Report 93114 Summary - March 1994

A Review of Caltrans' Management of the Contract with Morrison Knudson Corporation for the Design and Construction of Railcars

Results in Brief

In June 1990, the voters of California approved Proposition 108 and Proposition 116 authorizing the sale of nearly $3 billion in general obligation bonds. The purpose of these propositions was to provide funds for the acquisition of rights-of-way, capital expenditures and improvements, and the acquisition of passenger railcars and locomotives for intercity rail, commuter rail, and urban rail transit systems.

According to Proposition 116, the state Department of Transportation (Caltrans) will be allocated $100 million to fund a competitive proposal program for the acquisition of standardized state-of-the-art intercity and commuter railcars. As of January 1, 1994, Caltrans had committed approximately $214 million of the funds raised from bond sales authorized by both propositions to fund a contract for the purchase of 113 railcars. Of these, 66 are intercity cars and 47 are commuter cars.

The focus of this audit was to review and evaluate specific aspects of the contract that Caltrans entered into with Morrison Knudsen Corporation (M-K) for the purchase of the 113 railcars. (Throughout this report, we refer to this project as the California Car project.)


During our review we noted the following conditions:

Through the California Car project, Caltrans sought, among other goals, to create jobs in California by accomplishing some part of the production of the railcars here in the State. Because of previous court decisions and an Attorney General opinion on the subject of preference for California or American companies which had found requiring such preferences unenforceable, Caltrans determined it could not include a provision in the contract for the California Car Project that would have required the contractor to maximize the amount of work on the California Car to be accomplished in California. Rather, Caltrans "encouraged" the proposers on the project to commit to maximizing the amount of work to be done in the State. Consequently, in its initial proposal to Caltrans, M-K did not indicate a commitment concerning the creation of jobs in California. During the negotiation of the original contract, (January 1992), M-K eventually informed Caltrans that it intended to maximize California content. But it was not until November 1993 when Caltrans exercised an option to have M-K produce an additional 25 railcars that Caltrans and M-K agreed to more specific and enforceable provisions regarding California content. The change order that outlines M-K's responsibility to produce the 25 additional cars also defines the amount of California content that Caltrans expects M-K to provide, both for the 25 additional cars as well as for the 88 cars to be provided under the original contract. The change order requires that M-K create the equivalent of about 580 full-time jobs at its Pittsburg, California facility doing the assembly and final testing on 66 cars, 45 from the original order and 21 from the additional order.

Caltrans originally contracted with M-K for the production of 88 California cars for an amount totaling $153.7 million. The first cars were to be delivered by August 1993. However, Caltrans and M-K have agreed to changes to the original contract that have increased M-K's contract to $214 million and have delayed the delivery date of the first railcars by 12 months to August 1994. One of the changes to the contract added 25 railcars to the original order, at a cost of $54.6 million. The remainder of the change orders, which mostly dealt with design changes and optional features to the railcars, added $6.1 million to the cost of this contract. (This amount includes two change orders totaling approximately $1.1 million that are pending approval.)

Several factors contributed to the changes on this contract that have added to the cost and delivery time of the railcars. First, as is typical in the railcar building industry, Caltrans and M-K entered a contract that only spelled out in general terms the design characteristics of the California Car. After first obtaining input from the Rolling Stock Advisory Committee, which was established to provide input to the design of the railcars in accordance with Proposition 116, Caltrans developed a Request for Proposals (RFP) based on general parameters or "performance specifications" rather than detailed design specifications. According to the chief of the Office of Rail Equipment for Caltrans, it is not surprising that there were change orders on this type of contract, since not all of the design characteristics of the California Car were spelled out in detail in the performance specifications. So, as the design characteristics of the California Car became more detailed, change orders became necessary. A second factor that has added cost and time to this contract is that Caltrans exercised a contract option to have M-K produce an added 25 cars to the original 88-car order. By exercising this option, Caltrans added $54.6 million to the contract cost and extended the delivery schedule two months. A third factor that has contributed to the added cost and extended delivery is that in overseeing the design of the railcars, Caltrans has had to be responsive to the input of local transportation agencies and railroad operators. One of the change orders that we discuss in this report was the result of negotiations between local transportation agencies and Caltrans about the internal configuration of the commuter car. These negotiations led to a five-month delay in the original delivery schedule.

By the time that the contract for designing and producing the railcars was awarded to M-K, Caltrans had substituted the less rigorous federal goals for the statewide goals for the participation of disadvantaged businesses in the project. This substitution took place because of the involvement of $5 million of federal dollars on this project. Then, eight months after the contract had been awarded to M-K, Caltrans was in the midst of negotiating a change order with M-K. As part of an agreement reached on this change order, Caltrans reiterated that the federal goals were to apply for this contract, although Caltrans also required that M-K make a good faith effort to attain the State's goals throughout this contract. However, the change order does not outline M-K's responsibilities in making "a good faith effort" in seeking the participation of disadvantaged businesses in the event it is unsuccessful at attaining the statewide participation goals.

We recommend that Caltrans clearly specify M-K's responsibilities to make a good faith effort in seeking the participation of disadvantaged businesses in the event it is unsuccessful at meeting the statewide goals.

The Legislature asked us to determine whether Caltrans could have entered an agreement with a contractor other than M-K to build the 25 railcars beyond the 88 railcars called for in M-K's original contract. Caltrans chose not to do this, instead exercising an option in its contract with M-K to have M-K build the 25 cars. However, in the opinion of the Legislative Counsel, if Caltrans had decided to seek a contractor other than M-K for the additional 25 cars, Caltrans would have been free to use the design drawings developed by M-K to solicit proposals from other contractors.

One of the other issues we were asked to address was whether it would have been less costly for Caltrans to use a contractor other than M-K to build the 25 additional railcars. However, we cannot conclude on whether the State would have saved money using other contractors without actually going through the process of advertising for this work and receiving and evaluating proposals from competing firms. According to the consultant for Caltrans, the design drawings are refined over the life of the contract. However, the closer the plans are to the as-built phase, the more value the plans have to other contractors who might bid on the production of additional railcars.

Another purpose of this audit was to assess the reasonableness and propriety of the overhead costs associated with managing the California Car Project. Over the life of the contract with M-K, an estimated $8.2 million, or 3.8 percent of the total cost, will be spent on managing the contract. This includes the costs of both the Office of Rail Equipment (part of Caltrans) and the consultant, Booz-Allen & Hamilton, Inc. (Booz-Allen). To assess the reasonableness of the $8.2 million expenditure, we contacted three public entities other than Caltrans that manage contracts of comparable size and scope. However, these entities were either unable or unwilling to share information with us on the costs of managing their respective contracts. Caltrans' Division of Rail informed us that the costs associated with managing contracts of this size and scope usually range from 5 percent to 8 percent of the contract total.

To gauge the propriety of the amounts charged by Booz-Allen for overseeing the M-K contract, we reviewed a sample of the supporting documentation for all billings received to date by Caltrans. We ensured that the amounts being charged were allowable costs according to the terms of Booz-Allen's contract with Caltrans. We found no improper expenditures among the items we tested.