This article is an excerpt from The Art of Tendering: A Global Due Diligence Guide, which is available for purchase.
In its 2016 annual report findings entitled “Metrolinx—Public Transit Construction Contract Awarding and Oversight”, the Auditor General of Ontario found significant project management problems at Metrolinx, a provincial government public transportation agency. As the report notes, Metrolinx is responsible for “operating a network of train and bus routes across more than 11,000 square kilometres (km) in the Greater Toronto and Hamilton Area”, which includes “680 km of railway track on seven train lines, 66 train stations and 15 bus terminals” to service “69 million annual passenger boardings” on its vehicles.
The report found that Metrolinx did not have adequate processes in place to ensure that it was consistently obtaining value-for-money in its construction projects. This inadequacy created an ongoing risk of Metrolinx spending more than required on its projects. In addition, the Auditor General found that Metrolinx failed to implement a proper contractor performance management system to deal with poorly performing contractors:
Metrolinx continues to award contracts to poorly performing contractors that submit the lowest bids—it does not track contractors’ past performance and does not consider contractors’ ability to deliver completed projects on time, which has resulted in Metrolinx incurring additional costs. Metrolinx has had many years to implement a contractor performance-management system but still has not done so.
More specifically, the report observes that Metrolinx failed to sanction design consultants when project design flaws contributed to project delays and cost overruns, and instead continued to use those same consultants notwithstanding their past performance problems:
Metrolinx allows design consultants to produce designs that are not feasible to construct, contain errors, misestimate the quantity of materials required, or omit specifications—all with no repercussions. Because designs created by consultants are used by the contractor to calculate bid prices, they need to be free of error; otherwise, there can be considerable cost overruns during construction. Also, since construction cannot begin until the design is finalized, design delays can significantly impact the overall project time frame and cost. In our review of a sample of Metrolinx project documents from the past five years, we noted that consultants made frequent errors in their designs. In one project alone, errors made by the consultant caused a project to be over budget by 35%, or $13.6 million, a cost that Metrolinx had to pay as a result of the design not including all final requirements. In a sample of six projects whose total initial construction costs were over $178 million, $22.5 million more had to be spent just because of the design consultants’ errors and omissions. There were no repercussions in these cases, and Metrolinx did not factor in this poor performance when selecting these design consultants for future projects.
The Auditor General found a similar pattern in Metrolinx’s failure to sanction poorly performing general contractors, noting that a contractor “might repeatedly be late in delivering work, not construct the project according to the approved design, not follow safety regulations and/or not fix deficiencies on time—yet Metrolinx will hire the contractor for future projects, provided it is the lowest bidder.” For example, the report noted that one contractor was awarded 22 projects after prior poor performance, while another was paid in full after being terminated for poor performance and was then hired for another contract:
One contractor was awarded 22 more projects after performing poorly for Metrolinx. We noted that Metrolinx issued a letter of default to a contractor in 2009 because construction workers had not even shown up on the project site for several weeks. Despite this, since then, Metrolinx has awarded this contractor 22 more projects worth a total of $90 million. We reviewed the contractors’ performance on a few of these 22 projects and noted that project staff continued to rate its performance as poor. For example, on a project in 2012, this contractor installed several pieces of substituted equipment and building materials that were not approved in the contract (the substitutions were caught by Metrolinx only after-the-fact). On another project in 2013, this contractor took six months, after it had already completed the project, to fix its deficiencies—one significant deficiency was the absence of a functioning camera and surveillance system that posed a safety risk to commuters using the station.
Metrolinx terminated a contract with another poorly performing contractor, paid it almost the full amount, and then re-hired it for another contract. Metrolinx hired the same contractor for Phase 2 of a project to install external cladding (cover) for a pedestrian bridge over Highway 401 even though the contractor had performed extremely poorly on Phase 1. The contractor again had performance issues on Phase 2: it significantly damaged glass covering the bridge, and Metrolinx estimates it will cost $1 million to replace the glass. Metrolinx terminated the contract with the contractor because of performance issues, even though the construction had not been completed, and paid the contractor almost the full $8 million of its contract. We noted that, after performing poorly on both Phase 1 and Phase 2, Metrolinx still awarded this contractor another major project valued at $39 million (to build a new platform at a GO station).
The report also found that Metrolinx failed to sanction contractors who breached safety standards or who failed to address the risk of poorly performing subtrades. The Auditor General further concluded that Metrolinx lacked the appropriate controls in its enterprise management system to ensure proper approvals for cost overruns, failed to ensure that contractors rectified deficiencies in a timely manner, failed to inspect work to ensure that contractors were using specified new parts instead of recycled parts, and failed to protect itself against excessive mark-ups in its sole-source construction contracts, which in some instances were 74 percent higher than industry benchmarks.
In response to these audit findings, Metrolinx stated that it welcomed “the recommendations made by the Auditor General to improve construction procurement and contract management processes”, noting that over the period of review, “Metrolinx’s annual capital investments, including construction costs, more than doubled” and that it had “taken many measures over this period to continue to improve its controls over this program.”
As this case study illustrates, organizations with rapidly expanding procurement mandates run the risk of project volumes exceeding their ability to maintain proper project management practices. Public institutions should therefore ensure that their project governance practices are well established and that their staffing is adequately resourced, ensuring they are better positioned to meet the surging demands of increasing project workloads.
