PBC Construction Change Orders Audit

The Office of Inspector General (OIG) conducted an audit of the Public Building Commission of Chicago’s (PBC) change order review and approval process. PBC manages the planning, design, and construction of public buildings such as schools, firehouses, and libraries for local government clients such as the City of Chicago, Chicago Public Library, Chicago Public Schools, Chicago Park District, and City Colleges of Chicago.

The objective of the audit was to determine if PBC could provide reasonable assurance to its clients that change orders were justified and reasonably priced

A change order is an agreement between a contractor and a client that authorizes a departure from the original contract terms, and provides information on how the change will affect the cost, time, and scope of work. For example, in the course of a construction project, a contractor may discover that additional concrete is required to complete the building’s foundation. PBC’s Development Division, which includes both project managers (PMs) employed by PBC and PMs engaged under contracts, is responsible for managing and reviewing change orders to ensure that the changes are justified and the contractors’ costs reasonable.

Under PBC’s established process for reviewing and approving change orders, PMs complete standardized forms during their review of the proposed work and submit them to PBC management for approval. If the reviewing PM determines a necessary change is attributable to an error or omission by the architect—for example, a failure to include a component in the original drawings—the PM executes what PBC calls an “errors and omissions” (E & O) change order. In this situation, PBC may ultimately hold the architect liable for any damages caused by the mistake.

OIG identified nine PBC construction projects underway in 2014 and 2015 where the change order costs were projected to exceed 5% of the original contract price excluding the contingency and site work allowance, which is an industry standard threshold for determining whether thorough review is warranted. For each project, we assessed whether the documentation complied with PBC’s change order review and approval process. We also reviewed E & O changes to determine if PBC sought to recover damages attributed to the architect. We found at least 1 problem in 99 out of 228, or 43.4%, of the change orders we reviewed, including proposals that lacked the necessary detail and instances where contractors overbilled PBC clients. Overbilling and insufficiently detailed proposals undermine PBC’s ability to assure its clients that increases in contracted project costs are necessary and reasonable. In addition, we found that the Commission inconsistently applied its E & O damage recovery policy. As a result, PBC could not provide its clients or the public with reasonable assurance that it made adequate efforts to recover damages related to architects’ errors or omissions.

OIG concluded that PBC designed a robust process to review and approve change orders. However, ineffective implementation permitted errors and inconsistencies in the recording of information and recovery of damages. Because PBC allowed contractors to submit inconsistent information and did not hold architects accountable for errors, the Commission cannot demonstrate that it effectively safeguarded public funds. OIG recommends that PBC improve its change order review and approval process by requiring contractors to submit cost proposals on a standardized digital form, and by implementing an electronic document control system for change order reviews and approvals. In addition, PBC should revise, and then consistently implement, its E & O damage recovery policy to ensure that damage calculations are reviewed and decision rationales are recorded.

In response to OIG’s audit, PBC stated that it agrees with all of our recommendations and proposed several corrective actions to improve the way it manages change orders. Specifically, PBC has already begun to utilize a standardized electronic cost proposal form that facilitates accurate calculations and requires contractors to itemize labor and material costs. PBC has also conducted internal change order trainings and begun to require additional staff to review change orders. Finally, PBC will update its E & O Manual to include language requiring that all E & O Committee decisions be documented and stored in a centralized location.