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Home My Public Portal AboutExhibit MSD 70D - Review of Construction Management & Design Invoices-Contracts - June 2021This report is intended solely for the use of The Metropolitan St. Louis Sewer District (“MSD”) and is not intended to be and should not be used by any other parties without the prior written consent of MSD. Metropolitan St. Louis Sewer District Review of Construction Management and Design Contracts/Invoices Fiscal Year 2021 June 2021 Exhibit MSD 70D This report is intended solely for the use of The Metropolitan St. Louis Sewer District (“MSD”) and is not intended to be and should not be used by any other parties without the prior written consent of MSD. Construction Management and Design Contracts/Invoices I FY 2021 AUDIT PLAN The St. Louis Metropolitan Sewer District Review of Construction Management and Design Contracts/Invoices June 2021 Table of Contents Introduction and Scope .......................................................................... 2 Objectives and Methodology .................................................................. 4 Overall Conclusion and Results ............................................................. 6 Opportunities for Improvement ............................................................... 7 Acknowledgements ................................................................................ 8 INTRODUCTION AND SCOPE This report is intended solely for the use of The Metropolitan St. Louis Sewer District (“MSD”) and is not intended to be and should not be used by any other parties without the prior written consent of MSD. Construction Management and Design Contracts/Invoices 2 FY 2018 AUDIT PLAN During 2012, a Consent Decree (the Decree) between the United States of America (EPA), the State of Missouri (MNDR), and the Metropolitan St. Louis Sewer District (MSD) was entered with an effective date of April 27, 2012. As a result of the Decree requirements, the District developed and implemented Project Clear initiative, which contains a very large construction component. The work outlined in this component was originally scheduled to take place over twenty-three years. However, on June 22, 2018, a United States District Judge approved an amendment that extends the schedule from twenty-three years to twenty-eight years. (The reasoning behind the extension is the issuance of new regulatory requirements requiring the acceleration of projects outside the scope of the Consent Decree.) The Consent Decree currently calls for approximately six billion dollars in system upgrades (in 2018 dollars) to the existing wastewater collection and treatment systems. With the requirements of the Consent Decree, the ongoing regulatory requirements outside the actual scope of the Consent Decree and identified infrastructure deficiencies requiring intervention, annual construction and engineering design activities and costs continue to be significant. Prior fiscal year District payments for capital assets are as follows (per audited cash flow statements): Fiscal Year Payments for Capital Assets FY 2020 $277,790,939 FY 2019 $231,228,233 FY 2018 $236,673,660 FY 2017 $259,279,932 With these activities and costs showing no real “slowdown” in sight, the importance of maintaining effective procedures and controls around the administration of construction/capital improvements projects remains a significant objective for the District and Internal Audit (IA). This engagement is simply one of several audits of the overall area. Other engagements include reviews of: • Construction Change Order Processing • Individual Overhead Rates • Active Construction Contracts • Project Accounting/Pay Application Processes • Procurement Procedures • Diversity Program INTRODUCTION AND SCOPE This report is intended solely for the use of The Metropolitan St. Louis Sewer District (“MSD”) and is not intended to be and should not be used by any other parties without the prior written consent of MSD. Construction Management and Design Contracts/Invoices 3 FY 2021 AUDIT PLAN Scope: The scope of this engagement consisted of a review of District Construction Management and Design contracts (Engineering Consultant Contracts) along with the related contract billings and invoices. Specifically, the scope involved a review of the structure of the contracts along with a review of the procedures utilized by the District to process the related contract billings and invoices. The scope period for invoice transactions was Fiscal 2020 (7/1/19 – 6/30/20). OBJECTIVES AND METHODOLOGY This report is intended solely for the use of The Metropolitan St. Louis Sewer District (“MSD”) and is not intended to be and should not be used by any other parties without the prior written consent of MSD. Construction Management and Design Contracts/Invoices 4 FY 2021 AUDIT PLAN Objectives: The overall objectives of this engagement were to:  Ensure the structure of each consultant contract is adequately designed, incorporating provisions or mechanisms that adequately control costs and protect the District.  Ensure District procedures to review, approve, and process engineering consultant invoices are properly designed and implemented.  Ensure the invoices submitted by the contractors: o Are prepared accurately. (Cost-plus and Lump Sum/Percentage of Completion) o Are supported by appropriate documentation. (Contractor and District) o Are prepared using appropriate labor rates (when applicable) and prepared in accordance with the terms of the contract. o Contain overhead rates (when applicable) that are accurately and properly calculated using rates that were reviewed and/or agreed to by the District. o Contained costs that are allowable per the provisions of the contract. o Do not contain costs already absorbed (paid by) by the District. OBJECTIVES AND METHODOLOGY This report is intended solely for the use of The Metropolitan St. Louis Sewer District (“MSD”) and is not intended to be and should not be used by any other parties without the prior written consent of MSD. Construction Management and Design Contracts/Invoices 5 FY 2021 AUDIT PLAN Methodology: To accomplish the above objectives, Internal Audit (IA): • Obtained a report detailing the population of District engineering consultant contracts for the scope period and selected contracts from the population (both cost plus and lump sum/percentage of completion). • Reviewed and analyzed the provisions of each contract selected. • Obtained a report detailing the disbursement/billings population for the contracts selected. • Selected monthly disbursements/billings for each of the selected contractors. • Performed walkthrough procedures with District personnel to gain an understanding of the procedures utilized by the District for reviewing, approving, and processing billings for such contracts. • Reviewed and tested each transaction selected by reviewing the supporting documentation and making inquiries of District personnel as well as contractor personnel, as necessary. OVERALL CONCLUSION AND RESULTS This report is intended solely for the use of The Metropolitan St. Louis Sewer District (“MSD”) and is not intended to be and should not be used by any other parties without the prior written consent of MSD. Construction Management and Design Contracts/Invoices 6 FY 2021 AUDIT PLAN In the opinion of Internal Audit, in all significant respects, the controls and procedures utilized to process and to monitor engineering Construction Management and Design billings and invoices are effectively designed and implemented. However, IA did identify one opportunity for improving the review and documentation procedures. This item is discussed in detail in the Opportunities for Improvement section of this report. Initial Inherent Business Process Risk: Moderate Risk # Overall Assessment of Engagement Results: Satisfactory ** ____________________________________________________ DEFINITIONS How Results Are Assessed ** Engagement results are evaluated as Satisfactory, Generally Satisfactory or Unsatisfactory. • Satisfactory (clean opinion) – No significant engagement findings2 or material weaknesses3 were noted. Engagement findings1 may have been noted. • Generally Satisfactory (qualified opinion, i.e. “except for”) – Results contain significant engagement findings2. No material weaknesses3 were noted. • Unsatisfactory (adverse opinion, immediate Management attention required) – Significant engagement findings2 and/or material weaknesses3 were noted. Types of Findings 1. Engagement Finding (#Low Risk): An engagement finding is a condition that could adversely affect the organization but is less severe than a significant engagement finding or significant deficiency. Classification includes process or control deficiencies that are not significant deficiencies as well as includes other low risk or low impact conditions. 2. Significant Engagement Finding (# Moderate to High Risk): A significant engagement finding is a condition that could adversely affect the organization. Definition includes all types of findings, such as irregularities, waste, ineffectiveness, conflicts of interest, illegal acts, errors, and significant deficiencies in internal control over financial reporting as well as other significant internal control weaknesses. A significant deficiency is defined as a deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. 3. Material Weakness (# High Risk): A material weakness is a deficiency, or a combination of deficiencies, in internal control, such that there is a reasonable possibility that a material misstatement of the financial statements will not be prevented or detected and corrected in a timely basis. For internal audit purposes, the definition also includes material and/or severe irregularities, waste, ineffectiveness, conflicts of interest, illegal acts, errors, and other material control weaknesses, etc. (The term “material weakness” should be thought of as a serious category of significant engagement findings and/or significant deficiencies. However, not all significant engagement findings and significant deficiencies are material weaknesses.) ^ - Definitions are based on guidance from the IIA Standards, GAAS, and the PCAOB. # - Risk is assessed at the District (Entity) Level. (Risk to the District as a whole.) OPPORTUNITIES FOR IMPROVEMENT This report is intended solely for the use of The Metropolitan St. Louis Sewer District (“MSD”) and is not intended to be and should not be used by any other parties without the prior written consent of MSD. Construction Management and Design Contracts/Invoices 7 FY 2021 AUDIT PLAN 1. Review and Verification of Labor Rates for Subcontractors: Cost-Plus Contracts When reviewing the invoice/billing documentation for cost-plus contracts, IA noted the following:  Information regarding the titles and/or positions for subcontractor project employees is not consistently properly documented within the supporting documentation provided/maintained in the billing packets. The documentation varies by subcontractor. o Without the inclusion of such information, it is very difficult to verify the propriety of the labor rates for the subcontractor project employees. Ideally, based on title or project role, the labor rates would be tied back to the over-arching contract of the prime contractor. Note: It should be noted that, currently, Engineering personnel that is very familiar with the individual projects as well as the participating contractors does review the rates for propriety. Personnel completes a checklist documenting the review of the rates. However, personnel not familiar with the particular projects/contractors would have much more difficulty in verifying the labor rates due to the absence of consistent or adequate documentation regarding the titles/roles of the subcontractor project employees. Recommendation: IA recommends that the District: • Continue its’ efforts to develop and implement a schedule, to be included in each cost-plus billing packet, that documents the project role of each subcontractor project employee. o The inclusion of such a schedule will improve documentation by showing more clearly the relationship of the subcontractor project employee labor rates to the provisions of the overarching contract of the prime contractor. Risk Rating at District (Entity) Level: Low Risk Rating at Business Process Level: Moderate Process Owner Response: Going forward, contractors/firms utilizing cost-plus billings will be required to complete a standardized schedule that will be provided by the District. This standardized schedule will detail the job role/classification of each subcontractor project employee. District personnel will utilize this standardized schedule to verify subcontractor labor rates to the overarching contract amendment of the prime contractor. Date of Implementation: In place by July 1, 2021 ACKNOWLEDGEMENTS This report is intended solely for the use of The Metropolitan St. Louis Sewer District (“MSD”) and is not intended to be and should not be used by any other parties without the prior written consent of MSD. Construction Management and Design Contracts/Invoices 8 FY 2021 AUDIT PLAN Internal Audit Engagement Team: MSD Internal Audit: Todd Loretta Brown Smith Wallace: Ron Steinkamp Bret Simmons Henry Woods Katie Wibbenmeyer We would like to thank District personnel for their excellent cooperation and assistance during this engagement. Specifically, we would like to express our gratitude to the following: Engineering: Rich Unverferth Allen Muehlher Angela Silberschlag Brad Nevois Jim Dunajcik