Report 2015-117 Recommendation 8 Responses

Report 2015-117: California Department of General Services' Real Estate Services Division: To Better Serve Its Client Agencies, It Needs to Track and Analyze Project Data and Improve Its Management Practices (Release Date: March 2016)

Recommendation #8 To: General Services, Department of

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 the 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.

Annual Follow-Up Agency Response From October 2020

While PMDB is unable to control the most significant portion of its costs (staff salary rates), PMDB has nonetheless periodically compared its rates to recently contracted rates for similar services (project management and design). In each review, PMDB's rates were in keeping with the industry.

As part of its commitment to ensure that DGS' project management branch charges its client agencies a competitive hourly rate, DGS will continue to periodically evaluate and compare its rates with those of appropriate private firms. From DGS' perspective, it has materially implemented this recommendation.

California State Auditor's Assessment of Annual Follow-Up Status: Will Not Implement

Annual Follow-Up Agency Response From October 2019

While PMDB is unable to control the most significant portion of its costs (staff salary rates), PMDB has nonetheless periodically compared its rates to recently contracted rates for similar services (project management and design). In each review, PMDB's rates were in keeping with the industry.

As part of its commitment to ensure that DGS' project management branch charges its client agencies a competitive hourly rate, DGS will continue to periodically evaluate and compare its rates with those of appropriate private firms.

From DGS' perspective, it has materially implemented this recommendation.

California State Auditor's Assessment of Annual Follow-Up Status: Partially Implemented

We disagree with the division's assessment that it has fully implemented this recommendation. Specifically, our recommendation is that the division conduct a rate analysis that fully accounts for differences between the project management branch's hourly rate and private firms' rates. The division did not provide evidence demonstrating that it has identified and implemented any strategies to ensure that the project management branch's rates are as competitive as they can be, nor how adjusting staffing ratios will reduce its rates in the future. Until the division addresses these shortcomings, we will continue to report this recommendation as partially implemented.

Annual Follow-Up Agency Response From October 2018

In 2017, the Project Management and Development Branch (PMDB) reviewed the then-recently contracted rates for both Architectural and Engineering (A&E) and Project Management (PM) firms for two new Sacramento office buildings. For PM, DGS' rate was 1.1% higher than the Contract Management (CM) firm and 9.5% lower for A&E. In 2018, using the architectural retainer contract with HGA Architects as a reference point, PMDB architectural fees were 1.3% higher, engineering fees were 3.71% higher, and PM fees were 2.2% higher. As PMDB did not materially raise rates from 2017 to 2018, these percentage differences for A&E showcase the volatility of industry rates.

Utilizing its 2016/17 Budget as a baseline, PMDB determined that its own overhead (including administrative support) and that of RESD (division) represents approximately 8.8% of its total budget. Further, PMDB pays for approximately 14.4% of DGS' total distributed overhead costs (non-billable functions within DGS, such as costs associated with Legislative Affairs, Communications, IT, DGS Executive Office, etc.). The department believes that these percentages are reasonable.

Given these factors, PMDB believes that it has materially implemented the recommendation.

California State Auditor's Assessment of Annual Follow-Up Status: Partially Implemented

Since its one-year response, DGS has only provided us with additional explanation as to why it believes it is restricted in the actions it can take to adjust its rates based on a comparison with private firms' rates. This additional explanation does not address our recommendation that the division conduct a rate analysis that fully accounts for differences between the project management branch's hourly rate and private firms' rates. Further, the division did not provide evidence demonstrating that it has identified and implemented any strategies to ensure that the project management branch's rates are as competitive as they can be. Until the division addresses these shortcomings, we will continue to report this recommendation as partially implemented.

Annual Follow-Up Agency Response From November 2017

For its one-year response, the Project Management and Development Branch (PMDB) conducted a follow-up analysis of its hourly rates by reviewing the recently contracted rates for both A&E and PM firms for two new Sacramento office buildings, using the same methodology. For PM, DGS' rate was 1.1% higher than the CM firm and 9.5% lower for A&E.

As recommended by the California State Auditor, PMDB further reviewed its administrative and overhead costs compared to a sampling of private sector firms that the branch does business with. However, this proved to only have minimal utility as the basis for costs (percentages of fees for profit, overhead, contingency, etc.) are not published by these firms. In terms of rates structure, PMDB generally follows the model of private sector firms except that most firms have a far more delineated number of positions and use a tiered rate structure. Mimicking this structure in PMDB would require the establishment of additional civil service classifications, which is impractical. PMDB is in the process of reviewing whether a tiered rate structure is possible, but preliminary analysis indicates that it would be impractical due to civil service hiring and termination restrictions (impacts to costs on a per project basis are also proving very difficult to predict). A key difference between PMDB and private sector firms is the ability of the latter to right-size the workforce based upon market conditions.

Based upon its 2016/17 Budget, PMDB determined that its own overhead (including administrative support) and that of RESD (division) represents approximately 8.8% of its total budget. Further PMDB pays for approximately 14.4% of DGS' total distributed overhead costs (non-billable functions within DGS, such as costs associated with Legislative Affairs, Communications, IT, DGS Executive Office, etc.). The department believes that these percentages are reasonable.

California State Auditor's Assessment of Annual Follow-Up Status: Partially Implemented

Since its one-year response, DGS has only provided us with additional explanation as to why it believes it is restricted in the actions it can take to adjust its rates based on a comparison with private firms' rates. This additional explanation does not address our recommendation that the division conduct a rate analysis that fully accounts for differences between the project management branch's hourly rate and private firms' rates. Further, the division did not provide evidence demonstrating that it has identified and implemented any strategies to ensure that the project management branch's rates are as competitive as they can be. Until the division addresses these shortcomings, we will continue to report this recommendation as partially implemented.

1-Year Agency Response

For its one-year response, PMDB conducted a follow-up analysis of its hourly rates by reviewing the recently contracted rates for both A&E and PM firms for two new Sacramento office buildings, using the same methodology. For PM, DGS' rate was 1.1% higher than the PM firm and 9.5% lower for A&E.

PMDB reviewed its admin/overhead costs. Management within PMDB are almost all partially billable, which follows the model of private sector firms and reduces their overhead impact. PMDB runs a small internal admin unit (PMDB's current budget share of divisional and its own overhead is approximately 8.8% of its total budget), comprised of direct purchasing/contracting, invoicing, and budgetary support. The department's overall distributed admin costs (i.e. Admin Division, Executive Office, etc.) is outside control of RESD, though DGS' position is that these costs are reasonable and reasonably distributed amongst revenue generating programs (PMDB pays for approximately 14.4% of DGS' total distributed admin costs).

DGS operates on a fee for service/cost recovery model, having almost no discretion in setting rates. The amount to recover is divided by the total number of billable hours to get the necessary rate. Decreasing the rate would require: (1) reducing overhead costs, the majority of which are outside of PMDB's control; (2) add billable staff, which is only possible when there are a sufficient number of projects to sustain the larger workforce; or, (3) make traditionally non-billable staff bill their time to projects they are indirectly supporting, which would result in lower rates, but higher overall project costs, especially for smaller dollar figure projects. The department is restricted in the actions it can take to adjust its rates based on a comparison with private firms' rates. That said, PMDB is actively reviewing its staffing ratio to projects and will be hiring additional billable staff which will reduce its rates in the future.

California State Auditor's Assessment of 1-Year Status: Partially Implemented

We disagree with the division's assessment that it has fully implemented this recommendation. Specifically, our recommendation is that the division conduct a rate analysis that fully accounts for differences between the project management branch's hourly rate and private firms' rates. The division did not provide evidence demonstrating that it has identified and implemented any strategies to ensure that the project management branch's rates are as competitive as they can be, nor how adjusting staffing ratios will reduce its rates in the future. Until the division addresses these shortcomings, we will continue to report this recommendation as partially implemented.

6-Month Agency Response

Recently, RESD's Project Management and Development Branch (PMDB) conducted an analysis of its hourly rate compared to rates charged by private Architectural and Engineering (A&E) firms that DGS has on retainer contracts. For the analysis, PMDB identified the roles in those contracts that were comparable to its A&E staff and those that were comparable to its project management staff. The comparable positions' rates were then averaged and compared to PMDB's hourly rate ($178 for FY 2016-17).

PMDB's analysis showed that its rate is competitive with project management rates, i.e., PMDB's rate was only 4.6% higher than the private firms' average hourly rate. For A&E services, PMDB estimates that its rate is 14.7% higher than the private firms' average hourly rate, which is not unexpected or unreasonable considering the state's cost recovery model discussed below.

As recommended by the state auditor, PMDB will continue to periodically (at least every two years) evaluate and compare its A&E and project management rates to the private sector. However, 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 its rates based on a comparison with private firms' rates.

California State Auditor's Assessment of 6-Month Status: Partially Implemented

We disagree with the division's assessment that it has fully implemented this recommendation. Specifically, our recommendation is that the division conduct a rate analysis that fully accounts for differences between the project management branch's hourly rate and private firms' rates. However, the analysis that the division provided only assessed the hourly rates for A&E staff and project director positions, and did not include an assessment of its administrative and overhead costs that contribute to its higher hourly rate. Further, the analysis does not fully explain the reasons that the project management branch's hourly rate remains higher than those of private firms providing similar services. Finally, the division did not provide evidence demonstrating that it has identified and implemented any strategies to ensure that the project management branch's rates are as competitive as they can be. Until the division addresses these shortcomings, we will continue to report this recommendation as partially implemented.

60-Day Agency Response

Recently, RESD began the process of collecting private sector consultant rates for use in the recommended analysis. By December 2016, RESD will compile the private sector rates and evaluate and compare them to its own rate.

In addition, by December 2016, RESD 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, RESD will compare those costs against applicable private sector expected costs for a similar project. Based on the results of that analysis, RESD will explore and implement reasonable and applicable methods to ensure that it delivers projects as cost effectively as possible.

California State Auditor's Assessment of 60-Day Status: Pending

All Recommendations in 2015-117

Agency responses received are posted verbatim.