Report 2018-108 Recommendation 1 Responses

Report 2018-108: California High‑Speed Rail Authority: Its Flawed Decision Making and Poor Contract Management Have Contributed to Billions in Cost Overruns and Delays in the System's Construction (Release Date: November 2018)

Recommendation #1 To: High-Speed Rail Authority, California

To ensure that the change orders it approves are necessary and that their costs are appropriate, the Authority should adhere to the guidance and estimates the oversight firms provide to it. If the Authority chooses to deviate from the oversight firms' recommendations, it should clearly document why it made those deviations.

1-Year Agency Response

In September, we provided examples of change orders where the Authority adhered to the PCM guidance, which is the recommendation, as well as the various levels of the Authority's Delegation of Authority for Design-Build Contracts, up through Business Oversight Committee approval.

Regarding Business Oversight Committee approval of change orders, the example change orders the Authority provided and references in its response did not include change orders that went before the committee, and therefore do not include documentation of the Committee's review for conformance with the oversight firms' recommendations. Although the change orders provided did not require the Committee's approval, each change order that does require Committee approval includes an accompanying Business Case that shows the PCM's recommendations, thus enabling the Committee to verify if the recommendations have been adhered to.

Also, in June 2019 the Authority's Board of Directors (Board) updated the CEO's delegation for contract management through delegation to manage contingency following the approved program schedule (baseline). The Authority's Delegation of Authority for Design-Build Contracts aligns with the delegation to the CEO approved by the Board.

Also, the Authority's Delegation of Authority for Design-Build Contracts requires appropriate review by state managers before any change order is approved. All change orders are submitted by the PCM, with one to four state managers (or the Business Oversight Committee for change orders greater than $20 million) reviewing the change order before it is approved. Thus, appropriate review of change orders by state management, including reviewing adherence to PCM recommendations, has been implemented.

California State Auditor's Assessment of 1-Year Status: Fully Implemented

In our 6-month assessment, we noted that the Authority still had not demonstrated the Business Oversight Committee's review of change orders for conformance with the oversight firms' recommendations. As part of its 1-year response, the Authority for the first time provided an example of the committee using the Business Case tool it created for this purpose--though the change order did not deviate from the PCM recommendation.

The Authority also provided data indicating that, for the first six months after implementing the new procedures, it did not deviate from PCM-recommended dollar amounts for any change orders among its three construction projects. This kind of monitoring--and thorough follow-up when any such deviation occurs--will be critical to ensuring the issues we identified in our audit do not recur. This is especially true given the fact that, as we mentioned in our previous assessment, the Business Oversight Committee does not review all change orders.

6-Month Agency Response

The Authority provided documentation to show the Business Oversight Committee charter was revised and the Business Case template was updated to identify if there is a disagreement with the PCM. We also provided examples of change orders where we adhered to the guidance from the PCM.

California State Auditor's Assessment of 6-Month Status: Partially Implemented

There has been no change in the status of this recommendation since the Authority's 60-day submission in January 2019. In our response to that submission, we acknowledged the charter revisions the Authority mentions here, but explained that because the Authority reported at the time that it had not diverged from any oversight firm recommendations, we were not yet able to determine that the Authority is adhering to its new requirements. The Authority indicated to us in June 2019 that it still has not diverged from any oversight firm recommendation since the time of our audit report; as such, our assessment remains the same as our assessment of its response at 60 days. Further, the oversight process the Authority has put in place does not apply to all change orders--only those that come before the business oversight committee. The example change orders the Authority provided and references in its response did not include change orders that went before the committee, and therefore do not include any documentation of the committee's review for conformance with the oversight firms' recommendations. As such, we are not able to assess the performance of any additional oversight structure not already in place at the time of our audit.

60-Day Agency Response

The Authority revised the Business Oversight Committee charter to require documentation when a governance committee overrules the PCM's recommendation. The revised Business Oversight Committee charter has been approved.

The Business Case, which is the document that is prepared for requesting a change to the Baseline or a proposed change order that requires approval by the Business Oversight Committee, has been updated to document the PCM's recommendation and cost estimates along with an explanation of any deviations. The Business Case has been implemented.

California State Auditor's Assessment of 60-Day Status: Partially Implemented

The Authority provided the revised Business Oversight Committee charter, which states that the committee is to ensure that the Authority adheres to the oversight firms' guidance and should clearly document the reasons for any deviation from those recommendations. However, the Authority told us that it has not yet used the new change order proposal document for a case wherein the proposed change deviates from the oversight firm recommendation. Therefore, we are not yet able to determine that the Authority is adhering to this new requirement. Once we are able to review instances in which the Authority has appropriately justified deviations from oversight firm recommendations, we will be able to conclude that this recommendation has been fully implemented.

All Recommendations in 2018-108

Agency responses received are posted verbatim.