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California High‑Speed Rail Authority
Its Flawed Decision Making and Poor Contract Management Have Contributed to Billions in Cost Overruns and Delays in the System's Construction

Report Number: 2018-108


Audit Highlights . . .

Our audit of the California High‑Speed Rail Authority and its contracting and cost control practices highlighted the following:

Results in Brief

Conceived as the nation's first bullet train, the California high‑speed rail system promises to transform how Californians travel across the State. However, the California High‑Speed Rail Authority (Authority)—the state agency responsible for planning, building, and operating the system—faces serious challenges. Although the Legislature created the Authority in 1996, voters did not approve major funding until 2008, when they authorized $9.95 billion in general obligation bonds, $7.5 billion of which is for the system's planning and construction. Two years later, the Authority received $2.6 billion in funding through the American Recovery and Reinvestment Act (Recovery Act) to begin planning and construction. In 2011 it received an additional $929 million in federal grant funding, bringing total federal support to $3.5 billion. The Authority receives 25 percent of the revenues from the State's cap‑and‑trade program, resulting in $1.7 billion as of December 2017. In total, the Authority has secured $12.7 billion in funding and identified up to $15.6 billion in possible future funding. The Authority expects this funding will be sufficient to complete initial segments of the system between Madera and north of Bakersfield and between San Francisco and Gilroy, but not to connect those segments or finish the rest of the system between San Francisco and Los Angeles. Its most recent cost estimate for the larger system, which it presented in its 2018 business plan, is $77.3 billion.

Since 2012 the Authority has incrementally modified its plans for a fully dedicated high‑speed rail system. Instead, it now intends to share existing transit infrastructure wherever feasible, an approach known as blending that has helped to offset rising costs in the system. It currently plans to blend with local rail service on the San Francisco Peninsula and in Los Angeles, as well as to share a freight corridor between San Jose and Gilroy. Although less costly than the dedicated approach, blending also subjects high‑speed trains to lower speed limits and sometimes requires sharing time on the tracks with other rail operators. The extent to which blending will negatively affect rail service will not be known until a private sector operator, which will ultimately run the system for the Authority, makes service decisions, such as how fast and frequently to operate the trains. The fact that the Authority has now exhausted all feasible options to use existing infrastructure raises concerns about its ability to mitigate future cost increases.

The Authority's spending to date and future projections suggest that the risk of such additional cost increases is high. Costs for the three current construction projects in the Central Valley have been significantly greater than the Authority originally projected, in large part because the Authority did not complete many critical planning tasks before moving forward with construction. Although the Authority has asserted that the early start was necessary to comply with the requirements for the system's federal grant funding, it was aware that beginning construction without completing sufficient planning would expose the construction projects to a number of risks it had not addressed. The risks associated with beginning construction early—the fact that the Authority had not acquired sufficient land for building, had not determined how it would relocate utility systems, and had not obtained agreements with external stakeholders, including impacted local governments and other railroad operators—developed into costly problems. These risks have contributed to more than $600 million in changes to construction contracts to pay for work for which the Authority had not sufficiently planned or budgeted.

Despite being aware of these risks, the Authority did not account for them in its project cost estimates until this year. It now forecasts that finishing the construction that is currently underway will require still another $1.6 billion in contract changes. In addition, it estimates that it will need to push completion dates back as far as March 2022—close to the federal government's December 2022 grant deadline. If the Authority does not complete the construction by this deadline, it may need to repay $3.5 billion in federal funding, $2.6 billion of which it reports it has already spent. To meet the current schedule, the Authority will need to ensure that construction proceeds twice as fast as it has thus far. Meeting this schedule, which the Authority acknowledges is aggressive, will be possible only if it effectively monitors and mitigates risks—tasks it has performed inconsistently to date. Moreover, looking beyond the Central Valley, the Authority's precarious funding situation means it cannot repeat past mistakes.

In addition, the Authority will need to do more to control the soaring costs of its contracts by improving its contract management. After the Authority conducted two internal audits in 2015 and 2016 that identified significant deficiencies with its contract management practices, it established a contract administration organization in 2016, which included the Contract Management Support Unit (CMSU). This unit then oversaw the development of revised policies and procedures that emphasize the specific processes contract managers must perform and document. The Authority also tasked CMSU to monitor compliance with the policies. However, the potential effectiveness of the policies has been limited by the Authority's contract management structure. The Authority has 56 contract managers throughout its organization, but these individuals generally do not serve in contract management roles full‑time. Moreover, the Authority has in essence placed portions of its oversight of large contracts into the hands of outside consultants, for whom the State's best interests may not be the highest priority. In addition, CMSU—which is staffed by consultants rather than Authority employees—has performed only weak and inconsistent oversight.

Likely as a consequence of these organizational weaknesses, when we reviewed nine planning, engineering, and consulting contracts, with a combined value of $1.3 billion, we noted significant problems with the Authority's adherence to its requirements related to invoice review, deliverables monitoring, and change management. For example, Authority procedures require a systematic approach to ensure that contractors bill only appropriate and allowable costs. Although Authority contract managers asserted through standardized checklists that they had complied with those procedures by reviewing each monthly invoice for accuracy, few could provide evidence of those reviews.

We found similar problems when we reviewed the Authority's monitoring of deliverables—the services or work products for which it contracted. To document the timeliness and quality of a contract's deliverables, the Authority requires each contract manager to maintain a tracking log of those deliverables and to provide the contractor with written notices of acceptance. Nonetheless, none of the contract managers for the nine contracts we reviewed maintained tracking logs. Further, only two contract managers could demonstrate any formal documentation for the acceptance of deliverables, and we have concerns regarding the timeliness with which these two contract managers evaluated and accepted deliverables. Moreover, for nearly all the contracts we reviewed, the only documented information about the timeliness and status of deliverables came from the contractors themselves, leaving us unable to determine how the Authority ensured it received the quantity and quality of work for which it paid. Because of the lack of documentation, we were also generally unable to determine how the Authority identified and resolved problems with deliverables. Without the contract management documentation its policies require, the Authority cannot demonstrate that the hundreds of millions of dollars it has spent to date on the contracts we reviewed has been necessary or appropriate.

We also found that the Authority often amended its contracts to add time or additional funds and that when doing so, it relied on the contractors' own estimates and projections of the associated costs and delays. The Authority designed its contract management procedures, as well as the related tracking requirements, to ensure that it identifies the need for contract changes in a timely manner and that it appropriately ensures the justification of those changes before adopting them as amendments. However, we found little documentation demonstrating whether or how the Authority independently evaluated the validity and size of the amendments to contracts we reviewed. In some instances, we noted that the Authority approved the amendments based wholly on the information the contractors reported to it.

Construction of the high‑speed rail system is not only a major undertaking in terms of its costs, but it also affects the State's environment. Although the Authority is aware that it needs to manage the environmental effects of construction, we identified ways it could improve its monitoring and measurement of these impacts. For example, the Authority intends for the system to be a model for future rail infrastructure, but it has not sufficiently identified key objectives in its sustainability policy to ensure that its active construction projects follow sustainable practices. Further, an expert we retained determined that although the Authority appropriately estimated the environmental impacts of its current construction before beginning work, it has not comprehensively evaluated its performance against those estimates.

Summary of Key Recommendations

Before executing its next construction contract, the Authority should establish formal prerequisites for beginning construction to prevent avoidable cost overruns and project delays. At a minimum, these prerequisites should identify specific benchmarks related to property acquisition, utility agreements and relocations, and agreements with external stakeholders, including impacted local governments and other railroad operators.

To enable policymakers and the public to track the Authority's progress toward meeting the Recovery Act deadline in 2022, the Authority should begin providing quarterly updates to the Legislature detailing the progress of Central Valley construction by January 2019.

To improve its contract management, increase accountability, and demonstrate that the significant amounts it pays for contracted services are justified, the Authority should take the following steps by May 2019:

To help ensure that it meets its sustainability goals, the Authority should comprehensively compare the environmental impact of its construction to its baseline estimates on a quarterly basis by May 2019.

Agency Comments

The Authority agreed with our recommendations and identified actions it is taking or planning to take to implement them.

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