdfhttp://business.flydenver.com/pr/DIAPR_1007290.pdf


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and relocation of certain utilities. Table 2 provides a history of the projects budget

and projected cost to complete by year.

Table 2.History of HTC Project Budget

YearHTC Budget(in millions)

Other RelatedProjects Budget

(in millions)Total Budget(in millions)

Projected Cost AtCompletion(in millions)

2010 N/A N/A N/A $900

2011 $500 N/A $500 $500

2012 $500 $75 $575 $600

2013 $544 $128 $672 $672

2014 $544 $128 $672 $737

Source:Developed by the Auditors Office based on source information from the HTC Project

Management Team. Projected costs at completion are higher because the budget has not yet

been adjusted.

In January 2012, our office released an audit of HTC, which found that the projects

components were not forecasted to be completed on-time or on-budget.

Specifically, based on projections developed in late 2011 by Parsons, the then project

manager, the project was estimated to be completed six to eight months behind

schedule and approximately $9 million over budget.18

In October 2012, DIA issued $870 million in bonds, the proceeds from which were to be

used in part to finance the cost of HTC.19 In the 2012 Official Bond Statement, DIA

leadership noted that such factors as labor and materials may cause the actual cost

of completing the project to exceed the established budget of $500 million. DIA

leadership also communicated to City Council in October 2012 that the project was

currently estimated to be completed 5 percent over budget. 20Additionally, in 2012,

DIA leadership again redefined the scope of HTC. While the project still included the

key elements of the hotel, public plaza, and transit center, the other related projects

that had been included in the scope in 2011 were removed from the scope and

classified as their own separate project. A budget of $75 million was set for these

projects, which were to still to be completed by HTC contractors. HTC Program

Managers explained that Parsons should not have included these projects in the

original budget. However, DIA leadership did not question Parsons inclusion of these

projects until budget duress occurred. Therefore, HTC Program Managers set a

separate budget for these other capital projects to stay within the $500 million budget

that was set for HTC.


Auditors Office, January 2012,www.denvergov.org/auditor/DenverAuditor/AuditServices/AuditReports.19

Revenue Bond Series 2012 A-C. Denver International Airport, accessed on September 19, 2014.

http://business.flydenver.com/stats/financials/reports/2012_seriesA-B-C.pdf.20

Business Workforce and Sustainability Committee Meeting, October 31, 2012. City and County of Denver SIRE Public

Access System, accessed on September 19, 2014,

www.denvergov.org/sirepub/mtgviewer.aspx?meetid=1274&doctype=MINUTES.
http://www.denvergov.org/auditor/DenverAuditor/AuditServices/AuditReportshttp://www.denvergov.org/auditor/DenverAuditor/AuditServices/AuditReportshttp://www.denvergov.org/auditor/DenverAuditor/AuditServices/AuditReportshttp://business.flydenver.com/stats/financials/reports/2012_seriesA-B-C.pdfhttp://business.flydenver.com/stats/financials/reports/2012_seriesA-B-C.pdfhttp://www.denvergov.org/sirepub/mtgviewer.aspx?meetid=1274&doctype=MINUTEShttp://www.denvergov.org/sirepub/mtgviewer.aspx?meetid=1274&doctype=MINUTEShttp://www.denvergov.org/sirepub/mtgviewer.aspx?meetid=1274&doctype=MINUTEShttp://business.flydenver.com/stats/financials/reports/2012_seriesA-B-C.pdfhttp://www.denvergov.org/auditor/DenverAuditor/AuditServices/AuditReports


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In the 2012 Official Bond Statement, DIA leadership communicated to investors that

they budgeted $180 million to complete the hotel, another $320 million to complete

all other aspects of HTC, including the plaza and transit center, and $75 million to

complete other related capital projects. These budget elements are presented in

Table 3.

Table 3. October 2012 Budget for HTC and Other Related Projects

Scope ElementBudget

(in millions)

Hotel $180

Non-Hotel $320

HTC Project Total $500

Other Capital Projects $75

HTC and Other RelatedProjects Total

$575

Source:2012 Official Bond Statement.

In July 2013, DIA issued $726 million in bonds, the proceeds from which again were to

be used in part to finance the cost of HTC. 21 DIA leadership had also recently

increased HTCs budget from $500 million to $544 million, representing a 9-percent

increase in the budget. One reason DIA leadership increased the budget by $44

million was because the designs of key components of the project were finally

completed. This enabled HTC Program Managers to obtain a more accurate estimate

of what the final cost of the project would be. No changes to the project scope were

made at this time. However, the scope of the other related projects did change to

include the costs related to two RTD projects. With the addition of these two projects,

DIA leadership increased the budget for other related projects from $75 million to $128

million. Table 4 provides a breakdown of the budget by project.

Table 4.July 2013 Budget for HTC and Other Related Projects

Scope ElementBudget

(in millions)

Hotel $177

Public Transit Center $298

Enabling $63

Owners Costs $6

HTC Project Total $544

Other Capital Projects $75RTD Costs $53

HTC and Other Related Projects Total $672

Source: HTC Project Management Teams July 2013 Monthly

Dashboard.

21Revenue Bonds Series 2013 A-B. Denver International Airport, accessed on September 19, 2014.

http://business.flydenver.com/stats/financials/reports/bonds_2013A-B.pdf.
http://business.flydenver.com/stats/financials/reports/bonds_2013A-B.pdfhttp://business.flydenver.com/stats/financials/reports/bonds_2013A-B.pdfhttp://business.flydenver.com/stats/financials/reports/bonds_2013A-B.pdf


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Since the inception of HTC, DIA leadership and HTC Program Managers have

communicated changes to the scope and budget of the project to City Council,

stakeholders, and the public through regular presentations and bond offering official

statements. City Council members did not voice any concerns or ask any questions

about the budget overruns. The changes to the project have also been

communicated by the Denver Auditors Office. As noted in our January 2012 audit ofHTC, we found that the project was likely to exceed the $500 million budget set in

2011.22

Regular communication by DIA leadership and HTC Program Managers with City

Council and key stakeholders, including airline partners, about the changes to the

scope and budget of HTC is a best practice. According to the Project Management

Institute, regular communication with stakeholders is a key process to keep

stakeholders engaged and project teams motivated, which help ensure that projects

are delivered on-time and within budget.23

Potential Issues May Cause the Project to Exceed its $544 Million Budget

and May Eventually Cost As Much As $599 Million or More

According to the HTC Program Manager and a consultant for the City, i3 Integration

LLC (i3), it is definite that the HTC project will exceed the current $544 million budget,

but unlikely to increase more than 10 percent. As such, the project is now estimated to

cost between $571 and $599 million. DIA will need to rely on cash on hand or

additional bond issuances to cover the costs of the overruns. Significant capital

improvement cost overruns leading to increased debt or spending cash on hand can

negatively affect DIAs bond ratings.24General reasons provided by the consultant for

the projected increase include an accelerated schedule to accommodate RTD, rising

labor and materials costs, and unanticipated existing conditions, such as the 2013

flood. However, while we believe that these reasons have validity, we also determinedthat the newly implemented change management process is not sufficient, the

project lacked an independent construction consultant from the beginning, and

generous contract terms have been negotiated for on-time completion. These

combined factors either contribute to or fail to mitigate risks related to rising project

costs.

Change Management Process Is Not Sufficient to Keep Costs from Rising

In response to the 2013 increase in the HTC project budget from $500 million to $544

million, a Change Management Committee (CMC) and change management

review process were developed to manage and control project changes that could

further increase costs. As stated in the Introduction and Background section of thisreport, the City hired i3 to assist the CMC and PMT with establishing the change

management review process. Members of i3 work with the PMT and contractors to

22See The Department of Aviations South Terminal Redevelopment Programatthe Denver Auditor's website.

23Communication: The Message Is Clear. Project Management Institute, accessed on September 19, 2014.

www.pmi.org/~/media/PDF/Knowledge%20Center/Communications_whitepaper_v2.ashx.24

Fitch Affirms Denver, COs Sr. Airport Revs at A+; Subs at A; Outlook Stable, September 26, 2014,

http://finance.yahoo.com/news/fitch-affirms-denver-cos-sr-194600862.html.
http://www.denvergov.org/auditor/DenverAuditor/tabid/442986/Default.aspxhttp://www.denvergov.org/auditor/DenverAuditor/tabid/442986/Default.aspxhttp://www.denvergov.org/auditor/DenverAuditor/tabid/442986/Default.aspxhttp://www.pmi.org/~/media/PDF/Knowledge%20Center/Communications_whitepaper_v2.ashxhttp://www.pmi.org/~/media/PDF/Knowledge%20Center/Communications_whitepaper_v2.ashxhttp://finance.yahoo.com/news/fitch-affirms-denver-cos-sr-194600862.htmlhttp://finance.yahoo.com/news/fitch-affirms-denver-cos-sr-194600862.htmlhttp://finance.yahoo.com/news/fitch-affirms-denver-cos-sr-194600862.htmlhttp://www.pmi.org/~/media/PDF/Knowledge%20Center/Communications_whitepaper_v2.ashxhttp://www.denvergov.org/auditor/DenverAuditor/tabid/442986/Default.aspx


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identify and analyze potential risks and their financial impact to the project, and

determine strategies to mitigate or minimize the risks. The PMT has weekly contractor

meetings to discuss potential changes and risks associated with the project. The

outcome of the PMT and contractor meetings, any relevant supporting documents,

and risks identified by the PMT, exclusive of contractors, are reported to i3, which then

uses the observations to assess remaining work and risks. The assessment is presentedin various forms, including monthly reports by contract and scope element as well as a

monthly presentation to the CMC. These status updates promote oversight,

understanding, and transparency within the City.

In addition, the CMC was developed to oversee all significant change orders, an

important tool for ensuring that the total HTC project cost remains within the $544

million budget.25 However, members review and approve only significant changes

proposed by MHS; other contractors proposed changes are not afforded this same

scrutiny. According to the i3 consultant, the change order review process was

implemented in this limited capacity because the MHS contract was in its infancy at

the time the CMC was developed, whereas the other contracts were further along. A

management decision was made at that time to focus the CMCs resources on the

contract deemed the highest riskthe MHS contract.

In addition to reviewing only significant change orders, a proposed change order

(PCO) is sometimes submitted to the CMC for final approval after a change directive

has already been issued by the PMT to the contractor to proceed with the changes

immediately (see Appendix B for an

overview of the process). An example of

this is when scope modifications are

necessary to work imminently being

performed. For instance, between

January 2014 and April 2014, threechange directives were issued to MHS

related to work being performed at that

time. However, these changes, totaling

approximately $680,000, were not

brought before the CMC until May 28,

2014. According to HTC Program

Managers, the change management review process was implemented in this way to

facilitate the timeliness of the project, as the CMC only meets on a monthly basis. The

CMC is a major control designed to help ensure that the project remains within the

$544 million budget but it is less effective as work on the changes may already have

begun or been completed before the CMC has the opportunity to review andapprove the proposed change. Accordingly, the CMC should develop a process by

which change orders can be approved timely to ensure that all significant

contractors changes are approved by the CMC prior to work commencing.

25Significant change orders are defined by the PMT and the i3 consultant. For example, all MHS proposed change orders of

$50,000 or more.

The CMC is a major control

designed to help ensure the

project remains within the $544

million budget but it is less

effective as work on the changes

may already have begun or been

completed.


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In pursuing a successful construction project, DIA leadership assumes the initial

responsibility for assembling a team of firms or individuals that can work together to

meet the needs of the project. Generally speaking, the earlier in the process the team

is created, the greater the benefit received.26For future airport construction projects,

DIA executive leadership should establish a management structure that includes

change management early in the process in order to meet DIAs needs and providethe greatest opportunity for budgetary success.

The HTC Project Did Not Have an Independent Construction Consultant During Initial

Contract Development

During the initial phase of the project, DIA did not retain an independent construction

consultant to assist in developing the contract terms. When conducting large

construction projects such as HTC, it is a sound practice to retain an independent

construction audit consultant to provide guidance on effective construction cost

control.27DIA leadership does not have this type of consultant for the HTC project and,

therefore, there was no one acting in this capacity to provide advice during the initial

phase of the project when contract terms were developed and negotiated.Construction audit consultants review the construction activities of an organization for

efficiencies and can assist in avoiding excessive charges and recovering costs. Their

work can include providing pre-contract advisory services, on-going project cost

control and related construction cost verification services, and comprehensive

construction contract close-out cost control reviews.

Even if a project is on budget and on schedule or completed under budget, that

does not necessarily mean that all costs were appropriate; a construction audit

consultant can provide some assurance in this area. In the construction industry, it is a

good business practice to have a construction audit consultant involved throughout

the projects life cycle when the project contains the following risks:

Is large in size

Classifies as high profile or high risk

Is being completed on a fast-track schedule

Includes complex contract terms and types of contracts

With large construction projects being as costly as they are, it is imperative to have

sound processes and procedures in place as well as sufficient independence in the

project management function to prevent loss of funds, fraud, and negative impact to

operations. Cost avoidance when an independent construction audit consultant is

retained for a project can be up to 5 percent of total project cost.Contracts for the HTC project and related invoices and change orders were reviewed

by the Auditors Offices independent construction auditing consultant and

construction monitor for compliance and reasonableness. The analysis found that the

26CM/GC Guidelines for Public Owners, Associated General Contractors of and National Association of State Facilities

Administrators, second edition, 2007.27

We consulted with an independent construction audit consultant and the Construction Monitor from the Auditors Office

about this practice.


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MHS contract is a CM/GC construction contract agreement, which allows a

retroactive review of costs to ensure pricing accuracy.28If inaccuracies are identified,

DIA can recoup costs. Therefore, the DIA Chief Executive Officer should make specific

plans to engage a qualified resource to conduct a construction close-out review of

the project records maintained by the City, MHS, and as necessary any applicable

subcontractors, to assist DIA leadership in the determination that there have been nomaterial third-party overbillings to the airport. Additionally the DIA Chief Executive

Officer should ensure that the recommended construction close-out review begin no

later than three months before substantial completion of the project and continue

until the final change order and invoice is submitted by MHS.

Contract Terms Were Negotiated To Incent On-Time Completion at a Premium

When the MHS tri-venture contract was amended in March 2013, the contract terms

were negotiated to incent on-time completion of the project. The contract included

several elements that incentivized on-time completion: a generous CM/GC fee, a

high labor rate, and the establishment of base contract amounts for certain

subcontractors through change orders rather than a request for bid. We found thatthese terms are favorable to the contractor and may have been less favorable to DIA

with regard to overall cost.

CM/GC Fee Percentage and Labor Rate The MHS contract includes a

CM/GC fee, which will be paid to MHS as a percentage of the total project

cost or Cost of Work. This fee, representing MHSs profit, was established at 4.25

percent, which is regarded as being at the high end of what is typical in a

large capital project. The HTC Program Manager indicates that CM/GC fees

typically range from 2 percent to 5.25 percent.

The analysis performed by our independent

construction auditing consultant alsoidentified concerns related to billable costs

for MHS labor and the impact that has on

the profit paid to MHS. In the MHS contract,

DIA agreed to a supervisory labor rate of

140 percent for both preconstruction and

construction activities. Typically the labor

rate is lowered when moving from the

preconstruction phase into the construction

phase, since the owner is able to provide

field office space and equipment for the contractor. However, in the MHS

agreement, the rate remained the same for both phases. When calculatingthe labor rate, the hourly wage of an MHS contractor is multiplied by the labor

rate to derive the amount HTC will be billed. Currently, the total estimated

charges by MHS for both preconstruction-phase and construction-phase labor

could total approximately $26 million.

28CM/GC projects are characterized by a contract between an owner and a CM who will be at risk for the final cost and time

of construction. SeeAppendix A for additional details.

Contract terms were

negotiated favorably for

the tri-venture to

incentivize on-time

project completion, at a

cost to the HTC budget.


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leadership and personnel in reviewing and negotiating contract terms on any future

unique and large scale construction projects to ensure that DIA and the City obtain

fair or favorable contract terms.

DIA Lacks a Sufficient Control Environment To Forecast and Assure

Project Costs Will Not Exceed Established BudgetsAuditors could not conclude whether the potential cost to complete HTC will or will

not exceed the estimated maximum of 10 percent noted by HTC Program Managers

or whether any additional costs are reasonable. This was due to inefficiencies found in

the projects control environment, including document retention, invoice review, and

project reporting. With limited controls, we question the quality of due diligence DIA

can provide in attempting to project future costs with reasonable assurance. We also

determined that other related project elements, including capital projects and RTD

infrastructure, are adding to the total cost to complete the redevelopment program.

Auditors Could Not Verify that HTC Will Not Exceed $599 Million

The audit team sought to determine whether the $599 million projected maximum

budget for HTC was accurate. However, we could not verify this estimate due to lack

of documentation, both based on i3 reporting and HTC document retention

practices. In addition, the HTC invoice review process could be further improved to

mitigate rising costs.

The PMT and i3 Final Project Cost Estimates Lack Full Supporting Documentation

Due to a lack of documentation supporting the PMT and i3 consultants projected

maximum project cost of $599 million, auditors were unable to conclude whether the

potential HTC budget increase of 10 percent is accurate, and we cannot provide

assurance that the budget will not increase more than that amount. To try andvalidate the potential HTC budget increase of up to $599 million, auditors tested

multiple project changes and risks identified in the i3 consultants May 2014 monthly

reports by contract.29During this test, auditors determined that limited documentation

is available to support many of the potential changes and risks identified in the

reports. For example, the PMT and i3 consultant did not have documentation for the

potential changes and their estimated amounts identified by the contractors that

have not yet been presented to the PMT for review and negotiation. In addition, there

was no documentation supporting the amounts assigned to risks independently

identified by the PMT and i3 consultant since these risks were developed in

brainstorming sessions. Furthermore, documentation obtained for review of various

estimated changes and amounts identified by the contractors that since had been

reviewed and approved, or submitted and in negotiation with the PMT, sometimes

varied greatly from the original amount carried on the report. Finally, we noted three

instances of differences between the amounts presented in the May 2014 report and

29SeeIntroduction and Background for information detailing the four types of changes and risks identified in monthly

reports generated by i3.


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amounts provided in the supporting documentation, resulting in a net understatement

of approximately $138,000.

Document Retention Is Insufficient To Assess Whether All Costs Were Reasonable and

in Compliance with Contract Terms

DIA uses two systems to provide construction records retention and payment

management for the HTC project: Aconex and Textura. We were informed by DIA

leadership that Aconex, the HTC records retention system, contains all documentation

related to the HTC project. However, we discovered that Aconex does not contain all

contracts, invoices, and change orders. As a result, we needed to make multiple

requests for supporting documentation and in many cases the documentation was

incomplete or in some cases, missing. Following are examples of the difficulties we

encountered using Aconex, which delayed and complicated the completion of our

audit work:

Some contracts, invoices, and change orders are not in Aconex but are

located on a shared network drive.

Some contracts, invoices, and change orders are in Aconex but are not easily

found using the Aconex search function.

Some documents in Aconex are inadvertently marked confidential, preventing

direct auditor access until additional requests for access were made.

Documents were not provided in logical order, which caused complexities in

determining whether required contract documentation was submitted timely

and accurately.

These limitations exist since there are no formal Aconex guidelines regarding what

documents should be uploaded into the system, when, and how they should be

classified, including whether or not a document should be marked confidential.Compounding this issue of incomplete documentation is the PMTs lack of

subcontract documentation in Aconex or elsewhere, which will be discussed later in

this section.

Aconex was purchased only for the HTC project but Textura was implemented in 2013

for all DIA construction projects. For HTC, Textura is being used by DIA Business

Management Services (BMS) and PMT staff to manage invoices and payments related

to the MHS contract only.30Auditors learned that Textura does not contain supporting

documentation for MHS invoices, but rather only the invoice and schedule of values,

which DIA personnel compare to ensure that the two align. However, Textura was not

built to hold supporting documentation, but rather seems to serve as a one-stopdocumentation storage center for high level review.

30Textura is a web-based system that was implemented by DIA to manage invoices and payments for construction

contracts.


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The lack of organization and full project documentation in Aconex and Textura makes

it difficult for third parties, such as auditors, and non-project personnel to review key

project documents such as monthly dashboards, invoices, change orders,

subcontracts, and budgets. The disorganized records may have resulted in less than

high quality reviews of invoices and therefore, errors may not have been identified. As

such, HTC may have improperly paidcontractors for items not allowed under the

contract, paid more than the amount

allowed under the contract, or paid for work

that had yet to be completed. Turnover in

personnel and improper recordkeeping also

leave a gap in the institutional knowledge

that may be beneficial to auditors

conducting a close-out audit. More

importantly, due to the inadequate

recordkeeping it would be difficult for auditors to conduct a close-out audit and for

DIA to ensure that it is adhering to the City's record retention policy.

The City has a Citywide Records Management Program, which specifies that all City

agencies must retain all City records, including financial documents such as invoices,

for seven years.31Aconex will be used until the end of the HTC project, including the

close-out phase, at which time the records will either be placed in a static cloud-

based environment or on a drive for retention. We recommend that DIA Executive

Management take the necessary steps to ensure records related to the HTC project

are properly maintained and organized, which includes assurance that all supporting

documentation for invoices and change orders are included in Aconex. In addition,

these records should be retained in accordance with the Citys retention schedule.

Invoice Review Process Is Insufficient ToAssess Whether All Costs Were Reasonableand in Compliance with Contract Terms

To address concerns from our 2012 audit, DIA leadership agreed to dedicate more

resources to HTC invoice reviews and perform bi-annual comprehensive reviews of

invoices. However, during our follow-up work to assess the implementation of

recommendations from the original audit, and through our work conducting this audit,

we found that the changes DIA leadership and HTC management have made to the

invoice review process were incomplete and remain ineffective.32

HTC Program Managers further developed and defined the invoice review process,

which required an increase in Parsons staff to assist with reviews. However,

implementing detailed invoice reviews has not been made a priority by HTCmanagement. This has resulted in a continued lack of resources, limited supporting

documents, and staff turnover and has reduced the effectiveness of the process.

31Executive Order 64 governs the Citys Records Management Program. In addition, the Denver General Records Retention

Schedules includes references to the latest regulatory environment and best practices and defines the minimum retention

period.32

The Department of Aviations South Terminal Redevelopment Program Follow -up Report, City and County of Denver

Auditors Office, October 2013,www.denvergov.org/auditor/DenverAuditor/AuditServices/AuditReports.

Disorganized records may

have resulted in lower

quality reviews of invoices

and therefore, errors may

not have been identified.
http://www.denvergov.org/auditor/DenverAuditor/AuditServices/AuditReportshttp://www.denvergov.org/auditor/DenverAuditor/AuditServices/AuditReportshttp://www.denvergov.org/auditor/DenverAuditor/AuditServices/AuditReportshttp://www.denvergov.org/auditor/DenverAuditor/AuditServices/AuditReports


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Further, the PMT has not been conducting periodic comprehensive audits of randomly

selected invoices to ensure that monthly reviews were appropriate.

Current Invoice Review ProcessThe current invoice review process contains six steps

that are designed to ensure that all invoices submitted by the prime contractors are in

alignment with contract terms. Figure 5 provides a summary of the current invoice

review process.

Figure 5.HTC Invoice Review Process

Source:Developed by the Auditors Office based on source information from the HTC Project

Management Team.

As outlined in Figure 5 and illustrated in detail in Appendix C, the invoice review

process begins when a prime contractor submits an invoice to members of the PMT for

review. Prior to submittal, the prime contractor receives its subcontractors invoices for

labor, reimbursable expenses, and deliverables. These invoices are reviewed by the

prime contractor and combined to create the consolidated invoice submitted to the

PMT. Members of the PMT, specifically Parsons staff, review the invoice to ensurecompliance with contract terms and mathematical accuracy and to validate

completed work with the schedule of values in the Guaranteed Maximum Price

(GMP).33 The PMT also reviews necessary supporting documentation such as

inspection reports and timesheets. If discrepancies regarding materials, work

33The schedule of values is used for establishing the cash flow of a project. It is a listing of elements, systems, items, or

other subdivisions of the work, establishing a value for each, the total of which equals the contract sum.

6) DIA Finance and Administration and City Controller's Office Process Payment

5) DIA Business Management Services Provides Final Review and Approval

4) HTC Program Managers Review and Approve Invoice

3) DIA Business Management Services Reviews and Approves Invoice

2) Project Management Team Reviews Invoice and Reconciles with Prime Contractors

1) Prime Contractor Submits Monthly Invoice


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performed, and other direct costs billed are identified during the invoice review, the

PMT is responsible for reconciling these issues with the prime contractor.

Once issues are sufficiently reconciled, the PMT forwards the invoice to the BMS HTC

Contract Administrator (CA) for review. The CA performs a high-level review of the

invoice to ensure compliance with contract terms and other legal guidelines, rules,

and requirements, and works with members of the PMT to address any concerns

related to this review. The CA then ensures that the invoice is allocated to the

appropriate funds, all required funds are encumbered, and adequate funds remain to

pay the invoice.

After the CA approves the invoice, it is routed to the HTC Program Managers for

review