1989 Report of the Auditor General of Canada

Main Points

3.1 We examined five construction projects having a total value of approximately $650 million. In one case, by the time the project is completed, planning and construction will have taken 16 years; in another, a long-term strategic plan is still not in place, although $375 million has been expended (paragraphs 3.16, 3.54 and 3.55).

3.2 The Department of Public Works (DPW) was directed to purchase a facility at Rigaud, Quebec at a cost of $5 million for a Customs and Excise (C & E) Training College, although it did not meet C & E requirements. Although the original consultants' report stated the property would be adequate to meet C & E needs "with some renovations", the cost of renovations so far has been $35 million (3.22, 3.23 and 3.30).

3.3 The Maurice Lamontagne Institute in Mont Joli Quebec, the estimated cost of which was initially reported to Parliament at $17 million, was built for the Department of Fisheries and Oceans at an approved cost of $48.2 million. The Department estimates the eventual cost to be $56.7 million; we conclude that an additional $20.9 million will be required to complete the facility to its full capabilities, raising the cost to $77 million (3.39, 3.43 and 3.49).

3.4 The Department of Public Works is accountable for the Northwest Highway System and the Department of Indian Affairs and Northern Development (DIAND) is responsible for the Northern Roads Program. In 1973, Treasury Board directed that the Northwest Highway System and the inter-territorial roads under the Northern Roads Program be turned over to British Columbia, Yukon, and the Northwest Territories. This divestiture has not taken place (3.55).

3.5 DIAND has reached agreement in principle with the Yukon and Northwest Territories Governments to transfer the remainder of the Northern Roads Program, at annual funding levels of $8.1 million and $9.4 million respectively, without obtaining Cabinet's approval for a framework to transfer responsibilities for roads (3.50).

3.6 We found the capital projects of the Rideau Canal and Trent-Severn Waterway of the Canadian Parks Service were well managed in accordance with our criteria for due regard to economy and efficiency. The Bassano Dam project met the audit criteria during the implementation phase (3.65 and 3.19).

Introduction

We examined five construction projects

3.7 As part of the Office's continuing examination of capital acquisitions by federal departments and agencies, we examined five construction projects with a total value of about $650 million: the Bassano Dam in Alberta; the Customs and Excise Training College at Rigaud, Quebec; the Maurice Lamontagne Institute, Mont Joli, Quebec; the Northwest Highway System and Northern Roads Program; and the Rideau Canal and Trent-Severn Waterway. These projects are representative of departments' efforts to acquire new facilities to provide accommodation and service.

Audit Scope

Progress of each project

3.8 We examined each project using criteria developed by our Office, approved by the Public Accounts Committee, and agreed to by the departments concerned. We assessed the progress of each project from the time departments had identified the need for construction up to the time of our audit.

Planning and management systems

3.9 We focussed on how departments plan capital projects as well as the systems and practices they use to manage them. We also examined how the projects were related to departmental plans and objectives.

Contracts

3.10 We also looked at contracts to assess whether officials in the departments and the service agency, the Department of Public Works (DPW), had followed departmental and Treasury Board direction in developing appropriate contractual arrangements for each project.

3.11 For those projects that had reached the commissioning phase (the phase in which the equipment or construction is turned over to the Crown), we assessed whether departments had received the equipment or buildings for which they had contracted.

Audit Findings

Planning not significantly improved

3.12 We found no evidence that departmental and agency planning had improved significantly over previous years. One project, the Bassano Dam rehabilitation, will have taken over 16 years from the original planning to project completion. During the planning period the estimated cost of the project escalated from $5 million to $17.2 million. In the Northwest Highway System, long- term strategic plans for both highway construction and divestiture of highways and roads to British Columbia and the Yukon Territory were still not in place.

Needs definition and options analysis flawed

3.13 In the case of the Maurice Lamontagne Institute, the Department of Fisheries and Oceans had been directed to build the facility and, operating under the pressures of the Special Recovery Capital Projects Program (SCRPP), did not have time to carry out a needs or options analysis. The cost, reported to Parliament in 1983 at $17 million, is now projected at $56.7 million. With the additional components that, in our view, are necessary to complete the project, the cost will eventually rise to $77 million. For the Rigaud project, Customs and Excise did not review its options when a major change occurred that could have had a significant impact on the need for a project of that size.

Two projects ran into difficulties

3.14 The Rigaud Training College for Customs and Excise ran into difficulties during the implementation phase, due largely to inadequate evaluation of the facility's condition when it was purchased. In addition, we noted that there were no standards governing the construction of residential facilities. In the case of the Maurice Lamontagne Institute, we concluded that an additional $20.9 million will be required before the facility can be used to its full potential.

Some well-managed projects

3.15 We also noted two capital programs that were well managed in accordance with our criteria: the Rideau Canal and the Trent-Severn Waterway. In addition, once the Bassano Dam project reached the implementation stage it was managed with due regard for economy and efficiency.

Case Studies

Case Study 1: Rehabilitation of the Bassano Dam, Bassano, Alberta

Long delays but well managed once under way

3.16 Under an agreement between the federal government and the government of Alberta, signed in 1973, the Prairie Farm Rehabilitation Administration was directed to undertake the rehabilitation of several irrigation works in the Province. The federal government initially committed support totalling $26.2 million, not including the value of property it transferred to Alberta, estimated at $2 million. $16.5 million was identified as the estimated cost to rehabilitate four irrigation works, including the dam at Bassano, originally built in 1914. The agreement called for the rehabilitation projects to be completed within five years; the Department of Regional and Economic Expansion estimated that the works at the Bassano Dam would cost $5 million.

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3.17 The Bassano Dam project was delayed for six years while land claims with the neighbouring Blackfoot Indian Band were dealt with, during which time construction costs escalated for reasons beyond the control of the PFRA. In 1984, PFRA was authorized to start the project, expected to take two years at an estimated cost of $17.2 million.

3.18 The project was further delayed by problems encountered in rehabilitating a working structure over 70 years old for which original design drawings were unreliable. As a result, the dam's rehabilitation is now scheduled for completion in 1989-90. The anticipated cost of the project is about $15.5 million, about 10 percent below the 1984 estimate.

3.19 We have examined the implementation phase of the Bassano Dam project from all aspects, and consider it to have been well managed by PFRA in accordance with our criteria.

Case Study 2: Training College, Rigaud

A catalogue of problems and delays

3.20 The Department of National Revenue, Customs and Excise (C&E) had determined by 1976 that it needed a training college for customs and excise officers. At the same time the Taxation Branch of the Department was considering a "Centre for Career Development" which could be located with the proposed college.

3.21 C & E was given approval in principle, in June 1976, to build a college at a location that would support the government's decentralization policy. With Taxation's requirements at that time, the combined capacity of the facility would be about 450 residential rooms.

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3.22 The Department of Public Works (DPW) was directed to buy the College St. Viateur at Rigaud at a cost of $5 million to meet the C & E and Taxation requirements, even though C & E had previously indicated that the location met none of the criteria for departmental requirements, or for the government's decentralization policy. Following the purchase, preliminary repairs were undertaken to enable the college to commence operating immediately. Taxation withdrew from the project in November 1978, but Customs and Excise indicated that its training requirements would grow, in the longer term, enough to take up the vacated capacity.

3.23 In 1984 the Department of Public Works started the main renovation project, with an estimated total cost of $34,986,000 and a scheduled completion date of October 1987. Completion is now scheduled for the fall of 1989.

3.24 We examined the process followed by the Department of National Revenue (C&E) in determining the need for a college and concluded that the initial needs definition phase had been performed satisfactorily. However, when Taxation withdrew in 1978, no re- examination of need was undertaken, even though up to that point C & E had been expected to require only half the facility's total capacity.

3.25 Over the three years before the contract for the main renovations was awarded in June 1986, C & E training days achieved were about 60 percent of those planned. We noted that in 1981 when cost increases were reported and in October 1985, when the results of tenders indicated that a significant cost reduction would be necessary to keep within the budget, Customs and Excise did not re-examine alternatives in light of the fact that its planned training program had apparently overstated its needs.

3.26 In summary, when construction started in 1986, it was to meet needs established in 1976 and not re-examined since then.

3.27 We examined the options analysis undertaken in 1976 and are satisfied that it was adequate. We recognize that once the property had been purchased, the options were restricted to the extent and design of the work needed to make the facility acceptable as a training college. In our opinion, however, had the Department examined other options before seeking Effective Project Approval from the Treasury Board, it could have determined and advised the Board whether a smaller project with provision for future expansion could have been completed sooner and more economically.

3.28 The Department has informed us that due to recent changes in compulsory course requirements for Customs Inspectors, and with anticipated legislative changes likely to have a significant impact on the Excise Branch, there may well be a requirement for the full facility.

3.29 We examined the process by which the Department of Public Works (DPW) and the Department of National Revenue (C&E) estimated the total cost of the project. We found that both Departments followed appropriate procedures.

3.30 Before acquiring the property in 1977, DPW engaged two consultants at $10,000 each. Their preliminary analysis indicated that, with some renovations, the property would be adequate as a training college for Customs and Excise and Taxation. (We noted, however, that there were no criteria for training institutions or precise accommodation standards for either department). In 1978, the same architectural consultants were engaged to prepare the studies for the preliminary renovation work, which would allow the College to begin operating. In 1980 they were again appointed to conduct the preliminary studies for the main renovation project and, having so far demonstrated satisfactory performance, were engaged jointly with another firm to undertake the main design work and site supervision in 1983.

3.31 In our opinion, for a project of this nature and scope, the initial contracts did not provide enough latitude for a realistic evaluation before the decision to proceed. The full scope and criteria for technical training were not provided until the consulting contract for the main work was signed in May 1983. By then approximately $8 million had already been spent to buy the property, and to complete emergency work and sufficient renovation to maintain the security of the building and permit limited operation of the College. This amount was in addition to the cost of the main renovation project -- about $35 million.

3.32 DPW followed Treasury Board and departmental directives in seeking an architectural consultant for the project, but was directed to engage a second consultant to work jointly with the recommended firm. During the main design phase, the joint consultants were often late and demonstrated less than full co-operation with the Department.

3.33 In March 1980 Customs and Excise started limited operation of the training college, which continued throughout the renovations, a condition the consultants said was one of the constraints to delivering the project on time.

3.34 In any other renovation project, the option of occupying the premises during construction should be carefully evaluated.

3.35 In August 1985 tenders were called for the main renovation package. The lowest valid tender at about $24 million exceeded DPW estimates by almost $5 million, or 25 percent. As a result, a cost reduction exercise was undertaken to ensure that the project would remain within the approved TB budget and a total of $4.6 million was cut from the project. C & E expressed some concern over the impact these cuts would have on its training program, but nevertheless concurred with the decision. On completion of the cost reduction exercise a new tender call was issued and a valid tender for the main renovation work was accepted in June 1986. This time, the tenders received were within DPW's estimates. To cover the additional work needed due in part to site conditions and the increased time spent to prepare for the second tender call, the consultants' fees were increased by over $1 million.

3.36 DPW's cost estimates before the two tender calls had been based on consultants' advice, which we evaluated in the light of the results of the two calls. The consultants had advised that the notable difference between the estimate and the result of the first tender call was due to "unusual market conditions" and the difficulties inherent in a project of this complexity. We were unable to confirm the basis for this advice. As a consequence, we conclude that the Department of Public Works was not kept fully informed.

3.37 Work began on the main renovation package in late 1986, with completion scheduled for October 1988. Changing requirements and unexpected conditions in the old buildings have combined to delay the project by almost a year and to increase the cost of the contract by some $3.1 million. These increased costs have been the result of over 380 change orders. In our opinion, some of these unexpected problems could have been avoided had there been an adequate examination and analysis of the buildings and had the client's needs been adequately defined prior to the start of design work.

3.38 Thirteen years after the initial requirements were identified, the project has been kept within the Treasury Board approved budget, but only by completing a significant cost reduction exercise, which reduced the standard of quality of the facility. The project is now over two years late.

Case Study 3: Maurice Lamontagne Institute, Mont Joli, Quebec

A story of escalating costs

3.39 In 1983, the Department of Fisheries and Oceans (DFO) was directed, under the Special Recovery Capital Projects Program (SRCPP), to build a marine sciences research institute near Mont Joli, Quebec. The institute would accommodate research scientists and the cost was reported to Parliament in the 1984 Main Estimates at $17 million.

3.40 Because the Department was directed to establish a world-class facility of a given size and in a given location and because of time constraints, neither a full needs analysis nor a full options analysis was undertaken.

3.41 The exigencies of the SRCPP were such that DFO and the Department of Public Works (DPW) were under severe time pressures to meet SRCPP objectives. In our opinion DPW and DFO managed the definition stage well in trying to meet these requirements. The Department of Public Works followed departmental and Treasury Board directives in selecting the design consultants and the contractors, but was told which design consultant to engage. As a result, an architectural firm was engaged whose design proposal and capability had been ranked second and whose tendered price was over $200,000 more than the lowest bidder, whose proposal had been ranked first.

3.42 In attempting to meet the construction timetable, the Department of Public Works went to tender before completing a thorough cost estimate of all elements of the project, and before all design documents were completed. Furthermore, to comply with SRCPP guidelines to reduce the time for construction and to allow more contractors to participate, the project was broken down into several small phases or construction lots. Work costing $2.4 million was eventually added to the various construction contracts to accommodate unforeseen site or design conditions; about $400,000 of this, the Department of Public Works estimates, was due to time pressures. DFO calculated that costs related to the remote location selected for the project would amount to about 10 percent of the construction costs. In our opinion, a similar project undertaken without the pressures of the SRCPP and in a less remote location could have been built for as much as $5.2 million less.

3.43 The project was approved at an initial estimated total cost of $44 million. Additional costs have increased the approved total to $48.2 million. However, the Department of Fisheries and Oceans estimates that the cost of the project will e $56.7 million, excluding both a computer and the second phase of the harbour facilities, which the Treasury Board had been advised would be addressed in future submissions. The additional $8.5 million is to cover expected additional work to complete designs (at $6 million) that were part of the original scope of the project, and new waste water treatment facilities which have been necessitated by changes in environmental regulations.

3.44 Regulations governing the treatment of waste water were changed after construction had been completed. Until the facilities to meet the new regulations are constructed, at an estimated cost of $2.5 million, domestic sewage is given primary treatment, and liquid chemical and biological wastes are only diluted before being emptied into the St. Lawrence River.

3.45 A central computer necessary to meet the scientific computing requirements of the institute was identified in the original TB submission but not costed. A separate submission was to be made for the computer and the Department now estimates the cost of providing this essential facility to be $5.6 million.

3.46 As part of the project so far approved, DFO has constructed an approach jetty costing $8 million. The Department expects that this jetty can be used only about 25 percent of the time that the St. Lawrence River is ice-free. An additional $13 million will be required to construct a breakwater if the jetty and harbour are to be used more often. We consider that the Department has not fully justified its requirement for the harbour, and decisions still need to be made on the future of the harbour.

3.47 Additional construction of minor works, at a total cost of $2.3 million, has been identified by the Department as "desirable but not essential".

3.48 In addition to the $8.5 million the Department estimates it will need to complete the project, we have identified a further $20.9 million ($5.6 million for the computer; $13 million for phase II of the harbour; and $2.3 million for "desirable, but not essential" minor works). The first two items were identified in the original Treasury Board submission as requests for future submissions but were not fully costed.

3.49 In summary, the Department was directed to undertake the project with a cost originally identified to Parliament at $17 million and subsequently approved by Treasury Board at $48.2 million. The Department expects the project to cost $56.7 million, but its estimates do not include the costs of the additional items, amounting to $20.9 million, described previously. In our view, these elements are needed before the project meets the standard originally considered appropriate for a world-class facility. We are aware that the Treasury Board was advised of further submissions that would cover the additional items, but we have calculated that completing it to meet the full scope of its capabilities as originally approved will bring the cost to over $77 million, or nearly $30 million more than originally estimated.

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Case Study 4: Northwest Highway System and Northern Roads Program

Lack of plans, funds and other difficulties delay divestiture proceedings

3.50 In 1958, the federal government approved the Northern Roads Program, currently administered by the Department of Indian Affairs and Northern Development (DIAND), to develop the oil and mineral potential of the Yukon and the Northwest Territories. The program has since been updated to introduce new economic measures designed to encourage economic development by determining, using socio-economic criteria, the construction requirements for a network of permanent highways and roads in the territories.

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3.51 In 1964, administration and control of the Northwest Highway System, Haines Road and all property forming part of the Northwest Highway System were transferred to the Department of Public Works (DPW). The Department introduced a policy of gradual highway reconstruction and paving, in areas where traffic volume and accident rates justified the cost of improvements.

3.52 We reviewed management controls and engineering procedures and practices related to the maintenance and construction of nine highway and road systems.

3.53 We also examined the current status of the divestiture of territorial highways and roads initially directed by Treasury Board in 1973.

3.54 From 1980 to 1989 DPW paid $375 million to maintain and reconstruct the Northwest Highway System. DIAND paid $140.2 million between 1981 and 1989 to construct and reconstruct roads under the Northern Roads Program. These expenditures are approximate and do not represent the full cost of constructing and reconstructing the highways and roads.

3.55 In our 1979 audit of DPW highways and roads systems we reported the lack of long-term strategic plans for capital road construction for the Northwest Highway System. These plans have not been developed.

3.56 In 1986, Treasury Board directed that DIAND should seek approval of a capital plan only in the context of a Cabinet-approved framework for the transfer of responsibilities to the Territories. However, DIAND has reached agreement in principle with the Yukon and Northwest Territories Governments to transfer the remainder of the Northern Roads Program, at agreed annual funding levels of $8.1 million and $9.4 million respectively, without obtaining Cabinet approval for a framework to transfer responsibilities for the roads. DIAND is now in the process of seeking Cabinet approval for the transfers at the agreed funding levels. This is the final transfer of the current Northern Roads Program.

3.57 The transfer to the respective governments of responsibilities for roads is delayed because of differences over the wording of the agreements and because responsibilities for funding future roads need to be clarified. DIAND has already transferred its road maintenance responsibilities for both territorial and inter-territorial roads and its construction responsibilities for territorial roads to the territorial governments.

3.58 Notwithstanding a 1973 Treasury Board direction, the Northwest Highway System, and inter-territorial highways and roads under the Northern Roads Program, have not been transferred to British Columbia, Yukon and Northwest Territories.

3.59 Demands by the Province of British Columbia, and conditions under which the Yukon Government has indicated it will accept responsibility for its sections of the Northwest Highway System, have become so complex that divestiture is not likely to occur without major financial concessions by the federal government.

3.60 The lack of long-term strategic plans for capital roads for the Northwest Highway System, providing for realistic funding based on justified social and economic needs, has made it difficult to determine the annual funding levels that are and will be required until the divestitures can be negotiated, to properly maintain and reconstruct the highways and roads at acceptable safety levels and design standards. DPW is presently engaged in an economic review of highway requirements.

3.61 The lack of funds has caused DIAND difficulty in achieving prompt agreement with the Yukon and Northwest Territories Governments on the acceptance of capital road plans and the annual funding levels required for transfer of road responsibilities.

3.62 The current restriction of capital funds for the Northwest Highway System has had an adverse effect on Public Works' ability to meet the conditions laid down by the British Columbia and Yukon governments for divestiture of the highway.

3.63 We noted that $7.3 million for the upgrading of the South Klondike Highway was approved on 19 July 1983 in spite of Treasury Board's concern over the economic viability of the project. Since that time $20.8 million has been expended on reconstruction of this highway with Treasury Board approval.

Payment for work done in error

3.64 Our examination of management controls revealed that in November 1983 a payment of $1,227,000 was made to the Yukon Government for work carried out in error on a federal section of the Carcross-Skagway Highway, fourteen months before completion of a Treasury Board-directed audit, to be done as a prerequisite for payment. The payment was approved by Treasury Board, on condition that DIAND formally define its responsibilities for inter-territorial roads with the two territorial governments. This has not yet been done.

Case Study 5: Rideau Canal and Trent-Severn Waterway

Well planned and well managed

3.65 The Rideau Canal and the Trent-Severn Waterway are Heritage Canals operated by the Canadian Parks Service of the Department of the Environment. They each spend approximately $3 million annually on capital projects. We examined all the capital works of the two systems for 1986-87, and in accordance with our criteria for due regard to economy found them to be well planned and managed.