Firm Overcharged MTA $2.1 Million, Audit Concludes

The Metropolitan Transportation Authority’s inspector general has concluded that weak or nonexistent internal controls allowed a major engineering firm to overcharge the agency more than $2.1 million for work on the Metro Rail subway project.

The scathing audit report, which was obtained Wednesday, concludes that Daniel, Mann, Johnson & Mendenhall improperly charged the county transit agency more than $600,000 a year in overhead for its offices in Washington, New York, Baltimore, Hawaii, Denver and Phoenix although they had no apparent connection to work done for the MTA.

More startling, the audit discovered that the MTA never sought to recover the $2.1 million and proceeded to negotiate a new contract provision that prevents the agency from auditing overcharges in the future. Instead, the MTA agreed to pay the contractor’s overhead at a fixed rate without regard to actual costs.

The changes weakened provisions designed to protect the MTA and were made without review by top officials in apparent violation of federal regulations, the audit found.

“Because of the unclear lines of authority and the lack of an audit trail,” the inspector general’s report said, “we could not determine who made . . . the decision to change significant control provisions of the contract, who had the authority to do so, and therefore who could be held accountable for the results.”

The auditors found that the MTA’s “existing procedures for negotiating with contractors, including the requirement that negotiations be documented, were either ignored or circumvented in this case.”

MTA Chief Executive Officer Julian Burke said in a prepared statement that the inspector general’s report “raises serious concerns as to whether MTA has the policies and procedures to protect its interests in negotiations with its contractors.”

Since becoming transit chief a year ago, Burke said he has changed the agency’s contracting procedures in an effort to “ensure contractors do not overcharge us in the future.”

Burke said he has instructed the agency’s staff to pursue recovery of overcharges.

Officials at DMJM said they had not seen the audit report and could not comment on its findings.

But spokeswoman Alexandria Spencer said the Los Angeles-based firm raised strong objections to the initial findings of MTA auditors in 1996. “We felt the allegations were outrageous,” she said.

Spencer said the company has one of the lowest overhead rates in the industry. “We haven’t stayed in business by overcharging our clients,” she said.

More than 75% of DMJM’s work is for public agencies, she said, and its overhead allocation system meets federal requirements.

The company’s stance is directly at odds with the auditors’ conclusion that DMJM pooled indirect costs from its offices nationwide and then allocated them to the Los Angeles project office “in a manner that was not in reasonable proportion to benefits by MTA.”

The engineering firm is a partner in a consortium called Engineering Management Consultants, which has overseen the MTA’s rail construction projects, including subway and light rail lines. Previous audit reports have criticized Engineering Management Consultants’ cost overruns on the subway and the now-halted Pasadena light rail project.

Besides working for the MTA, DMJM has played a key role in the initial design and development of the Alameda Corridor, a $2-billion rail expressway that will better link the county’s ports to freight yards in downtown Los Angeles.

MTA officials are preparing another audit that will show how the Alameda Corridor’s engineering team spent $8.5 million in MTA money that was given to the corridor project for design work. The audit is the first on the initial design and planning for that project.

DMJM is one of four private firms that make up the Alameda Corridor Engineering Team.

The team leader is John Rinard, former chief engineer for Metrolink, the region’s commuter rail line.

While in that job, he was one of a few top officials at the MTA’s predecessor agency who cost Los Angeles County taxpayers a total of $660,000 when they defaulted on home loans or sold their houses at a loss during the recession. Rinard was unavailable for comment Wednesday.

DMJM has provided engineering services for a variety of corridor elements, including the costliest and most critical part of the project--a 10-mile, concrete-lined trench that will contain rail lines and a road.

James C. Hankla, the new chief executive officer for the Alameda Corridor Transportation Authority, said he was not ready to discuss any audits and declined to comment. He said he has only been with the corridor agency for a few days and has been preparing to enter negotiations with Tutor-Saliba Corp., a large contractor that may build the trench section of the corridor.

Hankla, who is regarded as one of the most effective municipal administrators in the state, was hired by the Alameda Corridor agency to bolster its management team at a time of increasing activity.

In the year ahead, the Alameda Corridor Authority will issue revenue bonds, begin construction on major sections of the project and face increasing oversight by local, state and federal agencies.