Joint Legislative Audit Committee Testimony

Will Kempton
January 24, 2005

Good afternoon. I am Will Kempton, the Director of Caltrans. On behalf of the Department, I appreciate this opportunity to meet with you and to provide a response to the Bureau of State Audits’ (BSA) report dealing with the Toll Bridge Seismic Retrofit Program (TBSRP) and the Department’s project management. The Bureau’s report examines the cost increases for the program that occurred between the adoption of the budget established by AB 1171 in 2001 and the revised cost estimate submitted to the Legislature in August 2004. The report also takes a critical look at the Department’s project management practices for the program.

While the audit reviews other causes, an unfortunate effect of this report is the implication that the Department’s management practices are the principal factor in the cost increases experienced by this program since 2001. I will be the first to admit that the project management practices of the Department can be improved. However, there were significant actions taken by the Department in managing this program that did help to control costs and mitigate risks associated with this extremely complex undertaking. I want to take this opportunity to identify for the Committee the major factors driving the program’s higher costs, and to demonstrate that the Department’s management practices had little to do with these increases, and, in many instances, helped to control them.

There were two basic components that led to delays and cost increases in the TBSRP, and I want to focus on these components for the Committee’s consideration. They are:

The complexity of the overall program, especially the East Span of the Bay Bridge, and
The dramatic impact of external factors in the program’s cost increases.

In terms of complexity, the audit briefly acknowledges that this factor has impacted cost increases, but gives relatively little consideration to the technological challenges presented by the program and especially the signature span design. In truth, the toll bridges are the largest and most complicated bridges in the state, and nowhere in the world have bridges as complex as these been seismically retrofitted. The replacement spans included in the program are also extremely complex structures that involve difficult seismic issues and underwater work. By way of example, a self-anchored suspension (SAS) design has never been built with the main span’s length, its asymmetrical configuration, and under the seismic requirements of this location.

With respect to the issue of complexity, I have recently been asked by legislators, business leaders, and others, “What do you mean by complexity?” The following points outline some of the specific complexities associated with the SAS design:

An SAS bridge requires an extensive temporary tower and false work system; basically building a substantial temporary bridge to construct the permanent bridge.
The complexity of the SAS steel orthotropic box girder superstructure requires difficult welding techniques and sophisticated segment erection procedures.
Controlling the quality of welding and maintaining the required tolerances of the large complicated steel superstructure and tower sections would be a significant challenge for even the most experienced fabricator.
Constructing the steel tower and the interface connection between the tower and foundation would require some of the largest industry equipment available. Some specialized equipment would have to be built specifically for the project.
The SAS bridge would require miles of special prefabricated wire strands for constructing the 30-inch diameter suspension cables, currently only available in Japan and China.
Final transfer of the SAS superstructure loads from the temporary bridge to the main suspension cables is a unique and difficult operation that would require a unique and highly technical effort to develop a workable approach.

Perhaps the best demonstration of the complex nature of this design lies in the fact that after the bid was advertised, the Department received nearly 800 bidder inquiries, we issued 26 addenda to the bid, we extended the bid timeframe, and we received only one bid, well over any estimates previously provided by the Department and other engineering organizations.

As the audit notes, Bechtel Infrastructure Corporation, a consulting firm hired by the Metropolitan Transportation Commission (MTC) to perform an independent cost review of the TBSRP, reported, “The proposed East Span is sufficiently unique that traditional estimating metrics for highway construction do not apply.” The report goes on to cite a reference by the joint venture design firm for the Richmond-San Rafael Bridge saying, “it (the design firm) is using retrofit strategies at scales never used before and that circumstances such as these produce a greater degree of cost uncertainty and limit the ability to draw from past experiences and to employ traditional estimating practices.”

The audit report goes on to acknowledge that the Department, in fact, recognized these significant challenges and used numerous outside experts and academic advisers when estimating project costs. It should also be noted, as it is in the report, that under the Department’s supervision, private consulting firms participated in the preparation of the cost estimates for all of the toll bridges except for the West Span of the SFOBB.

Industry experts agree that when the size of a project involves costs exceeding a half billion dollars, the impact on cost estimating is compounded. Estimating costs for major projects has called into question the ability of departments of transportation across the country to accurately forecast and to control the costs of these “mega projects.” A 1997 government analysis of 30 active highway and bridge projects that were estimated to cost between $100 million and $695 million found that 23 of those projects had experienced substantial growth over initial estimates. These facts are not cited as an excuse for the cost increases in the TBSRP, rather they substantiate a problem that exists throughout the nation in terms of managing costs for large projects.

The second major component affecting program costs are the external factors encountered in large-scale projects, particularly those that take more than a few years to design and construct. Mr. Cliff J. Schexnayder, a fellow with the American Society of Civil Engineers, has indicated that, “this time span is normally several years in duration but for the highly complex and technologically challenging mega projects it can easily exceed ten years.” Mr. Schexnayder goes on to say that major changes to the project scope, unforeseen engineering complexities and constructibility issues, and changes in economic and marketing conditions can, and often do, occur during these longer timeframes, and these factors drive increases in a project’s costs.

The BSA report does acknowledge some of the market and project developments that led to higher estimates for the program, including steel prices and escalation. It is apparent that volatile market conditions contributed significantly to the cost increases associated with the TBSRP, and this conclusion is borne out in the report. Following are some of the key findings of the BSA report that relate to the influence of external factors:

“…comparing Caltrans’ two costs estimates, from 2001 and 2004, we found that much of the program’s cost increase occurred in several areas such as structural steel, contractor overhead, and support costs.” (Page 23)
“Although unable to fully define the underlying causes of these increases, our analysis suggests that a number of factors, including volatile market conditions and project delays, led to higher estimates. After reviewing these factors, it appears that at the time Caltans created the estimates for AB 1171 in April 2001, it could not have foreseen issues that explain major increases in cost, with the exception of the lack of full cost escalation.” (Page 23)
“Our analysis points to the following market and project developments that led to higher estimates for these cost categories: higher steel prices; lengthened schedules that increased the need for the contractor overhead and Caltrans support, and further escalated costs; escalation that Caltrans did not apply to the entire life of the projects at the time of AB 1171; difficulties with underwater work; and recognition of significant continuing risk that led to increased contingency reserves.” (Page 24)

We concur that these BSA findings clearly indicate that external factors since 2001 were a primary influence on increases in TBSRP costs.

The following lists summarizes some of the external factors affecting the cost of the East Span project:

Market conditions became unexpectedly volatile following September 11, 2001.
Bonding and insurance requirements increased.
Steel and steel fabrication prices increased.
Suppliers for high-performance steel were limited.
Costs to ship long distance were excessive.
Construction industry had reached near-capacity levels.
Additional environmental protection was needed because of marine work.
Pile installation permit had additional requirements.

So, as the audit report acknowledges, the impact of “volatile market conditions” and other factors materially influenced cost growth. The evidence is also clear that project complexity and constructibility concerns substantially affected the cost estimates for this program. However, there is no corresponding evidence that the Department’s project management practices had more than a nominal impact on increases in costs.

Chapter 2 of the audit is entitled “Caltrans’ Project Management Practices Need Improvement.” Again, I would acknowledge that there is certainly room for change in the way the Department does business. However, the Department is working hard to correct identified deficiencies in our management practices.

In spite of the need for improvement, I do not think that the BSA report adequately represents that the Department has attempted to manage the TBSRP in a manner consistent with our best practices and those of peer departments nationwide. Nor does the BSA report properly acknowledge the high level of risk assessment and organization put in place to identify and manage those risks to alleviate cost and schedule pressures.

Since the inception of the TBSRP, the Department has incorporated risk identification and management in its business practices. This is demonstrated through the unusually extensive marine geotechnical investigations, the unprecedented level of contractor outreach efforts, the ongoing value analysis studies, the extensive utilization of outside experts, and the unique public bidder inquiry sessions associated with this program.

To date, the Department has incorporated a significant amount of changes to the contracts and the contracting structure within the Toll Bridge Program to address risks and manage these projects. The East Span project is larger and significantly more complex than contracts traditionally managed by industry or led by the Department. In recognition of this complexity, the Department has implemented a number of risk management actions over the last several years, some of which are listed below. Our staff relayed to BSA during its audit these risk management processes and actions taken with external firms to assess, evaluate, and provide the Department with management information to better mitigate costs and schedule risks. However, most of these actions are not referenced in the BSA report:

Commissioned the “Quality Assurance and Risk Management Report and Mitigation Summary” (Kimberly Horn and Associates, December 2002 and February 2003).
Prepared, or caused to be prepared, numerous value analyses and constructibility reports (e.g., Value Management Strategies, Parsons Brinckerhoff, Independent Review Committee).
Conducted constructibility workshops with potential contractors and fabricators, internal constructibility reviews, construction peer review workshops, and an interactive bidder inquiry response process.
Conducted twice-monthly Executive Risk Management Assessment meetings with our Chief Engineer and project delivery division managers, providing guidance and oversight on high-risk issues that required resource or policy direction.
Conducted Principal Mangers Risk Assessment Team monthly meetings led by the East Span Project Manager to evaluate project issues and develop timely solutions.
Reviewed project management practices for quality assurance by a Caltrans Central Region Peer Team.
Conducted Construction Administration Process Evaluations (CAPE), including contract change orders and contract claims resolution management.
Created a Quality Specification Development Team to clarify bid documents, increase bidder flexibility, and minimize change orders and claims related to specifications.
Conducted numerous Dispute Review Board Peer Reviews with industry experts and a formal lessons-learned process for construction management.
Requested that an Independent Review Committee, including experts in transportation management, public contracting, bonding and insurance, the steel industry, and structural engineering, review the East Span contracts to recommend changes that would encourage competitive bidding while managing risk. A few examples of changes made as a result of expert feedback include advanced payment bond for materials on hand at foreign locations and other efforts to level the playing field for foreign and domestic bidders.

In addition, numerous innovative management actions and contract requirements were applied to many of the TBSRP East Span contracts to encourage strong bid competition, lower bids, and to minimize costly delays during construction. While a few of these items are mentioned in the BSA report, the majority of these efforts are not acknowledged. Examples of these actions and requirements include:

Pier 7 of the Port of Oakland was obtained to provide office space for both the Department and the contractor near the work site as well as facilitate materials delivery to the work area. By providing this area, the Department has reduced contractor costs and claims as well as provided for increased communication with the contractor for faster resolution of issues. Delay cost claims on the ongoing Skyway contract can range from $250,000 to $500,000 per day.
A formal design campus was required for the contractor and the Department to work together in the same office space to speed up the review and approval of time critical working drawings and requests for information. Plan approval delays can result in significant cost increases, especially on a project with 15,000 to 25,000 shop drawings to be drafted, reviewed, and approved.
The Department obtained approval from the Federal Highway Administration (FHWA) to use “Alternative C” bidding, which allowed for the use of a foreign and domestic steel bid on the SAS contract. This process had never been used prior to this project.
A separate demonstration pile contract was initiated to test constructibility of piles resulting in reducing bidder risk. This test project identified risks early that would have resulted in millions in costly delays once construction began.
A modified mobilization specification provided for a revised schedule of and limits on payments for large and complex contracts. Also, a payment item was added to reduce the financing costs of contractors to mobilize marine equipment to access the work.
A corridor value analysis specification added a process whereby contractors from projects along the East Span corridor can meet with the Department to propose and discuss as a group ways to accelerate the overall project and reduce costs.
Design elements were revised to address concerns with available marine equipment due to the hull restriction of the Jones Act.
Extensive review of welding specifications resulted in many revisions to improve constructibility and incorporate lessons learned from claims on other projects.
Earthquake liability was capped to limit contractors risks for the cost of damages should a seismic event occur during construction.
Low bids factoring in time as well as cost were combined with incentives and disincentives to challenge and encourage the contractor to do the work as quickly as possible.
Payment and performance requirements were reduced to an acceptable risk level, in order to lower bonding costs and foster bid competitions. The Department advocated legislation in 2003, AB 1745, which allows the Department to consider lowering the payment-bonding requirement on large construction projects ($250 million +) from 100 percent of bid amount to 50 percent. The ability to obtain bonding was a significant factor in contractors’ ability to assemble a bid for these contracts.
A bidder compensation stipend specification was developed to encourage more competitive bids and partially compensate the bidder for the significant effort necessary to prepare bids for projects of these magnitudes.
A table in the specifications was added to assist bidders in identifying submittals and their review times, thus keeping submittals off of the critical path. An additional payment item for accelerated working drawings was also added to limit delay during reviews.
A bid item was added to contracts which allowed the contractors to build scaled mock-ups of portions of complicated actual work components off-site to ensure methods and constructibility issues are resolved prior to on-site construction. This process was very effective on the Skyway contract to identify reinforcing steel congestion and other constructibility issues. Including this item helped reduce contractor risk and hence lowered costs.
An intensive series of more than 25 informational and technical exchange meetings were held for prospective bidders, small businesses, and disadvantaged businesses to enhance communication for constructibility during the design and bid process.

There is no doubt that the above actions resulted in significantly reduced potential costs. That said, the Department must strive to continuously improve its risk management practices. Managing risks on large and complex projects require specific skills, training, and experience in risk management. In continuing efforts to deliver quality projects on schedule, within budget, and to meet the challenge of building complex bridges in high seismic zones, greater emphasis will be given to continuously improving, formalizing, and documenting risk management efforts.

Actions are underway to secure the services of an expert in risk management who will assist the Department in reviewing and providing input on establishing a comprehensive risk management plan that clearly defines roles and responsibilities for risk management with respect to the East Span project. Under this assignment, East Span project risks will be identified and quantified. Risk response activities will be implemented and tracked, and risks throughout the life of the project will be monitored and controlled.

In addition, the Department recently announced a series of high-level changes, aimed at improving the management of the TBSRP. Chief Deputy Randell Iwasaki has taken over management of the statewide TBSRP, including the San Francisco-Oakland Bay Bridge. Placing the Department’s Chief Deputy as the senior manager for the program is a clear indication of the importance of this assignment. As previously stated, we have also reached an agreement with a highly respected consultant, CALTROP Engineering Corporation of Upland, California, to work with the Department to enhance and improve risk management practices on the East Span of the Bay Bridge. We have selected Richard Land as our new Chief Engineer. Land has worked 27 years for the Department, gaining the experience and knowledge in design and construction needed to meet the challenges as Caltrans’ highest-ranking engineer. These changes clearly demonstrate that we are committed to the successful completion of the TBSRP, and that this Administration is working hard to make Caltrans a well-managed, more accountable state agency. The following list identifies some of the actions this Administration has pursued or is pursuing to improve the Department of Transportation:

Completed

Reorganized project management structure.
Hired a risk management consultant and developed a risk management plan.
Implemented a legislative tracking system.
Implemented recommendations of the Transportation Expert Review Panel in support of Agency’s Performance Improvement Initiative.

In Progress

Embracing and developing actions to address recommendations from the Self Help Counties Coalition “Red Tape Attack Report.”
Establishing an Organizational Performance Measures team focused on measures for key departmental outcomes including stewardship and business health.
Increasing the number of “Delegations of Authority” between Caltrans Headquarters and the districts.
Supporting legislation to authorize innovative procurement practices.
Implementing a host of improved project management practices.
Continuing to develop the project management workforce.
Creating a web-based Project Delivery Lessons Learned database that any employee statewide can submit to and access.
Communicating and strongly encouraging the use of the Project Risk Management Handbook to develop risk response plans for projects.

The audit team has also concluded that increases in estimates for the Department’s support costs contributed significantly to overall program costs. Certainly, with the rising capital costs and extended schedules, support costs are expected to increase as well. However, it is still the primary influence of the project’s complexity and the constructibility issues associated with the signature span that have resulted in the longer schedule requirements. And even though support costs are also increased, the rate of the increase is lower than on the capital side. The chart below confirms the projected increase in support costs for portions of the program, but also clearly shows that capital costs have risen at a sharper rate than the attendant staffing and consultant costs.

CHART

In terms of overall project management practices, I think it is important to reiterate three points: First, I acknowledge that the Department can and must improve its overall project management performance. Second, the Department’s project management performance with respect to the TBSRP had some effect on program cost assessment but did not materially drive the cost increases facing us today. As discussed above, the Department did employ elements of a prudent risk management strategy, was successful in controlling some cost increases through effective construction management techniques, and regularly consulted outside experts in an effort to employ improved practices in the management of this program. Finally, the Department’s experience in managing the types of large and complex projects associated with this program is not dissimilar to the experience of most of the nation’s departments of transportation. The challenge to public agencies and private industry in controlling costs and managing these types of projects is a serious national problem that needs to be addressed. Substantial engineering literature attesting to the existence of this problem is available, but the point is not addressed in the BSA audit report.

I want to correct one significant misperception that I believe is fostered by the report. As one of its key finding, the BSA maintains that, “approximately $930 million of the $3.2 billion (program) cost increase relates to the May 2004 bid for the superstructure of the East Span’s signature span. The remainder is attributable to other cost categories…” This statement has been misinterpreted in the media to suggest that the costs associated with the signature span account for less than a third of the overall program cost increase. As the BSA report concludes, more than 90 percent of the cost increase between 2001 and 2004 relates to the East Span replacement project. Of that amount, the audit report acknowledges that the most significant piece of that increase was attributable to the signature span, the cost of which rose by more than $1.3 billion, or 162 percent of the
AB 1171 estimate. This does not even take into account the additional programmatic contingency recommended in the August 2004 estimates, the bulk of which is required because of the signature span. Table 4 in the report lists the amount of increases in various cost categories; correctly reporting that $1.2 billion (or 70 percent) of the
$1.7 billion increase in capital outlay for the East Span project is attributable to the signature span.

I also need to address the report’s conclusion regarding communication planning and management. Although there is no justification for the failure to provide timely reports to the Legislature, there are factors that should mitigate the concern that the Department failed to disclose any information on this issue.

In addition to the BSA 2002 audit report to the Legislature highlighting cost pressures on the program, and to the regular reports to the California Transportation Commission and FHWA, the Department’s 2002 TBSRP Annual Report to the Legislature dated May 2003 highlighted cost issues and mitigation strategies. As stated in the 2002 Annual Report, the Department was actively identifying risks and implementing a plan to mitigate those risks for this high-priority project. This plan continued to be implemented for the signature structure until bid opening in May 2004.

Had the Department notified the Legislature prior to the May 26 bid opening, the information would not have been based on fact but, instead, would have been purely speculative.

At the time of the bid opening, the Department identified the need to reassess the projected program costs due to the high bid and initiated the cost review by Bechtel Infrastructure Corporation, which was not completed until August 2004. It had been hoped that a cost review by all parties of all design options of the main span could identify opportunities to bring the program back in line with the AB 1171 budget. It was not until the end of July that it became obvious that there was no apparent way to complete the East Span project within the legislative budget.

With respect to reporting requirements, I have already put in place a strict compliance policy for meeting legislative report deadlines, and I have implemented an effective tracking system to ensure the Department meets all required submittal dates.

The Administration has taken the cost increases and the delays in schedule for the TBRSP very seriously. Although taking office well after the factors influencing the increases and delays were in motion, the Administration worked first to take steps to reduce the pending bid for the SAS span, and then joined cooperatively with the Metropolitan Transportation Commission to assess the overall cost increases necessary to complete the program after the SAS bid came in well over previous estimates. The Administration and the Legislature worked diligently at the end of the last legislative session to craft a revised financing plan for completion of the program, but that effort was unsuccessful. The Administration then undertook an extensive and unprecedented outreach effort involving contractors, design consultants, industry experts, federal, and other state departments of transportation academicians to advise California as to the best solution for completing the East Span of the Bay Bridge. While no obvious single solution came out of that effort, the Administration made a decision to proceed with a revised design with the aim of saving time and money in completing this important safety project.

After the BSA initiated its review of the program at the direction of this Committee and published its report in December, the Administration also engaged the services of two independent groups to determine the factors contributing to cost increases on the East Span of the Bay Bridge. The Business, Transportation and Housing Agency hired The Results Group to determine what events led to the significantly increased cost estimates for that project between 2001 and 2004. A second group of academic experts, called the Expert Technical Committee, was convened to conduct a peer review of the Results Group work and to offer suggestions and recommendations as to how the Department can improve its project management practices. Both of these independent groups confirmed the basic message I am delivering today that project complexity and external factors outside of the control of the Department were the primary forces driving the cost increases associated with this program. Moreover, the reports from these groups conclude that the Department’s project management practices likely had little impact on the increased costs and have undoubtedly contributed to reduced costs in some areas. The reports from these separate independent reviews can be accessed on line at www.bth.ca.gov.

In closing, I want to thank the Committee for the opportunity to speak with you today, and to once again underscore that project complexity and other external factors were the major contributors to the cost increases in the TBSRP. I would agree with the Auditor’s conclusions that the East Span portion of this program accounts for the majority of those program cost estimates and I also accept the report’s recommendations and will take the necessary steps to implement them. I was hired to improve management practices, project delivery, and accountability at the Department, and that is what I intend to do.

I urge the Legislature to act quickly to pass legislation providing a funding solution and the necessary tools that will permit us to move forward and complete this critical safety project.

Finally, I would like to read a short excerpt for The Results Group report that summarizes what I think is the underlying reason why we are here today:

“In June 1998…, none of the parties – from state government to local entities to the public – fully comprehended the cost implications of the enormity of this project, in particular the complexity of the SAS. Each of Caltrans’ major project cost estimates were developed in conjunction with or validated by leading international engineering and design companies. Nonetheless, at each juncture, the previously developed…cost estimates fell short. This project is not unlike most mega-projects around the world in suffering cost increases and schedule extensions. As studies of these projects reveal, the largest single factor may be the inability of the human mind to grasp, or perhaps to accept, the magnitude of the undertaking and the time and resources required to complete it.”

That concludes my testimony, Madame Chair. I will be happy to answer any questions.