Mistakes, Problems Add Millions to Subway Cost : Metro Rail: The Red Line is running about $200 million over budget. It may be costliest such project in U.S.

Compared to the rest of the Los Angeles subway project, this underground job looked simple: Finish the carpentry, tiling and other details of the depot at historic Union Station.

But simple it was not.

By the time the station opened for passengers early this year, taxpayers had paid the contractor 81% more than the competitively bid price. Costs for the nearby Civic Center station and tunnels ran 45% over the original contract.

These additional construction costs typify problems that have plagued the nation’s most expensive subway project and helped to raise the cost of the Red Line about $200 million over budget.

“This thing is, by far, the most expensive public works project in the history of the world for what is being delivered,” said Don H. Pickrell, chief economist for the U.S. Department of Transportation’s research center at Cambridge, Mass. “It is the Aswan Dam of urban transportation.”

Although no two transit systems are exactly alike, comparisons indicate that mile for mile the $1.45-billion Los Angeles project is costing more than other projects built in the United States in the past decade, even accounting for inflation. The 4.4-mile subway is the centerpiece of the planned network of hundreds of miles of below- and above-ground transit lines, known as Metro Rail.

Local transit officials said that the Los Angeles subway, although expensive, is a worthwhile investment--the beginning of a world-class system that will reduce car traffic and air pollution while helping to revitalize the city’s core.

Interviews and thousands of pages of construction and financial documents studied by The Times show that the subway overruns had many causes--ranging from mistakes that could have been avoided to plain bad luck:

* Transit administrators failed to secure access rights to property in the path of construction, causing a chain of delays costing millions of dollars. A federal inspector general’s report obtained by The Times concluded that access problems hampered eight of the first 10 subway construction contracts.

* When one contractor encountered contaminated soil and other unexpected problems, officials were slow to respond to the company’s demands for more money--culminating in a settlement of nearly $26 million.

* There were design errors and other costly misfortunes--such as a decision to build a large-scale water treatment plant at Union Station that was never fully used. The $4-million plant was dismantled two years ago at taxpayers’ expense.

* In their push to open the subway by January of this year, officials paid subway builders millions of dollars to speed up work.

The overruns were paid through amendments to competitively bid contracts. Scores of these change orders were approved last year, as transit executives strived to open the subway, called the Red Line.

“This project experienced a high number and cost of change orders, even given the high risk of unforeseen underground conditions associated with tunneling in a dense urban area,” said Edward McSpedon, Metro Rail’s president of rail construction, in a report in May.

The subway overruns and a decline in local sales tax revenue have recently threatened to stall new components of the regional rail network.

“There’s $200 million less to spend on the next project,” said Thomas A. Rubin, a financial executive with the Metropolitan Transportation Authority.

McSpedon’s report said subway construction contracts rose 35% over budget, helping to drive the overall cost of the Red Line 16%, or $200 million, over budget. Last month, McSpedon’s staff estimated that when all accounting is complete, the subway could cost $30 million less than the projected $1.45 billion.

Cost overruns occur on nearly all major rail projects. A study by the federal Department of Transportation in 1990 found that projects in Sacramento, Atlanta and Baltimore exceeded original construction budgets by 13% to 60%. On the other hand, a system in Pittsburgh, Pa., was completed in the late 1980s at a cost 11% under its forecast.

But the overruns in Los Angeles are all the more striking because the original estimated price of the subway was seen by some experts as remarkably expensive: The 4.4-mile Red Line has cost about $330 million per mile. A 21-mile system in Miami cost $57 million per mile, or $1.2 billion, while the first 60.5 miles of Washington’s transit system cost $73 million per mile, or $4.4 billion.

Now, six years after digging began in Los Angeles, records show that most of the $200 million in overruns are attributable to the 12 contracts for construction of stations and tunnels.

The costs now are under tighter control, said McSpedon, who is overseeing the subway’s expansion to the Eastside, and to more of Downtown and the San Fernando Valley.

Some subway construction overruns are inevitable. Tunnel contractors sometimes encounter design problems or underground obstacles that could not have been reasonably anticipated when the job was awarded. Like mechanics who phone a car owner to get authorization before fixing an unexpected problem, subway builders can obtain payment for extra work only by negotiating or winning changes to their contracts.

Public transit officials in such circumstances may recommend paying a contractor extra. But change orders are not intended to compensate contractors for their mistakes in construction or bidding. If abused, change orders undermine the open, competitive-bidding process that is intended get the public the lowest price while ensuring fairness for those who try to win the jobs.

“A good contractor . . . will include all expected costs in his bid and will try to avoid change orders,” said Donald L. Steward, a professor of contract management at Sacramento State University.

For the officials who must decide who is right and who is wrong in disputes over change orders, the task can entail sifting through mounds of documents and weighing conflicting points of view.

These decisions have been even more complicated in Los Angeles because control of the project has not remained with one agency. In mid-1990, control shifted from the Southern California Rapid Transit District to the Los Angeles County Transportation Commission.

“It wiped out the institutional memory,” said William W. Marsh, a former contracts administrator for the RTD.

Operation of the subway has shifted this year to yet another agency, the Metropolitan Transportation Authority. The MTA, which now oversees construction of an additional 13 miles of subway to be opened over the next decade, was formed in April with the merger of the RTD and the county transit commission.

This juggling of agencies has fostered finger-pointing and a blurring of accountability for the cost overruns. In his memorandum in May, Metro Rail’s McSpedon blamed the overruns on the 6-year-old project’s “early management problems.”

When McSpedon assumed control in July, 1990, he pledged to speed construction and build cooperation with contractors. He and his staff made significant strides toward both--opening the subway on Jan. 30, and whittling the backlog of demands for change orders.

“The sooner you get these things settled, the less they cost you. But it also helps to restore working relationships with the contractor, so we’re getting out of this contentious mode,” McSpedon said.

But public records reviewed by The Times show that when they decided to accelerate construction, McSpedon’s staff expanded the scope of contracts instead of opening the work to competitive bidding. They also paid the largest subway contractor, Tutor-Saliba Corp., for change order requests that other officials had determined were unfounded.

McSpedon said that using change orders helped speed construction and was done at a fair price. Overall, transit officials said they acted appropriately in deciding how much to pay all the contractors.

“We’re not in the business of making contractors whole for their mistakes,” said subway project manager Charles W. Stark. “But if you’re not willing to accept responsibility for changed conditions and the other things over which the contractor has no control, you’re guaranteed to get claims (from contractors)--large ones.”

Interviews and records show that virtually all the extra payments to contractors during the period of mid-1990 through March, 1993, were authorized without formal auditing of the contractors’ claims. Some change orders, although questioned by consultants because of insufficient documentation from contractors, were paid in an attempt to speed the project, according to people familiar with the events.

“I refused to sign a lot of the change orders because they were not supported with adequate documentation,” said Clayton H. Kass, an engineer who worked as a claims analyst from 1990 to 1992 for Parsons-Dillingham, the firm retained by the transit agency to manage change orders and subway construction.

Other than saying that “different types of (change orders) require different supporting documentation,” representatives of Parsons-Dillingham declined to discuss the remarks of Kass, who said he resigned because he was unwilling to acquiesce on the change orders.

Stark, who joined the project in 1991, acknowledged that there was no formal auditing from mid-1990 to early 1993, but said he was satisfied that his engineering aides adequately reviewed requests for contract increases. Stark said he knew of no instance when a contractor intentionally sought a change order that was undeserved.

But he also noted that as of last spring, all proposed change orders of $200,000 or more are supposed to be audited before money is paid. The examinations, he said, may deter contractors from submitting claims that lack merit.

“I think it’s good for an auditor to come and just take a quick check for reasonableness of costs,” Stark said. “(Contractors) react to their environment. If they know that something’s going to be audited, they’ll probably act accordingly.”

Contract consultant Jay G. Halverson, whose firm advises public agencies nationally regarding claim disputes, said he finds that at least 10% of contractors’ demands for extra payment are typically subjected to formal audit.

“I find it unusual that on major claims they have not brought in CPA-type people to audit those,” Halverson said.

Although accountants were not used for auditing, some of the subway change orders were scrutinized by Kass and other engineering consultants who, records show, saved taxpayers money by identifying sizable potential overcharging.

The Times studied the change orders for the 12 construction contracts, along with federal government reports on the subway project. The handling of these contracts illustrates how the overall cost of the subway ballooned. For instance:

Union Station

The massive overruns on the station’s excavation and finishing contracts were caused by poor planning and oversight, officials acknowledge.

“It was a disaster,” said McSpedon, president of the MTA’s Rail Construction Corp. since 1990.

Original plans for the station called for tunneling directly through contaminated soil--even though the contamination had been well-documented. This would be an extraordinarily costly and potentially hazardous undertaking.

“Nobody looked at the soil reports,” said Marsh, the former RTD official. “That’s an enormous (planning) error.”

After tunnel workers encountered the contaminants, the route was altered, resulting in months of construction delays and at least $15 million in extra costs, by Marsh’s estimate. A change order of $4 million was paid to build a plant to treat contaminated ground water.

But the plant was never used at full capacity because, with the onset of a drought, there was far less water to process. Instead of storing or selling the hundreds of thousands of dollars worth of pumps, tanks and other hardware, the transit agency in mid-1991 paid a company $25,000 to dismantle the plant and the equipment.

Transit officials said they decided that it would have been too complicated and expensive to store or sell the equipment.

Without referring directly to the water treatment plant, a report by the federal transit department’s inspector general concluded in 1991 that many of the contamination-related costs at or near Union Station would have been averted with proper planning.

Another change order at Union Station, for $380,837, was caused by omission of a seemingly basic design feature: The station’s ceiling ventilation ducts were not designed to withstand the intense air pressure of oncoming trains. If the ducts failed, experts said, the reduced ventilation could have endangered passengers.

“It clearly should have been caught in design,” said James Pott, an engineer and a former commissioner for the MTA’s rail construction subagency.

Martin Rubin, an executive of the design firm of Parsons Brinckerhoff Quade & Douglas Inc., declined to comment.

As officials raced to open the subway and the above-ground Metrolink commuter train to outlying suburbs, they approved an $8.2-million change order for additional construction. The money paid for skylights, stairways and a pedestrian tunnel for handicapped and other passengers at Union Station.

Officials decided against soliciting competitive bids for the work. Instead, they sought proposals from two contractors that were already working at the Union Station site: Tutor-Saliba and Morrison-Knudsen Corp. Tutor-Saliba’s proposal was lower, but the transit agency still paid what its engineering staff had warned in memos was a premium price for concrete and reinforcing steel. Representatives of Tutor-Saliba said the higher prices reflected the custom nature of the work.

Stark, asked why the $8.2-million job was not opened to competitive bidding, cited the rush to complete the work in time for the opening of Metrolink in October, 1992. He said cost of the work would be charged to Metrolink, not the subway project.

Pershing Square Station

The cost of excavation work on this station at 5th and Hill streets ran 79% over the competitive bid by Guy F. Atkinson Construction.

Poor oversight of day-to-day construction and delays in processing the contractor’s requests for change orders contributed to the cost overrun, records and interviews show.

The Atkinson company had at first sought $3.6 million in increases in 1988 after encountering uncharted utility lines and fuel tanks and asbestos insulation that had to be removed. Those and other demands, totaling $41 million, were reviewed last year by an arbitrator who recommended that the agency pay Atkinson about $26 million, including interest on the disputed amount.

Officials said the agency paid the contractor $25.7 million, rather than risk the expense and uncertainty of litigation.

One engineer assigned to review the matter said poor record-keeping by the transit agency’s on-site construction managers made it impossible to effectively counter the contractor’s demands.

The engineer, who spoke on condition of anonymity, said the daily inspection logs kept by construction managers sometimes were imprecise. “For one day, the log said: ‘Installing 12-inch water main on Hill Street.’ Where on Hill Street? Near 4th, or 5th? How many feet is it?,” he said. “That lack of detail is what blows you out of the water when you sit down to settle a claim with a contractor.”

Shaker M. Sawires, an MTA official who reviewed and helped settle the dispute, said the quality of the daily inspection logs “could have been better.” But Sawires said most of the $25.7-million settlement was attributable to uncharted underground obstacles at a site that had been a hub of Los Angeles since the 19th Century.

Seventh & Flower Station

This two-level station, where water leaks are an ongoing problem, has construction overruns that now are 29% over the original contract costs and are expected to rise.

The station, the transfer point between the subway and Blue Line trolley to Long Beach, also is the subject of a major lawsuit.

Granite Construction Co. sued the MTA for $26 million in October, 1992, after transit officials rejected an independent arbitration panel’s recommendation that the company be paid about $16 million for change orders.

Alleging 668 errors or omissions in the station’s design, Granite representatives said the transit agency did not warn the builder about underground utilities, unstable soil and other conditions. The MTA is seeking unspecified damages from Granite for extensive water-leak repairs at the station. The litigation is being reviewed by an arbitrator.

Granite’s construction difficulties caused a nearly seven-month delay for a separate firm that was hired to do finish work at the station.

As a result, the transit agency paid the joint venture of Tutor-Saliba-Perini $2.9 million through change orders to cover its downtime and to accelerate the finishing work.

Tutor-Saliba-Perini has received a total of $31.7 million--70% more than its bid for finishing work at 7th and Flower.

Almost $700,000 of the cost overrun covered Tutor-Saliba-Perini’s patching and grouting of leaks at the station. But, after this station and others continued to show new leaks, officials hired another subway contractor, Morrison-Knudsen, to plug leaks at all five subway stations--at a cost of $2.4 million.

A third subway contractor, M.L. Shank Co., protested the decision to bypass competitive bidding for the systemwide leak repairs.

“There is not the slightest justification for performing this several million dollars in work . . . without competition,” the firm’s president said in a May, 1991, letter to McSpedon.

In the transit agency’s response one week later, McSpedon wrote that if “a systemwide (leak-repair) program is instituted, it will be advertised for competitive bids.”

Asked why he did not seek competitive bids, McSpedon told The Times that the process would have delayed start-up of the subway.

McSpedon also said the MTA is considering whether to charge contractors for leak repairs at stations they have built. But officials acknowledged privately that it is highly unlikely that the contractors could be forced to pay.

Many of the cost overruns are not eligible for reimbursement from federal funds. This means that Los Angeles County consumers may bear most of the cost of the leak repairs, through a half-cent sales tax dedicated for Metro Rail. The sales tax, McSpedon said, “gives us the flexibility to avoid getting into contentious issues with the feds.”

The issues are not limited to leak repairs. The federal government generally will not pay for cost increases caused by design errors or negligent supervision of construction.

And Parsons-Dillingham, the firm that has received more than $150 million to examine proposed change orders and to inspect subway construction, has a provision in its contract exempting it from liability, McSpedon said.

Officials with the MTA said they will try to recover some of the overrun costs from the project’s team of architects and engineers, which has been paid $181.5 million. But, McSpedon said, the designers are insured only up to $17 million, of which he would expect to win no more than a fraction. The team includes Parsons Brinckerhoff Quade & Douglas Inc.; Daniel, Mann, Johnson & Mendenhall; ICF-Kaiser Engineers, and Harry Weese & Associates, Ltd.

The MTA so far has not sought money for the leak repairs from the designers’ insurance. But the agency is planning to submit a $6.8-million claim against its own “builder’s risk” insurance policy.

No matter what the outcome, McSpedon said, officials overseeing construction of the next 13 miles of subway have gleaned valuable lessons from the cost overruns on the subway’s first segment.

“We can, and will, get increasingly more value per dollar as we continue to build,” McSpedon said. “As long as we keep our eyes open and learn from yesterday.”

Next: How L.A.’s biggest subway builder won millions of dollars extra.

BACKGROUND

The Red Line subway is part of a regional network of above- and below-ground rail lines called Metro Rail. The 4.4-mile subway cost $1.45 billion to build and opened on Jan. 30. Funding sources were the federal government, 48%; sales tax collected in Los Angeles County, 28%; state government rail bonds, 15%, and revenue from special tax districts formed along the subway route, 9%.

Running Over

The first segment of the Metro Rail subway ran $200 million over budget--fueled in part by construction overruns of 35%. Following are the 12 major tunneling and station construction contracts that produced most of the overrun on the $1.45-billion project:

A) Westlake/MacArthur Park Station, finishing work

Award Value: $13.2 million

Contract Increase: $4.3 million

Growth: 33%

Contractor: Tutor-Saliba Corp.

*

B) Westlake/MacArthur Park Station, excavation

Award Value: $23.4 million

Contract Increase: $8.8 million

Growth: 38%

Contractor: Tutor-Saliba-Perini joint venture

*

C) Tunnels from 7th & Flower Station to Westlake/MacArthur Park Station

Award Value: $26.3 million

Contract Increase: $3.3 million

Growth: 13%

Contractor: Shank-Ohbayashi joint venture

*

D) 7th & Flower Station, excavation

Award Value: $42.8 million

Contract Increase: $4.4 million

Growth: 10%

Contractor: Granite Construction Co.

*

E) 7th & Flower Station, finishing work

Award Value: $18.7 million

Contract Increase: $13 million

Growth: 70%

Contractor: Tutor-Saliba-Perini joint venture

*

F) Tunnels from Pershing Square to 7th & Flower Station

Award Value: $18.2 million

Contract Increase: $6.8 million

Growth: 37%

Contractor: Shank-Ohbayashi joint venture

*

G) Pershing Square Station, excavation

Award Value: $38.7 million

Contract Increase: $30.6 million

Growth: 79%

Contractor: G.F. Atkinson Construction Co.

*

H) Tunnels from Union Station to Pershing Square Station; excavation of Civic Center station

Award Value: $61.5 million

Contract Increase: $27.5 million

Growth: 45%

Contractor: Tutor-Saliba-Groves joint venture

*

I) Civic Center Station, finishing work

Award Value: $32.1 million

Contract Increase: $18.4 million

Growth: 57%

Contractor: Morrison Knudsen Corp.

*

J) Union Station subway depot, finishing work

Award Value: $19 million

Contract Increase: $15.4 million

Growth: 81%

Contractor: Tutor-Saliba Corp.

*

K) Union Station subway depot, excavation

Award Value: $46.7 million

Contract Increase: $7 million

Growth: 15%

Contractor: Tutor-Saliba-Perini joint venture

*

L) Main yard and shops and tunnel to Union Station

Award Value: $37.7 million

Contract Decrease: $1.1 million

Differential: 3%

Contractor: Tutor-Saliba-Perini joint venture

Note: Contractor is suing Metropolitan Transportation Authority for $3.7 million, related to costs of July 1990 tunnel fire.

Source: Metropolitan Transportation Authority and Superior Court records