DIA’s costly Great Hall Project needs stronger oversight to avoid overpaying for work, audit says (Local News Tips & Reviews)

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Construction began in late 2021 on Phase 2 of the Great Hall project, which includes a new upper-floor security checkpoint on the northwest part of Level 6 at DIA. (Andy Cross/The Denver Post)

Denver International Airport’s $2.1 billion terminal renovation project needs stronger management and oversight of its major contractor to ensure the airport isn’t overpaying for work, city auditors found in a long-awaited report released Thursday.

The audit spurred pushback from airport project officials, who defended both their handling of the quick effort to reboot the troubled project in late 2019, after DIA terminated its prior project contracting team, and their oversight of the new contract arrangement. Since Hensel Phelps Construction took over the Great Hall Project three years ago, work has proceeded more smoothly — though with a vastly expanded budget and a timeline extended by several years, to 2028.

But auditors questioned a lack of documentation supporting the selection of Hensel Phelps through a quick, streamlined bid process in which DIA limited the pool to companies that had done previous airport work. They also were critical of DIA’s oversight of subcontracting, which is a major feature of Hensel Phelps’ contract — giving the company responsibility for selecting smaller firms through competitive bids to perform significant amounts of work.

In some cases, the audit suggests DIA overpaid for some work, but the amount isn’t quantified.

DIA took issue with several findings and rebuffed most of the auditors’ recommendations. For some, it agreed in part with suggestions to improve its oversight or processes but still classified its response to a given item as “disagree.”

“I am disappointed airport officials chose to agree with only three of our 10 recommendations,” Auditor Tim O’Brien wrote in the 81-page report’s opening letter. “Denver International Airport would be better able to ensure it receives the contracted work it pays for at the best value to the city if it were to implement our recommendations” in several areas.

During an Audit Committee meeting Thursday morning, O’Brien characterized DIA’s responses to the audit recommendations as “disingenuous at best.”

“As you’re on your way to 100 million passengers, there will be more projects,” O’Brien told airport project officials who were in the room. “You’ve stated that you feel that you oversee these contracts well, and my experience with the airport overseeing contracts has not been — I would not describe it as well at all.”

A DIA official who oversees major projects conceded some of the auditors’ criticisms.

“I think the underlying (thrust of) the audit is to improve our documentation and better document our procedures, and so we’ll look forward to that,” said Jim Starling, the airport’s chief construction and infrastructure officer, to the Audit Committee. “But we always appreciate getting feedback so that we can make improvements (and) successfully manage all the work that we have coming up — and there’s a significant amount of growth that is necessary.”

Michael Sheehan, DIA’s senior vice president for special projects, defended decisions made in late 2019 to sidestep normal contracting processes, something the airport publicly acknowledged at the time. Officials, including Mayor Michael Hancock and then-DIA CEO Kim Day, wanted to bring in a new main contractor quickly.

The airport lacked an evaluation process to decide whether to use an alternative contracting approach — in this case, for the general contractor also to serve as a construction manager — but decided a full project restart would take too much time. Still, auditors pointed out that the lack of records documenting the selection deliberations leave unclear whether Hensel Phelps was best qualified for the job.

“We understand that it was a compressed procurement,” Patrick Schafer, the senior audit manager, said Thursday. “… We knew they had to work fast. But we’re talking $2.1 billion spent. And there’s not one iota of documentation that we can see that that was given to Hensel Phelps and they were deserving of it.”

In a news release Thursday, the auditor’s office said, citing an interview last fall with Sheehan, that airport executives “directed managers at the time to limit documentation related to the project because of the number of open records requests the airport received from the public.”

Sheehan said Thursday that in limiting records, officials were “trying to be sensitive to” the potential for litigation with the terminated contracting team — which had used some of the same local subcontractors that potentially would work under the newly selected contractor in the future.

Still, he agreed with a recommendation that the airport develop special contracting procedures to follow the next time it faces an unexpected need for an expedited contract process.

Construction on the Great Hall terminal project began in mid-2018 and includes the relocation of security screening and overhauls of airline check-in areas to ease congestion as DIA sees record passenger traffic growth.

DIA has faced scrutiny separately for how its previous contracting arrangement — a long-term partnership deal with a Spanish company and its American partners — soured in 2019. A “lessons learned” review commissioned by DIA last year assigned blame to officials on both sides of that deal for decisions that resulted in escalating cost overruns and delays, well beyond the $650 million original budget, before DIA pulled the plug in August of that year.

The new city audit does not delve deeply into the first contracting arrangement. It focuses on DIA’s oversight of the contract with Hensel Phelps to deliver a rebooted first phase, a second phase and a new “completion” phase for the project.

Auditors recommended that DIA officials more tightly monitor Hensel Phelps’ subcontracting practices. They found that the company frequently doesn’t receive three bids for each component, which is a recommended best practice, and say it’s unclear if it always selects the lowest qualified bidder, as required by its contract.

But Sheehan pointed out in a written response to the audit that the contract doesn’t require three bids, and that’s not always feasible.

Auditors pointed to two cases where they said DIA officials didn’t know Hensel Phelps had selected itself as a subcontractor, including for nearly $1.8 million in concrete work. But Sheehan replied that officials were aware it was handling that work itself, under change orders for task orders.

For the concrete subcontract, the audit raises the possibility that Hensel Phelps packaged routine and specialized types of work together in a way that may have dissuaded outside contractors from bidding for the work. Ultimately, Hensel Phelps performed the specialized portion of the work, for vertical concrete columns, while selecting a company as its partner for the more routine part of the job.

“Had the two types of work not been combined or if the procurement had been more fair, a different concrete construction company may have been awarded the job,” the report said.

Sheehan wrote that Hensel Phelps did not mark up the pricing for the work it handed to its partner company, so ultimately it didn’t cost DIA more than it would have under separate subcontracts.

He added that “DEN Special Projects has seen no evidence that (Hensel Phelps) structured the bidding for its self-performed work packages to its advantage and would have required the Contractor to re-do a package if this occurred.”

This story was first published by The Denver Post, a BusinessDen news partner.

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