Background

Since its October 2002 inception, CTRMA has chosen to depend almost exclusively on service contractors rather than employees for its needs, using them for a variety of financial, accounting, general counsel, investment banking, bond counsel, auditing, trustee, marketing and engineering services.

Some of CTRMA’s prime contractors, such as its general engineering consultant (GEC), HNTB Corporation of Kansas City, Missouri, have agreements with subcontractors or have formed alliances with other firms to provide services to CTRMA. The others are sole contractors (Exhibit 8). HNTB has hired subcontractors directly without using a public purchasing process, as allowed by law.

Initial Operations

The CTRMA board examined toll-road operations in Texas and Florida to determine an appropriate model for its staffing and organization.[36]

One model studied was the North Texas Tollway Authority (NTTA), which operates four toll facilities in the Dallas metropolitan area. NTTA is a large operation that employs 500, including design and construction engineers, contract managers and toll takers, and has 60 ongoing projects. The estimated cost for NTTA’s seven largest projects currently in development is $2.5 billion.[37]

The other model—the one CTRMA preferred—was that of Florida’s Orlando-Orange County Expressway Authority (OOCEA). OOCEA, in operation since 1963, manages a 92-mile expressway in the metropolitan Orlando area.[38] OOCEA depends heavily upon contractors rather than in-house staff. It employs 42 persons, using dozens of contractors to execute a five-year plan of 76 projects costing an estimated $1.4 billion.[39]

While CTRMA identified OOCEA as its model, the Texas authority makes even greater use of outsourcing. The authority did not hire its first employee, Executive Director Mike Heiligenstein, until December 2003, more than a year after CTRMA began operations and well after the GEC contract was signed. An administrative assistant joined the authority in February 2004. And the critical role of chief financial officer was not filled on a full-time basis until November 29, 2004.

On January 26, 2005 the new CFO presented, and the CTRMA board approved, the authority’s first operating budget. The authority had functioned for two years without an operating budget. The newly approved budget can be found in Appendix 4.

Until November 2004, CTRMA had just one full-time employee, the executive director, and one part-time administrative assistant. In November 2004, CTRMA hired a chief financial officer and in February 2005, the CTRMA board announced the hiring of a director of Operations and a communications director (Exhibit 9).

An independent transportation and engineering consultant for CTRMA told the review team that, if he could do anything differently in the formation of CTRMA, he would have urged the board to hire employees more quickly, to reduce its dependence on contractors and allow it to better evaluate contractor performance.[40]

Purchasing Requirements

CTRMA’s purchasing policies require contractors to comply with state purchasing laws and regulations, including Chapters 223 and 370 of the Transportation Code and Chapter 2254, Subchapter A of the Government Code.[41]

Throughout 2003, CTRMA issued public requests for qualifications (RFQs) to acquire various professional services. This process followed CTRMA’s procurement policy. CTRMA notified potentially interested parties and published a notice in the local newspaper; named a committee of CTRMA board members and interim staff to review proposals; “short-listed” the most qualified three or four candidates; and interviewed them. The selection committee then recommended its choices to the CTRMA board.

CTRMA has conflict of interest policies concerning its staff and board members, the authority’s prime contractors and those contractors’ “key personnel.” (See Chapter 3 of this report for more information.) The policy states that those receiving more than $10,000 over 12 months should be listed on CTRMA’s Web site. These policies, however, should, but do not expressly apply to subcontractors.

The review team found that some of CTRMA’s practices require stricter attention, particularly in the area of subcontractor oversight (see Chapter 3).

One business practice that could be improved is CTRMA’s documentation of its contractor selections. Scoring sheets provided by CTRMA featured short descriptions of criteria used to evaluate candidates, but did not identify their relative importance or value, or the actual scores assigned by individual committee members.

Because CTRMA had no staff initially, its contractors evaluated and commented on candidates for other CTRMA contracts. The review team found that, in at least one instance, a contractor’s comments after candidates had already been evaluated and scored changed the outcome. An e-mail from an individual working for one of CTRMA’s financial advisors recommended that a candidate for bond counsel services, which was ranked second after the initial evaluation, receive additional points for being a larger firm, even though the size of the firm was not a specific evaluation criterion.

Additional credit was added, raising the initial “qualification” score of the second-placed firm from 8.50 to 9.45. That change, plus a score from a subsequent oral interview in which this firm received 0.25 more points than its top competitor, allowed the larger firm to best the former first-place team by 0.04 points in the overall final rating.[42]

Allowing contractors to comment on the selection of other contractors apparently is not unusual in transportation, according to those in the industry, but it is unusual to change scores after the initial evaluation.

Stricter adherence to the stated selection criteria would have provided the public with greater assurance that its tax dollars were being spent fairly and wisely.

Prime Strategies, Inc.

CTRMA’s first contractor was Prime Strategies, Inc., an Austin transportation consulting firm led by its principal, Mike Weaver. Prime Strategies is also Williamson County’s road bond manager for its multi-corridor transportation plan, which will build roads using $350 million in bonds approved by voters in 2000.

In 2002, Williamson and Travis counties retained Prime Strategies “to assist in the formation and initial operations of CTRMA.”[43] Prime Strategies subcontracted with Brian Cassidy of the Austin law firm Locke Liddell & Sapp LLP for general counsel services.

In January 2003, Williamson County transferred its transportation consulting contract with Prime Strategies to the newly created CTRMA.[44] At that time, the CTRMA board asked Weaver and Cassidy to serve as an interim staff for the authority and to begin developing requests for qualifications for professional services. In February 2003, the CTRMAboard approved procurement policies and procedures prepared by Weaver and Cassidy.[45] The two continued to operate as CTRMA’s interim staff until Prime Strategies’ contract expired on August 31, 2004.

The CTRMA board subsequently selected Brian Cassidy of Locke Liddell & Sapp over several competitors to serve as the authority’s contracted general counsel, a position he still holds.

HNTB Contract

HNTB Corporation is CTRMA’s largest contractor, in terms of both dollars and scope. In July 2003, CTRMA selected HNTB over two other competitors for a five-year contract to serve as the authority’s general engineering consultant. As GEC, HNTB is responsible for:

• public liaison;

• technical services;

• project, design and construction management;

• administrative services;

• maintenance and operational services;

• advanced project development;

• engineering services;

• feasibility evaluations of proposed toll-road projects;

• right of way acquisition;

• relocation of utilities, railroad tracks and other obstructions;

• mobility planning;

• environmental services, including the acquisition of environmental permits for construction;

• architectural and landscaping services; and

• surveying and mapping.

HNTB now serves as CTRMA’s de facto staff, subject to the oversight of the authority’s board, executive director and chief financial officer. The contract provides that:

(t)he GEC will operate as an extension of, and in complete coordination with, the Authority’s (CTRMA’s) staff. To that end, the GEC shall be expected to represent, promote and advance the interests of the Authority throughout all aspects and phases of the Authority’s activities and shall, when and as requested by the Authority, fully support the Authority in its dealings with contractors and suppliers, engineers and other consultants, the Authority’s counsel and accountants, traffic and revenue advisors, rating agencies, bond insurers and underwriters, governmental entities and the public in accordance with the highest professional standards.[46]

HNTB has selected a large group of subcontractors to assist CTRMA. HNTB’s original proposal to CTRMA named a group of subcontractors that were approved in the September 2003 contract between the authority and its GEC.[47]

In November 2003, the CTRMA board approved HNTB’s recruitment of three additional subcontractors: WHM Transportation, to provide quality control for traffic and operations; Martin & Salinas Public Affairs, for public relations and public affairs services; and Crespo Consulting, for water quality studies.

Appendix 5 lists CTRMA contractors and subcontractors, along with their hourly rates.

CTRMA pays HNTB based on a formula of “actual hourly salary rates” for positions and classes of employees working on the project, multiplied by a federally regulated overhead rate (called the “FAR,” an acronym for Federal Acquisition Regulations) of 1.5353 (or 153.53 percent of actual costs) plus 15 percent profit.[48]

The FAR is a cost component specifically intended to defray the contractor’s indirect costs of doing business, such as home office expenses and payroll, and used in transportation contracts by the federal government, TxDOT and now CTRMA.[49] The FAR generally is subject to adjustment each January 1, according to federal regulations, but CTRMA’s contract with HNTB locks in the profit percentage.

HNTB’s FAR was lowered in June 2004 to 150.43 percent, in response to the results of an independent audit of the company. According to HNTB, the new rate should be applied to all 2004 invoices. The review team found that invoices submitted after June 2004 reflect the new rate; HNTB supplied CTRMA with a credit reflecting the difference between the two rates for invoices submitted before June.[50] The current rate will be a provisional 2005 rate until another audit is performed.

In addition to its regular compensation, HNTB receives reimbursement for “reasonable out-of-pocket expenses,” such as travel, printing and other expenses “directly approved, in advance, by the Authority.”[51] HNTB’s contract requires it to be liable for any expenses that TxDOT deems unreimbursable.[52] The review team found that TxDOT has not rejected any expenses thus far.

Between July 2003 and November 2004, the CTRMA board approved eight work authorizations and two extensions for HNTB (Exhibit 10). As of November 2004, HNTB’s authorized work was worth more than $16.5 million.

EXHIBIT 10 HNTB Work Authorizations
Work Authorization (WA)	Effective Date	Maximum Amount Payable	CTRMA Board Approval	Scope of Work
WA 1	7/28/03	$15,000	7/25/03	Strategic plan and deadlines for 183-A
WA 2	8/22/03	$15,000	9/3/03	Continuation of WA 1 and core staff at CTRMA offices
WA 3	8/27/03	$6,377,921	8/27/03	General engineering services for US 183-A development
WA 3.1	9/24/03	$1,252,457	9/24/03	GEC core staff for CTRMA
WA 3.1 Supplement 1*	9/29/04	$1,775,160	9/29/04	GEC core staff for CTRMA, 183-A schematic review, revisions and project administration
WA 3.2	9/24/03	$500,000	9/24/03	Design concept conference
WA 3.3	9/24/03	$350,000	9/24/03	Public involvement services for US 183-A
WA 3.3 Supplement 1**	9/29/04	$744,630	9/29/04	Public involvement services for US 183-A
WA 3.4	11/5/03	$3,488,862	11/5/03	Prepare and post request for competing qualifications for a comprehensive development agreement (CDA)
WA 3.5	3/31/04	$1,987,257	3/31/04	Procurement of CDA contractors, environmental compliance services, public involvement
Total		$16,506,287
*Annual renewal of authorized work increasing compensation 42% over the previous year. **Annual renewal of authorized work increasing compensation 113% over the previous year. Source: Central Texas Regional Mobility Authority.

The review team found some questionable features in CTRMA’s contractual arrangements with HNTB.

A TxDOT audit of CTRMA dated September 10, 2004 noted an apparent discrepancy between the contractual FAR (revised to 150.43 percent) and 15 percent profit margin, and HNTB’s estimates for work authorizations:

...the overhead rates [FARs] used in the fee estimates of some of the work authorizations range from 168.01% to 175% and the profit rate ranges from 15.57% to 16.54%. This has the effect of increasing the profit and the maximum amount payable for these work authorizations.[53]

A transportation consultant under contract to CTRMA explained that HNTB had been using a “blended” FAR and profit margin—a combination of the rates and margins offered to HNTB and its many subcontractors—in the work authorizations. He recommended, as TxDOT did, that the authority require HNTB to use contractor-specific information in estimating the cost of future work authorizations.[54] Doing so would lower the not-to-exceed cost estimate in the work authorizations and provide CTRMA with better financial controls. A monthly reconciliation of work authorization estimates and invoices would provide greater accountability and financial control.

Oversight of Subcontractors

HNTB hires and pays subcontractors in the same manner as the company itself was hired and is paid. The “master agreement” between HNTB and its subcontractors, like HNTB’s contract with CTRMA, contains no hourly rate information, no maximum cost and no specific duties. That information is found in attached work authorizations and exhibits.

Also attached to the master agreement is HNTB’s contract with CTRMA. A provision in the master agreement states that “[a]ll portions [of HNTB’s contract with CTRMA]...pertinent to Consultant’s responsibilities, compensation and timing of Services and not in conflict with any provision of this Agreement are incorporated herein and made binding on Consultant.”[55]

In at least one instance, however, HNTB deviated from this practice, when hiring Adisa Public Relations in July 2004 to assist in the management and support of CTRMA’s Web site. The one-page agreement states simply that the prime agreement between HNTB and CTRMA is attached, and that “(a)ll portions thereof not in conflict with any provision of this Agreement, are incorporated and made a part hereof.” The agreement does not state specifically, as other agreements do, that the provisions of HNTB’s prime agreement are binding on the consultant.[56]

Although they are hired by HNTB, subcontractors are not bound by its overhead rate and, according to HNTB’s contract with CTRMA, are required to use their own rates regardless of whether they have been independently audited according to federal regulations. One subcontractor, for example, used a FAR of 198 percent (a 1.98 rate), plus an additional 15 percent for profit. HNTB selected the subcontractor without a public, competitive process that could have made the FAR a criterion. Instead, HNTB’s invoices to CTRMA simply categorized these charges as “expenses” and passed the cost along to the authority without further explanation.

The management of subcontractors is a perennial problem in large state contracts. Outsourcing governmental functions can provide many benefits, but the risk of lax financial controls and poor management becomes greater when government outsources much of its oversight responsibility as well, as in the case of CTRMA.

Recent publicity surrounding several contracts in the state’s health and human services agencies illustrates the problem. In 2004, several high-profile state and local government contracts for goods and services were found to be poorly managed, unduly expensive or acquired under questionable circumstances.

The State Auditor’s Office (SAO) released an audit of one such contract and made the following recommendations that should be applied to CTRMA’s business practices:

• Establish effective performance penalties to provide adequate incentive for contractors to control costs and efficiently administer contracts.

• Ensure that all subcontractors receiving...funds provide necessary, measurable products or services in exchange for the funds they receive.

• Independently audit subcontractors’ use of...funds to ensure that it is fully aware of how all these funds are used.

• Ensure that agreements among subcontractors are documented and that subcontractors’ agreements and payment rates are reported to the Commission.[57]

Several legislative committees have found that even state employees trained in purchasing procedures generally lack training in contract management and oversight. Yet any entity that relies as heavily on outsourcing and its contractors as does CTRMA has a powerful motivation to enforce its contracting provisions with both prime and subcontractors.

State contracts generally require advance approval of subcontracts, and fully apply all contract terms and conditions, including conflict of interest provisions, to subcontractors. For example, a common provision in many Comptroller contracts states that:

[I]n no event shall any provision...be construed as relieving Contractor of the responsibility for ensuring that all services rendered under its subcontracts comply with all the terms and provisions of this Agreement as if they were rendered by Contractor [emphasis added].[58]

CTRMA acknowledges that it has no formal contract monitoring program or procedure in place to assess its contractors’ performance effectively.[59] In an apparent attempt to remedy this situation, in January 2005 CTRMA advertised for a director of operations to:

• participate in the development, analysis, formulation and administration of the CTRMA Project Development and Operations budget;

• approve the forecast of funds needed for staffing, equipment, materials and supplies;

• administer assigned contracts, negotiate and prepare request for proposals for contracts with external professional service providers and vendors;

• implement budgetary adjustments as appropriate and necessary;

• monitor and evaluate quality, responsiveness, efficiency and effectiveness of the programs, service delivery methods and procedures;

• respond to and resolve citizen inquiries and complaints regarding toll road development and toll services programs; and

• select, train, motivate and evaluate administrative, technical and clerical personnel for toll services operations.[60]

Given the large number, complex nature and multimillion-dollar cost of CTRMA’s contracts and subcontracts, plus the wide range of duties expected of the individual hired for this position, it seems highly unlikely that a single person could be expected to perform these roles adequately. In February 2005, CTRMA filled this position; the new director of operations will start work in mid-March.

Appendices 5 and 7 show that CTRMA has numerous contractors doing public relations and public involvement work at rates ranging from $85 to $240 per hour for the principals of the companies. Multiple contractors and subcontractors are conducting public outreach meetings, producing fact sheets and graphic design at a wide range of hourly rates.

Statewide Contract Management Guide

The 2001 Legislature required several state agencies—the Texas Building and Procurement Commission, Comptroller’s office, Department of Information Resources, Office of Attorney General and Governor’s Office, with assistance from the Legislative Budget Board and SAO—to write a contract management guide to improve state business practices.[61] The Legislature also required that all state agencies follow the guide’s practices and procedures.

The Statewide Contract Management Guide addresses both contract management training and management best practices and provides valuable guidance to any governmental entity, particularly new ones such as RMAs.[62]

Recommendations

7. CTRMA and other RMAs should employ a professional contract management officer to ensure that all of their contractors and subcontractors comply fully with the terms and conditions of their contracts and that they provide necessary, measurable products or services for which they receive public monies.

This officer should be added in addition to the director of Operations and should oversee all aspects of existing CTRMA contracts. CTRMA should employ additional contract managers as warranted.

CTRMA should evaluate all contracts, including those that are subcontracts of the GEC to ensure that the CTRMA is getting the best value for taxpayer dollars and to prevent paying for the same service multiple times.

8. State law should be amended to require the State Auditor’s Office to conduct audits of RMAs within two years of their creation.

As new organizations spending local, state and federal funds in addition to bond revenue, it is critical that RMAs exert proper oversight of their operations and expenditures. Because of the close relationship between TxDOT and RMAs, an independent outside entity, such as SAO, should audit RMA operations.

9. CTRMA and other RMAs should ensure that their contractors’ cost estimates employ the current federally audited overhead rate (the “FAR” rate) and contractually stipulated profit margins. To provide greater accountability over contractor expenditures, CTRMA and other RMAs should reconcile work authorization estimates and invoices monthly.

The current practice of allowing cost estimates to employ overhead rates higher than those contractually allowed does not provide CTRMA with accurate information on its expenses or its contractors’ performance.

10. State law should be amended to require RMAs to follow the provisions of the Statewide Contract Management Guide.

Provisions of particular benefit would be chapters concerning contract administration, contract management responsibilities and monitoring performance. For additional guidance, CTRMA should consult recommendations made by the State Auditor’s Office regarding other agencies’ contract management.