A major rail contractor won approval for a $15.9 million change order Thursday to cover increasing prices for steel and other materials for the 20-mile Honolulu rail system.
Kiewit/Kobayashi, a Joint Venture, made the claim for additional money because prices for steel and other materials escalated during the 23 months since the joint venture originally expected to begin work on the project.
The joint venture is also seeking additional money for profit and overhead costs related to the steel and materials purchases, but that issue is still being negotiated, city officials said.
Kiewit/Kobayashi has a $195 million contract to build a maintenance and storage facility for rail cars near Leeward Community College. As part of that contract, the joint venture will also purchase the steel for train tracks for the entire 20-mile rail line.
The cost of steel and other materials, such as concrete ties, fasteners and aluminum, as well as shipping costs, escalated from $61.5 million in 2010 to $77.4 million in new price quotes, according to the change order proposal made public Thursday by the Honolulu Authority for Rapid Transportation.
The final cost of the steel could increase again later depending on exactly when the steel is actually milled, city officials said.
"Steel has gone up in price, and concrete has gone up in price, and those costs were not fixed in the contract," said Daniel Grabauskas, HART executive director.
The city estimates the entire rail system from East Kapolei to Ala Moana Center will cost $5.27 billion. That includes $861 million in "contingency" funding that was budgeted to pay for change orders or other unexpected costs.
The Kiewit/Kobayashi change order approved by the HART Finance and Project Oversight committees will be paid out of that contingency funding.
The change order will increase the cost of Kiewit’s $195 million Maintenance and Storage Facility contract but will not increase the overall $5.27 billion projected cost of the rail system, said Don Horner, chairman of the HART Finance Committee.
"We are locking in all of our prices for steel for the entire project now so we won’t have the risk going forward," Horner said. "We are doing a substantial step in the project by locking down commodity prices, for example, like steel."
Horner appeared to become angry Thursday while questioning city officials about the possibility that the cost of concrete could also escalate, triggering new change orders for construction of the 20-mile elevated guideway.
"There will be potential for that, yes," said Frank Doyle, HART deputy project officer.
"Not ‘potential,’ that’s unacceptable," said Horner, who said he wants the city to nail down how much increase in the cost of concrete and other materials is likely. "We should have a pretty good handle on our exposure."
Horner said after the meeting that he does not believe that increased materials costs will cause the rail project to exceed its $5.27 billion budget. "We remain confident there is ample contingency in the budget to account for those escalations," Horner said.
The city also has opportunities for significant savings, Horner said. HART is revising the overall financial plan for rail, and Horner said he believes the city can save about $100 million by reducing the interest and fees on the money HART will borrow to help finance construction.
Lance Wilhelm, senior vice president of Kiewit Building Group, said the city could have required contractors who bid on the rail project to absorb any increases in materials’ costs themselves, but that would have resulted in significantly higher bid prices. The city chose not to do that.
"Relative to any construction contract, this is fairly standard operating procedure," Wilhelm said. "If commodities escalate, a claim process for an equitable adjustment is put in place."
Kiewit Infrastructure West Co. last year won city approval of a separate $15 million change order to cover the cost of delays in a separate rail contract to build the 6.5-mile West Oahu/Farrington Highway guideway from East Kapolei to Pearl Highlands.
The final cost of that change order is also still being negotiated, with Kiewit claiming it is entitled to additional money because of the construction delays.
The city has awarded more than $2 billion in construction and other rail-related contracts, pressing ahead with contract awards to try to take advantage of low bid prices during the construction industry slump.
Some critics argue the city rushed the rail project and awarded contracts too early, and now faces change orders and cost escalations because of unexpected delays.
When the city solicited proposals for the first section of guideway in 2009, planners thought the city could win federal approval of the environmental impact statement for the rail project along with federal approval to begin final design work in early 2010.
The city had to wait until early 2011 to obtain federal approval for the EIS, and did not win federal approval to advance to final design of the rail project until the end of 2011.
Kiewit/Kobayashi’s original 2010 proposal for the rail maintenance yard assumed the company would begin work in April 2010, but the joint venture’s contract award was not even finalized until June 24, 2011, according to city records.
Kiewit was not given permission to begin final design work until Jan. 10. That approval included authorization to take steps such as ordering the steel, according to city records.
Grabauskas said city officials made a calculation that it was better to award rail contracts early to take advantage of depressed construction costs.
"Time will tell whether that decision was the right decision," Grabauskas said. "At this point, in balance, the savings still shows that was the right decision."
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