Report 2002-103 Summary - August 2002
California Department of Transportation:
It Manages the State Highway Operation and Protection Program Adequately, but It Can Make Improvements
Our review of the California Department of Transportation's (Caltrans) management of its State Highway Operation and Protection Program (SHOPP) found that:
- Most SHOPP projects do not exceed their original funding allocation. Also, although most of the 20 projects we reviewed experienced time delays, the causes for the delays appear reasonable.
- Resident engineers did not always maintain complete records of project events. Without these records, Caltrans is vulnerable to contractor claims for more money and cannot accurately assess contractors for liquidated damages.
- Caltrans does not evaluate the financial stability of the surety insurers that issue performance and payment bonds to its contractors.
- Caltrans lacks comprehensive policies and procedures instructing district staff on how to document and address complaints from the public regarding projects.
With more than 23,000 employees, the California Department of Transportation (Caltrans) operates and maintains the 15,000-mile State Highway System. California's ever-busier highways require increasing amounts of upkeep, so the Legislature in 1989 created the Caltrans State Highway Operation and Protection Program (SHOPP) to allocate the almost $4 billion Caltrans spends each year on capital improvements to preserve the highway system. In 2000 and 2001, a SHOPP-funded project in Ventura County encountered design and execution problems with the construction of a concrete median barrier along Highway 33 (Highway 33 project). Numerous delays in this project extended motorists' inconvenience for more than a year longer than planned.
Public outrage over the Highway 33 project delays prompted our review of Caltrans' management of construction projects under SHOPP. Our review found several factors contributing to the Highway 33 project delays, including Caltrans' use of outdated information to develop its design plans, its failure to monitor the contractor's performance properly, and its failure to terminate the contract immediately after problems with the contractor's performance arose. However, our review of 19 other projects did not reveal large-scale problems like those of the Highway 33 project, leading us to conclude that Caltrans manages the SHOPP adequately. Although some of the other projects did exceed their funding allocations and project completion dates, the additional costs were minimal and the causes of delays were reasonable.
However, Caltrans could not always account for construction delays because many resident engineers, who are responsible for managing project construction costs and contracts, failed to maintain complete and accurate records of contractor activities and weather conditions. For example, the resident engineers for 5 of the 20 reviewed projects did not maintain complete daily records of project events. These records support the engineers' weekly statements of days when contractors could not work because of factors such as the weather and days when contractors chose not to work on the scheduled tasks. Without these records, Caltrans is vulnerable to contractor claims for more money and cannot accurately assess contractors for liquidated damages (monetary charges that Caltrans can assess against a contractor who does not complete the project in the time allowed under the contract).
A surety insurer guarantees the behavior of persons or the performance of contracts through the issuance of a bond. State law permits Caltrans to obtain financial statements from surety insurers and to determine whether the insurer's assets exceed liabilities in an amount equal to or more than the bond. Caltrans can protect the State further against project losses by reviewing other aspects of an insurer's financial statements and using the Internet and other resources to verify its financial status before accepting a performance or payment bond and again during the project work, especially when a contractor is having trouble fulfilling the contract terms. In the Highway 33 project, when Caltrans dismissed the contractor, its surety insurer proved to be insolvent. Caltrans did not obtain and review the financial statements of the Highway 33 project surety insurer. Our review of the calendar year 1999 financial statements of that surety insurer found that, although the assets exceeded the liabilities by more than the bond amount, the income statement showed an operating loss of about $7.9 million. Also, before Caltrans approved the Highway 33 performance bond, Standard & Poor's (S&P) had revised its opinion of this surety insurer from stable to negative. It continued to downgrade the insurer's credit rating in the year 2000, while the Highway 33 project itself was floundering. Caltrans maintains that the problem with the Highway 33 project insurer is unusual and contends that it does not have the authority to use financial information to challenge the sufficiency of an insurer. However, the small amount of effort required to check the surety insurer's financial statements and other financial indicators is worth the protection from major losses when contractors fail to perform according to their contracts.
Finally, although it uses methods such as press releases and flyers to inform the public of projects, Caltrans lacks comprehensive policies and procedures instructing district staff on how to document and address complaints from the public. Without a well-coordinated strategy, the Caltrans public information officer for the Highway 33 project could not effectively monitor and respond to the public outcry that grew without Caltrans headquarters even knowing about the negative publicity surrounding this project.
To ensure that it can defend itself adequately against contractor claims and to assess contractors accurately for liquidated damages, Caltrans should ensure that the resident engineers and assistant resident engineers maintain complete and accurate daily records of all relevant events on working days and nonworking days and ensure that resident engineers complete the weekly statements accurately.
To ensure that Caltrans can collect on a performance bond, the Legislature should consider expanding Caltrans' ability to use other indicators included within the financial statements and information available from companies such as S&P as a basis for determining the sufficiency of an insurer before accepting performance bonds. Further, the Legislature should clarify Caltrans' authority to use the information it obtains from financial statements and other financial indicators to object to the sufficiency of an insurer throughout the bond term.
To ensure that districts handle complaints consistently, Caltrans should develop comprehensive public relations policies and procedures that address the process to use when responding to complaints, the documents that should be maintained, and the method district offices should use to assess their public relations efforts. Further, Caltrans should monitor the district offices' public relations efforts periodically.
Caltrans agrees with our findings and recommendations related to its management of construction projects and handling of public concerns regarding its projects. However, Caltrans believes that when considering our recommendation, the Legislature should focus its attention on granting the Department of Insurance authority to review the sufficiency of insurers and share its findings with relevant state agencies, including Caltrans. Further, Caltrans believes that the Legislature should consider the cost of such a policy relative to the likely benefits in view of how rarely situations arise where a contractor fails to perform and its surety becomes insolvent.