[Audit Report on the Safety of Dams Project Constructed by the Bureau of Reclamation at Coolidge Dam]
[From the U.S. Government Printing Office, www.gpo.gov]

Report No. 98-I-190

Title: Audit Report on the Safety of Dams Project Constructed by
       the Bureau of Reclamation at Coolidge Dam

Date: January 12, 1998

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United States Department of the Interior

W-IN-BOR-006-96

OFFICE OF INSPECTOR GENERAL
Washington, D.C. 20240

AUDIT REPORT

Memorandum

To:       Assistant Secretary for Indian Affairs

From:     Robert J. Williams
     Assistant Inspector General for Audits

Subject: Audit Report on the Safety of Dams Project Constructed by the Bureau
of Reclamation at Coolidge Dam (No. 98-I-190)

INTRODUCTION

This report presents the results of our review of the Bureau of Reclamation's costs associated
with the construction of the Coolidge Dam safety of dams project. The audit was initiated
in response to an August 4, 1995, request by the Deputy Commissioner of Indian Affairs to
determine whether project costs were reasonable. In the audit request, the Deputy
Commissioner stated that because of the increased amount of noncontract' costs for the
project, the Bureau would have to justify to project beneficiaries the rate increases necessary
to recover costs "far in excess of original projections" and that the financial impact to the
project users "may be devastating."

BACKGROUND

Coolidge Darn, located on the Gila River approximately 115 miles southeast of Phoenix,
Arizona, is owned and operated by the Bureau of Indian Affairs (Figure 1).

`The Bureau of Reclama tion used the terminology "contract" and "noncontract" to explain its
construe
program to the Congress. According to the Bureau, contract costs related to major construction
contracts

noncontract costs for the Coolidge Dam safety of dams project were for: (1) preconstruction
activities such as

tion
and

geologic investigations, drilling, architectural and engineering design specifications, and analyses;

(2) construction supervision activities, including management, inspection, surveys, and contract
administration;
(3) small contracts; (4) flood operations; (5) tribal land use permit fees; and (6) supplemental
analyses
associated with the 1988 modification report.

 
The Bureau of Indian AEkirs completed Coolidge Dam in 193 1 under the authority of the San
Carlos Act of 1924 (43 Stat. 475476). The Dam is the primary water storage facility for the
Bureau's San Carlos Irrigation Project, providing irrigation water for 50,000 acres of Indian
land on the Gila River Indian Reservation and 50,000 acres of private land in the San Carlos
Irrigation and Drainage District. In 1984, the Bureau of Reclamation updated information
on the safety of dams, and its reports indicated serious safety deficiencies in the Dam's
foundation that could cause the failure of the Dam during certain flood and seismic events.
The Bureau of Indian Aflairs requested the assistance of the Bureau of Reclamation to design
and construct the necessary measures to correct the safety deficiencies. The Congress
specifically authorized safety modifications for Coolidge Dam in a 1984 amendment (Public
Law 98-404) to the Reclamation Safety of Dams Act of 1978 (Public Law 95-578). The
1984 amendment authorized additional appropriations of $650 million for the Safety of Dams
program and identified the Coolidge Dam project and a number of other projects to be
undertaken. The Act required project beneficiaries to repay 15 percent of the safety of dams
modification costs. The Act also required irrigation water users to repay, without interest,
their allocated portion of project costs based on their ability to pay, not to exceed a 50.year
period, and authorized the Secretary to negotiate appropriate repayment contracts with

2The irrigators' ability to pay consists of the amount that irrigators can afford to pay for water service
as determined
by farm budget analyses, which compare the income derived from the sale of crops with the cost of
producing the
crops, along with a reasonable return to the farmer.

2

 
On November 10, 1988, the Bureau of Reclamation completed the "Coolidge Dam, Safety
of Dams, Modification Report." The report concluded that Coolidge Dam needed structural
modifications to prevent failure and the subsequent loss of life and property that could occur
under normal operating conditions or during a flood or earthquake.3 The report identified
safety deficiencies, including dam abutment and buttress instability and abutment erosion
during floods in which water would flow over the top of the Darn. The Bureau of
Reclamation's 1988 estimated cost of the recommended modifications was $43.3 million,
which included $10 million for engineering, administration, and overhead. In addition to
structural modifications, the report recommended: (1) installation of an early warning system
to alert people downstream of a potential dam failure and (2) operation of the system until
the structural modifications could be completed. However, the report did not estimate the
additional costs for these interim safety measures.

In July 1990, the Acting Assistant Secretary for Indian AflFairs authorized the Area Director
of the Bureau of Indian Affairs Phoenix Area Office, with the assistance of the Bureau of
Reclamation, to negotiate and execute a repayment contract with the San Carlos Irrigation
and Drainage District for its share, 7.5 percent, of the safety of dams modification costs to
Coolidge Dam.4 The Assistant Secretary required the form and terms of the repayment
contract to generally follow the Bureau of Reclamation's contract repayment guideline except
that the repayment period was not to exceed 10 years unless prior approval from the Assistant
Secretary was obtained allowing for a longer period.

Reclamation guidelines require a signed repayment contract before construction of a project
can proceed. However, in February 199 1, the Assistant Secretary for Indian AfEGrs approved
the Phoenix Area Director's request to waive the requirement for a signed repayment contract
before proceeding with construction on the Coolidge Dam project. In an October 10, 199 1,
memorandum to the Regional Director of the Bureau of Reclamation's Lower Colorado
Regional Office, the Phoenix Office Field Solicitor concluded that a waiver could be justified
for the project because: (1) immediate repairs were necessary to protect public safety; (2) only
7.5 percent of the construction costs would be reimbursable under the repayment contract;
and (3) execution of a repayment contract was expected in the near future.

Construction of the Coolidge Dam project began in June 1991, when the Bureau of
Reclamation awarded a contract to construct a new access road to the work site at the
downstream base of the Dam. In February 1992, the Deputy Commissioner of Indian AfEa..irs,
to enhance contract negotiations with the District, waived the earlier stipulation that limited
the repayment period to 10 years or less. In June 1992, the primary construction contract for

is defined as the maximum runoff condition that would result Tom the most severe combination of
hydrologic and
meteorologic conditions that are considered reasonably possible for a particular drainage basin. For
Coolidge Dam
the PMF was defined as having a peak flow of 800,000 [cubic feet per second] and a 17-day volume
of 2,754,OOO
acre-feet. "

4Public Law 98-404 requires project beneficiaries to repay 15 percent of the safety of dams
modification costs.
The San Carlos Irrigation and Drainage District has a 50 percent interest in project water. Therefore,
the District's
repayment share is 7.5 percent (50 percent times 15 percent) of the total modification costs.

3

 
the safety modifications was awarded, and modification work on the Dam was substantially
completed in February 1995. As of September 30, 1995, the cost of the project totaled $46.9
million, and as of October 1996, a repayment contract had not been negotiated with the
District.

SCOPE OF AUDIT

We conducted our audit from May through Ott
Lower Colorado Regional Office in Boulder City,

Arizona.

ober 1996 at the Bureau of Reclamation's
Nevada, and at its Area Office in Phoenix,

To accomplish our audit objective, we reviewed applicable laws, planning

documents, correspondence, and construction cost data from the Bureau's financial reports
concerning the safety of dams project at Coolidge Dam. We analyzed the history of cost
increases from when costs were first incurred in fiscal year 1987 to the end of fiscal year 1995
(September 30, 1995) and compared the relative percentage of noncontract costs for this
project with percentages of noncontract costs for other recent Bureau safety of dams projects.
We also interviewed officials at the Bureau of Reclamation's Lower Colorado Regional
Office, Phoenix Area Office, and Denver Service Center and at the Bureau of Indian AfTairs
Phoenix Area Office to discuss project design, planning, construction, changes in the scope
of work, variances between contract and noncontract costs, and comparison of costs and
scope of work of other safety of dams projects.  Our review was conducted without the
benefit of a technical evaluation of the efficiency and effectiveness of the safety of dams
project constructed by the Bureau of Reclamation at Coolidge Dam.

Our audit was conducted 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 were considered necessary under the
circumstances. We limited our review of internal controls to the extent necessary to satisfy
the audit objective. We also reviewed the Secretary's Annual Statement and Report to the
President and the Congress, which is required by the Federal Managers' Financial Integrity
Act of 1982, for fiscal years 1994 and 1995 and determined that none of the reported
weaknesses were directly related to the objective and scope of our audit.

PRIOR AUDIT COVERAGE

Neither the Office of Lnspector General nor the General Accounting Office has performed an
audit of the Bureau of Reclamation's safety of dams project at Coolidge Dam during the past
5 years. However, the Office of Inspector General has issued four reports related to the
Bureau of Reclamation's cost accounting process as follows:

 
- Three audits of the Bureau of Reclamation's financial statements for fiscal years 1992
through 1995 determined that the Bureau's internal control structure was generally sufficient

- "Working Capital Fund, Bureau of Reclamation" (No. 96-I-644) issued in March 1996,
stated that the Bureau did not have adequate controls to monitor and enforce cost recovery
for the working capital fund. As a result, according to the report, the Bureau undercharged
customers for the capital cost component of the fund and overcharged customers for the
operational cost component of the fund. The report further stated that certain Bureau offices
used funds derived from operational overcharges to subsidize activities that were not fund
related. The report contained seven recommendations to improve controls and to help ensure
that the Bureau operated the fund in compliance with applicable laws and regulations. Based
on the Bureau's response to the draft report, we considered four recommendations resolved
but not implemented and the remaining three recommendations unresolved. During our audit

of the Coolidge Dam safety of dams project, we reviewed the audit work performed on the
working capital fund and concluded that the weaknesses identified would not have resulted
in unreasonable charges to the Coolidge Dam project.

RESULTS OF AUDIT

Overall, we concluded that Bureau of Reclamation costs associated with the Coolidge Dam
safety of dams project were reasonable. Specifically, we found that: (1) the overall increase
in project costs was less than what would have been expected if the Bureau had constructed
all of the modification work proposed in the 1988 modification report; (2) the percentage of
noncontract costs for this project was similar to the rates of noncontract costs for five other
safety of dams projects constructed by the Bureau; (3) the Bureau incurred noncontract costs
of $3.5 million for necessary activities that were not either included or anticipated in the 1988
cost estimates; and (4) the increased percentage of noncontract costs was largely a result of
post-1988 investigations by the Bureau of Reclamation, which significantly reduced the scope
and cost of modification work performed under the construction contracts. In addition, we
do not believe that requiring project users to pay the $270,000 repayment increase between
the actual cost of the project ($3,517,500) and the 1988 cost estimate ($3,247,500) would
cause significant additional financial impacts beyond those anticipated in 1988. Further, we
estimated that the delay by the Bureau of Indian AfEairs in establishing a repayment contract
with the project users resulted in a fiscal year 1996 loss to the Federal Government of at least
$175,000.

5 The reports consisted of the following: "Bureau of Reclamation Financial Statements for Fiscal
Years 1992 and
1993" (No. 94-I-1055), issued in July 1994; "Bureau of Reclamation Financial Statements for Fiscal
Years 1993
and 1994" (No. 95-I-547), issued in February 1995; and "Bureau of Reclamation Financial
Statements for Fiscal
Years 1994 and 1995" (No. 96-I-635), issued in March 1996.

5

 
Inflationary Impacts on the 1988 Project Cost Estimate

While the percentage of noncontract project costs increased significantly on the Coolidge
Dam project, we found that the increase in total project costs was less than what would have
been expected ifthe Bureau of Reclamation had constructed all of the work proposed in the
1988 modification report. We noted that the project costs of $46.9 million as of September
30, 1995, were 8.3 percent ($3.6 million) higher than the 1988 estimate of $43.3 million for
the project. However, during this period, the Bureau's construction costs increased by an
        By applying the Bureau's average construction cost increase to the
1988 project cost estimate, we determined that the estimated cost of the modification work
envisioned in the modification report in 1995 dollars would be approximately $53.3 million,

as shown in Figure 2.

Coolidge Dam Safety of Dams Project
Estimated Versus Actual Costs

60 /

  I   Indexed Estimate    I
1988 Estimate        1995 Actual

I?!! / /`,  Contract Costs
//            Noncontract Costs
  Total Project Costs

Figure 2. Estimated versus actual costs.

As such, we believe that the Bureau's additional investigative and design efforts, while
increasing significantly the project's noncontract cost percentage, resulted in an overall
reduction in the cost of the project.

index values as of October 1988 and October 1995.

6

 
Comparison With Other Reclamation Safety of Dams Projects

To determine the reasonableness of noncontract costs for the safety of dams project at
Coolidge Dam in relation to other safety of dams projects, we reviewed noncontract costs for
five Bureau of Reclamation safety of dams projects that were under construction as of
September 1995: Ochoco in Oregon, Rye Patch in Nevada, Bumping Lake in Washington,

million to $28 million.

We determined that while the relative percentage of noncontract costs of the safety of dams
project at Coolidge Dam was significantly greater than what was estimated in 1988, the
percentage was similar to the percentages for the five projects we reviewed. Specifically, we
calculated noncontract cost ratios of from 41.1 percent to 59.6 percent for the five projects,
as shown in Figure 3. The weighted average percentage for noncontract costs for all five
projects was 50.1 percent, which approximates the 51.2 percent of noncontract costs for the
Coolidge Dam project.

Comparison of Noncontract Cost Percentages
at Various Reclamation Safety of Dams Projects

60

10

   Rye Patch      Bartlett      Avenge      Coolidge
ochoco     BumpingLake    Horseshoe

O Noncontract Costs Expressed as a Percentage of Total Project Costs

Figure 3. Comparison of noncontract cost percentages.

Additional Noncontract Costs

We also identified noncontract costs of at least $3.5 million associated with activities that
were not included in the 1988 cost estimate. Specifically, the Bureau of Reclamation incurred

projects, and the remaining two projects were selected because the projects were administered by
the same regional
and area offkes as was the Coolidge Dam project.

7

 
noncontract costs of $1.5 million for the design, construction, and operation of an early
warning system to alert people downstream of a potential dam failure (the modification report
recommended installing this system; however, it did not estimate the system's cost);
$1.3 million for the design of a new access road to the work site; and $717,000 for
unanticipated flood operations resulting from severe and prolonged flooding of the work site
during 1993.

Changes in Project Scope

We determined that the shifting of costs between the contract and the noncontract cost
categories of the project during the period of 1988 to 1995 resulted principally from
post-modification report investigations, which greatly reduced the scope of modification work
performed under the construction contracts. While these investigations decreased contract
costs by $10.4 million, they increased noncontract costs by $14 million from the Bureau's
1988 project cost estimate. Overall, the project's actual costs of $46.9 million resulted in a
$3.6 million (8.3 percent) net increase over the 1988 cost estimate of $43.3 million, although
the mix of contract and noncontract costs varied significantly as follows:

Project Costs

Contract Costs
Noncontract Costs
Total

  1988
(Estimated)

$33.3

  10.0
$43.3

(In millions)


1995
(Actual)

$22.9

24.0
$46.9

Difference
(Actual less
estimated)

($10.4)
14.0*
$3,6

*At least $3.5 million (25 percent) of the difkrence was for added noncontract cost activities that
were not included
or anticipated in the 1988 cost estimate.

On a percentage basis, noncontract costs increased from 23. I to 5 1.2 percent, while contract
costs decreased from 76.9 to 48.8 percent. The variations in the relative percentages of
noncontract and contract project costs from the 1988 estimated to the 1995 actual costs are
illustrated in Figure 4.

 
Estimated Versus Actual Cost Percentages
Coolidge Dam Safety of Dams Project

1988 (estimated)
. . , . . . .
. . t:
.,.; .,. :.
.: . . t t
El
. :_ .
_......
._:._. . . .  Noncontract Costs
.: . . . :

1995 (actual)

Contract Costs

, Figure 4. Estimated versus actual noncontract and contract cost percentages for the project.

In a December 8, 1994, memorandum to the Area Director of the Bureau of Indian AfGirs
Phoenix Area Office, the Area Manager of the Bureau of Reclamation's Phoenix Area Ofice
stated that the Bureau of Reclamation's additional planning, investigative, and design efforts
had significantly reduced the scope of modification work performed under the construction
contracts. To substantiate this statement, we verified that the Bureau of Reclamation had
incurred noncontract costs of approximately $9 million for design data collection and design
and specification activities during 1989 through 1992, which coincided with the period between
the completion of the Coolidge Dam modification report (November 1988) and the award of
the primary construction contract (June 1992). We also verified that the actual scope of
modification work performed was less than what was anticipated in 1988 while, according
to the Bureau, still fully addressing the dam safety issues.

In addition, we verified that the actual construction costs were significantly less than those
estimated. The two most important changes involved reductions in the amount of construction
work required for dam abutment stabilization and spillway modifications as follows:

- To stabilize the foundation of the Dam, the 1988 modification report proposed the
installation of cables in both the left and the right dam abutments to provide additional support
for unstable rock beneath the Dam's left and right buttresses. However, after additional

9

 
geologic investigations, the Bureau's final design eliminated the proposed foundation
stabilization work on the right abutment and, to buttress the left abutment, included a reinforced
concrete wall, which was constructed.

- The modification report proposed replacing the existing spillways with new reinforced
concrete spillways approximately 2 feet thick, widened from 60 to 100 feet, and straightened
slightly. As contemplated in the modification report, the wider and straighter spillways would
have accommodated increased water flows of up to 200,000 cubic feet per second. However,
the Bureau's final designs did not include plans for replacing, straightening, or widening the
spillways because Bureau studies found that the increased spillway capacity would not be
adequate to pass enough water during the probable maximum flood event to prevent water
Tom overtopping the dam and eroding the Dam's foundation. Instead, the Bureau's design
provided for stabilizing the Dam's foundation and controlling erosion to safely pass water over
the Dam. Accordingly, the Bureau placed a thinner reinforced concrete overlay over the
existing spillways, which retained the spillways' existing capacity for accommodating water
flows of 120,000 cubic feet per second (Figure 5). This overlay allowed for the redesign of
the spillways' water flow surfaces and included the addition of ramps in the floor and side walls
of the spillways to dissipate the energy of water flow to reduce the potential for destruction
of the spillways.

Figure 5. Coolidge Dam after safev of dam mod@cations. (Bureau of Reclamation photograph)

10

 
Financial Impact on Project Users

In the August 4, 1995, audit request, the Deputy Commissioner of Indian AR&s stated that
beneficiaries of the Coolidge Dam project would experience "devastating" financial impacts
because of rate increases required to repay project costs "f&r in excess of original projections. *'
Based on the 1988 modification report's project cost estimate, the District's repayment
obligation would have been $3,247,500 (7.5 percent of $43.3 million), while the District's
repayment obligation is $3,517,500 (7.5 percent of $46.9 million) based on actual costs
incurred through the end of fiscal year 1995. The $270,000 increase in the District's repayment
obligation represents a total increase of about $5.40 for each acre of private land irrigated by
     In addition, the time allowed for repayment will be negotiated based on the
District's ability to pay but may be in excess of the 10 years initially required by the Bureau
of Indian Affairs. While our review did not include an analysis of the District's financial
condition or its ability to repay the costs of the safety of dams modifications, we believe that
the financial impact of the additional $270,000 repayment obligation over the repayment period
would be minimal.

Financial Impact on Federal Government

We found that because the Bureau did not obtain a repayment commitment from the District
before the project was completed in February 1995, repayment of the $3.5 million of project
costs attributable to the District (non-Indian irrigation beneficiaries) did not begin in 1996.
We estimated that the cost to the Federal Government of delaying the start of repayment for
1 year was approximately $175,000, assuming an annual interest rate of 8 percent on the
District's $3.5 million repayment obligation. Our estimate represents the difference between
the present value of the $3.5 million repayment obligation based on a 10-year stream of
payments beginning in 1996 ($2,360,000) and an identical stream of payments beginning in
1997 ($2, lS5,000).9 We also estimated that further delays to 1998 would cost the Government
an additional $162,000 and that additional losses would accumulate for each additional year
that repayment is delayed. Accordingly, we believe that the Assistant Secretary for Indian
AfEairs should facilitate the conclusion of the repayment contract negotiations with the District
to minimize financial impact on the Government.

*The District's repayment obligation would have been $64.95 per acre ($3,247,000 divided by
50,000 acres of
private land irrigated in the San Carlos Irrigation and Drainage District) under the 1988 cost estimate
and is $70.35
per acre under the actual costs incurred, an increase of $5.40 per acre.

?Present value is a financial term that refers to the time value of money, which recognizes that a
dollar available
in the future is worth less than a dollar available today, since money can be invested. Therefore, in
discounting a
future stream of revenues, prevailing interest rates provide the basis for converting future amounts
into today's
dollar equivalents. For example, assuming an interest rate of 8 percent, $1 due in 10 years is worth
only $0.46
today.

11

 
Bureau of Reclamation and Bureau of Indian Affairs Responses and Office
of Inspector General Reply

Although this report contained no recommendations, we provided draft copies of the report
to the Bureau of Reclamation and the Bureau of Indian AEkirs for their comments.  On
June 23, 1997, the Bureau of Reclamation's Audit Liaison Officer responded that the Bureau
of Reclamation concurred with the results of our audit. In the July 24, 1997, response
(Appendix) from the Assistant Secretary for Indian AfEairs, the Bureau of Indian Affairs stated,
"While we agree [the Bureau of] Reclamation used the funds for the project, we continue to
have serious concerns about whether all of the nonconstruction costs associated with the
project were reasonable, applicable to the project, and reimbursable under the terms of the
Reclamation Safety of Dams Act Amendments of 1984." In that regard, the Bureau of Indian
AfEairs questioned the efficiency of Bureau of Reclamation project management, stating that
the Bureau of Reclamation's nonconstruction costs of 175 percent of construction costs as
of September 30, 1995, were "4.4 times higher than the industry norm for similar public works
projects [40 percent], even though there was nothing unusually difficult or complicated about
the project. " The Bureau of Indian AfEairs further stated that it believes that costs incurred
by the Bureau of Reclamation for flood operations ($726,895), access road repairs
($4.98 million), early warning system installation ($1.6 million), and Bureau of Reclamation
stand-by costs (no amount cited) were not eligible for reimbursement under the Act. In
addition, the Bureau of Indian Affairs stated that the San Carlos Irrigation and Drainage District
has not submitted the repayment agreement to its membership "pending the determination of
final project costs. "

In response to the Bureau of Indian AfXairs request for audit, we determined that the costs
incurred by the Bureau of Reclamation for safety of dams work on the Coolidge Dam were
reasonable in relation to original cost estimates and similar projects. That notwithstanding,
the Bureau of Indian Mairs, in its response, questioned the efficiency of the Bureau of
Reclamation's operations by citing high noncontract costs, which the Bureau of Indian Affairs
,
equated with project overhead, and the eligibility for reimbursement of the costs of certain
other activities under the Act. Regarding the efficiency of the project management, all of our
audits of costs proposed or claimed by construction contractors are subject to a technical
evaluation as noted in the qualification contained in the Scope of Audit section of this report,
which states that "our review was conducted without the benefit of a technical evaluation of
the efficiency and effectiveness of the safety of dams project constructed by the Bureau of
Reclamation at Coolidge Dam." Therefore, we cannot answer technical questions concerning
the efficiency of the costs incurred by the Bureau of Reclamation for project management.
Furthermore, we explained to the Phoenix Area Office Director and the Phoenix Area Safety
of Dams Coordinator, prior to the start of this audit, that the review would not evaluate the
efficiency or effectiveness of the Bureau of Reclamation's safety of dams operations. Regarding
the eligibility of project costs for reimbursement, the Bureau of Indian AEairs, in its response,
cited costs of four activities that it believed did not meet the criteria for reimbursement
contained in Public Law 98-404, the Safety of Dams Act Amendments of 1984. Whether
certain costs qualify for reimbursement under Public Law 98-404 is a legal matter. The Bureau
of Indian Affairs should address the issue of cost eligibility directly to the Office of the
Solicitor.

12

 
During our review, we noted that on August 18, 1995, the Bureau of Reclamation responded
to Bureau of Indian AfEirs concerns that "Reclamation's overhead is out of line" with other
work the Bureau of Indian Af&irs had contracted out to private engineering firms. The Bureau
of Reclamation explained that its noncontract costs are not the same as a private firm's
overhead but that "Reclamation uses noncontract and contract terminology as a means of
defining our program to Congress." The Bureau of Reclamation stated, "Major contracts are
listed as line items whereas many lesser contracts and costs are lumped as noncontract."
Specifically, the Bureau of Reclamation further stated that its noncontract costs included about
$9.2 million of direct project costs for construction supervision, drilling, small contracts and
purchase orders, flood operations, modification reports, and land use permits and that if these
costs were subtracted from noncontract costs and added to contract costs, its ratio of
noncontract to contract costs would be 44 percent.

Work we performed during our current audit supports the Bureau of Reclamation's statement
that its ratio of adjusted noncontract to contract costs is not out of line with the private sector.
The Bureau of Reclamation also provided to the Bureau of Indian AfEairs: (1) further details
on how noncontract costs were used and (2) a breakdown and explanation of its determination
of reimbursable costs for repair of Coolidge Dam. However, the Bureau of Indian AflFairs
continued to express concerns about these costs.  Because we believe that the concerns
expressed in the response are technical and legal issues, we suggest that the Bureau of Indian
Affairs seek further clarification and justification from the Bureau of Reclamation about the
nature of project costs and the efficiency of project operations and address its questions about
the eligibility of costs for funding under the Reclamation Safety of Dams Act Amendments
of 1984 to the OfEce of the Solicitor.

The legislation, as amended, creating the Office of Inspector General requires semiannual
reporting to the Congress on all audit reports issued, the monetary impact of audit findings,
actions taken to implement audit recommendations, and identification of each significant
recommendation on which corrective action has not been taken.

We appreciate the assistance of Bureau of Reclamation and Bureau of Indian Affairs personnel
in the conduct of our audit.

13

 
APPENDIX
Page 1 of 4

United States Department of the Interior

OFFICE OF THE SECRETARY
  Washington. DC. 20240

JUL 2 4 1997

Memorandum

To .
  .


From:

Assistant Inspector General for Audits

Assistant Secretary - Indian Affairs

Subject: Preliminary Final Audit Report, "Safety of Dams Project Constructed by the Bureau of
   Reclamation at Coolidge Dam," (Assignment No. W-IN-BOR-006-96)

The subject audit report reviewed the Bureau of Reclamation's (Reclamation) costs associated with
the construction of the Coolidge Dam safety of dams project. The Coolidge Dam is operated and
maintained by the Bureau of Indian Affairs (Bureau). We appreciate this opportunity to offer the
following comments on the report.

The report concludes that Reclamation's costs associated with the project were reasonable. This
conclusion was based on an analysis of financial reports and of contract and noncontract costs for
this project and other Reclamation projects and not on an audit of project costs incurred by
Reclamation. While we agree Reclamation used the funds for the project, we continue to have
serious concerns about whether all of the nonconstruction costs associated with the project were
reasonable, applicable to the project, and reimbursable under the terms of the Reclamation Saferv
of Dams Act Amendments of1984 Two common complaints among Reclamation's clients are the
amount of organizational overhead charged to their projects, and Reclamation's tendency to overstaff
many project related functions. Such was the case in our opinion with the Coolidge Dam safety of
dams project--high overhead and overstaffing.

Coolidge Dam was designed and constructed by the United States Indian Irrigation Service as a
feature of the Bureau of Indian Affairs San Carlos Irrigation Project under the authority of the San
Carlos Act of1924 (43 Stat. 475-476). Since its completion in 193 1, the dam has been operated and
maintained by the San Carlos Irrigation Project and has provided a continuous source of irrigation
water for 50,000 acres of Indian land on the Gila River Indian Reservation and 50,000 acres of
private land in the San 0x10s Inigation and Drainage District (District), both in Pinal County,
Arizona.

Reclamation's involvement in the Coolidge Dam safety of dams project was mandated by the
Reclamation Safety of Dams Act Amendments of I984 (Public Law 98-404). Coolidge Dam was the
only non-Reclamation dam covered by the Act and subject to the repayment requirements contained
therein. In 1994, the Congress passed the Indian Dams Safety Act of 1994 (Public Law 103.302),
which established the framework and general guidelines for the Bureau's Safety of Dams Program.

14

 
APPENDIX
Page 2 of

The Act stated that any funds appropriated as a result of this Act were to be "nonreimbursable." As
a result, Coolidge Dam is the gnly Bureau dam to have a repayment obligation associated with safety
of dams repairs and modifications. This fact has not been lost on the Indian and non-Indian
recipients of Coolidge Dam irrigation water. In addition, the water users consider the obligation
extremely overpriced.

In negotiating the repayment contract with the District, the District's negotiators requested an

accounting or breakdown of project costs before finalizing the terms of the contract. This request
was forwarded to Reclamation's Lower Colorado Regional Director in a memorandum from the
Bureau's Phoenix Area Director dated August 12, 1994.

Reclamation's Arizona Projects Office provided the cost breakdown on December 8, 1994. Upon
reviewing that data, the Bureau found Reclamation's breakdown and explanation of costs to be very
confusing and was astounded by the magnitude of some of Reclamation's charges. For instance,
Reclamation's Phoenix, Tucson, and Boulder City Offices charged $5.8 million to the project under
the generic heading "Prime Contract" plus an additional $6.4 million to the project for
"Construction Management." In addition, the Denver Offke charged $4 million presumably for
design services. These charges, which totaled $16.2 million, were for a prime construction contract
that totaled only $12.4 million (a 130% nonconstruction to construction cost ratio).

Before forwarding the cost breakdown to the District, the Bureau requested a meeting with
Reclamation's Lower Colorado Regional Director to discuss the Bureau's concerns over project
costs. During the resultant meeting on January 26,1995, it became apparent that Reclamation was
neither interested in answering the Bureau's questions nor addressing its concerns over project
costs. It also became apparent that Reclamation had made little effort to control costs on the
Coolidge Dam project.

When subsequent discussions between the Bureau and Reclamation failed to produce any positive
results, the Bureau decided to request the audit fkom your office. Our primary purpose in requesting
the audit was to determine whether the costs were reasonable, applicable to the project, and
reimbursable under the terms of Public Law 98-404. We agree that Reclamation used the funds on
the project. However, we believe that the amount of funds to be repaid should be reasonable and
in accordance with the terms of the Act. If not, the costs included in the repayment contract should
be subject to adjustment or negotiation.

  .
Reunb ursability of Project Costs, Public Law 98-404 requires reimbursement of only those costs
"incurred in the modification of structures under this Act, the cause of which results from new
hydrologic or seismic data or changes in state-of-the-art criteria deemed necessary for safety
purposes." The Bureau believes that some of the coss incurred by Reclamation on the project do
not meet this criteria and should, therefore, not be included in the repayment contract. These costs
include the following:

                .
  Flood operatlo ns.  Reclamation incurred $726,895 to monitor watershed conditions and
reservoir inflow, to predict spillway discharge, and to issue status reports to downstream
jurisdictions during the 1993 floods. While this was a valuable service provided to downstream

4

15

 
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Page 3 of 4

residents by Reclamation, it was strictly voluntary. The costs had nothing to do with the safety of
dams modifications and should, therefore, not be included in the repayment contract.

  Access road repai& Reclamation built a temporary gravel road at a cost of $4.98 million
($3.79 million construction contract plus $1.19 million in Reclamation charges) to provide access
for construction equipment and materials to the dam site during the project. The temporary road
was damaged during the 1993 floods. While the water users are responsible for repaying the
original cost of constructing the road, the Bureau believes that the water users should not be
required to repay the $233,000 cost of repairing the damage to the road caused by an act of nature.
It should be noted that the construction contract for repairing the road was $260,000 and
Reclamation's charge for overseeing the repairs was $103,000. The Bureau has already reimbursed
Reclamation $130,000 from the Bureau flood repair and mitigation funds; thus, the $233,000 cost.

  Early warning svstem% Prior to initiating work on the project, Reclamation recommended and
the Bureau agreed that certain interim measures should be undertaken to ensure the safety of
downstream residents until the modifications could be completed. Among those measures were the
restriction of reservoir levels, the initiation of around-the-clock monitoring of the dam by Bureau
personnel, and the installation of an automated early warning system.

The Bureau transferred $500,000 to Reclamation to design and install the early warning system,
which was accomplished at a cost of $1.6 million. The cost included nearly $1.4 million in direct
charges by Reclamation, including $681,000 to oversee a private sector equipment installation
contract totaling $23 6,000.

In addition to our concerns as to whether the costs are reimbursable under the terms of Public Law
98-404, we also question the extremely high cost of Reclamation's involvement (especially the
$681,000 charge to oversee a $236,000 contract) and the disposition of the $500,000 initially
provided by the Bureau.

  Stand-bv costs. Construction activities were suspended because of high reservoir levels and
the flooding of the construction site at the base of the dam for approximately 3 months in 1993.
During the period, Reclamation maintained a full complement of project personnel at the site. In
the Bureau's opinion, the water users should not have to reimburse the Government for any portion
of the cost of maintaining this crew in as much as they did not contribute to the completion of the
project. The crew could have been furloughed or reassigned during that period, as were the
contractor's employees.

nstruction Efficiencv Measurement. Most of the engineering and construction industry measures
project management efficiency by comparing nonconstruction costs to construction costs.
Construction costs are the costs of actually constructing a facility or structure and its appurtenances,
and nonconstruction costs are site surveys and investigations; the preparation of designs, plans,
specifications, and estimates; NEPA compliance and related environmental activities; contract
administration and construction inspection and quality control; and any other activity not directly
related to the physical construction of the facility. Reclamation, however, compares noncontract
costs to contract costs. As used in this formula, either element may include either or both

16

 
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Page 4 of 4

construction and nonconstruction costs.  Any contract less than $200,000 is considered a
noncontract cost.

While nonconstruction costs as a percentage of construction costs may vary according to type, size,
difficulty, and remoteness of a project, a common project management goal on civil engineering
public works projects is to hold nonconstruction costs to about 40 percent of construction costs. By
way of comparison, the Federal Highway Administration has a goal of 27 percent for bridges and
large highway construction projects, and the Bureau's Office of Facilities Management and
Construction Center has a goal of 6 percent for architectural design and 20 percent for large building
construction projects. No one we contacted has ever heard of a situation where nonconstruction
costs in excess of 100 percent of construction costs were considered acceptable.

If the 40 percent rule-of-thumb were applied to the Coolidge Dam safety of dams project with
construction costs of approximately $17 million (including the construction access road),
nonconstruction costs would be about $6.8 million and total project costs would be about $23.7
million. However as the audit report notes, total project costs had reached $46.3 million by
September 30,1995. As of September 30, Reclamation's nonconstruction costs on the project were
approximately $29.9 million, or 175% of construction costs. This is 4.4 times higher than the
industry norm for similar public works projects, even though there was nothing unusually difficult
or complicated about the project.

ReDavment Contract, The report states that a repayment contract had not been negotiated with the
District. The basic agreement was reached on the repayment contract on February 22,1992, when
the Deputy Commissioner of Indian Affairs, acting on behalf of the Assistant Secretary - Indian
Affairs approved the Phoenix Area Director's request to waive the lo-year payback stipulation.
Since that time, the District has refused to submit the agreement to its membership for ratification
pending the determination of final project costs, and verification of those costs by an independent
audit. As of July 1, 1997, we still do not know what the final cost of the project. Although the
Bureau accepted the completed project in January 1996, costs have continued to accrue.

If you have any questions regarding this issue, please contact Mr. Ken Clouser, Phoenix Area Safety
of Dams Coordinator. Mr. Clouser was in travel status when the audit team visited the Area Office.
Mr. Clouser's input and knowledge of the project would be most valuable to your office's
understanding of the project history and of the Bureau's difficulties in obtaining an accounting of
project costs from Reclamation. Mr. Clouser's telephone number is (602) 379-6956.

17

 
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