oversight

Audit Memorandum - Oakland Housing Authority - Limited Review Rehabilitation of the 49th Street Housing Authority Development Oakland, California

Published by the Department of Housing and Urban Development, Office of Inspector General on 2002-09-17.

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

                                                                  Office of Inspector General
                                                                                   Pacific/Hawaii District
                                                                    450 Golden Gate Avenue, Box 36003
                                                                   San Francisco, California 94102-3448


                                                             Issue Date
                                                                    September 17, 2002
                                                             Audit Case Number
                                                                    2002-SF-1002




TO:           Joyce L. Lee
              Director, Office of Public Housing, 9APH


             //SIGNED//
FROM:         Mimi Y. Lee
              District Inspector General for Audit, 9AGA

SUBJECT:      AUDIT MEMORANDUM-Oakland Housing Authority - Limited Review
                               Rehabilitation of the 49th Street Housing
                               Development Oakland, California


                                    INTRODUCTION
Because of a citizen complaint, we completed a limited review of the operations at the Oakland
Housing Authority (OHA) where we examined the process used to rehabilitate the 49th Street
housing development. The objective of this limited review was to determine whether the
rehabilitation performed on the housing development at 49th Street was done in accordance with
applicable Federal requirements. We performed the following work to accomplish our objective:

   ü Interviewed the citizen complainants, OHA management and staff, and HUD Office of
     Public Housing staff;

   ü Reviewed HUD monitoring reports regarding OHA’s modernization;

   ü Reviewed HUD regulations relating to procurement of construction work;

   ü Reviewed contract files and vendor payments related to 49th Street’s rehabilitation; and

   ü Conducted site inspections and analyzed construction costs of the modernization work
     done at 49th Street, using our certified general appraiser.

An examination of OHA’s management controls was not necessary for our objective. Therefore,
our conclusions are not based on any reliance on such controls.
Audit Memorandum No. 2002-SF-1002                          Oakland Housing Authority-Limited Review


Our review covered the period from June 1998 through December 2000 and was performed
intermittently between September 2000 and March 2001. We performed this work in accordance
with generally accepted government auditing standards.

Within 60 days please give us, for each recommendation in this report, a status report on: (1) the
corrective action taken; (2) the proposed corrective action and date to be completed; or (3) why
action is considered unnecessary. Also, please furnish us copies of any correspondence or
directives issued because of the audit.

Should you or your staff have any questions, please contact me at (415) 436-8101.

                                         SUMMARY
We found the OHA had expanded the scope of a $467,500 roof replacement contract into a
comprehensive modernization project costing nearly $3 million without following Federal
requirements. As a result, the work cost more than necessary, and a sample of change orders
identified $105,201 of questionable costs. Further, we found problems with the quality of the
work. We make several recommendations to correct these problems.

                                      BACKGROUND
As of May 2000, the OHA owned and managed 3,306 dwelling units in its low-rent program,
subsidized by the U.S. Department of Housing and Urban Development (HUD). These units are
located at 267 sites throughout the city of Oakland, California.

Twenty-four of these housing units are at the northern Oakland 49th Street development (referred
to as “49th Street”) built in 1968. Each of the development’s six two-story buildings is of wood-
frame construction with a stucco exterior, and contains four units. All units contain three
bedrooms with about 888 square feet total living space and 63 square feet of patio or balcony.
The OHA used HUD Comprehensive Grant Program funds for a $2.9 million rehabilitation of
49th Street, which took place between June 1998 through July 2000.

HUD’s Office of Inspector General (OIG) received a citizen complaint alleging various
improprieties at the OHA. Our review confirmed problems with the rehabilitation of 49th Street,
which are discussed herein.




                                                2
Audit Memorandum No. 2002-SF-1002                        Oakland Housing Authority-Limited Review



FINDING: OHA Paid Too Much to Rehabilitate the 49th Street Housing Development,
              Including $105,201 of Questionable Payments to the Contractor

In disregard of Federal procurement requirements, the OHA used change orders to expand the
scope of a $467,500 contract for roof replacement and limited exterior work for the 49th Street
housing development into an overly costly $2,966,444 comprehensive modernization project. In
addition, proper procedures were not used to manage the change-order process. Our review of
$631,827 out of $2,397,052 in change orders, which represents a sample of 26 percent of
change-order costs, identified $105,201 of questionable costs. Further, onsite inspection
identified problems with the quality of the work. As a result, funds were used that could have
been better spent to improve the OHA’s housing stock, and additional monies will be necessary
to correct the deficient work and its effects.

                                            Administrative Requirements for Grants and
 Federal requirements call for full and
                                            Cooperative Agreements with State, Local and
 open competition and other practices
                                            Federally Recognized Indian Tribal Governments,
 to assure costs are reasonable.
                                            published in Title 24, subpart 85.36 of the Code of
Federal Regulations (CFR), 24 CFR 85.36 contains HUD’s procurement requirements. These
regulations require housing authorities to:

   ·   Conduct all procurements in a method providing full and open competition. Grantees are
       prohibited from placing unreasonable qualification requirements on firms and are
       prohibited from taking any arbitrary action in the procurement process. [24 CFR 85.36
       (c)(1)]

   ·   Perform a cost or price analysis in connection with every procurement action including
       contract modifications. The method and degree of analysis is dependent on the facts
       surrounding the particular procurement situation, but as a starting point, grantees must
       make independent cost estimates before receiving bids or proposals. A cost analysis must
       be performed when adequate price competition is lacking, and for sole source
       procurements, including contract modifications or change orders. [24 CFR 85.36(f)(1)]

   ·   Solicit proposals from an adequate number of qualified sources. [24 CFR 85.36(d)(3)]

   ·   Make procurements non-competitively only when competitive procurement is not
       feasible and the item is available from only one source, a public exigency or emergency
       exists that will not permit a delay caused by a competitive solicitation, the awarding
       agency authorizes the procurement, or after a solicitation of a number of sources the
       grantee determines competition is inadequate. [24 CFR 85.36(d)(4)(i)]

   ·   Maintain a contract administration system that ensures contractors perform in accordance
       with the terms and condition of their contracts. [24 CFR 85.36 (b)(2)]

Specific HUD procedures have additional requirements concerning contract change orders.
Section 6-10 HUD Handbook 7460.8 REV-1, Procurement Handbook for Public and Indian
Housing Authorities, permits the use of change orders after the contract award only if the
                                              3
Audit Memorandum No. 2002-SF-1002                          Oakland Housing Authority-Limited Review


changes are within the scope of the contract. Change orders for new work beyond the original
work contracted are considered outside the scope of the original contract and are not allowed.
Thus, if the scope of additional work is beyond the scope of the original contract, a new
competitive award must be made.

                                           In March 1993, the OHA performed a physical needs
 OHA recognized in 1993 the need to
                                           assessment for 49th Street. The OHA determined a
 wholly modernize 49th Street.
                                           comprehensive modernization was needed, including
the replacement of the project’s roofs, windows, doors, bathrooms, kitchens, parking lot,
electrical and mechanical items, fences, patios, and numerous other items. The OHA estimated
the modernization work would cost $1,406,556 ($58,000 per unit). This estimate was increased
in May 1996 to $1,568,256 ($65,344 per unit) and included additional items such as lead and
asbestos abatement, changes to the roof design, and dry rot repair.

                                           As a result, the OHA solicited proposals, and in July
 A competitive process began in 1997
                                           1997, received two bids of $1,198,500 and
 to do modernization work.
                                           $1,039,950 for work at 49th Street, which included
roof replacement, and other work. (The OHA, however, was unable to provide a copy of the
request for proposals or other documents detailing the work to be performed.) At a
September 15, 1997 board of commissioners meeting, OHA’s executive director requested all
bids be rejected on the basis the OHA did not have sufficient funds to rehabilitate 49th Street.
The executive director told the board the job should be redesigned in line with OHA’s financial
capacity. Accordingly, the board voted to reject the bids.

                                             Thus, while the OHA was aware 49th Street needed
 In 1998, the OHA awarded a contract to
                                             a major modernization, it reduced the scope of work
 do only a portion of the needed work.
                                             statement to cover only the replacement of the roof,
windows, and site work. The proposed site work consisted of repairs to the sewer lines, parking
lot, landscaping, drainage, and the playground area. On March 18, 1998, the OHA issued a
request for proposals for the reduced work and received three bids by the closing date in April
1998. On June 5, 1998, the OHA awarded Contract Number 811963 to the DSKA Construction
Corporation that submitted the lowest bid of $467,500.

The scope of rehabilitation work for 49th Street under the contract with DSKA is listed below:

       Roof
       Replace existing building roofs with pitched roofs
       Furnish and install pre-engineered roof trusses and roof framing
       Construct roof gables and dormers
       Extend vents to top of new roofs

       Windows
       Replace windows, and restore waterproofing and stucco around window frames

       Site Work
       Install hard-wired smoke detectors and fire extinguishers in each unit

                                                4
Audit Memorandum No. 2002-SF-1002                             Oakland Housing Authority-Limited Review


       Remove/install site lighting, electrical conduit, and cable TV lines due to roof work
       Miscellaneous site repairs
       Site utility repairs
       Repair/reroute water line
       Cleanout and inspect sanitary sewer and storm drain systems
       Repair sewer lateral and cleanouts
       Replace wood trash enclosure with CMU-wall trash enclosure with metal doors
       Repair and replace existing parking concrete slab and curbs
       Construct access ramps
       Repair concrete driveways
       Install children play area and playground equipment
       Landscaping
       Grading and drainage
       Repair patio fences

                                            The DSKA began working on the project in June
 Shortly after work began, conditions
                                            1998 with work scheduled for completion work in
 were found to be so serious that
                                            December 1998. The contractor removed the existing
 additional work could not be
                                            roofing and discovered the under-layer of plywood
 postponed.
                                            sheathing was disintegrating as well as extensive dry
rot in the supporting wood joists. The project’s architect inspected the structure in July 1998 and
recommended replacement of the supporting wood joists and the damaged ceiling in the second
floor units. Based upon the architect’s recommendations, the OHA’s project manager instructed
the contractor on August 31, 1998 to remove sections of exterior stucco to determine the extent
of the dry rot damage from the leaking roof. When the stucco was removed, it was discovered
the dry rot damage to the structure of the buildings was extensive and additional work would be
necessary.

                                        At that time, the OHA should have reassessed the full
 The OHA disregarded Federal
                                        scope of the rehabilitation.           Nevertheless,
 requirements when it decided not to
                                        management decided not to suspend the roof work or
 competitively procure for the
                                        solicit proposals for additional work, based on the
 additional modernization work.
                                        belief this would have resulted in excessive delays
and additional costs. However, the OHA’s decision process did not consider Federal
requirements calling for a competitive selection process for the additional work. Thus, in
disregard of Federal requirements, the OHA began issuing a series of change orders on
September 28, 1998. As a result, the OHA increased the work piecemeal, ultimately doing a
comprehensive modernization of the development.

The OHA paid DSKA a total of $2,397,052 for all change order work. Thirty-one of 66 change
orders provided $1,850,254 for work beyond the scope of the original DSKA contract. Work
under these 31 change orders included:

   q    Replacing the stucco exterior of all six buildings;

   q    Replacing interior sheet rock in all 24 units;

                                                  5
Audit Memorandum No. 2002-SF-1002                                 Oakland Housing Authority-Limited Review




      q   Removing and installing new kitchen cabinets, laminated counter tops, wall heaters,
          toilets, sinks, showers and tubs in all 24 units;

      q   Removing and installing double glazed sliding glass doors in the balcony and decks for
          all 24 units;

      q   Installing laminated and vinyl flooring in all 24 units;

      q   Renovating the balcony or deck at all 24 units;

      q   Installing new exterior and interior doors in all 24 units;

      q   Installing new electrical boxes and devices, TV cables and phone lines;

      q   Painting the entire interior and exterior of the development; and

      q   Installing an irrigation system.

Thus, the total cost for the modernization at 49th Street was $2,966,444 consisting of $467,500
for the original contract, $2,397,052 for change orders, and $101,892 for architectural/-
engineering and other costs.1

                                           While the OHA believed the competitive process
    49th Street cost 50 percent more than
                                           would      significantly  delay    completion     of
    two similar projects where OHA
                                           modernization work, it still took DSKA over two
    selected contractors competitively.
                                           years to complete the modernization. Also, we
believe it is likely OHA could have substantially reduced the cost of the modernization at 49th
Street if it had used a competitive bidding process to procure the work beyond the scope of the
roofing contract with DSKA.

We reviewed the costs associated with comprehensive modernization performed by general
contractors on other OHA developments, selecting two developments that had work done similar
to that performed at 49th Street: Campbell and Peralta developments. The modernization of these
two developments was done between 1998 and 2000.

The modernization of 77 Campbell units was done between March 1998 and November 1999.
This development was built in 1936. Modernization work included, but was not limited to,
gutting units, installing all new mechanical systems, hazard abatement, converting and replacing
the roofs, converting units for new entry and laundry areas, landscaping, and exterior fencing.
Units were two to three bedrooms and averaged 900 square feet. The average per-unit cost was
$83,085.

1
   In hindsight, it would have been more cost effective if the OHA had originally demolished and replaced the
development. Our appraiser estimated this would have cost about $2,840,000, $125,000 less than the actual
modernization cost. Also, a new development would have the advantage of a longer life span as well as better
design and function.
                                                     6
Audit Memorandum No. 2002-SF-1002                           Oakland Housing Authority-Limited Review


The modernization of 140 units at Peralta started around May 1998. At the time of our review in
July 2000, the work was 99.9 percent completed. Work included unit gutting, landscaping, roof
conversion, hazard abatement, structural upgrading, unit layout, exterior reconfiguration, exterior
wall rebuilding, new utilities, drainage, and new mechanical systems. The units were one to
three bedrooms and approximately 600 to 900 square feet. The average size of units at the
development was 1.77 bedrooms. The average per-unit cost was $82,999.

While Campbell and Peralta had virtually the same average per-unit cost of $83,000, the cost for
49th Street was half again higher at $123,602 ($2,966,444 divided by 24 units). The unit cost
comparisons for modernization work are frequently invalid, and 49th Street had the disadvantage
of starting with a partial rather than complete modernization. Still, the 50 percent variance is
very large. We believe this variance is at least partially due to unreasonable costs charged for
work ordered through the change orders.

                                         Our certified general appraiser performed an
 A sample of change orders showed
                                         independent cost analysis using standard union labor
 most exceeded reasonable cost.
                                         rates and materials prices from standard construction
industry cost estimating books and actual price quotes from suppliers on 9 of the 66
modernization change orders for 49th Street. These represented $631,827 (26 percent) of the
$2,397,052 in change orders. The nine change orders were selected because their cost estimates
could be more readily determined. Thus, the sample was not necessarily representative of all
change orders.




                                                7
Audit Memorandum No. 2002-SF-1002                                    Oakland Housing Authority-Limited Review


For the nine change orders, our appraiser determined the OHA overpaid on eight for a total of
$92,901 (15 percent) out of $631,827 tested.

      Change                                                                Cost Per OIG         Excessive
      Order                Work Performed                   OHA’s           Cost Analysis          Costs
                                                             Cost
                  Remove and install sliding
         11       glass doors                                 $35,870               $23,382          $12,488
                  Remove and install front metal
         12       doors                                        29,190                 16,253             12,937
                  Remove & install all interior
                  sheet rock; remove fixtures in
         15       kitchen & bathroom, and wall
                  heater
                                                              186,039               162,473              23,566
                  Install wall heaters, vents, and
                                                                                                     2
      23 & 33     exhaust fans                                 39,114                24,661              14,453
         47       Replace floor coverings                     199,998               194,415               5,583
         51       Repave parking lot                           16,302                10,297               6,005
                  Remove & install water heaters
         55                                                    36,654                 18,785          17,869
                               Total excessive costs                                                 $92,901

                                            We also noted the questionable payment of $12,300
    Payment on change order 19 was also
                                            under change order 19 where work was not done.
    questionable.
                                            The change order was for adding color to the exterior
stucco in lieu of painting the exterior; however, our examination showed no coloring within the
stucco. Also, there was subsequent change order 50 for painting all exterior surfaces.

                                       Our appraiser considered the overall quality of
    The quality of some work was poor.
                                       materials installed and the construction workmanship
to be fair, based on observations of the development’s exterior and the interiors of two
apartments. Nevertheless, she noted several exceptions where work was below average or
unacceptable, including:

      Ø Small holes drilled into kitchen walls and not repaired, oversized hole for exhaust fan
        vent;

      Ø Separation of the kitchen countertops from the walls;

      Ø Use of inferior plastic baseboard moldings;

      Ø Poor quality of materials used for lattice work on patio fences;

2
  The excessive costs on change orders 23 and 33 are largely due to the apparent duplication of wall heaters in the
two change orders.
                                                        8
Audit Memorandum No. 2002-SF-1002                         Oakland Housing Authority-Limited Review


   Ø Water stains on eaves and soffits due to absent or improper surface treatment; and

   Ø Patio enclosures installed with direct wood-to-earth contact, creating opportunity for rot
     and termite damage.




The principal effect of the overspending and needed correction of deficient work cited above is
the reduction of funds available for modernization of other OHA housing developments.

                                           The OHA’s project manager for the modernization
 Further   disregard    of   Federal
                                           work did not perform proper cost analyses required
 requirements seriously weakened the
                                           by Federal requirements in order to arrive at
 change order process.
                                           reasonable costs for the change orders. Rather than
independently determining specific labor and materials quantities and prices in order to evaluate
the reasonableness of the contractor’s proposed price, the project manager only compared the
per-unit cost based upon the DSKA’s own estimates of the change order costs. In addition, the
contractor provided details of its estimated costs for less than half of the change orders. One
notable example of inadequate review of contractor estimates was the change order for painting a
metal fence. In this instance, the contractor submitted a subcontractor’s invoice for work at a
different OHA development as the support for the estimate for 49th Street. There was no
evidence the project manager questioned this. Another instance was the duplication of wall
heaters in two different change orders.

The OHA’s management controls were also weak since supervisory oversight of the change
order process was ineffective. Even though there was insufficient or no supporting
documentation supporting the basis of the project manager’s change order approvals, they were
all approved by the supervisor - the director of modernization, the executive director, or deputy
executive director.

                                               9
Audit Memorandum No. 2002-SF-1002                            Oakland Housing Authority-Limited Review



AUDITEE COMMENTS
The OHA provided its written response dated February 15, 2002 to our draft audit memorandum,
which is included as Appendix B-1. The following is the summary of OHA’s comments:

OHA claimed they frequently discover unanticipated work that results in costly change orders.
The 49th Street reconstruction was unfortunately an extreme example and was not typical. After
work had begun, it became apparent to the Authority that they were faced with a much more
difficult project than they had anticipated. This was partially due to hidden conditions (e.g.
amount of dry rot) and due to events that took place after the work was bid but before work
began (vandalism and theft). OHA claimed they have since instituted more thorough destructive
testing procedures for similar projects to avoid a repeat of their experience at this site.

OHA stated while they agree with much of the description of the project, they do not agree with
the conclusions of the findings. OHA stated to understand more fully the project, it is necessary
to have more of the context of the work. In addition, OHA does not agree with amounts
proposed as reasonable for the cost of various change orders. OHA stated the amount provided
in the draft report is without basis or explanation. At the time of work, OHA’s staff completed a
thorough review of the contractor’s estimates and negotiated price as appropriate. In response to
the amounts included in the draft report, OHA reviewed the R.S. Means report for 1998, which
provides industry standards for like work. Included in the attached response to the draft is a
comparison to R.S. Means for the change orders. OHA stated the R.S. Means schedule of costs
supports the reasonableness of the amounts negotiated at the time by OHA representatives.
OHA acknowledge that their analysis was not well documented in the file and they have taken
steps to ensure ample documentation of cost analysis is retained in the files for the future.

Critical Decisions for OHA:

OHA stated they were confronted with a development under re-construction that had ever-
expanding unanticipated critical construction needs. OHA had to make critical and prudent
decisions that would be in the best interest of the Authority and in the use of its funds such as the
weather, additional cost and time for the contractor delay and for the architectural services,
community concerns, and having two general contractors working on the project at the same
time.

OHA claimed at no time did the management adopt a cavalier attitude towards HUD rules and
regulation regarding procurement in making this decision. Nor did OHA management take
lightly its need to be a responsible and prudent owner in light of this dire situation. OHA
proceeded with change order work after having determined that an extremely urgent situation
existed. OHA determined that proceeding with change orders to complete the project was in the
best interest of the Authority.

Auditee’s Responses to Findings:

OHA stated the 49th Street construction work included similar work as the Peralta and Campbell
Village projects and also included additional work such as dry rot repairs, rebuilding of balconies

                                                 10
Audit Memorandum No. 2002-SF-1002                           Oakland Housing Authority-Limited Review


and replacement of stucco, which the other projects did not have. OHA stated the overhead and
profit margin, size and number of units, similarity of work and economy of scale should be
considered when comparing unit or square foot cost of projects. Economies of scale can reduce
costs for large projects and increase costs for small projects; 49th Street was a small project.
With the absence of the three above items from the Peralta and Campbell Village projects, the
dissimilarity in unit size and number, and the overhead and profit margin difference, it makes
comparison of the three projects unit cost incongruent.

OHA stated it analyzed each change order and determined that the costs were reasonable for the
particular task. OHA used the following criteria to establish change order cost:

·   Appropriate Davis Bacon wage labor rates were applied, both skilled and unskilled.

·   Labor Burden insurance did not exceed 30 percent. These were workman’s compensation,
    liability insurance and EDD/IRS.

·   Material cost invoice were verified.

·   Contractor’s bond did not exceed 2.5 percent.

·   Overhead and profit did not exceed 20 percent.

OHA claimed they also negotiated, whenever feasible, the number of the contractor’s workers on
a particular task and the estimated hours to do the work. It is difficult for the OHA to reasonably
compare change order cost with those presented by the OIG in their report because there is no
example of the criteria used by the OIG to establish their cost estimates. OHA claimed the costs
associated with change order numbers 11, 12, 15, 23-33, 47, 51 and 55 are reasonable and within
the industry standards.

OHA stated there was no duplication of payment for wall heaters in change order 15. OHA
claimed the wall heaters were only removed in change order 15, when all of the sheet rock was
removed. In change order 23, wall heaters were purchased and installed. There was no
duplication of payment.

Regarding the alleged ineligible cost in change order 19, OHA claimed it had recommended the
paint color of building be mixed into the stucco, as had been done successfully on another
project, Peralta Villa. The OHA claimed they verified the paint color mixed into the stucco.
However, after the heavy rainfall in the month of February, it was apparent that the paint mixed
into the stucco was not sufficient to protect and seal the building against moisture penetration.
After meeting with the modernization director, it was determined an additional two coats of paint
would be in the best interest of the authority and provide a minimum of five years before these
buildings would need additional painting.




                                                11
Audit Memorandum No. 2002-SF-1002                           Oakland Housing Authority-Limited Review


                Comparison of OIG and OHA Change Order Analysis Results

                        OHA                OIG             Difference       1998 R.S. Means
Change Orders         $555,467           $450,226          $105,201            $662,103

Quality of Work:

The OIG stated in its report the overall quality of work at the 49th Street site was fair, with some
exceptions. OHA stated OIG did not identify the units in which suspect work was found. OHA
claimed a site visit and inspection was conducted by OHA representatives on February 13, 2002.
OHA claimed the following observations were made regarding the exception noted by the OIG:

·   Random inspection of kitchen areas did not reveal holes of any kind.

·   Random inspection of kitchen areas found no evidence of any separations; however, counter
    tops are normally caulked and sealed when installed. Over a two or three years period,
    caulking may dry and crack and this may have been what OIG observed.

·   Laminated wood flooring is used in every room but the kitchens and baths. Laminated wood
    baseboard is used where there is laminated flooring. Kitchen and bath floors are covered
    with sheet vinyl floor coverings; these areas have vinyl baseboards, as called for in the
    drawing and specifications, and plastic is not used.

·   The patio privacy lattice panels connected to the top of the four foot high patio enclosures are
    typical industry standard redwood lattice panel. The condition of some of the panels after
    being installed two years ago, does show signs of weathering and some are in a state of
    disrepair. Replacement and or repair of those will be addressed by the OHA Facilities
    Management Department.

The OHA claimed they inspected the project on the early afternoon of February 13, 2002. It had
intermittently rained all morning and was raining at the time of the inspection. There were no
water stains on the buildings, either on the soffits, eaves or on the exterior stucco. What the OIG
may have observed on the eaves was typical weathering of the wood facade, after two years of
exposure to rain and sun.

All patio enclosures are three to four inches above grade and approximately two inches above the
concrete patio slab (see enclosed photograph).

In summary, OHA’s recent inspection of the site determined that the site was reconstructed with
the specified and appropriate materials. The quality of work was found to be adequate.

We conducted the exit conference with OHA representatives on April 16, 2002. In response to
their request, we provided our supporting calculations for the excessive charges related to the
change orders. We also provided them with copies of our pictures showing the inferior work.
OHA representatives asked for an additional two weeks to respond to the additional information

                                                12
Audit Memorandum No. 2002-SF-1002                           Oakland Housing Authority-Limited Review


provided. The OHA provided its written response on May 14, 2002 which is included as
Appendix B-2. The following is the summary of OHA’s comments:

“As-built” drawings:

OHA claims it would be advantageous when designing renovations to begin with “as-built”
drawings from the original construction. Using “as-built” would provide the Authority with a
good starting point and would enable the Authority to avoid costly destructive testing and other
analysis. Unfortunately, the Authority does not have “as-built” drawings for the 49th Street
project. The absence of “as-built” drawings alone added to the requirement for extensive
destructive testing, change orders and expense. Together with the added costs resulting from
vandalism and theft, the absence of “as-built” drawings contributed to the unusual expense of the
work at 49th Street.

Sequencing of Change Orders:

OHA stated they reviewed the sequencing of the change orders in terms of the actual date that
they were processed and approved and the work completed. OHA stated the numerical order as
well as imprecise descriptions of the change orders made it appear that work may have been
duplicated. OHA stated HUD-OIG outlined perceived discrepancies involved with change order
15 (removal of sheet rock, fixtures, and wall heaters plus reinstallation of sheetrock), change
order 23 (vent) and change order 33 (install wall heaters and range hoods). These associated
events were properly sequenced, and there was no duplication.

Reasonableness of Costs:

OHA agreed with HUD-OIG’s finding of ineligible cost associated with change order 12 in
amount of $12,300. OHA claimed the contractor no longer exits, and therefore they do not have
the option to request refund.

OHA stated the change order 55 (removal and install hot water heaters) was another perceived
discrepancy. While change order 55 stated 100 gallon hot water heaters were to be installed, a
careful check of the specifications revealed that 80 gallon units were in fact required. Despite
this error, the price associated with the change order was correctly calculated.

Quality of Materials and Supplies:

OHA claimed the Authority specifies higher quality material where experience has demonstrated
higher levels of wear and tear. This was the case in our selection of a more expensive, and more
durable, sliding glass door in change order 11. In our experience, we have found that
investments made in more durable materials saves maintenance dollar over the life of the
product.

OHA stated with exception of $12,300 for change order 12, the costs were reasonable within the
context of this difficult work.


                                                13
Audit Memorandum No. 2002-SF-1002                          Oakland Housing Authority-Limited Review


Comprehensive Property Inspection:

OHA stated the contractor is no longer in business; and therefore, the authority will not be able
to obtain any credit from the contractor. OHA stated their Preventative Maintenance Program
(PM) has competed several cycles through this site. The PM crew routinely inspects the site and
each apartment and makes requisite repairs to the building, systems, and apartments. In addition,
we are scheduling a special inspection by senior members of the facilities management
department within the immediate future.

OIG EVALUATION OF AUDITEE COMMENTS

As we stated in our draft report, we take no exception to the fact that 49th Street needed a
comprehensive modernization including the replacement of the project’s roof, windows, doors,
bathrooms, kitchens, parking lot, electrical and mechanical items, fences, patios, and numerous
other items. The OHA was aware of this fact back in March 1993. At that time, OHA estimated
the modernization work would cost $1,406,556 ($58,000 per unit). However, the OHA decided
to delay the modernization project until 1998; and even then, it decided to reduce the scope of
work statement to cover only the replacement roof, windows, and site work.

OHA stated they had to make critical and prudent decisions that would be in the best interest of
the Authority and its use of funds. OHA believes the competitive process would significantly
delay completion of modernization and it would have significantly increased the cost. As a
result, the OHA increased the scope of the work by issuing a series of change orders that resulted
in comprehensive modernization of the project.

We disagree with this rational and methodology. It is interesting to note, OHA vacated the 49th
Street project in 1996 (the month is unknown) and it did not start modernizing the project until
July 1998. It took nearly two years to complete the modernization. We do not believe OHA
achieved its goal of completing the modernization in timely manner.

As we stated in our draft report, after the extent of the dry rot damage from the leaking roof was
discovered, OHA should have reassessed the full scope of the rehabilitation. In addition, OHA
had prior knowledge that the 49th Street project required a major modernization. However, OHA
did not suspend the work and disregarded the Federal requirements by not competitively
procuring for the additional modernization work.

OHA claimed it analyzed each change order and determined the costs were reasonable for the
particular task. However, OHA was not able to provide adequate supporting documentation to
support its claim.

We compared the costs associated with comprehensive modernization performed by general
contractors on Campbell and Peralta developments to the 49th Street project. We also stated in
our report the unit cost comparisons for modernization work are frequently invalid, and 49th
Street had the disadvantage of starting with a partial rather than complete modernization.
However, the 50 percent variance is very large, even if we take into consideration the economies
of scale.
                                               14
Audit Memorandum No. 2002-SF-1002                          Oakland Housing Authority-Limited Review




               Projects                   Total Units               Cost per Unit
               Campbell Village                77                         $83,085
               Peralta Villa                 140                          $82,999
               49th Street                     24                       $123,601

We reviewed the OHA Cost Breakdowns based on 1998 R.S. Means (referred to as “Cost
Breakdown”) for Change Order Numbers 11, 12, 15, 23-33, 47 and 51 and we have the following
comments:
The OIG estimated the labor and material costs based on two construction costs data sources:
R.S. Means Repair & Remodeling Costs Data for year 2000 and Saylor Publications of Current
Construction Costs for year 2000. In addition to using both cost data sources, the OIG also
performed pricing of the costs with major building materials suppliers in the Bay Area. The
estimation is primarily based on the scope of work in each of the Change Orders. The estimation
also includes the construction work actually performed in two inspected units in terms of the
quality of the materials installed and the construction workmanship. OIG’s estimation included
union labor wages and made adjustments to reflect the increase in labor wages due to the degree
of difficulty of rehabilitation/repair construction. The union labor wages in the Bay Area are
slightly higher than the Davis-Bacon Wage Rate. A 2.5 percent bond premium and 20 percent
overhead and profit were also included in the estimation.

The labor hours estimated in the OHA Cost Breakdowns are overall 8 percent to 10 percent
higher per R.S. Means Standard for Construction. In addition, it is unusual to have the skilled
worker perform the work typically performed by the unskilled laborer per R.S. Means Standard
for Construction.

The 31 percent of overhead and profit allowance listed in R.S. Means is based on the
presumption of the installing contractor’s annual billing of $1,000,000 and up. In R.S. Means, a
20 percent of overhead and profit calculation is applicable for the $2,000,000 project. The total
rehabilitation costs for the project were $2,966,444. Thus, a 20 percent overhead and profit
calculation is reasonable for the subject project. Both DSKA’s cost breakdown to the Change
Orders and our estimation applied the 20 percent calculation.

Change Order 11: Removing and installing sliding glass doors. The Cost Breakdown overstated
the labor hours and the cost of the materials. Our estimation includes the labor hours per
R.S. Means. The cost of the material was quoted at the local building supplier.

Change Order 12: Removing and installing front metal doors. The front doors, metal frames and
locks was to be installed at a cost of $1,215 each, for a total of $29,190. The Cost Breakdown
number 12 overstated the labor hours, and cost of materials. It is typical to have the demolition
laborer remove the disrepaired metal doors and frames. The OIG’s estimation includes the labor
hours per R.S. Means. The cost of the material was quoted at the local building supplier.

Change Order 15: Remove and install all interior sheet rock, fixture in kitchen (no replacement),
bathroom (no replacement), and wall heater (no replacement). The Cost Breakdown 15 is almost
the same with DSKA’s cost breakdown for the Change Order 15 dated April 9, 1999 with the

                                               15
Audit Memorandum No. 2002-SF-1002                               Oakland Housing Authority-Limited Review


exception of the difference in unit price and percentage of overhead and profit. Neither of the
cost estimations mentioned the removal of all toilets, tubs and all wall heaters. It is reasonable to
include all the fixtures and appliances attached to the wall while removing all the interior sheet
rock. The OIG’s estimation is based on the scope of work stated in the Change Order 15 to
calculate the labor hours and cost of material.

Change Order 23: Replacement of heater vent lines and all 24-wall heaters. The Cost
Breakdown 23 includes a unit price for the labor and material for the installation of 24-35000
BTU Williams Wall Heaters. DSKA’s cost breakdown for the Change Order 23, dated
January 11, 1999, includes two unit prices for the replacement of vent lines and heaters for the
first and second floors, respectively. The OIG’s estimation is based on the scope of work stated
in the Change Order 23 to calculate the labor hours and the cost for material was quoted at the
local building supplier.

Change Order 33: Provide and install 24-35000 BTU Williams wall heaters and to provide and
install 25 NU-tone range hoods in the kitchen areas. The Cost Breakdown 33 stated the removal
and replacement of heater vent lines. DSKA’s cost breakdown for the Change Order 33, dated
November 28, 1999, stated the wall heaters and range hoods installations, and included a lump-
sum proposal from a subcontractor. The OIG’s estimation is based on one of the items in the
scope of work stated in the Change Order 33 because Change Order 23 covers the costs for
replacement of vent lines and heaters. The OIG’s estimation includes only the costs of providing
and installation of 24 NU-tone range hoods in the kitchen area. The cost for material was quoted
at the local building supplier.

The unit price in the Cost Breakdown 33 is the same as the unit price in DSKA’s cost breakdown
for the Change Order 23 dated January 11, 1999. However, the same unit price related to the
different scope of work. DSKA’s cost breakdown includes the costs not only for the replacement
of the vent lines, but also for the heaters for both floors. Cost Breakdown 33 includes the costs
for removal and replacement of heater vent lines. It did not include the installation for the 24
heaters. It is unusual for the installation of wall heaters to occur 10 months prior to the removal
and replacement of the heater vent lines. It is reasonable that the installation of the vent lines
and wall heaters be completed at the same time.

Change Order 47: To provide for approximately twenty thousand square feet of laminated wood
floors in each of the twenty-four living units. OIG’s estimation is based on the following
measurements:

Description                               Unit (square feet)       Total (square feet)
Interior living area                              888                     21,312
Bathroom                                           40                        960
Kitchen                                           108                      2,592
The other living area                             740                     17,760
                                           Unit (lineal foot)       Total (lineal foot)
Wall base for bathroom and kitchen                 61                      1,461
Wall base for the other living area               198                      4,752


                                                 16
Audit Memorandum No. 2002-SF-1002                           Oakland Housing Authority-Limited Review


The OIG’s estimation includes the same $72,004.18 for all the material costs of laminated floor
from the supplier’s estimate to the DSKA’s cost breakdown for Change Order 47. The material
supplier stated the estimate was for the approximately 20,000 square feet of floor covering. The
673 pieces of wall base was for the coverage for approximately 5,270 lineal feet for the base of
the wall. (Each piece is measured 94” or 7’10.08” long.) The Cost Breakdown 47 contains
questionable quantity of the materials. An explanation is necessary from OHA.

Change Order 51: (1) To provide all work necessary to apply hot mixed asphalt paving over a
prepared subbase, including a sprayed sealer over the asphalt surface. (2) To provide painted
parking stall markings, including one parking stall designated as handicap. (3) All parking stalls
are to have one precast concrete wheel stop anchored in the asphalt surface of the parking lot.
The Cost Breakdown 51 listed the lump-sum paving contractor cost. Without the details of the
itemized cost breakdown, the OIG is not able to determine whether the Cost Breakdown 51 is a
reasonable estimation.

Change Order 55: To provide and install four new 100-gallon hot water heaters and six new
electrical water pumps. In addition, the contractor is to clean and drain the two other existing hot
water tanks and reconnect all of the gas flue and water lines at all six tanks to meet and correct
the code violations as specified in the City of Oakland’s code correction notice dated March 16,
2000. The unit price of a water heater and circulating pump in Cost Breakdown 55 is $2,225.56
and $440.00, respectively. Based on two field inspections, the description of four new water
heaters is A.O. Smith, gas-fired water heater, commercial grade, 100-degree temperature rise,
81-gallon, Model BTR180. The quoted unit price for the 81-gallon water heater is $2,051.75.
The quoted unit price for the circulating pump is $380.00 and J-box is $18.00. The OIG
obtained the costs of the water heater, circulating pumps and J-box with the local building
supplier. The OIG inspected only four new water heater installations. The other two water
heaters were not inspected because the keys for the two utility closets were not available at the
time of the inspection.

The OIG’s staff inspected the subject project on March 14, 2001 and March 21, 2001,
respectively. Unit 5 of 357 49th Street is an occupied upstairs unit. Unit 3 of 364 49th Street is a
vacant downstairs unit. These two inspected units were reported to be representative of the
project. The overall quality of materials installed and quality of construction workmanship and
conditions in these two units are consistent. The units consist of a living room, kitchen with
laundry, three bedrooms and one bath. There is no other floor plan in the project. The Project
Manager with the OHA stated the vacant unit sustained severe damage resulting from
water/sewer overflow from the bathroom to the living room and hallway. The floor covering in
these areas was removed. The bottom portion of the interior drywall in these areas was also
removed. The unit has never been occupied since the completion of rehabilitation of the project.

We reviewed OHA’s response dated May 14, 2002 and we have the following comments:

We take no exception to the fact that 49th Street needed a major comprehensive modernization
including the replacement of the project roof, windows, doors, bathrooms, kitchens, parking lot,
electrical and mechanical items, fence, patio, and numerous other items. OHA claimed the lack
of the “as-built” drawings contributed significantly to the costs. However, OHA failed to

                                                17
Audit Memorandum No. 2002-SF-1002                           Oakland Housing Authority-Limited Review


provide any evidence linking the absence of “as-built” drawings to the rehabilitation effort such
as the replacement of the windows, doors, bathrooms, kitchen, wall heaters and other items that
resulted in a significant cost over run at 49th Street project.

As we stated in our draft audit report, the excessive costs on change orders 23 and 33 are largely
due to the apparent duplication of wall heaters. The change order 15 states “removal of all wall
heaters”, the change order 23 states “replacement of all wall heaters”, and change order 33 states
“provide and install 24-35000 Williams wall heaters”. These change orders were approved and
signed by the contractor, the architect, and OHA’s project manager for the 49th Street project, the
director of modernization, and the contract office (executive director). In addition, OHA paid
the contractor the amount stated in these change orders for the above tasks. The payments were
approved and signed by the project manager, director of modernization and the executive
director. Finally, OHA did not provide any supporting documentation to demonstrate there was
no duplication of payment for these change orders.

The excess costs associated with change orders 11 and 55 were based on the reasonableness of
the costs and not the type of material or supplies.

After reviewing OHA’s comments, we still believe OHA did not follow Federal requirements in
rehabilitating the 49th Street project. As a result, the work cost more than necessary, and we
identified $105,201 of questionable payments to the contractor. In addition, we found some
problems with the quality of the work.




                                                18
Audit Memorandum No. 2002-SF-1002                          Oakland Housing Authority-Limited Review



RECOMMENDATIONS
We recommend you require the Oakland Housing Authority to:

1A.    Return the monies to the modernization program from nonfederal funds for the ineligible
       and unnecessary/unreasonable costs of $105,201. (See Schedule of Questioned Costs.)

1B.    Perform a comprehensive physical examination of the project and require the contractor
       to repair all construction defects identified, or repair the defects at its own expense with
       nonfederal funds.

1C.    Use a competitive procurement process any time there is a substantial change in the scope
       of a modernization project as required by HUD and Federal procurement regulations.

1D.    Institute improved procedures over the change order process. These would include
       requiring contractors to submit supporting cost estimates, OHA performing proper cost
       analyses, documentation on the negotiation or prices, and effective scrutiny by
       supervisors.




                                               19
Audit Memorandum No. 2002-SF-1002                             Oakland Housing Authority-Limited Review



                                                                              APPENDIX A

                        SCHEDULE OF QUESTIONED COSTS

           Issue(Recommendation No.1A.)                               Unreasonable/           Total
                                                      Ineligible 1/   Unnecessary 2/
     Excess charge for change order #11                                     $12,488        $12,488
     Excess charge for change order #12                                      12,937         13,037
     Excess charge for change order #15                                      23,566         23,566
     Excess charge for change orders #23 & #33                               14,453         14,453
     Excess charge for change order #47                                       5,583          5,583
     Excess charge for change order #51                                       6,005          6,005
     Excess charge for change order #55                                      17,869         17,869
     Charge for adding coloring to stucco not
     done under change order #19                          $12,300                            12,300

                     TOTALS                               $12,300            $92,901      $105,201

1/       Ineligible amounts are those questioned because of an alleged violation of a
         provision of a law, regulation, contract, grant, cooperative agreement, or other
         agreement or document governing the use of funds, or are otherwise prohibited.

2/       Unreasonable/unnecessary amounts are those not generally recognized as ordinary,
         prudent, relevant, or necessary within established practices. Unreasonable amounts
         exceed those incurred by the ordinarily prudent person in the conduct of a competitive
         business. Costs must be necessary and reasonable to be eligible under Federal cost
         principles.




                                                 20
Audit Memorandum No. 2002-SF-1002        Oakland Housing Authority-Limited Review




                                    21
Audit Memorandum No. 2002-SF-1002        Oakland Housing Authority-Limited Review




                                    22
Audit Memorandum No. 2002-SF-1002        Oakland Housing Authority-Limited Review




                                    23
Audit Memorandum No. 2002-SF-1002        Oakland Housing Authority-Limited Review




                                    24
Audit Memorandum No. 2002-SF-1002        Oakland Housing Authority-Limited Review




                                    25
Audit Memorandum No. 2002-SF-1002        Oakland Housing Authority-Limited Review




                                    26
Audit Memorandum No. 2002-SF-1002        Oakland Housing Authority-Limited Review




                                    27
Audit Memorandum No. 2002-SF-1002        Oakland Housing Authority-Limited Review




                                    28
Audit Memorandum No. 2002-SF-1002            Oakland Housing Authority-Limited Review



                                                             APPENDIX B-1
                                AUDITEE COMMENTS




                                       29
Audit Memorandum No. 2002-SF-1002        Oakland Housing Authority-Limited Review




                                    30
Audit Memorandum No. 2002-SF-1002        Oakland Housing Authority-Limited Review




                                    31
Audit Memorandum No. 2002-SF-1002        Oakland Housing Authority-Limited Review




                                    32
Audit Memorandum No. 2002-SF-1002        Oakland Housing Authority-Limited Review




                                    33
Audit Memorandum No. 2002-SF-1002        Oakland Housing Authority-Limited Review




                                    34
Audit Memorandum No. 2002-SF-1002        Oakland Housing Authority-Limited Review




                                    35
Audit Memorandum No. 2002-SF-1002        Oakland Housing Authority-Limited Review




                                    36
Audit Memorandum No. 2002-SF-1002        Oakland Housing Authority-Limited Review




                                    37
Audit Memorandum No. 2002-SF-1002        Oakland Housing Authority-Limited Review




                                    38
Audit Memorandum No. 2002-SF-1002        Oakland Housing Authority-Limited Review



                                                            APPENDIX B-2




                                    39
Audit Memorandum No. 2002-SF-1002        Oakland Housing Authority-Limited Review




                                    40
Audit Memorandum No. 2002-SF-1002        Oakland Housing Authority-Limited Review




                                    41
Audit Memorandum No. 2002-SF-1002                       Oakland Housing Authority-Limited Review


                                                                        APPENDIX C
                        DISTRIBUTION OUTSIDE OF HUD
Subcommittee on Oversight and Investigations, U.S. House of Representatives
Associate Director, Housing and Telecommunications Issues, U.S. General Accounting Office
House Committee on Financial Services, U.S. House of Representatives
Senior Advisor, Subcommittee on Criminal Justice, Drug Policy and Human Resources,
U.S. House of Representatives:
Chairman, Committee on Governmental Affairs, U.S. Senate
Ranking Member, Committee on Government Affairs, U.S. Senate
Chairman, Committee on Government Reform, U.S. House of Representatives
Ranking Member, Committee on Government Reform, U.S. House of Representatives
Oakland Housing Authority, Oakland, California




                                            42