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Corporation of the City of North Bay

Investigation of the North Bay Memorial Gardens Sports Arena Renovations

Report to Council January 27, 2014

kpmg.ca

KPMG LLP 925 Stockdale Road Suite 300 North Bay ON P1B 9N5

Telephone (705) 472-5110 Fax (705) 472-1249 www.kpmg.ca

Mr. Peter Leckie City Solicitor The Corporation of the City of North Bay 200 McIntyre St. East North Bay, ON P1B 8H8 January 27, 2014

Dear Mr. Leckie: Investigation of the North Bay Memorial Gardens Sports Arena Renovations KPMG LLP has been engaged by the Corporation of the City of North Bay (the City) to investigate the renovations of the North Bay Memorial Gardens Sports Arena (Memorial Gardens). We understand that our review has been requested as a result of an escalation in the costs associated with the renovations, which have increased from the initial budget of $12.0 million to a projected cost of approximately $16.2 million. The terms of our engagement are governed by our engagement letter with the City dated December 13, 2013. This report must be considered in its entirety by the reader. Should you have any questions concerning our report, please contact the undersigned at your convenience. Yours truly

Oscar Poloni, CPA, CA, CBV Partner, Assurance Tel: 705.669.2515

KPMG LLP is a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (KPMG International), a Swiss entity. KPMG Canada provides services to KPMG LLP. KPMG Confidential

Table of Contents
Summary of Key Findings.................................................................................................... 4 Restrictions ......................................................................................................................... 5 Scope of Review ................................................................................................................. 6 Overview of the Memorial Gardens Renovations................................................................ 7
A. B. C. D. Initial approval by City Council ................................................................................................................... 7 Project team .............................................................................................................................................. 8 Construction management approach ........................................................................................................ 9 Selection of trade contractors ................................................................................................................... 9

Project Costs ..................................................................................................................... 10

A. B. Budgeted project costs ........................................................................................................................... 10 Project payment certificate costs ............................................................................................................ 11

Factors Contributing to Escalation in Project Costs ........................................................... 13

A. B. C. D. E. Insufficient support for the initial budget estimate ................................................................................. 13 Use of construction management approach and insufficiency of contingencies .................................... 13 Inadequate supervision of change order process ................................................................................... 14 Scope changes and unforeseen conditions ............................................................................................ 15 Performance issues................................................................................................................................. 15

Communication and Awareness of Cost Escalations ........................................................ 16

A. B. Required communication of cost escalations.......................................................................................... 16 Other reporting with respect to the Memorial Gardens Renovations ..................................................... 18

Items for Consideration ..................................................................................................... 20

Summary of Key Findings

A. Factors leading to the escalation in project costs
1. Based on the results of our review, we note that the initial project budget of $12,000,000 was not supported but rather was described as a conceptual figure. Given the significant discrepancy between the budgeted construction costs and cost estimates prepared in connection with the project, it would appear that the likelihood of completing the Memorial Gardens renovations within the approve budget were remote from the inception of the project. 2. In order to complete the project within the allotted time frame, the City adopted a construction management approach that involved the commencement of construction activities before the completion of design drawings. Given the absence of final design drawings, it appears that significant changes were made to the project subsequent to the establishment of the budget, resulting in cost escalations. While the project budget did contain contingency provisions, these were ultimately insufficient to deal with both the expansion to the project scope and the cost of unanticipated work requirements. 3. The management of change orders relating to the Memorial Gardens renovations appears to have been insufficient, with some change orders approved verbally and work commenced without cost estimates provided. As a result, the project would have been challenged to manage the cost of change orders issued and the impact on the budgeted contingency provisions. While formal documentation has been prepared for change orders, we understand that certain of this documentation was prepared after actually completion of the work. 4. During our discussions with representatives of the project team, we were advised that issues with the performance of one or more parties adversely impacted the project from a timing and cost perspective.

B. Factors contributing to the absence of awareness of the escalation in project costs

5. We were advised by Mr. Peter Chirico, managing director of community services and the individual responsible for the Memorial Gardens renovations, that he assumed that budget and cost information related to the project included HST and that the costs would be reduced by the amount of the eligible HST rebate. 6. Mr. Chirico further indicated that as a result of his expectation of an HST rebate, as well as unutilized contingency provisions and incremental cost recoveries from the North Bay Battalion Hockey Club and Nipissing University, he believed the project was under budget and as such, did not communicate cost escalations to City Council or management. 7. Notwithstanding Mr. Chiricos comments, a review of project documentation as well as the reporting requirements under the Citys purchasing by-law appear to indicate that reporting of cost escalations would have been required as early as February 2013.

C. Items for consideration

8. In addition to our findings, our report includes suggested courses of action for consideration by the City to prevent recurrences of unreported construction cost escalations. These potential courses of action include but are not limited to the requirement for mandatory involvement of finance personnel on major capital projects, a prohibition on utilizing construction management for capital projects and the establishment of contingency provisions based on historical experience.

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Restrictions
9. We understand that our report is intended to assist the City and its legal counsel with examining, understanding and resolving this matter. We understand that in this case, our report may potentially be used by the Citys legal counsel for the purposes of civil litigation in connection with the Memorial Gardens renovations. We consent to such uses of our report, however, it is not to be published, circulated reproduced or used for any purpose without our prior written permission in each specific instance, except as noted above. 10. We will not assume any responsibility or liability for any costs, damages, losses, liabilities or expenses suffered by the City as a result of the circulation, publication, reproduction, use of or reliance upon our report contrary to the provisions of this section. We will not assume any responsibility or liability for any costs, damages, losses, liabilities or expenses suffered by anyone else as a result of the circulation, publication, reproduction, use of or reliance upon our report contrary to the provisions of this section. 11. Comments in our report are not intended, nor should they be interpreted to be, legal advice or opinion. 12. We have relied upon the completeness, accuracy and fair presentation of all the information obtained during the course of our investigation (the Information). Our comments are conditional upon the completeness, accuracy and fair presentation of such Information. Subject to the exercise of professional judgment and except as noted in our report, KPMG has not audited nor otherwise independently verified the accuracy or fair presentation of any of the Information. Should additional information be provided to us after the date of this report, we reserve the right but will be under no obligation to review this information and adjust our report and calculations. 13. The individuals that prepared this report did so to the best of their knowledge, acting independently and objectively. KPMG LLPs compensation is not contingent on any action or event resulting from the use of this report. 14. This report, including the attached schedules, must be considered in its entirety by the reader.

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Scope of Review
15. In preparing our report, we have considered the following information:

Information concerning financial aspects of the Memorial Gardens renovation project, including but not limited to project budgets, cost estimates, progress payment certificates, change orders and internal accounting summaries

Information relating to procurement aspects of the Memorial Gardens renovation project, including but not limited to request for proposal documents, proponent submissions, supplier contracts and proponent evaluation forms

Copies of reports to City Council relating to the Memorial Gardens renovation project and supporting documentation, including staff reports and analysis Copies of relevant policies, procedures and by-laws relating to procurement, expenditures and Council reporting Discussions with, and information provided by:

Mayor Al McDonald, City of North Bay Councillor Dave Mendocino, City of North Bay Mr. Jerry Knox, Chief Administrative Officer, City of North Bay Mr. Peter Chirico, Managing Director, Community Services, City of North Bay Mr. Allan Korell, Managing Director, Engineering, Environmental and Works, City of North Bay Ms. Margaret Karpenko, Chief Financial Officer, City of North Bay Mr. Peter Leckie, City Solicitor, City of North Bay Ms. Cathy Conrad, City Clerk, City of North Bay Ms. Beverly Hillier, Manager, Planning Services, City of North Bay Mr. Paul Valenti, Manager of Purchasing, City of North Bay Mr. Al Lang, Director of Financial Services, City of North Bay Mr. Scott Bradford, Director of Information Systems, City of North Bay Mr. Ian Kilgour, Director of Parks and Recreation, City of North Bay Mr. Matthew Delean, Principal, NORR Limited Mr. Ken Allen, President, K.J. Allen Investments Inc. Mr. Andre Roy, Construction Manager, M. Sullivan & Sons Limited Mr. Peter Wall, Project Manager, M. Sullivan & Sons Limited Mr. Mike Griffin, President, North Bay Battalion Hockey Club

Other information as contained in our files.

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Overview of the Memorial Gardens Renovations

A. Initial approval by City Council
16. On or about November 5, 2012, City Council passed Resolution No. 2012-627 which authorized the City to ratify an agreement with the Brampton Battalion OHL Hockey Club for the leasing of Memorial Gardens and relocation to North Bay for the 2013-2014 hockey season, with a fifteen (15) year agreement. The resolution represented the culmination of the Citys efforts to secure an Ontario Hockey League franchise, which we understand had been ongoing since July 2012. 17. Based on the approval provided by Resolution No. 2012-627, the City ratified the Arena Lease, License and Loan Agreement (the Arena Agreement) with the Brampton Battalion Hockey Club Ltd. (the Battalion). Pursuant to Paragraph 4.1 of the Arena Agreement, the City agreed to undertake certain renovations and upgrades to Memorial Gardens which the Battalion acknowledged would not exceed $12,000,000 as per Paragraph 4.2(a) of the Arena Agreement. 18. In connection with Resolution No. 2012-627, City Council received staff report CSBU 2012-77, which provided background information to the recommendation for Council to approve the Arena Agreement. The staff report indicated the following with respect to capital costs for the Memorial Gardens renovations: The initial proposed upgrades were estimated at a cost of approximately fourteen million nine hundred thousand dollars ($14,900,000) as shown in the attached report. Further negotiations with the team officials and discussions with the architect have reduced the costs associated with the renovations to approximately twelve million dollars ($12,000,000). Also included with this report is the draft lease agreement with the club that further indicates an upset limit for capital expenditures of twelve million dollars ($12,000,000). 19. Staff report CSBU 2012-77 also provided an indication of the planned sources of financing for the Memorial Gardens renovations, which we have summarized in Figure 1. Figure 1 Summary of planned sources of financing
Funding Source Funds allocated to Memorial Gardens under the Citys ten year capital forecast Interest free loan provided by the Battalion Industry Canada-FedNor Northern Ontario Heritage Fund Contributions from reserves (to be repaid through Capital Reserve Fund Fee) Total project funding Amount Percentage of Total 32.5% 41.7% 8.3% 8.3% 9.2% 100.0%

$3,900,000 $5,000,000 $1,000,000 $1,000,000 $1,100,000 $12,000,000

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B. Project team
20. Following the ratification of the Arena Agreement, we understand that the City commenced planning for the Memorial Gardens renovations, including the establishment of a project team that would be responsible for the oversight of the project. 21. Pursuant to Paragraph 4.2 of the Citys Purchasing By-law 2004-196, managing directors are delegated with the authority to acquire goods and services for the purposes of their business units 1. Consistent with Purchasing Bylaw 2004-196, Mr. Peter Chirico, Managing Director Community Services, was assigned responsibility for the Memorial Gardens renovations. 22. In order to assist Mr. Chirico with the management of the project, the City retained NORR Limited (NORR) for architectural services and K.J. Allen Investments Inc. (Allen) for project management services. In both instances, these contracts were undertaken through a non-competitive procurement (i.e. sole sourced). We note that staff report CSBU 2013-06 advised City Council of the non-competitive procurement process, citing the short-time frame for the completion of the Memorial Gardens renovations as the rationale for the non-competitive procurement. We also note that Paragraph 11.1 of Purchasing By-law 2004-196 permits non-competitive procurement under these circumstances. 23. We were advised that Mr. Mike Griffin, Battalion President, also participated in construction team meetings. 24. As discussed in the next section, a representative of M. Sullivan & Sons Limited was assigned to the project team in the capacity of construction manager. 25. In certain instances, other individuals participated in project team meetings, including representatives from the City, NORR and MSS. However, we were advised that the input of other participants was limited to specific matters and did not include discussion of project budget. Accordingly, our understanding of the team responsible for the oversight of the project is depicted in Figure 2. Figure 2 Project team structure
Mr. Peter Chirico Managing Director Community Services City of North Bay Overall project responsibility Mr. Mike Griffin President North Bay Battalion Hockey Club Battalion representative

Mr. Matthew Delean Principal NORR Limited Architectural services

Mr. Ken Allen President K.J. Allen Investments Inc. Project management services

Mr. Andre Roy Construction Manager M. Sullivan & Son Limited Construction management services

Purchasing By-law 2004-196 was subsequently repealed and replaced with Purchasing By-law 2013-200 effective October 15, 2013. Under the new purchasing by-law, the responsibilities and authorities of managing directors is consistent with the former by-law.

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C. Construction management approach

26. The Battalions first home game of the 2013-2014 season was scheduled for Friday, October 11, 2013, (referred to as the puck drop date), which represented the latest possible completion date for the renovations. 27. Based on the timeframe available for the renovations (approximately 48 weeks or 11 months from the ratification of the Arena Agreement to the first scheduled home game), the City chose to proceed with the renovations through the use of a construction management approach. 28. A construction management approach allows for certain aspects of a project to commence before the completion of full design drawings as soon as a specific part of the design is complete, bids for that trade package can be solicited and construction can commence. The overlapping of design and construction activities is referred to as fast-tracking and reflects the major benefit of a construction management approach the ability to reduce project timeframes. This differs from a more traditional stipulated-sum approach to construction which typically involves a construction project being tendered upon the completion of design drawings 2. 29. In support of the construction management approach, NORR issued a request for proposal document on or about February 1, 2013 for the selection of a construction manager. The evaluation of the construction manager proposals involved a two-step process whereby proponents were first evaluated based on technical considerations. Where proponents received a rating of 55 out of 70 possible points, they were then evaluated based on financial considerations. 30. Overall, a total of four proposals were received in response to the construction management request for proposal, with two proponents receiving the necessary first stage technical evaluation scores to be subject to the secondstage financial evaluation. The successful proponent M. Sullivan & Sons Limited (MSS) was the highest rated proponent based on the technical evaluation and was also the proponent with the lowest cost.

D. Selection of trade contractors

31. On or about March 16, 2013, the City issued an expression of interest for trade contractors in connection with the Memorial Gardens renovations. The expression of interest indicated that the City and MSS reserved the right to invite additional contractors to bid if there was not enough qualified interest expressed in the project. 32. Commencing in April 2013, MSS issued over 30 bid packages in connection with the Memorial Gardens renovations. We were advised that the bid packages were issued and received through the Citys Purchasing Department so as to provide transparency to the procurement process. We were further advised, however, that the evaluation of bids received and the ultimate bid awards were made by MSS.

Taken from the publication Construction Management An Owners Guide to Using the Construction Management Project Delivery System on Alberta Infrastructure Funded Building Projects

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Project Costs
A. Budgeted project costs
33. On or about September 26, 2012, the City received a cost estimate prepared by NORR dated September 26, 2012 (the NORR Estimate). Based on our review, this appears to be the first documented budget estimate for the Memorial Gardens renovation. 34. The NORR Estimate outlined an order of magnitude cost breakdown for the renovations of $14,999,820. The NORR Estimate also included a partial list of items excluded from the cost estimate, which included Harmonized Sales Tax (HST). 35. At the time of the Citys approval of the Arena Agreement, City Council was advised in staff report CSBU 2012-77 that the NORR Estimate had been reduced from $14,900,000 to $12,000,000 through negotiations with the Battalion and discussion with NORR. Staff report CSBU 2012-77 further indicated that $1,000,000 of the reduction was attributable to the removal of the scoreboard from the cost estimate as the Battalion would be responsible for the purchase and installation of the scoreboard. 36. While staff report CSBU 2012-77 did not provide an indication of the breakdown of the $12,000,000 budget between so-called hard construction costs and soft ancillary costs (including architectural and project management services), subsequent documents 3 indicated that the $12,000,000 was comprised of $10,000,000 in hard costs and $2,000,000 in soft costs. 37. On or about January 28, 2013, City Council received staff report CSBU 2013-06, which provided an update on the Memorial Gardens renovation, including a discussion concerning the contract arrangements with NORR and Allen. Staff report CSBU 2013-06 also indicated that the fees for NORR and Allen will be contained within the budget previously detailed and capped at the $12,000,000 limit as previously detailed. 38. On or about February 28, 2013, NORR received a Class D cost estimate (the Class D Estimate (R.0)) for the Memorial Gardens renovations prepared by A.W. Hooker Associates Ltd. (Hooker). The Class D Estimate (R.0) indicated a total estimated construction cost of $12,325,000, excluding HST and soft costs. With soft costs included, the Class D Estimate (R.0) indicated a total estimated cost for the Memorial Gardens renovations of $14,325,000 ($12,325,000 in construction costs and $2,000,000 in soft costs). 39. On or about March 30, 2013, NORR received a revised Class D cost estimate from Hooker (the Class D Estimate (R.1)), which indicated a total estimated construction cost of $12,191,000, excluding HST and soft costs. With soft costs included, the Class D Estimate (R.1) indicated a total estimated cost for the Memorial Gardens renovations of $14,191,000 ($12,191,000 in construction costs and $2,000,000 in soft costs).

Documents referring to $10,000,000 in hard costs and/or $2,000,000 in soft costs include (i) the request for proposal document for construction management services dated February 1, 2013 (Section 1.3.2); (ii) staff report CORP 2013-20 dated February 25, 2013 relating to the awarding of the construction management contract to MSS; and (iii) the contract between the City and NORR for architectural services dated December 6, 2012 (Section A5)

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40. On or about May 29, 2013, MSS prepared a budget forecast (the May Budget Forecast) for the project that adjusted the Class D Estimate (R.1) for the results of tender closings to date. The May Budget Forecast reflected a total construction cost of $13,085,640, consisting of the Class D Estimate (R.1) of $12,191,000 and $894,640 in higher than budgeted prices for tenders awarded to date. With the inclusion of soft costs, the May Budget Forecast projected a total cost of $15,085,640 for the Memorial Gardens renovations ($13,085,640 in construction costs and $2,000,000 in soft costs). 41. Despite the apparent increase in costs, we were unable to identify any reporting to City Council with respect to the Memorial Gardens project budget until August 2013 and have confirmed with City staff that no such reports were made. 42. On or about August 2, 2013, staff report CSBU 2013-78 advised City Council of an increase in costs for the Memorial Gardens project as a result of unexpected items and higher than expected contract prices. Specifically, staff report CSBU 2013-78 indicated the following: As the project has progressed and tendering complete to approximately 93%, our latest update for the construction is $12,035,810.00, which includes soft costs for the project. It is anticipated that the remaining tenders for construction together with change orders for unforeseen costs should reach approximately $600,000.00 for a total projection of approx. $12,635,810.00. 43. Staff report CSBU 2013-78 also indicated that while the Class D Estimate (R.1) indicated a total construction cost of $12,191,000, this project number was based on preliminary drawings and renderings only and at best was a guideline of where we were going. The estimate was used as a guide only and we were made quite aware of this at the time of presentment. No reference appears to have been made with respect to the May Budget Forecast in staff report CSBU 2013-78. 44. Based on the recommendations contained in staff report CSBU 2013-78, City Council authorized an increase in the total budget for the Memorial Gardens renovation to $12,600,000. 45. We understand that prior to Mr. Chiricos sick leave in November 2013, no further budget updates were provided to City Council in connection with the Memorial Gardens renovations. Subsequent to Mr. Chiricos sick leave, the City announced that the projected costs for the Memorial Gardens renovations were expected to be in the order of $16,200,000.

B. Project payment certificate costs

46. In April 2013, MSS began to issue progress payment certificates to the City in connection with the Memorial Gardens renovation on a monthly basis. We understand that as at the date of our report, a total of seven progress payment certificates have been issued by MSS in connection with the project, covering the period from April 2013 to October 2013. 47. Consistent with the traditional format for progress payment certificates, the progress payment certificates issued by MSS for the Memorial Gardens renovations listed (i) the original contract amount; (ii) the amount of authorized change to the original contract amount; and (iii) the revised contract amount. Given the use of a construction management approach and the corresponding absence of a stipulated sum for the project, we have assumed that contract amount is synonymous with the overall construction budget. 48. The progress payment certificates submitted by MSS were accompanied by a detailed project budget that indicated the budget for the individual construction components, the costs committed to date and the balance of the remaining budget.

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49. As summarized in Figure 3, the progress payment certificates issued by MSS, as well as the supporting detailed budgets, consistently reflected construction costs that were in excess of $12 million. As these cost estimates did not include soft costs, the indicated total costs (construction plus soft costs) were forecasted to be in excess of $14,000,000, as demonstrated in Figure 3. Figure 3 Projected construction costs as per progress payment certificates and supporting budget details
Certificate Number Certificate Date Period Covered Construction Costs per Certificate Original COP-01 COP-02 COP-03 COP-04 COP-05 COP-06 COP-07 May 17, 2013 Jul 3, 2013 Jul 26, 2013 Aug 19, 2013 Sep 27, 2013 Oct 23, 2013 Dec 9, 2013 Apr 2013 May 2013 Jun 2013 Jul 2013 Aug 2013 Sep 2013 Oct 2013 $12,264,072 $12,264,072 $12,264,072 $12,264,072 $12,264,072 $12,264,072 $12,264,072 Additional $140,574 $193,560 $521,769 $1,131,672 Total $12,264,072 $12,264,072 $12,264,072 $12,404,646 $12,457,632 $12,785,841 $13,395,744 Budgeted Construction Costs $12,264,072 $12,337,072 $13,176,628 $13,474,066 $13,208,580 $13,264,672 $13,878,440

50. As at December 9, 2013 (the date of the most recent progress payment certificate received by City), a total of $9,307,185 in construction costs have been incurred in connection with the Memorial Gardens renovations, of which $930,719 is subject to a 10% contractor holdback. 51. As at December 12, 2013, the City has forecasted the total cost to completion to be in the order of $16,317,854, which includes all construction and soft costs. We understand that this amount includes contingency provisions and as such, is subject to change depending on actual costs incurred.

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Factors Contributing to Escalation in Project Costs

52. Based on the results of our review, we have identified a number of different factors that appear to have contributed towards the escalation in project costs from the $12,000,000 budget initially approved by City Council and which are discussed further in this section of our report. 53. For the purposes of our report, we have not attempted to allocate the variance between the approved budget and the final projected costs to the individual factors.

A. Insufficient support for the initial budget estimate

54. As noted earlier in our report, the initial budget estimate of $12,000,000 (consisting of $10,000,000 in construction costs and $2,000,000 in soft costs) was presented to City Council as being based on the NORR Estimate (dated September 26, 2012), with adjustments made to reflect discussions with NORR and the Battalion. 55. During the course of our review, we were unable to locate any documentation in support of a budget estimate of $12,000,000 and were advised by representatives of NORR, Allen and MMS that they were not aware of a budget reflecting project costs of $12,000,000. 56. During our discussions with Mr. Chirico, we were advised that a budget estimate for $12,000,000 was not prepared in support of the City Council approval for the project. Rather, Mr. Chirico indicated that the $12,000,000 was a conceptual figure with no substantive support. 57. Based on the results of our review, it appears that the initial budget for the Memorial Gardens renovations of $12,000,000 was not supported. 58. Given the significant differences between the approved budget of $12,000,000 and both the earlier NORR Estimate ($14,999,820) and the subsequent Hooker Class D cost estimates (both of which exceeded $14,000,000 once soft costs were included in the estimates), it would appear that the likelihood of completing the Memorial Garden renovations within the approved budget were remote from the inception of the project.

B. Use of construction management approach and insufficiency of contingencies

59. We understand that the major risk associated with the use of a construction management approach is the potential for higher costs in comparison to a stipulated-sum approach as a result of a number of factors, including:

The absence of a guaranteed maximum price for the work to be completed The establishment of a project budget without the benefit of completed design drawings for the entire project The inability to obtain so-called market rates for additional work performed in relation to unanticipated changes due to design changes

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60. Notwithstanding the potential risks associated with a construction management approach, we note that the Class D Estimate (R.1), which appears to have formed the basis for the MMS projected budget for the project, contained a 5% design contingency (intended to accommodate cost increases arising from design issues) and a 5% general construction contingency. 61. Based on discussions with representatives of architectural firms, we understand that a 5% design contingency and a 5% general contingency are viewed as standard for construction management projects. 62. Notwithstanding the above, we note that the Hooker Class D cost estimates (R.0 and R.1) both indicate that a 20% variance from the estimated prices could occur, which would support the view that a higher contingency would be required. 63. Based on a review of emails relating to the project, we note that in March 2013, the project team did discuss the implications of a 20% cost differential, which was estimated to result in the project being $2,000,000 over budget. It appears that this matter was ultimately resolved based on (i) the view that the Class D Estimate (R.1) had a higher level of detail due to the design work already completed by NORR; and (ii) the intention of the project team to manage the renovations to the $12,000,000 budget limit. In retrospect, it would appear, however, that a higher design contingency would have been appropriate.

C. Inadequate supervision of change order process

64. During the course of our review, we were advised by Mr. Chirico and members of the project team that change orders for the project were often approved verbally and without quoted prices. We were further advised that formal change orders were issued and approved by Mr. Chirico after the work had already been undertaken, with formal change orders only beginning to be issued in August 2013. 65. We were further advised that in certain instances, verbal approval for change orders was provided by MSS and not Mr. Chirico. 66. The approach to managing change orders for the Memorial Gardens renovations is inconsistent with our understanding of the typical approach to change order management, which requires price quotes prior to the approval of the change order and the documentation of formal approval prior to the commencement of work. Additionally, we understand that change orders are approved by the owner (i.e. City). 67. We were advised by Mr. Chirico and other members of the project team that the use of verbal approvals for change orders, as well as the approval of change orders by parties other than the City (i.e. MSS) was required as a result of the tight timeframes for the project and the inability to take the time necessary to follow a more formal approval process. 68. The use of initial verbal approvals for change orders and the absence of price quotes at the time of the approval would appear to compromise the ability of the project team to manage the overall budget for the Memorial Gardens renovation, particularly the management of the contingency provisions, thereby exposing it to potential unknown cost escalations. 69. Based on the most recent change order summary provided by MSS, we understand that change orders totalling $2,754,626.56 have been issued in connection with the project. This compares to a total contingency provisions (design and construction) of $1,133,400 in the Class D Estimate (R.1).

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D. Scope changes and unforeseen conditions

70. During the course of our discussions with representatives of the project team, we were advised that a number of changes to the scope of the renovations were made during the project, with a total estimated cost of $1.4 million. 71. We were further advised that the most significant being the installation of kitchen equipment and renovations to the concession areas (collectively amounting to more than $500,000). 72. We note that Paragraph 11.11 of the Arena Agreement required the City to provide such first class equipment as the Licensee [Battalion] shall reasonably require for its concession operations within the Arena the cost of which shall be included in the Capital Improvements. Given the contractual requirement of the City to fund the cost of concession and kitchen items, we are uncertain as to why these items were apparently excluded from the original project budget. 73. In addition to changes to the scope of the renovations, we were advised that a number of unforeseen conditions were experienced during construction, including the need for asbestos abatement, mould remediation and changes to electrical and mechanical systems. Certain of these items were included in staff report CSBU 2013-78, which supported the recommendation to City Council to approve an increase in the project budget to $12,600,000.

E. Performance issues
74. During our discussions with representatives of the project team, we were advised that issues with the performance of one or more parties adversely impacted the project from a timing and cost perspective.

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Communication and Awareness of Cost Escalations

A. Required communication of cost escalations
75. Part 18 of Purchasing By-law 2004-196 outlines the requirements for contingency management, as follows: 18.1 Where the expenditure limit of a contract is expected to exceed the approved amount, but the project remains within its approved budget, including contingency, (1) the Managing Director responsible for the project or his authorized delegate may approve the overage so long as the amount of the cumulative overages for the contract is equal to or less than 10% of the value of the contract; and (2) the Chief Administrative Officer or his authorized delegate may approve the overage so long as the amount of the cumulative overages for the contract is equal to or less than 15% of the value of the contract. 18.2 If the amount of the cumulative overages approved for a contract is expected to exceed 15% of the value of the contract, the matter will be referred to Council for consideration. 76. Based on our interpretation of Part 18 of Purchasing By-law 2004-196, we note the following:

Disclosure is required to the Chief Administrative Officer or Council once the cost overage of a contract exceeds 10%, regardless of whether the project is within its approved budget The basis for determining whether disclosure is required is projected costs and not actual costs incurred.

77. Based on the above, it would appear that Mr. Chirico in his capacity as managing director was required to disclose the expected increase in construction costs as early as the winter/spring of 2013. As depicted in Figure 4, forecasted construction costs were consistently above the threshold requiring Council approval, notwithstanding the approved budget increase in August 2013. Figure 4 Projected costs, budgeted costs and approval thresholds
$15

NORR Estimate

$14

May Budget Forecast Class D Estimate (R.0) and (R.1) Council approval required CAO approval required

$13

$12

2. $11 Based on our interpretation of Part 18 of Purchasing By-law 2004-196, we note the following: Approved budget
$10 Progress payment certificate projected costs $9 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13

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78. During our discussions with Mr. Chirico, we were advised that he did not believe he was actually above the projects established budget and was not required to report to either the CAO or Council in accordance with Purchasing By-law 2004-196 based on the following:

Mr. Chirico indicated that he believed HST was included in all quotes, invoices and budget information prepared in conjunction with the project. Given that HST incurred in connection with Memorial Gardens is entitled to a 100% rebate, he indicated that he believed the HST rebate was available to offset the increased costs.

Mr. Chirico indicated that the project team was revising the project scope and undertaking other cost reduction strategies that would reduce the overall projected costs. Mr. Chirico indicated that he believed the City was entitled to cost recoveries of $400,000 to $600,000 from the Battalion and Nipissing University, which would be available to offset the projected costs. Mr. Chirico indicated that he was advised by MSS that $500,000 of contingencies would not be required for the project.

79. With respect to specific requirements of Purchasing By-law 2004-196 to report increases in contract costs based on projected expenditures, Mr. Chirico indicated that his understanding was that no reporting was required as long as the overall budget approval was met. This would appear to be inconsistent with Part 18 of Purchasing By-law 2004196. 80. While Mr. Chirico indicated his belief that all budgetary amounts included HST and therefore would be reduced by the applicable rebate, the results of our review indicate the following:

The Class D cost estimates prepared by Hooker indicate that HST was excluded from the cost estimates. The progress payment certificates issued by MSS in connection with the project indicate that HST is charged above and beyond the projected costs for the Memorial Gardens renovations.

81. While Mr. Chirico has considered incremental revenue from the Battalion and Nipissing University in his determination of the net project costs, he does not appear to have considered the loss of Industry Canada-FedNor funding, which was anticipated to be in the order of $1,000,000. We understand that the City was aware of its inability to obtain Industry Canada-FedNor funding as early as May 2013. 82. Based on our review, it is apparent that Mr. Chiricos assessment of the projects budget should not have included HST (which we have confirmed with Mr. Chirico). Based on our interpretation of Purchasing By-law 2004-196 , it also appears his assessment of the project budget should not have considered incremental revenue sources. Notwithstanding these issues, we have calculated the projects budget using Mr. Chiricos approach in Figure 5. Based on this analysis, it appears that he was required to report the cost overruns to the Chief Administrative Officer in October 2013 based on the variance from project budget.

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Figure 5 Calculation of variance from approved budget based on Mr. Chiricos assumptions
May 2013 Projected capital costs per progress payment certificate Less: HST rebate (@13%) Less: Contingency credit Less: Recoveries from Battalion and Nipissing University (maximum assumed) Net project costs before Industry Canada-FedNor adjustment Adjustment to net budget for loss of Industry Canada-FedNor revenue Revised project costs based on Mr. Chiricos understanding Approved construction budget Variance between projected costs and budgeted amount $12,264,072 ($1,410,911) ($500,000) ($600,000) $9,753,161 $1,000,000 $10,753,161 $10,000,000 7.5% October 2013 $13,395,744 ($1,541,103) ($500,000) ($600,000) $10,754,641 $1,000,000 $11,754,641 $10,600,000 10.9%

B. Other reporting with respect to the Memorial Gardens Renovations

83. During the course of our review, we have examined the minutes of the construction team meetings held in connection with the Memorial Gardens renovations. Based on our review, we did not identify any discussion of project budget in the construction team minutes. We were advised by members of the core project team that budget discussions occurred after the construction team meetings and as such, were not included in the meeting minutes. 84. During the course of our review, we have examined the minutes of the Citys senior management team meetings (held every second week) from October 2012 to November 2013 and did not identify any disclosure on the part of Mr. Chirico concerning potential cost escalations for the Memorial Gardens renovations. Based on our review of the minutes and agendas for the senior management team meetings and our discussions with City staff, we understand that major capital projects were a regular agenda item for discussion during the meetings. 85. With respect to the absence of disclosure at senior management team meetings, we were advised by Mr. Chirico that he did not discuss cost overruns as he was of the view that the project was within the original budget amount (reflecting his incorrect assumption that HST rebates were available to offset the cost escalations). 86. As directed by Resolution No. 2010-121, the Citys finance department prepares status reports on capital projects on a semi-annual basis. We were advised by representatives of the Citys finance department that these status reports consider the amount of funds expended on capital projects as well as information obtained through discussions with the managing director (or delegate) responsible for the capital project. 87. On or about August 2, 2013, the Citys finance department issued staff report CORP 2013-82, which contained the capital status report for the period ended June 30, 2013. Included in the report was an analysis of the Memorial Gardens renovations, which indicated:

Total expenditures to date of $1,424,152 Projected total expenditures of $12,000,000 No anticipated surplus or deficit

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88. While the individual who prepared the capital status report is no longer employed with the City, we were advised by representatives of the finance department that the individual would have discussed the Memorial Gardens renovations with Mr. Chirico as part of the capital status process. 89. With respect to the capital status report, we were advised by Mr. Chirico that he did not disclose cost overruns as he was of the view that the project was within the original budget amount (reflecting his incorrect assumption that HST rebates were available to offset the cost escalations). 90. During the course of our discussions with Mr. Chirico, we were advised that he did not disclose cost escalations on the Memorial Gardens project throughout the construction period as he was under the impression that the combination of HST rebates, incremental cost recoveries from the Battalion and Nipissing University and lower than expected contingency requirements combined to offset the cost escalations and maintain the project within the approved Council budget of $12,600,000. However, Mr. Chirico did indicate that prior to his sick leave in November 2013, he had indicated to Mayor McDonald, Councillor Mendocino and Mr. Jerry Knox that the construction costs had increased from $12,600,000 to $13,000,000. When requested, Mr. Chirico was unable to provide evidence that the discussion had occurred, indicating that it was a verbal discussion. 91. We were advised by Mayor McDonald that he did not recall any conversations with Mr. Chirico concerning potential escalations in project costs beyond the approved amount of $12,600,000. Mr. McDonald also indicated that he did not recall having the conversation referred to by Mr. Chirico. 92. We were advised by Councillor Mendocino that he did not recall Mr. Chirico advising him that the project costs had increased to $13,000,000. Councillor Mendocino did indicate that Mr. Chirico had indicated to that the requirement to purchase kitchen equipment could increase the cost of the Memorial Gardens renovations above the approved amount of $12,600,000 to potentially $13,000,000 but that Mr. Chirico was attempting to absorb this cost within the approved budget amount. Councillor Mendocino indicated that he requested that Mr. Chirico finalize the costing of the kitchen equipment and advise as to the impact on the overall project budget. 93. We were advised by Mr. Knox that Mr. Chirico did not disclose the fact that the project costs would increase above the approved budget amount of $12,600,000. Further, Mr. Knox indicated that he inquired of Mr. Chirico as to whether the project was in excess of the approved budget amount and if so, the need to disclose the increase to Council. We were advised by Mr. Knox that Mr. Chirico did not indicate that the costs had increased above the approved budget amount.

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Items for Consideration

94. Suggestion no. 1 The City may wish to consider prohibiting the use of construction management for future capital projects so as to avoid the risk of significant cost escalations. 95. Suggestion no. 2 The City may wish to undertake a five year historical capital review to determine the sufficiency of contingency provisions and, based on this review, adjust contingency provision for future capital projects to reflect the Citys historical experience. 96. Suggestion no. 3 The City may wish to require mandatory participation by finance personnel on major capital projects (i.e. projects exceeding a certain threshold). The role of finance personnel would be to:

Ensure sufficient diligence over the establishment of project budgets Monitor capital costs (hard and soft) against project budget on a monthly basis Ensure consistency between financial information reported to Council and senior management and internal accounting records

97. Suggestion no. 4 The City may wish to increase the level of diligence associated wit the semi-annual capital status review for major projects. Based on discussions with representatives of the Citys finance department, we understand that the review currently does not incorporate the verification of information received from management. We note, however, that the City had access to progress payment certificates for the project at the time of the capital status report and, had these been examined, the cost escalations could have been identified in July 2013. 98. Suggestion no. 5 The City may wish to establish steering committees for major capital projects that include representation from City Council.

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