[Costs Claimed by Sletten Construction of Wyoming, Inc., Under Contract No. NDC000037 to Build the National Historic Trails Interpretative Center, Bureau of Land Management]
[From the U.S. Government Printing Office, www.gpo.gov]
Report No. C-CX-BLM-0044-2003
Title: Costs Claimed by Sletten Construction of Wyoming, Inc.,
Under Contract No. NDC000037 to Build the National Historic
Trails Interpretative Center, Bureau of Land Management
Date: March 19, 2004
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This file contains an ASCII representation of an OIG report. No attempt has been made to display graphic images or illustrations. Some tables may be included, but may not resemble those in the printed version. A printed copy of this report may be obtained by referring to the PDF file or by calling the Office of Inspector General, Division of Acquisition and Management Operations at (202) 219-3841.
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Memorandum
To: Gwendolyn L. Moore, Contracting Officer Bureau of Land Management
From: Anne L. Richards Regional Audit Manager
Subject: Costs Claimed by Sletten Construction of Wyoming, Inc., Under Contract No.
NDC000037 to Build the National Historic Trails Interpretative Center, Bureau
of Land Management (No. C-CX-BLM-0044-2003)
INTRODUCTION
At your request, we have audited additional costs of $488,921 claimed by Sletten
Construction of Wyoming, Inc., (Sletten) for overhead on the subject contract. The
Bureau of Land Management (BLM) contracted with Sletten to build the National
Historic Trails Interpretive Center (NHTIC) in Casper, Wyoming. The objective of our
audit was to determine whether the costs claimed by Sletten were allowable, reasonable,
and adequately supported in accordance with the contract terms and the Federal
Acquisition Regulation. In addition, we attempted to provide information requested by
BLM concerning the total project costs, actual overhead costs, and the actual costs
incurred for each contract modification.
BACKGROUND
On March 22, 2000, BLM awarded a firm-fixed-price contract to Sletten1 to build the
NHTIC. The purpose of the NHTIC was to explain and interpret the history of the major
overland trails that early emigrants followed as they settled in the American west.
The NHTIC was developed in cooperation with three primary partners: the BLM, the
National Historic Trails Center Foundation (a private nonprofit entity), and the City of
Casper, Wyoming. BLM funded the construction of the building, the Foundation funded
the exhibits, and the City donated the land that the NHTIC occupies. The three parties
1The contract was originally awarded to Westates Construction Company, a wholly owned subsidiary of
Sletten, Inc. During the performance period, Westates was renamed Sletten Construction of Wyoming, Inc.
signed a cooperative agreement that details the operations and maintenance costs of the
facility and clarifies the responsibilities of each party.
BLM provided the Notice to Proceed on April 10, 2000, and construction began the same
day. The original contract was for $5,710,000, and the NHTIC was to be completed in
480 days. However, during the course of construction the contract was modified 17
times, mostly for changes in the building design and for additional work. As modified,
the final contract amount totaled $6,355,542.89 and the period of performance was
increased to 784 calendar days. The project was accepted by BLM on February 20, 2003.
Sletten asserted that while the project was under construction it encountered significant
problems beyond its control which BLM failed to adequately address. Sletten alleged
that inadequacies, conflicts, and errors in the government-furnished plans and
specifications caused delays on the project. Sletten is requesting additional compensation
because it believes these problems added extra performance time and costs.
Sletten submitted a total of 70 change order requests (CORs) that were incorporated into
the first 16 modifications1 to the contract. Sletten asserts that all CORs for the project
were successfully negotiated except for COR No. 17443, which requested compensation
for extended field office overhead and extended home office overhead as a result of
construction delays. This COR was originally submitted to BLM seeking compensation
for 192 calendar days of extended field office overhead for about $192,559. Sletten later
amended its request to include $120,192 in home office overhead for the same contract
extension. BLM declined to pay the amount, stating that Sletten was fully reimbursed
through the 16 modifications.
On July 25, 2003, Sletten formally submitted its certified claim to BLM which updated
the amounts of overhead costs allegedly incurred since the submission of COR No.17443.
The claim requested compensation for a delay period of 274 calendar days, which
consisted of 304 days of actual performance delay less 30 days for weather interruptions.
Sletten�s claim of $488,921.41 was comprised of $275,956.36 for extended field office
overhead, $171,524 for extended home office overhead, $41,393.45 for profit, and $47.60
for bond and insurance. Although BLM modified the contract to extend the performance
period by 304 days, BLM still maintains that the modifications fully compensated Sletten
for its costs.
SCOPE AND METHODOLOGY
The audit scope covered the total costs incurred by Sletten to construct the NHTIC.
Costs for the entire construction period, which encompassed Sletten�s fiscal years ending
March 31, 2001, through March 31, 2003, were subject to our review.
The audit scope covered only the issue of verifying the allowability of the claimed costs.
Our audit did not address whether Sletten�s claim has merit, and accordingly, we did not
review the plans and specifications of the contract to assess the validity of the claim.
1The final modification, No. 17, was a minor administrative adjustment in which BLM deobligated the
remaining funds after construction was complete.
The audit fieldwork was primarily conducted at Sletten�s corporate offices in Great Falls,
Montana. To accomplish the audit objective, we interviewed company officials, verified
the calculations of the claim, reviewed Sletten�s accounting system, and judgmentally
selected and examined supporting documentation for the costs incurred for the contract.
Our audit focused on evaluating field office overhead and home office overhead, which
comprised the major cost items included in the claim.
To help evaluate the reliability of Sletten�s accounting system, we obtained and read
Sletten�s audited financial statements for the three fiscal years that covered the
construction period. We also interviewed the public accounting firm that conducted the
annual financial statement audits.
We interviewed BLM�s contracting officer and contracting officer�s technical
representative to become familiar with the administration of the contract and the manner
in which the NHTIC was constructed. We examined pertinent documents maintained by
BLM, including the contract and associated contract modifications, change order
requests, correspondence files, and the daily contract diary.
We visited the NHTIC in Casper, Wyoming, and toured the facility with BLM officials
who had first-hand knowledge of the construction project.
To confirm our audit conclusions regarding the claim, we consulted with the Defense
Contract Audit Agency, an organization that has extensive experience in performing
audits of construction claims.
Our audit was performed in accordance with the Government Auditing Standards, issued
by the Comptroller General of the United States. Accordingly, we included such tests of
records and other auditing procedures that we considered necessary under the
circumstances.
TECHNICAL EVALUATION
BLM had not performed a technical evaluation of the claim at the time of our audit.
Therefore, our conclusions are qualified to the extent that the results of a technical
evaluation may affect the claimed costs. For example, Sletten based its claim on a
delayed performance period of 274 calendar days. For consistency purposes, we used the
274 days when computing the audit adjustments contained in this report. However, our
audit adjustments may need to be recomputed should a technical review of the timelines
affecting the contract performance result in a redetermination of the length of delay.
RESULTS OF AUDIT
We concluded that the claim for reimbursement of additional costs submitted by Sletten
Construction of Wyoming, Inc., overstated its alleged damages. Specifically, we found
that Sletten�s actual costs incurred for extended field office overhead were much less than
claimed and that the claim for extended home office overhead was not valid. As a result,
we questioned $256,525.52 of the $488,921.41 total amount claimed. Our findings are
explained in the following paragraphs and are summarized in the accompanying
Appendices.
EXTENDED FIELD OFFICE OVERHEAD
Sletten claimed $275,956.36 for extended field office overhead. Field office overhead
refers to costs incurred at the job site that benefited the entire construction project (such
as general supervision, office trailers, and utility expenses), rather than an individual task
or activity (such as earthwork, roofing, or landscaping). The term �extended� refers to
field office overhead that was incurred during the delayed performance period.
In its claim, Sletten requested compensation for 13 field office overhead cost items in the
total amount of $1,007.14 per calendar day. Sletten�s accounting records, however,
disclosed that only $737.42 per calendar day in costs was actually incurred for these
items (see Appendix 1). Consequently, for the alleged 274-day delay period, Sletten
claimed $73,903.28 in excess of its actual costs. We questioned this amount, and our
calculations are shown in Appendix 2.
PROFIT. Sletten claimed $41,393.45 for profit on the extended field office
overhead. Sletten computed its profit by applying a 15 percent rate to the overhead
amount. We did not evaluate the reasonableness of the profit rate as this is a matter that
we defer to the contracting officer. However, we noted that the profit rate was consistent
with the rate that Sletten proposed to BLM in its correspondence dated May 26, 2000.
Nevertheless, we questioned $11,085.49, which represents the amount of profit
associated with the field office overhead that we classified as questioned in the previous
paragraph (see Appendix 2).
BOND AND INSURANCE. Sletten claimed $47.60 for bond and insurance costs,
which it computed by applying a .015 percent rate to the combined amount of claimed
extended field office overhead and profit. We found that the bond and insurance rate was
consistent with the rate that Sletten offered to BLM in its correspondence dated May 26,
2000. However, we questioned $12.75, which represents the bond and insurance amount
associated with the field office overhead and profit that we classified as questioned (see
Appendix 2).
EQUIPMENT. In its claim, Sletten listed 10 equipment items as additional field
office overhead, but did not officially request reimbursement for these items. According
to the claim, the equipment was on the project site, but Sletten did not have a �current
intention to seek additional field office overhead compensation� for the costs. As
requested by BLM, we expanded the audit scope to include a cost analysis of the
equipment. Accordingly, we developed the actual cost per calendar day for each item
based on Sletten�s accounting records and we are presenting this data for informational
purposes only (see Appendix 3).
EXTENDED HOME OFFICE OVERHEAD
Sletten claimed $171,524 for extended home office overhead. Home office overhead
refers to general and administrative costs (such as officers� salaries, bookkeeping, office
rent, and advertising) generally incurred at the home office rather than at the job site.
The term �extended� refers to home office overhead that was incurred during the delayed
performance period.
Sletten computed the claimed extended home office overhead by using a mathematical
calculation known as the �Eichleay Formula�2. In brief, the formula computes a daily
overhead cost for the project which is multiplied by the number of days that the project
was delayed. The resulting figure, commonly known as �unabsorbed overhead�,
represents the amount of damages for which the contractor is entitled to recover.
Our analysis disclosed that the Eichleay Formula has been used in situations where the
Federal Government causes a work stoppage at the job site that idles the contractor�s
construction workforce. Since work has stopped, progress payments to the contractor are
suspended or at least greatly reduced. Meanwhile, expenses at the home office continue
to accrue, but because the dormant job no longer generates sufficient revenue, the home
office expenses are not compensated (or absorbed) by that job.
However, we found that the circumstances involving the BLM contract preclude the use
of the Eichleay Formula. Sletten and BLM officials stated, and the daily contract diary
prepared by the BLM project inspector shows, that work never stopped during the BLM
contract. The job did take longer to complete than originally expected, but Sletten was
reimbursed for its additional performance costs through contract modifications. The
modifications, in fact, provided $43,313.15 specifically for overhead costs that were
computed in accordance with an overhead rate proposed by Sletten in its correspondence
to BLM dated May 26, 2000. Further, since Sletten�s billing submissions to BLM
continued without interruption during the project, Sletten likewise continued to recover
its home office costs. Accordingly, we questioned $171,524, the full amount of claimed
extended home office overhead.
AUDITED HOME OFFICE OVERHEAD RATES. As requested by BLM, we
computed the actual home office overhead rates based on Sletten�s recorded costs. For
informational purposes, we computed two sets of rates. In the table that follows, the
second column shows the home office overhead rates without adjustments for certain
unallowable costs based on the Federal Acquisition Regulation (FAR). The third column
reflects full adjustments for the FAR.
Fiscal Year Ending
March 31
Unadjusted Overhead Rate
(Percent of Total Direct Costs)
Adjusted Overhead Rate
(Percent of Total Direct Costs)
2001
10.0
7.9
2002
6.8
6.0
2003
7.4
6.0
Although we do not believe that Sletten incurred unabsorbed home office overhead
during the BLM contract, we do recognize that home office expenses are a legitimate cost
of doing business. Accordingly, if negotiations result in Sletten receiving an equitable
2The Eichleay Formula was established in a judicial decision in 1960 and has subsequently been used to
develop claimed overhead costs in some construction claims.
adjustment for additional direct costs (which would include field office overhead), Sletten
should also receive an appropriate allocation of home office overhead as part of the
equitable adjustment. In our opinion, the adjusted overhead rates or the rates proposed by
Sletten in its correspondence to BLM dated May 26, 2000, would provide a fair basis for
computing the overhead amount.
TOTAL PROJECT COST INFORMATION
We estimated that Sletten incurred $7,133,000 in costs for the BLM contract. However,
this figure is only an approximation because Sletten�s accounting system commingled the
BLM contract costs with costs incurred for the exhibits funded by the National Historic
Trails Center Foundation. The exact costs for the Foundation could not be accurately
determined, but Sletten estimated the amount at $246,093. Accordingly, to estimate
Sletten�s incurred costs, we deducted the estimated costs for the Foundation from the
total project cost of $7,379,099.
As requested by BLM, we attempted to determine the actual costs that Sletten incurred
for each of the 16 contract modifications. However, we were unable to accomplish this
because Sletten�s accounting system did not provide a cost breakdown by individual
modification.
Finally, Sletten bid the contract expecting a profit of $437,451. However, Sletten�s
financial records show that it actually experienced a loss of $222,794.
In the March 23, 2004, response (Appendix 4) to the draft report, you provided comments
suggesting changes to the report. We have considered the comments and made changes
to the final report where appropriate.
Section 5(a) of the Inspector General Act (5 U.S.C. � App. 3) requires the Office of
Inspector General to list this report in its semiannual report to Congress.
Although this report does not require a response, we appreciate being kept apprised of the
status of negotiations with Sletten and the final disposition of the claimed costs. If
further information is needed regarding this report, please contact me or Mr. Tim Musil at
(303) 236-9243.
Appendix 1
ANALYSIS OF COSTS CLAIMED BY
SLETTEN CONSTRUCTION OF WYOMING, INC.,
FOR EXTENDED FIELD OFFICE OVERHEAD
Amount Claimed
Amount Claimed
Audit
Adjusted
Line Item
(Per Week)
(Per Calendar Day)
Adjustment3
Costs
Supervision
$1,000.00
$ 142.85
General
Superintendent
1,150.00
164.29
Lead Man
800.00
114.29
Labor Burden
1,280.00
182.86
Payroll
Subtotal
$4,230.00
$ 604.29
($74.59)
$529.70
Storage Trailer
25.00
3.57
0.72
4.29
Office Trailer
87.00
12.43
0.29
12.72
Inspector Trailer4
87.00
12.43
(12.43)
0
Phone
148.00
21.14
(2.36)
18.78
Power
80.00
11.43
9.94
21.37
Temporary
Toilets
137.00
19.57
(10.17)
9.40
Pickups
278.00
39.71
(25.12)
14.59
Heat
1,344.00
192.00
(120.48)
71.52
Forklift
634.00
90.57
(35.52)
55.05
Total
$7,050.00
$1,007.14
($269.72)
$737.42
3Adjustments reflect the costs supported by Sletten�s accounting records.
4Sletten�s accounting system combined the costs of the office and inspector trailers.
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Appendix 2
COSTS CLAIMED BY SLETTEN CONSTRUCTION OF WYOMING, INC.
FINANCIAL SUMMARY OF AUDIT RESULTS
Description
Amount Claimed
Amount Questioned
Balance
Extended Field Office Overhead
$275,956.36
$ 73,903.285
$202,053.08
Profit (15%)
41,393.45
11,085.496
30,307.96
Bond & Insurance (.015%)
47.60
12.757
34.85
Subtotal
$317,397.41
$85,001.52
$232,395.89
Extended Home Office
Overhead
171,524.00
171,524.008
0
Total
$488,921.41
$256,525.52
$232,395.89
5The amount questioned was computed by first multiplying the $737.42 audited field office overhead cost per
calendar day (see Appendix 1) by 274 days of performance delay. The resulting amount of $202,053.08 was then
subtracted from the claimed amount of $275,956.36 for a balance of $73,903.28.
6The amount questioned was computed by multiplying the $73,903.28 questioned for field office overhead by the
15 percent profit rate.
7The amount questioned was computed by combining the amounts questioned for field office overhead of
$73,903.28 and profit of $11,085.49 and multiplying the product of $84,988.77 by the .015 percent bond and
insurance rate.
8As explained in the report, we questioned the full amount of the claimed extended home office overhead.
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Appendix 3
ANALYSIS OF OTHER EQUIPMENT COSTS IDENTIFIED
BY SLETTEN CONSTRUCTION OF WYOMING, INC.,
FOR FIELD OFFICE OVERHEAD
Audited Costs
Line Item
(Per Calendar Day)
1984 Bantam 22T Hydraulic Crane
$ 68.23
1985 Chevy 2T Water Truck
36.56
2001 Bobcat, Model 753
34.34
Two 1998 Miller Welders
13.47
Extended rental for Sandblast Truck
327.64
Extended rental for EFCO & Symons Concrete Forms
52.89
Ingersoll Rand Compressor
13.54
900 CFM Air Compressor9
0
Genie S45 Manlift
48.86
Genie S40 Manlift
43.94
Total
$639.47
9No cost is shown because this item was not found in the project accounting records.
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Text Box: Appendix 4
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