Report 2010-122 Summary - April 2011
California Department of Transportation:
Its Capital Outlay Support Program Should Strengthen Budgeting Practices, Refine Its Performance Measures, and Improve Internal Controls
Our review of the California Department of Transportation's (Caltrans) Capital Outlay Support Program (support program), highlighted the following:
- Caltrans has done little analysis to determine the frequency or magnitude of support cost budget overruns and to inform stakeholders of the overruns.
- Sixty-two percent of the projects that completed construction during fiscal years 2007-08 through 2009-10 had support costs budget overruns, which totaled more than $305 million of the $1.4 billion of such cost expenditures made during that period.
- Differences between a project's budgeted and actual support costs are due primarily to an increase in the hourly rate for support costs—one project we reviewed was about 14,600 hours under budget yet nearly $6.8 million over the cost budgeted.
- Some potential causes for support cost overruns include:
- Project managers did not use a detailed approach to develop a support budget when the project was ready for construction.
- Project managers monitored their budgets based primarily on the hours charged and not the dollars spent.
- Although Caltrans has established a goal of reducing total support costs to 32 percent of the total capital costs, it has historically failed to use a consistent method to calculate the ratio over time, and has generally not met its goal for the last three fiscal years.
- Caltrans' time-reporting system lacks strong internal controls, and better project monitoring and the use of performance metrics could help it minimize cost overruns.
RESULTS IN BRIEF
The California Department of Transportation (Caltrans) is responsible for the design, construction, maintenance, and operation of the California State Highway System, as well as that portion of the Interstate Highway System within the boundaries of the State.1 The Capital Outlay Support Program (support program) provides the funding and resources necessary to develop and deliver the projects to construction, as well as to administer and oversee the projects once they are under construction. Support program functions include engineering, design, environmental studies, right-of-way acquisition, and construction management of state highway projects. The fiscal year 2010-11 Budget Act allocated $1.8 billion to Caltrans for the support program.
Despite a stated goal to reduce overruns in its project budgets, Caltrans has done little analysis to determine the frequency or magnitude of support cost budget overruns. Further, although opportunities exist to inform stakeholders of the extent of these overruns, Caltrans has not done so, limiting valuable information on the efficiency and effectiveness of the support program. Based on our review of the data provided by Caltrans, 62 percent of the projects that completed construction in fiscal years 2007-08 through 2009-10 had support costs that exceeded their respective budgets. These overruns totaled more than $305 million of the $1.4 billion in support cost expenditures for the projects that completed construction during these fiscal years. Caltrans' California Transportation Improvement and Programming System (CTIPS)—which Caltrans uses, in part, to capture project budgets—is currently more reliable than Caltrans indicated had been the case in prior fiscal years. Nevertheless, our review of the data provided by Caltrans for fiscal years 2007-08 through 2009-10 found that Caltrans did not ensure that this system effectively and accurately tracked a project's total support budget. According to the chief of the Division of Transportation Programming, CTIPS was not intended, at the time those projects were programmed, to capture projects' total support budgets.2 Further, she stated that Caltrans did not have a process for its headquarters to track projects' total supports budgets and instead relied on its districts to do so. As a result, Caltrans risks limiting its ability to compare budgeted support costs to actual support costs, thereby decreasing its and the public's accurate assessment of the effectiveness and efficiency of the support program or individual projects.
Differences between the budgeted and actual support costs of a project can generally involve one of two factors or a combination of the two factors: a difference between the expected and actual number of hours that staff charged to the project and a difference between the expected and actual hourly rate of staff time. Our analysis found that the primary cause for support cost overruns was an increase in the hourly rate for support costs. For example, one project was about 14,600 hours under budget but exceeded its budgeted dollar amount by nearly $6.8 million, an amount representing a support cost overrun of 83 percent. The changes in the hourly rate for support costs were due, in part, to salary increases effective from fiscal years 2005-06 through 2008-09. Specifically, the annual salaries for certain Caltrans employees, including engineers, increased by more than 40 percent during this four-year period. We also found that project managers often did not update their budgets to account for these and other support cost increases. According to the chief of Caltrans' Division of Project Management (division chief), until about five years ago, Caltrans placed a greater emphasis on ensuring that capital costs were within budget because these costs were generally the larger part of the project's total budget. However, she explained that more recently Caltrans has been increasing its emphasis on managing support costs separately from capital costs.
Based on discussions with Caltrans project managers, we found several potential causes for support cost overruns. For example, project managers for 12 of the 40 projects we reviewed indicated that they monitored their budgets based primarily on the hours charged and not dollars spent. If a project manager does not pay attention to costs, escalations in the rate paid per hour could cause a support cost overrun, even if the project remains under its budgeted hours. Further, project managers for 10 of the 40 projects we reviewed did not use a detailed approach to develop a support budget when the project was ready for construction. According to the division chief, when budgets are overstated, fewer projects received funding, and when budgets are understated, the subsequent overruns take funding away from other projects, leading to construction delays. A February 2010 memorandum that took effect in July 2010 requires Caltrans to produce quarterly a list of projects that are expected to exceed their budgets and to distribute this list to the districts. The memorandum further requires project managers to prepare funding plans to address these potential cost overruns. Further, because the California Transportation Commission (commission) does not track or review construction support cost overruns for State Transportation Improvement Program (STIP) projects, neither the counties nor Caltrans is held accountable when construction support costs exceed estimates. Given the limited funds available for STIP projects, overruns on current projects impair the State's ability to undertake future projects.
Caltrans has established a goal of reducing support costs to represent a ratio of 32 percent of the total capital costs, referred to as the support to capital costs ratio (support-to-capital ratio). Although it has identified this goal as an objective in its current strategic plan, Caltrans has failed historically to use a consistent method to calculate this ratio over time, thus decreasing the value of the ratio for assessing Caltrans' performance in managing the support program. Using a consistent methodology, we conducted our own assessment of Caltrans' support-to-capital ratios for the last three fiscal years and determined that Caltrans generally did not meet its goal. Finally, the support-to-capital ratio has limitations and could be defined more precisely to better measure efficiency, given that support costs can vary greatly depending on a project's size and type, both of which can have a large impact on the resulting ratio.
Additionally, Caltrans' time-reporting system lacks strong internal controls, and better project monitoring and the use of performance metrics could help it minimize cost overruns. We found that Caltrans lacks strong internal controls to ensure that staff appropriately charge time to support program projects. Further, although Caltrans has established some project-monitoring processes and performance metrics, it has not comprehensively implemented these tools. For example, consistent use of earned value metrics could help Caltrans to better manage its support program projects. Earned value management integrates measures of a project's scope, cost, and schedule to help the project management team assess and measure project performance and progress. However, in reviewing four districts, we noted that their use of earned value management varied greatly. For example, the Los Angeles district has a robust system utilizing earned value metrics.
Moreover, although Caltrans recently sought to hire consultants rather than hire permanent employees to address a temporary increase in workload, it was not successful in doing so. According to the chief of Caltrans' Project Delivery Management Support Office, requests for additional consultants historically have been revised during the legislative budget process to align with a staffing ratio of 10 percent consultants to 90 percent state staff. The deputy director of the San Diego district's Division of Project Management stated that this ratio creates limitations and that consultants have been an effective way to manage resources. To the extent increases in workload are temporary in nature, it may be more fiscally prudent for Caltrans to address this workload with consultants rather than with permanent state employees.
To improve accountability internally and with the public, Caltrans should create and incorporate an analysis of support cost budget variances in its quarterly report to the agency and in its annual report to the Legislature and the governor. The analysis should report on the number of completed projects with budget variances and on the number of open projects for which the estimates at completion predict budget variances. Further, the analysis should report on the overrun and underrun ratios for those projects, and the portions of the variances due to rates and hours. Caltrans should also include in its strategic plan a measurable goal for reducing variances.
To improve performance metrics related to the support program, Caltrans should take the following steps:
- Devise, use, and publicize a consistent method for reporting the support-to-capital ratio on its Web site and in other reports to the public. Further, Caltrans should recalculate past support-to-capital ratios using the method devised to allow for comparisons across years.
- Develop goals—and then publicly report on its progress in reaching those goals—for the support-to-capital ratio based on project type, for STIP and the State Highway Operations and Protection Program (SHOPP), and for project size.
To better develop and manage project budgets, Caltrans should direct its project managers to use a detailed approach based on project tasks, such as those included in a project work plan, when finalizing project budgets before construction.
To ensure it monitors the status of projects, Caltrans should do the following:
- Continue to implement the policies described in its February 2010 memorandum to the districts describing an approach Caltrans will take to monitor support costs within budget. Moreover, Caltrans should direct its project managers to monitor budgets for all projects according to both hours and costs.
- Implement earned value management throughout its districts in a manner similar to the implementation in the Los Angeles district. To allow for performance evaluation of project work, Caltrans should ensure that these performance metrics are available at the task level for both active and completed projects. Caltrans should instruct districts to aggregate this information for all projects by task level, to better assess the effectiveness and efficiency of support costs by task level. Caltrans should also make graphical displays of project cost and adherence to schedule available to project managers.
To better address costs associated with the support program, Caltrans should do the following:
- Ensure that its new project management system contains strong controls that ensure employees charge time only to projects and phases to which the employees are assigned.
- Commission an independent study of the costs and benefits of using consultants to address temporary increases in workload and, if the study reveals cost savings, to use consultants. To the extent possible, Caltrans should also use temporary staff appointments for temporary increases in workload when consultants are unavailable.
To increase accountability for budget overruns of support costs, the Legislature should consider legislation that would expressly require the commission to review and approve project construction support costs when they differ from the amount budgeted by 20 percent or more.
To ensure that Caltrans does not hire permanent state staff beyond its need for such staff, the Legislature should consider appropriating funding for consultants to address temporary increases in Caltrans' workloads when Caltrans requests such funding.
Caltrans generally agreed with our recommendations, except for our recommendation regarding the use of temporary staff and the need to commission a study of the benefits of using consultants to address temporary increases in workload. Additionally, Caltrans raised concerns about recommendations regarding tracking where employees are authorized to charge time and requiring the commission to review and approve project construction support costs.
1 When we use the name Caltrans, we are referring to the statewide organization and its management headquartered in Sacramento. We refer to Caltrans' districts as districts or identify the locations of specific districts' headquarters.
2 Transportation programming is the commitment of transportation funds to be available over a period of several years for allocation to particular projects.