State-paid audit on Honolulu rail project reveals some overpayments made to building contractors

A state audit of the city agency tasked with building the $9.2 billion Honolulu rail project found instances where building contractors were overpaid — but how widespread that practice has been appears to be unclear.

The audit of the Honolulu Authority for Rapid Transportation was conducted for state Auditor Les Kondo by the private accounting consultant firm Baker Tilly Virchow Krause LLP at a cost of just under $100,000. The firm’s job was to examine HART’s “contractor invoice review and payment processes for compliance with document policies and procedures, as well as the rail authority’s enforcement of contract billing terms and conditions.”

The company reviewed 150 of the 1,070 invoices processed by HART in fiscal 2017 and 2018. The invoices were valued at $205 million and represented about 31% of the costs HART incurred during the two-year period.

Kondo, in his own summary to the report released Friday, concluded that Baker Tilly’s test sample “represents a tiny fraction of the estimated $9.188 billion it will cost to complete the rail project, and the overages in this report are correspondingly small.”

Nonetheless, “Baker Tilly’s observations did demonstrate the potential for error,” the summary said. “To restore confidence in this project, HART should be more diligent and mindful about how it manages public money.”

Generally, Baker Tilly “found that HART’s review and payment of contractor and consultant invoices was … consistent with HART’s documented payment application procedures,” the summary said. “However, Baker Tilly noted certain errors and inconsistencies that are reported as ‘observations’ in the report. Although the financial impact of the observations appears relatively insignificant, we note that the reported ‘leakage’ of public funds is based on a very small sample of invoices and, irrespective of the amount, constitutes ‘overspending’ of public funds.”

Kondo on Friday stressed to the Honolulu Star-Advertiser that the scope of Baker Tilly’s work was narrow.

Time, resources and the sheer magnitude of the rail project made it difficult to do otherwise. “The project’s been going on since 2009 … so to have any entity look at every invoice, that’s a monumental task, not only from a time perspective, but also from a cost perspective,” he said. “We got them to do what we thought we could get them to do within the time that we wanted them to do it and within the price that we could pay.”

Two findings noted by Kondo:

>> HART allowed itself to be overcharged $123,957 in labor costs by contractor Lea + Elliott Inc. based on calculations using an incorrect overhead rate. The then-head of contract administration then incorrectly believed there was a policy allowing a waiver to the contractor if the savings would be 3% or less. HART, in response, thanked the auditor for pointing out the discrepancy. Lea + Elliott has agreed to pay the difference, and reorganization has consolidated several divisions so that “there is more check and balance and senior-level oversight.”

>> Contractor HDR Engineering Inc. overcharged HART $5,143 by applying an incorrect billing rate in 12 of 100 labor transactions as part of a test sample. The sample included eight of the 40 invoices submitted by HDR during the audit period.

HART CEO Andrew Robbins reiterated Friday that “we’re taking his observations under advisement, and we have some follow-up actions.”

Robbins said most of the key issues raised have to do with events that took place prior to 2017. Robbins took over as HART’s chief in late 2017. “Starting in 2017, we completely overhauled our project controls function and our claims management,” Robbins said. “I’m confident we have the proper controls in place and the proper management system in place.”

The audit was the fourth in a series conducted directly by or through Kondo’s office as part of a requirement inserted into Act 1, the measure that allowed for additional funding for the project using state tax dollars.

In related news, Federal Transit Administration Region 9 Administrator Ray Tellis and other officials were in Honolulu this week to hold meetings with Robbins, Honolulu Mayor Kirk Caldwell, Councilman Ikaika Anderson and other key city leaders.

Among the topics discussed was FTA’s call for the city to accelerate the pace of its contributions to pay for the project before the agency releases $744 million in project funding that has been withheld. FTA officials also want a better estimate of the cost of completing the last 4.1 miles of the project and said in a March 29 letter that they won’t resume funding until they get a clearer picture.

Robbins said Friday that his staff is expected to complete the updated plan shortly. It will then need approvals from the HART board and the City Council. The process also will include a Council resolution to “address the provision of the city subsidy in the coming weeks.”

He said he anticipates the plan would then be submitted to the FTA “in the next two months, maybe sooner.”

The FTA first required HART to submit a recovery plan for the project in 2016 when it became clear the project was vastly overbudget and delayed. The original 2012 agreement between the city and FTA called for the guideway and its 21 stations to be built for $5.26 billion by 2020.

The recovery plan sought by FTA is supposed to outline a path to complete the project for $8.299 billion in construction plus $897 million in financing costs, or a total of $9.196 billion. HART officials have insisted that construction costs will be held to $8.165 billion.

Caldwell told the Honolulu Star-Advertiser on Thursday that the two meetings with the FTA that he attended were positive. “It looks like we’re working toward a solution where we can have a recovery plan that’s approved by the FTA and we can start to receive the remaining ($744 million) that’s outstanding,” he said.