How the Port “got it done” on a one-bid contract

The Port of Seattle received just one bid last year for a contract to build a new cruise-ship terminal near the Magnolia Bridge. It came in 30 percent above the Port’s $30 million estimate.

Under Port policy, elected commissioners are supposed to be alerted when the best bid exceeds the Port engineer’s estimate by 10 percent, triggering oversight that might lead them to rebid or delay the project to attract more competition.

But members of the Port’s staff didn’t follow that policy.

Nor did they tell commissioners that the lone bidder, PCL Construction Services, had recently agreed to pay a $1 million fine to the U.S. Department of Justice. Prosecutors had linked the company to contracting fraud by two federal employees.

Instead, Port consultants upped their estimate. Then staff told commissioners the bid was within 2 percent of that estimate and said the cruise-ship terminal contract should go to PCL for $38.9 million.

A Port-funded investigation released this month criticized the Port for changing estimates after it advertised for bids. The investigation by former U.S. Attorney Mike McKay urged an end to the practice.

Otherwise, Port staff could regularly alter estimates to avoid alerting commissioners to a high-cost project. McKay found that estimates were manipulated on a third-runway contract at Seattle-Tacoma International “to lull the Commission into taking no action.”

Port CEO Tay Yoshitani has blamed his predecessor Mic Dinsmore for a “get-it-done culture” that allowed improper contracting practices found by McKay. But the cruise-ship contract was approved after Yoshitani took over the Port 22 months ago.

Yoshitani said the Port needs to change its estimating practices. “When McKay pointed this out, it caused me to sit back and think that how we define our estimates does not really make a lot of sense,” Yoshitani said in an interview.

Yoshitani defends staff

But he also defended members of his staff, saying they had reason to believe what they were doing was allowed. “I don’t think there’s been intentional misrepresentation,” he said, pointing to different ways McKay and Port staff have defined proper estimating.

Yoshitani also defended his staff this year after a state audit criticized the controversial third-runway contract.

Yoshitani argued in a public hearing that the audit was flawed because it used an “early verbal” Port estimate of $93 million for the job instead of a revised one that was $12 million higher.

But McKay’s report said the $93 million estimate was valid and dated just six weeks before the Port advertised for the bids. McKay said Port staff couldn’t provide justification for the revised $105 million estimate despite his repeated requests.

Yoshitani said last week he did not believe staff misled him. He said he believed evidence to support the $105 million estimate might still be found.

“I can’t imagine them just pulling it out of the air,” Yoshitani said.

Yoshitani said he is relying on Ralph Graves, his new director of capital development, to recommend fixes. Yoshitani hired Graves, a former colonel with the U.S. Army Corps of Engineers, in August as part of a reorganization recommended by last year’s blistering state audit.

Graves started after the commission approved the cruise-ship terminal contract.

The Port’s problem, McKay said, is that it doesn’t “lock down” estimates at the time it advertises for bids, as is standard practice for the state Department of Transportation and other government agencies.

Port manual cited

At that point, almost all details about a project should be known, and estimates should be highly accurate.

But “it appears to me there’s some inconsistency in our procedures,” said Graves.

The Port has a manual that tells members of the staff they can revise the engineer’s estimate just before opening bids, Graves said, to reflect the latest market information. They can change carefully crafted cost estimates if they believe few contractors will bid.

That’s what appeared to happen with the cruise-ship terminal, he said.

Graves stressed the difference between staff following flawed guidelines and committing fraud, “with intent to deceive.”

But as McKay said in his report, commissioners can’t make a “valid comparison” between an estimate — detailed down to unit prices for doorknobs and with embedded allowances for profits — and the winning bid, if staff can keep adjusting figures.

Toothless policy?

Such changes make the commission’s oversight policy toothless, McKay said, because “it would provide the ability to routinely circumvent the 10 percent notification” rule.

Port spokeswoman Charla Skaggs said two consultants and six Port managers approved, or were responsible for, the revised estimate.

Yoshitani was not involved in revising or approving the estimate, Skaggs said. The cruise-ship terminal is scheduled to open early next year.

Port staff did notify the commission five times in 2007 of winning bids that exceeded estimates by more than 10 percent.

But those five projects were much smaller than the cruise-ship terminal. Four were less than $1.9 million and the fifth was a $7.6 million contract to Gary Merlino Construction, 30 percent over estimate. The commission approved all five.

Graves said staff didn’t see a need to notify commissioners about the record of PCL Construction Services.

In March 2007, two weeks before the Port first advertised for bids on the terminal, the U.S. Department of Justice announced it was prosecuting two Federal Aviation Administration employees for illegally steering a $4.3 million Sea-Tac airport contract to a favored company, PCL. Both employees later pleaded guilty.

According to the Department of Justice, the two employees had told PCL it was not the low bidder and needed to decrease its bid by $55,000 to win the contract, which the company did.

New PCL code of conduct

PCL later acknowledged it used confidential information to gain a competitive edge. It agreed to pay a $1 million fine but was not charged with a crime.

“It looked like the matter had been dealt with,” Graves said. The company was not barred from federal contracting, he noted.

PCL, headquartered in Canada, disciplined the employees who received the confidential information. The company implemented a new code of conduct and training to ensure that all employees understand the company’s legal obligations when entering into government contracts.

Fred Auch, a PCL regional vice president, said the company’s problems occurred because it dealt with a public agency the same way it did with private companies.

“There wasn’t anything untoward, unethical or immoral about doing this in the private world,” he said. “How does a company know it’s receiving confidential information? How do you know it’s not part of the whole process of going through a final and best offer?”

Graves said he would probably advise the commission to adopt a variation of McKay’s recommendation that estimates be “preserved intact and not altered.”

Graves said, though, staff should be allowed to revise the estimates under certain conditions. He would like the Port to allow some provisions, if it’s clear when and why estimates were updated, and one person is accountable for justifying the changes.

Commissioner Bill Bryant said such exceptions might be OK as long as any changes are transparent.

“The investigation identified a potential loophole and I think it’s important that the commission and CEO close it,” Bryant said.

Bob Young: 206-464-2174 or byoung@seattletimes.com