Response to the Audit

CALIFORNIA DEPARTMENT OF GENERAL SERVICES

February 25, 2016

Elaine M. Howle, State Auditor
California State Auditor
621 Capitol Mall, Suite 1200
Sacramento, CA 95814

Re: CALIFORNIA STATE AUDITOR’S REPORT NO. 2015-117

Pursuant to the above audit report, enclosed are the Department of General Services' comments pertaining to the results of the audit.

The Government Operations Agency would like to thank the state auditor for its comprehensive review. The results provide us with the opportunity to better serve our clients and protect the public.

Sincerely,

Marybel Batjer, Secretary
Government Operations Agency

Date: February 25, 2016

To: Marybel Batjer, Secretary
Government Operations Agency
915 Capitol Mall, Suite 200
Sacramento, CA 95814

From: Daniel C. Kim, Director Department of General Services

Subject: RESPONSE TO CALIFORNIA STATE AUDITOR’S REPORT NO. 2015-117

Thank you for the opportunity to respond to the California State Auditor’s (state auditor) Report No. 2015-117, which addresses recommendations to the Department of General Services (DGS) resulting from its audit of the Real Estate Services Division (RESD). The following response addresses each of the recommendations.

OVERVIEW OF THE REPORT

DGS has reviewed the findings, conclusions and recommendations presented in Report No. 2015-117. DGS will take appropriate actions to address the state auditor’s recommendations.

In summary, the state auditor identified a number of areas for improvement in RESD’s project management process including the need for a: (1) central project tracking system, (2) consistent client communication activity; (3) strategic planning process that more effectively measures the division’s performance in delivering projects; and, (4) more robust staff training program.

Since my appointment in June 2015, I have focused extensive efforts on reviewing RESD’s operations. Through my review, I found that the division has highly professional and committed management and staff. I also have found that RESD can provide greater customer service through more focused and streamlined project delivery, real estate management and facility maintenance functions and activities. The state auditor’s findings and recommendations will assist the department in meeting this goal.

Recently, DGS began the process of reorganizing RESD to improve the efficiency and effectiveness of its real estate operations. In part, the extensive reorganization will create two divisions: (1) a new Facility Management Division that primarily includes the facility maintenance and direct construction functions and activities that were previously performed by the Building and Property Management branch and the Direct Construction Unit, respectively; and, (2) a new RESD with extensive revisions to the previous organizational structure including consolidating all real estate broker functions under the Asset Management Branch. As part of the reorganization, executive management will be tasked with ensuring that a high priority is placed on fully addressing the issues raised in the state auditor’s report.

DGS appreciates the state auditor’s in-depth audit and is fully committed to promptly and completely addressing the issues identified in the audit report. In general, the actions recommended by the state auditor have merit and will be promptly addressed.

RECOMMENDATIONS

RECOMMENDATION # 1:

To ensure long-term efficient and effective delivery of projects, the division, in its planned implementation of its new project management system in July 2017, should do the following:

Ensure that the project management system can centrally track and extract all data regarding project status, including time delays, cost overages, and the reasons for each.

Track the reasons that projects are pending to identify its true backlog of projects. In doing so, it should develop a process to follow up on those projects that are pending to ensure that they are not on hold unnecessarily and are appropriately moving forward.

At least annually, use the centrally tracked data to identify common themes in the causes for project delays and cost overages and develop solutions to address these issues. Further, it should report the results of its review to General Services’ executive management.

DGS RESPONSE # 1:

RESD plans to implement a new project management system ¹ a which will allow management and staff to more effectively plan, manage, and control projects. As noted in the report, the new system (Primavera) is part of FI$Cal. Currently, FI$Cal has scheduled Primavera’s statewide implementation for July 2017.

When combined with a new project costing financial system ² (also part of FI$Cal) being implemented in July 2016, the new project management system should address all of the issues recommended by the state auditor. Specifically, the new system will include provisions that allow project management to: (1) centrally track and extract all relevant data regarding project status; (2) identify and follow-up on pending projects; and, (3) centrally track common themes for project delays and cost overages. RESD will also ensure that DGS executive management are kept informed of significant project issues, including the results of its analysis of common themes impacting project timeliness and cost.

RECOMMENDATION # 2:
Until the division implements its planned project management system, it should, by September 2016, develop a process to, at a minimum, identify project status and reasons for project delays as well as cost overages. Using these data, the division should modify its project management processes to ensure the efficient and effective delivery of projects.

DGS RESPONSE # 2:

By September 2016, RESD will implement an interim system that allows the identification of project status and reasons for project delays as well as cost overages. As part of this system, which will be developed using division expertise and department information technology staff support, a management reporting component will be implemented that allows common themes in the causes for project delays and cost overages to be identified and addressed in a timely manner.

RECOMMENDATION # 3:

The division should develop and implement a process for preparing reasonable time frames and cost estimates for its projects within the building management branch. To better inform the development of this process, the division should evaluate the branch’s structure, which should include a staffing analysis, to determine whether it is effectively organized and whether it should add cost estimator positions.

DGS RESPONSE # 3:

DGS is in the early stages of an extensive reorganization of RESD, including the creation of a new Facility Management Division (FMD). Along with other programs and functions, FMD will be responsible for performing the duties of the previous Building and Property Management Branch. FMD will ensure that an efficient and effective process is developed for preparing time frame and cost estimates for its projects, including, if deemed necessary, the use of department estimating staff.

RECOMMENDATION # 4:

To ensure that client agencies are paying equitable rates, by December 2016 General Services should develop and implement a strategy for allocating its administrative costs equally among all the projects it completes for client agencies, including those portions outsourced to private firms.

DGS RESPONSE # 4:

In consultation with department budget staff, DGS will fully consider the state auditor’s recommendation to implement a new strategy for allocating its administrative costs to architectural and engineering (A&E) and construction contracts. However, DGS notes that, while this proposal may reduce costs for DGS clients who do not contract with private A&E firms, it will increase project costs for DGS clients who do contract with private A&E firms. Therefore, changing the allocation of administrative costs does not reduce costs overall to the state. Accordingly, DGS proposes to focus on the state auditor’s larger point that it find ways, where feasible, to reduce the department’s overall project costs and complete projects in a more timely manner.

RECOMMENDATION # 5:

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

DGS RESPONSE # 5:

Based on state policy and practice, DGS is limited to setting rates based on a cost recovery model. That is, DGS sets its hourly rate based on its cost to perform the work, and this cost is largely determined by the salaries established through collective bargaining. Therefore, the department is restricted in the actions it can take to adjust project management rates based on a comparison with private firms’ rates. Nevertheless, DGS will compare its rates to those charged by A&E firms under contract with the department.

In addition, DGS will focus its efforts on another analysis that we believe will be more meaningful. Specifically, as discussed in the report, DGS will obtain the data needed to perform a comparison of project management branch staffing and consulting costs on a given project relative to the total construction costs for that project. Using the computed proportion of costs, DGS will compare those costs against applicable private sector expected costs for a similar project. Based on the results of that analysis, DGS will explore and implement reasonable and applicable methods to ensure that it delivers projects as cost effectively as possible. While DGS believes this analysis will prove helpful, our intent is not to match ourcosts to those of private firms but to find ways to lower our overall cost to complete construction projects.

RECOMMENDATION # 6:

To improve its communication with client agencies, the division should:

Ensure that project managers are using consistent procedures by providing specific expectations related to communicating and documenting time delays, cost changes, and change orders, at a minimum.

Develop a process for providing detailed bills and invoices to client agencies clearly describing the work for which it is charging.

DGS RESPONSE # 6:

In the near future, RESD will update its policy manual and provide additional guidelines addressing expectations for project managers to communicate significant project issues to clients in a timely manner.

In consultation with department accounting staff, RESD will also implement policies and procedures that ensure that clients are provided detailed project and cost information on a more routine basis. Further, the new project management system (See Recommendation # 1) scheduled for implementation in July 2017 will allow clients to have direct online access to project status information, including cost data.

RECOMMENDATION # 7:

To effectively evaluate the performance of its branches in delivering projects, the division should develop meaningful goals and objectives and a method of measuring its success in achieving them as part of its strategic plan that is focused on ensuring that projects are delivered on time and within budget.

DGS RESPONSE # 7:

Currently, DGS is in the process of developing its 2016 Strategic Plan that includes a theme addressing efficiency, which is defined as doing what we do better, faster and cheaper. To date, RESD has developed an objective to implement a pilot construction management project with soft costs reduced to 20 percent of overall construction costs. Soft costs represent those costs incurred in designing, inspecting and managing a capital outlay project. In the near future, RESD and FMD will develop additional goals and objectives that are focused on ensuring that projects are delivered on time and within budgeted cost estimates.

RECOMMENDATION # 8:

To ensure that its project management staff are adequately trained and have the information necessary to deliver projects as efficiently and effectively as possible, the division should:

Conduct a comprehensive survey every other year of all of its client agencies to inform necessary improvements to its processes and training program and, in the interest of transparency, make the survey results public.

Develop and implement by December 2016 a periodic training program for staff within its project management and building management branches. This training program should include updated information that reflects any processes it revises based on its review of critical project status data and its progress towards meeting its goals.

DGS RESPONSE # 8:

In consultation with subject matter experts located in DGS’ Office of Strategic Planning, Policy & Research, RESD will implement a comprehensive client survey process which will routinely survey clients of each of our construction management projects. The results will also be published on DGS’ website.

In addition, by December 2016, RESD will initiate a training program for project management and building management staff. The training will ensure that staff is trained in a timely manner on the knowledge, skills and abilities needed to deliver projects as efficiently as possible.

CONCLUSION

DGS is firmly committed to effectively and efficiently managing its operations implemented to plan, design, and construct capital outlay projects. As part of its continuing efforts to improve those processes, DGS will take appropriate actions to address the issues presented in the report.

If you need further information or assistance on this issue, please contact me at (916) 376-5012.

Daniel C. Kim
Director

Footnotes

¹ Oracle's Primavera project control and contract management solutions. Go back to text.

² Oracle's PeopleSoft project costing financial management application. Go back to text.

Comments

California State Auditor’s Comments on the Response From the California Department of General Services

To provide clarity and perspective, we are commenting on the response to our audit report from the California Department of General Services (General Services). The numbers below correspond to the numbers we placed in the margin of General Services’ response.

During the course of our audit work, the acting deputy director of the Real Estate Services Division (division) informed us that he was currently evaluating the Building and Property Management Branch’s structure but could not provide a date when the evaluation would be complete, as we describe in the Audit Results. However, at no time during the audit, until this response, did General Services inform us that it was in the process of reorganizing the entire division. We look forward to General Services’ 60‑day response to further explain this reorganization and how it may assist General Services in implementing our recommendations.

As stated in our recommendation, the purpose of this recommendation is to ensure that client agencies are paying equitable rates. The division’s current methodology, as described in the Audit Results, requires the client agencies whose projects are completed solely by the Project Management and Development Branch to absorb the costs for administrative services General Services provides on projects contracted out to private firms. This creates an inequitable distribution of these administrative costs regardless of the net impact on the State. Thus, we stand by our recommendation.

At our exit conference, in which we shared our draft report with General Services, its director described this additional analysis and, accordingly, we included this perspective in the Audit Results. We also acknowledge that there is value in conducting the analysis the director of General Services describes and, in our recommendation, we state that General Services should explore and implement any other reasonable methods to ensure it is delivering projects as cost effectively as possible. However, as stated in the Audit Results, we believe that without conducting an analysis of its hourly rates, General Services will not be certain of the various factors that may contribute to its rate being higher than those of private firms. Such an analysis may lead to additional efficiencies and cost savings and is, thus, meaningful.