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INTERNAL AUDIT - VÉRIFICATION INTERNE

AUDIT OF

STADE MONCTON 2010 STADIUM CONSTRUCTION OVEREXPENDITURES

FINAL REPORT

May 2013

Internal Audit of Stade Moncton 2010 Stadium Construction Overexpenditures (2011-A01)

Page | 2

Contents Executive Summary .................................................................................. 4

A) Background and Audit Objectives ................................................. 10

Audit Objectives and Scope ....................................................... 10

Audit Approach and Methodology ............................................. 11

B) Project Management ....................................................................... 12

Project Management ................................................................... 12

RECOMMENDATIONS: ................................................................... 13

C) Project Budgeting, Monitoring and Cost Control ........................ 15

No Detailed Budget ..................................................................... 15

Project Budget vs. Statement of Probable Cost .................... 16

Project Cost Monitoring and Control ........................................ 18

Architects’ Estimates .................................................................. 20

Committed Costs.......................................................................... 21

Project Status Reporting ............................................................ 22

Contingency .................................................................................. 23


D) Financial Authorization Levels ....................................................... 29

Approval Authority to Award ..................................................... 29

Approval Authority for Requisitions, Purchasing Cards ........ 29

Approval Authority to Pay .......................................................... 30

Invoice Payment Approvals ........................................................ 31

Contract Progress Payments ...................................................... 32

Contract Change Orders ............................................................. 33

Accounts Receivables Write-off ................................................ 36


E) Procurement Practices .................................................................... 41

Tender Award Adjusted in Error ............................................... 42

Warm-up and Practice Tracks Not Tendered .......................... 45

Architect Fees .............................................................................. 47


F) Records Management ....................................................................... 53

Contracts Not Found ................................................................... 53


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Contract Management and Review ........................................... 53

Centralized Records Management System .............................. 53

Matching Invoices to Contracts ................................................. 54


G) Contract Approvals .......................................................................... 58

Common Law Exceptions ............................................................ 58

Contracts were signed by Mayor and City Clerk .................... 59

Council Resolutions ..................................................................... 60


Appendix 1- Timeline ............................................................................ 62

Appendix 2 – Project Costs ................................................................... 63


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Executive Summary

The City of Moncton hosted the International Association of Athletics Federations (IAAF) World Junior Track and Field Championships from July 19 to 25, 2010. Funding for the project came from the federal, provincial and municipal levels of government and l’Université de Moncton. The initial estimated cost in 2005 was $13.5 million. Approved funding was secured for $20.5 million and the final cost of the construction project was over $24.3 million, leaving an over-expenditure of over $3.8 million.

This report identifies thirty-six (36) recommendations for improvement to address the observations found during the audit.

Observations:

The key observations are identified below. Management comments are in italics.

The City did not assign a full time Project Manager to oversee the stadium construction project. The audit found that the accountability for the day-to-day management of the stadium construction project was dispersed between the Architect, the Director of Municipal Facilities, the General Manager (RPTC) and the Building Committee.

o Management agrees with the finding.

Many tools required to successfully manage the project were lacking such as a detailed budget, and project status reporting and monitoring. As a result, expenditures were being committed to the project even though there was insufficient funding to meet the obligations. Information projecting the over expenditures was available; yet the City did not take corrective action to control the project scope and costs within the approved funding. Instead the City focused, unsuccessfully, on obtaining additional funding from the Federal and Provincial Governments.

o Management agrees with the finding. The Moncton Stadium project was an extraordinary project as the project involved various parties outside of the City of Moncton. The control, management and accountability of the project was extremely complex.

The audit found that the construction of the Warm-up and Practice Tracks, valued at over $1.2 million was not tendered in accordance


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with the NB Crown Construction Contracts Act, the Agreement on Internal Trade and the Atlantic Procurement Agreement.

o Management agrees with the finding. The Warm-up and Practice Tracks component not being tendered occurred because of tight timelines and availability of the existing approved contractors on site to complete that component.

The audit also identified several weaknesses with the City’s policy and governance framework. The Signing Authority Policy lacks detail and clarity and does not provide guidance beyond the approval for purchase requisition and purchasing cards. It is silent on approvals required in the accounts payable process, including the approval for contract change orders and write-offs.

o Management disagrees in part with the finding. The signing authorities’ levels are clearly indicated in the Policy 1004 – Awarding Authority. Signing authority and awarding authority are used interchangeably and are considered equivalent as it will be noted upon reading 1004.10 and 1004.11.

The audit noted that the records and information management processes to track and manage information, records and documents were ineffective, and some contracts could not be located in City records. Finally, the use of Common Law Exceptions as authority to enter into contracts on behalf of the City should be clarified in a policy.

o Management agrees with the finding.

Recommendations:

The following is a summary of the recommendations made to address the audit observations identified above. Management responses are in italics.

THAT the project budget is verified to ensure that sufficient funds are available to pay for the expenditures before committing costs.

o Management agrees with the recommendation. It is normal standard practice for the funding balance of approved project budgets to be verified to ensure that sufficient funds available to pay for the expenditures.


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THAT the Project Manager be provided with the required authority and resources to deliver the project on budget, on time and on scope.

o Management agrees with the recommendation. It is normal practice and procedure that the Project Manager has the required authority and resources to manage the projects.

THAT the municipal Policy 1003 – Signing Authorities be updated to provide clear guidance on the signing authority levels, including Change Orders.

o Management disagrees in part with the recommendation. The Oracle signing authority limits are always based on the authorized limits as approved by Council and clearly indicated in Policy 1004 and applies to all purchases with the exception of hired equipment (I06’s) and Contractor Certificates. Additional controls including the tendering process and base rates established by Council provide the controls necessary for approval of Contractor Certificates and Hired Equipment payment. In addition, such signing authority levels would apply where the change orders exceed the total budget available for the project in question.

THAT a municipal policy be developed to provide guidance with respect to the provision for bad debt and the write-off of accounts receivable.

o Management agrees with the recommendation.

THAT the municipal policies be updated to clearly identify the City’s requirements to comply with existing procurement laws and trade agreements.

o Management disagrees with the recommendation. It is the role and responsibility of the Purchasing Department staff to provide guidance to all City employees as to the compliance to such laws and trade agreements.

THAT the City establishes policies and procedures governing records and information management.

o Management agrees with the recommendation. The records management process is currently under review.


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THAT the municipal policies be updated to clearly identify the Common Law Exceptions that may be used by the City.

o Management agrees with the recommendation.

Additional comments by the City Manager

The Moncton Stadium project was one of the largest projects undertaken in the history of the City. The project had numerous unique requirements not normally encountered by the City of Moncton during the completion of its normal capital program. The project was multi-phased with very tight timelines, managed by an external Building Committee with members from relevant participant parties, overseen by a consultant specialist with contracts to both the International Association of Athletics Federations (IAAF) and City of Moncton and funded by three levels of government and Université de Moncton (UdeM). Because it was understood at the commencement of the project, that the Stadium would be turned over to the UdeM at the end of the IAAF 2010 games, the UdeM played a large part in the design, control and process during the construction phase. To allow for continuity of appearance, infrastructure and related components, the UdeM wanted their chosen architect/consultant to lead the project in that manner. The project was a joint project between the City of Moncton and the UdeM with the establishment of a Building Committee. Although the Building Committee structure and an initial Stadium agreement with the UdeM attempted to address and consider these above factors including potential conflicts, approval processes and sharing of costs, this was not always successful during the execution of the project. Despite numerous requests to be included in the Building Committee, no representative of the City of Moncton Finance department was included in the Committee nor was there a formal direct connection between the Finance department and the Committee. As a result, direct or complete communication of the progress of the project, the issues and potential financial


Page | 8

implications was not communicated on a regular basis, and the City of Moncton management was not informed in a timely manner as to the progress of the project. In addition, with the Building Committee structure in place, the Finance department relied on the approvals from the members of that committee and the General Manager of EDTC for the payment of invoices related to the project. There was fragmented communication between all parties during the project because of the numerous and various parties involved and as a result, control and reliance was placed on the Building Committee for the making and approval of decisions related to the project. Another significant factor that impacted the performance and decisions made during project implementation was the fact that the Stadium was primarily being constructed to host an international sporting event (IAAF 2010 games) and as such, the focus and reputation of the City of Moncton was front and centre to the world. As the games approached and the stadium was in the final stage of completion, last minute adjustments as requested by the IAAF, deficiencies and last minute Fire Marshall orders were required to be addressed and completed prior to the commencement of the games. These additional items were required to be completed without the benefit of sufficient time to inform and obtain Council or City Manager approval nor to fully access or secure outside funding to support the cost overruns. As such, the work required was completed to ensure that the games proceed to enhance Moncton’s reputation with the expectation that the shortfall in funding would be addressed and secured subsequent to the games. In the end, the funding was not approved by senior levels of government and the Moncton Stadium Project was left in a deficit position with the City of Moncton being responsible for the shortfall. The City of Moncton has learned from that experience and it is confident that such a scenario will never occur again. While there were improperly authorized cost-overruns due to timing and an inadequate project management approach, the legacy of that facility is one for which we can all be proud as we get ready to host the largest, most important women’s sports event in the world, the FIFA Women’s World Cup Canada 2015. Additionally,


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the Canadian Track and Field Championships will be held at the Stadium in 2014. Those events would not be occurring if the Stadium was not built. The economic and global impact of those two events alone will bring millions of dollars into the community and shine a global and national spotlight on Moncton. While we would all be happier if Council hit its budget number for the Stadium, we can nonetheless be proud of the accomplishment of building a world-class facility that will pay dividends for years to come.


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A) Background and Audit Objectives

The City of Moncton (City) hosted the International Association of Athletics Federations (IAAF) World Junior Track and Field Championships from July 19 to 25, 2010. The City of Moncton partnered with l’Université de Moncton (UdeM) to design and build a new stadium, a warm-up track and two practice tracks. The stadium and warm-up tracks were built on the UdeM campus while the practice tracks were located at NB Department of Education schools located in Dieppe and Shediac, NB.

The initial bid for the games was submitted in 2005 and the 2010 IAAF World Junior Track and Field games were awarded to the City at the end of March 2006. The land surveying and stadium design began in the summer of 2007 and the stadium construction was completed on July 17, 2010 in time for the games. The ownership of the stadium was transferred to UdeM for one dollar but the City maintains a shared use agreement.

Funding for the project came from the federal, provincial and municipal levels of government and l’Université de Moncton. The initial estimated cost in 2005 was $13.5 million excluding the $3.5 million value of land that was provided by UdeM. The project’s budget was increased to $17.3 million in 2007 and by the end of the project the total funding was planned at $20.5 million.

The final cost of the construction project was over $24.3 million, leaving a shortfall of over $3.8 million (Table 1).

Table 1

Audit Objectives and Scope

The objectives of the audit are to:

determine if all procurement policies and regulations were adhered to;

Partner Planned Actual Variance

City of Moncton 5,000,000$ 8,954,683$ 3,954,683$

Gov NB 7,675,000$ 7,675,000$ -$

Gov Canada 7,500,000$ 7,500,000$ -$

U de M 350,001$ 242,713$ (107,288)$

TOTAL 20,525,001$ 24,372,396$ 3,847,395$

The initial budget

was estimated at

$13.5 million, the

funding received

was $20.5 million,

and the final cost

of the construction

was over $24.3

million.


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assess the adequacy and effectiveness of controls over the disbursement of funds;

assess the adequacy and effectiveness of internal control processes;

evaluate the capital project monitoring;

assess the project reporting to stakeholders.

The audit was focused on the activities relating to the construction of the IAAF stadium, warm-up and practice venues. The audit does not include the operational (non-construction) expenditures of the IAAF games that were managed by the Local Organizing Committee (LOC).

Audit Approach and Methodology

Interviews were conducted with members of City Council, staff from the City of Moncton and stadium contractors.

A review of City Council and Committee minutes, procurement documents, contracts and agreements, was performed. A timeline of events throughout the project was compiled (Appendix 1).

The financial entries and accounts payable transactions were examined and reconciled. Samples of various transaction and agreements were further tested for compliance with policies, statutes, and verified for accuracy.

Observations and detailed recommendations are provided and form part of this report. Management response to the observations and their action plans are also included.


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B) Project Management

The City and UdeM signed a Joint Venture Agreement on April 13, 2008 whereby UdeM would contribute land valued at $3.5 million and the City would make an initial investment of $5 million toward the construction of the stadium. Further, the parties agreed that the City would have the sole legal, financial or other responsibility for the construction of the stadium. A Building Committee was established that consisted of two members from UdeM, two members from the City and the architect. The Committee’s role was defined as being responsible for the supervision of the stadium construction work.

Project Management

A project manager1 is the person assigned by the owner (i.e. City) to achieve the project objectives. As the person responsible for the success of the project, the project manager is in charge of all aspects of the project including, but not limited to:

Developing the project management plan and all related component plans,

Keeping the project on track in terms of schedule and budget,

Identifying, monitoring, and responding to project risks, and

Providing accurate and timely reporting of project metrics.

The roles and responsibilities for the stadium construction project were defined in various documents, and are shown below.

- Director of Municipal Facilities: The position job specification indicates that the position manages new construction or renovation projects of city facilities, including the development of specifications, project management functions, and adherence to performance criteria. Ensures projects are implemented on-time and on-budget.

- Building Committee: The Memorandum of Partnership between the City of Moncton and l’Université de Moncton states that the stadium Building Committee is responsible for the supervision of the stadium construction.

-Organisports Consultants Inc.: The contract states that the consultant will provide guidance to the architect and engineers for all

1 Project Management Institute, A guide to the Project management Body of Knowledge (PMBOK

Guide) – Fourth Edition


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facilities to be included in the stadium design and construction.

- Koch Architecture Inc.: The architectural contract states that the architect shall coordinate the services of the consultants engaged by:

the architect: Structural, Mechanical, Electrical and Landscape Architects.

by the client: Any other consultant including surveyor, geotechnical consultant, legal counsel, etc.

The audit found that the accountability for the day-to-day management of the stadium construction project was dispersed between the Architect, the Director of Municipal Facilities, the General Manager (RPTC) and the Building Committee.

The City did not assign a full time Project Manager to oversee the stadium construction project.

The City did not take corrective action to cut the scope of the project when cost estimates exceeded the approved funding. As discussed later in this report, the City focused on obtaining additional funding instead of controlling the project scope and costs within the approved funding.

RECOMMENDATIONS:

1. THAT a project manager be assigned to all large construction projects (e.g. projects greater than $1 million).

Management Response:

Management agrees with the recommendation.

We agree that in the case of the Moncton Stadium project, a dedicated project manager should have been assigned to the project. However, as a practice, there are project managers for all projects performed by the City of Moncton. In most cases, they oversee more than one project at a point in time. The City Manager has already committed that an owner’s representative should be assigned to large construction projects. The thresh-hold value, however, should be more than $1million. A suggested threshold value of $5,000,000 would seem to be an appropriate amount based on extent of projects completed by the City of Moncton. Special consideration should be given to projects where scope and complexity warrant a full-time owner’s representative.


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2. THAT the Project Manager be provided with the required authority and

resources to: - Develop a project management plan and all related component plans - Be accountable to keep the project on track in terms of schedule and budget - Be accountable to keep the project on track in terms of budget - Identify, monitor, and respond to project risks, and - Provide accurate and timely reporting of project metrics and status to the stakeholders, including the City Manager.


Management agrees with this recommendation and it is normal practice and procedures that the Project Manager has the required authority and resources to manage the projects.


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C) Project Budgeting, Monitoring and Cost Control

The City reported the final construction cost as $24,372,396. After a 2011 year-end adjustment, the funding revenues are $20,417,713 which leaves a cost overrun of $3,954,683 that was incurred by the City.

Table 2

Actual Amount

Funding $20,417,713

Expenditures $24,372,396

Loss $3,954,683

As the stadium construction progressed, the projected cost of the stadium increased significantly. The stadium’s scope and funding was increased in late 2007 from $13.5 to $17.5 million. The total funding received during the project was over $20 million (table 3).

Table 3

Planned Stadium Funding - All Contributions (thousands)

Funding Partner 2006 Nov 2009 May 2010 Aug 2010

City of Moncton $ 3,500 $ 5,000 $ 5,000 $ 5,000

Gov’t of NB 3,500 5,000 7,500 7,675

Gov’t of Canada 6,500 7,500 7,500 7,500

UdeM 350 350 350 350

Total $ 13,850 $ 17,850 $ 20,350 $ 20,525

No Detailed Budget The audit found that the records kept by the City did not contain a detailed budget for the project. We expected to find a detailed budget broken down by a work breakdown structure (WBS) of smaller manageable activities (figure 1).

The budget must be in sufficient detail to provide a basis for comparison against actual costs, in order to identify and track cost variances from the budget. As well, without a detailed budget it is difficult to identify what tasks are within the project scope and if milestones and targets are being met. A detailed budget is the baseline that is the reference point needed to monitor and manage costs. The project’s cost performance should be measured against the authorized budget.

The City did not

have a detailed

budget for the

Stadium

Construction

Project.


Page | 16

Figure 1

The Finance Department indicates that it is standard practice at the City to have detailed budgets for projects that include areas of construction, consultants and other cost components. In the case of the Stadium project, the Finance department did have a summary budget that included the value of the awarded tenders, but there was no detailed budget that estimated the costs for all elements of the project.

The audit found that there was no approved project budget to serve as the baseline to compare against actual expenditures. As a result, the monitoring of costs against budget at a WBS level was not possible.

Project Budget vs. Statement of Probable Cost

Some documents were found to be similar to budget estimates. Budgets and cost estimates are predictions based on the information known at a given point in time. They should be refined during the course of the project to reflect additional information as it becomes available; therefore the accuracy of a project estimate should increase as the project progresses.2

The contract3 with Koch Architecture Inc. states that the architect will

2 Project Management Institute, A guide to the Project management Body of Knowledge

(PMBOK Guide) – Fourth Edition 3 Royal Architectural Institute of Canada (RAIC), Contract Document 6

Example: Work Breakdown Structure (WBS)

10 Substructure 18,711$

Excavation Building 8,862$

Backfil l Building 9,849$

20 Structural 1,555,000$

Roof Structure 445,000$

Bridge 79,000$

Foundation & superstructure 1,031,000$

30 Exterior Enclosure 459,590$

etc.

etc.

40 Interior Partitions & Doors 324,455$

50 Vertical Movement 230,000$

60 Interior Finishes 219,678$

70 Fittings & Equipment 148,860$

80 Mechanical 568,400$

82 Electrical 1,984,000$

90 Site Development 7,171,112$

110 Overhead & Profit 1,793,373$

120 Allowances 1,460,318$


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prepare and submit to the client a statement of Probable Construction Costs. The architect’s Statement of Probable Construction Cost is a detailed estimate broken-down to the WBS detail.

There are however some distinctions between Cost Estimates, Project Budgets and Statements of Probable Construction Cost.

As mentioned above, cost estimates for the planned work should be subdivided into a work breakdown structure (WBS). The cost estimate’s supporting documentation should provide a clear and complete understanding of the how the estimate was developed, what assumptions were made and any known constraints. Costs should be estimated for all resources that will be charged to the project, including consultant fees, labour, materials, equipment, services, facilities, information technology, contingencies, etc. The cost estimate is for all likely costs for resources required to complete the activity.

This definition is confirmed in the architectural contract, which defines a Project Budget as the estimated total expenditure for the entire project. It includes, but is not limited to, the construction costs, construction contingencies, HST, professional fees, cost of land, rights-of-way, and all other costs to the client for the Project. As well, the Project Management Institute states that a “project budget constitutes the funds authorized to execute the project4”. The project budget is determined by totalling the cost estimates of individual activities to a higher component level of the WBS and ultimately for the entire project. This establishes an authorized baseline and includes all authorized budgets.

On the other hand, Statements of Probable Construction Cost only take into consideration the “construction costs” defined in the architectural contract. The contract describes Construction Costs as the contract prices of all project elements designed of specified by, or on behalf of, or as a result of, the coordination by the Architect, including cash allowances, building permit fees, changes, construction management fees or other fees for the coordination and procurement of construction services, and all applicable taxes, including the full amount of value added taxes, whether recoverable or not. But, Construction Cost excludes the following:

• The compensation of the Architect and Consultants, • Other professional fees, which are the responsibility of the

Client, • The land cost, and land development charges.

4 Project Management Institute, A guide to the Project management Body of Knowledge

(PMBOK Guide) – Fourth Edition


Page | 18

The architect’s “Estimate of Probable Cost” was provided on seven (7) occasions with cost estimates at the work breakdown structure level.

Contrary to the definition above, the architect’s first “Estimate of Probable Cost” of $13 million, dated July 22, 2005 included architectural fees. Since the initial project budget in the Business Plan (July 29, 2005) was also for $13 million, it could be conceived that the Estimates of Probable Cost would be used as the project budget. Unfortunately, some later versions of the Estimate of Probable Cost excluded the architect’s fees which were a substantial cost to the project ($1.8 M).

Table 4

Financial Cost Summary (thousands)

Expenditures Actual

Expenditures Budget5 Variance

Site Clearing $ 155 $ 155 $ -

Stadium Construction - Phase I 6,410 5,853 557

Stadium Construction - Phase II 11,572 10,524 1,048

Warm-up and Practice Tracks 1,847 1,400 447

Synthetic Track 1,288 1,196 92

Construction Management Fees 297 120 177

Stadium Preparation for CFL Game 517 175 342

Architecture Fees6 1,832

Other 453

Total $ 24,372 $ 20,5257 $ 3,847

There was no tracking of actual costs by WBS but our analysis of the costs by supplier allowed the development of a Financial Cost Summary (Table 4). The calculated variance is the difference between the actual costs and the internal auditor’s estimated breakdown of the budget based on the value of awarded contracts.

Project Cost Monitoring and Control Expenditures were not held within the amount of approved funding and the construction of the stadium continued even though the level of approved funding was being surpassed. Focus was placed on offsetting the increasing costs by finding additional revenues. The City increased efforts to secure an

5 There was no detailed project budget by work breakdown structure to perform a variance

analysis. This is an estimated budget that takes into consideration the value of the awarded contracts.

6 The architectural fees are a percentage of the total construction costs as defined in the

contract. 7 This amount does not include the Accounts Receivable write-off of $107,287 in December

2011.

Focus was on

finding additional

funding instead of

controlling costs

within existing

funding.


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additional $2.5 million in funds from senior levels of government as the projected costs were growing. Furthermore, staff generally believed that the project should not be stopped since the stadium had to be constructed to meet the obligations and deadline for hosting the 2010 IAAF games.

In January 2010, the actual costs (i.e. paid expenditures) exceeded the project funding. Although more project funds were added in May 2010, the expenditures from committed contracts continued to increase costs beyond the level of available funding for the duration of the project (see figure 2).

Figure 2

There is contradictory information on who was clearly aware that the project was overspent or estimated to be overspent.

The City’s Senior Management Group indicates that it was not provided with regular project status updates to communicate issues and potential financial implications. The Finance Department officially identified the stadium overruns in May 2010, three months after the $17.5 million dollar funding level was surpassed.

However, there were occasions8 prior to May 2010 where the City Council and/or the Finance Committee were provided with information on the 8 Project related communication with City Council occurred on the following dates:

Nov 21, 2006 – Approval of Memorandum of Agreement

Dec 17, 2007 – Award of Land Clearing

May 5, 2008 – Award of Phase I Stadium Construction

May 5, 2008 – Award of Synthetic Track purchase

Apr 20, 2009 – Award of Phase II Stadium Construction

May 2009 – Award of Warm Up Track and Practice Venue

Nov 26, 2009 –Presentation at UdeM, Overview and Stadium Costing Summaries

May 5, 2010 – Public Council - Financial Update- 2010 IAAF Games

The City was

aware of the

projected cost

overruns as early

as May 11, 2009.

There is

contradictory

information on

who was clearly

aware that the

project was

overspent, or

projected to be

overspent.


Page | 20

project, such as during the awarding of tenders. The City was aware of the projected cost overruns as early as May, 11, 2009 as evidenced by a letter sent by the City and the Local Organizing Committee to the Prime Minister, which indicates that cost of the project would be $23.5 million ($21.5 million, excluding the warm-up and practice tracks).

Yet other financial information provided appears to have been lacking in providing a complete project financial status. For example, a presentation to City Council on November 26, 20099 estimated the stadium construction cost at $20.6 million. The presentation identified a balanced $18.5 million in tendered contracts and $18.6 in committed and pending revenues. But the presentation failed to identify $1.6 million already spent in Change Orders and another $1.3 million due in architectural fees. At the time of the presentation, there were over $22 million committed in tendered contracts, change orders and architectural fees while the approved funding was only $17.5 million.

Figure 3

Architects’ Estimates The architect provided two sources of budgetary information for the City to use: Estimated Construction Costs (on their invoices) and periodic Opinions of Probable Cost. As shown in figure 3, the architect consistently estimated the project to be above the approved funding by $1.5 to $3.5 million. Although the project costs did not surpass the funding until January 2010, the

May 25, 2010 – Finance Committee – Financial Update and Value in Kind

Aug 16, 2010 – Private Meeting - Approval of CFL Components

Nov 10, 2010 – Finance Committee – Cost Projection for Moncton Stadium 9 The November 26, 2009 presentation by the General Manager of Recreation, Parks,

Tourism and Culture, to City Council and others, was held at UdeM.

The architect

consistently

estimated the

project to be

above the

approved funding

by $1.5 to

$3.5 million.


Page | 21

architect’s cost projections were consistently over the level of approved funding.

Committed Costs10

An analysis of the committed costs indicates that expenditures were committed to the project even though there was insufficient funding to meet the obligations.

The audit found that there was no verification of the project’s unencumbered balance to ensure that sufficient funds were available to pay for the expenditures. The unencumbered balance11 of the approved project budget should be verified before committing costs to the project. The unencumbered balance is the amount of the approved project budget that has not been spent or committed to be spent (e.g. tender, contract).

In May 2009, the committed costs exceeded the approved funding for the first time. There was over $19 million in commitments made but only $17.85 million in funding (see Table 5 and Figure 4).

The cost control process is designed to monitor the status of the project in order to manage changes to the cost baseline and updates to the project budget. Any increase to the authorized budget should only be approved through the Change Control Process (i.e. change orders). Project expenditures must not exceed the authorized budget. To achieve this project cost control12 should include:

Influencing the factors that create changes to the authorized cost baseline

Ensuring that cost expenditures do not exceed the authorized funding

Monitoring cost performance to understand variances from the authorized cost baseline

Monitoring work performance against funds expended

Ensuring that all change orders are acted on in a timely manner

Preventing unapproved changes from being included in the reported cost

Informing appropriate stakeholders of all approved changes and

10

Once a contract (e.g. purchase order) has been approved there is a legal commitment to pay the agreed price for the goods or services. The value of this purchase order at this point becomes a committed cost to the project even if it has not yet been paid.

11 Once a contract (e.g. purchase order) has been approved there is a legal commitment to

pay the agreed price for the goods or services. The value of the purchase order becomes a committed cost to the project. The unencumbered balance is the amount of the approved project budget that has not been spent or committed to be spent.

12 Project Management Institute, A guide to the Project management Body of Knowledge (PMBOK Guide) – Fourth Edition p. 179

There was no

verification of the

unencumbered

balance to ensure

that sufficient

funds were

available to pay for

expenditures.

Committed costs

exceeded the

approved funding

fourteen (14)

months before the

IAAF games.


Page | 22

associated costs, and

Acting to bring expected cost overruns within acceptable limits.

The audit concludes that project cost reporting was incomplete in providing a full project financial status that would have clearly identified to the stakeholders that the project would be significantly over budget unless costs were reduced.

Figure 4

Table 5

Commitments vs. Funding (as at May 2009)

Date Commitment Costs

Jan-06 Architecture Fees - Initial Design $ 37,296

Dec-07 Land Clearing Tendered $ 154,900

Apr-08 Architectural Contract - Phase I, II, Synthetic (@ $17.5 million “Construction Costs”)

$ 1,302,150

May-08 Phase I Tendered $ 5,853,054

May-08 Synthetic Track Tendered $ 1,195,949 $ 10,524,033 Apr-09 Phase II Tendered

May-09 Change Orders (up to May 2009) $ 491,073

Total Committed Costs $ 19,558,456

Approved Funding $ 17,850,000

Committed over Approved Funding $ 1,708,456

Project Status Reporting The City should report on project status and activities by producing project status reports to help make informed decisions regarding project scheduling and budgets. In establishing report content and frequency it is important to keep in mind that high profile projects often require more extensive

The project lacked

to provide

complete reporting

of project metrics

and status to the

key stakeholders,

including City

Council.


Page | 23

reporting of activity compared to more routine projects. Meaningful reports should provide straightforward project information for the project manager and stakeholders. At a minimum13 the financial status report should:

1. provide a comparison of actual results to the project plan, including: • Percent of project completed • Percent of project budget expended • Progress on key project milestones • Contract status information • Revenue and expenditure activity • Cash flow and investment maturities • Funding commitments • Available appropriation • Comparison of results in relation to established

performance measures 2. highlight significant changes to project scope or costs.

The project lacked to provide complete reporting of project metrics and status to the key stakeholders, including City Council.

The Deputy Treasurer–Finance provided five (5) recommendations14 for major projects that address some of the stakeholder reporting issues. The first was a formal quarterly financial report that outlined the status of funding, costs, change orders. The second was the establishment of project committees that gather members from the Finance dept., the contractor, the Engineering dept. and the project architects for monthly reviews of costs, progress, opportunities and risks. These two recommendations will provide additional controls for major projects, like the construction of the stadium.

Contingency The level of contingency funding for the project was insufficient. A construction contingency is either a fixed amount or a set percentage of the construction contract amount that is budgeted for unforeseen emergencies or design shortfalls identified after a construction project commences.

Contingency funds are included in a budget so the project can proceed with minimal interruption for small (non-scope) changes or cost overruns. However, if the project requires a scope change, contingency funds may also be used in part to meet that need.

13

Government Finance Officers Association - Best Practices, Capital Project Monitoring and Reporting

14 The recommendations form part of a November 20, 2010 memo.

The level of

contingency

funding for the

project was

insufficient.


Page | 24

Contingency Reserves vs. Management Reserves15

The contingency reserve amounts are included in the project baseline budget. This reserve is for the “known-unknowns” resulting from a project risk assessment. Contingency reserves are budgeted allowances for uncertainty in the project budget, for example, when the costs of have known variability. They take into account some probability of risk events in your cost estimates but these price variations don’t justify a change in budget, because they do not change the project scope. These items would be shown as cost variances from budget (over or under).

Unplanned changes to the project scope should be covered by the management reserve. This reserve is for the “unknown-unknowns”, or general risk that you cannot identify. This reserve is not included in the project baseline budget. Approved change orders that affect the project scope and budget will result in re-baselining or adding/removing budget funds in order to match the scope changes. Management reserves require a higher level of scrutiny than the use of contingency reserves since the project scope is being modified.

Running a project without sufficient contingency is undesirable. Similarly, project estimators should refrain from including too much contingency allowances in estimates. According to the Royal Architectural Institute of Canada (RAIC), the Architect and the Client should include reasonable contingencies in the Construction Budget for:

• bidding in case the lowest acceptable bid is higher than the mutually agreed estimate of Construction Cost prepared or agreed to, by the Architect; • changes in the Work, because they are unpredictable and to a degree inevitable; • costs such as special inspection and testing, especially in renovation work, which may not become known until the Project is under construction16.

The architects’ standard Contract17 does not include a provision for a fixed limit of Construction Cost or Contract Time. If a Contract is amended to require the Architect to keep the Construction Cost within a fixed limit, (i.e. with no budget flexibility to allow for cost increases), architects are suggested to require the Client to include contingency amounts in the

15

A Guide to the Project Management Body of Knowledge, Fourth Edition; 7.2.2.2 Reserve Analysis, p.177

16 Royal Architectural Institute of Canada (RAIC), Document 6 Guide, 2006

17 Royal Architectural Institute of Canada (RAIC), Document 6 Guide, 2006


Page | 25

Construction Budget in order to accommodate design changes, price escalation before bidding, and cost increases during construction18.

The architect’s Stadium estimates included a “Construction” contingency and a “Design” contingency of five percent each19 for an average total Contingency Reserve of $1.2 million. However, a May 2009 document from the Architect indicates that the “budget” for the contingency was set at $200,000 and was being reduced to $65,000. Nonetheless, as shown in table 2, the project was overspent by $3.8 million or 19% and even a larger contingency would not have fully offset such a large over-expenditure. Contingencies should be based on the level of risk related to the project and could easily be in the range of 8 to 10%.

The City should have a methodology to determine the financial risks related to large capital construction projects (e.g. probability of HST rebate) to allow for the determination of Contingency Reserves. The City should also have a policy to set a fixed percentage of project budgets for Management Reserves.

RECOMMENDATIONS: 3. THAT a project budget be created and maintained for all construction

projects. The project budget will:

- include all estimated costs of the project - be subdivided into a manageable work breakdown structure (WBS) - be used as the baseline against which expenditures will be

compared. Management Response:

Management agrees with the recommendation and the process is normal practice for the City of Moncton

We agree in the case of the Moncton Stadium project that the budget should have been more extensive and detailed to provide improved baseline measurement. However, the practice is that all projects performed by the City of Moncton have a budget broken down by the various disciplines in sufficient detail to be meaningful in a budget format and subsequent reporting format. More complicated projects have more detailed and complex budgeting formats that tie in directly to the tenders or pricing of such projects.

18

Royal Architectural Institute of Canada (RAIC), Document 6 Guide, 2006 19

In one (1) instance (February 2007) the Design Contingency was 10%.


Page | 26

4. THAT before committing costs to any project, the unencumbered balance of the approved project budget is verified to ensure that sufficient funds are available to pay for the expenditures.


Management agrees that it is normal standard practice for the unencumbered balance of approved project budgets to be verified to ensure that sufficient funds available to pay for the expenditures.

5. THAT the municipal policies be updated to indicate that expenditures on capital projects will not exceed the level of approved funding.


Management disagrees with the recommendation.

It is implied that expenditures on capital projects will not exceed the level of approved funding for each project. There is regular reporting to Council on capital projects and any required additional funding must follow the appropriate approval process.

Due to the tight schedule required to complete the Moncton Stadium project, there was insufficient time for verifications while awaiting for senior levels of government funding approval.

6. THAT the project’s unencumbered balance be clearly indicated on all Council Report Forms that recommend the awarding of a contract for a project (e.g. Tender, RFP, etc.).



The available funding, source of funding and accounts providing that funding are currently stated in the Council Report Forms that recommend the awarding of a contract for a project. In the case of the Moncton Stadium project, the clarity of such reports could have been improved for that specific project.


Page | 27

7. THAT project budget estimates should include all the resources that will be charged to the project, including consultant fees, labour, materials, equipment, services, facilities, information technology, contingencies, etc. The cost estimate supporting documentation should also provide a clear and complete understanding of:

- how the estimate was developed (e.g. source of standard rates) - what assumptions were made, and (e.g. scope excludes warm-up

tracks) - known constraints (e.g. date of the event; funding limit). Management Response:


The project budget estimates do have consideration of consultant fees, labour, materials, other costs and contingencies. The more detailed, the more extensive and the higher the cost of a project would involve much more detailed background supporting materials and assumptions.

The Moncton Stadium project presented complexities in managing both the budget and the resulting project costs because of the IAAF requirements, the constantly changing scope resulting therefrom and multiple internal and external individuals involved in all facets of the project.

8. THAT the City report on project status and activities by producing project status reports that highlight significant changes to project scope or costs, and provide a comparison of actual results to the project plan, including20:

- Percent of project completed - Percent of project budget expended - Progress on key project milestones - Funding commitments - Available appropriation (i.e. unencumbered funds) - Contract status information - Revenue and expenditure activity - Cash flow and investment maturities - Comparison of results in relation to established performance

measures.

20

Government Finance Officers Association - Best Practices, Capital Project Monitoring and Reporting (2007).


Page | 28



There is currently reporting in place for Capital Projects, whereby monthly capital reports are produced and discussed with management.

More extensive reporting, as noted, would only be practical for large construction projects (in excess of $ 5M), and for smaller projects the extensive reporting indicated is likely to provide insufficient benefit versus the cost to accumulate and report on all those factors for every project that the City completes.

In addition, there is regular reporting of Capital Projects to the Finance Committee.

9. THAT the recommendations 1 and 2 of the November 20, 2010 memo

from the Deputy Treasurer–Finance be implemented and that criteria for a “major project” be clearly defined.



At the present time, recommendation # 1 (quarterly reports) are being presented to Finance Committee when such meetings are held. Recommendation # 2 (project meetings) are being held for large projects in excess of $ 5M (e.g. Turtle Creek, Transportation Discovery Centre) to ensure that progress and risk assessment of such project is taking place on a timely and regular manner.

10. THAT the municipal policies be updated to provide guidance on the use

of project risk assessments and construction contingencies in municipal capital projects.


Management disagrees with this recommendation. Standard operating practices do have contingencies shown on the project estimates and disclosed on Council Report Forms. The contingency used will vary upon size and complexity of the project but ranges from 8 to 15% for the City of Moncton projects.


Page | 29

D) Financial Authorization Levels

The current Purchasing Policy contains sections on awarding approval and signing authority. There are numerous approvals within the procurement-to-payables process and in order to ensure that financial commitments and payments are authorized by the proper authority, the City has identified positions with financial approval authority levels.

The Signing Authority should not be confused with Awarding Authority. The latter refers to the authorization to enter into a formal contract or to directly purchase goods or services (i.e. create a commitment).

Approval Authority to Award The City of Moncton Policy 1004, Awarding Authorities, provides essentially four levels of awarding approval (Table 6). Table 6

Level Threshold Approver

1 Over $75,000 City Council

2 $40,001 to $75,000 City Manager

3 up to $40,000 General Managers

4 Misc. below $25,000 Misc. others

The policy also says that City Council will be the awarding authority when a purchase will result in an over-expenditure of an entire department’s budget. There is no similar constraint for overspending of an entire capital project budget.

Approval Authority for Requisitions, Purchasing Cards

The Signing Authorities Policy 1003 consists of one paragraph and only authorizes designated personnel to:

Initiate purchase requisitions

Utilize a purchasing card, or

Provide authorization for the purchasing department to award a contract.

The policy’s focus on signing authority within the purchasing function is not surprising since the Signing Authorities policy is within the Purchasing Section of the City’s policy manual.

The delegation of authority to personnel was identified in a “Master Signing Authority List21” obtained from the Finance Department that generally

21

Master Signing Authority List was dated October 1, 2008.


Page | 30

follows the same four approval levels as the Awarding Authority policy. Nonetheless, according to Signing Authorities Policy 1003, the list only applies to initiation of purchase requisitions and use of purchasing cards.

Approval Authority to Pay

The Signing Authorities Policy 1003 lacks detail and clarity and does not indicate if the signing authority applies to circumstances beyond “purchase requisitions and purchasing cards”.

The City, like any organization, is required to authorize many types of transactions as part of its daily functions. For example, the City regularly pays the following expenditures:

training and education

refundable employee expenses

payment of invoices against approved purchase orders

payment of invoices without a purchase order

payment of invoices from consultants

payment of invoices for contractual obligations

progress payments for construction contractor certificates

construction change order

government payments

payments to past and current employees

debt payments

These items are not procured or awarded through the purchasing process and therefore would not be captured in the Awarding Authorities Policy 1004; but they should be subject to the approval authority levels for payment.

Furthermore, the policies are silent on the approval limits required for the following transactions:

non-budgeted expenditures

provisions for bad debt

bad debt write-offs

adjustments to accounts

credit payments or refunds, and

contingency fund expenditures.

Approval Levels - Aggregate Amendment Value22 The municipal policy 1004 – Awarding Authority defines approval levels for awarding of contracts (e.g. City Council approval at a threshold of $75,000 or

22

Public Works and Government Services Canada (PWGSC) Supply Manual, Chapter 6 - Approvals and Authorities.

The Signing

Authority Policy

lacks detail and

clarity and does

not provide

guidance beyond

the approval for

purchase

requisition and

purchasing cards.


Page | 31

more). It would seem logical that changes to a tender that will increase the financial commitment beyond the awarded amount would require re-authorization at the same level or higher (i.e. “Aggregate Amendment Value”). In principle, once an approval level has been reached it should not be lowered.

However, current approval levels are not defined as to whether they are based on aggregate amendment value or simply transaction value.

Specifically to this audit, the policy does not identify any approval levels for Progress Payments or Construction Change Orders. The audit assumes that approvals are required for these payments since the documents have a location for signatures.

Invoice Payment Approvals

Accounts Payable Invoices

A properly authorized vendor invoice is a key control in the payment process. The identification of the authority level of the signatory / approver before payment is a preventive control that provides independent oversight and a challenge function by the Accounts Payable team to determine if the departmental expenditures have sufficient authority. The City utilizes manual signatures on “Payment Authorization Forms” and “Payment Certificates” to authorize these vendor payments.

The City’s Finance Department has a naming convention to distinguish between various types of payments, such as those matched to a Purchase Order, Consultants’ invoices, or invoices without any purchase order. In this case, the consultant’s invoice should be attached to a duly authorized payment request form with the contract attached (i.e. Batch type I11 – Consultant Invoices). The value of the invoices must be within the authorization limits of the approver. The signing authority policy is silent on approvals required in the accounts payable process.

Non-tendered invoices

A selection of paid invoices for non-tendered goods and services was reviewed for compliance with municipal policies.

Architectural Invoices

Some licensed professionals, such as architects are exempted from the competitive procurement rules23,24,25. Although they are formally exempt the City may use a competitive process regardless. In the case of the stadium

23

The NB Public Purchasing Act - Section 27 24

Agreement on Internal Trade - Annex 502.4 Section L. (Non-Application) 25 City Council eliminated the exemption for professional Services on April 16, 2012.

The Signing

Authority Policy is

silent on approvals

required in the

accounts payable

process.


Page | 32

construction, the Memorandum of Agreement (MOA) signed with UdeM stated that the university would select the professional architect to ensure that the stadium properly “fit” into the campus environment.

The architectural contract for the stadium was awarded without competition and did not flow through the public tendering process. The approval of invoices for payment was nonetheless required.

Seventeen (17) paid invoices to two architectural firms were reviewed. The audit found that twelve (12) invoices valued at over $2.2 million were paid without proper authorization since the municipal policies do not delegate sufficient authority to the Project Manager. The “architectural fees” accounted for over $1.8 million.

Other Non-tendered Services

Another seven (7) invoices for other non-tendered services were judgmentally selected for review. Only one (1) invoice valued at $75,000 was paid without proper authorization.

Contract Progress Payments

Progress Payments26 are common in the construction industry where large contracts are paid in intervals based upon the value of work completed as certified by someone other than the contractor.

When the scheduled work is completed, an application for payment is made by the contractor. Then, the payment certifier, usually an engineer or architect, issues a payment certificate confirming that that the value of work completed is accurate. The owner is then required by the construction contract to pay the amount certified within a specified period of time.

The City’s policies do not reflect the construction industry’s practice of using progress payments. Due to their nature, progress payments for construction contracts are often for large dollar amounts. For example, the largest of the 56 progress payments on this project was for $1.8 million.

Authorized approvals are key controls in the procurement-to-payables process. Progress payments were made to three (3) firms whose contracts formed part of the initial approved stadium budget and were publicly tendered and awarded by council. All of the progress payments, valued at over $21 million, were approved by the Project Manager or designate (Table 7).

26

A “Payment Certificate” is filled-out and approved to initiate a “Progress Payment” or ‘Progress Claim”. These three terms are often used synonymously.

The authorization

level for the

construction

Project Manager

does not reflect

the use of Progress

Payments and their

significant

amounts.

Each of the

Progress

Payments, valued

at approx. $22

million, were

reviewed and

signed.


Page | 33

The controls surrounding the approval of these progress payments can be lessened, since these construction contracts followed the public tendering process and were properly awarded by Council. The larger concern is for the approval of progress payments for contracts that were non-competitively sourced and equally the progress payments for change orders made to contracts. Included in the progress payments are about $1.8 million in non-competitive procurements and over $2.3 million in change orders (Table 7).

Table 7

Progress Payment Summary (Thousands)

Expenditures Public Tender

Non-Competitive

Procurement

Change Orders

Total (excl. Tax)

Stadium Construction - Phase I $ 5,853 - $ 557 $ 6,410

Stadium Construction - Phase II 10,524 - 1,048 11,572

Synthetic Track 1,196 - 92 1,288

Practice and Warm-up tracks - 1,282 664 1,946

Stadium Preparation for CFL - 517 - 517

Total $17,573 $1,800 $2,361 $21,733

A sample of nine (9) progress payments from the non-competitive procurement payments and a sample of 16 change orders were selected for review. Of these 25 items, only three (3) were within the established signing authority limits.

Contract Change Orders As mentioned, it is unclear whether the signing authority policy is applicable to these progress payments and change orders. Approval levels should be set, particularly for change orders, since they bypass the competitive procurement process.

“Change orders are common on large construction projects where unknown site conditions, design changes, errors or omissions can occur. Change orders alter the work originally set out in the contract. Except in the relatively rare cases of change orders that reduce the scope of the work to be carried out, change orders generally increase the scope of work.” By definition, they effectively constitute a contract for new work. The fewer the number of change orders, the greater the chance to manage the project within budget, scope and deadlines.

Definition of a Change Order:

“A Change Order is a written amendment to the Contract prepared by the Consultant <<Koch Architecture Inc.>> and signed

The municipal

policies do not

provide guidance

on the use and

approval of

Change Orders.

Change orders

accounted for

over $2.3 million

in stadium

project costs.


Page | 34

by the Owner and the Contractor stating their agreement upon:

a change in price;

the method of adjustment or the amount of the adjustment in the contract price, if any; and

the extent of the adjustment in the contract time, if any27.”

Change orders should also be categorized by the reason for the change such as: unknown site condition, an error or omission, a design change, a code change, etc.

Change orders carry a particular risk of contractors underbidding their competition to win the contract, and then recouping their losses through change orders. As a result, change orders are often limited to a percentage of the original contract.

“Very often the costs associated with that work are high – far higher than the minimum price at which a competitive contract process is usually required. Nevertheless, the change order process is almost always carried out in the absence of competitive bidding28”.

Approval - Change Orders The municipal policies do not provide guidance on the use and approval of Change Orders.

The industry practice in place during the construction of the stadium was that each Change Order document was recommended and stamped by the architect, approved and signed by the contractor and also approved and signed the owner (i.e. City). The Owner’s approval was usually the signature of the Director of Municipal Facilities who had an authorization level of $15,00029. Nearly all Change Orders exceeded this amount.

The Finance Department has indicated that “financial authority levels do not specifically reference change orders, but in practice, change orders are permitted to be approved up to the total value of the approved contract, including the contingency amount in place.”

However, change orders typically increase the value of the approved contracts beyond their awarded amount.

27

Standard Construction Document CCCD 2- 2008; Canadian Construction Documents

Committee. 28

Summit - Public sector purchasing magazine, October 2009. 29

Master Signing Authority List was dated October 1, 2008.

Only 3 of 25

change orders and

non-competitive

progress payments

sampled were

within the limits of

the Master Signing

Authority List.


Page | 35

Given that no formal approvals are required for Change Orders but that the awarding of tenders does require approval (e.g. City Council at a threshold of $75,000 or more); in the absence of specific guidance, it would seem logical that changes to a tender that will increase the City’s financial commitment beyond the awarded amount, would require a similar re-authorization at the same level or higher (i.e. “Aggregate Amendment Value”). In principle, once an approval level has been reached it should not be lowered.

Change orders accounted for over $2.3 million for the stadium project (figure 5).

Figure 5

Expenditures Change Orders

(thousands)

Stadium Construction - Phase I $ 557

Stadium Construction - Phase II 1,048

Synthetic Track 92

Practice and Warm-up tracks 664

Total $ 2,361

A sample of sixteen (16) change orders was selected for review:

All the Change Orders were approved by the Architect with their stamp and signature.

The employee approving fifteen (15) of sixteen (16) Change Orders did not have a sufficient approval authority limit. This is in accordance with the Master Signing Authority list.

Fifteen (15) of sixteen (16) Change Order calculations were correct. The Change Order was:

o Supported by invoices or other documentation, o Supported by a completed and properly documented Change

Order form, o Footing and Tax calculations were accurate, o Change Order value (amount) was properly carried to Progress

Payment.

The audit found that with the addition of other internal controls, such as the requirement for verification of unencumbered balances to ensure that sufficient funds are available, and clearly defined accountability for project costs, the Project Manager should be given sufficient authority to approve the majority of the project’s change orders.


Page | 36

Accounts Receivables Write-off In addition to providing the land, UdeM committed to funding an amount of $350,000 towards the construction of the stadium. At year end of 2010, the City recorded an accounts receivable due from UdeM; and in May 2011, the City of Moncton received a cheque for $242,712.45 towards the outstanding amount.

UdeM had indicated to the General Manager of EDTC30 that there were invoices related to the construction and other costs that they had not been reimbursed by the City; therefore these amounts were being deducted from the outstanding amount. The Finance Department requested supporting documents for these offsets without success prior to the completion of the 2011 year end. As a result, the Finance Department decided that it seemed unlikely that this money would be recuperated and the outstanding balance $107,287.55 was written-off to bad debt for the 2011 fiscal year.

In December 2012, the City received the details of the offsetting expenses from UdeM. The costs were related to:

legal costs for the stadium agreement ($28,174),

geotechnical services and utility costs capital costs during construction ($29,984) and

costs associated to the September 2010 CFL game ($49,130).

The Finance department indicates that the decisions were made based on professional judgment and the principle of conservatism, which applies to situations when estimates must be made in conditions of uncertainty. When uncertainty exists, conservative estimates would ensure that assets and revenues are not overstated or liabilities and expenses are not understated.

The determination that the account was uncollectible may seem premature. However, there are currently no City policies governing the provision for bad debt or the write-off of accounts receivable.

Research has indicated that other municipalities do have guidance with respect to the write-off of accounts receivable. For example, the Municipal Government Act of Nova Scotia states that:

“The treasurer shall promptly advise the council of (a) all moneys due to the municipality that the treasurer

considers cannot reasonably be collected after pursuing all reasonable avenues of collection; and

(b) the reasons for the belief that such moneys cannot be collected,

30

EDTC – “Economic Development, Tourism and Culture”, City department in 2010.

Over $100,000 in

Stadium project

costs were written-

off to bad debt in

2011.


Page | 37

and the council may write off the amounts determined to be uncollectible.” 31

As a result, the audit finds that the municipal policies should be revised to provide guidance with respect to the provision for bad debt and the write-off of accounts receivable.

RECOMMENDATIONS:

11. THAT the accounts payable process for Consultant Invoices be clearly defined to determine the signing authority level required for payment.


Management agrees with this recommendation and the process is normal practice for the City of Moncton

The corporate signing authority levels which are approved by Council and managed within the Oracle system does drives authorized signing authority for all payment streams above the P-Card limit. This is not explicit in the policy but is implied by the signing authority and is outlined in the Oracle Purchasing Requester user guide. A resolution has been recently passed defining the signing authority levels for consulting invoices and the Purchasing policy will be updated accordingly. In relation to the Moncton Stadium Project, the Consultant Invoices were reviewed and approved by the General Manager of the Economic Development and Tourism department and the Director of Municipal Facilities. It should be noted that, all except 3 of the 17 consulting invoices tested, had been incurred based on Council approval and as such, the sign off by staff was one indicating that the work was completed and not for the actual authorization of work as this authorization was granted as the result of Council approval

12. THAT the municipal Policy 1003 – Signing Authorities be updated to

provide clear guidance on the signing authority levels required for:

Invoices from Consultant (i.e. I11 batch type) Invoices with Purchase Orders (i.e. I01 batch type) Invoices with Standing Orders (i.e. I02 batch type) Invoices without Purchase Order (i.e. I03 batch type) Invoices for Contractual Payments (i.e. I04 batch type)

31

Section 38 of the Nova Scotia Municipal Government Act; http://nslegislature.ca/legc/statutes/muncpgov.htm; last accessed January 5, 2013.

http://nslegislature.ca/legc/statutes/muncpgov.htm


Page | 38

Invoices for Hired Equipment (i.e. I06 batch type) Invoices without Purchase Order (i.e. I07 batch type) Contractor Certificates (Progress Payments) (i.e. I12 batch type) Employee Expenses (i.e. I20 batch type) Miscellaneous Invoices (i.e. I90 batch type) Construction Change Orders Management Response:

Management disagrees with this recommendation

The signing authorities’ levels are clearly indicated in the section 1004- Awarding Authority. The City does not distinguish between signing authority and awarding authority as it will be noted upon reading section 1004.10 and 1004.11.

In the Oracle User Guide (Purchasing-Requester), the Procurement Policy (page 6-8) clearly indicates how goods are to be acquired ( Central Stores, P Card, competitive bid, formal tendering).

The Oracle signing authority limits are always based on the authorized limits as approved by Council and applies to all purchases with the exception of hired equipment ( I06’s) and Contractor Certificates.

Additional controls including the tendering process and base rates established by Council provide the controls necessary for approval of Contractor Certificates and Hired Equipment payments. We will review and update the policy as appropriate on a regular basis. In the case of the Moncton Stadium, as is the case with all other City of Moncton Projects, contractor payments would have been signed as approval for payment by project management (and as also approved by the consultant) based on work completed to date. Any authorization for completion of such work was provided by Council approval during the tender awarding process.

13. THAT the municipal Policy 1003 – Signing Authorities be updated to indicate that one Corporate Signing Authority List will be maintained.


Management disagrees in part with this recommendation

If required for clarification, the Awarding authority policy 1004 can be updated to clarify this point.


Page | 39

14. THAT the City should maintain a Corporate Signing Authority Schedule that is updated at least yearly, and:

- lists the employees with delegated authority, - specifies the maximum authority level delegated (i.e. dollar

value), - specifies the type of authority delegated (e.g. awarding/

commitment authority, payment authority), - has specimen signatures for reference purposes, - is delegated and signed by the City Manager.


Management agrees with this recommendation and this process is normal practice for the City of Moncton

The signing authority limits as approved by Council are maintained on a continuous basis in the Oracle system and any delegation in authority limits are tracked in the Oracle system and a manual email is communicated to Accounting staff involved with payments that are non- purchase order stream (contract payments, commodity exemptions).

In the case of the Moncton Stadium, it was an anomaly whereby expenditures were approved beyond the level of authority and installed at the stadium prior to the payment being issued from the City. Specifically related to the costs incurred at the Stadium in advance of the CFL game, these capital costs were approved by Council and such items were incurred not only for the upcoming 2010 CFL game but for future events that were anticipated and have in fact occurred at the Stadium since that time and continue to occur because the assets and related infrastructure were invested in the Stadium during final construction.

15. THAT the approval of Change Orders be limited to a fixed percentage of the initial contract or a fixed amount



The change orders need not be limited as a fixed percentage or fixed amount but in practice are approved up to the level of the budget of the project. It is the contingencies ranging from 8 to 15% in each project that provide the extent of what the change orders may amount to. Such things as change in scope, change in design and numerous other factors will account for the majority of change orders.


Page | 40

16. THAT the municipal policies be revised to add financial authorization levels to project managers for the approval of construction change orders.



In practice, the level of authorization of the construction change orders for project managers is based on the budget of the project and approval can be made up to the unencumbered level of the budget. Once over that amount, authorization as outlined in item 12 must be obtained before exceeding the budget. In the case of the Moncton Stadium project, many of the change orders were approved in excess of financial authorization in order that construction of the Stadium not be delayed so as to complete construction prior to the commencement of the IAAF games in July 2010. Under normal circumstances, if the change orders caused the project to be over budget, the approval process would follow the authorization process as outlined above.

17. THAT the municipal policies be revised to provide guidance and a standard classification for Construction Change Orders to identify change orders that are the result of a third party (e.g. contractor, architect) and may be recoverable.



The situation where there is a recoverable change order is a rare occurrence within the City of Moncton projects. Where such a situation does occur, the project manager communicates such instance to the Finance area via e-mail with all relevant information and an invoice would be created to the third party at that time. The change order incurring such a cost would then be recorded to the project like any other change order with the details of the billing included in the project file of the project manager and in the finance department.

18 THAT a municipal policy be developed to provide guidance with respect to the provision for bad debt and the write-off of accounts receivable.


Management agrees with this recommendation


Page | 41

E) Procurement Practices Legislation and agreements identify exceptions where the requirement for competitive procurement is needed. The exceptions are based on a financial threshold or special circumstances, where the administrative burden of the procurement regulations usually outweighs the benefits received from a competitive procurement process. However, the City must not invoke the use of the exceptions for the purpose of avoiding competition or in order to discriminate against suppliers.

When a non-competitive (i.e. sole source) procurement is selected, the justification for the exception should be documented. As mentioned above, some licensed professionals are exempted from the procurement rules32. As a result, the contract for architectural services was awarded without competition and did not flow through the public tendering process. When the contract is calculated on the initial budget of $13.5 million it had an estimated value of above $1 million.

The corporate Purchasing Policy is a key document that guides City staff. It sets the financial authority limits for the awarding of procurement contracts, but does not discuss the financial thresholds for public tendering that are set-out in the legislation and trade agreements. Specifically, the policy make no mention of the NB Public Purchasing Act, the Agreement on Internal Trade, the Agreement on the Opening of Public Procurement for New Brunswick and Quebec (2008), or the Atlantic Procurement Agreement, all to which the municipality is bound. As well, there is no discussion of the NB Crown Construction Contracts Act to which municipalities are encouraged to, but not required, to follow.

These laws and agreements clearly identify financial thresholds for public tendering as shown in Table 8.

32

City Council eliminated the exemption for professional services on April 16, 2012.

Justification of

non-competitive

processes should

be documented.

The Purchasing

Policy provides no

reference or

guidance on how

to comply with

existing

procurement laws

and trade

agreements.


Page | 42

Table 8

Public Tendering Thresholds

Legislation / Agreement Goods Services Construction

Contracts

NB Public Purchasing Act33

>$25,000 >$50,000 n/a

Atlantic Procurement Agreement34

>$25,000 >$50,000 >$100,000

Agreement on Internal Trade (Canada)

35

>$100,000 >$100,000 >$250,000

NB-Québec Trade Agreement36

>$100,000 >$100,000 $100,000

to $250,000

NB Crown Construction Contracts Act37

n/a n/a >$40,000

Tender Award Adjusted in Error

A tender was awarded for $430,000 less than the correct amount. The successful proponent submitted a base bid amount for Phase II of $11,278,733 excluding tax38. City staff recommended in the Council Report Form that the tender price be reduced by $754,700 due to the removal of some optional items that were not going to be constructed and the tender was awarded by Council on April 20, 2009 for a value of $10,524,033.

However, six (6) optional items were subtracted from the final tender price/ base bid amount instead of four (4). As a result, the tender price was reduced by $430,000 more than it should have (see items 8 and 13 in Table 9). The tender should have been reduced by $324,700 instead of $754,700.

33

Source: http://laws.gnb.ca/en/ShowTdm/cs/P-23.1// ; last accessed October 5, 2012. 34

Source: http://www.gnb.ca/0337/01-e/3-e.htm ; last accessed October 5, 2012. 35

Source: http://www.ait-aci.ca/index_en.htm ; last accessed October 5, 2012. 36

Source: http://www.gnb.ca/0337/01-e/27-e.htm ; last accessed October 5, 2012. 37

Source: http://laws.gnb.ca/en/ShowTdm/cs/C-36// ; last accessed October 5, 2012. 38

All figures exclude tax.

http://laws.gnb.ca/en/ShowTdm/cs/P-23.1/

http://www.gnb.ca/0337/01-e/3-e.htm

http://www.ait-aci.ca/index_en.htm

http://www.gnb.ca/0337/01-e/27-e.htm

http://laws.gnb.ca/en/ShowTdm/cs/C-36/


Page | 43

Table 9

Item Description

Tender Price was

reduced by: Item

Tender Price should have

been reduced by:

1 Ticket booth $ (30,000) 1 $ (30,000)

4 Eagle heads $ (40,000) 4 $ (40,000)

6 Parking lot $ (225,000) 6 $ (225,000)

7 VIP access to parking $ (29,700) 7 $ (29,700)

8 South End bleachers $ (405,000)

13 Wireless antennas $ (25,000)

Total

$ (754,700) Total $ (324,700)

Eight (8) of eleven (11) optional lump sum items were “credit” items and three (3) items were “debits”.

The prices of optional credit items are submitted as part of the base bid price and may be subtracted if the City decides to reduce the project’s scope.

The prices of optional debit items are not part of the base bid price submission, they are add-ons. These items can be added to the base bid price if the project’s scope is increased.

The successful proponent noticed the error and requested that the funding be returned to the project, since the adjusted tender value did not reflect what was submitted as their bid. To correct the error, a Change Order was created to increase the value of the awarded phase II tender by $430,000. The Change Order followed the approval practice at the time; it was signed-off by the architect and the Director of Municipal Facilities and a total of $430,70039 was added to the contract value.

The effect was that the change order created a financial commitment greater than the awarded tendered amount. The funds committed as a result of the change order were $10,954,033, while the official awarded amount for the tender was $10,524,033.

The additional funds (i.e. $430,000) were not awarded by a level of authority based on a cumulative or aggregate value. The municipal policies do not provide guidance on the administration of changes to submitted tender prices or the final awarded tender amounts. However, in principle once an

39

Note: There is a discrepancy of $700. The successful proponent (i.e. Pomerleau Inc.) sent e-mail saying that the price of item #7 was $29,000 CR. The Revised Tender Response sheet shows $29,000 with “7” overwritten in the hundredth position. (i.e. $29,700).

The change order

created a financial

commitment

greater than the

awarded

tendered amount.


Page | 44

approval level has been reached it should not be lowered. As an example, once the City Council level of approval has been reached a subsequent increase to the tender amount should revert to City Council regardless of dollar value. In this case, the change order has the effect of increasing the value of the tender from $10,524,033 to $10,954,033 without the consent of Council. The change order was not brought to City Council for approval.

A cause could be that the original tender response sheets identified all thirteen (13) optional items as lump sum additions for extra work (i.e. debit amounts). Later, the tender response sheets were changed (i.e. Revised Tender Response Sheets) to identify eight (8) of the eleven (11) optional items as lump sum reductions (i.e. credit amounts); three (3) remained as extra work (i.e. debit amounts) and two (2) items were deleted from the list of options.

The submitted Revised Tender Response Sheets stated the following at the top of the Optional Prices section:

“(All unit prices specified below shall NOT be included with the Total Tendered Price to be submitted on Page 20 of the Tender Response Sheet(s). Depending on the availability of funding, the City may choose to exercise one (1) or more of the optional items described below to the scope of the construction project, at the unit prices specified herein).”

As well, the following note was added for seven (7) of the eight (8) optional credit items on the Revised Tender Response Sheets:

“NOTE: Cost of <<insert optional item>> shall be included in Total Tender Price specified on Page 20 of the Tender documents, and as per drawings dated July 4, 2008”.

These are clearly contradicting statements that could have easily led to confusion and resulted in the two (2) optional debit items being erroneously identified as credit items.

CRF Details - Tender Award/ Approvals

The April 20, 2009 Council Report Form (CRF) did not describe what scope changes were being proposed due to the elimination of optional items from the project. If the optional items being modified were described and listed it is more likely that the erroneous elimination of the “South-end Bleachers” for $405,000 would have been detected during the CRF reviews, since this was a large part of the project.


Page | 45

Warm-up and Practice Tracks Not Tendered

The responsibility for the procurement function was also disbursed between the City’s Purchasing section of the Finance Department, the initial Director of Municipal Facilities and the Architect. There was no competitive procurement process used to solicit bids in accordance with the NB Crown Construction Contracts Act, the Atlantic Procurement Agreement or the Agreement on Internal Trade.

A fee proposal in the amount of $1,282,461 for the construction of one (1) warm-up track and two (2) practice tracks was submitted by Acadian Construction (1991) Ltd. and was accepted by Koch Architecture Inc. This fee proposal forms part of a contract dated July 17, 2009, between the City of Moncton and Acadian Construction (1991) Ltd. On July 28, 2009, a Construction Management Contract between the “City of Moncton (acting as an agent for Moncton 2010)” and Acadian Construction (1991) Ltd. was also signed. The total expenditures related to this contract are $1,987,248.

The Memorandum of Agreement and the Joint Venture Agreement between UdeM and the City defined the warm-up and practice tracks as part of the “Stadium” and also indicated that the City would be responsible for the call for tenders for the construction of the stadium.

New Brunswick municipalities are not required to follow the Crown Construction Contracts Act, unless they state that they shall conform to it. The stadium Building Committee minutes dated April 4, 2007 indicate that the Crown Construction Contracts Act would be followed.

The thresholds in the Crown Construction Contracts Act, Atlantic Procurement Agreement, and Agreement on Internal Trade for the public tender of construction contract were surpassed (see table 8). The requirements of the contracts are stated below.

NB Crown Construction Contracts Act

NB Crown Construction Contracts Act - C-36 (82-109) Regulations40 states:

4(1) Subject to subsection (2), every award of contract for the construction, repair or alteration of land or structures owned by the Crown shall be preceded by public tender.

4(2) Where a proposed contract for the construction, repair or alteration of land or structures owned by the Crown has a value, estimated by a Crown engineer or architect, of less than,

(c) in the instance of works other than highways, forty thousand dollars, the award of contract may be preceded by tenders invited

40

Source: http://laws.gnb.ca/en/ShowPdf/cr/82-109.pdf ; last accessed October 5, 2012.

http://laws.gnb.ca/en/ShowPdf/cr/82-109.pdf


Page | 46

from not fewer than three persons, or

rather than preceding the award of contract by public tender.

4(4) Where an award of contract would fall within the provisions of subsection (2) but those provisions are not followed, the award shall be made in accordance with subsection (1).

Atlantic Procurement Agreement

Section 2 iv) of the Atlantic Procurement Agreement (APA) states that it shall apply to procurement contracts for goods, services and construction by entities in “Appendix B”, which includes municipalities as defined in the NB Municipalities Act, where the estimated value of a construction contract is $100,000 or greater. The APA also states in section 3 i) that except as otherwise stated, all provisions of the Agreement on Internal Trade apply to public procurement for the bodies reference in Section 2 i) which includes municipalities as defined in the NB Municipalities Act.

Agreement on Internal Trade

Article 502(4) of the Agreement on Internal Trade (AIT) indicates that Annex 502.4 establishes the provisions to cover procurement by municipalities.

Section C(3) of Annex 502.4 of the AIT applies where the procurement value of a construction contract is $250,000 or greater. Section G(1) states that “Procurements covered by this Annex shall be subject to a tendering process”.

NB Crown Construction Contracts Act

The Crown Construction Contracts Act does not formally apply to Municipalities.

In accordance with the Regulation under the CCCA, if the estimated value of the procurement for construction (other than highway) is $40,000 or greater, a public tender must be issued. Although this legislation does not formally cover municipalities, they are expected to follow the basic principles as they are consistent with the trade agreement that applies to municipalities41. If a municipality issues a tender that indicates that it is being tendered under the Crown Construction Contracts Act, then the rules and procedures in that Act must be followed42.

The audit found that contract for the construction of the warm-up and practice tracks was not tendered in accordance with the Crown Construction Contracts Act.

41

Local Government Resource Manual (4/12/2011) - Section 9 Page 2; http://www.gnb.ca/0370/0370/0003/0009-e.asp ; last accessed November 5, 2012.

42 ibid

The construction of

the Warm-up and

Practice Tracks was

not in accordance

with the NB Crown

Construction

Contracts Act,

Agreement on

Internal Trade and

Atlantic

Procurement

Agreement.

http://www.gnb.ca/0370/0370/0003/0009-e.asp


Page | 47

It is assumed that competitive procurement will provide the best value for money. Since there are no competing suppliers it is not possible to determine if the best value for money was received. As a result, the City could have received less value than if the contract was tendered.

Other suppliers could potentially have sought legal remedies or other recourse due to their inability to submit a bid to a public tender and the public’s perception of the transparency in the City’s competitive procurement process may be decreased.

The City entered into a “Transfer of Rights” Agreement with Athletics Canada and the Local Organizing Committee in September 2008. Interpretation of the “Transfer of Rights” agreement indicates that except for the “event venue/stadium”; the Local Organizing Committee had the rights, responsibilities and obligations for all activities including the construction of the warm-up and practice tracks.

However, the appointment and transfer of certain rights to a “Local Organizing Committee” should not permit the municipality from circumventing the spirit and intent of public tendering statues.

Architect Fees

Architectural Services are exempt43 from the regulations of the Public Purchasing Act and the Agreement on Internal Trade.

NB Public Purchasing Act: Section 27 - Services

Agreement on Internal Trade: Annex 502.4 Section L (Non-Application), Appendix C Circumstances, Appendix D Sole Suppliers, Section 27(1) Circumstance.

An architect’s fees are made up of two elements44: fees for architectural services (the major component); and reimbursable expenses for out-of-pocket expenses (such as travel and communications, and reproduction of contract documents). After the client and the architect reach agreement on the extent and nature of services to be provided for the project, the architect’s fees can be determined in several ways, including:

lump sum (fixed fee);

time basis (hourly or per diem rates); and

percentage (of construction cost).

The Memorandum of Agreement between the City and UdeM states that the university will select the architect but that the fees would be paid from the

43

Note: On April 16, 2012, City Council passed a motion to tender all Professional Services and not invoke the exemptions professional services provided in the legislation. 44

Royal Architectural Institute of Canada, www.raic.org

The construction

project would have

saved $81,655 if

the rate charged

for architectural

services for the

Warm-up and

Practice Tracks was

maintained at the

original contract

rate.

http://www.raic.org/


Page | 48

project funding. A contract between the City of Moncton and Koch Architecture Inc. for architectural services for the “Athletic Stadium” project was signed and dated July 28, 2009. The contract indicated a “construction budget” of $17.5 million, with the fee being calculated at a rate of 8.57% on the initial $8 million “construction costs” and 6.49% on the remaining “construction costs”.

The architecture fee is calculated based on “construction costs” as defined in the architectural contract which includes allowances, building permit fees, management fees, and all applicable taxes, whether recoverable or not. As the project “construction costs” increase, the architectural fees increase as well.

Although the following three agreements all define the project as the construction of a stadium that includes training and warm-up facilities, the project was defined in the architectural contract with Koch Architecture Inc. as only an “Athletic Stadium”.

Event Organization Agreement (2006-03)

Memorandum of Agreement between City and UdeM (2007-01-23)

Joint Venture Agreement between City and UdeM (2008-04-13)

New Rate for Warm-up and Practice Tracks

As a result, additional architectural services were required for the design of the training and warm-up facilities. Internal communication states that staff was to amend the existing contract with Koch Architecture Inc. to supply the additional services. No amendment to the Koch Architecture Inc. contract was found. Instead the architectural services for the training and warm-up facilities were performed by Architecture 2000 Inc. for the construction of one (1) warm-up track and two (2) practice tracks. However, no contract with Architecture 2000 Inc. was found in the municipal records.

It should be noted that on May 1, 2008, Edmond Koch ceased to be the sole a Director of Koch Architecture Inc. and two new directors were appointed. The two new directors were existing directors of Architecture 2000 Inc. This may be a contributing factor as to why a contract extension was not made with Koch Architecture Inc. The sister companies also have the same business address.


Page | 49

àTable 10

$ 2,087,391 Practice Track and Warm-up Construction Costs

x 6.49% Koch Architecture Inc. Rate

$ 135,472 Estimated Koch Architecture Inc. Fee

$ 217,127 Actual Architecture 2000 Inc. Fee

$ 81,655 Unrealized Savings

Nevertheless, the rate charged on the invoices was 10% of the total construction costs for a total fee of $217,127. If the effective rate charged for architectural services was maintained at the rate of the original contract with Koch Architecture Inc. (i.e. 6.49%) instead of increased to 10%, the construction project would have saved $81,655 (Table 10).

RECOMMENDATIONS:

19. THAT there be a clear separation on the Tender Response Sheets, between the Optional Prices that are additions to the Total Tender Price (i.e. debits), from the Optional Prices that are reductions from the Total Tender Price (i.e. credits).



The practice is that the additions and reductions for optional prices are clearly indicated on the Tender Response Sheets and are separated from the base bid on the Tender Response Sheet. This is industry practice and has been in place in the City of Moncton for many years. The error which occurred upon the awarding of the Stadium project was a human error and not contributed to or by the tender format.


Page | 50

20. THAT the municipal policies be updated to provide guidance on the administration and specifically the approval of changes to submitted tender bids and final awarded tender amounts.



The process of revising final recommended tender amount is permitted in accordance with the terms and conditions of a tender document. This adjustment to the final awarded tender amount would occur to ensure the project costs would fall within the allotted budgets. The significant change orders that occurred subsequent to the tendered bids being submitted on the Moncton Stadium was an anomaly and is not a normal occurrence for City of Moncton projects.

21. THAT the municipal policies be updated to provide guidance on the administration and approval of Change Orders.



This recommendation is similar to # 15 and 16. Please see commentary for those recommendations.

22. THAT the municipal policies be updated to specify whether approval levels are based on transaction value or Aggregate Amendment Value.



In practice, the approval levels are based on transactional values. Where the cost of the items (most likely change in scope or design) falls under the project budget, approval is permitted for the project manager, but there it exceeds the budget, additional authorization is required.


Page | 51

23. THAT all the tender price adjustments are clearly itemized on the Council Report Form along with the rationale for the adjustment.



Agree that in the case of the Moncton Stadium project any adjustments should have been reflected in the Council Report Form. However, it is the City’s current business practice to include significant tender price adjustments and explanations on the Council Report Form with rationale for the adjustment to allow Council to understand the process that has taken place.

24. THAT the municipal policies be updated to clearly identify the requirement of the:

- NB Public Purchasing Act, - Agreement on Internal Trade, - Agreement on the Opening of Public Procurement for New

Brunswick and Quebec (2008), - Atlantic Procurement Agreement. Management Response:


The City of Moncton’s corporate purchasing policy deals with the acquisition of goods and services that fall BELOW the thresh holds of these acts and trade agreements. The Corporate Purchasing Policy can be updated to acknowledge these Acts, and briefly outline the thresh holds that apply to each act/trade agreement.

25. THAT the municipal policies be updated to provide guidance on how to comply with existing procurement laws and trade agreements.



It is the role and responsibility of the Purchasing Department staff to provide guidance to all City employees as to the compliance to such laws and trade agreements


Page | 52

26. THAT the City determines under what circumstances, if any, that the NB Crown Construction Contracts Act will be utilized and that the municipal policies be updated to reflect these circumstances.



The NB Crown Construction Contracts Act does not apply to municipalities unless they want to mandate it. The Act also requires all construction related work over $ 100,000 in value be tendered. It is not the City’s intent to mandate that this Act be followed. In practice, most of the City’s construction related work, regardless of dollar value, is subjected to a formal or informal competitive bidding process, or is documented within the City’s purchasing records if it requires a sole source. Because numerous parties and external stakeholders were involved in the Moncton Stadium project, it was determined that the NB Crown Construction Contracts Act would be followed. This decision was made by the Building Committee as supported by minutes of April 4, 2007 whereby it was resolved that the CCCA would be followed.

27. THAT the justification for the selection of non-competitive (i.e. sole source) procurements is documented.



It is standard practice for full documentation and justification provided to Council where there is a selection of a vendor that is of a non-competitive (sole source) nature. In the case of the Moncton Stadium project, the selection of a vendor without procurement competition to complete the Practice Tracks was done so by the Building Committee. The decision based on managements’ understanding is be based on the facts that the vendor was extremely competent, had already been engaged on an existing phase of the project and that the timeline requirements of the completion of the Practice track did not allow for a full competitive process to be followed.


Page | 53

F) Records Management

During the audit, four (4) of sixteen (16) contracts could not be located in the corporate records management system. The contracts were unable to be located by the City Clerk’s office, the City Solicitor’s office or the RPTC Department overseeing the stadium construction.

Contracts Not Found

A total of four (4) contracts were not found in the municipal records.

Three (3) contracts with Organisports Consultants Inc. did exist but could not be located in the municipal records. Copies of the contracts were provided by the consultant.

As indicated above, the Municipalities Act states that contracts must be signed by the City Clerk and the Mayor; therefore, the audit expected to find the contracts signed and in the municipal records.

One (1) contract with Architecture 2000 Inc. for the delivery of architectural services for the construction of the Warm-up and Practice Tracks was not found in the municipal records. The value of this contract was $217,127.

Contract Management and Review

There was no corporate knowledge or control over the financial exposure that the contracts added to the City.

Copies of the four (4) contracts were not provided to the City Solicitor’s Office. As a result, there was no legal review of the contract terms from the City Solicitor’s Office to ensure that no undue exposure to the City was undertaken.

Centralized Records Management System

The audit found that the records management processes to track and manage information, records and documents, including contracts, was ineffective.

The City has effectively two records management practices. The first is the use of a computerized records management system, which can track paper and electronic records but is primarily used to track Council Meeting agendas, minutes and some contracts that have been approved at a public or private session of Council. Meanwhile, a second decentralized records management system whereby each department maintains their own paper records is also in place. Having two separate records management systems creates duplication and confusion since there are no clear municipal policies or guidelines for records management processes.

Generally, records management practices are very inconsistent. Records in

The records

management

processes to track

and manage

information,

records and

documents,

including contracts,

was ineffective.


Page | 54

electronic and paper formats are managed differently. Many current recordkeeping decisions, especially for electronic records, are based on personal preference or discretion, rather than standardized municipal wide recordkeeping rules and procedures45.

As a result, the City is at risk of not have been able to retrieve the contracts or other documents in order to fulfill a request under the access to information act (i.e. RTIPPA46).

Matching Invoices to Contracts

The approval and payment of the vendor invoice is a key control in the process. The matching of the vendor’s invoice to a purchase order, blanket order, or a contract before payment is a preventive control that provides independent oversight by the Account Payable staff to determine if the departmental expenditures have the proper authority.

The City’s Finance Department has a naming convention to distinguish between various types of payments, such as those matched to a Purchase Order, Consultants invoices, or invoices without any purchase order. These are referred to as batch types. l

Consultants’ invoices should be attached to a duly authorized payment request form with the contract attached (i.e. Batch type I11 – Consultant Invoices). In this case there was no contract on record to attach for confirmation but the payments were processed nonetheless.

A review of the payment batch types used to identify the Organisport Consultants Inc.’s invoices in the procurement to payables process identified inconsistencies. Five (5) of twenty-five (25) invoice payments related to the contract period were coded properly as Consultant Invoices (i.e. Batch type I11). There was no Accounts Payable matching of invoices to the contract to verify that the correct amounts were being paid.

45

Records and Information Management Needs Assessment, Infomatrix, January 2013, p.3 46

Right to Information and Protection of Privacy Act of New Brunswick

There was no

matching of

invoices to the

source contract to

verify that the

correct amounts

are being paid.


Page | 55

RECOMMENDATIONS: 28 THAT the City of Moncton implements a comprehensive municipal wide

Records and Information Management Program to manage the records lifecycle regardless of media type.



The records management process is currently under review. As Moncton entered into the world of the Right to Information and Protection of Privacy Act (RTIPPA), on September 1, 2012, it became evident that a review of recordkeeping practices, particularly as they pertain to electronic records, would be necessary. A review of the City of Moncton records and information management practices for both paper and electronic environments was conducted in December of 2012 and the report provides recommendations for establishing more consistent and effective recordkeeping. It includes recommendations on the continued use of the Provincial Archive’s Municipal Records Authority (MRA), a RIM (Records Information Management) policy, procedures and guidelines, governance and staffing, active and inactive records and information management, the use of software and technology in recordkeeping and delivers a strategic plan that provides a roadmap for the establishment of enhanced municipal wide records and information management practices. This report is currently under review and a go forward strategy is being developed. It should be noted that the City Clerk’s Office strictly adheres to the Municipal Records Authority and all appropriate records keeping practices relative to the records of Moncton City Council are appropriately managed.

29. THAT the City establishes policies and procedures governing records

and information management.



This will be part of the above strategic plan.


Page | 56

30. THAT all individuals dealing with corporate records be provided with

training on the procedures and records management requirements.



See above, training during and following implementation will be provided.

31. THAT the municipal policies be updated to include guidance on when it is required to obtain an internal legal review of contracts, in order to assess the risk to the City.


Management agrees with this recommendation and the process normal practice for the City of Moncton

Since the beginning of the 2008-2012 City Council administration, contract management both relative to signing authorities and records storage has changed significantly. In a nutshell, contracts are not signed or entered into without a memorandum from the Legal Department accompanied by the appropriate authorizing resolution indicating that they have been reviewed for content and are ready for execution. With regard to the three contracts with Organisports Consultants Inc. it is highly unlikely these were ever provided to the Clerk’s Office for retention as they were not signed or executed by the Mayor and Clerk.

32. THAT all employees dealing with contracts be provided with training and guidance on the procedures, approvals, records management requirements, and risks associated with contracts.



No further comment.


Page | 57

33. THAT prior to payment, consultant invoices be matched and validated with the consultant’s contract by the Finance Department.



The matching and validation of consultant invoices to consultant contracts is currently a standard procedure in the Finance Department. At the present time, a significant percentage of consultant engagements are documented via a standing purchase order, RFP or an approved purchase order that define the terms and conditions of the consultant efforts and charges.


Page | 58

G) Contract Approvals

Some initial research, planning, consultation, and architectural design were done to prepare the proposal to the IAAF. The initial agreement with the IAAF to award the games to the City of Moncton was signed in Japan in late March 2006.

Between 2006 and July 2009, a total of 15 contracts or agreements relating to the construction of the stadium were identified. Fourteen (14) were found and reviewed while one (1) contract could not be located.

The legislation guiding municipalities on their authority to enter into contracts on behalf of the municipal corporation is in the Province of New Brunswick Municipalities Act, which states that:

10.2(2) All decisions of a council shall be

(a) made in a regular or special meeting of the council, and (b) adopted by a by-law or resolution of the council.

10.2(2.1)No act or decision of a council is valid unless it is authorized

or adopted by a by-law or resolution at a council meeting.

The Act also reads that only the mayor and clerk may sign the contract on behalf of the city.

5(2) Except as provided by regulation, no agreement, contract, deed or other document made or issued after January 1, 1967 to which a municipality is a party has any force or effect unless it is (a) sealed with the corporate seal of the municipality, and

(b) signed by the mayor and the clerk.

As a result, the audit expected to find Council Resolutions to authorize each contract that was executed by the City with the signatures of the Mayor and City Clerk.

Common Law Exceptions

However, there are clearly some practical concerns when arguing in support of the formal approval of all contracts. As a result, the following Common Law Exceptions47 have been recognized to exempt the need to approve certain contracts:

47

Rogers, Ian MacF.; The Law of Canadian Municipal Corporations (Second Edition 2009) ; Section 197.33


Page | 59

1. Insignificant or trivial matters involving small sums; 2. Matters of so frequent occurrence that they must by necessity be

attended to without waiting for the formality of the seal, or matters of urgency or necessity;

3. Where the corporation has received the benefit of goods and services supplied to it;

4. Contracts respecting land where there are acts of part performance as would operate in equity in the same matter as if the corporation were an individual;

5. Contracts in the name of the corporation made by agents authorized under the seal of the corporation to make such contracts;

6. Contracts made by a municipality where it is functioning as a trading corporation such as supplying a public utility.

The audit found that a “cascading” of approval occurs when a properly authorized contract contain a clause that directs the City to enter into a second subsequent contract. For example, the City of Moncton and UdeM signed the Memorandum of Agreement (MOA) on January 2007. The MOA stated that the City would subsequently enter into a Partnership Agreement, two Lease Agreements and an Architectural Contract. A resolution of council was passed to approve the execution of the MOA but the four (4) subsequent contracts were not brought before council for separate resolutions.

Nonetheless, as indicated in exception 2 (above), when the requirement to enter into an agreement was stipulated in a previously approved agreement and is non-negotiable; they are considered “matters of necessity” and would be exempt.

Contracts were signed by Mayor and City Clerk

A total of sixteen (16) contracts relating to City of Moncton and the 2010 IAAF Games were identified and total of thirteen (13) contracts were located in corporate records for review. The three (3) contracts with Organisport Consultants Inc. were not found in the corporate records.

Twelve (12) of thirteen (13) contracts located were signed by Mayor and City Clerk. The unsigned contract was later ratified by City Council.

Three (3) other contracts were provided by the contractor in electronic form only and therefore not tested.

One (1) contract was signed by the Mayor and the City Manager (not the City Clerk), in Osaka, Japan at the 2006 IAAF World Junior Games. The City Clerk was not in attendance. However, this contract was ratified by a motion of Council in approving the Memorandum of Agreement (MOA) with UdeM on

Twelve (12) of

thirteen (13)

contracts located

were signed by the

Mayor and City

Clerk.


Page | 60

November 20, 2006.

Council Resolutions

A total of sixteen (16) contracts (or agreement) relating to City and the 2010 IAAF Games were identified and total of thirteen (13) contracts were located in corporate records for review. The three (3) contracts with Organisport Consultants Inc. were not found in the corporate files.

i. Five (5) of sixteen (16) contracts had a Council Resolution authorizing their execution.

ii. Eight (8) of sixteen (16) contracts had common Law exceptions as defined in Rogers48.

The “enforceability” or the “validity” of a contract should be distinguished from the approval or support by City Council for the commitments made in the contract. Although a contract may remain enforceable after the fact under Common Law Exceptions, for significant contracts, the prior approval by a motion of City Council in support of the contract is a preferred control.

The audit found that some exceptions could potentially create a significant obligation on behalf of the City, such as in the case of contracts that are binding on the corporation since the City has “received the benefit of goods and services supplied to it”49 and contracts relating to “matters of urgency or necessity”50 which need to be expedited quickly. In these cases it is recommended that the Mayor, Council and City Clerk should be provided with the contracts, even if it is after the fact.

The audit found that the Legal Services Department’s use of the Common Law Exceptions as defined in Rogers appears reasonable and justified as a common practice to release the City from the requirement to have these contracts approved by City Council. However, the review also found that for clarity and transparency of the practice and use of Common Law Exceptions, that the City should define their use in a policy and also provide regular reporting to City Council of when the exceptions were invoked. Additionally the Mayor, City Council and the City Clerk should be notified as soon as reasonable, when a contract has been entered into as a result of the exception where the “corporation has received the benefit of goods and services supplied to it”; or if the contract is the result of “matters of urgency or necessity”.

48

Rogers, Ian MacF.; The Law of Canadian Municipal Corporations (Second Edition 2009) ; Section 197.33

49 Rogers, Ian MacF.; The Law of Canadian Municipal Corporations (Second Edition 2009) ; Section 197.33

50 Rogers, Ian MacF.; The Law of Canadian Municipal Corporations (Second Edition 2009) ; Section 197.33

The Legal Services

Department’s use

of the “Common

Law Exceptions”

appears

reasonable and

justified.


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RECOMMENDATIONS:

34. THAT all contracts and agreements, excluding the Common Law Exceptions, be signed by the Mayor and City Clerk, as stated in the New Brunswick Municipalities Act.



Since 2008, all contracts requiring the signature of the Mayor and City Clerk will not be signed unless accompanied by a memo from the Legal Department indicating that the contract has been reviewed and is consistent with Council approval where required and obtained. In the case of the Moncton Stadium project, the contracts with Organisport would most likely have been agreed to by the General Manager of EDTC and had failed to forward copies appropriately to the Clerk and Mayor for final approval and signing.

35. THAT the municipal policies be updated to clearly identify the Common Law Exceptions that may be used to release the City from the requirements for the approval of contracts and agreements as stated in section 10(2) of the Municipalities Act.



36. THAT the Mayor, City Council and the City Clerk be notified within one (1) month, when a contract has been entered into as a result of the following Common Law Exceptions:

- Where the “corporation has received the benefit of goods and services supplied to it”;

- Where the contract is the result of “matters of urgency or necessity”.


Management agrees with the recommendation. No further comment.


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Appendix 1- Timeline

Date Item 2005-Feb-19 Organisport is hired as a consultant. 1st invoice received.

2005-Jul-18 Motion from Private meeting

2005-Aug- E. Koch hired as Architect for initial concept.

2005-Dec-08 2006 Capital Budget approval

2006-Mar-29 IAAF Selects Moncton for 2010 Juniors

2006-Mar-?? Agreement signed with IAAF

2006-Nov-20 Motion to enter into an Memorandum of Agreement with the Universite de Moncton.

2006-Dec-04 Appraisal of stadium lands.

2006-Dec-18 Move the Province's $3.5 M to General CAPITAL Reserve fund.

2007-Jan-23 Memorandum of Agreement signed with UdeM

2007-Feb-09 2007 Capital Budget approval

2007-Apr-10 ACOA ICF Letter of Offer

2007-Oct-29 Contract - Athletics Canada and City of Moncton (Local Organizing Committee)

2007-Dec-12 2008 Capital Budget approval

2007-Dec-17 Award Tender for Clearing and Grubbing

2008-Apr-13 L'Universite de Moncton et Ville de Moncton - Accord de CoEntreprise (Joint Venture Agreement)

2008-Apr-13 Convention de Bail entre L'Universite de Moncton et la Ville de Moncton (Lease Agreement)

2008-Apr-13 Koch Achitecture Inc. contract

2008-May-05 Award Tender for Phase I - Acadian Construction

2008-May-05 Award Tender for Synthetic Track - Mondo

2008-Aug-12 Contract - Phase I -Acadian Construction

2008-Sep-01 Transfer of Rights Agreement - IAAF, Atheletics Canada, City of Moncton

2009-Jan-16 2009 Capital Budget approval

2009-Apr-20 Award Tender Phase II- Pomerleau

2009-Apr-21 Contract - Phase II- Pomerleau

2009-May Committed project costs exceeded the Approved Funding

2009-Jun-01 Contract - Synthetic Track -Mondo America

2009-Jun-30 Convention de Bail Interimaire entre L'Université de Moncton et Ville De Moncton

2009-Jul-17 Contract A - Warm-up Tracks - Acadian Construction

2009-Jul-28 Contract B - Warm-up Tracks - Acadian Construction

2009-Dec-07 Resolution to withdraw $3.5M from the Gen Cap Reserve (GNB funding)

2009-Dec-17 2010 Capital Budget approved.

2010-Jan Project Costs exceed the Approved Funding.

2010-Jan-06 Canada Revenue Agency (CRA) Ruling on Tax credits for the Stadium Construction.

2010-Jul-19 IAAF World Junior Track and Field Championships held in Moncton from July 19 to 25, 2010.

2010-Aug-16 City Council adds $540,000 in funding.


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Appendix 2 – Project Costs

RECONCILE TOTAL PROJECT COSTS (Excludes HST)

Construction Costs: (excl HST)

Clearing Contract 154,900$

Phase I Tendered 5,853,054$

Phase I Change orders 557,215$

Total Phase I 6,410,269$

Phase II Tendered 10,524,033$

Phase II Change orders 1,047,580$

Total Phase II 11,571,613$

Synthetic Track Tendered 1,195,949$

Synthetic Track Change orders 92,381$

Total Synthetic Track 1,288,331$

Practice & Warm-up Tracks Contract (excl. Mgmt fee; shown below) 1,182,461$

Practice & Warm-up Tracks Change Orders 739,014$

Less: Adjustment (74,227)$

Total Practice & Warm-up Tracks 1,847,248$

CFL Fit-out - Contractor costs 517,490$

Total CFL Fit-out 517,490$

Architectural Fees:

19,234,217$

Add HST (x 13%) 2,500,448$ Only for calc of Architect Fees

21,734,665$

Architecture fee on first $8M @ 8.57% 8,000,000$ x 8.57% = 685,600$

Architecture fee on balance @ 6.49% 13,734,665$ x 6.49% = 891,380$

Architecture Fees - Phase I, II, Synthetic 1,576,980$

1,921,475$ Before adjustment

Add HST (x 13%) 249,792$ Only for calc of Architect Fees

Architecture fee base amount 2,171,267$

2,171,267$ x 10% = 217,127$

Architecture Fees - Practice & Warm-up Tracks 217,127$

Architecture Fees - Initial Design 37,296$

Architecture Fees - CFL Fit-out 540$

Total Architecture Fees 1,831,943$

Project Management Fees U de M 68,648$

Facility Consultant Fees Organisports 88,674$

Management Fee - Practice & Warm-up tracks ACL 140,000$

Total Construction Management Fees 297,322$

Other Costs: (excl HST)

Synthetic Track - Lab & Field Testing 51,511$

Wireless Equipment 43,646$

Insurance 52,504$

Professional Services - HST Ruling 38,013$

Track Consultant 17,421$

Brush cutting 16,072$

Flooring & stairs 15,370$

Ground Preparation 13,512$

Field & Turf Repairs 13,338$

MONCTON 2010 INC 10,800$

INTERNATIONAL ASSOCIATION OF ATHLETICS 10,595$

Air travel 10,297$

Staff Labour 29,443$

Printing & copies 22,971$

Other transactions (less than $20,000 ea.) 107,789$

Total other costs: 453,280$

Total Project Costs 24,372,396$

Architecture Fee rate @ 10%

Total Costs Phase I, II, Synthetic Subtotal

Total Costs Practice & Warm-up Tracks Subtotal

Fee base amount


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