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Report Number: 2016-132


Department of Water Resources
The Unexpected Complexity of the California WaterFix Project Has Resulted in Significant Cost Increases and Delays

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Because of the Unexpected Complexity of the Project, the Planning Phase Has Experienced Significant Cost Increases and Schedule Delays

Key Points:

• The costs and timeline for preparing the BDCP increased because of the scale and unexpected complexity of the project.

• The costs to evaluate and plan for the potential implementation of the BDCP and its alternatives, which eventually included WaterFix, also increased.

The Costs and the Timeline for Preparing the BDCP Increased Because of the Unexpected Complexity of the Project

In a June 2006 steering committee meeting, the finance subcommittee presented a $13 million budget for preparation of the BDCP, which included budgeted consultant costs for completing all tasks except public outreach. The budget consisted of $6 million to provide for the participation of fishery agencies and $7 million for consultant costs and other costs related to the BDCP. As stated in the Introduction, fishery agency costs were to be split evenly between DWR and Reclamation and the consultant and other costs were to be split among DWR, the Authority, and Mirant Corporation. Following the establishment of the budget, DWR entered into a $1.6 million contract with Alameda County Flood Control and Water Conservation District Zone 7 (Zone 7) to cover its share of consultant costs for December 2006 through June 2008. The contract states that Zone 7 possessed special expertise related to the unique environmental compliance process that would guide the BDCP process. The scope of work in the contract included engaging the services of a BDCP consultant, the preparation of the BDCP, and the services of Zone 7 to manage the contract with the BDCP consultant. However, the parties subsequently discovered that the $1.6 million budgeted over the 19‑month term of the contract was insufficient to allow the consultant to successfully complete the BDCP. The parties first amended the contract in June 2008 to add an additional year, extending the term through June 30, 2009. In the spring of 2009, the parties agreed to amend the contract a second time, increasing the contract by $3.5 million and the term by another two years, thus extending the contract through June 30, 2011. The parties amended the contract a third time in March 2010 to increase the contract by another $2.6 million. These three amendments collectively increased the cost of this contract from $1.6 million to $7.7 million, nearly five times the original amount, and they extended its term by three years. DWR’s financial records indicate that it spent $7.5 million on this contract, and according to the chief of its enterprise accounting branch, the funding for these payments came from State Water Project contractors. However, DWR did not fully track BDCP funding or spending. Documentation provided by the Authority indicates that it contributed $5.2 million toward these costs, but we do not have any data on Mirant Corporation’s share of BDCP costs.

According to contract documents justifying the amendments, the BDCP was being developed with a greater level of stakeholder involvement than was customary in most conservation plans; consequently, development of the plan was proving to be more complicated, time‑consuming, and expensive than originally anticipated. For example, the justification included in DWR’s second amendment to its contract with Zone 7 states that the BDCP process called for a more extensive independent science advisory effort—the process of including independent scientific input to assist with plan development—than is typically the case with conservation plans, and this effort increased the cost of preparing the conservation strategy beyond the original estimate.

The science advisors for the project also recommended expanding the scope of the plan to include a larger share of terrestrial species and habitat, and this recommendation further increased projected costs. The cost increase contained in the third contract amendment was primarily due to the decision to have the BDCP consultant take on portions of the EIR that were not originally included in the scope of work. Specifically, according to the contract documents justifying this amendment, the parties decided that part of the environmental impact evaluation could be conducted most efficiently by the same consultants that were preparing the BDCP.

The organizational and decision‑making structure of the BDCP effort presented another challenge to the timely and efficient completion of the plan. In particular, the documented justifications for the second and third contract amendments explained that the time and cost of preparing the BDCP increased substantially because the BDCP consultant, while designing the plan, engaged directly with the steering committee, which consisted of several dozen members representing state and federal water and resource agencies, water contractors, and other organizations—a unique departure from the customary process in which a consultant team primarily develops the conservation plan elements that are then endorsed by a single advisory committee. For example, according to the justification for the second amendment, the consultant spent a significant amount of time and resources developing a report that evaluated conservation strategy options, but it subsequently received requests from members of the steering committee that required the consultant to develop and model various operational scenarios repeatedly, and these efforts were costly and time‑consuming. However, the justification for the contract amendment also defended the time‑consuming stakeholder process, stating that it would help ensure the plan’s stability and likelihood of implementation. Nevertheless, the project’s costs increased significantly.

Although Zone 7 stopped managing the BDCP consultant in July 2010, costs for preparing the BDCP continued to increase when DWR entered into a direct contract with the consultant to continue preparing the BDCP. This new contract ultimately increased the BDCP costs by $41.4 million. Specifically, in June 2010, DWR and the consultant signed a two‑year, $11 million contract for tasks such as completing working drafts of the BDCP chapters, obtaining public feedback on the BDCP, and finalizing the BDCP. By the time DWR and Reclamation released the draft BDCP for public review and comment in December 2013, the contract had been amended several times increasing the maximum amount payable under the contract by a total of $20 million, in part because of unanticipated modifications to the project that resulted in the need for multiple revisions to the plan. After publishing the draft BDCP in December 2013, DWR further amended the contract three more times, increasing the contract amount by an additional $10.4 million.

These amendments cited the need for additional time and funds because of changes in the public draft of the BDCP resulting from a new permitting approach; the addition of three new alternatives to be analyzed, reviewed, and incorporated into the BDCP; and an extended public comment period. Notwithstanding, we estimate that the cost of preparing the BDCP rose to approximately $60 million.

Costs to Evaluate and Plan for the Potential Implementation of the BDCP and Other Alternatives Also Significantly Increased

DWR has so far spent roughly $260 million to evaluate and plan for the possible construction of alternative conveyance facilities and habitat restoration projects, including those that constitute the BDCP and, subsequently, WaterFix. In March 2009, DWR estimated the initial budget for these activities to be $140 million, including the costs of management, planning, administration, preliminary engineering, and environmental services. The budget was to cover the conservation and conveyance program’s evaluation and planning efforts starting in 2008 until its expected completion in 2010. Conservation and conveyance program funds were also used to pay for the $41.4 million direct contract that DWR entered into with the BDCP consultant, as mentioned previously.

However, DWR subsequently reassessed the scope, technical needs, and schedule for the conservation and conveyance program’s evaluation and planning efforts, which led to a substantial cost increase. Consequently, in October 2010, the steering committee discussed the need for an additional $100 million—a 71 percent increase to the initial budget of $140 million—to continue the planning process. In 2012 DWR signed agreements with water contractors for the supplemental funding of $100 million to pay the “actual” remaining costs of the planning phase. These supplemental funding agreements extended the term of the planning process through December 2014. A document prepared by the former chief of DWR’s division of engineering indicates that the $100 million was intended to fund remaining environmental and engineering activities as well as a contingency reserve. With the $100 million in supplemental funding, the total budget for the conservation and conveyance program’s evaluation and planning efforts had increased to $240 million.

DWR ultimately exhausted the $240 million budget and contributed $15 million in surplus revenue in 2015 and 2016 to fund additional planning costs. Reclamation and the Authority also together contributed an additional $6.8 million. Through June 2017, total contributions exceeded the planning phase budget by more than $21 million. Moreover, as of June 2017, DWR had spent 99 percent of the $261 million contributed to fund the conservation and conveyance program. As described previously, although DWR officials filed the Notice of Determination in July 2017, Reclamation has not filed the Record of Decision. Nevertheless, DWR officials stated that no additional funds would be needed to complete the planning phase for WaterFix, as approved.

Purposes and Priorities for Using State Water Project Revenue as Described in State Law

All revenues the State derives from the State Water Resources Development System (also known as the State Water Project)—including those from the sale, delivery, or use of water or power—shall be used annually only for the following purposes and in the following order:

  1. The payment of the reasonable costs of annual maintenance and operation of the State Water Resources Development System and the replacement of any of its parts.

  2. The annual payment of the principal and interest on the bonds issued in accordance with the Water Code.

  3. Reimbursement to the California Water Fund for funds used for State Water Resources Development System construction.*

  4. Any surplus revenues in each year not required for the purposes specified in this chapter of the law shall be appropriated to the department for acquisition and construction of the State Water Resources Development System.

Source: Water Code, Section 12937 (b).

* Priority 3 is no longer active because DWR has reimbursed all funds it used from the California Water Fund.

As discussed in the Introduction, DWR has entered into water supply contracts with State Water Project contractors. Pursuant to these contracts, DWR collects payments from the contractors to recover all water supply‑related costs. DWR deposits this revenue in a special account. The text box shows the purposes for which this revenue can be used. According to DWR, surplus revenue is available to DWR to fund the acquisition and construction of the State Water Project, including WaterFix planning activities that are a necessary precursor to construction. When we researched the $15 million of surplus revenues that DWR used to fund project planning costs in 2015 and 2016, we discovered that the account in which DWR collects the revenues had an available cash balance that had grown from $10.7 million in December 2013 to $286 million by the end of April 2017. Furthermore, DWR projects the balance will increase to $293 million by the end of December 2017. According to DWRs’ chief of the State Water Project Analysis Office, a major factor contributing to the increase in the balance of this fund has been the decrease in outstanding debt resulting from the repayment of a California Water Fund loan and general obligation bonds initially used to finance the State Water Project. He further stated that DWR holds monthly meetings with the state water contractors, at their request, to provide transparency of State Water Project activities and financial information regarding State Water Project costs and revenues, including the surplus revenue balance. We reviewed the agenda and minutes for the June 2017 meeting and found that DWR disclosed the $286 million surplus to the state water contractors. Finally, the chief stated that these funds are available to pay for new State Water Project facilities, including WaterFix. However, DWR has not developed any concrete plans for how it will use this growing surplus revenue balance.



To improve management of large and complex infrastructure projects, the Legislature should enact legislation requiring agencies to publicly report significant changes in the cost or schedule of such projects if they are expected to exceed their established budgets by 10 percent or schedules by 12 months.


To better manage large infrastructure projects, DWR should develop and implement a project‑reporting policy requiring its management staff to document and justify decisions to proceed with such projects if they are expected to exceed their established budgets by 10 percent or schedules by 12 months. DWR should make these documented decisions and justifications publicly available and submit them to the Resources Agency for review and approval.

To ensure it makes appropriate use of its growing surplus revenue balance, DWR should develop a detailed plan describing how it intends to use these funds.

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DWR Did Not Select Appropriately Its Current Program Manager for the Conservation and Conveyance Program

DWR’s Process for Selecting Its Initial Program Manager

Source: DWR’s request for qualifications and various other DWR documents.

Key Points:

DWR Did Not Follow Proper Procedures in Replacing the Program Manager for the Conservation and Conveyance Program

Although DWR initially used a robust selection process that was in line with both the letter and spirit of state contracting law to select its first program manager, it later used other methods to select a replacement program manager, and these methods did not follow the competitive process required under the law. State law requires state agencies that are contracting for architectural and engineering services to select contractors based on demonstrated competence and professional qualifications. The architectural and engineering (A&E) contract process seeks the most highly qualified contractor; the agency then negotiates with that contractor a price that is fair and reasonable although not necessarily the lowest price. Additionally, based on the services DWR identified in the Scope of Work section of its request for qualifications and its contract with URS Corporation (URS)—its original choice to provide program management services—DWR was contracting for specific services that are consistent withconstruction project management, which a licensed engineer or general contractor must perform, as state law requires.

In May 2008, DWR used a competitive process to engage a consultant to provide program management services and engineering support services, as required by state contracting law and its own regulations. DWR followed the process detailed in the text box to select URS as the most qualified firm to support the conservation and conveyance program team’s efforts. In its response to the request for qualifications, URS identified the individual who would serve as program manager and presented his qualifications, detailed in Table 1, as part of the larger competitive process. DWR then negotiated with URS for a contract worth up to $60 million and with a term from May 2008 through December 2015.

Table 1
Hallmark’s Program Manager Does Not Appear to Possess the Qualifications That DWR Required When It Selected URS
Requirements and Selection Criteria from DWR’s Request for Qualifications URS – Program Manager Hallmark – Program manager
Possession of a valid professional engineering license Yes No
Relevant education M.S./B.S. Civil Engineering Rutgers University B.S. Economics North Carolina State University
Demonstrated competence and relevant experience of the program manager in the planning of large water resources infrastructure projects
  • Project Director, MWD Isolated Facility, Metropolitan Water District of Southern California, Sacramento County, California

  • Project Manager and Sponsor, Lake Perris Dam Seismic Evaluation and Dam Replacement Options, State of California Department of Water Resources, 2006

  • Senior Reviewer, Swift No. 2 Hydroelectric Project, Cowlitz County PUD, Cougar, Washington, 2006
None included in information provided to DWR or on Hallmark’s website.
Demonstrated competence and relevant experience of the firm in the planning of large water resources infrastructure projects, strategic program development, project management, environmental compliance, engineering, and construction

Managed programs ranging from those costing hundreds of millions of dollars to those costing more than $19 billion in construction value, including the following:

  • $3.4 billion San Francisco Transbay Terminal Program

  • $5.5 billion California Prison Health Care Receivership Program

Developed and implemented public and stakeholder coordination strategies to address the outreach issues associated with these complex programs.

Managed construction for several projects including the following:

  • $500 million UC Merced Campus

  • $33 million UC Davis MIND Institute

  • $120 million Bay Area Housing Project

  • $3.5 million Silicon Laboratories facility


However, not long after awarding the contract, DWR directed URS to replace its program manager with the president of Hallmark without DWR’s demonstrating that Hallmark was qualified to provide these services or had the required professional license. Specifically, 13 months after awarding the contract to URS, DWR issued a notice of disapproval that removed the individual URS had designated as the program manager apparently because he was not working full‑time on the project. A clause in DWR’s contract with URS allowed DWR to disapprove “the assignments or the continuing assignment of specific contractor personnel, subcontractors and subcontractor personnel.” However, the contract did not indicate a specific process by which the disapproved personnel should be replaced. Because of the size, cost, complexity, and significance to the State of WaterFix, we expected DWR to require URS to provide an equally qualified replacement; alternatively, DWR could have used a competitive process to select a replacement program manager based on the criteria it had established in the original request for qualifications. Instead, in an August 2009 amendment to its contract with URS, DWR replaced the program manager by directing URS to engage Hallmark as a subcontractor to provide the program management services.

By directing URS to engage Hallmark as a subcontractor in this manner, DWR did not select a firm that met the requirements of the request for qualifications, DWR’s regulations, or state law. Our review of the Hallmark contract file found no indication of how DWR identified Hallmark as the replacement program manager nor any evidence that DWR evaluated Hallmark’s qualifications for this role. DWR asserted that Metropolitan recommended Hallmark based on Metropolitan’s previous experience working with the firm. However, the general manager of Metropolitan told us that although he did recommend Hallmark, Metropolitan had not previously worked with the firm. Furthermore, when we asked him why he recommended Hallmark, he indicated that he was given the name by a third party but could not recall who that third party was. He also said that Metropolitan and other water contractors interviewed other individuals but determined Hallmark was the firm it would recommend to DWR; however, he was unable to provide us with any documentation of those interviews or how the water contractors arrived at their conclusion to recommend Hallmark. We were also unable to ascertain why Metropolitan was interviewing candidates on behalf of DWR.

DWR officials stated that DWR made its own independent assessment of Hallmark’s qualifications, and it based its selection on Hallmark’s successful program management experience in other programs. We subsequently talked to the former director of DWR who was involved in the selection of Hallmark. He recalled that Hallmark’s efforts on the University of California, Merced campus project brought Hallmark to the attention of the water contractors because Hallmark was largely given credit for managing the engineering contractors on that project. He also indicated that he thought the initial recommendation for Hallmark came from the general managers of Metropolitan and Westlands Water District. He stated that the water contractors believed that Hallmark could provide additional cost controls over the project. Nonetheless, DWR was unable to provide us with documentation of any assessments or with any other records supporting the selection of Hallmark.

Therefore, we performed a high‑level comparison of the qualifications of Hallmark and URS and found that Hallmark does not appear to possess the technical credentials or experience on relevant projects that DWR required when it engaged URS. In the initial request for qualifications, DWR identified the following as necessary qualifications of the program manager:

• Relevant education.

• Possession of a valid professional engineering license.

• Experience in the planning, managing, and oversight of large water resources infrastructure.

• Experience in strategic program development.

• Experience in project management and environmental compliance.

• Experience in engineering and construction.

In selecting Hallmark, DWR disregarded many of the qualifications required for the original program manager. Table 1 shows that Hallmark lacked a licensed engineer required by law for construction project managers and had no demonstrable experience planning large water resources infrastructure projects. Further, DWR was unable to provide some of the information listed in Table 1 regarding Hallmark’s qualifications. Instead, we searched Hallmark’s website and other public sources to obtain more information about the firm’s qualifications.

DWR explained that after one year working with URS, it became clear that demonstrated program management skills were needed rather than a strict focus on engineering. Although DWR officials cited Hallmark’s successful program management experience in other programs as a reason for the selection, staff members in its A&E contracting unit (contracting unit) raised concerns over Hallmark’s apparent lack of qualifications.

Excerpts From Allegations Against DWR About Selection of Hallmark as Program Manager

“The first activity that I believe violates the code and one that we routinely allow is letting contract managers direct contractors to add a specific sub to an existing contract. Put simply, the contract manager wants a specific contractor not currently under contract to perform some type of work allowed under the existing contract. Direct the prime to add the firm you want and have them do the work. No pesky RFQ, no SOQ review, no silly determining if the new folks are actually the most qualified, no allowing other firms to apply for the work, no following the code. The practice has become so prevalent, we’re actually starting to address it in our additional payment provisions where we allow a higher markup on subs we direct the contractor to add. This looks surprisingly like a bribe to keep them quiet.”

“Possibly the most egregious example of this [letting contract managers direct contractors to add a specific sub to an existing contract] is when a former DOE Division Chief, directed the Washington Division of URS (‘URS‑WD’) to engage the president of Hallmark Group, Inc. (‘Hallmark’), to fill the position of Program Manager by subcontracting with Hallmark for this purpose” (46‑8104, Amendment 1). Subsequently the PM services were removed entirely from the 8104 scope of work (Amendment 6) and Hallmark Group was issued its own contract (46‑9986). No RFQ was issued; the new contract’s scope of work says simply that 8104 ‘was being administratively separated into two contracts.’ According to his LinkedIn profile, Hallmark Group, provides ‘[m]anagement of large capital programs on behalf of government and institutional entities.’ No architecture, no engineering, no environmental services. He has a degree in economics. The ‘E’ in A&E does not stand for economics. The new contract was later tripled in size.”

Source: DWR employee emails.

Additionally, an employee at DWR with knowledge of the A&E contracting process also raised concerns over Hallmark’s qualifications. The employee indicated that Hallmark’s president, who is the program manager, had no architecture, engineering, or environmental services experience—only a degree in economics—as the allegations in the text box indicates. DWR’s internal auditors conducted an investigation into these allegations and concluded that DWR entered into the contract with Hallmark without using a request for qualifications. However, the internal auditors also stated that determining whether DWR’s entering into that contract without such a request violated state contracting law was a legal question that the investigation could not answer. DWR’s legal counsel subsequently reviewed the issues and found that DWR’s approach was legal; however, DWR’s counsel based its opinion in part on an unsupported assertion that DWR had determined that Hallmark was qualified.

In directing URS to subcontract with Hallmark, DWR also failed to follow the selection process that state law and DWR’s own regulations require, potentially resulting in DWR not receiving the best value for the contracted services. Although DWR asserted that subcontracting the program management services was appropriate and legal, the relationship established between URS and Hallmark does not appear to be a contractor‑subcontractor arrangement. In a traditional contractor‑subcontractor relationship, we would expect to see several conditions, including the following: the contractor is responsible for the subcontractor’s work products, the contractor determines payment to the subcontractor, and the contractor is legally responsible for the work of the subcontractor. However, the provisions DWR added to the contract with URS in the amendment to bring Hallmark on as a subcontractor clearly demonstrate that URS was not overseeing Hallmark’s work products, it was not determining payment to Hallmark, and it was not legally responsible for Hallmark’s work. Specifically, the language in the contract amendment that added Hallmark stated the following:

In summary, the process DWR used to award the “subcontract” without demonstrating that Hallmark had the required qualifications and professional license is contrary to the letter and spirit of the law, which is intended to create competition to ensure that the State obtains a competent and qualified contractor at a fair and reasonable price.

The ultimate result of this subcontract is that DWR later awarded Hallmark its own contract, also without a competitive process. Specifically, in 2013 DWR removed the program management services component from the URS contract and entered into a new direct contract with Hallmark through what DWR termed an administrative separation, known also as an assignment.4 The contract documentation justified DWR’s choice not to use a competitive process by referencing the fact that URS had been selected through a request for qualifications. However, this justification is inapplicable given that Hallmark was never identified nor included in URS’s response to the request for qualifications. DWR officials told us that Hallmark had been functioning as program manager for three years and thus had demonstrated its qualifications. Nevertheless, as shown in Table 1, Hallmark did not have the necessary qualifications to fill the program manager role in the first place based on DWR’s original request for qualifications.

We question DWR’s rationale for assigning the contract to Hallmark. When we asked DWR about the administrative separation and assignment of the program management services to Hallmark, DWR officials stated that it did so to increase workflow efficiencies. They also stated that its staff had experienced frustration going through URS to work with Hallmark, because of the additional layer of administrative processes. They did not believe paying URS the 5 percent subcontractor markup for work Hallmark performed was cost‑effective. According to DWR officials, the assignment provided its staff with direct access to the program manager while simultaneously saving the program significant costs. However, we question that reasoning because DWR created the difficulties in the first place by not awarding competitively a new contract for program management services, which would have provided its staff direct access to the selected program manager, following its notice of disapproval of URS’s program manager in July 2009. In addition, we are not convinced that DWR is saving money through the assignment because Hallmark has had to subcontract many of the program management functions, and DWR is generally paying a markup of 5 percent for invoices to Hallmark for overseeing those subcontractors.

DWR Did Not Accurately Value Its Initial Contract With Hallmark or Ensure That It Received Fair and Reasonable Pricing for one of Hallmark’s Subcontractors

DWR did not establish accurately the cost of the Hallmark contract before awarding it, resulting in an increase in the expense of the original contract award. When it awarded the contract to Hallmark, DWR did not ensure that the funding would cover adequately the services required for the duration of the contract; instead it simply transferred $4.1 million from the original URS budget to the new Hallmark contract. Although DWR awarded the contract for $4.1 million, it did not base this amount on accurate historical monthly costs or the correct term of the contract. Instead, DWR incorrectly used a contract term of 12 months to calculate the contract amount even though the contract itself was drafted for a term of 37 months. DWR also did not take into account the additional services that Hallmark’s subcontractors were performing under the contract.

Consequently, just seven months after awarding the contract, DWR amended it, increasing the budget by $7.3 million to cover the contract’s full term. DWR amended the contract three additional times to extend the term through December 2017 and to increase the total cost by $2.4 million. As of July 2017, the amount of the Hallmark contract had increased to a total of $13.8 million.

In addition, DWR paid for an important work product without ensuring that the price was fair and reasonable or that the work product was finalized. Specifically, in October 2012 DWR issued a deliverables paid task order to engage McKinsey & Company (McKinsey), a subcontractor to Hallmark, for $2.69 million, to develop the governance structure for the design and construction phase of the project, but DWR did not justify adequately the cost or ensure that it received a final work product.5 DWR regulations require it to estimate the value of services to be provided based on fees paid for similar services or based on a market survey. However, DWR staff in the contracting unit raised concerns about whether the cost of this task order was fair and reasonable because Hallmark did not present price comparisons or market rates for similar work. Although the task order stated that the price negotiated for McKinsey was fair and reasonable, it provided no analysis or support for the price, and we do not believe it complied with DWR’s regulations that require a fair and reasonable price be provided based on fees paid for similar services or on a market survey.

DWR’s contracting unit staff stated that they did not feel an email from Hallmark was sufficient justification for a fair and reasonable price because Hallmark did not provide either comparable prices or a market survey. The DWR contracting staff also were concerned that Hallmark’s email did not specify how Hallmark determined whether the price was reasonable because the email simply stated that the dollar amount “is worth it because McKinsey has such a great track record”, without specifying the dollar amount. However, DWR could not provide any documentation showing that the contracting unit staff’s concerns were ever addressed. Consequently, we don’t believe that DWR had adequate assurance that Hallmark’s price for this $2.69 million deliverable was “fair and reasonable.” Additionally, despite paying $2.69 million for this task order, DWR never made sure the consultant finalized the governance structure documents. DWR stated within the task order that these documents were due in January 2013, and according to DWR officials, DWR received draft documents but did not receive final governance structure documents. We discuss the status of the governance structure in more detail later in the next section.


To fully comply with state contracting law, DWR should ensure that it competitively selects architectural and engineering consultants based on demonstrated competence and professional qualifications. In addition, DWR should document in the contract file its evaluation of the competence and professional qualifications of all contractors and any subcontractors that are added to the contract subsequent to the competitive selection process.

To ensure that only qualified subcontractors are added to contracts after the initial award is made, DWR should make sure that contractors select their own subcontractors and that DWR subsequently approves the selection after it verifies their qualifications.

DWR should ensure that it retains adequate documentation in its contract files to support that contract prices are fair and reasonable and all deliverables are received.

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DWR Needs to Take Certain Steps to Better Prepare for the Transition of WaterFix to the Design and Construction Phase

Key Points:

DWR Has Not Completed Needed Analyses That Would Demonstrate the Financial Viability of WaterFix

Questions That Economic and
Financial Analyses Answer

Economic Analysis   Financial Analysis
Answers the questions:   Answers the questions:
Should the project be built at all?   Who benefits from the project?
Should it be built now?   Who will repay the costs?
Should it be built to a different configuration or size?   Can the beneficiaries meet repayment obligations?
Will it have a net positive social value for Californians regardless of who receives the benefits and who pays the costs?   Will the beneficiaries be better off financially after they meet repayment obligations?

Source: DWR’s Economic Analysis Guidebook.

Despite DWR’s own policy stating that an economic analysis is a critical element of the planning process, DWR has not yet finalized one for WaterFix, although it released an incomplete draft economic analysis in 2016. The text box defines the critical questions about the project that this analysis and a financial analysis are intended to answer. In October 2012, DWR issued a task order for a subcontractor, the Brattle Group, to perform an economic analysis that would measure the benefits and costs of the BDCP from a statewide perspective. Over the next 31 months, DWR budgeted $434,000 for the economic analysis. According to the various task order amendments, development of this analysis was a lengthy process that included various scope changes and input from a variety of stakeholders including Reclamation, the fishery agencies, public water agencies, and Delta agricultural interests. In addition, the economic analysis was revised several times to address feedback from stakeholders, changes in the project’s costs and footprint, and revisions to the draft BDCP. Then in May 2015, DWR canceled the remaining work on the BDCP economic analysis because the project transitioned from the BDCP to WaterFix, as described in the Introduction.

In June 2015, DWR directed the Brottle Group to instead develop an economic analysis for WaterFix, for which it had allocated an additional $356,000. DWR made public a November 2015 incomplete draft of the WaterFix economic analysis in response to a Public Records Act request in September 2016. However, DWR has not finalized the economic analysis report. According to DWR officials, the economic analysis could not be finalized because DWR determined it was not possible to complete an accurate cost‑benefit analysis until understanding which agencies will be participating in and funding the project and at what level. DWR officials further stated that the project will have varying economic benefits for each of the funding agencies, based on their unique situation including access to alternative water supplies and type of water users. DWR officials stated that once individual water agencies define their level of participation through their various public board processes, DWR will incorporate that information into a final cost‑benefit analysis.

We believe that it is essential for DWR to complete the economic analysis report as soon as it determines the extent to which individual water agencies will participate in funding the design and construction of WaterFix.

DWR also has not completed a financial analysis for WaterFix. The financial analysis answers critical questions about the project, which the previous text box lists. In 2012 DWR contracted with the consulting firm Public Finance Management through Hallmark, and in 2013 DWR initiated a task order for Public Finance Management to support the completion of a financial analysis for the project. The scope of work in the task order was organized to generate key deliverables, with the general objectives of reaching agreement on fair and affordable cost allocations and establishing reliable financing for implementation of the project. The task order acknowledged that these deliverables would require the collective effort of DWR, Reclamation, and state and federal water contractors, with the consultant providing support. As of July 2017, DWR data show that it has paid Public Finance Management $276,000 for its efforts.

However, according to DWR officials, no final decisions on cost allocations or interim financing have been made because discussions with state and federal water contractors are still ongoing. DWR officials further explained that the final financial analysis report cannot be prepared until the contractors desiring to participate in WaterFix are identified. They also stated that DWR’s contractor—Public Finance Management—modeled a wide range of financing options for WaterFix that were shared with water contractor boards. According to DWR officials, once individual agencies decide to participate, the financing will be tailored to meet each agency’s needs.

The financial analysis is critical in determining whether water contractors are willing and able to pay for the construction of WaterFix. The Delta Reform Act of 2009 states that construction of a new Delta conveyance facility (such as WaterFix) shall not be initiated until the water contractors that contract to receive water from the State Water Project and Central Valley Project have made arrangements or entered into contracts to pay for two things: (1) the costs of the environmental review, planning, design, construction, and mitigation required for the construction, operation, and maintenance of any new Delta water conveyance facility and (2) the full mitigation of property tax or assessments levied for land used in the construction, location, mitigation, or operation of new Delta conveyance facilities. The financial analysis is intended to provide a business case that the project is beneficial, financial modeling to analyze the cost of the project and the debt service associated with financing the project, and an acceptable cost‑allocation methodology.

DWR Has Not Fully Implemented a Governance Structure for Managing the Design and Construction Phase of WaterFix

Although DWR contracted with a consultant to develop a governance structure for the design and construction phase of the project, it has not fully implemented such a structure. Originally, in 2008, DWR intended the role of the program manager to include overseeing the entire project, from planning through construction. However, in the first nine months of 2012, DWR management, Hallmark, and the State Water Project water contractors attempted with limited success to create a new governance structure that would address issues of organizational design and governance, the roles and responsibilities of the stakeholders in the decision‑making process, and guidance on project implementation. In an October 2012 task order, DWR stated that such a governance structure would be unique and immensely important. At the same time, DWR contracted with McKinsey to develop a governance structure that would create a new way for DWR to work with the public water agencies. DWR used McKinsey’s draft work product as input for the development of the Design and Construction Enterprise Unit (Enterprise Unit), which DWR publicly announced as the governance structure for the project in 2014.

In September 2015, DWR developed a draft agreement that would formally implement the Enterprise Unit as the governance structure for the design, construction, and implementation phase of WaterFix. The draft agreement envisioned that the water contractors would create a joint‑powers authority—the Conveyance Project Coordination Agency (coordination agency)—to be a party to the agreement along with DWR. The contractors would organize the coordination agency to assist DWR in the design, construction, and implementation of WaterFix. The draft also envisioned that DWR and the coordination agency would enter into a contract with a “world‑class project manager”—designated the program director—to head the Enterprise Unit.

However, according to DWR officials, it is currently in discussion with the public water agencies to create a governance structure, but whether it will be the same or similar to the Enterprise Unit is unclear. According to DWR officials, because WaterFix has not yet been approved and because the public water agencies have yet to form the coordination agency, the Enterprise Unit has yet to be officially implemented. DWR officials stated that it is currently in discussion with the public water agencies to determine, under current conditions, what the most effective governance structure will be for the design and construction phase. Further, these officials told us that the governance structure will very likely follow some of the recommendations from the McKinsey effort. It is essential that DWR develop an appropriate governance structure so that it is prepared to oversee the design and construction of WaterFix in the event that the project is ultimately approved.

Program Management Documents

Program Management Plan
A dynamic document maintained by the program manager throughout the life of the program providing a scope of work, schedule, and cost estimates. It also includes the following:

Funding Statement
Also called the program component statement, this is the authorizing document for funding a program and is the key monitoring and control document. It is a dynamic document maintained by the program manager throughout the life of the program.
It includes the following:

Describes a proposed activity at a high level. It is the responsibility of the program manager to ensure that the charter is kept up to date during the life of the program.
The Charter includes the following:

Source: DWR’s Water Resources Engineering Memorandum 65a.

DWR Did Not Properly Maintain Important Program Management Documentation

Although WaterFix has evolved since it began as the BDCP, DWR has not maintained required program management documents for the planning phase. DWR policy requires certain documentation to initiate and authorize a State Water Project‑funded program—such as the DWR program that supports WaterFix—including a management plan, funding statement, and charter. The text box describes each of these documents. That policy also states that the program manager should maintain this documentation throughout the life of the program, and DWR included that same requirement in its contracts with URS and Hallmark.

Initially, when DWR established the conservation and conveyance program, it followed its policy by creating the required management documents. Specifically, in 2008, DWR’s division of engineering prepared a Charter and Management Plan (management plan) for the program, which contained all of the necessary management documents. Within the management plan, DWR identified and listed URS’s program manager’s responsibilities, including requesting program changes, reporting the status of business activities to DWR’s executive manager and deputy directors, and updating the management plan as required.

The contract with the program manager also specified that the program manager was to develop and maintain the program management plan and further enumerated the following responsibilities: reporting on cost, schedule, significant milestones, and resources compared to established baselines as well as providing oversight, analysis, and quality control of other contractors. The management plan identified the chief of DWR’s division of engineering as the executive manager of the conservation and conveyance program and the individual responsible for overseeing the program manager. The executive manager was also to oversee the program budget, schedule, engineering, and real estate activities and report to DWR’s executive management with periodic updates.

However, roughly one year after DWR established the conservation and conveyance program, it began to experience significant personnel changes but did not ensure that the management plan was properly updated to reflect these changes. For example, as this report describes earlier, DWR replaced URS as the program manager with Hallmark in August 2009. Four years later in 2013, DWR’s executive manager of the conservation and conveyance program retired. According to a former chief deputy director, DWR subsequently moved the responsibility for overseeing the program manager to DWR’s executive management, although the management plan was never updated to reflect this change.

Furthermore, DWR’s executive management also experienced significant turnover. For example, since DWR established the conservation and conveyance program in 2008, it has had three different directors and five different chief deputy directors. However, DWR did not update the management plan to document these changes or to describe how DWR handled them.

We reviewed the contents of the electronic document management system that DWR uses to store project management documents. The system is an electronic repository that contains numerous documents, including monthly progress reports that provide updates on the project’s milestones and accomplishments, various meeting agendas and minutes, and monthly budget reports. However, through our review of the documents in this system we were only able to locate one update to the management plan that covers the planning phase. The updated program management plan was completed in November 2009, but it did not properly address the significant personnel changes or the shift in the project from the BDCP to WaterFix. If WaterFix is ultimately approved, it will be important for DWR to develop, and update when necessary, a management plan for the design and construction phase of the project.


To ensure that DWR manages WaterFix in an effective manner, DWR should complete both the economic analysis and financial analysis for WaterFix and make the analyses publicly available as soon as possible.

In order to prepare for the potential approval of WaterFix and to ensure that the project is managed properly during the design and construction phase, DWR should do the following:


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Scope and Methodology

The Joint Legislative Audit Committee (Audit Committee) requested the California State Auditor to examine the funds spent on planning and design of WaterFix by DWR. Table 2 lists this audit’s approved objectives and the methods we used to address them.

Table 2
Audit Objectives and the Methods Used to Address Them
Audit Objective Method
1 Review and evaluate the laws, rules, and regulations significant to the audit objectives. Reviewed relevant laws, regulations, and other background materials related to the WaterFix project.
2 Determine how DWR collaborated to organize and fund the planning and design of the BDCP and subsequently WaterFix. Specifically, Identify the following:  
a. DWR’s role in organizing and financing the planning and design.
  • Interviewed relevant individuals and reviewed planning documents, including various planning agreements among participants and DWR’s funding agreements with the State Water Project water contractors, the Authority, and Reclamation.

  • Reviewed the BDCP and various drafts of the environmental impact report.

  • Reviewed a May 2008 Legislative Counsel opinion regarding DWR’s authority to construct a water conveyance facility.
b. The extent to which DWR engaged local agencies required to contribute towards WaterFix costs in developing the funding structure for planning and design.
  • Interviewed relevant individuals at DWR, Metropolitan, Kern, and the Authority.

  • Reviewed relevant documents, including BDCP steering committee minutes from 2006 through 2010, BDCP management committee documents, WaterFix business committee documents, and conservation and conveyance program financial meeting agendas.
c. The amounts and proportional share of contributions each local agency and any other entity that provided funds for planning and design made from 2006 to present.
  • Reviewed funding agreements to determine the funding obligations of entities participating in the planning phase.

  • Reviewed budgets and contracts DWR developed for the preparation of the BDCP beginning in 2006 to determine estimated costs because DWR did not track adequately BDCP contributions or spending.

  • Obtained data from DWR’s accounting system identifying participating state and federal entities and their proportionate contributions to the conservation and conveyance program’s planning costs from January 2008 through June 2017.

  • Traced the amounts from DWR’s data to supporting documentation from the two largest State Water Project water contractors (Metropolitan and Kern), the Authority, and Reclamation.
d. Whether the State allocated any General Fund money for planning and design.
  • Reviewed state budget acts for fiscal years 2006–07 through 2016–17 to determine whether the State allocated any General Fund money for the planning of the BDCP and WaterFix.

  • Interviewed DWR staff to determine if DWR used General Fund money to fund the planning and design.

  • Analyzed the expenses from the fund that DWR set up for the conservation and conveyance program expenses to determine whether DWR used any General Fund money to fund the planning and design.
3 Identify, by source, the amounts of funding DWR, each local agency, and any related joint powers authority raised and used to finance the BDCP and subsequently WaterFix. In the case of debt financing, identify the entities that issued debt and their relationships to the water contractor and determine when and how they secured each debt issuance.
  • Reviewed documents and data, as further described in Objective 2c.

  • Interviewed individuals at Metropolitan and Kern and traced their contribution amounts reported in DWR’s data to the entities’ audited financial statements to confirm the amounts and identify the sources of the funds.

  • Interviewed individuals at the Authority and obtained documentation of the Authority’s 2009 revenue note issuance, repayment, and cost‑sharing structure among its participating member agencies to determine the source of the funds.

  • Reviewed federal assistance agreements and interviewed individuals at Reclamation to determine the sources of its contributed funds.

  • Interviewed individuals at DWR to determine the need for any additional funding to carry out the remainder of the planning phase.
4 Determine how ICOE and/or Education monitor CENIC’s performance and whether these entities are providing all necessary oversight.
  • Interviewed individuals at DWR and reviewed relevant documentation. We determined that the water contractors have not created the coordinating agency; thus, it has no activities, no charter, and has not received any funding. DWR mentioned the coordinating agency in a draft agreement that DWR prepared to establish how DWR intended to manage the design and construction phase. DWR has not executed the draft.

  • We discuss the coordinating agency beginning on page 35 of the report.
5 Evaluate the process DWR used to select the contractor to manage design and engineering for the Design and Construction Enterprise Unit.
  • Reviewed relevant contracts, contract amendments, emails, and other documentation regarding DWR’s selection of the contractor to provide program management services for the conservation and conveyance program, and DWR’s efforts to replace that contractor with Hallmark.

  • Interviewed individuals at DWR regarding the selection of the program manager for the conservation and conveyance program and regarding the subsequent replacement of that program manager with Hallmark.

  • Reviewed Statements of Economic Interests (Form 700s) for relevant DWR employees and contractors. We did not identify any apparent conflicts.

  • As we describe on page 36, the Enterprise Unit was never officially established, nor was a contractor selected to manage it.
6 Review and assess any other issues that are significant to the audit.
  • Interviewed responsible individuals at DWR and reviewed management practices and policies, analyses, and agreements related to moving forward with the construction of WaterFix.

  • Reviewed and analyzed task orders and deliverables related to the contract for program management of the conservation and conveyance program and WaterFix.

Sources: California State Auditor's analysis of the Audit Committee's audit request number 2016‑129 and analysis of information and documentation identified in the table column titled Method.

Assessment of Data Reliability

In performing this audit, we obtained electronic files of conservation and conveyance program revenues and expenses from DWR’s accounting system for January 1, 2008, through June 30, 2017. The U.S. Government Accountability Office, whose standards we are statutorily required to follow, requires us to assess the sufficiency and appropriateness of computer‑processed information that we use to support our findings, conclusions, or recommendations. To gain assurance of the accuracy of these data, we traced the program revenues from the two largest state water contractors and all federal sources, which constitute 82 percent of the revenues, to supporting documentation from the responsible entities and found that the dollar amounts materially matched. We performed completeness testing of these data by comparing the total program revenues from DWR’s data to the budgeted amounts in planning documents and by ensuring that the data provided were not comingled with other data. We found the data to be complete. Consequently, we found DWR’s data to be of sufficient reliability for the purposes of determining the amounts that the various state and federal contractors contributed.

We conducted this audit under the authority vested in the California State Auditor by Section 8543 et seq. of the California Government Code and according to generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives specified in the Scope and Methodology section of the report. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives.

Respectfully submitted,

State Auditor

October 5, 2017

Mike Tilden, CPA, Audit Principal
Jordan Wright, CFE
Mariyam Ali Azam
Mary Anderson
Logan J. Blower

Legal Counsel:
Mary K. Lundeen, Sr. Staff Counsel

For questions regarding the contents of this report, please contact
Margarita Fernández, Chief of Public Affairs, at 916.445.0255.


4 Assignment is the legal term for transferring the rights and obligations of a contract from one entity to another. Go back to text

5 Deliverables paid task orders are task orders for which the contractor receives payment based on completion of the deliverable or work product. This differs from regular task orders for which the contractor is paid a specified rate for time spent on the task. Go back to text

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