A cost recovery opinion and perspective
Wednesday, Feb. 22, 2012
In a very heated Augusta Richmond County Commission meeting last evening, February 21, 2012, a proposed change order totaling $836,288 for modifications to the Tee Center Contract with RW Allen was disapproved (See The Change Order 2 document here).The substantial price increase was really the aggregate of 13 different change orders combined for the purpose of gaining Commission approval, usually a rubber stamp. This time the commission balked because of a stench boiling out of the unfinished Tee/Convention Center Kitchen. $399,823 of the increase was an HVAC upgrade to the kitchen area at the insistence of the city's partner in this public-private partnership, Augusta Riverfront LLC, operator of the Marriott hotel.
Neither side of the vote on the commission was wrong. Augusta's entire project management team had signed off on the change order four months ago, so disapproving it now was a moot point. Some commissioners accurately saw it that way and voted for approval, yet they all have serious questions. The rest missed the point about construction contract law and jumped to the real issue – are the Augusta Riverfront partners in this project controlling and expanding the scope to their benefit, yet totally at public expense?
The change order is a “done deal.” A war appears imminent between the partners over financial responsibility for various areas of the project.
There is a powerful ODOR coming from the kitchen.
The parties jumped into this agreement based upon a document entitled Management Agreement Term Sheet – Trade Center, Version 6 dated June 29,2007, which the Commission approved on August 21, 2007 (See TEE Center Term Sheet Document here). The purpose of the term sheet was to set forth that the “City of Augusta (“Augusta”) and Augusta Riverfront LLC (“LLC”) are interested in entering into a joint venture to own, build and operate a Trade, Exhibit and Event Center (“Trade Center”).”
This controlling document failed to establish effective dates or define WHEN operations start and construction ends. It would appear to embrace start of operations before project completion because it requires the Convention and Visitors Bureau to expend city funds 18 months before the project is complete. Aside from this, the project itself was scheduled to accommodate ongoing operations.
Let's see what the Term Sheet says about cost responsibility. “LLC has total responsibility to provide all operating cost of the Convention Center, including, but not limited to, labor cost, supply cost, insurance and all repair, maintenance, and replacement of equipment. These replacement costs include replacing kitchen equipment, laundry equipment, HVAC equipment, outside walls and roof.”
Then there is this section:
AUGUSTA AND LLC AGREE TO THE FOLLOWING TERMS TO OWN, BUILD AND
OPERATE THE TRADE CENTER
5. OPERATIONAL & CAPITAL FUNDING: It is anticipated that the new Trade Center's rental revenues may not be sufficient to cover its operating expenses, particularly in the early years. The Trade Center will have capital needs for addition and replacement of various fixed assets. Augusta and LLC will participate in these Operational and Capital Funding needs as follows:.......
d…......Augusta's Capital Funds shall specifically not be used for items related to Kitchen Equipment, Laundry Equipment, and any Convention Center or Hotel capital cost.
Remember there are no dates given to establish when operations start because operations were ongoing and overlap construction activities. Even more confusing is what is “Convention Center” versus “Tee Center.” Indeed, by actions of Augusta Riverfront LLC publicly acknowledging that BOTH are the "Convention Center" hasn't that partner effectively agreed that its financial responsibilities for the combined total include those that previously existed for the Convention Center?
Interestingly, the Term Sheet provided that the kitchen for which Augusta Riverfront had equipment repair and replacement responsibilities would be consolidated with the Tee Center kitchen.
7. KITCHEN AND BACK-OF-HOUSE: LLC and Augusta will allow the necessary modifications to the Convention Center to provide for the combined use of the kitchen, laundry and back of the house areas. The modified kitchen and back of the house space will be designed for use for both the Convention Center and the Trade Center.
In so combining the “Convention Center” with the “Tee Center” did Augusta Riverfront's existing financial responsibility for kitchen equipment disappear? Or did it carry over?
4. TERM OF AGREEMENT: Augusta and LLC agree to modify their agreement for the operation of the Convention Center to include the Trade Center.
The Term Sheet also clearly stated that catering revenues produced by the kitchen equipment do not result in any benefit for Augusta.
APPENDIX A: Definitions
For purposes of calculating the “Trade Center Operational Funding” described in Section 5., the Operating Revenues shall not include the following:.....
m. Trade Center Catering Revenues
2. Trade Center Catering Revenues: shall consist of those food and beverage revenues generated on formal, catered meal functions held in the Trade Center.
City Stink and Augusta Today contributor Lori Davis obtained the December 31, 2012 project billing from Construction Manager at Risk RW Allen to the city (See Document here: Attn to Kitchen Equipment Line Item Item 19 on Page 3). This billing includes a line item of $1,376,987 for Kitchen Equipment, $275,946 of which has already been billed and presumably paid, less the retainage. Examination of the supporting subcontractor invoice shows thousands of dollars to repair and clean existing equipment that would have apparently been the responsibility of the LLC under the previous agreement. The controversial HVAC change order to meet Marriott standards can be added to the total.
It is clear that the infrastructure and building costs for the kitchen are the responsibility of Augusta. These costs are included in the building mechanical, electrical, HVAC and other contracts. No potential issues are apparent there, other than cost issues that might be unearthed in the future by a construction auditor.
Adding the $1,376,987 of kitchen equipment to the Marriott-directed kitchen HVAC upgrade $399,083 means a total of $1,776,070 of kitchen equipment capital costs that are potentially disputable by the City of Augusta as costs to be born by Augusta Riverfront LLC.
Questions abound. Has the City backcharged the LLC for any of the $275,946 paid to date for kitchen equipment and repair or cleaning of existing equipment the LLC seems responsible for? Isn't the full $1,776,070 capital expenditures for which the LLC is responsible under the existing agreement and the Term sheet? Was an intent to treat the capital expenditures for new kitchen equipment as an Augusta cost adequately stated in the term sheet? Are the provisions for the LLC to be a partner in the project mean it can claim one start date for its project start date, yet another as the start date of 'operations' under the same agreement when no dates are stated in that agreement? Hasn't the LLC by announcing that the whole is now the “Convention Center” legally shot itself in the foot by in doing so embracing responsibility for kitchen capital expenditures? How many other costs of the Tee Center construction supplant existing LLC responsibilities for operating and capital costs from the existing Convention Center agreements? Where are the backcharges to the LLC?
To summarize, the Term Sheet establishing the relationship between the City of Augusta and the LLC for the Tee Center Project seems to be flawed in terms of effective dates; makes repeated statements that capital costs of kitchen equipment, which cost more than $1.7 million, and other capital costs are LLC responsibility; combines the existing “Convention Center” agreement with provisions making the LLC responsible for kitchen equipment with the new Tee Center construction and operations; and excludes Augusta from any apparent benefit from use of this capital equipment.
Somebody has a grand mess in their kitchen. This writer would be hard-pressed to decipher financial responsibilities under this informal, rushed, and incomplete Term Sheet “agreement.”
The lawyers are salivating because dividing this baby is going to take more than the wisdom and judgment of Solomon. The opinion from this quarter would be that it could be split 50-50. Given the size of these costs, that won't be an easy pill to swallow.
The commission is, yet again, in an impossible position with respect to this project. Can they get any more Tee'd off?
Stay tuned for more cost recovery analysis as the Tee Center documents are dissected while the project nears completion.***
Editor's note: City Stink contributor Al Gray is President of Cost Recovery Works, Inc., a Lincoln County, Georgia-based firm focused on construction, public administration, policy and cost recovery reviews on a guaranteed results basis.** Below are pdf files of the documents referenced in the above article:
TEE Update: Did Fred Fix the Kitchen But Fail to Execute?
RWA December Pay App. (Atten to Page 3. Line Item 19 "Kitchen Equipment")
RWA December 2011 Pay App
TEE center Term Sheet Document:
TEE Term Sheet (1)
TEE Center Change Order 2 Document:
Tee Center Change Order 2 R W Allen