December 5, 2011

Auditors find rampant problems in highway construction inspections

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By Megan Poinski
Megan@MarylandReporter.com

highway construction

Photo by g.bertschinger

When auditors delved deeper into the way contracts are handled for construction inspection services by the State Highway Administration, their fears of rampant, systemic problems in the agency came true.

“It was surprising and disappointing,” said Legislative Auditor Bruce Myers.

The 21-page audit detailing the problems – which Myers characterized as seeming to come from people with no appreciation for state procurement law – was released by the Office of Legislative Audits on Friday.

This report is a follow-up to a July audit  that detailed potentially criminal, ethical and contracting violations in the State Highway Administration’s Office of Construction.

Myers said that it looked like contracting issues could be more widespread, so auditors continued to investigate.

No potentially criminal activity was found in the new report, but auditors uncovered a contracting system that had few rules of its own and skirted existing law.

Contractors often used creative accounting to transfer unspent funds between different projects. Meanwhile, the construction inspection office did not maintain any documentation of what contractors were supposed to do, and had no standard method of estimating how much different projects should cost.

Contracts were often extended and modified without the required step of getting Board of Public Works approval, and new contracts were often awarded when there were still contractors doing work.

Transportation Secretary Beverley Swaim-Staley said that she has been working hard to change the culture in the office to one that closely manages all aspects of the contract process. She hopes that incoming State Highway administrator Melinda Peters will take advantage of her new position and several relatively new vacancies in high-level positions in construction inspection, procurement and auditing to recalibrate the way contracts are done. Peters replaces long-time head Neil Pederson, who resigned in June but remains on as a consultant.

The General Assembly’s Joint Audit Committee will be discussing both reports about the State Highway Administration at its Dec. 13 hearing.

Unauthorized modifications

In Maryland, most government contracts must be approved by the Board of Public Works, which is made up of the governor, state treasurer and comptroller. The board must also approve the vast majority of modifications to those contracts – including time extensions, additional money, or reprogramming funds.

While all contracts initially received Board of Public Works approval, auditors found that many of the contracts were substantially changed without going back to the board.

Maryland is broken up into several regions by the State Highway Administration, and construction services inspection contracts are given to people and agencies who will do inspections in a region for a fixed amount of time. State procurement law states that money can only be spent on the contract for which it was approved.

Auditors found that contractor were often involved in performing inspections in several areas, and tended to move the money they received between areas to cover for funds that ran out. For 10 contracts auditors looked at, nearly a fourth of all funds – about $11 million – were spent on different projects.

Contracting staff told auditors that this kind of borrowing funds was an accepted practice in their office. Myers said that this procedure is not accepted anywhere else, and he cannot recall finding another department doing this in other audits.

Auditors also found that administration staff also unilaterally extended contract times, never bringing any of the contracts to the Board of Public Works. The reason that contracts would be extended, the report states, is so unspent money in the contracts could get spent. About $26 million spent through unauthorized contract extensions should have been returned to the state for other needs, auditors wrote.

No documentation

Construction inspection services contracts were often missing several critical pieces of information that could be used to ensure the state was getting its money’s worth. Auditors found that contracts had no scopes of work – detailed lists of tasks that must be done under the contract.

“To give you any chance to manage and monitor a contract, you need to lay out those kinds of details,” Myers said.

Office of Construction personnel told auditors that the contracts were detailed enough, and putting together a scope of work for each one would be cumbersome. Auditors disagreed on both counts.

Auditors also found that there was no single way to determine the maximum amount that a contract could be worth. Auditors examined four contracts worth $34 million, and asked the office for documentation backing up the money spent on each. No sensible documentation was provided, and different employees gave completely different methods of trying to estimate the costs.

“Usually, people prepare that information well enough to take before the Board of Public Works, in case they get tough questions,” Myers said.

Too many contracts

The office sometimes gave inspection contracts for an area to multiple contractors. Auditors found that far too many contracts were given for no reason. One area had $15.4 million unspent on inspection contracts, and received Board of Public Works approval for another $16 million. Another area had $36.5 million in unspent contracts floating around, and received Board of Public Works approval for another $10 million.

Auditors received no justification for these initial contracts, and reported that the office never reported the amounts of other pending contracts to the Board of Public Works.

What now?

Swaim-Staley said that she has been busy trying to correct these problems. She has re-educated current employees working with contracts, and reached out to contractors about how the process is supposed to work. Also, there are several new checks and balances that she is introducing into the system to ensure that procurement law is followed.

“We’ve already prevented some things from occurring and caught some things in process,” Swaim-Staley said.

She plans to bring several of the contract changes that never got approval before the Board of Public Works approval later this month.

Myers said that the Office of Legislative Audits is currently working on its regularly scheduled compliance audit of the State Highway Administration, and is in place to dig more into contracting at the agency if the Joint Audit Committee wants it.