Report 2015-117 Recommendation 8 Responses

Report 2015-117: California Department of General Services' Real Estate Services Division: To Better Serve Its Client Agencies, It Needs to Track and Analyze Project Data and Improve Its Management Practices (Release Date: March 2016)

Recommendation #8 To: General Services, Department of

To ensure that the project management branch charges its client agencies a competitive hourly rate, by December 2016 and every two years thereafter, the division should conduct a rate analysis that fully accounts for differences between the project management branch's rate and private firms' rates. If it finds that the rates are not competitive, the division should identify and implement strategies to ensure that the project management branch's rates are as competitive as they can be with those of its private firm counterparts. Further, the division should explore and implement any other reasonable methods to ensure that it is delivering projects as cost effectively as possible.

Agency Response*

For its one-year response, PMDB conducted a follow-up analysis of its hourly rates by reviewing the recently contracted rates for both A&E and PM firms for two new Sacramento office buildings, using the same methodology. For PM, DGS' rate was 1.1% higher than the PM firm and 9.5% lower for A&E.

PMDB reviewed its admin/overhead costs. Management within PMDB are almost all partially billable, which follows the model of private sector firms and reduces their overhead impact. PMDB runs a small internal admin unit (PMDB's current budget share of divisional and its own overhead is approximately 8.8% of its total budget), comprised of direct purchasing/contracting, invoicing, and budgetary support. The department's overall distributed admin costs (i.e. Admin Division, Executive Office, etc.) is outside control of RESD, though DGS' position is that these costs are reasonable and reasonably distributed amongst revenue generating programs (PMDB pays for approximately 14.4% of DGS' total distributed admin costs).

DGS operates on a fee for service/cost recovery model, having almost no discretion in setting rates. The amount to recover is divided by the total number of billable hours to get the necessary rate. Decreasing the rate would require: (1) reducing overhead costs, the majority of which are outside of PMDB's control; (2) add billable staff, which is only possible when there are a sufficient number of projects to sustain the larger workforce; or, (3) make traditionally non-billable staff bill their time to projects they are indirectly supporting, which would result in lower rates, but higher overall project costs, especially for smaller dollar figure projects. The department is restricted in the actions it can take to adjust its rates based on a comparison with private firms' rates. That said, PMDB is actively reviewing its staffing ratio to projects and will be hiring additional billable staff which will reduce its rates in the future.

  • Response Type†: 1-Year
  • Completion Date: December 2016
  • Response Date: March 2017

California State Auditor's Assessment of Status: Partially Implemented

We disagree with the division's assessment that it has fully implemented this recommendation. Specifically, our recommendation is that the division conduct a rate analysis that fully accounts for differences between the project management branch's hourly rate and private firms' rates. The division did not provide evidence demonstrating that it has identified and implemented any strategies to ensure that the project management branch's rates are as competitive as they can be, nor how adjusting staffing ratios will reduce its rates in the future. Until the division addresses these shortcomings, we will continue to report this recommendation as partially implemented.

  • Auditee did not substantiate its claim of full implementation

Agency Response*

Recently, RESD's Project Management and Development Branch (PMDB) conducted an analysis of its hourly rate compared to rates charged by private Architectural and Engineering (A&E) firms that DGS has on retainer contracts. For the analysis, PMDB identified the roles in those contracts that were comparable to its A&E staff and those that were comparable to its project management staff. The comparable positions' rates were then averaged and compared to PMDB's hourly rate ($178 for FY 2016-17).

PMDB's analysis showed that its rate is competitive with project management rates, i.e., PMDB's rate was only 4.6% higher than the private firms' average hourly rate. For A&E services, PMDB estimates that its rate is 14.7% higher than the private firms' average hourly rate, which is not unexpected or unreasonable considering the state's cost recovery model discussed below.

As recommended by the state auditor, PMDB will continue to periodically (at least every two years) evaluate and compare its A&E and project management rates to the private sector. However, based on state policy and practice, DGS is limited to setting rates based on a cost recovery model. That is, DGS sets its hourly rate based on its cost to perform the work, and this cost is largely determined by the salaries established through collective bargaining. Therefore, the department is restricted in the actions it can take to adjust its rates based on a comparison with private firms' rates.

  • Response Type†: 6-Month
  • Completion Date: August 2016
  • Response Date: September 2016

California State Auditor's Assessment of Status: Partially Implemented

We disagree with the division's assessment that it has fully implemented this recommendation. Specifically, our recommendation is that the division conduct a rate analysis that fully accounts for differences between the project management branch's hourly rate and private firms' rates. However, the analysis that the division provided only assessed the hourly rates for A&E staff and project director positions, and did not include an assessment of its administrative and overhead costs that contribute to its higher hourly rate. Further, the analysis does not fully explain the reasons that the project management branch's hourly rate remains higher than those of private firms providing similar services. Finally, the division did not provide evidence demonstrating that it has identified and implemented any strategies to ensure that the project management branch's rates are as competitive as they can be. Until the division addresses these shortcomings, we will continue to report this recommendation as partially implemented.

  • Auditee did not substantiate its claim of full implementation

Agency Response*

Recently, RESD began the process of collecting private sector consultant rates for use in the recommended analysis. By December 2016, RESD will compile the private sector rates and evaluate and compare them to its own rate.

In addition, by December 2016, RESD will obtain the data needed to perform a comparison of project management branch staffing and consulting costs on a given project relative to the total construction costs for that project. Using the computed proportion of costs, RESD will compare those costs against applicable private sector expected costs for a similar project. Based on the results of that analysis, RESD will explore and implement reasonable and applicable methods to ensure that it delivers projects as cost effectively as possible.

  • Response Type†: 60-Day
  • Estimated Completion Date: December 2016
  • Response Date: May 2016

California State Auditor's Assessment of Status: Pending


All Recommendations in 2015-117

†Response Type refers to the interval in which the auditee is providing the State Auditor with their status in implementing recommendations made in an audit report. Auditees must submit a response regarding their progress in implementing recommendations from our reports at three intervals from the release of the report: 60 days, six months, and one year or subsequent to one year.

*Agency responses received after June 2013 are posted verbatim.


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