Leading Construction Firm for Wastewater Treatment Plant
Loses Big Contract with City of New Orleans
by Jack McCurdy
Synopsis: MWH, the leading candidate to build a new Morro Bay-Cayucos wastewater treatment plant, has had its $48 million hurricane-recovery contract with the city of New Orleans cancelled after the city Office of Inspector General found that MWH had engaged in a wide range of questionable practices and called for termination of the contract.
Montgomery Watson Harza (MWH), the big national contracting firm that is the leading candidate to build a new multi-million dollar Morro Bay/Cayucos wastewater treatment plant, had its $48 million hurricane-repairs contract cancelled by the city of New Orleans Wednesday after the Office of Inspector General concluded recently that MWH overbilled the city, made Christmas gifts to city employees overseeing MWH's work, engaged in noncompetitive bidding and disregarded "truth in negotiation" contract provisions.
Mayor Mitch Landrieu announced the city would take over MWH's contractual responsibility for management of hundreds of projects for the repair and rehabilitation of city-owned buildings, facilities and streets damaged by Hurricane Katrina, which hit the area in 2005. After he was elected mayor in May, Landrieu extended the MWH contract for 90 days ending yesterday, September 30, while it was being reviewed.
The inspector general had recommended cancellation of the contract with MWH.
In other developments involving MWH, a New Orleans city board member has been sentenced to 22 years in prison a few months ago for taking kickbacks involving MWH funds.
In Seattle, that city has discovered that two reservoirs with waterproof coating designed by MWH have leaked, requiring major repairs. A city spokesperson said litigation is being considered to recover all or part of the repair costs, which could name MWH as a defendant.
MWH has been chosen as design engineer for the planned new Morro Bay-Cayucos wastewater treatment plant at an estimated cost of $31 million and is seeking the contract to build the plant now located on the shore of Estero Bay in Morro Bay. An alternative design is under consideration by the joint Morro Bay-Cayucos board from PERC Water, which claims it could build a more technologically-advanced plant for $10 million less than MWH and is in the running to become the building contractor.
After months of investigation, the New Orleans Office of Inspector General (OIG) found that "total MWH billings for program managers, engineers, architects, construction managers and other identified classes of labor were more than 20% higher than the cost of the same services at the rates proposed by the two other firms. In addition to charges for these identified labor categories, MWH billed substantial sums under categories with vague, non-descriptive titles.
"For example, MWH charged more than $4.5 million for personnel described only as 'professional,' with no indication of their qualifications or roles. The lack of a meaningful description for this labor category makes it impossible to determine whether the billing rates were competitive or reasonable."
MWH was awarded the $48 million contract several years ago to manage the city's hurricane recovery program.
"Because the City did not require MWH to submit a fee schedule with its proposal, MWH faced no competitive pressure during the fee negotiations," the OIG report said.
Based on its findings, the OIG concluded that the city should cancel the contract with MWH and procure a new one.
In response to a draft of the OIG report obtained by the New Orleans Times-Picayune in March, a state agency involved in the city rehabilitation program halted payments to MWH in April, the newspaper reported.
Then, the OIG said, "A new administration took office in May, 2010, pledging reform. To its credit, it adopted a procurement policy for professional services contracts that as much as possible removed elected officials from contract awards. The administration also announced its intent to provide Invitations for bids . . . and requests for proposals (RFPs) to the OIG for review and comment before issuance."
To provide time for a review of the unsettled contract situation he inherited, newly-elected mayor Landrieu extended the MWH contract for 90 days, though at only about two-thirds of the amount MWH was previously being paid, a city official said. The extension was scheduled to expire on Thursday, September 30.
One thing the city has been doing during that period is to "bring management (of the repair work) in house," an OIG staff member said.
Deputy Mayor Cedric Grant, who oversees the $1 billion effort to restore the city, had told the Times-Picayune in June that as he "attempts to reduce the city's reliance on third-party consultants, he'll scale back the staff provided by MWH to about a dozen employees who will be required to report to City Hall," rather than to the MWH's local offices.
Another reason for extending the contract temporarily, Grant said, is the administration "still is trying to verify how much money the city may owe the company (MWH), which already has been paid $29 million" under the original contract dating to 2007, the Times-Picayune reported.
In June, Bruce Edwards, a member of the New Orleans Sewerage and Water Board, was sentenced to 22 years in prison after pleading guilty to collecting millions in kickbacks from two board contractors, including MWH, the Times-Picayune reported. In pleading guilty to wire fraud, Edwards admitted receiving money paid by MWH to Management Construction Consultant Inspection (MCCI), which was secretly controlled by Edwards, the newspaper said.
MWH paid MCCI more than $3 million for work arising from damage caused by Katrina to the water and sewer systems in the city.
The Seattle Times reported the leaks "triggered a massive do-over project involving the removal of waterproof coating applied to Beacon Hill's new covered reservoir. A second new reservoir, in West Seattle, had the same orange coating applied to its concrete cover, and it, too, (was) blasted off with pressure washers."
A Seattle Public Utilities official said the coating product had been" applied according to specifications written by MWH, a Broomfield, Colo., engineering and design firm."
A Utilities spokesperson said "we have not determine who is responsible for the failures. We don't know who is at fault yet." No date has been set for a decision on when or if litigation will be pursued, the spokesperson said.
--The contract terms negotiated by the city with MWH did not provide appropriate controls or incentives to contain costs.
--MWH’s compensation was based solely on the number of hours billed without regard to milestones or progress on projects. These terms
provided a disincentive to work efficiently and did not allow the city to hold MWH accountable for keeping costs within budget.
--MWH was also allowed to mark up all direct costs by about 23%. These mark-ups, or cost-plus-percentage-of-cost terms, are prohibited under Federal Emergency Management Agency (FEMA) reimbursement rules because they provide an incentive to maximize costs.
--City contract oversight was inadequate to protect against excessive fees and inappropriate charges.
--A management analyst retained by the city found that MWH billings had far exceeded the rate of progress on projects.
--The city also failed to require MWH to itemize more than $1.3 million in billings for direct costs. As a result, the City paid blindly for costs without knowing whether the expenses were reasonable or appropriate.
--MWH employees submitted reimbursement requests to the company for gifts to city employees and elected officials, including employees
responsible for overseeing MWH’s work. Under state and local ethics laws, a city employee may not accept gifts or gratuities from anyone who has or seeks to obtain a contract with the employee’s agency.
--Through February, 2010, MWH billed the city over $36 million for services provided under the contract and has been paid over $29 million.
--After issuing three separate RFPs and selecting seven firms for contract awards, the city inexplicably changed course and negotiated a contract with only one of the chosen firms--MWH. The city provided no documentation to show how or when the decision was made to
eliminate the other six selected firms from consideration in favor of directing all the work to MWH.
--The contract award was based on an RFP that sought the services of one person and limited total compensation to the $150,000 proposed annual cost. After MWH was selected, the parties entered into private negotiations over a four-month period that resulted in a major contract estimated at the time to be worth up to $48 million.
--The MWH contract has been extended twice, once after contract had expired, and adding that federal funds could used to pay the contractor, MWH.
--The city in effect privatized major responsibility for managing the city’s rebuilding program because many of the management functions that were formerly conducted by city employees were transferred to MWH employees or subcontractors, who were given roles in developing administrative practices for the city, in project planning, procurement, and contract management.
--This shift of management responsibilities to a contractor placed a daunting burden on the city to maintain control over the work and the cost of the rebuilding program, including the cost of MWH’s fees.
--Our evaluation found that the contract terms negotiated by the city did not provide appropriate controls or incentives to contain costs and that city contract oversight was inadequate to protect against excessive fees and inappropriate charges.
--The city’s RFP process, which allowed MWH’s proposal for a $150,000 scope of work to mushroom into a contract worth hundreds of times that amount, nullified any meaningful competition for the contract.
--This evaluation also found that the city failed to ensure that MWH’s fees would not exceed 8% of project costs, as MWH’s rate of billing has outpaced the rate of progress on the rebuilding.
--In 1997, the city awarded MWH a one-year contract to assist the city of New Orleans Sanitation Department with environmental compliance auditing at a cost of $230,000. The city has perpetuated this contract, changing the nature and scope of services provided, through a series
of extensions for more than 12 years, without seeking competitive proposals.
--In 2005, the city amended the 1997 contract with MWH to add on approximately $34 million in storm drain cleaning services following Hurricane Katrina.
--We asked city officials to explain the rationale for awarding a contract for up to $48 million on the basis of a proposal with a maximum cost of $150,000. They said that the evaluations of all three RFPs were considered in the selection of MWH for the contract. This explanation does not alleviate the problematic character of this procurement.
--Competing firms were not informed that responses to other RFPs would be factored into the selection process. MWH was the only firm to respond to all three RFPs and therefore received unequal treatment when the city considered all three. Moreover, the evaluation results for the three RFPs do not provide a clear rationale for favoring MWH.
-- MWH did not submit the highest rated proposal for these services and was not one of the four firms selected by the city pursuant to
the Construction Management Services RFP. Although MWH received the highest score on the RFP for Architectural and Design Services, the services requested differ substantially from the scope of work in the contract, and the relevance of that evaluation is not apparent.
--The city issued the RFPs in April, 2007, without a clear idea of the services needed or the budget for the contract. When it became clear in the course of negotiations that the scope had changed drastically, the city should have issued a new RFP to allow other firms to compete on a level
playing field for what would become one of the City’s costliest professional services contracts.
--Although each of the three RFPs indicated that cost was 20% of the criteria used to rank proposals, MWH did not submit a fee schedule or other cost information in any of its proposals. Instead, in each proposal, MWH stated it would “commit to working with the city to develop a
program that meets the goals, objectives, and budget” of the city.
--Despite the lack of information on fees or costs, the city gave high scores for “cost” to the MWH proposals for Construction Management Services (15 out of 20 possible points) and for Public Infrastructure Manager (20 out of 20 possible points). The City negotiated a fee schedule with MWH well after the contract was awarded.
--The relative scores for the Public Infrastructure Management RFP were even more irrational, with Regional Management Group receiving 10 points for cost compared with MWH’s 20 points. After receiving the highest possible score for cost, MWH was allowed to negotiate higher fees than those proposed by its competitors. These results show that the scores awarded for cost were meaningless.
--The rationale for giving MWH high scores for cost in the absence of fee information is puzzling. The city had no basis for comparing MWH’s fees with those proposed by other firms during the selection process because MWH was allowed to avoid providing this information.
--Both MWH and the city appear to have disregarded a contract provision titled “Truth-In-Negotiation” that states: "As of the Effective Date of this Agreement, Contractor represents and warrants that the rates charged City . . . for the performance of the Services are no higher than those charged Contractor’s most favored customer for the same or substantially similar services. In the event Contractor’s 'most favored customer'
rates are reduced during the term of this Agreement, Contractor shall be obligated to promptly notify City of such reduction in writing, and such reduced rates shall apply to any services provided on or after the date that Contractor first reduced such rates."
--Our review found no evidence to document MWH’s compliance with this provision.
--We asked MWH to provide all rate schedules reflecting MWH’s most favored customer rates during the contract period. In response to our request, MWH replied: MWH does not provide any of the same services or substantially similar services of which it provides to the city under the project management contract with any other client for which it can provide rate schedules.
--The assertion that MWH’s services to the city of New Orleans are completely different from services provided to any other customer strains credibility, particularly in light of representations MWH made in its proposal for the Infrastructure Project Manager contract: MWH has unparalleled experience in managing major infrastructure and building projects, including the interaction between federal, state, and local governments and non-governmental organizations.
--MWH’s unwillingness to provide any evidence that it has honored its promise to the city casts doubt on whether the company negotiated the compensation terms in good faith.
--Despite the clear understanding that time spent in contract negotiations could not be billed to the city, the city paid the $42,711.88 invoice in full to MWH.
--The city’s contract with MWH lacks any provisions that would allow the city to tie payments to a defined scope of work. It is simply an open-ended agreement to pay for all hours billed, and payments are not contingent on work products or deliverables. These terms do not allow the city to hold MWH accountable for using resources efficiently or keeping costs within a budget.
--An outside analysis arranged by the city revealed a lopsided distribution of labor classes, with an unreasonably high proportion of hours billed at the higher rates charged for managers and supervisors....MWH’s excessive concentration of higher-cost personnel inflated the cost of the contract.
--The analysis concluded that MWH billings through July, 2009, far exceeded the rate of progress on the projects. Based on these calculations, the analysis concluded that MWH had billed for approximately 118% of the actual value of its work and had overbilled by $2.9 million through July alone.
--The failure to specify what costs the city will pay for makes the contract difficult to manage, a problem that is compounded by MWH’s billing practices. The MWH invoices provide only lump-sum totals for broad categories of costs, with no breakdown of the expense items included in the billing. This form of billing makes it impossible for the city to determine whether the expenses charged are reasonable or appropriate.
--Examples of MWH expenses that appear questionable include:
• A $93,289.20 charge for telecommunications services for a one-month period;
• Gift purchases, including flowers, theater tickets, and Christmas gifts for city employees;
• Unusual travel expenses, including a flight from Salt Lake City to Las Vegas with no apparent connection to New Orleans;
• MWH operating expenses, membership costs in professional organizations, MWH employee business cards, donations, and 75 polo shirts.
--While MWH claims that many of these expenses were not billed to the city, the failure to include any itemization of expense billings makes such claims impossible to verify. This risk is compounded by terms that allow MWH to mark up costs by about 23%, giving the company an incentive to maximize costs. By not requiring MWH to itemize expense billings, the city has failed to exercise adequate contract oversight.
--MWH invoices to the city included expense reimbursement requests submitted by employees to the company and, in some cases, receipts to substantiate the expenses. Some of these requests sought reimbursement for gifts to city employees or elected officials, including flowers, golf shop purchases theater tickets and restaurant meals with city employees or elected officials. In some cases, the city employees named were responsible for overseeing MWH’s work.
--State law states a city employee may not accept gifts or gratuities from anyone who has or is seeking to obtain a contract with the employee’s agency. For elected officials, this prohibition extends to gifts from anyone who has or seeks any contract with the city. These rules also place a limit of $50 on the value of any food, drink, or refreshment a city employee or elected official may consume as the guest of a prospective or
current contractor.
--The reimbursement requests and receipts submitted by MWH employees to the company suggest that some city employees and elected officials may have violated these ethics laws by accepting gifts or meals.
--The City has engaged in a practice known as “piggyback contracting,” which involves expanding an existing contract by adding on additional services. We determined that in at least two instances, the city procured services from other firms by instructing MWH to enter into subcontracts with the firms and act as a pass through for billing purposes. This practice circumvents the requirement for competitive procurement of services
through an advertised request for proposals.
--In one case, the city instructed MWH to award a subcontract for services to a firm that had responded to an earlier RFP, which was
then cancelled. MWH wound up billing the city more than $640,000 for the subcontractor's services based on MWH hourly rates that were higher than the subcontractor's own rates. And MWH played no role in directing or supervising the work.
The OIG report concluded:
"Over the past two years, MWH has billed the city of New Orleans more than $36 million under a contract that was procured without meaningful competition. The compensation terms invite excessive costs and jeopardize the City’s ability to maximize FEMA reimbursement for MWH’s fees. The city has blindly paid MWH’s expenses, which include a markup of approximately 23%, without adequate information to determine whether they are reasonable or appropriate. The city has also failed to exercise effective contract oversight and allowed costs to outpace the rate of progress on projects under management."
In response, the city said the OIG "fails to accurately present the facts regarding this issue. The findings presented in the...report are flawed, and many are based upon dated or incomplete information. As a result, the OIG's findings are not an accurate reflection of the services provided, value received, and effectiveness of the City's efforts to manage its massive recovery program through the use of an infrastructure project management services provider."
In its response, the OIG made a few minor clarifications but said it stood behind its findings.
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