Construction Contract Claim Settlements

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Florida Department of Transportation

OFFICE OF INSPECTOR GENERAL

CONSTRUCTION CONTRACT CLAIMSETTLEMENTS

REPORT 04G-9005

JUNE 2000


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Florida Department of Transportation

JEB BUSHGOVERNOR

6 0 5 S u w a n n e e S t reet Tal lahassee, F lo r ida 32399-0450

THOMAS F. BARRY, JR.SECRETARY

www.dot.state.fl

June 30, 2000

Mr. Thomas F. Barry, Jr., P.E., Secretary

Florida Department of Transportation605 Suwannee Street, MS 59Tallahassee, Florida 32399-0450

Re: Construction Contract Claim Settlements

Report 04G-9005

Dear Secretary Barry:

The report on our audit of Construction Contract Claim Settlements is attached. The objective of

this audit was to determine whether the Department has an adequate claims management systemthat includes reasonable evidence that claims are 1) settled for amounts that were clearlyestablished and adequately documented to be fair and equitable and 2) adequately tracked and

monitored and accurately reported.

We concluded that the Department has made recent improvements, but more are needed tomitigate the risks associated with managing claims. Essentially, the Department cannotadequately demonstrate its accountability for managing claims because claim settlement amounts

often were not clearly established or sufficiently documented to be fair and equitable, and theywere not adequately tracked and monitored or accurately reported.

The Departments senior staff agrees with our recommendations to appoint a cross-functionaltask team to develop a coordinated process for managing and resolving claims, for developing

procedures and guidelines relating to the General Counsels evaluations and advice, and foridentifying the minimum requirements for tracking and monitoring claims.

If we can be of further assistance, please let me know.

Sincerely,

(Original Signed by)Cecil T. Bragg, Jr., CPA

Inspector General

CTB/ecbAttachment


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CONSTRUCTION CONTRACT CLAIM SETTLEMENTS

AUDIT REPORT NUMBER 04G-9005

June 2000

OFFICE OF

INSPECTOR GENERAL


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2 ! Report No. 04G-9005

Audit Team Members

Audit Manager Eldon Blaxton, CIA, CFE

Audit Team Bob Anderson

Kim Smith, CPA

John Greene

Jim Maxwell, CIA

Sections 20.055 and 20.23, Florida Statutes, require the Florida Department of

Transportation's Inspector General to review, evaluate and report on policies,

plans, procedures and other operations of the Department and recommend

improvements. This audit was conducted to assist management in the effective

implementation of transportation programs by the Department.

This audit was conducted in accordance with applicable Government Auditing

Standards issued by the Comptroller General of the United States (1994

revision, as amended) and Standards for the Professional Practice of Internal

Auditing published by the Institute of Internal Auditors. We included such tests

and other auditing procedures as were considered necessary under the

circumstances.


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Report No. 04G-9005 ! 3

TABLE OF CONTENTS

Page

EXECUTIVE SUMMARY 4

BACKGROUND and INTRODUCTION 7

OBJECTIVES, SCOPE and METHODOLOGY 11

FINDINGS and RECOMMENDATIONS 13

I. Determining and Documenting Settlements 14

II. Tracking, Monitoring, and Reporting Settlements 18

EXHIBITS

1. Claims Referred to the FDOT Office of General Counsel 8

2. Claim Settlements by Fiscal Year 9

3. Summary of Large Claim Settlements 13

APPENDIX

Large Claim Settlements 23

ATTACHMENTS

1. Management Responses 25

2. Distribution 28


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As a percentage of total completed construction contracts each year, these amounts reflected represented1

2.5 percent, 3.2 percent, and 4.8 percent, respectively.

For example, effective with contracts let in February 2000, a revised claim specification should generate2

more timely and detailed contract claims, enabling Department or consultant CEI staff to perform more thorough and

timely claim analyses.

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EXECUTIVE SUMMARY

Contract Changes Contracts to construct roads and bridges often require modification

to accommodate such issues as unforeseen conditions, plan errors, or adjustments tosatisfy changing local needs and concerns. While these contracts are competitively bid, the

cost of changes to them must be established by other means. Most contract changes are

agreed to and paid with supplemental agreements (SA) that modify the contract.

Occasionally, however, the Department and the contractor cannot agree on the scope or

cost of the change. This dispute, then, provides the contractor the opportunity to file a

contract claim.

Resolving Claims Few claims are filed with the courts because districts typically

negotiate settlements to disputes. When contractors do file for legal proceedings, the

Departments Office of General Counsel (OGC) becomes involved. Even then, most ofthe claims filed with the courts are ultimately settled through negotiations by the districts or

by arbitration with the OGC involved in an advisory capacity.

Claims Payment Trend The Departments annual reports to the Legislature indicate

that the total dollars spent on claim settlements is increasing. Totals reported for the 3

fiscal years ending 1998-99 were $20.9, $41.3, and $65.4 million, respectively. Two1

risks the Department faces in managing these claims are the risks that they may be settled

for amounts that have not been clearly established and adequately documented to be fair

and equitable and that claim settlements may not be adequately tracked and monitored and

accurately reported.

Objectives The objective of this audit was to determine whether the Department has an

adequate claims management system that includes reasonable evidence that claims were:

! Settled for amounts that were clearly established and sufficiently

documented to be fair and equitable, and

! Adequately tracked and monitored and accurately reported.

Overall Conclusion The Department has made recent improvements, but more are2

needed to mitigate the risks associated with managing claims. The Department cannot


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Report No. 04G-9005 ! 5

adequately demonstrate its accountability for managing claims because claim settlement

amounts often were not clearly established or sufficiently documented to be fair and

equitable, and they were not adequately tracked and monitored or accurately reported.

While the Department can legitimately contend that it settled the claims reviewed in this

audit for about 43 percent of the $124.3 million claimed, the audit team could find

analytical support of entitlement for about 29 percent of the $53.6 million paid out.

I. Claim settlement files generally did not include supportingdocumentation establishing the entitlement to, or the fairvalue of, settlement amounts.

District staff generally did not comply with the Departments Construction ProjectAdministration Manual (CPAM) Section 4.4 procedures for documenting claims. For

over half the settlements represented in the random sample of 50, the audit team could not

locate the contractors written Notice of Intent to file a claim. Moreover, the team did

not find the Forwarding Memorandum, defined in CPAMSection 4.4.11.1, for any of

the settlements in the random sample, for any of the 29 in the expanded judgmental

sample, or any of the 14 settlement files reviewed in the OGC. Finally, although not

required by the CPAM, most of the settlement documentation reviewed for large claim

settlements did not explain how the settlement amount evolved from the claim analysis

prepared by the Department or consultant CEI, assuming such an analysis was prepared.

II. Claim settlements were not always adequately tracked andmonitored or accurately reported.

In assessing these responsibilities, the audit team established that the definition of claim

was somewhat elusive, procedures and processes for effectively tracking and monitoring

claims were lacking, and annual reports to the Legislature contained errors.


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Recommendations We recommend that:

! The Assistant Secretaries jointly appoint a cross-functional task team to

develop a coordinated process for managing and resolving claims. Thetask team should propose improved policies, procedures and guidelines

governing the claim settlement process,

! The Departments General Counsel establish procedures or guidelines to

govern activities relating to evaluating claims and advising the districts, and

! The Assistant Secretaries charge the cross-functional task team to identify

the minimum requirements for monitoring claims from their inception to

their resolution and establish who is responsible for each. The State

Construction Engineer should use those requirements as a basis for

designing a simplistic system to track and report contract claims.


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Section 4-3.2.3 of the Standard Specifications includes criteria for establishing the value of contract3

changes.

Report No. 04G-9005 ! 7

BACKGROUND AND INTRODUCTION

Contract Changes Contracts to construct roads and bridges often require modificationto accommodate such issues as unforeseen conditions, plan errors, or adjustments to

satisfy changing local needs and concerns. While these contracts are competitively bid, the

cost of changes to them must be established by other means. Most contract changes are

agreed to and paid with SAs that modify the contract. Occasionally, though, the

Department and the contractor cannot agree on the scope or cost of the change. This

dispute, then, provides the contractor an opportunity to file a contract claim.

Standard Specifications The Departments Standard Specifications for Road and

Bridge Construction (Specifications) is a document published by the Florida Departmentof Transportation (FDOT) and included by reference in all construction contracts. Among

other things, the Specifications address contract changes and claims.

Section 4-3 of the Specifications (1999 edition) governs changes to the contract

(Alteration of Plans or Character of Work). This section states,

If the Engineer makes alterations or changes in quantities that

significantly change the character of the work under the Contract,

the Engineer will make an adjustment, excluding loss of anticipated

profits, to the Contract. The Contractor and the Department shallagree to the basis for the adjustment prior to the performance of the

work. If the parties cannot agree to the basis, then the Department

will direct the work to be performed or deleted and make an

adjustment either for or against the Contractor in such amount as the

Engineer may determine to be fair and equitable. 3

Section 5-12 of the Specifications governs contract claims (Claims by

Contractor). Since at least the 1986 edition, this section has required the contractor to

provide a written Notice of the Intent to file a claim before beginning the work on which

the company based the claim. This section further states that if such notification is not

given, the contractor waives the right to claim extra compensation.


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An offer of judgment is an offer to settle prior to trial. If the offer is rejected and verdict exceeds the4

offer by more than 25 percent, the plaintiffs attorney fees must be paid in addition to the verdict.

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Revision to Standard Specifications In February 2000, the Department modified the

Specifications to require that changes to contracts be based on contractor costs plus

specified markups. The revised Specifications also specify the information to be included

in contract claims and require contractor certification of the claim. Prior versions of theSpecifications did not require specific content or certification of the claim and, prior to

1999, did not include criteria for pricing contract changes.

Resolving Claims Typically, the districts negotiate settlements to disputes, so claims

are not normally filed with the courts. When contractors do file for legal proceedings, the

Departments OGC becomes involved. Even then, most claims filed with the courts are

ultimately settled through negotiations by the districts or by arbitration with the OGC

involved in an advisory capacity. Few cases actually go to trial. Exhibit 1 reflects the

manner of resolution for cases referred to the OGC in FY1997-98 and 1998-99:

Claims Referred to the FDOT Office of General Counsel

Type of Settlement 1997-98 1998-99

Arbitrated 4 7

Negotiated 16 16

Offer of Judgment 0 14

Dismissed 1 4

Taken to Trial 1 2

Total Cases 22 30

Exhibit 1

For the five cases dismissed, the Department is considered to have prevailed; in oneof the three cases taken to trial, the verdict was considered to be favorable.

Claims Payment Trend Annual reports the Department submitted to the Legislature

indicate that the total dollars spent on claim settlements is increasing. Totals reported for

the past 3 fiscal years were as follows:


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$20.9

$41.3

$65.4

As a percentage of total completed construction contracts each year, these amounts represented 2.55

percent, 3.2 percent, and 4.8 percent, respectively.

A unilateral payment is used to effect a contract change and a timely payment when the contractor either6

refuses to timely execute an SA or the Department and the contractor cannot agree on the cost of the work.

Report No. 04G-9005 ! 9

1996-97 1997-98 1998-99(Millions of $)

Claim Settlements(By Fiscal Year)5

Exhibit 2

Claims Risks Two risks the Department faces in managing claims are the risks that:

! Claims may be settled for amounts that have not been clearly established

and adequately documented to be fair and equitable, and

! Claim settlements may not be adequately tracked and monitored and

accurately reported.

Mitigating Risks To help mitigate those risks, procedures for administeringconstruction contracts and their attendant claims are contained in the CPAM. Section 4.3

of the CPAMprovides guidance and outlines requirements for contract changes (SAs and

unilateral payments), and Section 4.4 provides guidance and outlines requirements for6

documenting and analyzing contract claims. Section 4.4.11 specifically addresses the

preparation of claim review packages and requires a Forwarding Memorandum, a

document intended to transmit critical information regarding the claim to the next level of

review. The Forwarding Memorandum is supposed to include specific statements,

analyses, recommendations and attachments essential to understanding the disputed issues.

This Memorandum should provide subsequent reviewers sufficient information to

determine the legitimacy of claim issues as well as the strength of the Departments position

to defend itself against the claim.


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10 ! Report No. 04G-9005

Payments All contract payments are processed through the Central Office. To initiate

payment, the districts submit authorization to the Departments Office of Comptroller. The

Office of Comptroller reviews the authorization, and when complete, forwards the

information to the State Comptroller for payment. SAs, including those settling claims notfiled with the courts, are paid as part of the monthly progress estimate for the project. If a

lawsuit is filed, the claim is paid using a Contract Invoice Transmittal (CIT) and

processed in accordance with specific procedures for that type of payment.


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The audit team interviewed the General Counsel in six districts and the District Construction Engineers,7

and two Resident Engineers (or their respective designees) in each of the eight districts. The team also interviewed

the State Construction Engineer and the Office of General Counsels Chief, Civil Litigation Counsel.

The SA Tracking System included 387 claim issues settled with SAs totaling $45,316,499 in FY1998-99.8

The audit team eliminated all SA claim settlement issues of $5,000 or less, reducing the universe to 286 claim

settlement issues with a cumulative amount representing 99.5 percent of the total reported. The random sample

accounted for $10,845,433 (24 percent) of this total. For perspective, the claim settlement SAs accounted for 26.7

percent of the total dollars represented by SAs for the year.

The cumulative settlement amount of these 29 SAs was $26,790,033. For ease of reference, this report will9

refer to settlements of $250,000 or more as large claim settlements.

Report No. 04G-9005 ! 11

OBJECTIVES, SCOPE and METHODOLOGY

Objectives

The objective of this audit was to determine whether the Department has an adequate

claims management system that includes reasonable evidence that claims are:

! Settled for amounts that had been clearly established and sufficiently


!Adequately tracked and monitored and accurately reported.

Scope and Methodology

The survey phase of this audit began with interviews of district and Central Office

personnel involved with managing and processing claims. The audit team also reviewed7

written procedures pertaining to claims as well as payment processing techniques to

understand how claim settlement information was accumulated and reported.

As an initial audit step, the team selected a random sample of 50 claim settlements paid by

SAs in FY1998-99. Because of anomalies involving six claim settlements greater than8

$250,000, the team selected a judgmental sample of 29 more claim-settlement SAs issued

from January 1, 1998, through October 31, 1999. SAs selected were those for which the9

amount was greater than $250,000 and that also met at least two of the following four

conditions:


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The team selected a sample of settlements of $250,000 or more from the FY1997-98 and FY1998-99 Reports10

to the Legislature. The cumulative settlement amount of these was $15,107,604.

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! The SA was written after final acceptance of the contract,

! The SA was the last one written for that contract,

! The previous SA was written more than 6 months prior to this SA, or

! The SA was assigned a reason code 851 or was coded C, identifying it

as a claim issue.

The focus of the review of large claim settlements was to determine whether the claim was

supported by a Department or consultant claim analysis for both entitlement and financial

issues, to see if the settlement amount was reconcilable to a fair-value analysis amount,

and to see if the supplemental agreement or claim file included a Forwarding Memorandum

as specified in CPAMSection 4.4.11.

The team then reviewed documentation supporting a third sample of 14 large claim

settlements that had been referred to the OGC. The contract files reviewed for these10

14 settlements were those maintained by the OGC. The focus was to determine if the OGC

was provided adequate claim analyses to establish a fair-value or risk exposure for the

claim and if the OGC prepared documentation to establish the basis for the settlement

amount. Throughout the audit, the team assessed internal controls associated with the two

risks mentioned in theBackground and Introduction section. The results of these

reviews follow in theFindings and Recommendations section.


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For example, effective with contracts let in February 2000, a revised claim specification should generate11

more timely and detailed contract claims, enabling Department or consultant CEI staff to perform more thorough and

timely claim analyses.

Report No. 04G-9005 ! 13

FINDINGS AND RECOMMENDATIONS

Overall Conclusion The Department has made recent improvements, but more are11

needed to mitigate the risks associated with managing claims. The Department cannot

adequately demonstrate its accountability for managing claims because claims often were

not:

! Settled for amounts that were clearly established and sufficiently


! Adequately tracked and monitored or accurately reported.

Exhibit 3, below, summarizes the audit teams observations with respect to the large claim

settlements associated with the three samples reviewed:

Summary of Large Claim Settlements

(49 Settlements; See Appendix)

Observation Claims Claimed Analysis SettlementsNbr Total Claim Total

No claim analysis in file 9 $ 18,846,292 None $ 10,506,672

No claim and no claim analysis 2 Unknown None 1,393,860

No entitlement per analysis 7 29,615,353 - 0 - 10,637,555

Some entitlement per analysis 31 75,886,585 $ 15,580,168 31,052,442

Total 49 $124,348,230 $15,580,168 $ 53,590,529Exhibit 3


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While the Department can legitimately contend that it settled these claims for about 43

percent of the $124.3 million claimed, the team could find analytical support of entitlement

for about 29 percent of the $53.6 million paid out.

I. Claim settlement files generally did not include supportingdocumentation establishing the entitlement to, or the fairvalue of, settlement amounts.

Section 337.221, Florida Statutes (F.S.), requires the Department to establish a process

to resolve claims and to document its final decision on all claims, including reasonable

support for its decision. Section 337.11(8), F.S., authorizes the use of SAs to effect

contract changes, including the settlement of contract claims. The Departmentsprocedures are outlined in CPAMSection 4.4.

District staff generally did not comply with CPAMSection 4.4 procedures for

documenting claims. Specifically, in over half the settlements represented in the random

sample of 50, the audit team could not locate the contractors written Notice of Intent to

file a claim. Moreover, the team did not find the Forwarding Memorandum, defined in

CPAMSection 4.4.11.1, for any of the settlements in the random sample, for any of the

29 in the expanded judgmental sample, or any of the 14 settlement files reviewed in the

OGC. Finally, although not required by the CPAM, most of the settlement documentation

that was available for large claim settlements did not explain how the settlement amount

evolved from the claim analysis prepared by the Department or consultant CEI, assuming

such an analysis was prepared.

Notice of Intent Since at least 1986, the Specifications have required that a

contractor provide written notice of the intention to file a claim for extra compensation

before beginning the work on which the claim is based. The purpose of this notice is to

afford the Department the opportunity to keep strict account of actual costs. The

Specifications further provide that the contractor waives the right to claim extra

compensation if such written notice is not provided.

Department staff stated that the written Notice of Intent was not particularlyimportant in dealing with claims and that the absence of a written notice would not stand in

court as a basis for withholding payment to the contractor. Whether that be the case or

not, the Specifications are contractually binding, and the requirement for a written notice is

the first step in the claim process.

An analysis of settlements in the random sample indicated the Department

effectively signaled it would be lenient in enforcing contractual provisions for resolving


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Calculations were made using software developed by James A. Faughn, Jr., Consultant-Lecturer,12

Statistical Sampling for Auditors. Projections are based on a confidence level of 95 percent. Projections above

are lower limits; the upper limits are 190 and 99, respectively.

Several files included summaries that were called memoranda of some sort, but they were after-the-fact13

summaries of the negotiated settlement.

The audit scope did not include an assessment of whether the settlement amounts were justifiable; the14

examples illustrate how the Department risks criticism that it cannot adequately demonstrate its accountability for

managing claims.

Report No. 04G-9005 ! 15

claims by not enforcing the requirement for a written notice. The random sample of

50 claim settlement issues included 27 claims (54 percent) for which no Notice of Intent

was on file, although other documentation in those files indicated the Department was

aware of the claim issues for 15. The statistical probability, then, is that at least 118 of the286 claims over $5,000 had no written Notice of Intent, and in at least 37 instances, the

Department did not know about the claims until they were filed.12

Forwarding Memoranda None of the 29 large claim settlements in the judgmental

sample was supported by a Forwarding Memorandum as described in CPAM4.4.11.1.

Moreover, 8 of the 29 lacked evidence of any analysis of the claim, and 3 lacked the

contractors claim document. The purpose of the Forwarding Memorandum is to

document the Departments assessment of the contractors entitlement to the claim and to

document the Departments assessment of a fair and equitable settlement. Two13

examples illustrate the inadequacy of the documentation explaining the rationale for the

settlement:14

1) In one claim settlement, the sum of the consultant CEIs claim analyses for

direct costs amounted to $108,931. At the conclusion of this project, the contractor

submitted a claim for $5,925,256 based on alleged total costs plus 15 percent profit,

return of liquidated damages, adjustment of asphalt overrun, additional subcontractor costs

(which were not yet paid), overhead and interest. The consultant CEI had kept detailed

records of the impact of numerous changes in the storm water drainage for the project.

The consultant CEI also indicated the contractor left the job for 6 months to pursue

hurricane-related work, thus contributing to the delays and additional costs. The audit

team found no details to explain the basis of the claim, nor did it find any documentation

that explained how the Department moved from the consultants analyses to the settlement

amount. The settlement was negotiated by telephone for the amount of $2,400,000 on the

condition that the contractor send in back up documentation. This settlement was

documented on a sheet of scratch pad paper.


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16 ! Report No. 04G-9005

2) In another case, the team found documentation indicating some Department

liability but found virtually no Department or consultant analysis indicating the extent, or

fair-value, assigned to that liability. This contract included incentives and bonuses for

meeting milestone dates and completing the project early. District staff indicated additionalwork was given to the contractor, and the contractor performed the work. However, no

agreement was reached on payment, and the consultant did not maintain records of the

contractors labor, materials, and equipment with the exception of one claim issue for

hauling embankment (valued at $395,699 in the settlement). The contractor filed a claim

for $4,132,611 at the conclusion of the job. In negotiations between the district and the

contractor, the contractor agreed to reductions totaling $189,115 for 16 claim issues and

the elimination of Home Office Overhead ($938,689) that was already accounted for in

the various labor, equipment and material markups on the 16 claim issues. The district

ultimately settled for $3,004,807. The audit team was told that no Department records

were available to substantiate the value of work claimed by the contractor and paid for by

the district.

Recommendation 1

We recommend that the Assistant Secretaries jointly appoint a cross-functional task team

to develop a coordinated process for managing and resolving claims. The task team should

propose improved policies, procedures and guidelines governing the claim settlement

process. At a minimum, the process employed should address critical elements of

managing claims, including the following:

! Establishing and enforcing a consistent definition of claim that clearly

addresses the dispute element,

! Enforcing the requirement that the contractor provide a written Notice of

Intent to file a claim prior to beginning the work on which the claim is

based,

! Requiring a predetermined, minimum standard of training in negotiation

skills for all Department or consultant staff who are involved in analyzing

claims and negotiating settlements,

! Requiring that all claims be supported by a determination of entitlement

and an analysis of fair price before entering into any negotiations and

requiring that the analysis serve as the basis for negotiating a settlement,

! Requiring that all claims be supported by a Forwarding Memorandum

thats meets the Departments CPAMrequirements,


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Report No. 04G-9005 ! 17

! Including provisions for project-level and higher managers to request real-

time assistance from the Office of General Counsel or the Office of

Inspector General in assessing entitlement or establishing fair price,

! Including language in each settlement agreement advising the contractor

that the settlement is subject to audit of the companys records and that the

Department may pursue civil or criminal sanctions in the event the claim

was falsely presented, and

! Periodically monitoring claim settlements as part of the Departments

formal Quality Assurance Review Program.

Management Response: The State Highway Engineer stated,

We agree to the need for a cross-functional team to review the

process for managing and resolving claims. The team will include

district representatives, General Counsel staff, member(s) from the

OIG Audit staff, and Central Office Construction. Greg Xanders,

State Construction Engineer, will establish the team and lead its

initial meeting. The teams efforts will include addressing the 7

bullets listed under this recommendation. However, some of the

bullets (2 and 7) have already been addressed by the new claims

specification. Bullet 4 will need to be addressed in a manner to look

for a way to keep such determinations and analysis as

confidential information to prohibit use against the Department in

legal actions.

Claims Involving OGC The team reviewed 14 claim settlements for which the

Departments OGC had some involvement. None included a Forwarding Memorandum.

Of the claims for which analyses were on file, the analyses often indicated the claim had

little or no merit; yet, the Department agreed to substantial settlements. As one example:

Both OGC files and district files included multiple claim analyses that generally

refuted the major issues raised in a contractors claim totaling $5,887,170. The

Department had made unilateral payments totaling $586,596 to resolve issues for which

the Department believed it had some responsibility. According to the documentation

available, the contractor waited until filing suit to provide details of some of the major

portions of their claim. The OGCs Case Closing Report references claim analyses that


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18 ! Report No. 04G-9005

stated the contractor and subcontractor caused their own problems. The first indication of

a settlement was in the OGCs Case Closing Report. According to that report, the district

settled all claim issues with the contractor ...the day before trial was to start.

Documentation in files reviewed at both the OGC and in the district did not explain howthe settlement amount was established. Negotiations were conducted by telephone. The

record of negotiations consisted only of names written on a sheet of paper along with the

agreed upon settlement amount of $4,200,000.

Recommendation 2

We recommend that the Departments General Counsel establish procedures or guidelines

to govern activities relating to evaluating claims and advising the districts. At a minimum,

these guidelines should establish a framework for evaluating claims and specify minimum

requirements for documenting the basis for them. Advice given to the districts should

include the parameters within which they believe a settlement would be in the

Departments best interest. If such documentation poses a legitimate threat to the

Departments litigation position, the Department should seek an exemption from the public

records law.

Management Response: The General Counsel responded,

Agree. The Office of General Counsel will set up guidelines for attorneys to

document settlement advice in a fashion which will not adversely affect the

departments ability to litigate or settle future construction claims. Although

the extent of this documentation may need to vary on a case by case basis,

the OGC agrees improved documentation is needed and desireable. It is not

advisable to seek any Chapter 119 amendment at this time.

II. Claim settlements were not always adequately tracked andmonitored or accurately reported.

Section 20.23, F.S., provides that the Department of Transportation is to be a

decentralized agency with a Central Office to establish and monitor the implementation of

policies, rules, procedures and standards. Section 334.048, F.S., specifies that the

policies, rules, procedures and standards are to establish accountability for all aspects of

the Departments operation. Further, Section 337.221, F.S., requires the Department to

report all claim settlements to the Legislature annually. In assessing these responsibilities,


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Trauner, Jr., Theodore J.;Reviewing, Auditing, and Resolving Construction Claims, November 1991.15

CPAM4.4, April 2, 1997.16

Contract Administration Core Curriculum, U.S. Department of Transportation, Federal Highway17

Administration, 1997.

Report No. 04G-9005 ! 19

the audit team determined that the definition of claim was somewhat elusive, procedures

and processes for tracking and monitoring claims were lacking, and annual reports to the

Legislature contained errors.

Definition of Claim A construction contract is unique among the various types of

contracts because of the changes clause. This clause is essential because changes are

inevitable. A claim is an unresolved, or disputed, change.15

Prior to December 1999, the Departments CPAMdefined a claim as, A written

demand submitted to the Department by the contractor in compliance with contract

documents and seeking additional monetary compensation, time, or other

adjustments to the contract, the entitlement or impact of which is disputed by the

Department. The Federal Highway Administrations definition, which is consistent with16

the CPAMdefinition, further specifies that a claim exists when the disputed demand goes

beyond project-level staff.17

In practice, the concepts included in these definitions were not consistently and

uniformly applied within the Department. In one district, an issue was not considered to be

a claim if district staff could agree to a settlement amount for the issue. In another district,

staff considered a claim to exist if the additional work and the cost thereof could not be

agreed to before work was performed. These varying definitions resulted in substantial

differences in the claim settlements reported from the districts.

Revised Definition In the December 1999 CPAMUpdate, the State Construction

Office changed the definition of claim.

As presently defined in CPAM4.4, a contractors written demand seeking

additional money, time, or other contract adjustments only becomes a claim when ...the

entitlement or impact of which is disputed by the Departmentand which cannot be

resolved by negotiations between the contractor and the Departments District-

level personnel. (Emphasis added.)


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20 ! Report No. 04G-9005

The revised definition essentially does not recognize the dispute element of a

claim until it has passed through all levels of district review. The definition, itself, tends to

obviate the requirement for some person or position near the source of the dispute to begin

documenting contractors activities. In turn, the Department reduces its ability to defenditself against baseless or exaggerated claims. Except for those referred to the OGC, none

of the SA claim settlements reviewed in this audit would have been identifiable as a claim

because they would have been treated as though no dispute existed. Moreover, those

referred to the OGC may not have had records kept to serve as a basis for refuting the

claim.

Managing Claims To properly manage claims, Project Managers need to:

! Acknowledge and respond to alleged instances of extra work, delay,

disruption, and inefficiencies and establish the Departments initial position

as to entitlement;

! Act to mitigate the impacts of claim issues alleged by the contractor;

! Document information relative to the alleged claim issue and the labor,

materials, equipment and contract time expended by the contractor;

! Attempt to reach agreement with the contractor and establish and

document the specific points of disagreement; and,

! Summarize the claim issues and critical information for transmittal to higher

levels in the organization for resolution.

To manage and control this process, district staffs need a method of tracking, monitoring

and reporting on pending and settled claims. The absence of this information hinders the

management of claims and the claims process.

Claims Tracking The Departments only means of identifying and locating claim files

for review is through the SA Tracking System and the Construction Offices AnnualReports to the Legislature. The SA Tracking System provides little information useful for

managing claims as it records only payments and provides for only a single, three-character

field to identify the cause of the claim. The Annual Report offers little more than the dollar

amounts of the settlements. The Department once maintained a Claims Tracking System

but terminated it during 1999. Central Office staff explained that the system was unreliable

and was burdensome to maintain. Hence, the Department has no central source of


23/31

A dummy SA is created to force a claim paid with a Contract Invoice Transmittal to post to the Contract18

Reporting System.

Report No. 04G-9005 ! 21

meaningful information on pending or potential claims, nor does it have complete

information on claims that were successfully refuted by the Department.

Claims Monitoring The absence of some system or process to monitor claims also

means the absence of any oversight of district successes or failures in resolving contractor

claims. Because Central Office monitoring of claims was limited to the SA Tracking

System, the Department had no means to identify and review claim issues that had been

denied by the Department or consultant project engineer and for which no SA was ever

written. Therefore, any review of claim settlement issues may be unintentionally biased to

worst-case examples. Other than the SA Tracking System, the audit team found no

evidence of Central Office oversight of the districts negotiation and settlement of claims.

Generally, Central Office oversight revolves around the Quality Assurance Review (QAR)

process; however, claims negotiation and settlement were not addressed in the QARs

performed.

Claims Reporting Our review indicated the FY1998-99 Report of Claims to the

Legislature was inaccurate. Claim settlements totaling over $3 million were not reported,

and approximately $7 million of SA claim settlements included in the 1998-99 report had

been reported in the prior years report. Those SAs that were included in the FY1998-99

report were dummy SAs intended only to record the payment against the contract .18

The process used to accumulate and report claim settlements was an informal process of

extracting information from the SA Tracking System, combined with a compilation of Case

Closing Reports from the OGC. Department staff made no attempt to reconcile the data

to the Departments accounting records.

Recommendation 3

We recommend that the Assistant Secretaries charge the cross-functional task team to

identify the minimum requirements for monitoring claims from their inception to their

resolution and establish who is responsible for each. The State Construction Engineer

should use those requirements as a basis for designing a simplistic system to track and

report contract claims to facilitate the districts management of claims and the CentralOffices oversight and reporting of claim settlements.


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22 ! Report No. 04G-9005

Management Response: The State Highway Engineer agreed and stated,

This will also be looked at by the team. If a program is determined to

be beneficial and needed by the districts, it must be simple to use andprovide useful information. Such a program would be primarily for

district use in their management of claims. Central Office can then

access as necessary for process reviews. The districts do have a

handle on typically what their major claims are. Also, the new

specification has tightened the process on a contractor filing a claim

with all the details in a more timely way.


25/31 Report No. 04G-9005

!23

APPENDIX Large Claim Settlements

$ Amount Per

Contract How SA Claim Analysis NoteNumber Selected District Number Settlement

Claim

18858 R 7 50 1,606,269 1,335,112 1,335,112

18949 R 5 7 10,373,745 819,384 2,959,507 4

19198 R 3 6 5,925,255 108,931 2,400,000

19211 R 6 12 734,000 280,000 1

19388 R Tpk 20 4,996,000 260,000 387,000

19456 R Tpk 37 1,141,076 551,273 551,273

18349 J 7 16 1,108,902 115,634 436,905

18462 J 5 9 2,907,202 119,728 1,850,000

18551 J 3 16 1,019,498 105,867 481,833

18626 J 5 17, 19 1,442,829 445,000 1

18746 J 5 19 2,488,177 646,681 1,400,000

18758 J Tpk 13 2,000,000 428,752 900,000

18768 J 7 10 1,554,850 329,539 689,633

18887 J 4 5 543,182 495,000 1

18903 J 5 19 3,053,381 1,450,000 1,450,000

18929 J 3 14 5,501,000 195,000 1,900,000

18960 J 7 11 1,432,894 581,865 1

18969 J 5 8 10,742,266 835,242 3,025,821 4

19011 J 4 43, 44 1,707,125 1,011,214 1,370,735

19113 J 6 26 2,954,162 1,038,482 1,200,000

19114 J 6 9 1,773,951 574,639 497,000

19129 J 7 5 882,121 476,513 519,516

19171 J 3 5 528,860 2

19183 J 6 26 865,000 2

19281 J 6 9 113,532 430,000 3

19343 J 4 16, 17 1,049,595 133,182 743,783

19410 J 3 6 2,651,685 0 495,000

19485 J 4 2 519,478 162,810 260,000

19754 J 2 10 1,129,150 525,000 1

19757 J 2 6 517,545 240,057 325,000

19758 J 2 6 1,038,226 1,050,000 1

19782 J 7 16 658,186 525,836 525,836

19839 J 2 9 597,117 0 525,000


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24 ! Report No. 04G-9005

APPENDIX(Cont.) Large Claim Settlements

$ Amount Per

Contract How SA Claim Analysis NoteNumber Selected District Number Settlement

Claim

19926 J 1 25 4,132,611 3,004,807 1

19945 J 7 7 335,573 268,439 268,439

E3539 G 3 CIT 597,270 507,626 290,000

17765 G 4 CIT 3,493,400 1,750,000 1

17799 G 6 CIT 1,500,000 199,844 411,571

17826 G 3 CIT 1,236,538 0 400,000 517932 G 2 CIT 2,188,269 0 1,296,666

18378 G 6 CIT 15,877,417 0 3,000,889

18401 G 6 CIT 3,295,550 2,101,060 2,486,000

18411 G 7 CIT 816,126 259,768 480,000

18819 G 2 CIT 4,900,000 2,375,000 1

18884 G 6 CIT 1,850,829 448,627 477,478

18924 G 5 CIT 2,084,065 83,289 450,000

19204 G 3 CIT 5,887,170 0 4,200,000

19329 G 2 CIT 1,177,157 0 720,000

19608 G 7 CIT 927,388 134,107 550,000

Totals 49 Settlements $124,348,230 $15,580,168 $53,590,529

Abbreviations

CIT - Contract Invoice Transmittal

OGC - Office of General Counsel

Tpk - Turnpike District

How Selected

G - Files reviewed in Office of General Counsel

J - Judgmental sample based on anomalies in random sampleR - Initial random sample

Notes

1 No claim analysis was found in the files reviewed.

2 Neither a claim analysis nor the contractor's claim was found in the files reviewed.

3 The claim was not found in the files reviewed.

4 Files included multiple analyses done by multiple consultants. Audit team used what appeared to be

"best supported." Total entitlement per that analysis was allocated to the two contracts in

proportion to the contractor's claims for them.

5 Claims Review Committee recommended $260,132.


27/31 Report No. 04G-9005

!25

Attachment 1 Management Response


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26 ! Report No. 04G-9005

Attachment 1 (Cont.) Management Response


29/31 Report No. 04G-9005

!27

Attachment 1 (Cont.) Management Response


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28 ! Report No. 04G-9005

Attachment 2 Distribution

Thomas F. Barry, Jr., Secretary

Ken Morefield, Assistant Secretary for Transportation PolicyNancy Houston, Assistant Secretary for District Operations

Cris Speer, Assistant Secretary for Finance and Administration

John Browning, Jr., Chairman, Florida Transportation CommissionAttention: Bill Ham (2)

William Monroe, Auditor General

Attention: L. R. Weathermon (2)David Twiddy, Secretary, District 1

Huey Hawkins, Secretary, District 2

Edward Prescott, Secretary, District 3

Rick Chesser, Secretary, District 4

Michael Snyder, Secretary, District 5

Jose Abreu, Secretary, District 6

Ken Hartmann, Secretary, District 7

Jim Ely, Secretary, Turnpike District

Freddie Simmons, State Highway Engineer

Bill Albaugh, Highway Operations Director

Greg Xanders, State Construction Engineer

Pamela Leslie, General Counsel

Dick Kane, Public Information Administrator

Sarah Porter, Legislative Programs Administrator

Bill Kynoch, Budget OfficerRobin Naitove, Comptroller

Nelson Hill, Chief Information Officer

Carolyn Runyan, Procedures Administrator

Marcia Cooke, Governor's Chief Inspector GeneralAttention: James Thomas

Chairman, Senate Transportation CommitteeAttention: Reynold Meyer

Chairman, House Committee on TransportationAttention: John Johnston

Chairman, Senate Budget CommitteeAttention: Tom Barrett

Chairman, House Transportation and Economic DevelopmentAppropriations CommitteeAttention: Eliza Hawkins

Chairman, Joint Legislative Auditing CommitteeAttention: Terry Shoffstall

John Turcotte, Director, Office of Program Policy Analysis

and Government Accountability (3 copies)James E. St. John, Division Administrator, FHWA


31/31

For further information call (850) 488-2501 / Suncom 278-2501 or Fax (904) 488-4417Suncom 278-4417.

For a copy of the report, please call, write or e-mail:

Ms. Nancy [email protected] (IA906NM)Office of Inspector GeneralFlorida Department of Transportation605 Suwannee Street, Mail Station 44Tallahassee, Florida 32399-0450

Permission is granted to reproduce this report.

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