Suffolk County Sewer Project Long Island, New York: Reasons for Cost Increases and Other Matters

Published by the Government Accountability Office on 1977-03-22.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

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Suffolk County Sewer Project
Long Island, New York:
Reasons For Cost Increases
And Other Matters
Environmental Protection Agency

Total estimated costs to construct the project
increased about $1 billion between 1969 and
1976. Inflation, a longer than anticipated con-
struction schedule, and higher interest rates
caused the increase.
Although the selection of and fees paid to
consulting engineers had been questioned, no
violations of applicable regulations in effect at
the time were found. In March 1976 new
regulations took effect, greatly changing the
procurement of professional engineering ser-
The county had performed some limited
audits of project costs, but the Environmental
Protection Agency had not. The Agency
inspected project construction for the first
time in December 1975.

CED-77-44                                                    977
                         WASHINGTON. D.C.   R2048

B-166506                                                 AV C       °

The Honorable Thomas J. Downey                                           6
House of Representatives

Dear Mr. Downey:                                          p/    C    v

    Your April 27, 1976, letter requested that we review the
administration of the construction of a sewer system in the
Southwest Sewer District of Suffolk County, New York.  The
Environmental Protection Agency, which had granted the dis-
trict $135.5 million as of December 31, 1976, is partially
funding construction.  You were concerned about a considerable
increase in estimated project costs and various allegations
of project mismanagement.  Because other agencies were con-
ducting investigations of possible criminal behavior and other
matters at the time of your request, we agreed to limit the
review to:

     -- increases in construction costs and related financing

     -- selection of consulting engineers and fees paid to
        the firms, and

     -- audits of project costs and inspections of project

     Total estimated costs of the project had increased about
$1 billion.   In 1969 total estimated project costs were
$521 million, whereas by 1976, the estimate had increased to
$1.5 billion.   Inflation, an extended construction schedule,
and higher financing costs were the primary factors accounting
for the increase in project costs.

     The cost estimate made in 1969 was stated in terms of
1969 dollars and made no provision for inflation.  Since then,
the "Engineering News Record" construction price index in-
creased 83 percent and the Agency's sewer price index increased
93 percent.  Originally, the project was estimated to be com-
pleted in 5 years, but it now appears that construction will
take more than 10 years.  Financing costs for borrowed funds


have also increased greatly.  Interest rates on long-term
bonds rose from about 5 percent in 1971 to almost 10 percent
in December 1975.

     The local news media raised certain questions concerning
the selection of consulting engineers for the project and the
reasonableness of fees paid to them.  We did not find any
violations of regulations in effect at the time consulting
contracts were awarded.  Since then, the Agency has changed
the regulations concerning the procurement of engineering
services in the construction grants program.

     Although Suffolk County had performed some limited audits
of engineering costs, the Agency had not audited project
costs, and its first inspection of construction was conducted
in December 1975.

     On September 24, 1976, we testified on the results of
our review before the Subcommittee on Investigations and
Review, House Committee on Public Works and Transportation.
The following sections of this report explain the results in
greater detail and provide some additional facts which were
not included in our testimony.

     We made our review at Suffolk County's Department of
Environmental Control and Department of Audit and Control,
New York State Department of Environmental Conservation, and
Environmental Protection Agency's region 2 and its headquar-
ters. We reviewed applicable regulations, held discussions
with cognizant officials, examined project files, and visited
the construction site.


     The Federal Water Pollution Control Act Amendments of
1956 (Public Law 84-660, 70 Stat. 498) authorized the first
Federal grants to assist in constructing sewage treatment
facilities.  This act authorized assistance of up to 30
percent of eligible project costs to a maximum of $250,000.
Amendments to the act in 1966 removed the maximum dollar
limitation on grants and increased the Federal share to a
maximum of 55 percent.  The Federal Water Pollution Control
Act Amendments of 1972 (33 U.S.C. 1251 et seq., Supp. V,
1975), commonly referred to as Public Law 92-500, increased
the Federal share to 75 percent of eligible costs and expanded

                            -2   -

the scope of eligible projects.   These amendments provided
contract authority of $18 billion  for sewer systems and
sewage treatment plants.

     The Agency's Municipal Construction Division in
Washington, D.C., and its 10 regional offices administer the
construction grants program.  The Agency allocates funds to
each State on the basis of a statutory formula.  State water
pollution control agencies then determine which projects will
be funded and the order of funding.  The responsible New York
State agency is the Department of Environmental Conservation.

     Concern over increasing contamination of the ground-water
supply, which the county uses for drinking water, gave rise
to an engineering survey of Suffolk County sewer needs in the
early 1960s.  A referendum proposing a sewer project was de-
feated in 1967 but, in November 1969, district residents
approved the current project by a narrow margin.

     The project is the first major sewer system to be
constructed in Suffolk County.  It is administered by the
Southwest Sewer District, an administrative agency of the
county. The project will serve an area of 57 square miles,
or about 6 percent of the county's total area, and about
300,000 persons, or about 23 percent of the county's current
estimated population. The project includes construction of
about 900 miles of lateral and interceptor sewers, a sewage
treatment plant capable of handling 30 million gallons of
wastewater a day, 1 main and 10 smaller pumping stations, and
an out fall sewer extending 2-1/2 miles into the ocean.

     The State Department of Environmental Conservation
approved the project for funding in 1970 and Federal grant
approval followed in 1971.         Initial construction began in
August  of that  year.     In  March  1972 construction began on an
interceptor   sewer   which   was  eligible   for Federal and State
aid and  construction     was  largely  completed    in January 1973.
As of November    15,  1976,   county  officials   reported  that con-
struction  of  lateral    and  interceptor    sewers  was about  55
percent completed     and  construction    of  the sewage  treatment
plant was about 40 percent completed.           Construction of the
out fall and main pumping       station  had   not begun.   The County
Commissioner   of  Environmental     Control   estimated  that  the
project  would  be  completed     by 1981.

     The county has applied for Federal funds for the project
under both Public Law 84-660 and Public Law 92-500.  The grant

                                - 3-

under Public Law 84-660 was originally approved in 1971.   The
Federal commitment under this grant totals $135.5 million,
or 44 percent of project costs which were eligible for
Federal aid.  As of December 31, 1976, about $23 million in
Federal funds had been expended.

     Under Public Law 92-500 the county has submitted a grant
application for $109 million to construct lateral sewers and
certain interceptor sewers which were ineligible for Federal
aid under the old law.  The Agency's region 2 office was
reviewing this grant application as of December 31, 1976.
If approved, Federal funds for the project will total about
$245 million.

     The total estimated project costs of $1.5 billion include
construction costs and financing charges.  (App. I summarizes
Federal, State, and county funding of project construction
costs and expenditures as of December 31, 1976.)


     Estimates of total construction costs for the project
increased from $269 million in 1969 to $612 million in 1976.
Our review disclosed a number of factors which contributed
to the large increase in estimated construction costs.
Inflation and an extended construction period appear to have
been the major factors. Others were changes in the scope of
the project and the cost of engineering services.  (App. II
compares cost estimates made in 1969 and 1976.)

     The initial cost estimate was stated in 1969 dollars
with no allowance for later price increases.  From January
1969 to April 1976, the "Engineering News Record" construc-
tion price index increased 83 percent, and the Agency's
sewer price index increased 93 percent.  For example, the
estimated cost of the sewage treatment plant rose from $30
to $77 million, largely due to high prices of steel and
other construction materials.  The current cost estimate of
$612 million includes inflation to date plus an 8.61-percent
annual inflation factor on unbid construction contracts.

     Extensions to the construction schedule have compounded
the effects of inflation, and obtaining approvals from the
State Department of Environmental Conservation and Agency
contributed to the extended construction schedule.  For
example, the county submitted a preliminary engineering
design report on the treatment plant to the State in July

                              - 4-

1971, but the State did not accept it until August 1973.
The State did not initially comment on the report until
January 1972, and the balance of the period involved ob-
taining additional data from the county on population pro-
jections and other matters, and resolving unacceptable
design parameters.  The Agency tentatively approved the plant
in January 1974, and the county received bids in July 1974
to construct the plant.  Construction began in March 1975.

     Besides inflation, the estimated cost of the project
increased because the scope of the project changed.   For
example, the estimate for the out fall had risen from $12 to
$70 million, an increase of 483 percent.   The current esti-
mate includes plans to extend the out fall 2-1/2 miles into
the ocean whereas initial plans were for a 1-1/2 mile ocean
out fall.   Also, the cost estimate for this out fall was
increased when a bid received on an out fall to be constructed
in neighboring Nassau County exceeded the pre-bid estimate by
40 percent.   Suffolk County will not solicit bids to construct
the out fall until the Army Corps of Engineers issues a permit
for the project.

     Project costs also increased due to the method of paying
for consulting engineering services.  Reimbursement for these
services was based on a percentage of costs, therefore, as
total costs increased, the costs of these services also

      Agency, State, and county officials agreed that the
primary factor causing the overall cost increase was infla-
tion.   These officials said that the original estimates were
based on preliminary engineering plans, which are not as
firm as detailed plans and specifications.   Basically, the
Agency found that the estimated project cost was reasonable
and that the cost escalation was not uncommon.


     The estimated cost to the county in interest charges to
finance project construction rose from $252 million in 1969
to more than $900 million in 1976.  The increase resulted
from considerably higher construction and engineering costs
and interest rates.

     In 1969 Merrill Lynch, Pierce, Fenner & Smith, Inc.,
proposed that the county finance the capital costs of the


sewer district through 10 long-term bond issues, the last
maturing in the year 2018.  The county sold $19 million in
long-term bonds at an interest rate of 5.25 percent in
October 1971.  However, it financed the project with
short-term notes thereafter until December 1975 when it sold
more long-term bonds.

     During 1972 the county sold three issues of 1-year bond
anticipation notes, totaling $180 million, at interest rates
from 3.0 to 3.3 percent.  The long-term rate in 1972 for a
comparable obligation was about 5.5 percent.  These short-term
notes were renewed in 1973, 1974, and 1975 at interest rates
ranging from 4.2 to 6.8 percent.  In April 1976, $54 million
in bond anticipation notes, due in September 1976, were sold
at an interest rate of 6.75 percent.  In July 1976 the cou ty
sold $60 million in notes, due in December 1976, at a rate of
9.35 percent.

     In November 1975 the county attempted to sell $54 million
in long-term bonds but received no bids. An issue, dated
December 1, 1975, and maturing in 1997, was later sold at an
interest rate of about 9.8 percent. On August 1, 1976, the
county sold an additional $150 million in long-term bonds at
an interest rate of 8.9 percent.  (A schedule of project
financing appears in App. III.)

     County officials stated that initially the decision to
go short term was based on market conditions.  They pointed
out that during the early years of project financing they were
able to invest the proceeds of the short-term issues at
interest rates higher than they were paying on the notes.
The officials said they could not foresee the changes in the
bond market in 1975 caused, in part, by the fiscal crisis
in New York City and New York State agencies.

     The current estimate of $913 million in interest charges
is based on a number of assumptions, including the amount of
future borrowings, the cost of money, and the repayment
period.  Changes in any of these factors could affect total
interest charges incurred on the project.

     The county plans to pay for the costs of debt service
on its bonds and for operating the sewer system by levying
the following annual charges on homeowners in the sewer

                            - 6

     -- A preconnection charge of 12-1/2 cents for each
        $100 of full value for 3 years.

     -- A sewer use charge of $50.

     -- A real property tax of 60 cents for each $100
        of full value.

     The uncertainties associated with future construction
costs and the condition of the bond market make projecting the
annual cost to the homeowner in the district very difficult.
In the prospectus for the county's August 1976 bond issue,
however, it was estimated that the annual cost for a house
with a full valuation of $30,000 would be $230, including the
annual use charge of $50 but not the preconnection charge.

     The county has also pledged as security for project
bonds up to 1 cent of the existing 3-cent sales and use tax
collected in the county, effective January 1, 1980.  If the
revenue from these sources is insufficient, all the taxable
property in the county can be taxed to pay the bonds and
related interest charges.


     In April 1970 the county legislature established a
committee to select consulting engineers for the project.
The Commissioner and Principal Engineer of the county's
Department of Environmental Control made recommendations to
the committee based on their evaluation of questionnaires
submitted by 59 consulting firms.  The Agency and State De-
partment of Environmental Conservation did not participate in
selecting engineering firms for projects.

     The county selected Bowe, Walsh & Associates to provide
design engineering services for all interceptor sewers, the
out fall, and most of the lateral sewers.  This firm was also
selected to technically inspect all project interceptors,
trunk lines, and lateral sewers.  In addition to Bowe, Walsh
& Associates, seven other consultants were responsible for
other project components.

     In June 1976 Price Waterhouse & Co. estimated total
costs of engineering services through project completion to
be between $72 and $80 million.  Through July 31, 1976,
Bowe, Walsh & Associates had been paid about $30 million--

                            - 7-

approximately $10 million for basic services and $20
million in special services fees.

     Basic services include preparing preliminary and
detailed plans and specifications and estimates of the cost
of proposed work.  Special services include inspecting work,
preparing applications and support for government grants,
and assisting the grantee as an expert witness in litigation
arising from the project.

     Before March 1976 consulting engineers were reimbursed
for basic services generally at 5.23 percent of construction
costs.  This rate appeared in the American Society of Civil
Engineers' Guide for the Engagementof Engineer-ing Services,
issued in 1968, for projects of abo    verage complexity
with net construction costs of $100 million or more.

     Consulting engineers were reimbursed for most special
services based on a multiplier of two times salaries plus
benefits, with reimbursement for actual travel and related
expenses.   Using the multiplier is also cost plus a percentage
of cost contracting.   American Society of Civil Engineers'
guidelines on using multipliers stated that the multiplier
which is applied to salary cost is a factor which compensates
the engineer for overhead plus a reasonable margin for con-
tingencies, interest on invested capital, readiness to serve,
and profit.

     We have consistently advocated avoiding contracts which
base fees on a percentage of cost because it gives contractors
positive incentive to inflate costs for increasing profits.
We reported our views of such contracts to the Agency in
August 1974 and again in May 1975.  The Agency's Office of
Audit also commented on the unacceptability of such contracts
in several audit reports.  Since March 1, 1976, the Agency
has prohibited engineering contracts which base fees on a
percentage of construction costs; and where multiplier con-
tracts are used, the multiplier and portions of the multi-
plier allocable to overhead and profit must be specifically
negotiated and separately identified in the contract.   In
all architect-engineer contracts, the Agency requires that
a maximum fee be fixed, subject to renegotiation if the
scope of work should change.

     The new regulations also provide guidance to grantees
on the procurement of engineering services. These guidelines
are designed to assure that grantees procure engineering

                            - 8

services on the basis of competence and qualifications.  The
Agency is required to review the entire procurement process.


     Regulatory procedures under both Public Law 84-660 and
Public Law 92-500 require a fiscal audit only at project
completion, before making final payment.  Interim audits are
not required but may be made if deemed necessary. As of
November 15, 1976, the Agency had not conducted an interim
audit of the project and none was scheduled.

     The New York State Department of Audit and Control and
the Suffolk County Department of Audit and Control have made
limited reviews of the fees paid to Bowe, Walsh & Associates.
The State audit agency reported in 1976 that since the con-
sulting engineer was paid on one basis for basic services,
on another basis for special services, and on still another
basis for work it subcontracted, inadequate cost control over
engineering services is possible. The State agency also
reported that reasonableness of profits could not be measured
and that the current reimbursement method for special ser-
vices limited the county's ability to control costs during
a period of inflation, since fees were based on a percentage
of costs.

     A 1972 county audit of special services fees paid to
Bowe, Walsh & Associates disclosed deficiencies which raised
questions about the propriety of certain charges under the
contract. During a followup audit underway as of November 15,
1976, the county requested various records which the firm at
first hesitated to provide.  We were told this matter was
resolved to the satisfaction of the county.


     A number of allegations were made about interceptor I-9
which is the first interceptor sewer project to be constructed
and was largely completed as of January 1, 1973.  The allega-
tions involved excessive leaks, improper slope, and structural
cracks.  Neither the State Department of Environmental Conser-
vation nor the Agency had been deeply involved in the inspec-
tion of the project, and the Agency did not inspect interceptor
I-9 during its construction.  A recent test of the interceptor
conducted by the county at the request of the Agency disclosed
that it was in acceptable condition.


     The recipient of a Federal water pollution construction
grant has the primary responsibility to inspect and assure
the adequacy of construction in progress. Regulatory
procedures under Public Law 84-660 required the cognizant
Federal agency to inspect the project after completion and
before final payment and it stated that interim inspections
could be made.  Regulatory procedures under Public Law
92-500 state that interim inspections may be made by either
the State or the Agency; the Agency has the responsibility
for conducting final inspections.

     Suffolk County entered into an agreement with its
primary consulting engineer to conduct day-to-day inspections
of the lateral and interceptor sewers and to submit weekly
inspection reports to the county.  The county also assigned
some of its own personnel to perform inspections of those
same components.

     On September 17, 1973, the consulting engineer told the
county that all work on I-9 was completed, tested, reviewed,
and was deemed satisfactory.  A maintenance inspection of the
interceptor sewer conducted in 1975 disclosed deficiencies,
including house connection leaks, manhole defects, and minor
structural defects.  The 1975 test showed that leaks in the
system totaled about 56,000 gallons a day more than allowable.
Subsequently, all defective work was reportedly corrected
by the construction contractor and all major portions of the
contract were determined to be within allowable limits, but
only after the fifth retest of the system.

     The Agency did not inspect project construction until
December 1975 but has made several inspections since then.
State officials informed us that the nine inspections they had
performed by July 22, 1976, three of which covered I-9, were
not in-depth inspections, and the county and consulting engi-
neer were notified in advance that inspections would be made.
In April 1976 the director of the State Division of Pure
Waters said that more frequent inspections of the Suffolk
County sewer project would be initiated.   (A schedule of
Agency and State inspections appears in App. IV.)

     In July 1976, in an attempt to resolve questions
concerning interceptor I-9, the Agency requested the county to
dewater the interceptor and to visually inspect it to determine
the adequacy of construction.  The inspection has been com-
pleted and portions of the interceptor eligible for Federal and
State aid were found to be satisfactory.  Ineligible portions

                          -   10 -

initially failed the test but repairs were made and it passed
a retest. The State is also reviewing the adequacy of the
construction and inspection and the qualifications of the
inspectors employed by the consulting engineer. As of
November 1976 this review was still underway.

     Since most of the information in this report has been
presented in a public hearing, we did not obtain formal com-
ments on the report's contents from Federal, State, county,
and private organizations from which we obtained information.
We did, however, obtain and consider the informal comments
of appropriate officials.

     We are sending a similar report on the results of our
review today to the Chairman, Subcommittee on Investigations
and Review, House Committee on Public Works and Transporta-
tion and the various State, county, and private organizations
involved. Copies of this report are being sent to the Admini-
strator of the Environmental Protection Agency.

                               Sinereey yours,           .

                              Comptroller General
                              of the United States

APPENDIX I                                                 APPENDIX I


                   FEDERAL, NEW YORK STATE, AND



                 EXPENDITURES AS OF DECEMBER 31,   1976

                           Total estimated                Total project
Participants              construction costs              expenditures

Federal                   a/   $244,872,500               $ 22,566,710
New York State                   94,368,756                 15,858,080
Suffolk County                  272,386,744                192,613,490

       Total              b/   $611,628,000               $231,038,280

a/ This amount assumes Federal approval of the pending grant
   application under Public Law 92-500.

b/   In 1974 the county estimated total construction costs at
     $641 million.  County officials informed us that various
     factors accounted for the decrease in estimated costs.
     These included awarding contracts at lower prices than
     projected, eliminating from the estimate unused contingency
     allowances applicable to largely completed contracts, and
     reducing the contingency allowance on unbid contracts from
     10 to 5 percent.

                                - 12 -
APPENDIX II                                               APPENDIX II


                     ESTIMATED PROJECT COSTS

                                 Estimated costs
                                1969         1976          increase
                              (note a)     (note b)        (note c)

                                  (000 omitted)

Disposal facilities:
    Interceptors              $ 50,575     $ 119,149           136
    Sewage treatment
      plant                     30,000          77,280         158
    Pump station                 1,400           3,500         150
    Outfall sewer               12,000          70,000         483
    Development expense         14,096          33,812         140

           Total               110,021         303,741         176

Collection facilities:
    Lateral sewers and
      appurtenances            134,715         261,133          94
    Pumping stations and
      force mains                1,428           3,396         138
    Development expense         20,421          40,204          97
    Land, easements, and
      right-of-way               4,430            3,154          -

           Total               159,044         307,887          94

           Total disposal
             and collection
             costs             269,065         611,628        127

Interest costs:                252,314         912,893        262

           Total              $521,379    $1,524,521           192

a/   Figures obtained from 1969 reports prepared by Merrill
     Lynch, Pierce, Fenner & Smith, Inc., and Bowe, Walsh &

b/   Figures obtained from prospectus for the county's August
     1976 bond issue, prepared by Smith Barney, Harris Upham,
     & Co., Inc.

c/   Increases are based on 1969 estimates.

                              - 13 -
APPENDIX III                                                                             APPENDIX III

                                   SUFFOLK COUNTY SOUTHWEST SEWER DISTRICT
                                   PROJECT FINANCING THROUGH AUGUST 1. 1976

                                                              Date of         Date of         rate
                                         Amount                issue          maturity      (percent)
                                      (000 omitted)
        Long-term serial                $ 19,000              10/ 1/71        1/1/2010       5.25
          bonds                           54,000              12/ 1/75        3/1/1997       9.77
                                         150,000               8/ 1/76        4/1/2010       8.91
        Short-term bond
         anticipation notes:
            1970                           7,365              12/23/70        12/23/71       3.09
                   First series           60,000               7/ 5/72         7/ 5/73       3.21
                   Second series          60,000               9/28/72         9/28/73       3.29
                   Third series           60,000              12/ 5/72        12/ 5/73       3.00
            1973:     (Renewal of 1972 bond anticipation note Issues)
                   First series           60,000               7/ 5/73         7/ 5/74       d.92
                   Second series          60,000               9/28/73         3/ 4/74       5.62
                   Third series           60,000              12/ 5/73         5/ 6/74       5.05
            1974:     (Renewal of 1973 bond anticipation note issues less a $2 million
                       principal payment for each series)
                   First series           58,000              3/ 4/74          3/ 4/75       4.26
                   Second series          58,000              5/ 6/74          5/ 6/75       6.04
                   Third series           58,000              7/ 5/74          7/ 3/75       6.81
           1975:      (Renewal of 1974 bond anticipation note issues less a $2 million
                       principal payment for each series)
                First series             56,000               3/ 4/75          5/ 4/76       4.16
                Second series            56,000               5/ 6/75          5/ 6/76       5.66
                Third series             56,000               7/ 3/75          7/ 2/76       5.80

                Second series (Renewal of 1975 bond anticipation note issue less a $2 million
                               principal payment)
                                       54,000              4/26/76        9/15/76         6.75
                Third series (Renewal of 1975 bond anticipation note issue less a $2 million
                              principal payment, and $6 million in new money also sold)
                                       60,000              7/ 2/76       12/15/76         9.35

                                                   -   14 -
APPENDIX IV                                                                                   APPENDIX IV

                                        SUFFOLK COUNTY SOUTHWEST SEWER DISTRICT
                                          ENVIRONMENTAL PROTECTION AGENCY AND

                                       PROJECT INSPECTIONS THROUGH JULY 22, 1976

     Date of        treatment                                           Interceptor contracts
   inspection         plant               1-7              II-IOAR             III-8        1-9 (note a)         -8
 March 20, 1972                                                                                Dept.
 Sept. 20, 1972                                                                                Dept.
 Nov. 28, 1972                                                                                 Dept.
 Sept. 24, 1975                                                                                                Dept.
 Dec. 4, 1975      Agency/Dept.                                                                            Agency/Dept.
 Apr. 22, 1976        Dept.
 May 11, 1)76      Agency/Dept.       Agency/Dept.       Agency/Dept.      Agency/Dept.
 June 18, 1976     Agency/Dept.                          Agency/Dept.
 July 22, 1976     Agency/Dept.         Agency                             Agency/Dept.

 a/ Work under contract I-9 was eligible for Federal and State aid and was substantially completed in
    January 1973. Work did not begin on other eligible portions until March 1975.

                                                     -    15 -