Transit Commision Auditors Cast Eagle Eye On Tutor’s Costs
September 28, 1992
By CHIP JACOBS
Los Angeles County Transportation Commission auditors are questioning tens of thousands of dollars in overhead expenses involved in cost overruns that the agency allowed major Metro Rail contractor Tutor-Saliba Corp. two years ago, according to a preliminary audit obtained by the Business Journal.
Among the “general and administrative” expenses LACTC examiners are either questioning or disallowing entirely are bonuses, donations, rent payments, executive pay hikes and airplane travel the Sylmar-based company spent in 1990. Those overhead costs were a small part — perhaps $100,000 to $150,000 — of the estimated $13.3 million that Tutor-Saliba granted in change orders from the LACTC in 1990. Auditors, under federal law, are only allowed to examine overhead expenses contained in change orders and not in competitively bid contracts.
Los Angeles subway builders historically have filed change orders to recover extra expenses they incur when there are alterations in construction design, work scope, schedule or site conditions. By policy, the LACTC grants the requested additional funds to avoid delays in ongoing work, then audits to monitor the validity of the request and may disallow expenses that are involved, in which case the contractor would have to reimburse disallowed funds to the agency.
Such alterations by many contractors pushed the cost of the subway’s first leg, a 4.4-mile stretch from downtown Los Angeles to Mid-Wilshire, $200 million over budget to $1.4 billion.
Since work on Metro Rail’s segment one began in the mid-1980s, Tutor-Saliba has landed seven tunneling and station-building contracts worth $220.1 million, nearly four times what the nearest contractor won, records show. Tutor-Saliba received an additional $58.8 million in change orders — including the $13.3 million approved in 1990 — for its work on the subway’s first leg.
Local transportation officials last week emphasized that the audit was only a draft, subject to negotiation before any funds are returned to the LACTC, and a routine function performed when any contractor wins change orders or files claims for them.
They also stressed that the federal government’s accounting and acquisition standards, which they follow, enable contractors to recoup general and administrative expenses in some instances. Overhead charges typically comprise about 3 percent of change orders.
“If a change order increases the amount of time a contractor or a subcontractor is on a job, then it obviously extends the overhead cost,” said Charles Stark, who oversees Metro Rail segment one for the commission’s building arm, the Rail Construction Corp. Because the Tutor-Saliba audit is one of the first examinations of a contractor’s overhead, Stark did not know how much the commission had won back previously from Tutor-Saliba or other companies in disallowed expenses.
Nonetheless, the audit comes at a critical point, with the RCC striving to contain costs on Metro Rail’s second leg. Meanwhile, the federal government has begun to probe allegations of reckless spending, fraud and corruption at the LACTC itself.
Upcoming audits will focus on the non-overhead elements of Tutor-Saliba change orders expenses for labor, equipment and materials — as well as change orders granted to rail construction- and design-management firms like Parsons Dillingham and O’Brien-Kreitzberg & Associates Inc., auditors said.
Meanwhile, Ron Tutor, chief executive officer and president of Tutor-Saliba, said many of the expenses being debated “weren’t worth arguing over,” though he added the audit was proof his operations are constantly under the microscope, despite several LACTC commissioners’ criticism of him.
“Everybody thinks these big government projects are a gravy train when really it’s a traumatic process,” he said. “People who say we bid low and just come back for change orders later don’t know the contracting process is like pulling teeth. They’re wrong.”
A few months ago, Los Angeles Mayor and LACTC Commissioner Tom Bradley at a commission meeting called Ron Tutor the “greatest change-order artist” he’s ever seen, according to published reports. Last week, meantime, Commissioner James Tolbert said he was outraged to learn from the audit that the LACTC had paid a private company such an array of overhead expenses.
“I have a hard time faulting Tutor for maximizing his hand because he is an American businessman, and it’s up to us to maximize to public interest,” said Tolbert, a Bradley appointee to the commission. “But it’s beyond me how any of these expenses could be a claim. Why should we pay one nickel for someone’s entertainment or fitness trainer?”
According to the audit, Tutor-Saliba rang up $255.81 million in expenses for materials, labor and equipment rental — known bureaucratically as the “cost of earned revenue” — for all its company projects during 1990. Of that, Tutor-Saliba had $7.7 million in general and administrative expenses for all its projects, roughly 40 percent of which was attributed to Metro Rail and the rest to work for Caltrans, the federal government and private developers, according to Ron Tutor.
While Tutor-Saliba has already received the $13.3 million for its 1990 change orders, LACTC auditors do not yet know precisely how much of that money was for overhead. The reason is that change-order agreements sometimes vary in how much overhead is allowed and it takes a long time to go through hundreds of pages of change order documents, according to LACTC Contracts Audit Manager Filberto Martinez, who worked on the Tutor-Saliba audit.
Reviewing Tutor-Saliba’s books, the auditors either questioned or disallowed what turned out to be 25 percent of the overheads. In turn, that ratio becomes a rough yardstick for how much Tutor-Saliba may have to reimburse from the 1990 change orders.
Before Tutor-Saliba is required to return change orders funds to the commission, auditors will arrive at that figure, Martinez said. All change orders above $200,000 must be approved by the LACTC’s 11 voting commissioners.
The preliminary audit, stamped “confidential” on each of its six pages, was completed last July, with Tutor-Saliba officials providing the records and commission auditors generating the overhead statement. Before the audit is completed early this fall, the draft will be sent out to Tutor-Saliba and the Rail Construction Corp for comments and revisions.
Looking at the company’s overall overhead outlays, auditors questioned an assortment of overhead items contained in a category called “other outsider services.”
In the case of entertainment, where $5,825 was spent in 1990 for things like Los Angeles Raiders and USC football tickets, the auditor quotes federal rules, which state “the costs of amusement, diversion, social activities … are unallowable.” The federal government is paying for roughly half of the multibillion-dollar, 17-mile subway system.
LACTC auditors said a $10,240 outlay for a physical trainer was also questionable because only Ron Tutor and a company executive vice president benefited. Without giving specifics, the $61,149 Tutor-Saliba spent for public relations was also questioned.
On other overhead fronts, commission inspectors questioned Ron Tutor’s salary increases because of U.S. government rules dictating that compensation for owners of private corporations be “reasonable” and “not a distribution of profit.” Tutor’s pay, the audit said, went from an estimated $312,000 in 1988 to $924,976 in 1990.
“They can disallow it, but I don’t have to ask their permission to raise my own salary,” said Tutor.
The draft audit stated Tutor-Saliba agreed with the LACTC auditors on most of the costs they questioned or said they would disallow, except for those dealing with rent, CEO compensation and its overall cost of earned revenue.
copyright Los Angeles Business Journal