Two Denton City Council members are calling for an internal audit of a city-managed construction project after a Denton Record-Chronicle analysis found that its price tag rose dramatically without their knowledge.

Denton Municipal Electric spent more than $816,000 to construct and furnish an 8,448-square-foot administration building on Spencer Road.

City Council members never voted on the project, but in January 2006 they informally authorized up to $450,000 to fund construction of a 7,749-square-foot administration building. They also agreed to let the municipal electric company act as its own general contractor — an unprecedented allowance for a new city office-building project — in an effort to accelerate the project and save money by avoiding contractor markups.

Council members were unaware as the project’s cost soared by 81 percent and the building’s size increased by 9 percent over the next year. They never asked for an update on the project, and city staff members never offered one.

Council members also never cast a vote related to the project because nearly all of its components fell under the $25,000 limit that required formal bidding. Likewise, all individual expenses fell below the $100,000 limit the city manager can approve without council approval.

“Regarding council oversight, the past practices, after reviewing this, are flawed in that we did not get reporting [on the building project], with or without overruns,” said Deputy Mayor Pro Tem Joe Mulroy, who, along with Mayor Perry McNeill, called for a review by the city’s internal auditor. “To a certain point in the project, there was no reporting base back to council.”

City Manager George Camp­bell, city purchasing agent Tom Shaw and the electric company’s leaders vigorously defended the project, saying it strictly followed all purchasing regulations and saved electric ratepayers money overall.

Campbell also said internal auditor Steve Shepherd looked at the project at his request in November and found few problems.

Shepherd declined to comment in detail on some of his conclusions because the audit report is not yet final.

“We think it’s an awesome story about trying to do something a different way as far as constructing this building,” said Phil Wil­liams, Denton Municipal Elec­tric’s general manager. “I think it did yield savings for our ratepayers.”

Invoices, internal e-mails and other city documents also show:

n The city paid multiple subcontractors between $24,250 and $24,975 — just under the $25,000 amount that would have triggered the formal bidding requirement at the time. (The Texas Legislature increased the trigger amount to $50,000 effective last September). Purchasing agent Shaw said subcontractors are well aware of the limit and often offer quotes just below it to avoid the wait and bonding requirements associated with the formal bidding process. The city saves money as a result, he said.

n Denton Municipal Electric used a mix of employees, temporary workers and subcontractors to perform the labor. The utility also used council-approved annual contracts for some materials, including concrete, and bought other items from vendors such as Home Depot and Lowe’s. As a result, the cost of a single job’s labor and materials sometimes counted as separate expenditures when they would have exceeded $25,000 together. “As a general contractor, we broke that up into separate disciplines,” Shaw said. “And if you talk to general contractors, you’ll find that that’s not that unusual.”

n An employee in the city’s purchasing office raised questions in a September 2006 e-mail about the appropriateness of issuing two purchase orders to the same vendor, E-con Concrete Con­struc­tion. Shaw said the city sought competitive quotes for all projects under $25,000 using an informal bidding method, and E-con offered the lowest quotes for the jobs in question. He said the e-mail reflects how closely his office was scrutinizing the project.

Shepherd, the internal auditor, said he found no evidence that workers split expenses to intentionally bypass competitive bidding rules. That practice, called bid splitting, is illegal under the Texas Local Government Code.

“We did not take issue with any of the purchasing rules or regulations,” Shepherd said.

Scott N. Houston, director of legal services for the Texas Municipal League, said there is little legal interpretation of what constitutes an illegal component purchase under state law because prosecutions are rare.

“So it’s up to each city … to make that determination in the first instance,” said Houston, whose organization provides services to Texas cities. “As long as that’s done on some reasonable criteria, I doubt that anyone would seek to prosecute them [a city] for a crime.”

Still, Mulroy said aspects of the DME project called for closer scrutiny. Mulroy and McNeill both said the internal auditor’s pending report would not pre-empt them from asking for another review.

“On the individual purchase orders it would raise questions, and I will be asking the city manager for a detailed analysis and report,” said Mulroy, chairman of the council’s audit and finance committee.

 

Project history

In 2005, city employees worked out an arrangement to shift funds from the water and wastewater departments to pay for a new DME building.

The water utilities offered to essentially buy the electric company’s upstairs office space at the city service center on Texas Street for up to $450,000. The move would allow the water utilities to consolidate operations at the service center.

In turn, DME employees would move out of the service center into a new building just outside the city limits and adjacent to the electric utility’s operations facility on Spencer Road. The council later annexed the land.

Members of the council-appointed Public Utilities Board questioned the funding arrangement during an Oct. 24, 2005, meeting. Assistant City Manager Howard Martin described the $450,000 as excess revenue that would otherwise be directed to a reserve account designed to keep utility rates stable.

Electric Utilities Director Sharon Mays, who retired from DME in January, said that the new facility would be furnished mostly with existing furniture and that city staff would perform some of the construction and painting to keep costs down, according to minutes from the meeting.

The board approved the plan unanimously.

Council members also questioned aspects of the construction plan when they considered it three months later.

Council member Pete Kamp, now mayor pro tem, questioned the reported cost per square foot to construct the building, calling it “extremely low.” A written report circulated to council members before the Jan. 3, 2006, meeting said the building would be 7,749 square feet and cost an estimated $362,000 — or about $47 per square foot. The electric utility asked the City Council for a 25 percent contingency fund, and the council approved a construction budget not to exceed $450,000.

Mays repeatedly assured the council that the electric company could “make this work.”

“If we can set poles from a leaky rowboat in Louisiana,” Mays said, referring to DME workers’ aid efforts after Hurricane Katrina, “we will find a way to do this within this budget.”

Without voting on the proposal, the council directed city staff members to proceed with the plan.

 

Rising costs

As workers constructed the building between summer 2006 and early 2007, unexpected costs arose, DME spokeswoman Lisa Lemons said.

“We didn’t realize that we were going to need an architect, and that put the price up,” she said.

Other unforeseen costs included engineering fees, network equipment and a fire protection system, Lemons said. Mays also decided to increase the size of the building by nearly 700 square feet to provide office space for three more employees and to meet Americans with Disabilities Act regulations for bathroom stalls and entry and interior doors, Lemons said.

In addition, the pending annexation proved complicated, since city officials wanted the building to meet both the Denton County codes that applied to it and the city codes that would eventually apply, Lemons said.

“We didn’t want to hold up building the building while we went through the annexation process,” said Williams, DME general manager. “So we got caught in between here.”

The project’s cost eventually totaled $816,712.71, including the building, labor, furniture, conference room equipment, landscaping and parking lot, Williams said.

The building and labor alone cost $673,020.19, or nearly $80 per square foot. Excluding labor costs for DME employees and temporary workers, the total comes to $564,427.20, or about $67 a square foot.

All expenses over $450,000 came from the electric company’s reserve funds, Williams said.

 

Budget question

City officials disagree over whether the council approved the $450,000 as a total project budget or simply as a cap on the amount of water utilities funding that could be used.

“I think it’s pretty obvious that we all thought that the total budget would not exceed $450,000 because that was reiterated several times” during the January 2006 meeting, said former Mayor Euline Brock, whose term ended in May 2006.

Kamp, however, said the council appeared to be approving only the transfer of water utilities funds.

Campbell, who started work in Denton in November 2006, said council members never set a cap on the project’s cost and clearly knew it couldn’t be completed for $47 a square foot.

“There wasn’t a budget,” Campbell said. “There was a cost of the building itself and the portion of the cost of that building [$450,000] that couldn’t be exceeded as money coming from water and wastewater. But there was never a total budget presented to the council because we didn’t know it.”

DME officials said they avoided contractor markups by buying needed materials and equipment directly. Campbell said the city almost certainly saved money overall as a result, but he acknowledged that there’s no way to know for sure.

“There’s no way to compare because we didn’t take bids [for a general contractor],” he said. “The intent was don’t take bids. Don’t get a general contractor and ask for proposals. We were under a time constraint; we needed the space in the service center. All of that would have taken a lot of time so [we said] let’s try something different, and we did.”

Jeff Morris, operations division manager for the electric utility, served as project manager for the building. Morris said his experience overseeing construction of multimillion-dollar electric substations qualified him for the job. He added that the extra workload did not detract from his regular duties.

Toby Cummings, president and chief executive officer of Associated Builders and Contractors of North Texas, which represents general contractors, subcontractors, insurance agents and suppliers, said local governments often lack the expertise to successfully serve as their own general contractors.

In addition, general contractors’ work comes with a warranty, so governments that shun them risk having to pay twice for shoddy work or poor materials, he said.

“Government should be engaged in governing,” Cummings said. “They provide service to the public. Becoming their own contractor and competing in the free enterprise system is not in the best interest of the taxpayer.”

Shepherd, the internal auditor, said the city performed a cost comparison using the RSMeans industry benchmarking Web site. The site determined that buildings of similar size and makeup ranged in cost from $719,806 to $999,730, including contractors’ overhead and profit and architectural fees.

“The only way to know for sure [about cost savings] is to benchmark your final cost with something like RSMeans,” Shepherd said. “Based on that, the appearance is we got value for our dollars.”

 

Council reaction

Last week, the electric utility’s marketing department sent a memo titled “Talking Points” to council members. The memo included suggested answers to questions about the project.

Council members mostly agreed that the city probably saved money by acting as its own general contractor. But most also believed city workers should have provided them regular financial updates.

“I think that the increased cost was not the kind of huge amount that would be a major scandal or anything, but I would have expected that the council would be informed about what was happening,” Brock said. “If it had been a formal contract with an outside contractor, then these increased costs and the changes in the size of the project would have been brought [to the council]. So I think that, that those changes happened without reporting to the council is a result of the informality of the whole thing.”

Of those on the council in January 2006, only Charlye Heggins said she didn’t see a need for more updates.

“If it had been exorbitant, then come back and tell us about it … but I didn’t see that much of a problem with the excess,” she said.

If the city continues to act as general contractor on future building projects, McNeill said he believes the facilities management department should take the lead. The city plans to use that arrangement in the near future to expand the police department’s East Hickory Street facility, he said.

Council member Bob Montgomery said the council can cause “more harm than heal” by meddling in a building project. For example, he said, council members in 2006 rejected a low bid for construction of a new terminal building and parking lot at the city airport because it was higher than they had expected to pay, but subsequent bids proved more costly.

With that experience fresh on their minds, some city employees may have been afraid to admit that $450,000 was unrealistic for the DME building, he said.

Still, Montgomery said the council should have been more informed.

“It should be a damn good lesson for future councils,” he said. “We’ve got to use better oversight than that.”

LOWELL BROWN can be reached at 940-566-6882. His e-mail address is lmbrown@dentonrc.com .

Denton Municipal Electric oversaw construction of its new administration building at 1659 Spencer Road. The project incurred the following costs:

Category	Amount	Contractor
Fire protection	$33,147	Golden Triangle Fire Protection Inc.
Network equipment	$27,565.20	INX Inc.
Painting	$24,975	Frank Conner
HVAC installation	$24,905	BCI Mechanical Inc.
Framing	$24,800	E-con Concrete Construction
Carpet/tile	$24,528.88	Floorsourcetx
Foundation installation	$24,356.25	E-con Concrete Construction
Lumber/other materials	$24,311.70	*See note
Architects	$24,250	Nelson + Morgan Architects
Concrete for foundation	$24,218	*See note
Engineering/survey	$23,785.25	Isbell Engineering Group
Plumbing	$23,480	BCI Mechanical Inc.
Security system	$22,933.50	ABE Corp.
Phones/data connectivity	$22,834.14	*See note
HVAC equipment	$19,235.95	*See note
Electrical	$18,126.93	*See note
Roofing felt/trim installation	$15,200	Tallent Roofing Inc.
Roof trusses	$14,456.85	Rushin Truss Ltd.
Roofing material	$14,409.45	*See note
Bricklayer	$14,325	R. Holt Masonry LLC
Rebar/fill sand for foundation	$12,700.33	*See note
Drywall material	$12,138	*See note
Drywall installation	$11,890	H.M. Luna Drywall Inc.
Cabinets	$9,305	Carney Custom Cabinets
Insulation installation	$9,253	Thermocote Systems Inc.
Doors material	$7,464.35	*See note
Doors installation	$7,400	E-con Concrete Construction
Brick	$6,480	*See note
Septic system	$6,300	Septic Solutions
Category	Amount	Contractor
Fire hydrant	$5,030	*See note
Windows	$3,986.62	*See note
Toilet partitions	$3,529	*See note
Break room appliances	$3,235	*See note
Insulation material	$3,042.35	*See note
Gutters	$2,444	Shockey’s Custom Gutters Inc.
Water tap/meter	$2,275	*See note
Fire alarms	$2,250	BWS Fire Systems Inc.
Awnings	$2,196.50	*See note
Blinds	$1,444	*See note
Mobile trailer rental	$1,442.50	*See note
Tractor rental	$1,247.17	*See note
Concrete for sidewalks/pads	$933	*See note
Fire permit fee	$930	*See note
Conference room phone	$762.28	*See note
Floor plan design	$595	*See note
Septic permit	$310	*See note
Total building	$564,427.20
DME employee/	$108,592.99 temporary labor
Total including labor	$673,020.19

 

Other related expenses:

Furniture/conference room	$72,169.73equipment
Parking lot	$37,605.32
Landscaping	$33,917.47

 

Total project

$816,712.71

 

*Denton Municipal Electric bought these items directly from various vendors.

SOURCE: Denton Municipal Electric