CSA
Summary
Read the report at California State Auditor ↗
Department of
General Services:
Certain Units Can Do More to Ensure That
Client Fees Are Reasonable and Fair
December 2002
2002-108
rotiduA
etatS
ainrofilaC
S
T
I
D
U
A
E
T
A
T
S
F
O
U
A
E
R
U
B
The first five copies of each California State Auditor report are free.
Additional copies are $3 each, payable by check or money order.
You can obtain reports by contacting the Bureau of State Audits
at the following address:
California State Auditor
Bureau of State Audits
555 Capitol Mall, Suite 300
Sacramento, California 95814
(916) 445-0255 or TDD (916) 445-0255 x 216
OR
This report may also be available
on the World Wide Web
http://www.bsa.ca.gov/bsa/
The California State Auditor is pleased to announce
the availability of an online subscription service.
For information on how to subscribe, please contact
David Madrigal at (916) 445-0255, ext. 201, or
visit our Web site at www.bsa.ca.gov/bsa
Alternate format reports available upon request.
Permission is granted to reproduce reports.
� � �
��������� ���� ������
������������� �������������������
������������ �����������������������
December 5, 2002 2002-108
The Governor of California
President pro Tempore of the Senate
Speaker of the Assembly
State Capitol
Sacramento, California 95814
Dear Governor and Legislative Leaders
As requested by the Joint Legislative Audit Committee, the Bureau of State Audits presents its audit report
concerning the fees the Department of General Services (General Services) charges for services it provides to
client departments.
This report concludes that General Services can improve its estimates of fees for capital outlay and
telecommunication projects—which generated three-quarters of General Services’ project management fees
during fiscal year 2001–02—by more consistently following time-tested and reputable best practices. These
best practices include documenting the basis for estimates, supervisory review of estimates, using a historical
database to help generate reliable estimates, and determining the reasons why past estimates varied from
costs. Although actual costs are expected to vary from estimates, the significant variances we found in project
estimates and line item estimates—many exceeding actual costs by more than 20 percent—further support the
need for General Services to follow best practices when estimating fees. Moreover, General Services’ process for
developing the hourly rates of staff—which are the basis of many fee estimates—appears reasonable; however,
we found that some units could provide more accurate information to General Services’ management when
it is deciding on the hourly rates to charge. In addition, because of cost accounting weaknesses, we could not
determine whether the consulting fees that the Office of Public Safety Radio Services (Radio Services) charges
to its clients were reasonable and fair. Finally, Radio Services does not review for errors in billings before they
are sent to departments.
Respectfully submitted,
ELAINE M. HOWLE
State Auditor
�������������������
�������������������������������������������������� ���������������������������������������� ������������������
CONTENTS
Summary 1
Introduction 5
Audit Results
Some Units Do Not Always Follow Best Practices
or Their Own Procedures When Estimating
Project Costs and Fees 15
Actual Project Costs Can Vary Significantly
From Estimates 22
Reports Used to Determine Client Hourly
Rates Do Not Always Reflect Actual Costs 27
Radio Services Can Improve Its Methods
for Assessing Consulting Fees Related to
System Services 30
Radio Services’ Billing Practices
Need Improvement 32
Recommendations 33
Appendix A
Income and Expenses of General Services’
Various Units, Fiscal Year 2001–02 37
Appendix B
Capital Outlay Project Fees and Descriptions 39
Appendix C
The Office of Public Safety Radio Services’
Project Fees and Descriptions 41
Appendix D
The Legislative Analyst’s Office’s Findings
Highlighted the Need for Additional Quality
Control Over General Services’ Project
Cost Estimates 43
Response to the Audit
State and Consumer Services Agency,
Department of General Services 47
California State Auditor’s
Comments on the Response
From the Department of General Services 57
California State Auditor Report 2002-108 11
SUMMARY
RESULTS IN BRIEF
As a provider of important and often-mandated services
to other state departments, the Department of General
Services (General Services) must ensure that the fees it
Audit Highlights . . . charges to client departments are reasonable and fair. We found
that certain units within the Real Estate Services Division
We found that certain units (Real Estate Services) along with the Office of Public Safety
within the Department of
Radio Services (Radio Services) can improve their processes and
General Services (General
controls for preparing project cost estimates, developing hourly
Services) often missed their
estimates of project fees billing rates, and invoicing client departments. Improving these
charged to client departments areas should lead to more reliable and accurate project fees and
by more than 20 percent.
improve client satisfaction with General Services.
These units, which are
within General Services’
Real Estate Services and The units we reviewed—which provide services for managing
Telecommunications divisions,
capital outlay and telecommunications projects—generated
could improve the accuracy
approximately three-quarters of General Services’ project man-
of their estimates by more
consistently employing the agement fees in fiscal year 2001–02. Other units within General
following best practices: Services also charge fees based on the cost of staff to provide
services such as contract review, accounting assistance, and
• Document how estimates
are calculated. administrative hearings. It is important that General Services
uses good estimating techniques and tools because the fees we
• Ensure the review and
reviewed are based upon estimates rather than on the actual
approval of estimates.
hours and approved billing rates—and because General Services
• Use multiple estimating
needs to recover the cost of providing services. Our review of the
approaches—along
project fees charged on five projects from Real Estate Services
with historical data—to
validate estimates. and five projects from Radio Services reveals that both could
improve their fee estimate processes by following time-tested
• Evaluate estimates on
and reputable best practices more consistently. For example, best
completed projects.
practices dictate that fee estimates are monitored adequately for
Further, we found that certain
accuracy and documented to show how they are calculated. We
units could more accurately
could not always evaluate whether fees were fair or reasonable
prepare and report cost
data that General Services’ because some project files did not contain support for how the
management uses to decide units estimated their fees. In addition, evidence of supervisory
on hourly rates. Finally, the
review of estimates and client approval of fees were sometimes
Office of Public Safety Radio
missing. The absence of client department approval of fee
Services needs to improve its
billing practices. estimates for two projects may result in Radio Services absorb-
ing approximately $93,000 to resolve a dispute with the client
department. Best practices also prescribe that General Services
should use a historical database of completed projects to help
generate reliable project estimates. Another best practice to
California State Auditor Report 2002-108 11
refine an entity’s estimating process is to evaluate a completed
project to analyze why estimates differed from actual project
costs. General Services’ managers told us that it plans to
conduct these types of activities, but its progress has been
minimal. Implementing these best practices is not without a
cost; however, they are best practices due to a general belief that
the long-term benefits outweigh the costs. Further, for many
services they provide, Real Estate Services and Radio Services
have no competition because state law requires departments
to use their services unless General Services approves the use of
an outside vendor. To their credit, we did find that Real Estate
Services and Radio Services follow some best practices. Most
notably, both clearly documented the scope for the 10 projects
we reviewed. Although actual costs are expected to vary some-
what from estimates, our review of project estimates and line
item estimates revealed that many estimates varied from the
costs by 20 percent or more. The significant variances we
found further support the need for Real Estate Services and
Radio Services to follow best practices when estimating fees.
Although General Services’ process for developing the hourly
rates of staff—which are the basis of many fee estimates—
appears reasonable, it can improve the accuracy of a report that
management uses to decide on the hourly rates. Units that pro-
vide services—with the assistance of General Services’ Office of
Fiscal Services (Fiscal Services)—provide management a report
to allow it to make the decisions on hourly rates. The report
recommends hourly rates for each type of service and is
designed to include the at-cost rate for each service, which is
calculated by dividing projected costs by the projected billable
hours. The Project Management Branch within Real Estate
Services appropriately developed its hourly rates, but Radio
Services’ staff made $10.2 million in arbitrary or unsupported
adjustments, such as shifting costs between units when cal-
culating its at-cost rate. In addition, Fiscal Services allocated
its overhead—which amounted to $7.6 million for fiscal year
2001–02—to units based partly on the units’ ability to absorb
the costs rather than on actual services provided. Although some
of these adjustments may be justified, staff told us that some of
the adjustments were made to achieve hourly rates similar to
the prior-year rates. This preliminary “leveling” process distorts
the picture that management sees when making rate decisions,
and may lead to setting rates inappropriate to recover actual unit
costs. In addition, some adjustments cause other units within
General Services to shoulder more than their fair share of costs.
22 California State Auditor Report 2002-108 California State Auditor Report 2002-108 33
Moreover, we could not determine whether the consulting fees
that Radio Services charges to its clients were reasonable and
fair because of weaknesses in its cost accounting system. Finally,
Radio Services does not review for errors in billings before they
are sent to departments; in one instance, this oversight resulted
in an under billing of $126,000.
RECOMMENDATIONS
To help ensure that the fees charged client departments are
reasonable and fair, we recommend that General Services’ units
follow best practices such as:
• Adopting and following a procedure to thoroughly document
assumptions used in creating project estimates.
• Documenting evidence of supervisory and client review and
approval.
• Conducting evaluations at the end of each major project.
• Developing a historical database of completed projects and
using the database to provide support for future estimated
project costs.
Further, to ensure that decisions on hourly rates are based on
actual costs, General Services’ management should receive
reports without arbitrary adjustments to at-cost rates. It also
should address the weaknesses in the cost accounting system of
Radio Services.
AGENCY COMMENTS
General Services generally concurs with the findings, conclu-
sions, and recommendations of the report and states that it will
take appropriate actions to address the recommendations. n
22 California State Auditor Report 2002-108 California State Auditor Report 2002-108 33
Blank page inserted for reproduction purposes only.
44 California State Auditor Report 2002-108 California State Auditor Report 2002-108 55
INTRODUCTION
BACKGROUND
The Department of General Services’ (General Services)
mission is to meet the varied responsibilities for
management review, control, and support of state
agencies as assigned by the governor and specifi ed in statute.
This includes providing support services to departments with
greater effi ciency and economy than they can provide for
themselves. Examples of services that General Services provides
for other state departments are in the text box below. For certain
services that General Services provides—particularly those
related to capital outlay and telecommunications projects—
departments generally do not have a choice of using a private
vendor or performing a function themselves; they must use
General Services and pay a fee.
General Services has six divisions with about
4,100 employees. Its budget for fi scal year
Services That General Services Provides
2001–02 was approximately $914 million, not
to Other Departments:
counting capital outlay appropriations. The major-
• Electronic commerce ity of General Services’ budget is for providing
these support services to other state departments—
• Telecommunications
its clients—for a fee. Appendix A shows the income
• Siting, acquisition, development,
and expenses of signifi cant units within General
leasing, disposal, and management
of state properties Services for fi scal year 2001–02.
• Architectural approval of local schools and
General Services assesses fees in several ways. One
other state buildings
common method, used for services such as some
• Printing services
radio-installation projects, is to charge clients for
• Procurement of supplies actual services performed by billing for hours of
effort at an established hourly rate plus materials
• Maintenance of the State’s vehicle fl eet
and equipment. Another method, used for con-
struction and installation services, including
architectural and engineering services and inspec-
tion, bases the client fee on fi xed-cost estimates
prepared before General Services performs the actual services.
These fi xed-cost estimates generally represent the amount billed
to the client regardless of the costs ultimately accumulated
by General Services’ cost accounting system. Fixed-cost
estimates consist of several line items prepared by various
General Services’ units. Methods for preparing each line item
estimate vary by unit, but they usually are based on the amount
44 California State Auditor Report 2002-108 California State Auditor Report 2002-108 55
of time it will take to complete a task multiplied by the estab-
lished hourly rate of staff performing the service or on a
percentage of the project cost. For some other services,
General Services charges clients fl at rates or an average of annual
or multiyear costs to minimize monthly or annual fl uctuations. It
is important that General Services uses good estimating techniques
and tools because many of the project management fees it charges
to client departments are based upon estimates—rather than the
cost of the services provided based on actual hours and approved
billing rates—and because General Services needs to recover the cost
of providing services.
Two of General Services’ more signifi cant revenue-generating
services are fees charged by branches within the Real Estate
Services Division (Real Estate Services) for the construction of
capital outlay projects and fees charged by the Offi ce of Public
Safety Radio Services (Radio Services) within the Telecommuni-
cations Division (Telecommunications) for the installation of
telecommunications systems. We chose units within these two
divisions for testing because they collected about
three-quarters of General Services project manage-
ment fees during fi scal year 2001–02 and the units
Capital Outlay Estimates Include Both
Hard and Soft Costs are responsible for preparing either time and material
or fi xed-cost estimates for project-related services.1
Hard costs include all private contractor The types of fees these two units charge are shown in
construction services such as site work;
Appendices B and C. The process that each unit uses
concrete; metal; doors; windows; and
heating, ventilation, and air conditioning to determine their fees is described in more detail in
systems. These costs typically represent the
the following sections.
majority of the total project cost.
Soft costs include the project-related fees
for Real Estate Services’ staff to provide Real Estate Services Prepares Several Cost
architectural and engineering services,
Estimates for Capital Outlay Projects
project and contract management,
construction inspection and travel,
State law mandates General Services as the primary
environmental document preparation,
and plan checking for schools and state department responsible for the planning
handicapped access.
and management of state capital outlay projects.
Capital outlay projects, which are overseen by the
Project Management Branch (Project Management)
of Real Estate Services, typically involve the
construction or renovation of working space for state employees.
They also include a variety of other projects. Because the
funding authorization for capital outlay projects usually occurs
in phases, Project Management leads the development of cost
estimates for each phase in order to guide the funding decisions.
1 This fi gure includes revenue from the Project Management Branch and the Professional
Services Branch (Design Services Section, Construction Services Section, and
Environmental Services Section) within Real Estate Services and from Radio Services
within Telecommunications.
66 California State Auditor Report 2002-108 California State Auditor Report 2002-108 77
Each estimate includes two types of capital project costs: “hard
costs”—the cost of construction materials and labor, and “soft
costs”—the cost of designing and managing the delivery of the
project. Project Management often uses services provided by the
Professional Services Branch within Real Estate Services, with both
units contributing to the overall project cost estimate, including
various line item estimates of soft costs for specific project services.
Table 1 illustrates that the level of project information available to
Real Estate Services when it prepares estimates at each of the major
planning phases varies considerably and affects how accurately Real
Estate Services develops these estimates.
TABLE 1
Real Estate Services Prepares Several Estimates for Capital Outlay Projects
Type of Estimate Description
Conceptual A conceptual estimate may be prepared when the need for a capital outlay project is first considered
by a state agency. This estimate typically is prepared without any detailed project design information or
analysis of the likely project site. Given the lack of detailed information, both the construction costs and
the project management fees are a very rough estimate.
Budget* Real Estate Services prepares budget packages at the request of the Department of Finance. The
development of a budget package typically involves input from a Real Estate Services’ in-house
design team or a private sector firm. Real Estate Services establishes project management fees at
this stage. The budget package consists of a project description and schedule, pre-schematic plans,
outline specifications, a construction estimate, and a budget estimate summary of project costs.
Preliminary Typically, Real Estate Services develops preliminary plans in two steps: schematics and design
development. Schematic documents are the initial architectural and engineering plans depicting
the designer’s conceptual framework of project needs. Design documents contain a site plan,
architectural floor plans, elevations, outline specifications, a detailed construction estimate,
and a preliminary estimate summary of project costs updating construction costs and project
management fees.
Working Drawing Working drawings are the final design phase in preparing construction contractor bidding
documents. The drawings constitute a complete set of plans and specifications describing
all phases of a project (architectural, structural, mechanical, electrical, civil engineering, and
landscaping) and its various systems to the degree necessary for accurate bidding. The
detailed working drawings are reviewed for compliance with statutory requirements, such as
access for the handicapped. As in the preliminary plan stage, a detailed construction estimate is
prepared along with a working drawing estimate summary updating any changes in project
costs that emerge during the development of the working drawings, including any changes in
project management fees. This estimate typically is done when working drawings are 95 percent
complete.
Final Real Estate Services prepares the final estimate after completing the working drawings and
establishing specific project detail, including any possible project scope changes. Where
appropriate, the project management fees reflect these changes.
As-Bid The as-bid estimate summary reflects the total estimated project cost based upon the accepted
contractor bid and an adjustment to the construction contingency based upon the accepted bid.
The project fee estimates are generally final, unless there are further changes in the scope of the
project or other unforeseen circumstances that require a budget augmentation or reallocation of
funds. In addition, the estimate generally represents the costs to the State.
Sources: The Department of General Services’ Real Estate Services Division and the State Administrative Manual.
* Initially sets the funding for the entire project after approval by the Department of Finance, the governor, and the Legislature.
66 California State Auditor Report 2002-108 California State Auditor Report 2002-108 77
Real Estate Services units generally base their capital outlay
project fees on estimates of the amount of services each unit
provides. For example, the Real Estate Services’ Construction
Services Section inspects public works projects during construc-
tion to ensure building code compliance and to provide
quality assurance. It estimates the fee associated with inspection
services based on the project scope, complexity, length, type,
and level of inspection required; the number of inspection
visits and hours believed to be required; and the hourly rate for
an inspector.
Radio Services Prepares Cost Estimates for Radio
Equipment Installations
Radio Services is another General Services’ division responsible
for project engineering, installation, and management. Under
California statutes and policy, state departments are to use Radio
Services to acquire, install, and maintain all radio and micro-
wave communication systems and facilities—except for certain
traffic-related systems—unless Radio Services authorizes the use
of another vendor. Radio Services charges departments for its
services using fixed-cost estimates, time-and-materials charges,
and non-project consulting fees called “system service.” As
with Real Estate Services, Radio Services also prepares fixed-cost
project estimates of hard and soft costs, with the estimate
representing the fee to the client department regardless of the
actual project cost. For time-and-materials projects, the total
project fee is based on the actual hours of effort at an estab-
lished hourly rate and materials costs at project completion.
Both the fixed-cost estimates and time-and-materials projects
include engineering time and equipment installation time of
Radio Services’ staff, materials costs, and a project management
fee. In contrast, Radio Services also assesses system service fees
for providing services such as preparing cost studies, develop-
ing reports, attending client meetings, and applying for licenses
from the Federal Communications Commission. These services
benefit one or all state public safety departments, and Radio
Services generally charges these departments a fee based on
an actual or prorated share of costs when the services benefit
all clients.
For most project-planning tasks, Radio Services’ staff rely on an
internally developed electronic estimating spreadsheet to assist
in preparing project cost estimates for installation tasks such as
detail design engineering. The estimating spreadsheet, which
includes predetermined estimates of hours required to complete
88 California State Auditor Report 2002-108 California State Auditor Report 2002-108 99
specific tasks, allows engineers and project managers to
estimate the labor costs associated with the installation of radio
and microwave equipment. The estimating spreadsheet also
includes approximate prices for various types of material and
equipment that may be used in completing these projects. Once
the estimating spreadsheet is used to gain an insight into the
magnitude of a project, Radio Services’ management said staff
use their professional judgment to assure that the final estimate
is reasonably accurate. For its project management services,
Radio Services assesses its fee based on 10 percent of total project
costs.
Most departments do not have a choice of vendors for capi-
tal outlay or telecommunications projects, so it is important
that fees for Real Estate Services and Radio Services are fair and
reasonable. Further, because many of its fees are based on esti-
mates—rather than the actual cost of the services provided—it
is critical that General Services prepares accurate estimates. In
fixed cost projects, underestimating fees causes General Services
to absorb costs, while overestimates cause client departments
to pay too much for the services. However, this is the case with
most any bid or estimate of costs for services that a vendor
provides. The key is to ensure that General Services can justify
the basis for its estimates because it generally does not have any
competition in providing these services to state departments.
Real Estate Services and Radio Services Use a Similar Method
for Setting Hourly Rates
A key element of fee estimates is the hourly rate of General
Services’ staff who provide the service. General Services’ method
for setting the various hourly rates is similar among its units.
It is simple in theory but complicated in practice. In theory,
General Services starts with a basic hourly rate to recover
costs—known as the at-cost rate. This rate equals a unit’s annual
budgeted expenditures divided by the unit’s estimated annual
billable hours. For example, Radio Services annually calculates
the total salaries, benefits, operating expenses, overhead, and
all other costs attributable to its engineers and technicians
and then divides this total cost by the total estimated billable
hours for these positions. The result is the at-cost rate, which
projects the hourly rate needed for Radio Services to recover
its total budgeted expenditures for these positions. Each office
or branch, together with the assistance of the Office of Fiscal
Services (Fiscal Services), annually prepares an at-cost rate and a
recommended rate. The recommended rate is the rate the office
88 California State Auditor Report 2002-108 California State Auditor Report 2002-108 99
or branch recommends to General Services’ management for
approval. Units within General Services include both the at-cost
rate and the recommended rate in a document called the “cost-
recovery scenario,” which is part of each division’s financial
plan. Financial plans contain other information needed to assist
General Services’ management in deciding on a final hourly rate,
such as a division’s expenditure plan, actual and projected cash
balances, and retained earnings. The financial plan is intended
to provide General Services’ management with a complete
financial picture. General Services’ management reviews the
financial plan and makes the final decision on the hourly rate
while balancing the need to recover budgeted expenditures and
each unit’s financial condition.
In practice, we found the calculation of the at-cost rate to be
more complicated. Each unit’s budgeted expenditures include
detailed calculations of statewide, departmental, and division
overhead; adjustments for costs allocated to other units or
billable positions; budgetary changes; adjustments for salary
savings; and projections of billable hours. Figure 1 illustrates
General Services’ process for determining the hourly rates
for billable positions. The key element of the process is that
the final decision for hourly rates rests with General Services’
management—primarily with the chief deputy director. Thus,
General Services’ management should have a full and accurate
picture of costs when deciding on the hourly rates to charge
client departments.
1100 California State Auditor Report 2002-108 California State Auditor Report 2002-108 1111
FIGURE 1
How General Services Determines
Hourly Rates for Its Services
Prior-Year Internal Budget Final Budget (Costs
Expenses for a Unit Adjustments Augmentations to Recover)
Final personal service
Staffing changes Approved by the
Personal service and and operating
and other Department of
operating expenses expense budget (in
adjustments Finance
Governor’s Budget)
Final budget divided
by billable hours
Departmental and Generally allocated based upon personal service dollars Added to each unit’s
statewide overhead or number of positions, or both final budget
Cost Recovery Scenarios:
(1) At-cost rate At-cost hourly rate
(2) Prior-year rate
(3) Recommended rate
Cash sheets, income
and expense, and Management
Final rate
retained earning decision on rate*
statements
* Final approval authority is with the chief deputy director of General Services.
SCOPE AND METHODOLOGY
The Joint Legislative Audit Committee (audit committee)
requested our audit after receiving concerns from the
Legislative Analyst’s Office (LAO) regarding the appropriateness
of Real Estate Services’ capital outlay project management fees.
Appendix D illustrates LAO’s concerns and the results of our
review of these concerns. Specifically, the audit committee
requested that the Bureau of State Audits:
• Review General Services’ policies and procedures used to
estimate fees for services it provides to client departments
and determine whether its methodologies result in fair and
accurate pricing.
1100 California State Auditor Report 2002-108 California State Auditor Report 2002-108 1111
• Determine whether General Services has an effective
quality control process for estimating and charging fees to
client departments.
• Determine whether the fees charged to client departments
were computed fairly and accurately and were consistent with
its policies for a sample of services.
• Compare General Services’ process for estimating project
management costs to industry standards or other reasonable
benchmarks.
To understand the requirements General Services must follow
when developing the fees it charges to clients, we interviewed
department staff and reviewed relevant state laws, regulations,
and budget documents, and relevant General Services’ manuals
and strategic documents.
To determine whether General Services’ procedures and
processes for calculating client agency fees are fair and
reasonable and include adequate quality control, we interviewed
key staff and program managers as well as several General
Services’ clients. We also reviewed relevant fiscal documents
used to calculate the fiscal year 2001–02 hourly rates for Real
Estate Services’ Project Management Branch and Radio Services.
We vouched key figures used to calculate the hourly rates back
to the Salary and Wages Supplement to the Governor’s Budget,
department documents based on information from the State
Controller’s Office, and department financial records. We also
reviewed and tested for fairness the allocation of statewide
and departmental overhead included in General Services’
hourly rates for all its units. We relied on General Services’
summaries of data from its financial records and timekeeping
systems for allocating overhead and did not vouch these data to
individual transactions.
To determine whether General Services’ project estimates
were computed fairly and accurately, we reviewed the project
files for five capital outlay projects from Real Estate Services
and five from Radio Services. Most of these projects are under
construction or were completed within the last two years. We
selected units within Real Estate Services along with Radio
Services for testing because these units generated about
three-quarters of General Services’ project management fees
in fiscal year 2001–02, and both provide project management
services and prepare fixed-cost project estimates. We reviewed
the calculations of selected project management fee estimates
1122 California State Auditor Report 2002-108 California State Auditor Report 2002-108 1133
that General Services developed at various stages during
project planning. We focused our testing on selected project
management fees or “soft costs” rather than the construction
or “hard costs” of capital outlay projects—which make up most
project costs—because the soft costs represent General Services’
fees for the project and because the LAO’s concerns centered
on these soft costs. We reviewed client service agreements and
invoices. Real Estate Services does not bill its clients directly for
capital outlay costs—project funds are appropriated separately
for Real Estate Services to draw upon during a project—so we
focused our testing of billing practices on Radio Services. We
also interviewed project managers and estimators to understand
and evaluate how staff applied General Services’ methods for
calculating fees. Finally, to determine whether General Services
followed best practices in preparing estimates, we compared its
practices to those used by other state and local governments, the
federal government, and practices recommended by professional
organizations.
We did not review whether General Services’ project estimates
or hourly rates are appropriate, because this requires a review of
the quality of the work and efficiency of General Services’ staff.
For example, although General Services may charge more or less
than the private sector for a similar task, the work performed
and the quality of the work also may be more or less than the
private sector would perform. Furthermore, comparing General
Services’ hourly rates to those of other governmental or private
sector organizations is complicated because the experience level
of the staff involved and the services provided may vary. For
example, General Services charges one rate for all project man-
agers, while a private sector company may have several rates
depending on the project manager’s level and experience. In
addition, as described earlier, the General Services rate includes
all costs of providing a service, including charges from statewide
central service departments such as the Department of Finance
and General Services’ travel costs. Private sector companies
might bill travel and overhead separately. As a result of these
variations, any attempt at comparing rates or estimates would be
of limited value. n
1122 California State Auditor Report 2002-108 California State Auditor Report 2002-108 1133
Blank page inserted for reproduction purposes only.
1144 California State Auditor Report 2002-108 California State Auditor Report 2002-108 1155
AUDIT RESULTS
SOME UNITS DO NOT ALWAYS FOLLOW BEST
PRACTICES OR THEIR OWN PROCEDURES WHEN
ESTIMATING PROJECT COSTS AND FEES
Although units within the Department of General
Services’ (General Services) Real Estate Services Division
(Real Estate Services) and Telecommunications Division
(Telecommunications) do well with certain aspects of estimating
costs and fees for capital outlay and radio equipment installation
projects, they do not always follow the best practices we identi-
fi ed or their own procedures. As a result, General Services cannot
ensure that fees charged to client departments for these services
are reasonable and fair. Our review of cost-esti-
mating best practices draws from several sources,
Elements of Estimating Best Practices
including the U.S. General Accounting Offi ce, the
National Aeronautics and Space Administration,
• The scope of the project should be
defi ned clearly. other state and local government agencies, and the
private sector. Together, these sources provide an
• Potential cost and schedule impacts are
estimated for all identifi ed tasks and interrelated set of best practices for project cost-
estimates are updated whenever there is a estimation processes.
change in requirements or schedule.
• The reasons for values assigned to each One prominent theme among these sources
cost item are documented in writing.
is that an individual’s knowledge and experience—
• More than one cost-estimating approach commonly referred to as professional judgment—is
is used.
an invaluable resource for good project cost
• Information on completed projects is estimation, but it is not suffi cient on its own.
retained and organized for future use, and Entities that prepare estimates should supplement
the validity of an estimate is supported by
staff’s professional judgment with a variety
demonstrated performance on completed
projects. of mechanisms to provide a more systematic
method of developing viable estimates. For
• Evaluations are held at the completion of
each project and differences in results are example, entities should strive to use more than
analyzed and accounted for.
one methodology when developing estimates
and should document the methodologies and
assumptions used in preparing estimates. Entities
also can improve the validity of estimates
by developing and using a historical project database that
includes detailed project information in an accessible format.
This historical information can provide a frame of reference
for establishing fees based on the historical cost of providing
services. Entities also should conduct an end-of-project analysis
to review the completed project in its entirety, including the
validity of the cost estimates. Implementing these best practices
is not without a cost. However, they are best practices because
1144 California State Auditor Report 2002-108 California State Auditor Report 2002-108 1155
there is a general belief that the long-term benefits outweigh the
General Services has no overall costs. This may be true especially for General Services
competition for many because its process, which is typical in the industry, is generally
services that the Real to charge departments based on the estimated fees regardless of
Estate Services and the actual costs to provide the service. Further, General Services
Telecommunications has no competition for many services these two divisions
divisions provide provide because departments are mandated to use its services
because departments unless it grants approval to use an outside vendor. Although it
are mandated to use the does not always follow best practices, General Services strives
services unless granted to employ certain procedures, including supervisory review
approval to use an of estimates and the use of checklists and estimating tools, to
outside vendor. ensure that estimates are accurate.
We evaluated fee estimates for 10 of General Services’
projects—five each from Real Estate Services and Telecommuni-
cations‘ Office of Public Safety Radio Services (Radio Services).2
As described in the Introduction, fee estimates are a conglomera-
tion of several line item estimates for a variety of services. We
tested a sample of the line items for each of the 10 projects for
compliance with General Services’ procedures and best practices.
For Real Estate Services, we tested the budget estimate because
it represents the document used to gain the initial legislative
funding of a project and the as-bid estimate because it generally
represents the final estimate and allocation of project costs
and fees.3
Table 2 shows mixed results for the two divisions’ compliance
with their own procedures and best practices. To their credit,
both Real Estate Services and Radio Services performed consis-
tently well in certain areas that we reviewed. For example, of
the 10 projects we reviewed, they clearly documented the scope
of each project when estimating costs and fees and updated the
estimates when scope changes occurred. A well-defined scope is
critical to controlling the costs and fees associated with projects.
Poorly defined projects are more inclined to incur significant
cost overruns or to fail. Further, each charged fees based on
their published rates. However, we found inconsistencies in Real
Estate Services’ and Radio Services’ procedures in the other areas
we reviewed, which we note in the following sections.
2 We tested nine fixed-cost projects and one time-and-materials project from
Radio Services.
3 See Appendix B for a description of the various types of capital outlay estimates.
1166 California State Auditor Report 2002-108 California State Auditor Report 2002-108 1177
1166
California
State
Auditor
Report
2002-108
California
State
Auditor
Report
2002-108
1177
TABLE 2
Certain Units Do Not Always Follow Best Practices or General Services’ Procedures When Preparing Fee Estimates
Real Estate Services Radio Services
Test Element Project Name Project Name
Campo Hesperia Porterville Paso Robles Kellogg
(Department (Department Willows (Department (Department Pt. Mugu Hill
of Forestry of Forestry Butterfield (California Riverside of Forestry of Forestry Wasco (Department (California
and Fire and Fire (Franchise Highway (Department and Fire and Fire (Department of of Parks and Highway
Best Practice Protection) Protection) Tax Board) Patrol) of Education) Protection) Protection) Corrections) Recreation) Patrol)
The scope of the project is identified l l l l l l l l l l
clearly
Estimates are updated for scope changes l l l l l l l N/A l N/A
Documentation exists to support all cost l l
estimate line item figures tested
More than one estimating approach l
is used
Evidence to show the client approved l l l l l l l
the estimate
Estimate validated by performance on
completed projects
An end-of-project evaluation was N/A N/A N/A N/A N/A l
conducted
General Services’ Procedure
The estimate methodology is generally l l l l l l l l
consistent with procedures
Evidence exists of supervisory or senior l l l l l l
level review of estimates
The rates used correspond to those l l l l l l l l l l
published in Price Book
l Project fully met test element
Project partly met test element
Project did not meet test element
N/A= Not Applicable
Neither Real Estate Services Nor Radio Services Uses Multiple
Estimating Approaches or Historical Data to Help Prepare
More Accurate Estimates
Neither Real Estate Services nor Radio Services regularly uses
multiple-estimating approaches or conducts formal comparisons
of estimated costs to actual costs from completed projects when
preparing estimates. Although Real Estate Services acknowledges
the potential usefulness of measuring and analyzing data from
completed projects, formal efforts to implement such plans
are at a very early stage. In August 2001, Real Estate Services
finalized its post-occupancy evaluation strategic plan and reports
it has information from three projects in a historical database
as of October 2002. The manager of the Capital Outlay Program
said General Services plans to use this historical database
to supplement its estimators’ professional judgment once it
The use of multiple contains adequate data. Further, a Project Management Branch
estimating approaches or (Project Management) project director explained that estimators
the use of historical data use their professional judgment, which is based on their
to compare against staff’s experience, when making estimates. Although this assertion
professional judgment seems reasonable, the process the project director describes is
could help validate and informal and depends on the experience of individual estimators
ensure the reasonableness rather than on a systematic review of past estimates as a basis
of estimates. for future estimates. Another best practice that these units are
not following systematically is the use of multiple-estimating
techniques for preparing fee estimates. This technique involves
preparing estimates using different methods and comparing the
results of each method to arrive at the most accurate estimate.
For these two units, the formal use of comparative analysis or
the use of historical data to compare against staff’s professional
judgment could help validate and ensure the reasonableness of
their estimates.
Better Quality Control Over Estimate Preparation Could
Improve Accuracy
Our testing also reveals a general lack of quality control in the
estimating processes for Real Estate Services and Radio Services.
Specifically, staff were unable to provide us with documenta-
tion to demonstrate how the estimators derived the estimated
cost for all line items for 8 of the 10 projects we reviewed. For
example, for Radio Services, we found two project files that were
missing the project estimate summary sheets, which summa-
rize a project’s cost elements and give a total estimated project
cost. The project managers for each project explained that they
believed that these documents were not required at the time.
However, Telecommunications division manual requires staff
1188 California State Auditor Report 2002-108 California State Auditor Report 2002-108 1199
to document all estimates and retain a record of all supporting
documents used to develop the estimates. Without these docu-
ments to support the estimates, we were unable to identify the
cost elements included in the total cost of the two projects or to
determine if the cost for each element is reasonable. Similarly, in
all five Real Estate Services projects, documentation was missing
for various line items to support Real Estate Services’ calcula-
tion of fees for the budget estimate, which, as mentioned earlier,
is a key estimate because it initiates legislative approval and
funding to begin preliminary plan work. Although the typical
budget estimate contains ample background support for proj-
ect hard costs, comparable information about soft costs is not
included. When we requested the supporting analysis for how
staff reached the fees included in the budget estimates, a Project
Management project director told us that the estimates are based
on staff experience and professional judgment, historical and
similar projects, conversations with and feedback from project
directors, and architectural and engineering proposals. However,
this information, which serves as the basis for the project fees,
is not documented. Moreover, although most line items used to
prepare the as-bid estimates were well documented, neither
Project Management nor the Environmental Services Section
could provide written evidence to support most of their line
item estimates. As a result, we were unable to determine whether
the capital outlay project fees established in the as-bid estimate
were fair and reasonable. Having adequate documentation to
support its estimates is also an important quality control because
Real Estate Services’ estimates are subject to little outside scrutiny.
As mentioned in the Introduction, Radio Services’ staff use an
estimating spreadsheet to help engineers and project managers
estimate project costs. However, Radio Services could not docu-
ment how and why it decided on the standard hours included
Project files for both Real as part of the estimating spreadsheet and has not performed
Estate Services and Radio any analysis to determine whether the hours are still reasonable
Services lacked support and fair. Radio Services’ managers said Radio Services developed
for how certain fee its standard hours in 1996 using the professional judgment of
estimates were calculated. engineers and technicians with specific knowledge of the work.
However, Radio Services has not attempted to determine how
well its spreadsheets perform by comparing the estimated
costs with the actual results of completed projects. Without
periodic analysis of the standard hours used in each spreadsheet,
Radio Services cannot justify that its project estimates are
reasonable or fair.
1188 California State Auditor Report 2002-108 California State Auditor Report 2002-108 1199
Moreover, although each division requires that supervisors
review and approve all estimate line items, we were unable
to verify that supervisors within Radio Services had done so
because some estimates do not include an area for supervisory
sign-off. Specifically, for four of the five estimates we reviewed
for Radio Services, staff could not provide evidence of
supervisory approval of the estimate. Radio Services prepares
its estimates and line item estimates electronically and the
estimate worksheets do not include an area for supervisory
approval. Although supervisors may review and approve the
worksheets, we could not verify this.
A more effective approach to documenting the estimated cost
for a project is found in the Real Estate Services’ Project Service
Agreement (service agreement). The service agreement is devel-
oped when capital outlay services are provided by in-house
sources. The service agreement documents we reviewed provide
varying levels of detail regarding General Services’ processes for
ensuring the quality of its fee estimates. These service agree-
ments typically articulate the project scope and basis of design,
indicate functional requirements and design assumptions of the
facility, and provide guidance if costs are expected to exceed the
budget. In addition, the service agreements detail the expected
time necessary to complete tasks along with the hourly rate
charged for the service. Both the project manager and the
professional services team leader had generally indicated their
review and approval by signing the service agreements we
reviewed. The agreements’ supporting documentation includes
fee worksheets, which indicate review and approval of the
expected task time by supervisors, section chiefs, or both.
Both Units Rarely Evaluate Completed Projects
Furthermore, we found that Real Estate Services and Radio
Services rarely evaluate completed projects. Best practices
suggest that end-of-project evaluations can help identify
patterns of success or failure in the estimating process and gain
an understanding of events or circumstances that affect the cost
of projects. Thus, this process can provide useful information
to improve the accuracy of estimating project costs, including
project management fees. Both Real Estate Services’ and Radio
Services’ managers agree they would like to conduct end-of-
project evaluations; however, heavy workloads and the need to
move on to new projects have hindered their ability to conduct
such evaluations.
2200 California State Auditor Report 2002-108 California State Auditor Report 2002-108 2211
Real Estate Services’ management is clearly aware of the
potential usefulness of a formal project-evaluation process
Best practices suggest and recently launched its post-occupancy evaluation program
that end-of-project (post evaluation). The post-evaluation process is designed
evaluations can help to evaluate a building project once it is complete and its
identify patterns of occupants have settled in. One objective is to establish and
success or failure in the evaluate performance criteria dealing with project design and
estimating process. construction strategies to improve project quality and customer
satisfaction. The potential impact of the post evaluation on
project soft costs—Real Estate Services’ fees—is likely to be seen
in budget estimates and in the subsequent design stage of capital
projects. It is not clear, however, how much the process will
improve the estimation of project fees. As of October 2002, the
post evaluation had been applied to only three projects and had
resulted in 14 entries into a “lessons learned” database. Similarly,
Radio Services did conduct an end of project evaluation for one
project we reviewed; however, the evaluation did not include an
analysis of the success of each line item estimate compared with
the actual costs. We believe the post evaluation also provides an
opportunity to assess the fee estimate’s accuracy by comparing
the estimate with actual costs, and to evaluate the reasons for
significant variances.
Obtaining Client Approval for Project Estimates Could
Reduce Conflicts
We found that Radio Services does not always obtain client
approval of its estimates before starting work on a project. In
some cases, clients insist that Radio Services start work on a
project before there is an agreement on the project scope and
cost. However, failure to obtain client approval of a project scope
and cost estimates can lead to significant problems, including
project delays, rework, and disagreements on costs. For example,
because Radio Services did not obtain client approval before
starting work on two projects, it may have to absorb costs of
approximately $93,000 for those projects. The total cost to
Radio Services for the two projects is estimated at $194,000.
Radio Services estimated the cost of the two projects using its
standard rates for labor and project management fees plus mate-
rials; however, the client, the Department of Forestry and Fire
Protection (Forestry and Fire Protection), felt the estimates were
too high and the departments began discussing how to reduce
costs. Although no agreement was reached on the cost of either
project, Radio Services started work on both projects. As work
progressed, the two departments continued discussions on cost.
Ultimately, Radio Services made a “re-estimate” of the projects
2200 California State Auditor Report 2002-108 California State Auditor Report 2002-108 2211
with the intent to “split the difference” between what Forestry
and Fire Protection felt was a reasonable cost and the actual
costs of the projects. However, had Radio Services followed its
procedure of obtaining client approval before starting work, it
could have avoided the conflict with Forestry and Fire Protection
and would not have had to absorb costs. Although not being
specific as to how costs were affected, Radio Services’ managers
stated that having more than one person overseeing one of the
projects and Forestry and Fire Protection’s insistence on start-
ing work before estimates, plans, and schedules were complete
and accepted contributed to the problems. To its credit, Radio
Services properly obtained client approval on the project costs
for the two other fixed-cost projects we tested. The last project
tested was a time-and-materials project, which Radio Services
billed for project costs based on actual charges. Radio Services
has since revised its procedures to ensure that each project has
a manager to oversee each project’s progress. Although this may
improve project monitoring, the chief of Radio Services said
there is still the potential for costly delays and debates when
clients insist that work start without agreement of the scope
and schedule. In contrast, agreements on costs for Real Estate
Services’ projects are accomplished through the State’s budget
process. The client department, along with General Services, the
Department of Finance, the Legislature, and the governor, are
involved in this process. If a project is approved, its funding is
included in the State’s budget.
ACTUAL PROJECT COSTS CAN VARY SIGNIFICANTLY
FROM ESTIMATES
Real Estate Services’ staff told us that the best performance
Actual costs ranged from measure of an estimate is to compare it with the actual costs.
more than 200 percent The estimates we tested did not always perform very well when
higher to 24 percent compared with the actual costs. The 10 projects we reviewed
lower than estimated are in various stages of completion, so we reviewed only those
costs for 8 of the 10 estimates related to the completed or substantially completed
projects we reviewed. phases within projects. Table 3 shows our comparison of the
actual costs with the estimated costs for 8 of the 10 projects we
tested and reveals that actual costs ranged from more than
200 percent higher to 24 percent lower than the estimated
costs.4 Although actual costs are likely to vary somewhat from
the estimates, the significant variances we found further sup-
port the need for Real Estate Services and Radio Services to better
follow best practices when estimating fees.
4 One Radio Services’ project we tested was a time-and-materials project for which Radio
Services’ staff did not prepare a cost estimate.
2222 California State Auditor Report 2002-108 California State Auditor Report 2002-108 2233
2222
California
State
Auditor
Report
2002-108
California
State
Auditor
Report
2002-108
2233
TABLE 3
Actual Project Costs Can Vary Significantly From Estimated Costs
Real Estate Services (selected project soft costs)* Radio Services (total project cost)†
Campo Hesperia Porterville
(Department (Department Willows (Department Paso Robles Pt. Mugu Kellogg Hill
of Forestry of Forestry Butterfield (California Riverside of Forestry (Department Wasco (Department (California
and Fire and Fire (Franchise Highway (Department and Fire of Forestry and (Department of of Parks and Highway
Protection) Protection)† Tax Board)‡ Patrol) of Education) Protection) Fire Protection) Corrections) Recreation) Patrol)**
Approximate
percent of
construction
completed 95% 15% 1% 100% 42% 0% 100% 100% 100% 100%
None
Estimated $370,955 $92,900 $11,745,390 $286,700 $500,400 $96,631 $79,603ll $24,262 $245,000 Prepared
Actual $422,164 $286,542 $8,975,040 $278,634 $580,250 $48,250§ $96,568 $23,032 $248,367 $80,493
Variance:
Over-Budget
(Under-
Budget) $51,209 $193,642 ($2,770,350) ($8,066) $79,850 N/A§ $16,965 ($1,230) $3,367 N/A
Percentage
variance 14% 208% (24%) (3%) 16% N/A§ 21% (5%) 1% N/A
* See Table 4 for a detailed breakdown of these figures.
† Project costs include hard costs; however, these costs are not a significant portion of the total cost.
‡ Project construction is substantially incomplete; data are through preliminary plan and working drawing phases only.
§ Project is not complete; we used the amount to be billed to the client for actual cost. However, the actual cost could be higher or lower; therefore, we did not calculate a variance
for this project.
ll Amount billed to the client department was $53,350.
** Time and materials project for which Radio Services did not prepare an estimate.
N/A= Not applicable.
To the credit of the estimating staff, one of the five Real Estate
Services’ project estimates and two of the four Radio Services’
estimates had actual costs that were within roughly 5 percent
of the total estimated costs we reviewed. Further, as described
previously, the other two Radio Services’ projects had problems
related to the lack of upfront client approval of the estimates.
However, a further analysis of the line items that comprise the
estimates for the five Real Estate Services’ projects revealed addi-
tional concerns.
Real Estate Services Can Improve Its Line Item Estimates
Table 3 indicates that Real Estate Services’ estimates for
completed phases of the five projects we tested were reasonably
We found that 20 of accurate, that is, less than a 20 percent variance between the
32 line item estimates for estimate and actual cost, for three projects. However, further
Real Estate Services varied analysis of the line item estimates, as shown in Table 4,
by more than 20 percent reveals that 20 of the 32 line items varied from actual costs by
from the reported costs. 20 percent or more. The overall estimates were fairly accurate
because the high and low line item estimates offset each other.
Although we did not find a standard by which to evaluate a
reasonable estimate variance, Real Estate Services’ staff suggested
that an overall variance of 5 percent or less is considered
very good. Further, if a project’s total actual cost exceeds the
estimate by more than 20 percent, Real Estate Services must
seek legislative approval for a project augmentation. Therefore,
having more than two-thirds of the line items varying from
actual costs by more than 20 percent indicates that there is room
for improvement.
Even though some of the poor line item estimates offset each
other, making the total estimate closer to the total costs we
tested, we noted that line items of certain types of costs con-
sistently had significant variances from the actual costs. In
particular, Real Estate Services appears to perform poorly when
estimating its project management cost, which is based upon
professional judgment regarding project-specific circumstances.
As shown in Table 4, estimates of project management fees fluc-
tuated from 92 percent higher to 47 percent lower than actual
costs. Real Estate Services could not provide documentation to
support the reasonableness of the project management fees we
tested, and our analysis suggests there is a need to perform better
analysis of these fees. Further, the large variances we found in
the other line items also indicate the need for improved estimat-
ing practice. We did not perform a more widespread analysis to
determine whether these variances were limited to the projects
2244 California State Auditor Report 2002-108 California State Auditor Report 2002-108 2255
2244
California
State
Auditor
Report
2002-108
California
State
Auditor
Report
2002-108
2255
TABLE 4
Real Estate Services’ Line Item Estimates Often Vary Significantly From Actual Costs
Campo (Department of Hesperia (Department of Forestry Willows (California Highway
Forestry and Fire Protection) and Fire Protection) Butterfield (Franchise Tax Board) Patrol) Riverside (Department of Education)
Percent Percent Percent Percent Percent
Selected Soft Cost Line Items* Budget Actual Variance Budget Actual Variance Budget Actual Variance Budget Actual Variance Budget Actual Variance
Architecture and Engineering $ 53,000 $ 43,166 (19) $23,000 $ 42,667 86 $5,342,500 $4,420,109 (17) $ 40,000 $ 45,947 15 $162,000 $147,942 (9)
Project Management 18,600 28,393 53 10,900 20,878 92 250,000 219,265 (12) 17,900 26,406 48 54,600 54,840 0
Environmental Review 35,000 35,006 0 — — — 258,000 250,147 (3) 5,000 3,910 (22) 5,000 3,754 (25)
Subtotals: Preliminary Plan Phase 106,600 106,565 0 33,900 63,545 87 5,850,500 4,889,521 (16) 62,900 76,263 21 221,600 206,536 (7)
Architecture and Engineering 69,500 88,499 27 40,000 209,221 423 5,129,390 3,455,759 (33) 50,000 62,022 24 208,000 292,256 41
Project Management 24,500 39,012 59 19,000 13,776 (27) 765,500 629,760 (18) 21,700 32,214 48 70,800 81,458 15
Subtotals: Working Drawing Phases 94,000 127,511 36 59,000 222,997 278 5,894,890 4,085,519 (31) 71,700 94,236 31 278,800 373,714 34
Architecture and Engineering 33,390 56,862 70 — — — — — — 24,000 30,315 26 — — —
Project Management 58,765 31,410 (47) — — — — — — 38,300 38,670 1 — — —
Construction Inspection 36,800 86,418 135 — — — — — — 45,000 39,150 (13) — — —
Construction Travel 41,400 13,398 (68) — — — — — — 44,800 0 (100) — — —
Subtotals: Construction Phase 170,355 188,088 10 — — — — — — 152,100 108,135 (29) — — —
Totals: All Phases $370,955 $422,164 14 $92,900 $286,542 208 $11,745,390 $8,975,040 (24) $286,700 $278,634 (3) $500,400 $580,250 16
* Budget data from “as-bid” estimates.
— Task not completed or not applicable.
and estimates we tested, or whether they are prevalent across
other capital outlay projects. This is because Real Estate Services
does not maintain aggregate records of its estimated soft costs
compared with actual costs. Instead, Real Estate Services’ com-
parison of estimated versus actual costs is informal and limited
to individual projects. We believe this approach has limited
value for improving the accuracy and validity of estimates
because it may not reveal cause and effect patterns across capital
outlay project types, phases, or management activities, which
contribute to inaccurate estimates. It is important that Real
Estate Services’ estimates are as accurate as possible to avoid the
need to request augmentations and potentially delay a project when
estimates are too low, and to reduce overcharges to capital outlay
funds or to tie up funds unnecessarily when estimates are high.
Radio Services’ Estimates Are Rarely Close to Actual Costs
Although Table 3 on page 23 indicates that Radio Services
Of the 40 projects prepared reasonably accurate estimates for the two projects for
completed by Radio which it obtained upfront client approval, that is, the Wasco and
Services during the last the Pt. Mugu projects, further analysis of additional estimates on
two fiscal years, the total other recently completed projects reveals that its estimates gen-
costs for 22 projects erally vary significantly from the actual cost. As shown on the
exceeded or fell below the next page, of the 40 projects completed by Radio Services during
estimates by more than the last two fiscal years, the total costs for 22 projects exceeded
20 percent. or fell below the estimates by more than 20 percent. Other
factors may have caused Radio Services to miss its estimates
substantially, but better adherence to best practices for estimat-
ing may have minimized these variances.
Although Radio Services’ projects are not typically as large as
capital outlay projects in terms of dollars—all but 6 of the
40 project estimates we reviewed were less than $100,000—we
found two projects having actual costs that varied by roughly
$70,000 from the estimate—one higher and one lower. Estimates
that are too high result in an unearned gain for Radio Services
and force its clients, which are usually public safety depart-
ments, to pay too much for services. Estimates that are too low
cause Radio Services to absorb excess costs. It is hoped that
the total variances will be small and will offset and not create
a liability for Radio Services. Unlike Real Estate Services, Radio
Services does not track costs by each line item but rather only
the total cost for materials and labor. Therefore, we analyzed the
total project costs, including hard costs. Without the line item
detail we were unable to determine if any particular line items
contributed significantly to the large variances.
2266 California State Auditor Report 2002-108 California State Auditor Report 2002-108 2277
FIGURE 2
Radio Services’ Estimates Often Vary From Actual Costs by More Than 20 Percent
��
��
��
�
�
�
� �
� � �
�
�
��� ��� �� � � �� ��
�� �� �� �� �� ��
���� ��� ��� �� �� ����
������������������
2266 California State Auditor Report 2002-108 California State Auditor Report 2002-108 2277
����������������
Source: Telecommunications Division listing of completed fixed-cost projects for fiscal years 2000–01 and 2001–02 (project
estimates exceeding $10,000 only).
REPORTS USED TO DETERMINE CLIENT HOURLY RATES
DO NOT ALWAYS REFLECT ACTUAL COSTS
Although General Services’ management requests that divisions
report the financial information needed to set hourly rates, the
reports that management receives do not always include hourly
rates based on actual costs. The actual cost rate—known as the
at-cost rate—is the rate needed to recover a unit’s costs and is
needed for management or other interested parties to determine
how close rates that are chosen reflect a unit’s costs. Although
we found that Project Management within Real Estate Services
properly reported its at-cost rates to management, Radio Services
was not always able to justify adjustments it makes in prepar-
ing its hourly at-cost rates. Further, the Office of Fiscal Services
(Fiscal Services) does not follow General Services’ methodology
for allocating its overhead for inclusion in the at-cost rate.
Although we agree with the theory behind General Services’
calculations of its at-cost rates, we found that Radio Services
could not justify certain adjustments it made in calculating
budgeted expenditures used to determine the at-cost hourly
rates of its engineers and technicians. In computing those
costs, Radio Services reduced the fiscal year 2001–02 projected
cost by $350,000 each, resulting in proposed hourly rates of
$93 for engineers and $88 for technicians. We attempted to
analyze the total $700,000 in reductions, but Radio Services
could not justify how it arrived at those amounts. The head
of Telecommunications’ Support Services Section said Radio
Services made the adjustments to phase in a rate increase and
to minimize the impact on client departments. However, when
preparing financial plans, which include at-cost and proposed
hourly rates, General Services has directed department staff to
provide a complete financial picture for executive management’s
review. Such arbitrary adjustments result in an inaccurate
at- cost rate that may lead executive management to set rates
at an artificial level to recover a unit’s actual costs. Further,
General Services’ management is receiving inadequate
information because the at-cost rate for Radio Services does not
reflect the true rate needed to recover Radio Services’ budgeted
costs. Moreover, a calculation based on projected costs that include
the $350,000 and the available billable hours would increase the
at-cost hourly rates to $94 for engineers and $92 for technicians —
$1 (engineers) and $4 (technicians) per hour higher than the
proposed rates. It is unknown whether this additional information
Radio Services was would have affected management’s decision on the hourly rates.
not able to justify The significance of these increases, if included in the final hourly
adjustments totaling rates, would depend on a project’s size.
$10.2 million that it
made when preparing the Radio Services made other unsupported adjustments to projected
at-cost rate for fiscal year engineer and technician costs totaling $9.5 million in fiscal year
2001–02. 2001–02. Specifically, it reduced projected engineering expenses
by approximately $5.5 million for external contracts, special
work orders, and maintenance engineering, and it reduced the
projected technician expense by $4 million for batteries, parts,
and rent. The assistant budget and planning officer said about
$5.1 million relates to adjustments for costs billed directly to
customers, and most of the remaining $4.4 million relates to
maintenance costs that are billed using a three-year average
of actual costs.5 The officer’s explanation is reasonable, but we
5 Radio Services provides maintenance for many types of telecommunications equipment
including pagers, “handi-talkies,” and mobile radios. State law requires departments to
use Radio Services for telecommunications equipment maintenance services.
2288 California State Auditor Report 2002-108 California State Auditor Report 2002-108 2299
could not determine whether the reductions to engineer and
technician costs were valid because Radio Services could not
demonstrate how it calculated them.
Fiscal Services Does Not Always Allocate Its Overhead Fairly
We also found that Fiscal Services does not follow General
Services’ methodology for allocating its overhead to other
units within General Services. Fiscal Services provides financial
accounting and analysis services to other units within General
Fiscal Services allocated Services, and its costs are an overhead cost of General Services.
its $7.6 million overhead Fiscal Services allocated its costs of approximately
cost to other units partly $7.6 million to other General Services’ units for fiscal year
based on the financial 2001–02. For units such as Fiscal Services, it is General Services’
health of each unit, which policy to allocate their costs to other units based on actual
is contrary to General services provided so that units can include the cost in their
Services’ policy. at-cost rates. However, we found that this policy is not always
followed. When determining how to allocate Fiscal Services’
overhead costs, its chief indicated that the cost of the actual
services is considered, as is the cash position and retained
earnings of each unit and the effect of the Fiscal Services
allocation on the hourly rate of each unit. In cases where
an increase in Fiscal Services’ overhead allocation appears
warranted based upon services provided, but will significantly
affect a unit’s hourly rate, the chief of Fiscal Services will decide
whether to make incremental increases to the unit’s hourly rate
over several years. The chief told us that this approach stabilizes
rates from year to year and limits the impact on the fees that
client departments pay, while allowing for the recovery of
Fiscal Services’ costs.
An example of how Fiscal Services allocated its overhead to
Project Management for fiscal year 2001–02 illustrates this
process. Fiscal Services calculated that its actual effort devoted
to Project Management was $279,000, which was substantially
higher than the $138,000 of services Fiscal Services originally
budgeted for Project Management based on prior-year services.
Despite the increase in services, Fiscal Services did not allocate
overhead to Project Management based solely upon the actual
effort because doing so would increase Project Management’s
at-cost rate. Instead, Fiscal Services allocated only $169,000 to
Project Management and spread the remaining $110,000 in
overhead to other General Services’ units that were believed to
have excess cash reserves or were positioned better to absorb
these costs without increasing rates. We have concerns with this
preliminary leveling of the at–cost rates because, without proper
2288 California State Auditor Report 2002-108 California State Auditor Report 2002-108 2299
disclosure, it may lead management to make rate decisions that
do not adequately recover each unit’s costs and could lead to
under- or overcharging fees to client departments. Allocating the
actual overhead to Project Management would have increased
the at-cost rate presented to management from $90.61 to $91.41
per hour, an increase of 80 cents per hour. Again, the impact
these types of differences would have on management’s final
decision on hourly rates or the cost of a project is unknown.
RADIO SERVICES CAN IMPROVE ITS METHODS
FOR ASSESSING CONSULTING FEES RELATED TO
SYSTEM SERVICES
In addition to installing and maintaining telecommunications
equipment, Radio Services provides consulting services such
as preparing cost studies, developing reports, attending client
meetings, and common services such as Federal Communication
Commission (FCC) license renewals, representing the
State before the FCC, and developing equipment specifications.
Radio Services refers to these services as “system services.”
Radio Services uses three methods to assess system service fees
to its clients. For Forestry and Fire Protection, Radio Services
reportedly assesses an annual fee based upon an average of the
prior three years’ system service charges. The Department of Fish
and Game (Fish and Game) pays a fixed monthly fee it negoti-
ated several years ago. For all other departments, Radio Services
charges a monthly fee based on staff’s actual time charges to
a department for consulting services and a prorated share of
common services. Radio Services agreed to each method to meet
each client’s needs. We found problems with each method.
Our concern with the annual fee based on an average of
the prior three years is that Radio Services is unable to calculate
accurately a three-year average of fees for Forestry and
Fire Protection because its cost accounting system has
weaknesses. In fiscal year 1999–2000, Radio Services reached
Weaknesses in Radio an agreement with Forestry and Fire Protection to begin using a
Services’ cost accounting rolling three-year average of the actual system service fees
system allow staff to to reduce fluctuations in the billing from year to year. As a
charge hours to one cost starting point, Radio Services set the fiscal year 1999–2000
center erroneously and fee at $600,000—the prior-year actual cost for system service.
cause Radio Services’ cost However, in subsequent years, Radio Services indicates
data to be wrong. that it has been unable to determine accurately the actual
annual costs of system service attributable to Forestry and Fire
Protection to include in the three-year average. Weaknesses in
3300 California State Auditor Report 2002-108 California State Auditor Report 2002-108 3311
its cost accounting system allow staff to charge hours to the
system service cost center erroneously, causing Radio Services’
actual costs to be wrong. Specifically, a senior telecommunica-
tions engineer said the system service account for Forestry and
Fire Protection became a holding place for nonbillable costs such
as cost overruns from fixed-cost projects, time spent on closed
projects, and equipment repairs that should be covered by sepa-
rate maintenance agreements Radio Services has with Forestry
and Fire Protection, but that this practice was discontinued in
fiscal year 2002–03. However, because these charges unnecessar-
ily inflated the system service costs attributable to Forestry and
Fire Protection, Radio Services held Forestry and Fire Protection’s
system service fees at $600,000 for fiscal year 2000–01 and at
$613,200 for fiscal year 2001–02—despite the fact that Radio
Services’ records show that charges exceeded $770,000 in both
years. Radio Services increased the fiscal year 2001–02 fees by
$13,200 because of increases in engineering and technician
hourly rate charges. In fiscal year 2002–03, Radio Services actu-
ally reduced its fees to $550,000 because its records indicate that
actual costs for fiscal year 2001–02 decreased to $634,000, not
including charges for June 2002. Although it appears that Radio
Services is trying to be fair with Forestry and Fire Protection by
reducing its fees to below its recorded charges, it cannot provide
support that its reductions are adequate to compensate Forestry
and Fire Protection for the erroneously recorded expenses it
believes exist. Further, given the uncertainty over the accuracy
of its cost accounting system, Radio Services also cannot be cer-
tain that it is not undercharging Forestry and Fire Protection.
We also found that the flat-rate fee that Radio Services charged
to Fish and Game exceeded the actual system service costs in
fiscal year 2001–02. Specifically, we found that Fish and Game
paid approximately $90,000, which is $28,000 more than the
actual system service costs calculated by Radio Services’ cost
accounting system in fiscal year 2001–02. When we asked about
the reasonableness of Fish and Game’s system service fee, the
senior telecommunications engineer told us that Radio Services
has been collecting system service data with an intent to use a
three-year average instead of the flat rate fee starting in fiscal
year 2003–04.
Moreover, we noted errors in the way Radio Services allocates
common charges—the cost of services that benefit all state
public safety departments, such as renewing FCC licenses—to its
nine biggest client departments. Specifically, in determining
the prorated portion of these common charges to allocate for
fiscal year 2001–02, we found that Radio Services’ staff used
3300 California State Auditor Report 2002-108 California State Auditor Report 2002-108 3311
$1.2 million instead of $12,000 in calculating the allocation
amount for the Department of Justice (Justice). Partly offsetting
this allocation error, we found that mathematical errors led to
It is doubtful these nine the use of an understated allocation amount for Forestry and
departments would have Fire Protection and the Department of Corrections (Corrections).
detected the errors we The amounts used to determine these departments’ allocations
found because Radio were understated by $796,000 for Forestry and Fire Protection
Services’ invoices contain and $67,000 for Corrections. Had we not brought these errors
insufficient billing to the attention of Radio Services’ staff, the net effect of these
information. three errors would have caused the allocation of common
charges to Justice to be overstated and the allocation to all eight
other departments to be understated. However, we could not
determine the dollar effect of the errors because Radio Services’
billing system calculates these charges automatically and is not
programmed to show in detail the amount of common costs
that are allocated. Moreover, it is doubtful that any of these nine
departments would have detected these errors because Radio
Services’ invoices show only the total system services billed,
rather than separate amounts for the common charges allocated
and the consulting services charged. Telecommunications’ Fiscal
Management unit head said Radio Services is setting up a process
to have a second person review and verify the calculations of the
prorated common system service charges to detect mathematical
errors in the future.
Finally, until it corrects the problems with its cost accounting
system, Radio Services will be unable to ensure that fees charged
for system service are reasonable and fair. Radio Services’
management recognizes the problems we identified and stated
that it has begun to replace its stand-alone billing systems with
a consolidated system, which they believe will help to prevent
similar problems in the future. In addition, Radio Services’
managers said the new system will perform other management
functions such as project management and tracking, billing,
timekeeping, and inventory tracking.
RADIO SERVICES’ BILLING PRACTICES NEED
IMPROVEMENT
We also found that Radio Services needs to improve its billing
practices to prevent inaccurate charges. Inaccurate invoices may
lead to over- or underbilling client departments and can lead to
wasted time and effort when staff must resolve errors later. Radio
Services’ managers told us that its supervisors do not review
billing invoices for accuracy before sending them to clients.
3322 California State Auditor Report 2002-108 California State Auditor Report 2002-108 3333
Supervisors receive invoices at the same time they are sent to
clients, but the supervisors are generally too busy to review the
invoices. Instead, Radio Services generally relies on its clients to
identify any billing errors. Although invoices contain detail on
hours charged, cost of parts used, and project codes, they gener-
ally lack key details on the services provided, including the type
of service performed, dates, locations, employee names, and
parts used. Clients probably cannot detect errors in billings with-
out these details. The same Radio Services’ managers told us they
Although Radio Services
are working with clients to revise the invoices so they include a
generally relies on its
sufficient amount of detail to meet clients’ needs.
clients to detect billing
errors, its invoices lack
We also found an error in the invoices for one of the five
the detail to do so.
Radio Services’ projects we reviewed. Until we discovered
the error, Radio Services’ was unaware that it had failed to
bill Forestry and Fire Protection $126,000, which included
$36,000 for the Porterville and other fire stations. According to
Telecommunications’ Fiscal Management unit head, the error
occurred because of a miscommunication between her billing
staff and the staff of the client engineering unit that prepared
the invoice. As a result, the client engineering unit prepared
Forestry and Fire Protection’s June 2002 invoice with incomplete
billing reports. After we raised this issue with Radio Services,
it implemented a process that it believes will ensure that the
client engineering unit receives all necessary billing reports for
preparation of invoices.
RECOMMENDATIONS
To ensure that its estimates of project soft costs and fees are
accurate and defensible and to improve the reliability of its pro-
cess for estimating project costs, General Services should require
Real Estate Services and Radio Services to employ the following
best practices:
• Adopt and follow a procedure to thoroughly document
assumptions used in creating project estimates.
• Document evidence of supervisory and client review and
approval and, if needed, develop a process for expedited client
approval when clients of Radio Services insist that projects
start immediately.
• Conduct evaluations at the end of each major project.
3322 California State Auditor Report 2002-108 California State Auditor Report 2002-108 3333
• Develop a historical database of completed projects and use
the database to provide support for future estimated project
costs for all major projects.
• Use multiple cost-estimating approaches for all significant line
item estimates of major projects.
• Periodically review the performance of its cost-estimating
tools against actual results and update the tools when
necessary.
To ensure that the reports General Services uses in setting
hourly rates reflect the true projected cost for each unit,
General Services should require each of its units to:
• Include in its cost-recovery proposals the actual, unadjusted,
at-cost hourly rate.
• Clearly document the existence of and retain support for any
adjustments designed to achieve a desired or recommended
hourly rate.
To improve its method of allocating overhead and to make the
allocation process more objective, Fiscal Services should consider
using another method to allocate its overhead costs to other
units, such as using an average of two or three years’ actual costs
per unit.
To improve the reliability and accuracy of its client fees,
Radio Services should:
• Update its cost accounting system so actual system service
charges can be accumulated for each client department.
• Implement a review process to ensure the accuracy of all
invoices, including system service charges.
• Review billings of Forestry and Fire Protection and Fish and
Game to ensure that the system service amounts charged
reflect the agreements with the departments and are based on
actual costs.
• Continue its efforts to provide its clients with an adequate
amount of invoice detail for them to review the accuracy of
charges.
3344 California State Auditor Report 2002-108 California State Auditor Report 2002-108 3355
We conducted this review under the authority vested in the California State Auditor by
Section 8543 et seq. of the California Government Code and according to generally accepted
government auditing standards. We limited our review to those areas specified in the audit
scope section of this report.
Respectfully submitted,
ELAINE M. HOWLE
State Auditor
Date: December 5, 2002
Staff: John Baier, CPA, Project Manager
Tyler Covey, CPA, CMA
Kyle D. Gardner, Ph.D.
Sheryl Liu-Philo, CPA
3344 California State Auditor Report 2002-108 California State Auditor Report 2002-108 3355
Blank page inserted for reproduction purposes only.
3366 California State Auditor Report 2002-108 California State Auditor Report 2002-108 3377
APPENDIX A
Income and Expenses of
General Services’ Various Units,
Fiscal Year 2001–02
Table A.1 highlights fiscal year 2001–02 incomes, expenses,
and gains or losses for units within the Department
of General Services. As the Introduction notes and as
highlighted in Table A.1 on the following page, we tested
projects from the Real Estate Services Division (including the
Project Management Branch and Professional Services Branch)
and the Office of Public Safety Radio Services because these two
units were significant in terms of income generated from their
respective services.
3366 California State Auditor Report 2002-108 California State Auditor Report 2002-108 3377
TABLE A.1
Income and Expenses of General Services
Percent of Total
General Services Unit Total Income Income Total Expenses Gain (Loss)
RESD-Project Management Branch* $ 371,468,000 34 $ 371,264,000 $ 204,000
RESD-Building and Property
Management Branch 216,274,000 20 210,782,000 5,492,000
Energy Management Division 93,501,000 9 95,138,000 (1,637,000)
RESD-PSB-Design Services Section† 56,731,000 5 56,405,000 326,000
Office of Fleet Administration 50,425,000 5 43,961,000 6,464,000
Telecommunications Division, Office of
Public Safety Radio Services 47,958,000 4 49,592,000 (1,634,000)
RESD-PSB-Construction Services Section 44,501,000 4 43,901,000 600,000
Procurement Division 40,412,000 4 48,565,000 (8,153,000)
Public School Planning, Design, and
Construction Revolving Fund 27,432,000 3 24,694,000 2,738,000
Telecommunications Division, Other Units 22,838,000 2 13,860,000 8,978,000
RESD-PSB-Special Programs Section 20,769,000 2 20,165,000 604,000
RESD-PSB-Environmental Services Section 4,723,000 < 1 4,731,000 (8,000)
All Other RESD Units 23,933,000 2 23,468,000 465,000
Other Units 73,534,000 7 73,631,000 (97,000)
Totals $1,094,499,000 100 $1,080,157,000 $14,342,000
Source: Fiscal year 2001–02 Income and Expense statements provided by General Services’ Office of Fiscal Services, including capital
outlay appropriations.
Note: We tested projects from the highlighted units.
* RESD = Real Estate Services Division
† PSB = Professional Services Branch
3388 California State Auditor Report 2002-108 California State Auditor Report 2002-108 3399
APPENDIX B
Capital Outlay Project Fees and
Descriptions
The services listed in Table B.1 on the following page
describe each of the soft costs, or project management
fees, of a capital outlay project. Typically, these costs are
estimated based on percentages of the total construction cost
and the professional judgment of staff at the time a project
budget estimate is prepared. Different units within the Real
Estate Services Division’s Project Management and Professional
Services branches estimate the costs of services. Each unit
generally bases its cost estimates for services on estimates of
time required to complete various project tasks multiplied by the
applicable hourly rate. We focused our testing on the services
highlighted in the table. Not all cost estimates listed may be
included in a project estimate.
3388 California State Auditor Report 2002-108 California State Auditor Report 2002-108 3399
TABLE B.1
Department of General Services - Real Estate Services Division
Major Capital Outlay Project Fees Overview
Architectural and Engineering Services
Type of Fee and Description
Architecture and Engineering Design: The cost of a design team for technical building design services.
Construction Inspection: The cost for an inspector to provide inspection services for the project during the construction phase.
Inspection Travel: Inspector’s time and cost to travel to a project site to provide inspection services.
Coordination and Contract Management: The cost associated with managing the various legal contracts of a project.
Advertising: The cost of publicizing the project and printing documents for the contract bid process.
Post Construction Guarantee Inspection: The cost to provide inspection services after construction is complete.
Other Project Services and Fees
Type of Fee and Description
Special Consultants: Funding for consultants who provide services outside the architectural and engineering team.
Materials Testing: The cost for quality control testing of the construction materials.
Project/Construction Management: The cost to manage the project during all its phases.
Site-Acquisition Cost and Fees: The cost of services required to procure the project site.
Disabled Veterans/Minority Businesses: The cost to encourage disabled veteran and minority business involvement.
School Plan Checking: The cost for the State Architect to check a school project for structural safety.
Hospital Plan Checking: The cost to ensure that a hospital project meets regulatory requirements.
Essential Services Plan Checking: The cost to evaluate project compliance with essential services facility regulations.*
Handicapped Plan Checking: The cost to ensure project compliance with the Americans with Disabilities Act.
Environmental Document: The cost to ensure project compliance with state and federal environmental laws and regulations.
Sources: The State Administrative Manual and the Real Estate Services Division.
Note: We tested estimates from the highlighted areas.
*Facilities designed to operate during times of disaster on a 24 hours a day, 7 days a week basis.
4400 California State Auditor Report 2002-108 California State Auditor Report 2002-108 4411
APPENDIX C
The Office of Public Safety
Radio Services’ Project Fees and
Descriptions
Table C.1 on the following page includes the cost elements
that commonly are found in a project estimate prepared
by the Telecommunications Division Office of Public
Safety Radio Services (Radio Services). Radio Services’ project
estimates are based on labor costs to complete the design and
installation of the radio or microwave equipment as well as
the materials used for the project. The estimated costs for the
cost elements generally are developed by Radio Services’ units
assigned to do the work, using internally developed estimating
spreadsheets in association with the professional experience of
the unit staff. Our testing focused on the services highlighted
in the table. Not all cost estimates listed may be included in a
project estimate.
4400 California State Auditor Report 2002-108 California State Auditor Report 2002-108 4411
TABLE C.1
Department of General Services - Office of Public Safety
Radio Services’ Project Fee Overview
Client Engineering Unit (CEU) Services
Type of Fee and Description
Unit Administration Support: The CEU cost to manage the assigned project. Each client agency has a designated staff person and
designated CEU staff that generally conduct the work.
Statement of Work Development: Engineering cost to ensure a complete understanding of the client’s desired end result for
the project.
Project Specification Development: Engineering cost to translate client operational needs into a technical specification.
Project Plan Development: Engineering cost to develop the work structure categorization and schedule for the project.
Client Engineering Unit Engineering: Cost required for project planning and implementation due to specialized knowledge of
unique client radio systems.
Support Unit Services
Type of Fee and Description
Area 3: Cost of work for installing mobile radios in vehicles brought to the Area 3 garage in Sacramento. In addition, this work
may include repair work on portable hand-held radio equipment sent to the Area 3 shop.
Consoles: Engineering cost to complete customer-requested console engineering work.
Federal Communications Commission: Engineering cost for researching and applying to the Federal Communications
Commission for new or modified radio licenses.
Field Labor: Cost of all work by technicians to install and test equipment, parts, and services associated with a
specific project.
Engineering: Cost to complete task-level engineering work of customer-requested engineering projects. Services include site and
vault engineering, developing drawings, writing work instructions, and assisting in the implementation of the project.
Microwave: Engineering cost to perform microwave engineering, developing drawings, writing instructions, and assisting in the
implementation of client projects.
Special Projects: Engineering cost to complete specialized design and fabrication of parts and equipment required to complete
customer-requested engineering work.
Project Management Unit: Working with the CEU, the cost to manage a client project.
Other Costs
Type of Fee and Description
Contingency: The cost added to allow for any uncertainty.
Source: The Office of Public Safety Radio Services.
Note: We tested estimates from the highlighted areas.
4422 California State Auditor Report 2002-108 California State Auditor Report 2002-108 4433
APPENDIX D
The Legislative Analyst’s Office’s
Findings Highlighted the Need
for Additional Quality Control
Over General Services’ Project
Cost Estimates
In its report titled Analysis of the 2002–03 Budget Bill, the
Legislative Analyst’s Office (LAO) identified several concerns
with the appropriateness of the Department of General
Services’ (General Services) project management fees. The LAO’s
concerns resulted from its review of General Services’ capital
outlay program budget proposals for fiscal year 2002–03. The
LAO identified 10 concerns from fee estimates that appeared
excessive, unnecessary, or inconsistently applied. Table D.1 on
page 45 summarizes the LAO’s findings and the results of our
more detailed review of the concerns presented by the LAO.
Table D.1 shows that three of the LAO findings were indeed
errors in General Services’ estimates and that General Services
was unable to provide written support for a fourth fee estimate.
According to the Capital Outlay program manager, relatively
new staff made two of these errors by failing to remove from
the initial conceptual estimates some standard costs that are
included on General Services’ estimating template. At the
time the staff prepared the two estimates, General Services
did not have a process for a supervisory or senior level review
of conceptual estimates. However, as a mitigating factor, the
Capital Outlay program manager said General Services does have
a process to check for errors in the estimates that staff prepare
after the initial conceptual estimate. However, we found that
this process could be more thorough because we found an error
in one of its budget estimates as well. Nevertheless, because of
the LAO’s findings, General Services now requires a supervisory
or senior staff review of all conceptual estimates. Finally, because
General Services was unable to provide written documentation
for how it calculated a fourth estimate for inspector travel fees
totaling $374,000, we could not determine the rationale of the
estimate. As noted in the Audit Results section of this report,
the lack of documentation for estimates leads us to conclude
that General Services needs to improve the quality control over
estimate preparation.
4422 California State Auditor Report 2002-108 California State Auditor Report 2002-108 4433
Although we agree with LAO’s concern that General Services
can improve its overall quality controls over cost estimates,
General Services did provide adequate explanations and/or
documentation addressing the remaining five LAO concerns.
For example, regarding the questionable Chino Prison
environmental review fee, General Services was able to provide
a standard breakdown of the tasks, number of hours, and
the hourly rate to support the rationale of the fee. Further, as
discussed in the Audit Results section of this report, we believe
that General Services’ method for assessing fees is reasonable in
principle. The LAO assumed that General Services’ fee was based
solely on reimbursing the inspectors for the mileage to travel
to and from the prison. However, the General Services travel
inspection fee actually is based upon the hourly billing rate of
the inspector while traveling, which seems reasonable because
the inspector is paid for this time. This factor alone causes the
fee to be significantly higher than just the mileage rate.
4444 California State Auditor Report 2002-108 California State Auditor Report 2002-108 4455
TABLE D.1
Three of the Legislative Analyst’s Office’s Concerns With Fees Resulted in General
Services Implementing Additional Quality Control
Legislative Analyst’s Office’s
Concern Regarding General
Estimated Services’ Fee Estimates- Result of the Bureau of
Project Name, if applicable Project Cost Amount of Fee Estimate State Audits Review
General Services provided support for
the travel budget calculation; however,
the estimator improperly used 24 months
instead of 18 months. As a result, this
Department of Corrections Excessive travel budgeted- fee was overestimated by an
Prison, Sacramento (Folsom) $11,929,000 $110,000 undetermined amount.
The estimate was based upon professional
judgment. General Services did not retain
Department of its written analysis to support its estimate;
Transportation District 3 Excessive travel budgeted- therefore, we could not determine
Office (Marysville) $56,131,000 $374,000 whether the fee was reasonable or fair.
Department of Corrections The fee appears justified by work
California Institute for Men Unnecessary environmental requirements and information that
(Chino) $1,936,000 review fee - $2,000 General Services provided us.
Department of Forestry and
Fire Protection Forest Fire General Services agrees this was an error
Station Apparatus Building Unnecessary school checking and recently put a quality control process
(Buckhorn) $931,000 fees - $6,200 in place to detect similar errors.
Department of Forestry and
Fire Protection Forest Fire Unnecessary school checking, General Services agrees this was an error
Station Replacement Building hospital checking, and essential and recently put a quality control process
(Elsinore) $1,641,000 services fees - $58,700 in place to detect similar errors.
The fee appears justified by work
Department of Mental Health Unnecessary handicap requirements and is based upon a
State Hospital (Atascadero) $806,000 checking - $1,100 percentage of contract costs.
The lack of an inspection travel fee
Department of Mental Health appears justified as inspection staff
Sexually Violent Predator are onsite and assigned to the project
Facility (Coalinga) $328,201,000 No travel budgeted full time.
The cost recovery method in principle seems
reasonable and fair. Further, fee estimates
The cost recovery method include the expected number of hours
does not reflect actual costs for a task multiplied by the appropriate
General finding Not applicable attributable to a project. hourly rate.
The cost to notify disabled
veteran and minority owned
businesses of state capital outlay The fee appears justified and is calculated
projects is a surcharge on the using the total unit costs to recover
total cost of a project with no divided by the annual value of capital
General finding Not applicable validation of the amount. outlay projects.
The errors noted above were contained in
conceptual or placeholder estimates, which
are based on little or no project information.
General Services has since implemented
additional quality controls for these
estimates that it believes will detect errors
There appears to be an overall in the future, but it can make additional
lack of quality control and improvements as noted in the Audit Results
General finding Not applicable review of fee estimates. section of this report.
4444 California State Auditor Report 2002-108 California State Auditor Report 2002-108 4455
Blank page inserted for reproduction purposes only.
4466 California State Auditor Report 2002-108 California State Auditor Report 2002-108 4477
Agency’s comments provided as text only.
State and Consumer Services Agency
Office of the Secretary
915 Capitol Mall, Suite 200
Sacramento, CA 95814
November 22, 2002
Elaine Howle, State Auditor*
Bureau of State Audits
555 Capitol Mall, Suite 300
Sacramento, California 95814
Dear Ms. Howle:
Enclosed is our response prepared by the Department of General Services to the Bureau
of State Audits’ Report No. 2002-108 entitled, Department of General Services: Certain
Units Can Do More to Ensure Client Fees Are Reasonable and Fair. A copy of the
response is also included on the enclosed diskette.
If you have any questions or need additional information, please contact me at
653-2636.
Sincerely,
(Signed by: George Valverde)
George Valverde
Deputy Secretary
Enclosures
* California State Auditor’s comments appear on page 57.
4466 California State Auditor Report 2002-108 California State Auditor Report 2002-108 4477
Department of General Services
Date: November 22, 2002 File No.: 2002-108
To: Aileen Adams, Secretary
State and Consumer Services Agency
915 Capitol Mall, Room 200
Sacramento, CA 95814
From: Department of General Services
Executive Office
Subject: RESPONSE TO BUREAU OF STATE AUDITS’ REPORT NO. 2002-
108– “CERTAIN UNITS CAN DO MORE TO ENSURE CLIENT FEES ARE
REASONABLE AND FAIR”
Thank you for the opportunity to respond to the Bureau of State Audits’ (BSA) Report No.
2002-108 which addresses recommendations to the Department of General Services
(DGS). The BSA’s audit primarily involved fees charged to client departments for projects
overseen by the Project Management Branch (PMB) located within the Real Estate
Services Division (RESD), and the Office of Public Safety Radio Services (Radio Services)
located within the Telecommunications Division (TD). The following response addresses
each of the recommendations.
OVERVIEW OF THE REPORT
The DGS has reviewed the findings, conclusions and recommendations presented
in Report No. 2002-108. The DGS will take appropriate actions to address the
recommendations.
Overall, the DGS is pleased that, as discussed in Appendix D of the report, the BSA’s
extensive and in-depth audit of DGS’ fee setting process did not substantiate the
1
Legislative Analyst’s Office’s (LAO) concerns that fees charged within the capital outlay
program were excessive, unnecessary or inconsistently applied. As noted by the BSA,
the few instances in which the LAO’s concerns were substantiated primarily related to
conceptual estimates and did not involve amounts that were used in the final funding of a
project. Conceptual estimates are typically prepared without detailed project information.
Therefore, they represent a very rough calculation of proposed project costs. These
estimates meet client needs by providing relevant information for use in determining if a
project is financially feasible. However, they are not used when the PMB develops a final
budget package for actual proposed project funding.
Based on its in-depth review of five projects each for RESD and Radio Services, the
BSA concludes that improvements could be made in the fee estimating process by more
consistently following recommended best practices. Although a number of the projects
reviewed by the BSA are unique and not representative of current control processes,
4488 California State Auditor Report 2002-108 California State Auditor Report 2002-108 4499
Aileen Adams -2- November 22, 2002
overall, the areas for improvement identified by the BSA do represent best practices. In
fact, in most areas, the BSA’s results validate actions already taken or being taken by the
DGS to improve operations. Specifically, the DGS has taken or plans to take the following
actions to improve its estimating process.
• Technology Projects – in December 2002, the TD plans to issue a Request for
Proposal for an automated system to replace its current environment of independent
automated and manual information systems. The new solution, the Automated
Enterprise Support and Oversight Product (AESOP), will provide flexible, integrated
and efficient systems to allow the TD to better manage its business activities. Although
affecting more systems than just estimating, the project’s scope provides for new
automated functions that will improve the estimating process, including the providing of
more accurate and timely historical project information.
The RESD has also recognized the need for additional historical information on its
projects and has performed some preliminary work in developing a prototype of a
database to be used for that purpose.
• TD Project Management Reorganization – in April 2002, the TD instituted a major
change in the authority and responsibilities of its Project Management Unit (PMU). In
brief, the PMU was reassigned to the Client Engineering Section which allows PMU
staff to work closer with client engineering staff and operating unit management to
more effectively estimate and control project costs.
• Post-Occupancy Evaluation Program – the RESD is in the early stages of
implementation of a Post-Occupancy Evaluation (POE) program. The POE program
was developed to support and enhance the design, construction and operation of
state buildings. It is anticipated that lessons learned through the POE process will
assist estimators in performing their work by providing additional project information,
especially in the area of project design.
• Conceptual Estimates – based on the results of the LAO’s analysis, which showed
weaknesses in the conceptual estimating process, the PMB has implemented
additional quality control processes within its estimating function. Specifically, to
assist in ensuring that the most accurate information possible is provided to clients,
approximately six-months ago policies were implemented that require all conceptual
estimates to be reviewed by the supervising estimator prior to issuance.
Although the above actions will improve the estimating process, it should be noted that
the preparation of project cost estimates will always require professional judgment. The
various projects overseen by PMB and Radio Services are unique in that each one
differs on such key issues as scope, location, schedule and construction type. Although
various tools are available to assist in the estimating process for an individual project,
2
the estimators’ professional judgement developed through his/her education, training and
experience is the most important factor involved in ensuring the accuracy of an estimate.
4488 California State Auditor Report 2002-108 California State Auditor Report 2002-108 4499
Aileen Adams -3- November 22, 2002
To ensure that highly capable staff prepare estimates, both RESD and Radio Services
assign only senior and experienced personnel to the estimating process. For example,
the PMB only hires at the level of Senior Estimator for its estimating function. Further, a
supervising estimator with over 20 years of experience oversees its estimating process
and reviews all budget estimates.
In summary, the DGS is continually striving to ensure that best practices are utilized in
all phases of its project management operations, including those discussed by the BSA
for estimating project costs. It is not surprising that further improvements can be made
in functions as complex and large as those administered by RESD and Radio Services.
Currently, RESD is administering approximately 340 major capital outlay projects valued at
$3.8 billion. Radio Services is administering 770 master and sub-projects valued at $140
million.
It should also be noted that the BSA focused its testing on soft costs for the projects
overseen by the PMB because the appropriateness of those costs was the LAO’s area of
interest. Soft costs represent those costs incurred in designing and managing a capital
outlay project. As noted in the BSA’s report, soft costs do not comprise a majority of a
project’s cost. In fact, those costs represent only approximately 25 to 30 percent of typical
project costs. The primary costs within a major capital outlay project involve hard costs,
i.e., the costs of construction labor and materials. Based on data maintained by the PMB,
the DGS has been very successful in ensuring that its hard cost estimates are reliable.
Specifically, for major capital outlay projects bid-out during the last two fiscal years the
average variance between the budget estimate and the actual construction contract award
varied by less than 5%. This low average variance reflects favorably on the estimating
process used within RESD.
The following response only addresses the recommendations. In general, the actions
recommended by the BSA have merit and will be promptly addressed.
RECOMMENDATIONS
RECOMMENDATION # 1: To ensure that its estimates of project soft costs and fees
are accurate and defensible and to improve the reliability
of its process for estimating project costs, General
Services should require Real Estate Services and Radio
Services to employ the following best practices:
• Adopt and follow a procedure to thoroughly document
assumptions used in creating project estimates;
• Document evidence of supervisory and client review
and approval and, if needed, develop a process for
5500 California State Auditor Report 2002-108 California State Auditor Report 2002-108 5511
Aileen Adams -4- November 22, 2002
expedited client approval when clients of Radio
Services insist that projects start immediately;
• Conduct evaluations at the end of each major project;
• Develop a historical database of completed projects
and use the database to provide support for future
estimated project costs for all major projects;
• Use multiple cost estimating approaches for all
significant line item estimates of major projects;
• Periodically review the performance of its cost-
estimating tools against actual results and update the
tools when necessary.
DGS RESPONSE # 1:
In general, the DGS agrees with the elements of estimating best practices identified in
the BSA’s report and is continually striving to implement processes that include those
practices. Toward that end, both RESD and Radio Services will take actions which ensure
that the BSA’s recommendations are fully addressed. The following information is provided
for each of the actions recommended above.
• Documentation of Assumptions – RESD is taking action to ensure that
documentation of assumptions used in making estimates is maintained. Specifically, a
summary sheet will be developed and placed in the estimate files for all future budget
package estimates.
For Radio Services, its existing process provides that assumptions which may impact
a project estimate must be stated on the Statement of Work and/or the Project Plan.
However, additional information will now be required to document assumptions
pertaining to the use of professional judgment.
• Documentation of Supervisor and Client Project Review – this issue relates to
activities within Radio Services. Radio Services will modify its workflow process to
ensure that documentation is maintained of a supervisor’s review and approval of a
project’s estimate. Specifically, its current Project Summary form will be modified to
include a project estimate final review sign-off line for completion by the Client Unit
Head. As to client project approval, Radio Services’ current project planning policies
already require client approval for each project. However, due to the emergency public
safety nature of Radio Services’ work, on occasion all planning documents can not
be completed prior to the start of a project. To address this issue, Radio Services
will develop a process to obtain a written consent to proceed from its clients when a
project is started without an approved plan being in place.
5500 California State Auditor Report 2002-108 California State Auditor Report 2002-108 5511
Aileen Adams -5- November 22, 2002
• End-of-Project Evaluations – as discussed in the Overview section of this response,
RESD has developed a Post-Occupancy Evaluation (POE) program that is in the early
stages of implementation. However, availability of funding may affect the use of POE’s
on all major projects.
In addition, Radio Services has taken a significant action that will assist in allowing the
efficient and effective post-evaluation of projects. Specifically, it has reorganized its
operations to ensure that its project management personnel work more closely with
operating personnel. This action will allow an expansion of Radio Services’ current
post-evaluation process. In the past, post-evaluations were mainly only conducted on
projects that showed a large variance between the estimate and actual cost. It should
be noted that the full implementation of a post-evaluation process for all major projects
will be delayed pending the completion of the AESOP project. That project will provide
more accurate and timely information for use in an effective and efficient project
evaluation process.
• Historical Database – the DGS strongly agrees that historical project information is
a valuable tool for use in the estimating process and plans to develop a technology
solution within both RESD and Radio Services to address this need. As discussed
under the Technology Projects’ part of our response, TD’s AESOP project includes
provisions that will result in the availability of more accurate and timely historical
project information. RESD has also begun the process of developing a database of
relevant historical information for use within the estimating process.
• Multiple Cost Estimating Approaches – as both RESD and Radio Services obtain
more historical project information, they will be able to use additional cost estimating
approaches for their projects. In the interim, both entities will continue to use available
estimating tools to ensure the obtaining of reliable and accurate estimates.
• Review of the Performance of Cost Estimating Tools – this issue again relates to
the availability of accurate and reliable historical project data. As previously discussed,
both RESD and Radio Services are actively attempting to develop this type of
information.
RECOMMENDATION # 2: To ensure the reports General Services uses in setting
hourly rates reflect the true projected cost for each unit,
General Services should require each of its units to:
• Include in its cost-recovery proposals the actual,
unadjusted, at-cost hourly rate;
• Clearly document the existence of and retain support
for any adjustments designed to achieve a desired or
recommended hourly rate.
5522 California State Auditor Report 2002-108 California State Auditor Report 2002-108 5533
Aileen Adams -6- November 22, 2002
DGS RESPONSE # 2:
As part of the department’s annual financial plan process, DGS policy provides that its
Executive Management Team be provided with at-cost rates as well as various other rate
scenarios that will impact an operating unit’s ability to be financially solvent and avoid rate
3
volatility. The BSA has identified an instance where an inadvertent error was made in the
presentation of Radio Services’ rates. The Office of Fiscal Services (OFS) will reemphasize
the importance of correctly reporting at-cost rates during the next annual financial review
process.
Pertaining to the second proposed action which also involves the operations of Radio
Services, the TD will prepare and retain documents, along with available supporting
data, defining any adjustments or allocation of costs made as part of the process used
in developing its engineering and technician hourly rates. As part of the annual financial
planning process, the OFS will also take the lead in ensuring that it documents and retains
records that will identify the basis for those costs that are excluded from hourly rate
calculations.
RECOMMENDATION # 3: To improve its method of allocating overhead and to
make the allocation process more objective, the Office of
Fiscal Services should consider using another method
for allocating its overhead costs to other units, such
as using an average of two or three year’s actual costs
per unit.
DGS RESPONSE # 3:
The OFS will include in the annual financial plan process additional detail that identifies to
the Executive Management Team the proposed distribution of overhead costs to operating
entities and the method used (personnel years, budget, etc.) to make that allocation.
Further, in addition to the current method used by OFS, other methods will be considered
and presented to the team.
RECOMMENDATION # 4: To improve the reliability and accuracy of its client fees,
Radio Services should:
• Update its cost-accounting system so that actual
system service charges can be accumulated for
each client department;
• Implement a review process to ensure the accuracy
of all invoices, including system service charges;
5522 California State Auditor Report 2002-108 California State Auditor Report 2002-108 5533
Aileen Adams -7- November 22, 2002
• Review billings to the Department of Forestry
and Fire Protection and the Department of Fish
and Game to ensure that the system service
amounts charged reflect the agreements with the
departments and are based on actual costs;
• Continue its efforts to provide its clients with an
adequate amount of invoice detail for them to review
the accuracy of invoice charges.
DGS RESPONSE # 4:
The TD’s current system allows for the accumulation of actual system service charges for
each client department. However, errors in coding those charges have occurred in the
past. Recently, the TD changed its practice to ensure that only system service charges
are coded to the system service line item and that staff have limited access to that line
item for time entry. As noted in the BSA’s report, several clients have requested that they
be charged for system services on an annual fixed-cost basis rather than on a monthly-
accumulated cost basis. In order to accommodate these clients, a pilot project was
implemented to evaluate the feasibility and impact of such a program. The current billing
system cannot accommodate this option; therefore, TD must manually calculate the annual
fixed-cost amount by averaging two to three years of system service charges for the
individual client. TD is implementing a process to use a rolling three-year period to ensure
that the average used for annual billing will reflect changes in actual system service costs
from year to year.
As to the second proposed action related to a review process of invoiced costs, the
TD continually strives to ensure that all client charges are accurate. The error in billing
identified during the audit involved one of the five projects reviewed by the BSA. The errors
made on that project are not representative of the TD’s overall billing systems and resulted
from a miscommunication between billing and program staff. As noted in the report, after
being advised of a system weakness that contributed to the error, the TD immediately
implemented a process to ensure that program staff receive all necessary information for
billing purposes.
In addition, the DGS’ technology staff are developing an additional management report for
system service charges that will detail the total system service hours for each agency with
the prorated percentage value listed along with the calculated prorated hours and cost.
This report will be provided to the TD’s Billing Unit for review before invoices are released
to clients.
For the departments of Forestry and Fire Protection and Fish and Game that are part of
the annual fixed-cost system service program, the TD has implemented procedures for
the review of monthly invoices to ensure the accuracy of amounts charged. As previously
stated, the annual fixed-cost amounts will be based on a three-year average of actual
system service costs.
5544 California State Auditor Report 2002-108 California State Auditor Report 2002-108 5555
Aileen Adams -8- November 22, 2002
As to the final recommended action, with the implementation of the previously discussed
AESOP project, Radio Services will be able to make a greater amount of invoice detail
available to its client agencies. The plan is to provide each client with the ability to access
their own invoice data on line with a range of prepared reports and an option to select a
download of their raw data so that they can organize it to suit their individual needs.
CONCLUSION
The DGS is firmly committed to effectively and efficiently managing its projects and
accurately charging for services rendered. As part of its continuing efforts to improve
these processes, the DGS will take appropriate actions to address the issues presented in
the report.
If you need further information or assistance on this issue, please call me at 376-5012.
(Signed by: Sandra Duveneck for:)
Clothilde V. Hewlett, Interim Director
Department of General Services
5544 California State Auditor Report 2002-108 California State Auditor Report 2002-108 5555
Blank page inserted for reproduction purposes only.
5566 California State Auditor Report 2002-108 California State Auditor Report 2002-108 5577
COMMENTS
California State Auditor’s Comments
on the Response From the
Department of General Services
To provide clarity and perspective, we are commenting on
the Department of General Services’ (General Services)
response to our audit report. The numbers below
correspond to the numbers we placed in the margin of
General Services’ response.
1
General Services has misstated our position. We were able
to substantiate 5 of the Legislative Analyst’s Office’s (LAO)
10 concerns and we do agree with the LAO, as stated on page 44,
that General Services can improve its overall quality controls
over cost estimates.
2
We do not fully agree with General Services’ emphasis on the
importance of professional judgment. As we state on page 15
of the report, best practices indicate that an individual’s
knowledge and experience—commonly referred to as profes-
sional judgment—is an invaluable resource for good project
cost-estimation, but alone it is not sufficient. Instead, entities
that prepare estimates should supplement staff’s professional
judgment with a variety of mechanisms, such as historical
data to use when preparing estimates and conducting
end-of-project evaluations, to provide a more systematic
method of developing viable estimates.
3
This statement is surprising. This is the first time General
Services has characterized the unsupported adjustments staff
made to its hourly rates as errors. Throughout our audit, staff
told us that these adjustments were intentional and were
made either to shift costs to the appropriate cost center or to
phase in a rate increase and to minimize the impact on client
departments—as we state on pages 28 and 29. Further, General
Services’ staff and its management team confirmed these state-
ments during the end of our audit briefings.
5566 California State Auditor Report 2002-108 California State Auditor Report 2002-108 5577
cc: Members of the Legislature
Office of the Lieutenant Governor
Milton Marks Commission on California State
Government Organization and Economy
Department of Finance
Attorney General
State Controller
State Treasurer
Legislative Analyst
Senate Office of Research
California Research Bureau
Capitol Press
5588 California State Auditor Report 2002-108