National Western Center: Hensel Phelps Construction Contract
On behalf of the Denver Auditor’s Office of the City and County of Denver, BKD performed procedures related to construction audit services in accordance with the scope of work described in the work order. This Scope of Services was agreed to by the Denver Auditor’s Office pursuant to Work Order A-1 dated December 12, 2019. BKD’s scope of work included the assessment of payment applications and change orders for the work completed by Hensel Phelps.
In June of 2018, the City and County of Denver (city) and National Western Center (NWC) awarded Hensel Phelps a not-to-exceed $275 million contract as the Horizontal Integrated Contractor (Contractor).
The following results are based on the scope of work noted above.
Contract Assessment: Based on completion of these procedures, we noted one potential enhancement to the existing contract. See observation three noted below.
Procurement Process Assessment: No observations were noted through completion of these procedures.
Payment Application Assessment: We selected 10 payment applications and obtained support, we further sampled contractor support related to the in-scope payment applications. Based on completion of these procedures and inquiry of NWC personnel about the process of reviewing subcontractor support. We noted one observation, see observation one below.
Change Order Assessment: No observations were noted through completion of these procedures.
Subcontractor Payment Assessment: Based on testing of the sampled payments, we identified one exception to contract terms. See observation two below.
Insurance/Bond Coverage Documentation Assessment: No observations were noted through completion of these procedures.
Closeout Process Assessment: No observations were noted through completion of these procedures.
1. BKD recommends that NWC implements a review process that would incorporate subcontractor support from a financial perspective. This could include, obtaining a sample of invoices supporting charges made within the Contractor’s monthly payment applications that would allow for a more thorough review of subcontractor payment applications and decrease the risk of unallowed costs being paid for by the city.
2. To comply with the Prompt Pay Ordinance at the city, NWC and the contractor should calculate and pay interest for the late payment that was identified during this assessment. Additionally, NWC should implement a process to assess that all payments to subcontractors were paid in accordance with the prompt payment ordinance. NWC should document any instances of late payments and the resolutions.
3. The NWC and the City Attorney’s office should enhance the existing clause to include the Contractor and other vendors. Over the course of construction projects, conflicts of interest may arise for all parties involved. The Contractor may work closely or have a partial ownership agreement with a subcontractor that bids on a scope of work. The architect may have a relative that works for a General Contractor that is bidding on the work. These related party and similar types of relationships should be disclosed when they arise. It is important to note that just because a conflict of interest may arise that should not automatically exclude an individual or firm from participating. Appropriate competition and quality of work may be impaired if a firm or individual are excluded, however it is important to be disclosed. It is important for the clause to be in line with any potential conflict of interest or related party policy or law.
The objective of our assessment of the City and County of Denver’s construction contract with Hensel Phelps at the National Western Center was to evaluate how the center reviews Hensel Phelps’ compliance with the contract terms. This included evaluating the National Western Center’s internal controls associated with the review, the center’s approval of pay applications and change orders, Hensel Phelps’ use of subcontractors, and Hensel Phelps’ adherence to project progress reporting. BKD LLP conducted this assessment on behalf of the Auditor’s Office. I am pleased to present the results of this assessment.
The assessment revealed the National Western Center needs to implement a review process of subcontractors’ financial documentation for the work subcontractors perform. The city and the National Western Center need to enhance language in future construction contracts to ensure subcontractors are paid in a timely manner after the contractor is paid and that the contract’s conflict-of-interest clause includes the contractor and other vendors.
By implementing recommendations for stronger review processes and contract language, the city and the National Western Center will be better equipped to manage future construction contracts.
We extend our appreciation to the personnel at the National Western Center who assisted and cooperated with us and BKD LLP during the assessment. For any questions, please feel free to contact me at 720-913- 5000.
A follow-up report is forthcoming.
Audit Team: Dawn Wiseman, Sonia Montano, Patrick Schafer
Consultants: BKD LLP (Courtney Reikofski, Jessica Escarcega)