HomeMy Public PortalAboutExhibit MSD 70L - Review of the Construction Change Order Process March 2022This 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.
Review of the Construction Change Order Process FY 2022 AUDIT PLAN
Metropolitan St. Louis Sewer District
Review of the Construction Change Order Process
Fiscal Year 2022
March 2022
Exhibit MSD 70L
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.
Review of the Construction Change Order Process I FY 2022 AUDIT PLAN
The St. Louis Metropolitan Sewer District
Review of the Construction Change Order Process
March 2022
Table of Contents
Introduction and Scope .......................................................................... 1
Objectives .............................................................................................. 3
Methodology ........................................................................................... 4
Overall Conclusion and Results ............................................................. 5
Opportunities for Improvement ............................................................... 6
Acknowledgements .............................................................................. 11
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.
Review of the Construction Change Order Process 1 FY 2022 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 the 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. Fiscal year District payments for capital assets are as follows (per audited cash
flow statements):
Fiscal Year Payments for Capital Assets
FY 2021 $303,040,026
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 Management and Design Contracts/Invoices
• 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.
Review of the Construction Change Order Process 2 FY 2022 AUDIT PLAN
Scope:
The scope of the audit focused on the procedures and controls for processing and executing
construction change orders. In addition to reviewing the actual change order process, individual
change order transactions were reviewed and tested from the three-year scope period of July
1, 2018, through June 30, 2021 (fiscal years 2019, 2020, and 2021). During the scope period
change orders were processed in the approximate amounts:
• $92.5 million in debit (increase) amounts
• $39.1 million in credit (decrease) amounts
o $53.4 million in net amounts.
o IA tested:
$56.3 million or 60.86% of the debit transactions
$34.2 million or 87.47% of the credit transactions
OBJECTIVES
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.
Review of the Construction Change Order Process 3 FY 2022 AUDIT PLAN
Objectives
The overall objective of this engagement was to ensure the adequacy of the procedures and
controls for processing construction change orders and managing related construction
contracts. Specific objectives were to ensure:
The District’s current internal controls related to the processing, review, and approval of
change orders are adequately designed and implemented.
District policies and/or contract specifications are adequately designed and
implemented.
Changes order transactions:
Represent a legitimate change in scope.
Are accurately calculated (mathematically).
Are supported by adequate documentation and proper approvals.
Are priced appropriately (labor and labor burden, types of material, material
quantities/takeoffs, mark-ups, etc.)
Do not include owner-provided items in the pricing.
Properly reflect application of sales taxes.
Are priced accurately and consistently for portions of work performed by
subcontractors.
Accurately reflect or comply with contract terms.
Are in compliance with contract allowances, contingencies, and District contract
specifications.
Change orders representing potential deletions or reductions in scope are properly
credited to the District.
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.
Review of the Construction Change Order Process 4 FY 2022 AUDIT PLAN
Methodology
To accomplish the above objectives, Internal Audit (IA):
Held discussions and performed walkthrough procedures with personnel from District
Engineering as well as personnel from the construction management teams (contractors)
to gain an understanding of the procedures utilized to generate, review, approve, and
document change order transactions.
Reviewed District policies and contract specifications governing change orders.
Obtained and reviewed documentation templates/forms used for this process.
Obtained a report detailing the population of all change order transactions processed for
the scope period:
o Reviewed the report for:
Dollar/cost amounts (percentage of change)
Number of work directives within the change orders
Type of work (facility/tunnel, open cut, etc.)
From the population report, made a selection of change order transactions from the two
main categories of “Facilities/Tunnel” and “Open Cut”. Performed testing and review
procedures:
Requested and reviewed the change order supporting
documentation.
Requested and reviewed the related contracts.
Applied the criteria outlined in the Objectives section, above,
when testing each transaction.
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.
Review of the Construction Change Order Process 5 FY 2022 AUDIT PLAN
In the opinion of Internal Audit, the controls and procedures utilized to manage and administer
the District’s Construction Change Order processes are effectively designed and implemented,
except for the procedures used to develop and maintain adequate supporting documentation
for the pricing of change orders. Items two and three are both related to documentation
supporting pricing (significant when aggregated). In all, three identified conditions are
discussed in detail in the Opportunities for Improvement section of this report.
Initial Inherent Business Process Risk: High Risk #
Overall Assessment of Engagement Results: Generally
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.
Review of the Construction Change Order Process 6 FY 2022 AUDIT PLAN
1. Documented Review by Design Personnel
Condition:
When reviewing supporting documentation for change order transactions, IA noted the following
regarding reviews performed by Design personnel:
• Documented reviews by and from Design personnel are a not standard part of the
documentation.
o This is important in cases in which the change in scope involves changes to the
design of the project. Personnel specializing in the design of the projects should
perform a documented review to ensure proposed changes are sound from a
design perspective.
It should be noted that during discussions Management communicated that the
Construction Team does work very closely with the Design Team when executing change
order transactions.
Recommendation:
To document and ensure the Design Team’s involvement in the change order process, IA
recommends that Management:
• Add a section to the existing Change Request/Change Order Checklist for a member of
the internal District Design Team to provide a documented review prior to the full
execution of the change order.
o For transactions that involve no change in the project design, include a
section to document as such.
Risk Rating at District (Entity) Level: Low
Risk Rating at Business Process Level: Moderate
Process Owner Response:
Engineering will add a section to the existing Change Request/Change Order Checklist. If the
change order involves a design change the Program Manager of Construction will request that
the change order be sent to the internal MSD Design Engineer for review prior to final approval.
When the change order is prepared by the Contract Administration staff, they will send the
change order to the internal Design Engineer for review and comment. This will give the Design
Engineer an opportunity to review the change order prior to the Program Manager of
Construction finalizing the change order.
Date of Implementation:
The Construction Division will begin making this process change immediately with full
implementation no later than April 1, 2022.
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.
Review of the Construction Change Order Process 7 FY 2022 AUDIT PLAN
2. Developing/Maintaining Adequate Support for Pricing of Change Orders
Condition:
When reviewing supporting documentation for change order transactions, IA noted the following
regarding the supporting documentation for the pricing of certain change orders:
• Documentation supporting the change order pricing was not available for two (2) of
the thirteen (13) selected transactions.
o As such IA was unable to review and verify the reasonableness and accuracy of
the pricing used for the specific change order transactions.
Management communicated and asserted that steps were absolutely
taken to establish appropriate pricing with the contractors.
• It is not clear whether the deficiencies were documentation
preparation issues or documentation storage/maintenance
issues.
It should be noted that during this time-period there were contributing factors that
should be considered when evaluating this condition:
Transition period for documentation – transitioning between:
• Hard copy documentation
• Partial Scan
• Full scan
Recommendation:
IA recommends that Management implement the following steps:
o Provide semi-annual training to the appropriate personnel.
Address the procedures used to prepare and maintain the appropriate
supporting documentation.
• Address the use of the "Change Request/Change Order Checklist”
and the underlying documentation.
• Address the scanning and storage requirements for
documentation.
Risk Rating at District (Entity) Level: Low
Risk Rating at Business Process Level: Moderate
Process Owner Response:
Engineering agrees with the recommendations listed above. The Construction Division does
have workflows/procedures and a detailed change order checklist for new employees to follow
however semi-annual training would help answer questions and make sure the procedures are
being uniformly followed as intended. Regarding scanning and storage MSD has recently
completed the processes for updating file storage procedures. MSD has updated file
management / organization which will allow the change order backup documentation to be
scanned and stored in a timely and uniform manner.
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.
Review of the Construction Change Order Process 8 FY 2022 AUDIT PLAN
2. Developing/Maintaining Adequate Support for Pricing of Change Orders (Continued)
Date of Implementation:
The changes related to scanning, and storage of backup documentation have already been
completed. The semi-annual training will begin in March and every six months thereafter.
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.
Review of the Construction Change Order Process 9 FY 2022 AUDIT PLAN
3. Accuracy of the Pricing Calculations
Condition:
When reviewing supporting documentation for change order transactions, IA noted the following
regarding the calculations for certain change orders:
• Three (3) of the thirteen (13) selected transactions contained calculation errors.
o Most of the errors pertained to the misapplication of markup percentages applied
to certain costs.
Markup percentages are spelled out in the District’s General Conditions
contract (“Green Book”).
Types of errors included:
• Using a 15% markup for subcontractor costs instead of the 10%
allowed by the “Green Book”.
• Using a 15% markup for rental costs. No markup is allowed by
the “Green Book” for rental costs.
o The accumulated cost of the errors (five errors) was
approximately $3,300 – not significant dollars.
• For one of the change orders, there was a discrepancy in the overall square footage
used within the documentation. That is, one part of the documentation showed one
overall square footage amount and another part of the documentation showed another
overall square footage amount (conflicting amounts). The change order was priced
based on square footage, as it involved repairs to an industrial chimney stack at Bissell
(masonry repairs to radial brick and mortar shell).The difference between the two
amounts calculates to a $20,000 or 3% difference in overall cost for the project. The
larger amount was used to price the change order.
o Several conversations were held with Management regarding this item. The
process owners are confident that the correct amount was used to calculate the
costs. The process owners, however, completely agree that the documentation
as presented to IA creates questions regarding overall square footage and
overall costs. It appears that the existing documentation was either not updated
properly with updated measurements or said documentation was prepared but
was not properly maintained.
Again, it should be noted that during this time-period there were contributing factors that
should be considered when evaluating this condition:
Transition period for documentation – transitioning between:
• Hard copy documentation
• Partial Scan
• Full scan
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.
Review of the Construction Change Order Process 10 FY 2022 AUDIT PLAN
3. Accuracy of the Pricing/Cost Calculations (Continued)
Recommendation:
Similar to item two above, IA recommends that Management implement the following steps:
o Provide semi-annual training to the appropriate personnel.
Address the procedures used to prepare and maintain the appropriate
supporting documentation. Also address the cost calculation process.
• Address the use of the "Change Request/Change Order
Checklist”.
o Focus on the Force Account section and the
requirements of the “Green Book”.
• Address the scanning and storage requirements for
documentation.
Risk Rating at District (Entity) Level: Low
Risk Rating at Business Process Level: Moderate
Process Owner Response:
Engineering agrees with the recommendations listed above. The Construction Division does
have workflows/procedures and a detailed change order checklist for new employees to follow
however semi-annual training would help answer questions and make sure the procedures are
being uniformly followed as intended.
Regarding scanning and storage MSD has recently completed the processes for updating file
storage procedures. MSD has updated file management / organization which will allow the
change order backup documentation to be scanned and stored in a timely and uniform manner.
Date of Implementation:
The changes related to scanning, and storage of backup documentation have already been
completed. The semi-annual training will begin in March and every six months thereafter.
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.
Review of the Construction Change Order Process 11 FY 2022 AUDIT PLAN
Internal Audit Engagement Team:
MSD Internal Audit:
Todd Loretta
Armanino:
Ron Steinkamp
Bret Simmons
Steve Strohman
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
Kent Kotthoff
Kevin White
Ray Scherrer