September 14, 1998

To:Strategic Policies and Priorities Committee

From:Audit Committee

Subject:Sheppard Subway Project Cost Overruns

Recommendation:

The Audit Committee on September 11, 1998, recommended to the Strategic Policies and Priorities Committee and City Council that the City Auditor be requested to review the management process relating to the Sheppard Subway and report in particular on the following:

(1)the agreement with Cadillac Fairview;

(2)the land acquisition process;

(3)the budgeting approval process; and

(4)the status of development levies.

Background:

The Audit Committee had before it a report (August 31, 1998) from the City Auditor reporting, as requested by the Budget Committee on any construction cost overruns dealing with the Sheppard Avenue Subway Line and recommending that the report be received for information and forwarded to the Budget Committee.

The Committee also had before it a report (July 15, 1998) from the Budget Committee forwarding a copy of the communication (July 10, 1998) from the Toronto Transit Commission, and the action of the Committee from its meeting of July 13, 1998, requesting that the Audit Committee meet as soon as possible on the cost overruns of the Sheppard Subway line.

City Clerk

Ina Robinson 392-7031

Attachments

Item 15

August 31, 1998

To:Audit Committee

From:City Auditor

Subject:Sheppard Subway Project Cost Overruns

Recommendation:

It is recommended that this report be received for information and forwarded to the Budget Committee.

Background:

At its meeting on May 26,1998, the Budget Committee requested:

"The City Auditor to report to the Audit Committee as soon as possible on any construction cost overruns dealing with the Sheppard Avenue Subway Line."

Comments:

In preparing this report we have met with senior representatives from both the TTC and Delcan- Hatch, a joint venture arrangement of three engineering firms, Delcan Associates, Hatch Associates and O'Brien Krutzburg. Delcan Hatch were retained to provide the majority of the project management and related professional engineering services to the TTC. We have also had discussions with two of the major contractors involved in the project.

On April 20, 1994, the former Municipality of Metropolitan Toronto (Metro) Council approved a $944.6 million budget for the Sheppard Subway project. The funding for the project was to be provided as follows:

Province of Ontario$708.5 million

Metro 236.1 million

$944.6 million

In May, 1996, the Province reduced its commitment by $137.5 million to reflect what it considered to be the necessary funds to complete a "no frills" subway including the possible deferral of the construction of the Bessarion station. As a result, TTC and Metro staff were requested to identify a reduction in the project costs in order to meet the amended budget.

On August 6, 1996, the Commission approved budget reductions estimated at $69.6 million. The revised budget for the project was therefore $875 million.

The proposed funding for the project was as follows:

Province of Ontario$571 million

Metro297 million

Federal Government 7 million

$875 million

As of July 31, 1998, approximately 72% of the total project costs have been confirmed. These costs amount to $672.5 million. When compared to the budget (72% x $875 million) of $630 million, the project at this stage is $42.5 million over budget. The cost overruns recently reported by management to the Budget Committee and the Commission were in the range of $39 - $44 million.

The remainder of the budget which has not yet been committed of $245 million (28% x $875 million) is represented by the following major contracts:

Project Budget

Bayview Station$ 50,000,000

Track contract20,000,000

Signals and communications58,000,000

Tunnel finishes8,000,000

Elevators and escalators15,000,000

Other 95,000,000

$245,000,000

Obviously, there is a potential for these projects to incur costs in excess of the amounts budgeted. The potential for future overexpenditures are more difficult to quantify as they are based on assumptions relating to future events. Included in "other" are approximately 40 different contracts each with a value of less than $3 million. The potential for these projects to be overbudget to a major extent is not significant.

Comments on the reasons for the overexpenditures as of July 31, 1998 and the potential for future overexpenditures are as follows:

1.The reasons for the Overexpenditures as of July 31, 1998

a)Unrealistic Budget Reductions

As a result of the Province's reduced commitment to the Sheppard subway project, TTC staff were asked to identify reductions in the project budget cost. The proposed reductions were in the range of $69.6 million. Included in these reductions was an amount of $11 million which represented cost cuts to be determined in the future. These costs have still not been identified. Our discussions with staff indicated that in hindsight, the reductions proposed by staff in many cases were overly optimistic and generally were made to accommodate a perceived acceptable level of expenditures.

b)Unreasonable Contingency Provision

All major construction project budgets especially those which extend over a period of years include a contingency provision. In the case of the Sheppard Subway, the initial budget of $944.6 million included a contingency provision of $66.5 million or 7% of the project cost. After identifying all potential cost savings, TTC staff determined, that it was only able to meet the revised budget by reducing its contingency provision. Consequently, this provision was reduced from $66.5 million to $37.3 million. At this point, the contingency provision of $37.3 represented approximately 4.2% of the revised budget of $875.4 million. We have been advised that projects which extend over a fairly long period should generally budget for contingencies in the range of at least 10%. We have confirmed this information with a number of engineering consultants who have been involved in the project management of multi-year major construction projects.

The last subway project completed by the TTC was an extension of the University Line from Wilson to Downsview including the construction of the Downsview station. The budget for this project was $185 million which included a $27 million provision for contingencies or 17% of the project costs. The provision of a contingency amount of only 4.2% for a project the scale of the Sheppard subway was completely unrealistic, particularly in view of the unknowns which existed when the budget was approved.

c)Tender Prices for Yonge and Bessarion Subway Stations

The lowest of only two bids for the Yonge station was $20.1 million higher than budget. The design of the Yonge station has been far more complex than was envisioned in 1996 when the project budget was established. We have been advised that when the budget was established, the project was at the 30 to 40% design stage and the cost of removing the roof of the existing Sheppard station and constructing the SE and SW connecting structures into the existing Yonge Subway structure was not well known. In addition, the existing Yonge Subway structure was not designed to connect to a future Sheppard Subway and the cost of constructing these two connections turned out to be significantly more than the preliminary estimates. These complexities were identified after the budget was approved.

I have discussed the question of why these complexities were not identified at the time the budget was prepared. I am advised by staff that the specific design work had not been completed to a level whereby this could happen. Significant additional design work was required in order to identify these complexities. The provision of an appropriate contingency amount is usually intended to cover such unanticipated additional expenses.

The increase in costs for the Bessarion station were essentially the result of increasing construction costs for materials and labour. There were seven bids received for Bessarion Station, the lowest tender price was $2.6 million higher than budget.

d)Utilities

The actual cost for the relocation of utilities was $9.4 million higher than budget. This budget was based on an initial assessment at the early design stage of the project. The actual relocation of cable and hydro lines was more extensive than initially envisioned. In circumstances similar to the complexities of the Yonge Station, an adequate level of contingency would have covered such overexpenditures.

e)Additional Work

The initial budget had a provision for an East Entrance to Leslie Station at a cost of $800,000 million and for an art program of $400,000. During subsequent budget reductions these items were eliminated. However, it was subsequently decided that these items were necessary in part to meet local Councillor's request and as a result, these items were added back to the budget. In addition, our review indicated that decorative light standards at Don Mills Station and various landscaping and other site plan requirements have increased the project cost by approximately $2.0 million.

2.The Potential for Future Overexpenditures

This report contains information as of July 31, 1998. There are a number of future events/contracts which could contribute to further negative budget variances. These are as follows:

a)Bayview Station Contract

The bid for the Bessarion station was approximately 8% over budget. It is not unreasonable to assume that the bid for the Bayview station could also be in the same range especially since recent labour wage settlements have resulted in hourly labour cost rate increases. These increased costs will be reflected in the bid price.

b)The Reasonableness of Cost Recovery Projections at the End of the Contract

The TTC in their budget projections have estimated certain revenue/cost recovery amounts at the completion of the project.

(I)Sale of Tunnel Boring Machines - $4.2 million

The TTC purchased these machines for both the Eglinton West and Sheppard Subway Projects at a cost of $18 million. We have been informed by management that they have a life expectancy of approximately 20 kilometres. The actual use of these machines will be approximately 4.4 kilometres. Consequently, they have a residual life expectancy of 15.6 kilometres. TTC staff have estimated that these machines could be sold for $4.2 million at the completion of the project.

Obviously, there is a very limited market for this type of machinery even on a world wide basis and consequently, the market value of the equipment at the end of the project is difficult to determine. If there are no major subway projects planned elsewhere in the world at the time of disposition, there will obviously not be a market.

There is also an uncertainty relating to the timing of the potential sale of the machinery. Because of the limited market it is unlikely that any sale will be consummated immediately at the time that they will no longer be needed by the TTC. If this is the case storage and ongoing maintenance costs will have to be considered.

There is also the issue of obsolescence to take into account. Depending on new technology this machinery could quickly become out of date.

(ii)Sale of Property - $6.3 million

The TTC have budgeted for a recovery to its costs an amount of $6.3 million relating to the sale of property.

The property concerned is located at the North West corner of Sheppard and Yonge. The TTC paid $6.3 million for this property and anticipates selling it for at least the same amount. It will be a prime location property adjacent to two subway lines. Again, it is difficult to precisely determine whether or not sales proceeds of $6.3 million are reasonable. The construction of the additional subway line should enhance or at least maintain the value of this property.

(iii)Rebates from North York Hydro - $1.0 million

The TTC had an agreement with North York Hydro to relocate a number of hydro cables at cost. North York Hydro, in addition to cost is charging various mark-ups. North York Council passed a resolution on October 16, 1996, that for utility work

undertaken by North York Hydro staff, no administration or mark ups were to be invoiced to the TTC. The TTC is holding back 5% of each invoice to recover the additional charges estimated to be approximately $1 million.

c)Contractual Obligations

An agreement with the Cadillac Fairview Mall Corporation includes a penalty clause which requires the TTC to complete construction of the parking facilities at Don Mills Station by November 30, 1998. If the construction of the parking facility is not completed by the specified date, Cadillac Fairview is entitled to damages up to $2.5 million to compensate for loss of business. Initially the contractor had an aggressive schedule to complete the work one week prior to the specified date. However, due to the labour strike this project is approximately three weeks behind schedule. In order to minimize any additional costs TTC staff are arranging with the contractor whereby hours of operation can be extended during weekdays and weekends at overtime and premium wage rates. The TTC will be responsible for these additional costs which could amount to approximately $1-$1.5 million. This amount is not included in the cost overrun at the present time.

d)The Site Plan Approval Process

The TTC is currently proceeding with construction activities prior to site plan approval by the Planning Department of the former municipality of North York. We have been advised that this process is being "short-circuited" due to the need to stay on schedule and not incur needless delay costs. One of the dangers inherent in this process relates to potential changes which may be required through the site plan approval process. Any changes as a result of the site plan process could involve significant additional costs particularly as this process could result in a redesign of an already completed structure.

e)Increased Labour Costs

For the last eight weeks there have been number of construction trade unions on strike. Recently most of them have negotiated contracts or are in the process of settlement and have been awarded increases in their wage rates. Due to fixed construction contract prices, the TTC is not responsible for the increase in labour costs, however, because of delays due to the work stoppage, charges for rental equipment will be higher than budgeted. It is estimated by staff that additional costs will be approximately $1.7 million. This has not yet been taken into account by staff in their cost overrun projections.

f)Scheduled Completion Date

The project is anticipated to be completed and in service on June 30, 2002. At the present time , the project remains on schedule for that date. However, any delays in regards to the completion date will result in additional costs and lost revenues.

g)Signals and Communications

The budget for signals and communication is presently $58 million. The design for the installation of systems and communication equipment at this point is at a very early stage and estimates in some cases are very preliminary and not well developed. Management have indicated that it will be another year before they are comfortable with these estimates. In these circumstances, there is a potential for budget overruns.

Conclusion:

Subsequent to the award of the Bayview Station contract which closes on September 16, 1998, the majority of all significant contracts will have been committed. At that time, costs for approximately 80% of the contract work will be known. While there will be a significant number of smaller contracts still to be awarded, the potential for significant cost overruns on these projects will not be significant.

The cost overruns reported to the Budget Committee and the Commission of approximately $39 - $44 million are in our view understated. Further, possible budget overruns will likely be as follows:

Bayview Station contract$ 4.0 million

Construction strike 1.7 million

Overtime costs to meet commitment to Cadillac Fairview 1.5 million

Construction cost escalation - estimated 3.0 million

Sale of Boring machines$ 4.2 million

$14.2 million

Other potential factors relating to potential overruns may include the final determination of the signals and communication budget. These amounts have not yet been finalized.

Once costs are known for the Bayview Station, a clearer picture will emerge as to the projected cost overruns on the complete project.

Contact Name and Telephone No.:

Rafiq Dosani, 392-8438

Jeff Griffiths

City Auditor

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