alameda corridor- east construction authority alameda corridor-east construction authority (ace) was...

Alameda Corridor-East ConstructionAuthority:Its Planning and Contracting Is GenerallySound, but Proposed Changes in Rail TrafficMay Affect Its Construction Program

May 200099135

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CALIFORNIA STATE AUDITOR

STEVEN M. HENDRICKSONCHIEF DEPUTY STATE AUDITOR

BUREAU OF STATE AUDITS555 Capitol Mall, Suite 300, Sacramento, California 95814 Telephone: (916) 445-0255 Fax: (916) 327-0019

MARY P. NOBLEACTING STATE AUDITOR

May 10, 2000 99135

The Governor of CaliforniaPresident pro Tempore of the SenateSpeaker of the AssemblyState CapitolSacramento, California 95814

Dear Governor and Legislative Leaders:

As requested by the Joint Legislative Audit Committee, the Bureau of State Audits presents itsaudit report concerning the management practices of the Alameda Corridor-East ConstructionAuthority (authority). This report concludes that the authority’s planning process and contractingprocedures are generally sound, but that proposed changes in rail traffic may affect itsconstruction program.

Respectfully submitted,

MARY P. NOBLEActing State Auditor

CONTENTS

Summary 1

Introduction 5

Chapter 1

Planning for the ACE Program HasGenerally Been Satisfactory butMay Require Adjustments if RailroadTraffic Is Consolidated 9

Recommendations 16

Chapter 2

Contracting Policies and ImplementationAre Generally Adequate, but SeveralChanges Would Strengthen Oversightand Assure Compliance With Regulations 17

Recommendations 23

Response to the Audit

Alameda Corridor-East Construction Authority 25

1C A L I F O R N I A S T A T E A U D I T O R

SUMMARY

RESULTS IN BRIEF

The Alameda Corridor-East Construction Authority (ACE)has generally used a sound process for planning itsconstruction program to mitigate anticipated traffic

problems at rail crossings throughout the San Gabriel Valley.However, a proposal to consolidate rail traffic in the areaof the program may affect ACE’s plans, leading it to delay andpossibly eliminate some projects. In addition, it has generallyadopted and implemented appropriate contracting policiesand procedures.

ACE was created in 1998 to find ways to alleviate anticipatedmotor vehicle congestion caused by an expected increase in railfreight traffic in eastern Los Angeles County. It has identifiedconstruction projects, ranging from low-cost improvements insafety features and signal devices at rail crossings to expensivegrade separations, which involve building underpasses orbridges so that rail and motor vehicle traffic no longer intersect.These projects have a total estimated cost of $912 million. ACEhas obtained various funding commitments amounting toroughly $370 million from local, state, and federal agencies,as well as from the Union Pacific Railroad (Union Pacific). Itis currently seeking additional government funding to financethe remainder of the program’s cost. Although its currentfunding sources do not require a cost-benefit analysis, we believeACE might improve its chances of receiving future funds byquantifying expected program benefits in dollars and comparingthem to estimated costs. This type of analysis could give ACEan advantage when competing with other agencies for limitedgovernment funds.

ACE’s planning process included building upon a feasibilitystudy, creating a project implementation plan, performingenvironmental assessments, and using a project schedulingsystem. These procedures ensured that ACE was addressingkey elements of the construction planning and managementprocess. In addition, ACE has included the public andlocal governments in its planning process. In some cases,ACE has made major design changes based upon input fromthe cities affected.

Audit Highlights . . .

Our review found that theplanning and contractingprocesses of the AlamedaCorridor-East ConstructionAuthority (ACE) are generallysound.

However, a proposal toconsolidate railroad freighttraffic may significantly affectACE’s construction program.

In addition, some of ACE’scontract award policiesconflict with regulations, andits conflict-of-interest codedoes not cover all persons onits contractor selectioncommittees.

C A L I F O R N I A S T A T E A U D I T O R2

Despite the quality of its efforts, ACE may have to substantiallyalter its plans if Union Pacific agrees to consolidate the majorityof its freight traffic to the southern of two lines crossing theSan Gabriel Valley. If this happens, many of the grade separa-tions planned for the northern line may no longer be necessary.ACE should therefore delay further work on a portion of thenorthern line until the disposition of freight consolidationis known.

For the most part, the contracting policies and procedures thatACE has adopted ensure that contracts will be properly awardedand monitored. These policies include awarding contractsthrough a competitive bidding process and requiring contractorsto provide detailed task schedules and monthly progress reports.Nevertheless, one of ACE’s contract award policies expands onstate and federal regulations, another conflicts with federalregulations, and a third requires clarification. In addition, itsconflict-of-interest code may inadequately protect againstpossible real or perceived conflicts because it does not includenonemployees who sit on its contractor selection committees.ACE rescinded another policy allowing contractors to beginwork before contract execution when we pointed out that thepolicy conflicted with California Department of Transportationguidelines. Finally, ACE violated its procedures for changing acontract’s scope of work by failing to commit to writing achange in scope for its program management contract.

RECOMMENDATIONS

To improve its competitive position when seeking futurefunding, ACE should consider quantifying program benefitsin dollars.

To avoid spending money on projects whose benefits may bereduced by possible rail freight consolidation, ACE should delayactivities planned for a portion of the northern rail line untilUnion Pacific makes a decision in July 2000.

To assure competitive contracting, ACE should make the follow-ing changes to its policies and procedures:

· Revise its policies regarding noncompetitive procurement toconform to those established in state and federal regulations.


· Require construction contractors to provide evidence ofappropriate licenses only upon contract award.

· Clarify its procedure for handling cases in which ACE’sboard rejects the recommendation of its contractor selectioncommittee.

· Amend its conflict-of-interest code to include members ofcontractor selection committees.

To ensure that contractors complete all elements of scopes ofwork, ACE and its contractors should agree in writing to anychanges in scopes of work.

AGENCY COMMENTS

The Alameda Corridor-East Construction Authority agreedwith our recommendations for the most part and will seekguidance from its board and funding authorities on how tobest implement them. ■


Blank page inserted for reproduction purposes only.


BACKGROUND

The Alameda Corridor-East Construction Authority (ACE)was created in September 1998 by the San Gabriel ValleyCouncil of Governments (council) to manage a construc-

tion program intended to mitigate anticipated traffic problemsat rail crossings in eastern Los Angeles County. The program wasestablished because of concerns that an increase in railroadfreight traffic in the area would lead to problems with motorvehicle congestion and to long delays at railroad crossings.An increase in railroad freight traffic is expected with thecompletion of major rail corridor improvements betweenthe ports of Los Angeles and Long Beach and downtownLos Angeles. Recognizing that the completion of theseimprovements in 2002 would trigger an increase in rail trafficthrough the San Gabriel Valley, the council commissioned afeasibility study (study) in 1997 to assess the condition of55 rail crossings between downtown Los Angeles and Pomona.

The study predicted that an expected 60 percent increase intrain traffic and a 40 percent increase in roadway traffic wouldcause the length of daily vehicle delays at rail crossings totriple by 2020. It also forecast a dramatic increase in railcrossing accidents, air pollution, and noise if no steps weretaken to improve traffic flows. To solve these problems, thestudy proposed improving safety and signal devices at all railcrossings, increasing queuing capacity by widening roads atsome crossings, and constructing grade separations at thosecrossings expected to experience long traffic delays. A gradeseparation is an underpass or bridge that separates rail andvehicle traffic to keep it from intersecting.

The council created ACE to implement the projects proposedin the study. ACE is governed by a seven-member board ofdirectors (board) consisting of a designee of the council;representatives from the cities of El Monte, Industry,Montebello, Pomona, and San Gabriel; and a representativefrom Los Angeles County. The board meets each month and setsoverall policy for the program, including approving theprogram’s scope and budget as well as any contracts greater than

INTRODUCTION


$250,000. The council can dissolve the ACE board by a majorityvote of its own board of directors. In this case, the councilwould assume all the rights and responsibilities of ACE.

Because ACE is a special-purpose organization of limitedduration, the council planned for it to maintain a minimalstaff and to rely heavily on outside contractors. In May 1999,ACE hired its first employee, a chief executive officer, and inSeptember 1999, after a competitive contract award process, itcontracted with the consulting joint venture Bechtel/Korve toprovide program management services. As of April 2000, ACEhad a staff of six, and the consultant’s program managementteam included five full-time and four part-time employees.Collectively, they will plan and manage the program.

The estimated cost of the program is $912 million; its estimatedtime for completion is eight years. Roughly $824 million, or90 percent of the total, is budgeted for grade separation projects.Projects are planned for two separate rail lines, both run by theUnion Pacific Railroad (Union Pacific) since its merger with theSouthern Pacific Railroad in 1996. ACE has split the programinto two phases. Phase I includes relatively inexpensivesafety-and-signal and road-widening projects that will addressthe needs at most of the rail crossings, as well as five gradeseparations on the northern line and six grade separations onthe southern line. This phase is set for completion in 2003 at acost of $418 million. Phase II includes a signal project plusseven grade separations on the northern line and two gradeseparations on the southern line. Phase II is scheduled forcompletion in 2007 at a cost of $494 million. The map inFigure 1 shows the major project locations.

ACE has secured roughly $370 million in funding from local,state, and federal governments and from Union Pacific. It hasalso applied for $58 million in grants and other funding and hasidentified another $57 million for which it plans to apply.

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FIGURE 1

Railroad Crossing Projects Planned by ACE

Note: All grade separation sites are scheduled for safety-and-signal work and some are also scheduled for road widening. A grade separation for Seventh Avenue, proposed in thefeasibility study, has been completed by the City of Industry and is not shown here. For ease of reading, we have excluded the names of rail crossings where ACE has plannedonly safety-and-signal work, and one rail crossing slated for both road-widening and safety-and-signal work.


SCOPE AND METHODOLOGY

The Joint Legislative Audit Committee (committee) requestedthat the Bureau of State Audits perform an audit of ACE’smanagement practices. The committee was generally interestedto learn how ACE’s policies and procedures are aligned to meetprogram goals. It placed special emphasis on a review of ACE’spolicies and procedures for contracting.

To assess whether ACE has identified and implemented criticalsteps contributing to sound planning, we reviewed the FederalHighway Administration guidelines for feasibility studies, theNational Corridor Planning and Development Program require-ments, the Caltrans Local Assistance Procedures Manual(Caltrans manual), and the Department of Transportation’s(Caltrans) guidelines on managing highway projects. Wecompared these guidelines and requirements to steps includedin the council’s study, ACE’s Project Implementation Plan, andits Project Management Guidelines and Procedures. We alsoreviewed program cost estimates to determine whether theywere based on detailed support and included adjustments forinflation. We found that they were. We then determined theamount and firmness of various funding sources identified forthe program. Finally, we reviewed Caltrans’ manual and federalregulations related to environmental studies and documentsand compared these to ACE’s environmental work todetermine whether ACE has fulfilled all requirements in thisarea of planning.

To determine whether ACE has developed and implementedproper contracting policies and procedures, we reviewedapplicable federal and state laws, regulations, and guidelines andcompared them to those in ACE’s Procurement Manual and itsProject Management Guidelines and Procedures. For largecontracts, we reviewed ACE’s requests for proposals, awardsprocess, and contract provisions. Finally, we interviewed ACEand project management consultant staff regarding contractmonitoring procedures and reviewed the monitoring activitiesfor ACE’s program management contract. ■


CHAPTER 1Planning for the ACE Program HasGenerally Been Satisfactory but MayRequire Adjustments if RailroadTraffic Is Consolidated

SUMMARY

The Alameda Corridor-East Construction Authority (ACE)satisfactorily planned for its construction program.Nevertheless, ACE may need to change these plans due to

a potential consolidation of railroad freight traffic. ACE haseffectively planned for grade separation and railroad safetyprojects by building upon the San Gabriel Valley Council ofGovernments’ (council) feasibility study (study), and developinga project implementation plan and environmental documents.In addition, ACE has exceeded basic funding requirements byestablishing an outreach program designed to seek publiccomment and support. At the same time, ACE has gainedsignificant funding commitments from local, state, and federalgovernments. Although ACE’s current funding does not requirea rigorous cost-benefit analysis, ACE could improve its chancesof obtaining future funding by comparing program costs tobenefits quantified in dollars.

ACE has proposed a consolidation of railroad freight traffic thatmay seriously alter the assumptions on which some of theprojects were based. ACE’s current plan was based on UnionPacific Railroad (Union Pacific) projections of rail freight trafficon the two main rail lines crossing the San Gabriel Valley andreflects similar rates of growth in rail traffic on both lines. If themajority of rail freight traffic is consolidated to one line, thegrade separations planned along the other line, which make upabout 44 percent of the program’s total costs, may no longer benecessary. Because of this possibility, ACE should review thecurrent program schedule and delay any spending on poten-tially unnecessary grade separations until the consolidation issueis resolved.


ACE HAS ADEQUATELY ADDRESSED CRITICALPLANNING STEPS

ACE has met critical planning requirements for its constructionprogram. The 1997 study commissioned by the council identi-fied a need for the program and proposed viable solutions; ACE’s1999 Project Implementation Plan outlined basic strategies andobjectives necessary for satisfactory completion of the project.Detailed policy and procedure manuals and a program sched-uling system give staff concrete methods for implementing theoverall plan.

The 1997 study addressed key elements described in the FederalHighway Administration’s guidelines for conducting feasibilitystudies. It identified a need for the program, discussed proposedalternatives, considered environmental constraints, andprovided a funding strategy. In addition, the study provided aschedule for program completion, preliminary cost estimates,and expected benefits. The council did not, however, quantifyprogram benefits in dollar terms and thus did not provide acomplete analysis of costs and benefits. Such analyses are impor-tant because they are generally considered the most objectiveand credible evidence of a program’s economic benefit. Althoughnot required by ACE’s current grants, this type of analysis couldprovide a compelling argument in favor of the program whenACE competes with other agencies for future grants.

The 1999 Project Implementation Plan successfully built onthe study by providing an updated master schedule, an imple-mentation strategy, a description of the funding status, andproject management controls to ensure that the project stayson schedule and within budget. These project managementcontrols relate to the project’s budget, work scope, cost,schedules, contracts, and reporting. ACE’s plan also includesprocedures for establishing quality control. In addition, ACEidentified activities that are critical to ensuring that the projectremains on schedule. The activities include issuing design andengineering contracts, completing geotechnical testing, andobtaining an owner-controlled insurance program to provideumbrella coverage for ACE and its contractors.

ACE adequately defined the roles and responsibilities of programmanagers in its Project Management Guidelines and Procedures.The guidelines define the specific responsibilities of projectmanagers, include methods of accomplishing project tasks,establish administrative reporting procedures, set forth limits

Although the feasibilitystudy provided a schedulefor program completion, itdid not quantify programbenefits in dollars.


of authority and approval, establish a capital project accountingsystem, and discuss how to coordinate activities with otheragencies.

ACE will rely heavily on contractors. However, by segmentingactivities and projects within the program, it has reduced itsreliance on any one contractor, thus minimizing the risks associ-ated with contractor failure. For example, ACE issued separatecontracts for environmental, disadvantaged business, andprogram management tasks. In addition, it divided the designneeds for its near-term safety projects into three packages, whichit intends to award to three separate contractors. Finally, ACEplans to hire a separate construction manager, rather thanrelying on its program manager to perform this function. Thiscontractor will monitor progress at construction sites and over-see the adequacy and timeliness of the work.

ACE has also developed schedules that cover the entire scope ofthe project. A master project schedule provides the frameworkfor completing various phases of the project within eight years.This schedule identifies completion dates for critical projectcomponents such as design work and right-of-way acquisition.ACE has staged projects so that nearby sites will not be underconstruction simultaneously, thereby limiting the effects onmotor vehicle traffic. Because each grade separation project isindependent of other projects, each one offers its own benefits.The program will therefore reduce traffic delays and improveair quality in proportion to the number of projects completed,even if the entire program cannot be finished because of ashortfall in funding.

FUNDING COMMITMENTS COVER ONLY PART OFTOTAL PROGRAM COSTS

Like many construction programs in their start-up phase, ACElacks commitments for the majority of its estimated costs. It hasobtained funding commitments totaling nearly $370 million, orapproximately 41 percent of its estimated program costs of$912 million, as shown in Figure 2. The Metropolitan Transpor-tation Authority (MTA) is the largest participant, providing17 percent of project costs, or $155 million. It is followed by thefederal government, which is providing $135.5 million throughits High Priority Projects Program, and the California Transpor-tation Commission, which is supplying $39 million through itsInterregional Transportation Improvement program (ITIP). In

ACE has secured$370 million ofthe estimated$912 million neededto fund the program.


addition, under federal regulation, Union Pacific must provide5 percent of the cost of the grade separations, or about$40 million. ACE has also applied for $58 million in FederalHighway Administration grants and state surplus funds and hasidentified another $57 million in grants and other funds forwhich it plans to apply. ACE is competing with other agenciesfor the pending grants and surplus funds, and therefore thisfunding is by no means certain. Funding sources for the remain-ing $427.5 million in estimated costs remain unidentified. As wementioned earlier, ACE might improve its chances of gainingadditional funding by completing a cost-benefit analysis of itsprogram.

FIGURE 2

ACE Funding Sources(In Millions)

Union Pacific

Fundsidentified

Federal

Fundsapplied for

Unidentified funding

MTA

State

CommittedFunding

Funding Not YetSecured

$427.5

$58 $57

$155

$40

$135.5

$39

The California Transportation Commission has only providedITIP funds for the southerly rail line because it views this line asthe main freight corridor through the San Gabriel Valley. ACEhas acknowledged this restriction by planning to use ITIP fund-ing only for its projects on the southern line.

ENVIRONMENTAL WORK HAS NOT REVEALEDSIGNIFICANT IMPACTS BUT MUST STILL BEREVIEWED AND APPROVED

ACE is on track to complete required environmental documentsfor projects under its administration that are scheduled fordesign work in July 2000. It has produced individual documents


for the safety-and-signal, road-widening, and grade separationprojects, along with technical reports that apply to the overallprogram. This work includes studies of how the projects willaffect air quality and motor vehicle traffic, and whether theywill require property relocations and hazardous materialscleanup. Some of this work has revealed the need for mitigationto reduce environmental impacts. For instance, ACE hasidentified special precautions its contractors must take duringconstruction to reduce dust and exhaust fumes caused by theirwork. It also plans to use best management practices to avoidsoil erosion that could pollute water supplies.

Based on its studies, ACE believes the environmental impact ofits projects will not be significant. It has therefore characterizedits projects as needing categorical exclusions or environmentalassessments, a level of environmental clearance requiring lessanalysis and public involvement than environmental impactreports. ACE has submitted many of its environmental docu-ments to the California Department of Transportation (Caltrans)and is waiting for Caltrans to determine whether it agrees withthe conclusions that ACE reached. Ultimately, the FederalHighway Administration must approve environmental clearancefor road-widening and grade separation projects. ACE cannotstart final design work for such projects until it receivesenvironmental clearance.

Although federal regulations do not usually require publichearings for projects that do not require environmental impactreports, ACE has made a point of seeking the input of localgovernments and the public. It has been particularly receptive tosuggestions made by the cities affected. This has led ACE tomake major changes in the design concept for particular gradeseparations. For example, the City of Industry requested that anelevated track project be scaled back, but that one of two re-maining grade separations be moved up in the schedule. Itreasoned that completing a scaled-back project earlier in theprogram would be preferable to completing a larger project atthe end of the program. ACE adopted the suggestion in itsproject implementation plan. The City of Industry alsoexpressed concern that an elevated track near a residentialdistrict would cause significant problems with noise andimpaired aesthetics. ACE is currently in the process of consider-ing less-intrusive grade separations for this area.

ACE has made majorchanges to severalgrade separation projectsbased on input fromneighboring cities.


ACE has also undertaken a public outreach program. So far,ACE’s staff and its environmental consultant have held meetingswith government officials, businesses, and residents in citiesalong the rail corridor. The consultant has recorded the publiccomments and will summarize them at the conclusion of thefirst round of meetings, expected in mid-May 2000. ACE plansto use these summaries to update its environmental documentsas necessary. In addition, it will give the comments andsummaries to design consultants before they begin their workon individual projects. As design progresses, ACE plans to gainfurther comments through more public meetings.

RAILROAD CONSOLIDATION COULD ELIMINATE THENEED FOR SOME GRADE SEPARATIONS

Based on a request by ACE, Union Pacific has undertaken asimulation study to determine the feasibility of consolidatingfreight traffic from a portion of its northern line to its southernline. Union Pacific is undertaking the study despite priorstatements that it intended to maintain a steady ratio of freighttraffic on the two main rail lines crossing the San Gabriel Valley.Union Pacific plans to make a decision regarding ACE’s requestby July 2000. A partial freight consolidation to the southernline could greatly reduce traffic delays at grade crossings on aportion of the northern line, eliminating the need for manyof the grade separations that ACE has planned on that line.The cost of all the grade separations along the portion of thenorthern line track where traffic congestion could be reducedtotal $397 million, or 44 percent of the total program costs.Figure 1 in the Introduction shows those grade separations.

Although building fewer grade separations would obviously lowerthe total cost of the ACE program, a rail freight consolidationwould incur other related costs that would partially offset anysavings. Prime among these would be the cost of expandingcapacity on the southern rail line to accommodate the extra railtraffic. According to ACE, Union Pacific has indicated that it willlook to ACE to finance the costs of such capital improvements asadditional track and widened bridges. In addition, extra rail trafficon the southern line may increase motor vehicle traffic delays atrail crossings not currently scheduled for grade separations, mak-ing new grade separations necessary. Finally, increased rail trafficon this line could have other environmental impacts, such asincreased noise, that would call for mitigation. Nevertheless, ACEbelieves that freight consolidation is worth considering.

Consolidation of railroadfreight traffic mightreduce the need for up to$397 million in gradeseparations, but will likelyentail other costs.


Given the potential for railroad freight consolidation, ACE mustsoon consider the effect that such consolidation might have onits near-term activities. One of the projects ACE has plannedand one being managed by the city of Los Angeles located onthe northern line are set to begin work close to the time that therailroad expects to complete its consolidation simulation studyin July 2000. Specifically, design of the Ramona Boulevard gradeseparation is scheduled to begin in fall 2000, while the ValleyBoulevard grade separation is already under way, according to itsoriginal funding timetable. The Valley Boulevard project isincluded in the ACE construction program and is fully fundedby the MTA as part of its 17 percent matching commitment toACE, but the project is administered by the city of Los Angeles.We estimate that work scheduled for the Ramona Boulevard andValley Boulevard projects between April 2000 and March 2001will cost a total of $5 million.

When we inquired about the scheduling for these projects,ACE’s chief executive officer stated that if a freight consolidationis in fact promising, he will recommend to local officials and hisboard that work be deferred on the Ramona Boulevard project.He also indicated that he plans to contact the city of Los Angelesto inform them that the railroad may consolidate freight trafficto the southern line. He stated that the Valley Boulevard projectis not under ACE’s administration, but that he believes it maywarrant grade separation even if a freight consolidation occurs,to eliminate motor vehicle traffic delays created by a nearbyfreight switching yard. The chief executive officer further statedthat he had heard that the Valley Boulevard project was notclose to construction so that it was unlikely that major spendingwould occur before Union Pacific reached a conclusion on thefeasibility of consolidating freight traffic. However, when weinquired with the MTA about whether the Valley Boulevardproject was behind schedule, we were told that funding for thefirst phase of the project had actually been accelerated, indicat-ing that work may be ahead of schedule.

If Union Pacific finds that railroad freight consolidation isfeasible, ACE will have to take immediate steps that will affectthe program in both the short- and long-term. First, it will haveto suspend all planned activities along the northern rail lineuntil it can determine the likely effect of freight consolidation.Second, it will have to estimate this effect. For example, if UnionPacific proposes to decrease freight traffic on the northern lineby 80 percent, ACE would probably find that its revised estimateof traffic delays would no longer warrant many of its planned


projects along this line. If, however, Union Pacific proposesdecreasing freight traffic on this route by only 10 percent, ACEwould probably find that most, if not all, of its planned projectsare still needed. Third, ACE will have to calculate any additionalcosts associated with consolidation, such as railway improve-ments and environmental mitigation activities, and comparethese to the cost savings from planned projects that can beeliminated. To determine additional costs, ACE will have tonegotiate with Union Pacific concerning the portion of railroadimprovement costs that ACE will finance. ACE will also have torevisit its environmental analyses of the program and determinethe affects of freight consolidation and identify necessary miti-gations. At the same time, ACE will have to determine whetherfunds earmarked for northern line projects can be shifted to newor existing projects on the southern line and if other financingfor new projects is feasible. Finally, based on all of these factors,it will have to decide whether or not to pursue the rail freightconsolidation option.

RECOMMENDATIONS

To improve its competitive position when applying for futurefunding, ACE should consider quantifying expected programbenefits in dollars and comparing them to estimated costs.

To avoid spending money on projects whose benefits may bevastly reduced by rail freight consolidation, ACE should delayactivities planned for a portion of the northern rail line untilUnion Pacific makes a decision about the feasibility of consoli-dation and ACE can weigh the effects on the program. ACEshould also keep the city of Los Angeles informed as to thestatus of its ongoing railroad consolidation discussions. ■

If freight consolidation isdeemed feasible, ACE willneed to take immediatesteps that will affect theprogram.


SUMMARY

The Alameda Corridor-East Construction Authority (ACE)has generally adopted and implemented policies andprocedures that assure the proper awarding and monitor-

ing of contracts. Moreover, external government agencies,such as the California Department of Transportation (Caltrans)and the Metropolitan Transportation Authority (MTA), provideadded oversight of large contracts and certain expenditures.Nevertheless, one of ACE’s contract award policies expands uponstate and federal regulations, another conflicts with federalregulations, and a third requires clarification. In addition,ACE’s conflict-of-interest code may not adequately cover allpersons who sit on its contractor selection committees. Whenwe began our audit, ACE’s contracting policies included aprovision that put at risk cost reimbursement from local, state,and federal agencies by allowing contractors to start work beforefinal contract approval. Finally, ACE failed to commit to writingchanges in the scope of a consultant contract, a violation ofcontract provisions and good management practices.

CONTRACT AWARD POLICIES ARE GENERALLYADEQUATE, BUT SOME POLICIES SHOULD BEREVISED OR ELIMINATED

ACE’s contract award policies generally comply with theCaltrans Local Assistance Procedures Manual (Caltrans manual).This manual summarizes relevant federal and state laws andregulations and is the basic reference used by local agenciesreceiving federal or state funding for transportation programs.For instance, ACE policies require the use of a request-for-proposals process to solicit offers for professional or technical

CHAPTER 2Contracting Policies andImplementation Are GenerallyAdequate, but Several ChangesWould Strengthen Oversight andAssure Compliance With Regulations


services worth more than $25,000 from competing contractors.In addition, requests for proposals must be advertised, mustidentify the factors to be evaluated in awarding the contract,and must allow contractors a minimum of 20 days to respond.

Despite the general adequacy of ACE’s contract award policies,we found three instances in which ACE should change or clarifythese policies to ensure adequate competition. First, ACE hasexpanded the circumstances under which noncompetitiveprocurements of goods or services are allowed beyond thosepermitted in federal and state regulations. Federal and stateregulations generally allow noncompetitive procurements inthe following cases: (1) when only one responsible source ofsupply is available, (2) when there is an unusual or compellingurgency, or (3) when the public’s interest would not be servedby competitive procurement. In contrast, ACE allows for non-competitive procurements in the following situations:

· An emergency situation, as defined in ACE’s EmergencyProcedures, exists.

· Only one responsible source of supply is available.

· ACE’s need is of a unique and compelling urgency.

· The equipment to be purchased is of a technical nature andthe procurement thereof without advertising is necessary toensure standardization of equipment and interchangeabilityof parts.

· The goods are for testing or experimental purposes.

We asked ACE’s senior project manager why the policy fornoncompetitive procurements was broader than that presentedin federal and state regulations. He told us that ACE would onlymake noncompetitive procurements where the ultimate ownerof improvements, either Union Pacific Railroad (Union Pacific)or the cities, require ACE to buy from a specific vendor forpurposes of standardization. If the broader policy is thereforedesigned to allow for situations where only one responsiblesource of supply is available, we believe that the three additionalcircumstances shown in the policy are unnecessary and willonly create confusion. If the broader policy is meant to providefor situations where more than one responsible source of supplyis available, but selection is limited to one vendor, it conflictswith state and federal regulations. Noncompetitive procure-ments should rarely occur, and when they do they should be

ACE has expandedthe conditions fornoncompetitivecontracting beyondthose allowed inregulations.


limited to those circumstances contained in federal and stateregulations. Otherwise, ACE may not receive the highest qualityof goods and services at the lowest cost. Moreover, ACE riskslosing federal funding if procurements are subsequently deter-mined to violate regulations.

Second, ACE requires that a construction contractor haveappropriate state licenses when it submits its contract proposal.In contrast, the Caltrans manual specifies that agencies canrequire state licensure only at the time of contract award. Thisrequirement stems from a federal regulation designed toensure that out-of-state contractors are not unfairly barredfrom competition. Although this policy conflicts withregulations, it has not had an adverse effect on ACE’slargest contract selections. Specifically, since the projecthas not yet reached its construction phase, ACE has not barredany construction contractors from submitting proposals basedon this requirement.

Third, ACE should clarify its policy governing selection commit-tee recommendations to the board of directors (board) for theawarding of contracts. The existing policy permits the boardto reject the selection committee’s recommendation andreturn it to the committee for further consideration andresubmission to the board. However, the current policy doesnot require that the board indicate what criteria it used to rejectthe recommendation, so that the selection committee canreconsider only those areas the board found unacceptable.Since the selection committee has an important role in ensuringa fair and competitive process, it is important that the boardlimit and clearly define the terms under which it returns arecommendation for further consideration.

In addition, we found that ACE’s conflict-of-interest codemay not adequately cover all persons involved in making orinfluencing significant agency decisions. ACE’s code covers itsboard members, its staff, and certain employees of its projectmanagement consultant team, but does not include all personssitting on its contract selection committees. Committee mem-bers include persons from outside ACE, such as representativesfrom cities, Caltrans, and the Metropolitan Transit DevelopmentBoard of San Diego. According to ACE’s Conflict-of-Interest andDisclosure Code, board members, employees, and consultantswho participate in making construction authority decisions thatcould foreseeably have a material effect on their own financialinterests should fall under its conflict-of-interest code and

ACE’s policy for rejectingselection committeerecommendations isunclear.


should file statements of economic interest. Likewise, anopinion issued by the Fair Political Practices Commission statesthat all persons on committees that have made recommenda-tions affecting the final outcome of an agency’s decision over anextended period of time should be included in the agency’sconflict-of-interest code. We believe that ACE’s selectioncommittees should be viewed as part of a system that hashistorically had and will have a significant effect on decisionmaking. Persons participating in this system should therefore beincluded in the conflict-of-interest code.

Instead of including selection committee members within itsconflict-of-interest code, ACE distributes a letter to committeemembers that discusses conflict-of-interest standards in generaland requires members to sign a copy of the letter and returnit to ACE at the first meeting of the selection committee.Although this letter provides some guidance for situations inwhich conflicts may arise, it does not require that selectioncommittee members publicly disclose any economic intereststhey have that could pose conflicts. Since the contract awardprocess relies to a significant extent on the recommendations ofcommittee members, it is imperative that ACE assure thatdecisions made by each member are free of real or perceivedconflicts of interest, to protect itself from future criticism byunsuccessful contract bidders.

Finally, ACE adopted a contracting policy that would haveallowed contractors to begin work before the final contract wassigned if ACE’s chief executive officer believed the contractnegotiations would be successfully concluded and if it wasimportant that the start of work not be delayed. In these cases,the policy authorized the chief executive officer to give acontractor a Notice to Proceed, permitting the contractor tobegin work before the contract had been executed. This policycontradicted the Caltrans manual, which prohibits reimburse-ment for work performed before a contract is signed. After weinformed ACE that this policy could put its federal and statereimbursements at risk, ACE revised the policy to state thatcontractors will not be authorized to start work until a contracthas been fully executed.

ACE does not requirenonemployees on itscontract selectioncommittees to discloseeconomic interests theymay have.


CONTRACTS AWARDED FOR THE ACE PROGRAMHAVE FOLLOWED ESTABLISHED PROCEDURES ANDHAVE BEEN REVISED ACCORDING TO EXTERNALRECOMMENDATIONS

Since 1996, the San Gabriel Valley Council of Governments(council) has executed 9 contracts and ACE has executedanother 4 contracts related to the construction program, all forconsulting work. We reviewed the 3 largest of these 13 contracts,1 contract executed by the council and 2 executed by ACE, andfound that both the council and ACE adhered to proper awardprocedures. For example, the process for obtaining projectmanagement services included a detailed request for proposals,sufficient advertising, selection based on published criteria, andadequate contract terms. ACE reviewed proposals from 6 firmsand awarded the contract to the highest-rated contractor,Bechtel/Korve.

Following requirements in the Caltrans manual, ACE requestedthat Caltrans conduct an audit of the Bechtel/Korve contract. Atthe time of our fieldwork, Caltrans provided this service forconsulting contracts exceeding $75,000. The purpose of theaudit was to alert ACE to any potential problems relative to theprovisions contained in the contract, the cost/price proposal,and the contractor’s cost-accounting system. Caltrans’ resultswere basically positive, although its auditors found somedeficiencies. For example, the contract included no provisionssetting a ceiling on the amount of the contract or requiringACE’s approval of the use of subcontractors; it included acost-plus-a-percentage-of-cost fee structure prohibited by federalregulation; and it contained some relatively small cost itemsthat were either unallowable or unwarranted. ACE correctedthese deficiencies with the Bechtel/Korve contract and incorpo-rated Caltrans’ recommendations in its standard provisions forfuture consulting contracts.

The MTA will provide another form of external controlover project expenditures. For example, a memorandum ofunderstanding between ACE and the MTA states that ACEmust submit quarterly progress and expense reports. The MTAreviews, approves, and reconciles these reports to the budgetbefore it reimburses the funds. In addition, the MTA has theauthority to conduct audits of the project as needed to ensurethat ACE is using MTA grant funds appropriately as defined inthe scope of work. The MTA is currently in the process of con-ducting two administrative audits of ACE’s subcontractors, withfindings to be issued by the end of May 2000.

ACE amended itsstandard provisions forconsulting contracts inresponse to therecommendations of aCaltrans audit.


CONTRACT MONITORING POLICIES ARE GENERALLYSOUND, BUT ACE MUST BETTER ABIDE BY ITS CHANGEORDER POLICY

ACE’s contract monitoring policies and procedures are basicallysound. They require that contractors provide detailed schedulesfor task completion, monthly progress reports, and detailedinvoices; that contracts include specific deliverables; and thatACE project managers review contractor deliverables, progressreports, and invoices. For example, ACE has used industrystandards to segment the construction program into logicalcomponents. By adopting such standards, ACE will requirecontractors to provide details on the staff, equipment, andmaterials to be used during the design and construction of itsprojects. ACE will use this information in conjunction withcontractor-provided activity schedules to track the progress ofprogram components. It will also use the information to developwhat is called a critical path plan that schedules the project,coordinates the work, and monitors and analyzes progress toidentify potential schedule delays. ACE will update the auto-mated schedule using progress reports and information gainedfrom weekly status meetings with contractors.

To determine whether ACE follows its monitoring policies andprocedures, we reviewed ACE’s monitoring of its project man-agement consultant, Bechtel/Korve. During the first six monthsof the contract, we found that ACE monitored consultantprogress by holding weekly status meetings, maintaining alisting of deliverables due during the phase and those received,and reviewing invoices. However, during this period, neitherACE nor Bechtel/Korve developed a detailed schedule for whencontract tasks and deliverables were to be completed. Instead,ACE accepted contract deliverables, mostly made up of draftreports and policies, by reviewing the deliverables, returningthem to the consultant for revision, and filing them aftermodifications were completed. In a few cases, ACE formallyaccepted deliverables, as witnessed by the approval of ACE’sboard. ACE has since improved its monitoring in this area.Specifically, during the next six-month scope of work that beganFebruary 4, 2000, Bechtel/Korve gave ACE a detailed scheduleindicating expected completion dates for specific deliverables.

As the agency and its program management consultant monitorthe progress of a project, they may become aware of a need forchanges in the contractor’s scope of work. ACE included aprovision in the Bechtel/Korve contract stating that it would not

As it begins to contractfor design andconstruction services,ACE must assure that allchanges in the scope ofwork be in writing.


compensate the consultant for any services in addition to thoselisted in the scope of work unless ACE authorized the services inwriting. In December 1999, however, ACE and Bechtel/Korveverbally agreed to change the scope of services to include onenew task and one redefined task, reallocating about 900 hours,or 8 percent of the contracted hours, from old to new tasks.Although the change was relatively small in this case and didnot add to the time or cost of the original contract provisions, itis essential for ACE to properly control the change order processas it begins to contract for design and construction services.Without written and signed change order agreements, even forchanges involving no additional time or cost, ACE opens itselfup to misunderstandings with its contractors and reduces itschances for receiving all the services it expects.

RECOMMENDATIONS

To ensure competitive contracting, ACE should make the follow-ing clarifications and changes to its policies and procedures:

· Revise its policies regarding noncompetitive procurement tomirror those contained in federal and state regulations.

· Require construction contractors to provide evidence ofappropriate licenses only upon contract award.

· Clarify its policy to require the board, when it rejects therecommendations made by its selection committees, tospecify those aspects of the original evaluations that it founddeficient.

· Amend its conflict-of-interest code to state that members ofcontractor selection committees be required to discloseeconomic interests in the same manner as ACE employees.

To ensure that contractors complete all elements of scopes ofwork, ACE should write out detailed descriptions for all changesin scope, including any agreed-to deliverables. Both partiesshould sign these change orders.


We conducted this review under the authority vested in the California State Auditor bySection 8543 et seq. of the California Government Code and according to generally acceptedgovernment auditing standards. We limited our review to those areas specified in the scopesection of this report.

Respectfully submitted,

MARY P. NOBLEActing State Auditor

Date: May 10, 2000

Staff: Doug Cordiner, Audit PrincipalJim Sandberg-Larsen, CPATheresa Gartner, CPAVikram Mandla


Agency’s comments provided as text only.

Alameda Corridor-East Construction Authority3871 East Colorado Boulevard, Suite 100Pasadena, CA 91107

April 28, 2000

Ms. Mary P. NobleActing State AuditorBureau of State Audits555 Capitol Mall, Suite 300Sacramento, CA 95814

Dear Ms. Noble:

On behalf of the Alameda Corridor-East Construction Authority, I am providing comments on yourdraft audit report on the management practices of our agency.

First, I want to commend the State Auditor's office for a thorough and professional job the team didon this audit. Your staff has done its best to understand our project and how we are organizing toimplement it. In light of the thoroughness of your audit, we are encouraged by the positive findingsincluded in your report and the relatively few and straightforward recommendations for improve-ments on our part.

As to the recommendations contained in the report for the most part we agree with them. Once thereport is public we will present it to our Board of Directors with a suggested response to eachrecommendation. There are three areas that the audit report focuses on that we believe we shouldcomment on at this point, however.

Delaying Project Elements While Awaiting Rail Freight Consolidation Studies - The reportrecommends delaying elements of the project whose justification may be diminished by a consoli-dation of Union Pacific Railroad (UPRR) freight traffic until a consolidation study now in process iscompleted. As we've shared with the audit staff, the ACE Construction Authority, it's parent agencythe San Gabriel Valley Council of Governments, and the Southern California Association of Gov-ernments have proposed freight consolidation of varying degrees on many occasions over the lastfive years. On each occasion, the UPRR dismissed consolidation over capacity and future trafficgrowth concerns. Notwithstanding this history, as the report indicates, we have raised the matteronce again with the UPRR and they are currently considering it. Unfortunately, even if the railroad'sresponse is neutral-to-positive, it will leave many unanswered questions as to whether such a planoffers net benefits. The report acknowledges unknowns about the public cost for necessary rail-road capacity expansion, sources of funding for those improvements, the impacts of consolidationand costs to mitigate them. Simply stopping work on certain elements of the project in the face ofsuch major uncertainties may not be the best approach for the Authority to take. Nevertheless, thepoint raised in the report is valid and the Authority will have to continue to weigh its options as itmoves forward.


Revised Policies on Noncompetitive Procurement - The report states that the Authority'spolicies permitting non-competitive procurement in certain circumstances expand on federal andstate regulations and should be restricted to cover fewer circumstances. We believe the provisionin our policies questioned by the report are explicitly permitted by the Federal Acquisition Regula-tions and not prohibited by state regulations. The provisions were included in our policy in anticipa-tion of the Authority being required by the UPRR or local jurisdictions (the ultimate owners andmaintainers of the improvements) to install specific materials or equipment for standardizationpurposes. In any event, if the Authority finds a non-competitive procurement necessary to meetthese specific railroad or city requirements, it will seek advance guidance from the appropriatefunding authorities.

Expanding our Conflict of Interest Code to Cover Technical Evaluation Committee (TEC)Members from Outside Public Agencies - The report states that our current practice requiringTEC members from other public agencies to certify compliance with conflict of interest regulationsdoes not go far enough to protect against real or perceived improprieties. We are more than willingto address the deficiency in our existing certification process cited in the report, though we are notsure the specific recommendation to cover employees of other public agencies under our Conflictof Interest is the most effective way of doing so. As we have indicated to your staff, our TECs areformed separately for individual procurements, vary in membership from procurement to procure-ment and typically are only in existence for 1-2 months. Conversely, our economic disclosurepolicy (which is governed by the County of Los Angeles) is oriented around annual filings of Boardmembers, employees and consultants who have longstanding, ongoing involvement in the organi-zation. I will review your recommendations with my Board and will use their guidance along withyour recommendations to develop some additional procedures to address your concerns.

In conclusion, the ACE Construction Authority appreciates the constructive comments included inthe audit. Please feel free to contact me should you have any questions regarding this matter.

Sincerely,

(Signed by: Rick Richmond )

Rick RichmondCheif Executive Officer


cc: Members of the LegislatureOffice of the Lieutenant GovernorMilton Marks Commission on California State

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