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Unforeseen issues drove the cost to overhaul Encanto Elementary 30 percent over budget. The project’s contractor was facing financial problems at the same time of the cost increases; but the district is adamant that there’s no link between the company’s issues and the cost overruns.
Encanto Elementary needed a lot of work. And last month, the San Diego Unified School District wrapped up the school’s comprehensive upgrade, replacing windows, retrofitting for air conditioning, updating the building for disability and accessibility compliance and planting trees to add shade on the playground.
In the end, the project cost the district more than $2.5 million over its original $8.6 million contract and finished more than a year past its scheduled completion date.
That unforeseen 30 percent cost increase in the project is an extreme outlier among the district’s construction projects. But the contractor responsible for the project has another big job with the district at Crawford High, and that one is on the cusp of reaching its budget, too.
The Encanto project was funded through Propositions S and Z, multibillion-dollar measures to fund school repairs and new construction projects.
Many of the cost increases and delays came from unforeseen construction issues, like termites and asbestos. But the timeline coincided with a culmination of financial problems faced by the project’s general contractor, T.B. Penick & Sons. The district is adamant that there’s no link between the company’s financial issues and the cost overruns with the Encanto Elementary project.
The district and T.B. Penick initially agreed to a contract to modernize Encanto Elementary in July 2014 for $8.6 million. But over three years, the contractor requested – and the district approved – changes to the project totaling another $2.5 million.
Whenever contractors need to exceed the agreed upon price of a project, they submit a request change. If the district approves, it’s called a change order. A project’s change order rate measures the percentage increase in a project’s cost based on all those adjustments.
Encanto Elementary’s change order rate of 29.4 percent is far and away the highest of the district’s active bond projects – the districtwide average rate is just 2.2 percent – according to the district’s latest construction report.
The next highest rate for active bond-funded projects is 9.2 percent, for upgrades to the athletic facilities at Crawford High School. T.B. Penick is the contractor on that project, too.
“Considering the district has 60 construction projects under way, it is not unusual for one or two projects to encounter unforeseen issues that necessitate above-average change orders,” said the district in a statement.
Unforeseen conditions led to many of the change orders. For example, the contractor discovered termite damage inside walls during renovation, and the change orders allowed workers to restore the building’s structural integrity.
William Savidge, the former chair of the Coalition for Adequate School Housing, the largest coalition of school district facilities professionals in the country, said good practice calls for districts to budget for a 10 percent change order rate in building upgrade and modification projects, because sometimes older buildings offer surprises that weren’t found during pre-construction surveys. The district heeds to that 10 percent budget cushion for project changes.
Encanto’s nearly 30 percent rate is much higher than that, and Crawford’s is creeping toward its limit.
The contractors at Encanto Elementary also found asbestos in one building, but not until construction started in particular classrooms.
Since that specific change order pushed the rate over the 10 percent threshold, it had to go to the school board for approval. None of the subsequent changes went to the board, because no individual change exceeded $200,000.
At the time the asbestos-related change went to the board, the project was already nearly $1 million over budget and the asbestos only cost an additional $19,902.
While the project was edging forward, T.B. Penick was having issues of its own.
At recent bond oversight committee meetings, district staff disclosed that a surety – a third party in bond contracts that ensures that all obligations are completed in case something goes wrong – would be guaranteeing the projects’ completion.
The district said it is standard practice to require the general contractor to submit a performance bond issued by a surety “to insure and therefore ensure project completion.”
“On nearly all projects the general contractor completes the construction project without needing assistance of their surety (insurance company),” the district said. “The insurance is only seldom needed when a financial or other operational issue arises that prevents the general contractor from completing the project, such as the case with T.B. Penick.”
Because T.B. Penick is experiencing financial challenges the surety is directly issuing payments to subcontractors on the company’s behalf for the Encanto and Crawford projects.
“T.B. Penick & Sons is having financial problems that have impacted the project schedules at Crawford High School and Encanto Elementary School,” the district said in a statement. “The San Diego Unified School District requires contractors to submit performance bonds on all construction projects to guarantee performance and ensure completion. The district is working with the performance bond surety to complete and closeout both the Encanto and Crawford projects. … Now that both projects are being overseen by the surety we expect satisfactory completion.”
T.B. Penick did not respond to multiple requests for comment.
The contractor has been slapped with several lawsuits alleging failure to pay subcontractors across the country. Several this year alleged nonpayment on projects on a military base in San Bernardino County.
Doug Flaherty, an attorney who represented two subcontractors in lawsuits regarding payment issues on projects in San Bernardino County against T.B. Penick, said it’s hard to gauge the relation between the lawsuits and the company’s financial issues.
Often, he said, payment disputes aren’t reflective of a company’s cash flow. And sometimes subcontractors have to file lawsuits before they’re paid for simple legal reasons. They have a limited window to file a suit, in case they aren’t ultimately paid, so they’ll do so early as a precaution.
Both of Flaherty’s lawsuits were dismissed and the subcontractors he represented were paid.
A member of the district’s Independent Citizen’s Oversight Committee, William Ponder, said he has concerns over potential links between the contractor’s financial issues, the lawsuits alleging it didn’t pay subcontractors and the projects it’s working on in the district.
“One of my major concerns is when you don’t pay subcontractors you start to look at the quality of their work,” he said. “What kind of quality work are these people going to do, if any? Then when things get behind, the completion dates are going to be pushed back by particular schools. That impacts the quality of education. That’s a huge concern.”
Francine Maxwell, a parent in southeastern San Diego who advocates for families at district schools in the area, said the issues with the Encanto project disrupted students’ education, since the year delay ended up interrupting another school year.
“Initially kids were moved to one side of the campus – the jack-hammering and smells and everything interrupts with what you’re trying to learn,” Maxwell said. “Students’ absentee rate went up.”
Maxwell also said the community wasn’t adequately notified about any of the issues with the Encanto project.
“Parents had never been sat down and given a complete assessment of their school,” she said. “They don’t know about the asbestos or the cost override. This is where community engagement falls completely short. People aren’t being kept abreast of what’s going on. These 30 percent changes would never happen north of [Interstate 8].”
Flaherty said that high change order rates can actually cause contractors to have financial issues, if they need to continue with pricey work before they get paid.
“There are contractors who underbid a job and then look for change orders,” he said. “But I don’t believe Penick is one of those contractors, in my experience. I represent subcontractors, so I’m a bit biased against general contractors, but I actually think Penick is a good one.”
Ponder said the issue with Encanto and T.B. Penick should be a lesson that makes everyone at the district pay closer attention to contractors and their projects, “because at the end of the day we’re talking about billions of dollars of taxpayers’ money that’s being spent. This may not be the only one. There’s just too many projects and a lot of money at stake here.”