If They Build It, U Will Pay

Flawed contracts. Cut corners. Inadequate inspections. Complaints about conflicts of interest. University of Minnesota president Mark Yudof might be getting out just in time.

On the morning of May 10, the University of Minnesota's Board of Regents gathered in the McNamara Alumni Center's sixth-floor conference room to get some bad news from the school's 14th president, Mark Yudof. Not the bad news that the U of M's much-lauded leader would be leaving the state to become chancellor at the University of Texas. That story wouldn't break for another three weeks. This bit of bad news had to do with the school's budget.

Yudof told the regents that a confluence of factors has necessitated yet another hike in tuition and fees. For students at the Twin Cities campus, that will amount to a 16 percent increase in the coming year--a hefty jump, considering that it will come on the heels of a 13 percent boost in 2001. Before Yudof launched into a characteristically detailed explanation of the reasoning behind the recommendation, however, there was one other small matter he wanted to address.

The million-dollar bus shelter.

It seems the shelter, which is to consist of two 80-foot-long structures, situated on opposite sides of Washington Avenue Southeast in front of the Coffman Union student center, poses an aesthetic conundrum. Sporting a copper roof, stainless-steel frame, and granite foundation, it might obstruct the south-facing view from Northrop Mall. And that, Yudof cautioned, could degrade the Mississippi River-centric vision of the campus first articulated by the acclaimed early-20th-century architect Cass Gilbert. Never mind that Coffman Union, which was built in 1939 and is now undergoing renovation, blotted out the river view from Northrop long ago. That was beside the point. An ugly bus shelter is, after all, an ugly bus shelter.

And what of the eye-popping price tag of $1 million? "A lot of things in this world cost more than I think they should," Yudof responded when the subject of cost was briefly broached.

After hearing Yudof's concerns, the regents quickly voted to place the matter back in the president's hands for further consideration. The deference to Yudof on the matter was hardly surprising; nor was the absence of any kvetching over the shelter's cost, even given the specter of a double-digit tuition hike. In his five years at the helm, Yudof has presided over the biggest construction boom in the school's history, and the regents have seldom shied from an opportunity to dig into their wallets. In all, the university has poured $1.2 billion into new construction and renovations during Yudof's five-year reign. Both the quantity and pace of the work is unprecedented not only in the Big Ten, but, according to U spokesman Tim Busse, in the nation. In recent memory, only the University of Connecticut has attempted a similarly large capital improvement campaign. "But they spread it over ten years. We've done ours in five," Busse boasts.

The media has cast this flurry of activity as an unmitigated triumph. When Yudof announced that he was leaving for Texas, columnists and reporters made note of the highly publicized athletics scandals that he inherited (and, some believe, bungled). For the most part, the press has summed up the president's tenure in glowing terms and has invariably paid tribute to his legacy as a builder. Yudof's political acumen, gift as a speaker, and undeniable fundraising skills, the orthodox view goes, transformed a musty, moribund campus into a gleaming testament to smart, aggressive planning.

Without question, the U campus was in need of more than a little nip and tuck when Yudof made the scene in 1997. There had been a chronic shortage of student housing in Minneapolis (before the construction of Roy Wilkins Hall in 1996, no new student housing had been added since 1969). And the lack of routine maintenance on existing buildings was beginning to show: roofs leaked, windows rattled, and grime accumulated. Campus landmarks like the once magnificent Walter Library, for instance, had fallen into pitiable disrepair, its treasured contents subject to the ravages of mold, dust, and cockroaches.

Yudof immediately made revitalizing the school's campus a priority. He promoted a painting, litter-cleanup, and flower-planting effort called "Beautiful U Day," that has since become an annual affair. More significant, in 1998, after his first appearance before the legislature, he secured a record $207 million dollars for an ambitious slate of new construction and renovation projects; soon after, pictures of a hard-hat-wearing Goldy Gopher, emblazoned with the slogan "Building a Better U," were plastered all over campus.

But as Yudof has garnered funding and promoted a plethora of projects, one question has been largely obscured: Is the U of M getting its money's worth? Publicly, U officials have consistently maintained that the school is getting a bang out of its buck. Privately, however, some are voicing worries that the U's biggest projects have been mismanaged. "The cost overruns were very large, and have been a great concern," says one senior official in the administration, in reference to the renovation of Coffman Union and the construction of Riverbend Commons, a new student-housing complex.

In three separate reports issued between April and June of this year, the U's Department of Audits and the Office of the General Counsel raise questions about the building boom and, in particular, call into question the use of a fast-track construction process known as "design-build." Among the problems documented: flaws in the contracts with builders, complaints about conflicts of interest, episodes of corner cutting, incidences of contractor overcharging, lack of oversight, and inadequate (sometimes nonexistent) inspections. If things don't change, one audit report warns, the U will be "exposed to substantial risks," and problems with the projects "may not be detected and could significantly reduce the quality or long term durability of University buildings."

And while insiders begin to wonder whether the U has received what it has paid for, there's no question that the institution has paid. Plenty. Since 1999, the school has spent or committed some $271 million on a total of 14 projects. "There's been some piss-poor management around here. And everyone knows it," says one midlevel staffer involved with the Coffman and Riverbend projects. "But nobody wants to talk about it publicly, because they'll just get hammered. They call it design-build. But the joke around here: 'It's not design-build. It's just build.'"

 

The vast majority of publicly funded construction in Minnesota is carried out under a time-honored protocol known as "design-bid-build." An architect or engineer is selected to design a project, a set of detailed plans is devised, and those plans are submitted to contractors interested in the job. The contractors then calculate how much it will cost to perform the work and submit a bid. The state (or other public agency) then awards the contract to whoever offers the best price. During construction, the architect or engineer acts as an agent of the public and ensures that the design is executed according to precise specifications. The process can be cumbersome and contentious.

Design-build is a less adversarial, more fluid approach to construction. The client solicits an architect and contractor to jointly come up with the plan for and price of a project. Touted as quick and efficient, design-build has been used with increasing frequency over the past decade. But the flexibility comes at a cost. The budgets for design-build projects are often approved before all the plans are finished; as a result, there are often changes in both the design and the bottom line. What's more, because each prospective design-build team is working on its own plan, it becomes difficult, if not impossible, to know with certainty if any given proposal for a project constitutes the best value. That troubles State Auditor Judi Dutcher. "This is why we have competitive bidding statutes," she says. "I'm not here to say design-build doesn't have its benefits. It's faster. But my concern as auditor is: Are taxpayers able to say, 'We got a good deal on this project'? And you can't say that if objective criteria are removed."

Over the past two years, Dutcher has observed a big push at the state legislature to expand the use of design-build. "When I've gone to the legislature to testify, the supporters always say, 'Private businesses do it this way.' Well, we're not a private business. We're the government," Dutcher says. "People seemed very emotional about wanting to get this through. I remember one of the lobbyists screaming at me in the halls of the capitol, saying, 'You don't know anything about design-build.'"

Larry Whitcomb, a professional engineer, says there's a simple explanation for the fervor: Bureaucrats like design-build because it is quick and clean; contractors like it because of the profit margins. "Design-build is very lucrative. If it wasn't, there wouldn't be all sorts of people trying to pass new laws to approve its use."

Until recently, Whitcomb was assistant director of planning and design at the state Department of Administration, where he oversaw one of the three major design-build projects carried out by the state government under a special legislative exemption: the construction of the Minnesota Employees Retirement Systems Building in St. Paul. Whitcomb didn't like what he saw: $5 million in extra costs and, he alleges, rampant corner cutting. His complaints to supervisors fell on deaf ears, however, and he says he was scolded for not being "a team player." Last August, Whitcomb, fearing he would be fired, took early retirement. But before he left, he requested a full audit of the project. In December, the Department of Administration concluded an internal review, dismissing all but one of Whitcomb's complaints. Whitcomb says the review was a "bureaucratic whitewash."

Although Whitcomb's complaints about design-build were met with little enthusiasm at the Department of Administration, he found a sympathetic audience in Dutcher. As it happens, Dutcher serves on the board of the Public Employees Retirement Association, the entity for which the St. Paul building was constructed. "Everything that could have gone wrong did," says Dutcher of the project. "Originally, I was opposed to design-build on a theoretical level. Now, having dealt with the process, I'm more against it than ever."

While Dutcher and Whitcomb were waging their respective little-heeded campaigns against the expanded use of design-build, the University of Minnesota had already embraced the method.

 

October 23, 1998 was the second annual Beautiful U Day. To mark the occasion, Mark Yudof climbed into the cab of a 50-ton crane and swung a maroon and gold wrecking ball into the East River Road Parking Ramp, an aging above-ground structure located on the school's East Bank. After demolition, the U planned to construct an underground replacement ramp to make room for a parklike plaza on the banks of the Mississippi. The regents authorized $29 million in bonds to pay for the new ramp and then, between February and September of 1999, approved a combined funding package to include extensive landscaping, improvements to surrounding infrastructure, and a 500-bed housing complex. The entire endeavor is commonly referred to as Riverbend Commons.

Initially, the U planned to use the conventional design-bid-build approach for the project. With construction costs pegged at $78.6 million, and a target completion date of August 2000, Riverbend was a very big, very ambitious undertaking. It would quickly grow even bigger. By June 1999, the cost estimate had climbed to $81.7 million, and the target date was rolled back to fall 2001. In the written request for funding, Eric Kruse, then the U's vice president for University Services, assured the regents that it would be complicated but the project could be managed "to reconcile" with the new bottom line. Soon it became apparent that even that number was unrealistic. At the end of 1999, Kruse broke the news to the regents: The costs for the project would exceed the budget by at least $20 million. In a letter, Kruse urged the regents to shift the project to design-build; his logic was that the U had committed itself to solving the student-housing crunch and a fast-track approach was the only way to meet a self-imposed deadline.

The U had already experimented with design-build on a much smaller scale. Under the state's competitive bidding law, the U was not permitted to use design-build for projects funded principally with state dollars. But projects funded through other sources--such as grants or user fees--were exempt. In March 1999, the U completed its first design-build project, the $4.3 million Barbara Barker Center for Dance. By the end of the year, four other design-build projects on campus were wrapped up, including the $10.4 million renovations of Ford and Murphy halls, which came in on budget and on time.

By all accounts, Kruse was among the U's most vocal advocates for design-build. In April 2000, the regents agreed to scrap the original plans for the Riverbend student-housing project and hire a design-builder. "The University's design-build contract requires the contractor to guarantee the maximum price of the construction early in the Project," Kruse assured regents in a letter.

Around the same time, the long-planned renovation of Coffman Union was running into budget trouble as well. The bids came in 30 to 70 percent over the approved $50 million budget, and Kruse repeated his argument for going with design-build on the project. The U ultimately selected the same design-builder for both Riverbend and Coffman projects: the Ryan Companies, a Minneapolis construction firm that has made a name for itself in the fast-emerging field.

When it was all said and done, the Coffman budget had ballooned to $71 million, 42 percent above the original allocation; Riverbend climbed to $103 million, 27 percent higher than originally hoped. Kruse, who resigned in January, did not return City Pages calls for comment. According to Greg Fox, interim vice president for University Services, the price escalation on the projects was the result of an "extraordinarily hot" construction market.

David Metzen, chair of the Regents Facilities Committee, says the decision to authorize design-build on the two projects was driven by the belief that it "would make this happen faster and cheaper than the original way." But Metzen allows that the absence of competitive bidding, along with the always evolving plans that are characteristic of design-build, has made it hard to know whether the U was getting its money's worth. "I wouldn't say design-build is the answer, and I wouldn't say we've done great," he says. "The message from the regents is, 'Keep these things on budget.' But there are certain things you can't control."

 

Inadequate controls on the U's design-build projects, as it turns out, was the central theme of an internal audit completed April 30. Many of the red flags raised in the report involve relatively small amounts of money, but there are a number of egregious violations of principle. Perhaps the most memorable (and symbolic) revelation is that Ryan stuck the U of M with a $5,075 bill to have one of the construction company's own placards hung from a construction crane. In another case, an electrical subcontractor billed the school $37,000 for the installation of refrigerators and microwaves at Riverbend Commons--even though the cost of installation was supposed to have been included with the purchase of the appliances. In both cases, the money was returned only after the auditors complained.

In the 49-page report, Gail Klatt, the head of the University's Department of Audits, compiled a list of 38 proposed reforms to the design-build process, 11 of them deemed "essential." At the top of the list is the need for increased oversight and a call for independent inspections. Such controls, Klatt notes, are especially vital under design-build because the architects are "no longer contractually bound to the university," but to the builder, removing the designer's traditional incentive to serve as a watchdog.

According to Klatt's report, informal visits to job sites by U employees revealed several defects in workmanship and materials. In one case, an electrical contractor cut corners on high-voltage cable splices, creating "significant safety hazards." A repair was subsequently made. But such defects, the audit notes, should not be left to be discovered via casual visits.

Although the U uses a consultant, or owner's representative, to assist in the management of construction projects, it has not required that the person perform on-site inspections. And according to the auditor's report, Armlin North and Associates, the company the U hired as an owner's rep for Coffman and Riverbend, was "reluctant" to make on-site visits. (Earl North, a principal in the firm, referred questions to the university's news service.)

For decades, the U did have employees on staff assigned to perform on-site visits. Then, in the early Nineties, supervisors at Facilities Management, the U's construction division, became concerned that if their in-house inspectors failed to spot problems with the work, it could expose the U to liability. So the inspection program was subsequently phased out. "That was a mistaken concern," responds general counsel Mark Rotenberg. "We are not aware of any advice, any document, any memorandum out of this office that told Facilities Management to restrict its inspections or oversight."

Greg Fox, who now leads the university's construction team, agrees that the reduction of inspections was a mistake. In fact, when he was vice chancellor at the University of Minnesota-Duluth, Fox resisted pressure to make similar reductions. "The more oversight we can provide, the better the project will be in the long run," Fox observes. "My recommendation to the president will be that we expand those inspections." Asked whether the absence of inspections had hurt the U during the recent spate of construction, Fox is circumspect, saying only, "I'm not trying to go backwards."

The audit outlined other instances in which completed work failed to meet the university's written construction standards. And in some instances, the U essentially sanctioned the shortcomings. At the very least, according to the report, the school should have received financial benefits from those concessions--it didn't. On the Riverbend project, for instance, Ryan Companies was supposed to install approximately 1,000 access doors in the ductwork. University officials agreed to deviate from the standard and require Ryan to install just 25 of the doors. But, according to the audit, there was "no evidence" that the U got the requisite break in price.

Mike Bauer, Ryan's senior project manager for Riverbend and Coffman, says he has not reviewed the audit report. He maintains, however, that the U's construction standards "are not applicable in all cases, and if they're not applicable, then there's no credit for them." The plans for both Coffman and Riverbend were regularly amended, Bauer points out, and different departments and officials at the U made varied and sometimes conflicting demands. "The U's a good client, but you have to bob and weave, constantly trying to cater to them," Bauer adds. "As large as they are, you can't please everyone."

While it may be impossible to satisfy everyone at the U, it seems the school did its best to bend over backward for Ryan. For instance, Pamela Beader, a former interim associate vice president at the U, authorized an amendment to the Riverbend contract that calculated the allowable cost for Ryan's labor charges. According to the audit, the new language empowered Ryan to charge $60,000 more than what would have been permitted under the original language. Over the course of the project, that bill would grow to $750,000.

Under a policy adopted by the regents, all changes to contracts are supposed to be reviewed by the Office of the General Counsel. That did not happen in this case, notes Mark Rotenberg, the U's general counsel. "We require this so that people around here are not obligating the U willy-nilly to all sorts of deals. Getting control over contracts is a major problem."

Earlier this month, Rotenberg's office concluded a legal audit of construction activities at the U of M. "This is a rare kind of activity. We're usually busy fighting with the Clem Haskinses of the world," Rotenberg acknowledges. "But when you've got hundreds of millions of dollars of public money being spent, it's critically important that the public's interests be protected."

The general counsel's report covers much of the same ground as the audit, but it also ventures into new territory. Among other things, the report concludes that the U should eliminate its "pre-qualification" process for selecting architects and engineers. That process, the report notes, is not used by either the state or federal government, and it has served to both restrict the pool of competition on university projects and create "an unfortunate impression" of unfairness and favoritism.

While stopping short of asking the U to discontinue the use of design-build, Rotenberg's report also makes a host of recommendations: The regents should mandate a third-party review of all design-build project plans; inspections programs need to be expanded; and a more detailed contract language could be used to help determine "price reasonableness."

Greg Fox defends the U's use of design-build, saying the school managed to get a "good value" on its projects. Still, he expresses a preference for the conventional design-bid-build approach. After reading the auditor's report, Fox called auditor Gail Klatt. "I asked her, 'Is this a solvable problem, or is this something that is structural and organizational?'" Fox recalls. "The answer was, 'I think these are solvable.' And that was the response I was hoping to get."

In an e-mail message, President Yudof did not respond to the question of whether the university had gotten its money's worth on Coffman or Riverbend, declined City Pages' request for an interview, and referred specific questions to Klatt and Fox. He did, however, address the issue of design-build in general terms: "I suppose that my overall view is that both the traditional method for construction and design-build have associated risks and benefits for the university. In the future, I think there are things that the U can do to minimize the risks and maximize the benefits, but there is no silver bullet when it comes to large-scale construction projects in the public sector."

 

On June 13, Mark Rotenberg and Gail Klatt delivered their department's findings at a joint meeting of the Board of Regents' audits and facilities committees. The presentation didn't cover all the recommendations. With some 75 separate proposals, Rotenberg noted, that couldn't be accomplished in the allotted time. But the call for "very significant improvements" in how the U handles its construction projects was hailed by some regents as both necessary and overdue.

"It was really clear to me in reading these reports that, frankly, there has been terrible mismanagement," said Regent Frank Berman. Berman, who is a Twin Cities attorney, expressed particular concern about conflicts of interest in the awarding of university contracts. He pointedly asked Rotenberg whether there was evidence of "personal relationships" between any university management and Armlin North Associates, the consulting firm hired by the U to help with Coffman and Riverbend. Rotenberg answered no, then reiterated a statement from earlier in the meeting, that his office's review of construction activity found "no evidence of criminal or civil misconduct by any University of Minnesota employee." (Rotenberg did acknowledge that a former associate interim vice president for University Services, Pamela Beader, had not cooperated with his inquiry. After leaving the university last June, Beader went to work briefly for Armlin North, then joined her former boss, Eric Kruse, at his startup consulting business, the Pegasus Group.)

As the meeting wore on, several regents questioned whether the U should discontinue its use of design-build altogether. Regent Anthony Barga said that after three years, he had grown "very skeptical" about the value of the approach. "The more I understand, the more hazards I see," agreed Berman.

The normally unflappable Yudof appeared vaguely miffed when the U's construction practices were characterized as problematic. On several occasions during the hourlong meeting, the outgoing president specifically defended the use of design-build. He pointed to the successful renovation of Murphy and Ford halls. He also pointed out that when the U resorted to design-build for Coffman and Riverbend, it was only because the projects were bid conventionally and came in over budget. "In my judgment, our experience has been pretty good with design-build," he said.

That Yudof might seek to temper criticisms is understandable. College presidents are often remembered largely for what they do or don't build. In 1988, for instance, university president Ken Keller was forced to resign in the wake of a scandal over excessive spending on renovations of Eastcliff, the presidential mansion. In his five years at the U, Yudof has never been accused of impropriety. To the contrary, his brick-and-mortar accomplishments have been the subject of innumerable public hosannas, just as his imminent departure has been widely lamented.

Now, however, his legacy has an added dimension. As he leaves for Texas, having presided over the biggest building boom in the U's history, the dismal task of overhauling the U's construction practices awaits his successor. And tough questions, once just muttered behind the scenes, are likely to be asked more and more: Did the University of Minnesota get a decent deal for its dollar? And if they didn't, who will pay the price?

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