MORE DWP CONTRACT BUNGLING LACK OF OVERSIGHT BLAMED IN $3.3 MILLION OVERBILLING.

Byline: BETH BARRETT

Staff Writer

The Department of Water and Power's primary contractor for dust-control work in the Owens Valley has overbilled the utility at least $3.3 million over the past eight years, according to a scathing audit released Tuesday.

The excessive billing by CH2M Hill, a Denver-based engineering firm with a $96 million contract for the project, included nearly $800,000 in markups on services that it improperly allowed subcontractors to pass on.

The audit by GCAP Services Inc., which comes more than a year after rising project costs drew widespread concern, also found that CH2M Hill lacked effective oversight of cost controls, subcontractor management and construction management.

Auditors and some DWP officials backed away from a preliminary finding that CH2M Hill had outlined a "strategy" in a 1999 company memo to circumvent limits on subcontractor markups.

"There were lapses on both sides," said David Nahai, president of the Board of Water and Power Commissioners. "The department should have managed the contract in a much more stringent manner, and the contractor should have done a much better job in controlling its personnel and its subcontractors."

The December 1999 memo was drafted by a former CH2M Hill official after DWP officials said they would not pay markups on "lower-tiered" subcontractors.

Confusion or strategy

The memo described how direct costs and other "usage" charges could instead be used to "add value to the contract."

"The purpose of this memo is to chart a course of action so that we can be compensated for subcontractor mark-ups on lower-tiered subs on the Owens Lake Project," read the memo, written on CH2M Hill stationery.

DWP Commissioner Nick Patsaouras said he remains convinced CH2M Hill was using the memo to tell subcontractors how to bill the agency to get around contract limits and add profit to the bottom line.

"The letter that the auditor found casts a shadow on the way CH2M Hill was billing with the markups," Patsaouras said.

But CH2M Hill officials said the memo was merely poorly written and confusing rather than a strategy for circumventing contract regulations.

John Corsi, CH2M Hill's director of corporate affairs, said there was "absolutely no strategy to overbill the DWP."

Corsi said he does not believe any billings violated contract provisions but the company is committed to reimbursing the city if any wrongdoing is found.

"This audit represents a bunch of opinions dressed up as facts -- and a lot of these facts are patently false," Corsi said.

Corsi said CH2M Hill's work passed two DWP audits and the agency never required the company to audit every invoice submitted by its second- and third-tier subcontractors.

"It was our responsibility to ensure the department billed a fair market rate and delivered services in a quality manner. The rates we were charging were fully disclosed in each task order submitted to the department," he said.

"This audit represents GCAP's retrospective opinion of how the contract should have been managed, rather than how it was managed."

A legacy of Los Angeles' early 20th-century diversion of Owens Lake water, the dust-control work is required by various legal and regulatory agreements to minimize air pollution.

Lack of oversight

City leaders began expressing concern early last year over the costs, which have soared to the $415 million range after initial estimates pegged them at $120 million.

CH2M Hill has been a key contractor on the project. Since 2001 the firm and its employees have contributed more than $22,000 to L.A. politicians' election campaigns.

More than $14,000 went to the campaigns of former Mayor James Hahn, according to city Ethics Commission records.

The GCAP audit, which cost $544,000, placed much of the blame of the CH2M Hill contracting problems on a lack of oversight by DWP officials.

DWP and its Water Resources Division "lacked internal controls to ensure the proper review, award and management of task orders under these agreements," the audit said.

Markups excessive

Among its findings, the audit said markups on reimbursable expenses and subcontract costs were excessive compared with those of other government agencies, and that unallowed markups for one subcontractor totaled more than $175,000.

The audit also said the DWP lacked cost analyses and checks, and negotiated labor rates with CH2M Hill that were 10 percent more than CH2M Hill's proposed rates.

The audit said 18 percent of billed labor was for positions not included in approved task orders, more than $100,000 in legal services were procured without approval from the city attorney, and contract compliance monitoring "was very limited."

"The Department's contracting and management practices resulted in reduced competition, increased costs and inadequate project reporting," it said.

Auditors identified $398,107 in "unallowable" charges in CH2M Hill's subcontractor billings -- about 5.4 percent of total subcontractor billings between Feb. 1, 2005, and April 28, 2006.

During the same period, auditors said CH2M Hill billed $330,136 in questionable labor and $13,884 in questionable expenses.

Auditors also said CH2M Hill improperly applied cash discounts of $606,516 for work in excess of authorized task order limits.

The company also billed $477,740 for management, as well as for markups on subcontractor costs.

KDG arrangement

Nahai said DWP staff also are continuing to review an arrangement with the politically connected subcontractor KDG Development Construction Consulting of Pasadena.

The firm is owned and chaired by former airports department executive director Lydia Kennard and run on a day-to-day basis by her husband, Sammi Reeves.

In that case, auditors found KDG used a unique tax classification for some employees and billed CH2M Hill about $1 million more than the contract allowed for regular subcontractors.

Auditors, however, said the workers also got benefits, making it difficult to determine exactly how much of that $1 million -- if any -- would have been disallowed.

KDG has defended the billings and Kennard, who has close ties to Mayor Antonio Villaraigosa and recently was awarded a three-year, $600,000 city airports consulting contract, said in an earlier statement to the Daily News that the DWP was not overbilled.

"The billing rates were fair and reasonable," Kennard said.

Nahai said the audit represents commissioners' continuing commitment to overhauling contracting procedures and eliminating waste within the mammoth utility.

"I don't want to vilify the contractor," he said. "It's my hope and expectation CH2M Hill will do the honorable thing and reimburse the city of Los Angeles for the monies that were overpaid."

beth.barrett(at)dailynews.com

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