EXECUTIVE SUMMARY

Our audit examined the Government’s management of the major capital projects to plan and construct high schools and primary schools over a period between 2008 and 2013.

The Ministry of Education was responsible for both projects. The high schools project resulted in the completion of only one of the three high schools originally planned, another two high schools being started but not completed, took over nine years, and cost $172.7 million, or almost double the initial planned costs. During this same period, the project’s design concept went from conventional, single­ building high schools to a campus-style approach that included hurricane protection capacity and other facilities for community use.

The primary schools project was completed over a three-year period. While the costs at $13.4 million were 34 percent higher than planned, the project delivered only four of the five classroom buildings originally planned.

The Ministry of Education demonstrated that it does not have the capacity to deliver major capital projects in a manner that ensures that value for money is achieved. Specifically, the Ministry of Education planned and constructed schools that:

• cost far more than originally planned;

• delivered less than promised; and

• were delivered later than when they were required.

The high schools and primary schools projects provide clear examples where value for money was not achieved due to:

• lack of clear roles and responsibilities between the responsible ministry and the responsible minister; and
• inadequate project management and procurement practices.

Our audit found weaknesses in the Government’s budget process for major capital projects as well as in the process for approval of appropriations and supplementary appropriations by the Legislative Assembly. We also found weaknesses in how the Government accounts for and reports on spending for major capital projects. The Legislative Assembly needs to have sufficient information about requests for major capital project funding in order to provide informed approval, and there should be at least a summary-level accounting back to the legislature at the end of the project. Given the shortcomings we noted in transparency and accountability to the Legislative Assembly, we believe the Government should implement improvements in the way the governance framework operates.

The observations raised in this report demonstrate that Cabinet and the Minister of Education did not understand their role in the oversight of major capital projects, either as called for by the governance framework or as a commonly understood good practice. While Cabinet was provided with regular project updates as part of annual funding requests, and it received information supporting requests for specific project decisions, the information provided did not give a clear picture of how value for money was to be achieved over the lives of the projects. Cabinet was never provided with, nor was it asked to approve, the key project outcome decisions related to the estimated cost, planned completion dates, and design quality for the two school projects.

We found that the former Minister of Education intervened to a highly inappropriate degree in the day­ to-day management of these projects leading to obscured accountability for the rise of the projects’ costs and their late delivery.

Our audit also found that that the Ministry of Education failed to establish the management framework necessary to ensure that value for money was achieved for these projects. Specifically, the Ministry failed to:

• establish an appropriate oversight function that ensured that planning, construction, and project completion and closeout were adequately managed by competent officials;
• establish the key planned outcomes for the projects- cost, completion deadlines, and the quality or design attributes- before key spending decisions went too far;
• ensure that procurement activities complied with legislative and policy requirements and were not open to the risk of abuse;
• establish appropriate management systems and practices necessary to ensure that responsible Ministry officials received timely information about the actual and forecast project costs and completion schedules; and
• establish adequate control over the project completion activities, including the production of adequate post-project completion reports.

The Ministry of Education’s records for these projects were not complete, causing us difficulties in conducting the audit. Further, we are concerned that Ministry officials attempted to control the information made available to us for audit purposes. While we were eventually given sufficient information to complete the audit, these restrictions have had an impact on our ability to report clearly to the Legislative Assembly on the weaknesses we observed in the governance and management frameworks.

The school construction projects represent significant investments by the Government. There are important lessons to be learned by the Government as it considers future major capital projects, including the completion of the John Gray High School. To avoid significant waste of public funds in the future, the Government should consider this report and our previous recommendations so that the lessons learned can be implemented.

INTRODUCTION

GOVERNMENT INVESTS SIGNIFICANTLY IN SCHOOL INFRASTRUCTURE

1. The Government invests in significant capital projects from time to time as part of its responsibility to deliver its programs to citizens. The quality of the Cayman Islands’ school infrastructure is an important element of its education program.

2. Since the mid-2000s, one of the Government’s largest capital investments has been the construction of high schools and, more recently, the construction of primary school buildings. With these investments, the Government planned to renew a significant amount of the country’s school infrastructure.

3. High schools: In 2005,the Ministry of Education estimated that the construction of three planned high schools in Grand Cayman would cost $95 million and would be completed by 2009. The Ministry informed us that the planned number of high schools to be built dropped to two in 2009 and that the estimated cost had risen to $197 million. During this same period the Government decided that it wanted to build campus-style high schools, incorporating a hurricane shelter capacity and facilities that would be used by the community.

4. In September 2012,the Clifton Hunter High School opened with three of the planned four academies built. Only the exterior shells of four of the eight buildings planned for the John Gray High School have been completed. While the Ministry has approval to proceed with the completion of these four buildings, it does not have the funding to do so. As of 31December 2013,the Ministry reported that it has spent $166.7 million on the two high schools, and $172.7 million on the high schools project overall (this includes spending on the third high school, no longer planned). The final project costs are below the 2009 cost estimate of $197 million largely because the John Gray High School was not completed.

5. Primary schools: Since 2005,many primary schools had been operating with temporary modular units as classrooms. The Ministry reported that these units were susceptible to mold infestations and were expensive to operate, while providing a less than ideal education environment.

6. In early 2010,the Government started planning a program to build a 2-story primary school building replacing the modular units at each of five existing school sites. The project would also include other improvements needed at specific schools and two smaller projects at other schools. The 2010-11 budget included plans to spend $10 million. All construction was to have been completed by the end of 2010-11.

7. During the period between 2011and 2013,the Ministry constructed new classrooms in 2-story buildings at four primary schools. This project also included parking lots and sports fields, depending on the site. In addition, smaller projects were undertaken at the Cayman Brae High School and at another primary school in Grand Cayman. The final primary school building was opened on 27 February 2013.The Ministry reports that the primary schools project has cost $13.4 million up to 31 December 2013.

8. The Ministry of Education spent over $180 million to plan and construct the Clifton Hunter High School, and the primary schools, and to partially complete the John Gray High School (see Exhibit 1). Including the cost of the Beulah Smith High School construction (abandoned before completion­ see our July 2012 report), the Ministry spent over $186 million.

Exhibit 1- Spending by fiscal year for the specific school construction projects included in this audit.

THE HIGH SCHOOLS PROJECT RAN INTO DIFFICULTIES IN 2009

9. During 2008, the Ministry began to have difficulties in its relationship with the prime contractor for the high schools project and, on 25 November 2009, terminated its contract to build the two high schools. The termination decision led to a protracted legal dispute with the contractor and others associated with that contractual relationship. On 22 March 2013, all the parties in this dispute agreed to settle their claims.

10. This ongoing dispute took three and half years to resolve, and it set in motion developments with existing sub-contractors that complicated the progress of the high schools project. The Ministry needed to decide how it would proceed with the project after the termination, including developing a new procurement strategy and procuring the services of consultants and contractors to carry out that strategy.

11. In the end, the Ministry proceeded with a construction management approach, in which it selected a project manager, a construction manager, consultant architects and engineers, and multiple prime contractors to complete the high schools project. While different approaches could have been selected, they all carried inherent risks largely around the state of the works that had been carried out but not completed under the previous prime contractor’s period of construction. No matter what approach the Ministry selected, it would have to pay the higher costs associated with the uncertainty about what was needed to complete the construction of the two high schools.

12. It was the Ministry’s responsibility to manage these risks and put in place the necessary management framework to ensure that value for money was achieved under the new procurement strategy and construction management approach.

WHY DID WE DO THIS AUDIT?

13. In July 2012,the Office of the Auditor General tabled its report entitled Management of Major Capital Projects. The report focused on the government’s overall management of major capital projects from the definition of need, evaluation of project merits, design, approvals, procurement, construction and, finally, project completion. The 2012 audit had examined two major projects: the construction of the Government Administration Building and the construction of three high schools (including the Beulah Smith High School, cancelled early in its construction).We had also examined project management for construction of the John Gray and the Clifton Hunter high schools although, given the legal actions surrounding the construction phases of these two schools, only to the end of the initial procurement phase when the contract was signed.

14. We reported in 2012 that the Ministry of Education’s project management practices were deficient, which impacted the cost and the delivery timeframe of the high schools. We also observed that the Ministry did not have the expertise to manage major capital projects such as the construction of the high schools. It did not develop a business case for the eventual design concept used to proceed to the contract tendering in 2008. Also, the involvement of politicians in the conceptual design phase contributed to poor management of the project.

15. While the high schools project has experienced lengthy time delays and delivered far less than promised, the primary school additions were carried out over a comparatively shorter period and have provided replacement classrooms and other services needed in the period following Hurricane Ivan.

16. The Government has invested significant funds to construct high schools and primary schools. We believe that an audit of the management framework used to manage the construction of these major capital projects provides useful information to legislators about what happened and lessons learned for future developments of this nature.

17. Generally, major capital projects have four distinct phases:

• Project governance and planning. A strategic framework guides the governance and planning of major capital projects to ensure that proposed projects are well researched and planned and that they meet the Government’s legislative requirements, strategic objectives, and operational needs. Frameworks consist of legislation, policies and practices that establish clear responsibility for procurement, identify the risks associated with the procurement, and establish effective project management practices and procurement strategies to mitigate the identified risks.
• Procurement/contracting. Procurement processes lead to an approved contract with qualified contractors and support an effective partnership with them to deliver the project based on the identified procurement strategies, with due consideration of cost, time, and quality-the key elements of value for money.
• Construction. The project management team oversees the physical construction of the asset in accordance with the project design and contract documents. The project management team, often supported by specialists under contract, also oversees the often numerous players who have an impact on the cost, time, and quality of the project. The project management team ensures that the contract deliverables are being met.
• Completion closeout leading to operation. Once construction is nearing completion, project closeout activity protects the interests of government by ensuring that all contract requirements for cost, time, and quality are met and that a post-project evaluation of the benefits is completed.

ABOUT THE AUDIT

18. The audit objective was to determine whether the Government managed the completion of the construction of the Clifton Hunter High School and the John Gray High School, and the construction of primary schools within a management framework that ensured that value for money was obtained from these significant public investments.

19. For the high schools project, we largely examined the construction and completion closeout phases.

The termination of the original prime contractor’s contract led to a new procurement strategy and the use of a construction management approach. This significant re-planning of the project meant that we had to examine aspects of project governance, planning, and procurement under the new procurement strategy developed in 2009 and 2010.The construction activities we examined related to the completion of the Clifton Hunter High School and the completion of the exterior shells of the four John Gray High School buildings.

20. For the primary schools project we examined the planning, procurement, construction, and closeout phases. We selected two out of four primary school buildings for more detailed examination.

21. Our audit did not examine details of the numerous disputes and settlements between the Ministry of Education and contractors, including the initial prime contractor for the high schools. However, where we found that disputes were linked to weaknesses in the Ministry’s overall management framework, we have referred to these weaknesses where we consider it appropriate.

22. Audit criteria are a key component of a performance audit to set out what basis the auditor will use to assess performance and to conclude on the audit objectives. Normally, the criteria reflect regulatory requirements and established business practices that management uses to assess its own performance. In the absence of such practices, it is the auditor’s responsibility to develop criteria that are reasonable under the circumstances based on best or reasonable practices and, to the extent possible, obtain agreement from the organization being audited.

23. The audit used the same criteria that were established for the audit of major capital projects reported in July 2012.These criteria came from established processes and practices for the management of major capital projects as well as legal and regulatory requirements specific to the Cayman Islands.

AUDIT FINDINGS

25. In the mid-2000s, the Government set out to build three high schools that would support educational needs on Grand Cayman. As initially approved by Cabinet in 2005, the project had an estimated cost of $95 million with all the schools to be built by 2009.The original high school design concept called for a traditional one-building school, but the concept evolved to a campus-style approach with other features such as hurricane shelter capability. By December 2013,the Ministry reported that it had spent at least $172.7 million on the high schools project (not including costs associated with the purchase of land) but to date only one high school has been completed.

26. The Clifton Hunter High School has provided educational services for about 900 students since early September 2012.While a new John Gray High School is partially built, the four buildings at that site are only partially completed and will require significant additional funding to get to the point where students can use them.

27. The plan to build five new primary school buildings as well as two smaller projects emerged in early 2010, with $10 million approved in the Government’s 2010-11budget. At that time, completion of the construction was planned for the end of June 2011. Later, one primary school building was removed from the project. In the end, four new 2-story primary school buildings along with the two smaller projects were completed by 27 February 2013,at a cost of $13.4 million.

28. Our examination of the schools construction revealed three significant observations:

• the Ministry has spent far more than was originally planned;

• the Ministry has delivered less than was promised; and

• what the Ministry has delivered has been later than promised.

29. The cost information we have included in this report was provided by the Ministry of Education.

However, due to the significant weaknesses in its financial control framework we observed during the conduct of this audit and carrying out other financial audit work, we are unable to provide the Legislative Assembly with any assurance that the Ministry has reported the costs of the construction of schools either accurately or completely. In effect, the Ministry does not maintain an accounting system and practices for the capture of cost information relating to a capital project.

30. In the following sections, we report on the underlying reasons behind the Ministry of Education’s poor management in the construction of schools. In addition, we examine several important governance and accountability issues that are systemic in the Government’s overall governance framework for major capital projects, expanding on findings in our July 2012 Report to the Legislative Assembly.

31-36 OMITTED

37. We note that the Framework for Fiscal Responsibility does not specifically address the weaknesses we identified in the budgeting processes that support the Legislative Assembly’s approval of appropriations and supplementary appropriations. Given the shortcomings we have noted about transparency and accountability to the Legislative Assembly, we believe there is a need to consider making changes in the governance framework.

Recommendation #1: The Government should consider changing the governance framework, including amending the Public Management Finance Law and Financial Regulations, to improve the transparency of planning and budgeting processes that lead to requests for appropriations for specific major capital projects and to improve accountability for major capital projects.

CABINET DID NOT APPROVE THE KEY VALUE-FOR-MONEY ATTRIBUTES OF PROJECTS

38. We would expect Cabinet to play a significant role in approving the need to proceed with a specific project and the key project planned outcomes related to the cost, completion schedule, and quality of design (once they are clearly known and before investments are fully committed). We would also expect that Cabinet would periodically receive accountability reporting on these planned outcomes from the Ministry.

SEE ATTACHMENTS

THE MINISTRY FAILED TO FOLLOW THE FINANCIAL REGULATIONS AND THE OPEN TENDER PROCESS

57. The Ministry of Education officials directed the procurement activities related to both the high schools and the primary schools projects. It used the high schools project and construction manager and the primary schools project manager to prepare tender documents and to participate in the tender evaluation process. The Ministry provided direction to these individuals and was responsible for ensuring that the Public Management and Finance Law, and Financial Regulations, and the Open Tender Process policy were being followed.

58. In the procurement activities we examined, we observed that Ministry officials did not fully comply with the legislative and policy requirements.

59. For example, under the Financial Regulations, the Central Tenders Committee is to review all procurements amounting to $250,000 or greater, and all procurements greater than $50,000 must be open to public tender. In the high schools project, we found that Ministry officials provided direction to project officials on how to prepare tender packages in a manner that would circumvent those requirements. A review of the lists of subcontracts and small works contracts shows many examples of contracts approved in a manner that avoided these tendering requirements.

60. We also made the following observations about procurement activities that we believe fall outside of the Financial Regulations or the Open Tender Process policy:

• In the high schools project, a program was started as a means of engaging small, local construction companies to carry out works that did not fall within the scope of works contracted to the Multiple Prime Contractors. The Ministry provided the construction manager with a list of contactors to be considered. The Ministry has told us that any contractor could sign up for the program as long as they met certain conditions. In all cases we examined, the contractors provided the necessary evidence that they met the conditions (for example, they had adequate insurance coverage or their employees had pension plans). However, we were not provided with documentation showing how the Ministry screened the companies that it actually put on the list it gave to the construction manager.

Initially, contracts under this small works program were to be for no more than $10,000. Once the contractor reached this limit, it was to stop work. However, we found that most of the contracted works continued well beyond the $10,000 limit, and several modifications of the original contracts were signed to allow this. Some of these contracts were eventually modified to more than $50,000. At other times, contracts were modified to have the contractor do work that was different from what was called for in the original contract.

• After a short period within the original$10,000 limit, which created significant work for Ministry officials to manage, the small works contracts were mostly made for amounts up to $50,000. Many of the contractors had several $50,000 contracts back to back for providing the same type of service (although sometimes on the other high school work site). Many times either the contracts were modified to exceed $50,000 or works were simply billed that exceeded $50,000. This procurement approach did not comply with the public tendering requirement of the Financial Regulations and the Open Tender Process policy. In other words, the Ministry carried out the procurement process in an unlawful manner.

• The Ministry did not play an active role in the tender process to select two consultants employed to support the design of three of the four 2-story primary school buildings. We found evidence that one consultant was provided information about its bid by Public Works Department (PWD) officials and subsequently made handwritten changes in the bid documents. PWD has not been able to provide us with an explanation for these changes. There is evidence on the file provided to us that the eventual tender winner was the company PWD wanted for the job and that the two other tender respondents were either not qualified or bid significantly above the pre-tender estimate. In the end, the winning consultant changed the bid proposal to eliminate one component of its initial bid and to increase its project expenses to allow for more visits to Grand Cayman. The final amount approved for the tender proposal was increased to $195,102,or just below the PWD pre-tender estimate of $200,000 for the contract related to the schools design.

The contract for this consultant was later modified to include the final building in the primary schools project and the Prospect Primary School, approved as a standalone project after the original approval of the primary schools project. An additional$104,375 was added to the original contract after the consultant provided an estimate of the cost to complete the design work for the additional two schools. PWD did not open this additional work to tender as is required for works exceeding $50,000. It also did not seek approval to provide this work to the consultant under a sole-source arrangement, which would have required the Chief Officer to approve the decision after ensuring that value for money was adequately considered. Instead, a PWD official and a Ministry of Education official approved the contract modification.

THE FORMER PREMIER INFLUENCED THE SELECTION OF THE HIGH SCHOOLS PROJECT MANAGER

61. In 2009,concerns were growing that the relationship between the Ministry and the original prime contractor was deteriorating. The Ministry informed us that in August 2009,the former Premier asked an American construction claims dispute consultant to review the high schools project with a view to recommending how the Government should proceed. We are not aware of the arrangements with this consultant, as Ministry officials could not provide us with a signed contract. The Ministry informed us that the consultant undertook this substantial review at no charge. However, the consultant’s report provided to Cabinet in September 2009 indicates that the consultant was retained by the Premier, although it provides no details about how this was accomplished.

62. The September 2009 report provides some insight into the consultant’s expectations about a future role in the high schools project. The report made specific observations and recommendations that pointed to the Government’s need to employ someone with the consultant’s skills to help navigate through the project’s complex dispute and management issues.

63. On 25 September 2009, the Ministry entered into a sole source contract with the consultant for the provision of services in October 2009. In late October 2009,the Minister of Education put forward a Cabinet paper proposing that the consultant’s company be hired to undertake the role of dispute resolution and project manager. The Paper indicated that this company was the only one that could provide these services in the time frame needed by the Ministry, and the services would therefore
be procured under a sole-source contract; that is, the work was not put up for public tender. The Ministry indicated to us that it did not complete a due diligence review of the consultant and his company, as the Premier had recommended the consultant and Ministry officials had observed his work during the recently completed review. While the information provided by the consultant demonstrated a long history in claims dispute resollution, it did not indicate that he or his company had similar experience in project management. The Paper also indicated that the Ministry had already engaged the consultant for services in October 2009.

64. Cabinet approved a sole-source contract for services between December 2009 and March 2010, which the consultant entered into with the Ministry on 14 December 2009. The scope of work included resolving the contract dispute with the original prime contractor, developing the tender package for the construction manager position, and entering into transitional arrangements with legacy subcontractors. A new contract signed with the consultant’s company on 29 March 2010 included the additional duties of project manager for the high schools project- among them, helping the Ministry establish key project outcomes such as the project budget and completion schedule. This contract and subsequent modifications to it were based on the level of effort set out in the contract or agreed to in each modification, and did not include specific project performance expectations aligned to key project objectives such as cost, time, and quality.

65. The 29 March 2010 contract with the consultant’s company had a value of $2.3 million, with work to be completed by September 2011. The project manager was still working on the project in December 2012,well after the Clifton Hunter School opened in September 2012. The consultant’s company has been paid a total of $3.1million.

66. We do not believe the Ministry did enough to ensure that the consultant and his company had the requisite skills to undertake all of the duties included in the contract, especially the duties of project manager. The project manager duties had the consultant proposing procurement arrangements with contractors and then, when those arrangements resulted in disputes, also proposing how the Ministry should settle the disputes. The Ministry may have been better served had it looked for independent advice on these disputes.

FAILURE TO PROTECT THE GOVERNMENT’S INTERESTS

67. In late 2009, the high schools project recommenced using a construction management approach.

Under this type of approach a project manager and a construction manager are selected to oversee the project, but the actual construction work is carried out by multiple prime contractors selected to complete specific work packages. On 30 December 2009,Cabinet approved the Minister’s request for authority to purchase equipment that had already been or was being purchased by existing or “legacy” subcontractors. Also, Cabinet approved payments to subcontractors with whom the Ministry was able to conclude agreements to assign to it their existing contracts with the former prime contractor. The process of negotiating the assignment of the contracts and the purchase of the equipment was given to the project manager, whose recommendations to the Ministry were to be verified by the project’s quantity surveyor and architect.

68. The project manager was not able to obtain the assignment of the “legacy” subcontractors’ contracts within the time allowed under the existing contracts. The project manager then negotiated temporary funding arrangements with the subcontractors so that the project could continue. These temporary arrangements were followed by new contractual arrangements with most of the subcontractors.

69. We examined four temporary funding agreements that provided for legacy subcontractors to receive $7.3 million as parts of arrangements to have them continue working on the construction site or to procure equipment. There is very little documentation available to show how this process was managed by the project manager or how the Ministry provided oversight for this procurement activity. For example, we were not provided with evidence that the quantity surveyor or the
architect had verified the amounts included in these temporary funding arrangements. We do know that some of the more significant arrangements with legacy subcontractors eventually ended up in dispute with the Ministry.

70. The services of the multiple prime contractors (MPC) used under the construction management approach had to be procured on a timely basis for the project to proceed efficiently. The construction manager for the high schools project indicated that limitations in the Government’s procurement policies and processes had a negative impact on the ability to achieve the project completion dates. A review of information in the Cabinet paper proposing that Cabinet approve the move to the construction management approach failed to highlight the potential challenges associated with applying the Government’s legislative and policy requirements to the procurement of so many MPC contracts.

71. The mechanical, electrical, and plumbing (MEP) contracts had to be procured twice, between 2010 and 2011,due to problems and disputes with the selected contractors. The final contractor won a tender process that proposed the completion of the project’s MEP requirements largely by supplying only the human resources needed to finalize the identified scope of work. The tender documents indicated that most equipment and supplies had been procured under previous contracts. However, the project manager who prepared the tender documents had failed to adequately assess the state of the existing MEP works and the amount of equipment and supplies actually purchased. Indeed, the tender documents included many untested assumptions. The promised equipment and supplies could not be found when the contractor began the work, and the amount of work defined as still needed to finish the project was underestimated.

72. The MEP contractor won the contract award in March 2011with a bid valued at $2.4 million, and completion was scheduled for August 2011. After numerous time extensions and price increases, the Ministry ended up paying the MEP contractor $11.3 million and the work was not completed until June 2013,ten months after the Clifton Hunter High School opened for its first school year. The construction manager estimated that an additional 21,200 man hours were required to remediate existing MEP works, while a further 12,400 man hours were required to implement
design changes. In other words, the scope of work was very poorly defined and the amount of time required was clearly underestimated.

73. The project’s quantity surveyor, the construction manager, and the Ministry’s last senior capital works manager all highlighted problems with the Ministry’s high schools project procurement activity including:

• failure to set realistic budgets and schedules;
• failure to adequately define the scope of works to be undertaken by contractors prior to entering into contractual arrangements;
• failure to adequately control the number of design changes that impacted the contractual arrangements; and
• inadequate bid documentation.

MINISTRY’S OVERSIGHT OF PROJECTS

74. Generally, it is the project manager’s responsibility to co-ordinate and to hold accountable the numerous parties who have responsibility for the key factors of cost, time, and quality in a major capital project. As the party that hired the project managers for the high schools and primary schools projects, the Ministry of Education was responsible for ensuring that they put in place the appropriate project management practices to manage changes in project scope, monitor the quality and quantity of work, monitor costs, and ensure compliance with safety and environmental rules.
We expected to find that project management reports were produced to keep the responsible Ministry officials informed about critical project issues and project progress and to serve as a means of holding the project management team accountable for the key cost, time, and quality factors.

THE MINISTRY FAILED TO ESTABLISH ADEQUATE OVERSIGHT OF PROJECTS

75. We found that the Ministry does not have any policies and procedures in place for the management of major capital projects. There is no guidance to staff on how they are expected to carry out their roles in overseeing major capital projects. Each project is treated as “one of a kind,” with the approach to be taken left to those responsible. Given that the Ministry has limited capacity to undertake such projects, it is all the more important that it clearly set out what is required to manage them.

76. The Ministry’s files that hold the reports, correspondence, meeting minutes, and other important documents demonstrating the management approach and decisions taken are very poorly organized and incomplete. For some periods in the high schools’ construction, there are almost no records to demonstrate how the Ministry carried out its role. At the time of our audit, some documents for both projects were still waiting to be filed even though the projects were completed over a year and a half previously. In September 2012,the Ministry’s senior capital works manager made the following comments about the state of record keeping during the initial prime contractor construction phase:

“But there are currently no accessible MOE records or data – specifically showing key management decisions and processes -available for any future audit. Where such records do exist, they will have to be released by staff holding such data on personal file systems. This is a continuation of the situation presented during the previous audit when there were either no records in existence or such were not made available by staff holding these records.”

77. The Ministry personnel with a role in the high schools project changed continually. There was a lack of continuity from the beginning of construction under the initial prime contractor (2008-2009) through to the recommencement of the project in late 2009,and finally during the construction management period (2010-2012). The high schools project was carried out over a period from 2005 to 2013,and some turnover would be expected for any multi-year project. That is why it is important that such a project be organized in a manner that allows it to continue even with personnel changes and that records are maintained to demonstrate key aspects of project management.

78. For both the high schools and primary schools projects, we found that the Ministry relied too heavily on its consulting project managers to ensure that proper project management systems and practices were in place. A normal expectation is that a ministry will establish a steering committee for a major capital project. The steering committee would meet regularly with the hired project manager to discuss critical project management issues and the project manager’s reports on the key project attributes of cost, time and quality.

79. The high schools project manager’s contract called for him to report to such a steering committee, but the Ministry did not create one. The contract also called for monthly project manager’s reports to be reviewed by the steering committee; the Ministry has told us that these reports were not produced. Nor was information provided to the Ministry so that project budget and completion schedules could be approved, as the contract stipulated. While it is easy to blame the project manager for not having carried out his responsibilities, the Ministry never demanded that the contract requirements be met, and it failed to carry out its responsibility under the contract to establish the steering committee. It was left to the project manager to communicate through letters, emails, and occasional meetings with the ever-changing Ministry staff.

80. In our view, the Ministry failed to establish an adequate control framework for the oversight of the high schools project, a failure that has had serious consequences. The obvious immediate consequences were late delivery, final products that did not meet needs and cost overruns. However, the ultimate consequences are much greater for the children of the Cayman Islands, the construction industry, and the economy.

81. The Ministry assigned one staff member to oversee the primary schools project under the supervision of the Deputy Chief Officer. The Ministry had the Public Works Department (PWD) fulfill the roles of both design architect and project manager. How the Ministry and PWD were to consider and resolve critical project issues was never formalized. Regular project management meetings were not scheduled, and issues discussed between the Ministry and PWD during the project were largely not documented as part of a formal project record unless they were raised in the weekly construction meeting with the prime contractor.

82. The absence of a formal record of discussion and decisions can lead to misunderstandings. For example,we noted that the Ministry requested numerous changes to the project through the contractors directly rather than through PWD. The Ministry told us that PWD had not been responsive to its requests. Meetings where critical issues were discussed between the Ministry and PWD and recorded in minutes would have ensured that these issues were dealt with in an open manner and thereby minimized the chance of misunderstandings.

ONGOING DESIGN CHANGES LE D TO UNCERTAINTY AND DROVE UP COSTS

83. The high schools project was commenced with the final design not yet established and with “value engineering” decisions yet to be made after the contract was signed with the prime contractor. Value engineering is undertaken when the owner,in this case the Ministry,wants to reduce a project’s cost and is willing to consider changes to the project design in order to achieve savings. However,these decisions would not normally have a significant impact on the first phase of construction,thus allowing construction to begin. All parties in the high schools project entered into this value engineering arrangement knowing that the project design would be subject to some uncertainty while these decisions were being made.

84. The Ministry was under considerable pressure to reduce the project cost,and this pressure increased as the economy worsened in 2008. Construction started in May 2008,while the architects continued to search for ways to reduce the cost of the project and still adhere to the approved design concept. The Ministry did not ensure that it had a robust process in place for timely agreement with the prime contractor on the cost of the proposed changes. As the number of changes and their potential costs rose,the relationship between the Ministry and the prime contractor began to deteriorate.It is important to note that contractual arrangements between an owner and a prime contractor are designed to provide an environment whereby an effective partnership is developed to deliver the project. The Ministry failed to establish the preconditions under which that partnership could develop successfully for the high schools project.

85. Given the pressure by the Government to reduce the project cost,in hindsight it would have been best had the Ministry decided to delay the project so that it could firm up its notion of what could be delivered given the available funding. However,it proceeded with the project amid uncertainty about how much funding the Government would provide.

86. Once the prime contractor’s contract was terminated in November 2009,the Ministry had an opportunity to establish a partnership with the new project manager and multiple prime contractors under the new construction management approach. Despite early signs that the Ministry would put in place the management control framework necessary to oversee the project manager’s work,we saw no evidence that it followed through with measures such as regular meetings with the project manager. Ministry officials told us that they met regularly with the project manager but that those meetings were not documented in the Ministry’s files. We do not believe that Ministry officials understood what their oversight role required. The high schools project was a significant undertaking and it needed a more formal structure than provided for by phone calls and email communication alone.

87. As the high schools project recommenced in early 2010, works by legacy subcontractors continued under temporary arrangements with the Ministry,and small works contractors were hired. The project manager was stretched to manage the work site,establish procurement arrangements for the many contracts required under the construction management approach,deal with the ongoing changes demanded by the Ministry,and provide support to ongoing legal disputes with contractors.

88. A priority under the construction management approach is to have a construction manager appointed to oversee the construction site so that the works conducted by multiple prime contractors are managed in accordance with the project design and the contractualarrangements. The initial tender for the construction manager position was rejected by the Central Tenders Committee in June 2010, and it was late October 2010 by the time a construction manager was under contract and engaged at the project site. So work by legacy and some smaller contractors continued for almost a year without a dedicated construction management function.

89. We noted that existing works were removed throughout 2010 and 2011 in order to incorporate the significant ongoing design changes. The costs of these removals were often discussed by the Ministry and the project manager as necessary to remediate deficiencies in the work done by previous contractors. However, we found that a subsequent arbitration decision and numerous dispute settlements with contractors provided very little support for the notion that the removals were largely a result of faulty work. It is more likely that the majority of the remediation work undertaken at the site was caused by the steady stream of design changes introduced by the Ministry and the resulting construction problems that ensued. Ministry officials demonstrated a lack of comprehension about the impact these changes would have on the project’s cost and its completion schedule. While the Ministry was continually looking for savings through design changes, its efforts largely escalated the project costs. Changing a project’s completion schedule alone carries inherent cost escalation factors, as contractors have to mobilize their construction crews and overhead staff to be on the project for the longer timeframe.

THE MINISTRY DID NOT HAVE CONTROL OVER THE PROJECT COSTS AND COMPLETION SCHEDULE

90. The Ministry does not have financial systems or staff capable of providing the detailed project information needed to carry out project management for major capital projects. Its financial systems are geared toward capturing costs annually to ensure that the Ministry does not exceed its funding authorities. Project management requires more detailed financial information about different aspects of the project over its full life. Project managers not only need to know the past costs but also must be able to forecast the future costs of completing the project. This is a capability that does not exist at the Ministry.

91. The Ministry relied on the project managers to provide the capability to capture detailed project cost information and to forecast future spending requirements. We found little evidence that the project managers used by the Ministry provided this type of reporting.

92. Clifton Hunter High School. In 2012, the Ministry hired a consultant to review the construction budget,monthly cost reports,and selected trades packages prepared by the project manager for the Clifton Hunter High School. In its report,the consultant stated that he was not able to substantiate the original construction budget,as the project manager had not provided the original build-up for the budget. Further,it reported that the project manager’s cost spreadsheets contained significant arithmetical errors and that the project manager did not have the capacity to forecast the future costs associated with the project.

93. The consultant did report that the construction manager’s financial reports included forecast cost information. However, given differences in these reports and the errors that they contained, it is clear that the Ministry did not know what the costs of the project were or what they were likely to be.

94. When it came to the completion schedule, we saw many different dates provided for completion and indications that comprehensive work scheduling was not always done. The Ministry’s records provide almost no information on work scheduling. It is clear that Ministry officials were almost always caught off guard each time they learned that the completion dates had slipped. In these instances, they would demand answers from the construction manager; the project manager never seemed to be held to account.

95. On 6 February 2012, the construction manager sent a detailed report to the project manager about their experiences during the project and describing their understanding of project issues. The report was prepared by the construction manager in response to questions raised by the Ministry for the reasons for the project completion dates slipping. According to the report, the planned project completion date in the tender documents was based on numerous incorrect assumptions. The construction manager provided a long list of reasons for the changes to the project completion dates over time:
• there was an incorrect planning assumption that mechanical and electrical equipment, plumbing and lighting fixtures, and window and roofing materials had been procured and delivered to the site or to offsite storage;
• estimates of works that tender documents said had been completed up to 31October 2009 were overstated;
• the extent of remediation work and redesign necessary was underestimated and appears to have been largely unknown by the Ministry at the time of the tender;
• subcontractors listed in the tender documents as available to complete project works had not in fact been engaged under contract;
• the mechanical, electrical, and plumbing contractor was terminated soon after the construction manager came onto the project, and there was a considerable delay in finalizing the contractual arrangements with a new contractor;
• procurement of multiple prime contractors took considerably longer than planned in the tender documents;
• the construction manager had to manage over 200 construction and supply-only contracts for the project, whereas initial plans called for only up to 45;
• the Ministry overrode the construction manager’s advice that only one contractor should provide the metal stud and drywall works. Instead the Ministry used three small, local contractors from its list of small works contractors. There were delays in the Ministry’s procurement of the contracts and there were performance issues with two of the three contractors chosen by the Ministry; and
• finally, the scheduled completion date was impacted by a significant number of changes by the Ministry and the architect that had to be arranged with multiple prime contractors, and by late and incomplete design drawings from the architects.

96. It is clear from the documents made available to us that the Ministry did not have a good grasp of the state of the construction works throughout much of the period between 2009 and 2011. We believe that the Ministry had to spend considerable time to address ongoing disputes with the original prime contractor and the “legacy” mechanical, electrical, and plumbing contractor. The Ministry appears to have relied heavily on the project manager and the architect for the ongoing management of the project, without receiving project reports on which to base this reliance.

97. Overspending on the high schools project. The high schools project has had a long and complicated history, with many publicly stated positions on what has gone wrong. It is clear that far less has been delivered at a far higher cost than predicted. In this report, we have presented observations about different factors in the cost increases and time delays. It is not possible for us to identify all factors or the amount of overspending associated with each. However, it is possible to identify some of the causes and to provide estimates of the cost impact (see Exhibit 3).

COMPLETION AND CLOSE OUT PROCE DUR ES WERE INADEQUATE

98. Good project management practices during construction normally minimize the number and nature of issues that need to be dealt with once construction is complete. The project manager should establish procedures to protect the owner’s interest by ensuring that all cost,time and quality requirements of contracts are met.

99. We would expect that the project manager would complete a post-project evaluation of what went right or wrong and whether the desired benefits have been achieved.

100. We found that information about the Ministry’s efforts to manage the closeout of both projects was almost non-existent, or very limited. In the last days of our examination work we found some unfiled documentation relating to the high schools project.

101. In many ways, the poor management found in the construction phase carried over into the closeout phase. The documents provided to us show that a Ministry official rather than the project manager took the lead in summarizing the results of meetings to discuss the closeout. The project manager did not provide clear reporting to the Ministry about how its interests were being protected during the closeout phase.

102. Our biggest concern about the closeout procedures for the Clifton Hunter High School is whether the Ministry should even have taken possession of the school in early September 2012,given the extent of work yet to be completed.

103. The Ministry was under intense pressure to open the school for the 2012 school year and, despite a one-week delay, the school opened with considerable work still going on. A significant portion of that work related to the mechanical, electrical, and plumbing contractor. The Clifton Hunter High School’s mechanical, electrical, and plumbing systems, including fire suppression and alarm systems, are very complex; however, when the school opened, the facilities management staff still had not received training on how these complicated systems should be operated. The correspondence we reviewed noted that any errors by untrained staff after possession could invalidate warranties on potentially affected equipment and could put students and staff at risk. The mechanical, electrical, and plumbing contractor continued to work on the project until June 2013,and between October 2012 and June 2013 the Ministry paid the contractor $1.43 million.

104. It was not until May 2013 that the Building Control Unit gave the Ministry a Certificate of Fitness for Occupancy for the Clifton Hunter High School. The Ministry received special permission to occupy the high school on 16 October 2012 while the school opened to students in the second week of September 2012.

105. On 3 September 2012, the Ministry’s senior capital works manager communicated his concerns about the prospect of having the project deemed substantially complete:

“As far as I am aware there is as yet no strategy or schedule in place for remedying defects, providing close out information or training. Hence my concern at the issue of a schedule of completion which does not address these important contractual obligations.”

106. At the time of issuance of this report, over 30 months after opening the school, Clifton Hunter High School has yet to receive a final certificate of occupancy with several matters still outstanding, some of which relate to student safety.

107. We also have concerns about the lack of documentation for the closeout work completed on the primary schools project, even though this project involved considerably fewer contractors.

108. The prime contractors for three of the four primary school buildings ran into financial difficulties during the construction. While the Ministry and the project manager worked with the contractors trying to find a way to get the prime contractors to finish the jobs, the three affected contractors eventually told the Ministry that they would not be able to complete the project without further payments from the Ministry. Exhibit 2 describes the process by which the Ministry made ex-gratia payments totaling $746,286 to the three contractors in order to have them complete the primary school construction, even though they had already been paid for this work.

109. The George Town Primary School opened on 17 May 2012 and the Sir John A. Cumber Primary School opened on 27 February 2013. However, the Certificates of Fitness for Occupancy were not issued until15 May 2013 and 6 May 2014, respectively. We are concerned that the Ministry did not obtain the appropriate approvals before these schools opened and students began attending classes. The Ministry has not provided us with letters from the Building Control Unit giving special permission to occupy these primary school buildings in advance of receiving the Certificate of Fitness for Occupancy. We believe that the Ministry took unnecessary risks with the safety and welfare of the students attending the schools all that time.

110. Given that both the high schools and primary schools projects have been complete for an extended period, we would expect the Ministry to have received a post-project evaluation report from each project manager establishing what went right or wrong and whether the desired benefits have been achieved. The specific requirement to provide such a report was not included in the project manager’s contract, and no such report has been produced for the high schools project. For the primary schools project, PWD produced a form of project report for the Ministry in May 2012 before the project was completed. The reports, one for each primary school building, largely focused on the problems with the primary contractors. PWD updated these reports during our audit, but they were still focused on construction activity and provided little in the way of lessons learned.

111. Why are post-project evaluation reports important? They provide ministries with important information that can help them learn and change their management practices as they go forward. In this case, for example, the Ministry of Education is still considering how it will complete the John Gray High School, which has not been worked on for over 2 years. It is important for the Ministry and Cabinet to have these problems highlighted, given the obvious problems encountered with the Clifton Hunter High School, so they are dealt with properly in planning the next stages of the John Gray High School development before the Government makes its decisions.

112. Given the high cost of the Clifton high School, we would have expected to see a school that would deliver all of the educational needs for some years ahead in the area that it serves. However, the school is already operating at maximum capacity, with some teaching areas exceeding capacity. With the population growth in the East End, there could be a need for more high school classroom space. To expand the school by adding a fourth academy would be very expensive, as it would require significant mechanical, electrical, and plumbing work.

113. Also, the approved concept of the high schools project included community use of the facilities.

However, the Clifton Hunter High School has not been used by the community except for some international sporting events. Therefore, a planned benefit of the school is not being realized in practice.

114. We were informed at the time of the audit that there wasn’t a formal assessment of the risks and a strategy in place to mitigate the risks of the John Gray High School site deterioration and the potential additional costs to the public purse while this project remains uncompleted. The Ministry has informed us that it intends to complete such an assessment when the project is restarted.

Recommendation #2: The Government should carry out an assessment of the John Gray High School project site and develop a strategy to manage its risks and future development before Cabinet is requested to approve further funding.

LIMITS ON ACCESS TO INFORMATION

MINISTRY OFFICIAL S LIMITED OUR ACCESS TO INFORMATION

115. Under the Public Management Finance Law, the Office of the Auditor General has “the right of access to all information held by any public officer….”. These powers, while considerable, are applied during the audit only after discussions with ministry officials and only with regard to the audit objective and criteria.

116. Our minimum requirement is that auditors be given access to those documents that we believe are necessary to conclude against the audit objective and criteria. We believe that in this audit we have met the requirement to conclude, but only after considerable extra audit work carried out over an extended period of time. We found the Ministry’s records in a state of disarray, and few staff with knowledge of their organization were available. For example, at the beginning of the audit, we asked for access to all records related to the management of the two projects, including the closeout activities for the high schools. We found high schools project records still waiting to be filed that related to closeout activity undertaken from September 2012 to the spring of 2013. These records were not formally provided to us.

117. During the audit, Ministry officials actively screened files and documents that we requested. They would indicate that they were ensuring we were provided only with records that we “needed” to perform the audit. Under the PMFL and accepted international auditing standards it is the Office of the Auditor General, and not public officials, that determines what is required for it to complete its audits.

118. Ministry documents we examined revealed that past Ministry officials had warned officials working on the high schools project about maintaining personal files that contained important project records. They warned that there was a high likelihood of important information being lost through this practice. Attempts were made at one point to have known personal records transferred to Ministry files. This appeared to have worked for a very short period during the project.

119. When we requested documents needed to complete our audit of both projects, we were sometimes provided with personal files of Ministry officials. Near the end of the audit examination work for the primary schools project, we found files in the Facilities Management office that contained documents important to that project that we had not yet seen. It turned out that the source of those documents was a Ministry official’s personal file. This official should have known that we required access to those documents. It is important that all public officers know there is no such thing as a personal file when it comes to records pertaining to government activity.

120. We believe that the actions of the Ministry demonstrate at best an inability to manage the information for which it is responsible. At worst, the Ministry’s actions were designed to limit our ability to conclude clearly on the selected audit objective and criteria. The PMFL is clear that “In the performance of his duties or exercise of his powers under this or any other law, the Auditor General shall not be subject to the direction or control of any person.”

121. The Office of the Auditor General has remedies under the PMFL to gain access to Government records. In this instance, we attempted to work with senior Ministry of Education officials to overcome the problems encountered. In doing so, we have been able to meet the minimum necessary requirements to conclude on the audit objective and criteria; largely because there is clear evidence that the Ministry did not manage these projects in a manner that met the audit criteria. However, we believe that the restrictions placed on us have driven up the cost of our audit considerably. Also, we believe that this audit report could have provided more information to the Legislative Assembly about the mature and extent of problems caused by the Ministry’s poor management of these projects.

122. In clearing our report with Ministry officials, we agreed that it would be inappropriate for the Office of the Auditor General to discuss the findings with the former Minister who was very involved in the day-to-day management of the schools projects. As Ministry officials provided the information documenting the former Minister’s involvement in the management of the projects, we agreed with the Deputy Governor that the current Ministry’s Chief Officer would discuss the findings with him. After following up with Ministry officials, we were unable to determine if Ministry officials followed through with their commitment.

CONCLUSION

123. The audit’s objective was to determine whether the Government managed the completion of the construction of the Clifton Hunter High School and the John Gray High School and the construction of primary schools within a management framework that ensured that value for money was obtained from these significant public investments. In my opinion, the Ministry of Education failed to establish the management frameworks to ensure that value for money was obtained, and it managed these projects poorly.

124. In 2005,the Ministry of Education promised to deliver three single building high schools by 2009 at a cost of about $95 million. It was able to deliver only the campus-style Clifton Hunter High School, and not until the 2012 school year. The John Gray High School has only four buildings that are partially completed but not yet fit for occupancy; construction of the third high school was cancelled in 2008. As at 31December 2013,the Ministry reports that it has spent $172.7 million on the overall project to deliver the three high schools ($166.8 million on the Clifton Hunter High School and the John Gray High School).

125. In 2010,the Ministry of Education began a project to build five two-story classroom buildings at primary schools to replace existing modular classrooms. The buildings were to be in place for the 2011 school year. Only four buildings were completed, and they were available only part way into the 2012 school year. Also, the cost of the project rose from the planned $10 million to $13.4 million- a 34 percent increase- for approximately 80 percent of the deliverables initially planned.

126. The Ministry has delivered less than it promised at a far higher cost than planned, and what has been delivered has been late. The people of the Cayman Islands and the students who need proper buildings in which to learn are still waiting for the high school infrastructure that the Government promised in 2005.

127. The Ministry did not implement the appropriate oversight functions necessary to manage large major capital projects such as the construction of schools. It has failed to ensure that projects are adequately planned, that the planned project outcomes related to cost, completion schedule, and quality of design are determined before proceeding, and that basic Cabinet approval is obtained for its plans before the investment decision is made.

128. The procurement activities that we examined for both projects demonstrated a disregard of the Financial Regulations and the Open Tender Process. Procurement was not conducted in an open and fair manner. Procurement activities led to the inappropriate selection of contractors, at the wrong price, completing the wrong works; and, in too many instances, they led to protracted disputes with the contractors. We are concerned that the procurement process was subject to override by politicians and officials.

129. The Government recently made some improvements to the governance framework for the management of major capital projects involving more than $10 million in planned project lifetime spending. In 2012,the Public Management Finance Law was amended to incorporate the Framework for Fiscal Responsibility, which provides new requirements for planning and controlling major capital projects. However, we have found that the governance framework still does not ensure that the Legislative Assembly receives adequate information to support requests for appropriations or supplementary appropriations related to funding a ministry’s major capital projects. Further, there is no accountability from ministries for their use of funds approved for major capital projects, especially those undertaken over a number of years.

130. Finally, there are important lessons to be learned from the Ministry of Education’s poor management of its construction of schools in recent years. As the Government considers new major capital projects, including the completion of the John Gray High School, it should review this report so that the lessons learned can be implemented in future projects. This report has two recommendations; one related to the need for greater transparency and accountability for major capital projects and the second, to mitigate continuing wasteful expenditure by assessing the John Gray High School site and developing a strategy for its development going forward.

131. The recommendations made in my July 2012 report on major capital projects need to be implemented as soon as possible to mitigate the waste of public resources in the future.

Alastair Swarbrick MA(Hons), CPFA, CFE Auditor General
George Town, Grand Cayman Cayman Islands

28 May2015

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