Calhouns Can(n)ons

Whose Ethics?

The following is a formal letter of complaint from LOCSD Board Chairperson Lisa Schicker. A few caveats are in order:

First, formal letters of complaint are like lawsuits; Both can be full of allegations that may or may not be true, so Caveat lector.

That said, this complaint does raise some interesting questions:

First, violations of state law and/or contract violations are clear: They either occurred or they didn’t, and as such need to be investigated by the proper authorities – in the case of state law, the DA needs to be involved; contract violations will require a hearing in a civil court, no doubt.

So, that leaves “ethics,” an interesting grey area the raises some questions. For example, as a professional independent contractor/consultant, who does MWH work for and answer to? Themselves? A Board Majority (3 votes)? The General Manager? The citizens whose tax/service-fee dollars are paying their bills? To whom, then does the consultant owe their due diligence, best ethical and professional practices, and fiduciary duty?

Since elected boards are, in almost all cases, “amateurs,” (if they weren’t, they would have no need of professional services by outside consultants), they are always at a disadvantage. How are they to know, for example, if their consultant is truthful, fair, objective, and is rendering the best possible service to the community? Does the consultant have an ethical duty to speak truth to power? Or is the consultant behaving like an unethical used car salesman and adding all kinds of unnecessary bells and whistles onto a project in order to jack their fees? Who, in short, has the knowledge and expertise to watch the consultant? And if a Board shuts down citizen advisory committees, thereby limiting a variety of “public eyes on the page,” . . . . and refuses to listen to and take seriously public input regarding contracts or costs and so forth . . . . ?

And if a consultant violates all manner of professional and ethical behavior and/or legal matters, thereby sticking taxpayers with excessive fees and costs, for example, who has the responsibility to see to it that legal remedies are applied? Individual citizens? The CSD Board? Right now, the CSD is in contractual/arbitration-type “discussions” with MWH, that may or may not resolve these issues and may or may not result in a satisfactory outcome, or may end up in court. But, if the CSD itself is dissolved, will legal remedies be left up to individual citizens? Will the County take over the matter or simply let it drop, thereby leaving the residents to forever wonder if they have been stuck with paying unnecessary? excessive? unethical? illegal? costs?

And, finally, regarding the $10,000 MWH contributed to the anti-recall effort, if MWH’s client was the community (certainly all property owners within the prohibition zone who were going to pay for this project, thereby paying MWH’s salaries), could it ever be considered ethical for such a firm to use what is, in reality, the citizens’ own money to get involved in any way in what was clearly a partisan political dogfight?

As for complaints to professional Associations, it’s been my experience that such Associations that even bother to have Codes of Conduct in the first place, have them as a piece of feel-good, for-public-consumption-only, CYA public relations ploy. When asked to seriously investigate a member, their usual response is, Talk to the hand. Our ethical standards are “voluntary,” and my, isn’t it unfortunate, what a sad world we live in, sigh, perhaps you need to see an attorney, thanks for writing to share your concerns with us, have a nice day.

Which is why God invented lawyers.
The letter:
May 10, 2006


Bruce D'Agostino
Executive Director
Construction Management Association of America
7918 Jones Branch Drive, Ste. 540
McLean, VA 22102


Subject: Formal Complaint Regarding Montgomery watson harza’s Conduct In Managing The LOs Osos Wastewater Project

Dear Mr. D’Agostino:

This letter is submitted as a formal complaint against Montgomery Watson Harza (MWH) regarding their behavior and performance related to the Los Osos Community Services District’s Wastewater Project. We are requesting that the Construction Management Association of America, which MWH is a member, be investigated for their egregious behavior that completely failed their client, the Los Osos Community Services District and the Citizens of Los Osos.

MWH was hired by the District in September 1999 to be the Project Manager for a planned wastewater treatment system in the community of Los Osos, which is serviced by a Community Services District. This initial assignment was a contract for $288,000.

The first project programming step was to develop a Wastewater Facilities Plan, and the District prepared an RFP for this scope. Oswald Engineering was selected for this task in summer 1999 and MWH was the firm that was hired in the fall to manage Oswald’s work. As described below, it is apparent that MWH failed in their oversight of this portion of the work and undermined Oswald’s efforts. It late 1999, less than one year after MWH was hired, MWH succeeded in taking over Oswald’s portion of the work. MWH then completed the Facilities Plan under the terms of Oswald’s original contract, which was amended at least six times for an additional amount paid to MWH exceeding $1.5 million. MWH had replaced Oswald in less than one year. Oswald was working on a ponding project, the scope of which was developed under MWH’s management. The Central Coast Regional Water Quality Control Board (RWQCB) refused to approve the MWH managed ponding design, due to site size limitations. Instead of reworking the ponding system with Oswald or relocating the plant site, MWH assisted the District in removing and suing Oswald. Recent documentation obtained by the District clearly indicates that MWH colluded with RWQCB staff to work against the Oswald design. Furthermore, MWH inappropriately postured itself to take over the preparation of the Facilities Plan from Oswald. This is a clear ethics violation in that MWH not only failed in its responsibilities to objectively evaluate alternatives, but removed oversight controls that have resulted in significant damages to the District and citizens of Los Osos.

MWH completed the Facilities Plan for an entirely different project. The original MWH contract, which was amended at least six more times, raised the MWH’s fees five-fold. MWH’s efforts in recommending against the community preferred system more than doubled the estimated project construction costs. The amendments and the billings are difficult to track, and in some cases not sequential. Subsequent investigation has revealed that MWH overcharged the District and in numerous instances doubled charged the District.

When MWH completed the Project Facilities Plan (Plan), the District issued an RFP that was prepared by MWH, for the design of the project recommended in the MWH Facilities Plan. The Facilities Plan prepared by MWH was clearly biased against any technology that was different from treatment systems previously designed by MWH for other clients. MWH’s selection criteria were grossly skewed towards a specific treatment process. MWH’s failure to objectively and ethically evaluate all available treatment systems, as well as collection systems, significantly increased the project costs to the citizens. MWH failed to openly inform the District and citizens of other options available that would have been to the community’s preferences and been the environmentally preferred option at a significant savings in capital construction and maintenance and operations.

MWH, serving in their role as the Project Manager, should not have competed for the design phase of the project. MWH clearly had a conflict of interest in developing and assisting with the design proposal phase of the project since they competed for the design contract. MWH wrote the language for the design request for proposal. This gave them a significant advantage during the design competition. MWH’s role as the Project Manager and then performing the design was not only inappropriate but clearly denied the District the object oversight of the design that a Project Manager would have provided. Investigations into the design work project clearly indicate that there was a significant amount of design work that required rework. MWH’s role as the Project Manager allowed MWH to cover up these design errors and omissions. MWH clearly violated its fiduciary responsibility to the District and the citizens of Los Osos to assure that payment was only for acceptable quality work. MWH’s breach of this fiduciary duty as the Project Manager was also flawed because as the Project Manager, MWH was not only responsible for the design reviews but also would review all requests for payment by the design firm to make sure the invoices were correct and reasonable. MWH clearly had a conflict of interest and their objectivity in performing these reviews at a minimum does not meet an acceptable level of performance and certainly did not provide an independent review of the design.

MWH competed with DMJM and Corrolla Engineering for the design assignment in mid 2001, and was awarded the contract in 2002. MWH developed the design, prepared bidding documents into three separate construction packages, and issued these documents to the construction community for bid.

MWH then assisted the District in conducting all phases of the pre-construction activity in the capacity as the District’s technical representative. They assisted with and/or prepared the Invitation for Bid, established the contractor prequalification criteria, facilitated the contractor prequalification process, assisted in the bidding process, reviewed the bids, recommended to the District what bids should be accepted, and assisted in the construction contract awards and the Notice(s) to Proceed.

In 2004, MWH advised the District that it was necessary to pre-qualify contractors bidding on the three contract phases. The project consisted of a conventional MBR plant with micro filtration along with two contracts for the installation of a conventional gravity collection system. Although there may be some justification to pre-qualify the treatment plant contractor, there is no justification to pre-qualify the gravity collection system pipeline contractors. MWH sized the pipeline contracts to such a level that it limited the construction bid capability of prospective bidders to only larger firms. The sizing of the pipeline contracts coupled with the extraordinary pre-qualifications of the pipeline contractors clearly limited the ability of small to medium size contractors to bid the gravity collection system. This act by MWH limited bid competition and exposed the District to increased expense due to the limited competition. A similar argument regarding the pre-qualification of the treatment plant contractors also exposed the District to limited bid competition and was a significant factor in the excessively high bids received.

As a result of the stringent pre-qualification criteria drafted by MWH, there was only one bidder on two of the construction contract packages, and two bidders on the third package. The bids received were substantially above the Engineer’s Estimate that had been prepared by MWH (bids were 24% - 57% over the Engineer’s Estimate).

At the bid opening, a MWH representative remarked to at least two of the District Directors (one of them being me) that the project should be re-bid, due to the lack of competition and because the bids were so high above the Engineer’s Estimate. They also made these statements and prepared a report that also strongly recommended that the project should be rebid due to the high bids. This reported was formally presented to the District Board and the Citizens of Los Osos at a District Wastewater committee meeting and at a District business meeting (tapes available.) Mysteriously, only one week later, after MWH was awarded a $7.685 million (sole sourced) amendment to their design contract for construction management services (total MWH contract value was increased to approximately $14 million), MWH then reversed their opinion about rebiding the construction of the project and recommended that all construction contracts be awarded. This resulted in a total project bid price of approximately $128.2M (MWH =$14M; Whitaker = $24.5M; Barnard = $43.5M; Monterey Mechanical = $46.2M). The Engineer’s Estimate was $78.2M (Whitaker = $19.8M; Barnard = $29.1M; Monterey Mechanical = $29.3M).

The cost of construction was $36M more than the Engineer’s Estimate. MWH’s negotiated fee for the construction management services was 18% of the Engineer’s Estimate. MWH’s motivation for accepting the bids was due to the fact that they would be paid more because their sole source construction management contract was based on a percentage of these higher construction bids. MWH did not compete for this lucrative and excessive Construction Management phase of the work. It is interesting to note that given MWH’s sole source construction management contract and the 740 day duration of the contract this would mean that MWH would be billing at a rate of over $10,000 per day for a team of 5 MWH employees.

This brought the project cost for construction to average of over $50,000 per property owner. Other costs not reflected in the $50,000 amount did not include the decommissioning of individual septic tanks and the installation of residential lateral lines, estimated at $2000-$6000 more per household or the construct of over $30 million in deferred capital facilities. Add to that the cost of financing, real estate purchase, and operating cost, and the monthly cost to the property owner is extremely high for a moderate income community, with 5000 households being required to hook up to the sewer. In addition, because of the land constraints (which MWH ignored), plant expansion to accommodate any additional properties outside the project area, also known as the “Prohibition Zone”, would be impossible. This would likely mean that if there was any growth, or if the remaining residences who were not being sewered (approx. 800 more homes) would choose to hook up at a later date, another treatment plant would be needed at significant additional costs.

The current LOCSD Board contends that MWH colluded with the Central Coast Regional Water Quality Control Board staff, staff of the California State Water Resources Control Board and the construction contractors to accelerate the construction contract awards less than a month before a scheduled recall election that would have significant impact on the location of the treatment plant portion of the work. The project funding, in the form of a State Revolving Fund Loan, was good until December 20, 2005; so there was no reason to rush. MWH, despite no contractual provision to do so, issued an illegal “conditional” Notice to Proceed (NTP). The “conditional” NTP was issued prior to the project being funded and contractually required permit being procured. MWH failed to notify the LOCSD that its recommendation to issue a “conditional” NTP which would permit the contractor to incur significant costs, was not provided for in the contract terms, violated contractual prohibition against front loading the contract and violated state and federal laws prohibiting unauthorized commitments.

As one of two of the seated dissenting Board members at the time of issuance of this “conditional” NTP, I personally protested in writing and at public meetings in May-September 2005, alleging such illegality – I was overruled. I also have numerous email correspondences with our past General Manager Bruce Buel and Steve Hyland, MWH engineer, protesting the use of this “Conditional” NTP notice, clearly and unequivocally pointing out that MWH’s actions violated the contract provisions, and State and Federal law.

Both of the minority Board members (one of them being me) were physically barred from one bidder’s conference MWH conducted in February 2005 (tapes available) and two construction kick-off meetings MWH conducted that were held in late July 2005, (photos available). MWH also refused to video tape the construction meetings, although both Directors and members of the public requested this taping.

It is our Board’s opinion that a violation of state law did occur when the District issued this “conditional” Noticed to Proceed (NTP) to the contractors on July 6, 2005. Because this “conditional” NTP allowed the contractors to incur costs, and because the District did not have the funds or the funding authority it needed to cover these incurred costs. It is clear that MWH’s actions wantonly violated State and Federal laws prohibiting unfunded obligations. Furthermore MWH’s actions clearly violated contractual clauses that specifically prohibited the contractors from front loading construction expenditures. It is incredibly ironic that the contract language prohibiting this act was written by MWH.

It is our opinion that a violation of state and federal law did occur when the “conditional” NTP was issued by MWH to the contractors on July 6, 2005. Project funding by the SWRCB Division of Financial Assistance did not obligate the project funding until August 8, 2005, nearly one month after MWH issued the “Conditional Notice to Proceed”. The required Coastal Commission permit and the site grading permit were required prior to the SWRCB funding the project. These permits were approved and the SWRCB funded the project on August 22, 2005.

The mandatory San Luis Obispo County (SLO) grading permit required that the District obtain a site restoration bond prior to the commencement of any and all grading activities. SLO County Public Works required the bond due to the pending recall election and pending voter initiative that could have halted work at the treatment plant site. Because of the County’s bond requirement, the District Board authorized staff to obtain the required grading bond specifically from “Insco Dico”. However, when Insco Dico refused to issue the bond (due to MWH’s failure to disclose the project risks and significant environmental impacts). MWH colluded with Monterey Mechanical, the treatment plant contractor, to arrange an alternate bond that not only covered the restoration of portions of the treatment plant site but also the restoration of the pipeline contractor’s sites. MWH’s action was not allowed under the contract terms and was in direct violation to the District Board’s authorization.

The District did not have the approved Coastal Commission permit (not issued until August 18, 2005) which was the necessary authority to allow the SWRCB to issue the funds (funds were not released until August 22, 2005) from the SRF Loan fund.

In addition to the improper bond and the illegal “conditional NTP”, MWH colluded with two of the three contractors to improperly pay the contractors at least 30 and possible 60 days early. On August 22, 2005, MWH issued an NTP in accordance with the contract documents. On August 28, 2005, the District requested disbursement of the first draw of funds from the SWRCB SRF loan. The first disbursement of SRF loan funds was specifically required to reimburse the District for all pre-design work and establish a construction contingency fund, as required under the terms of the SRF Loan Agreement. MWH was directed by the District Board to immediately draw down the full amount of the first disbursement, $10,968,984 from the SRF loan as authorized in the SRF contract documents. MWH, without cautioning the former District General Manager and in direct violation of the District Board’s direction, only requested an initial disbursement from the SWRCB of $6,486,144, MWH’s collusion with the former General Manager gives the perception that MWH was working with the former General Manager to cause the most financial damage to any newly elected Board, should the recall succeed.

It is worth noting that MWH worked with the contractors to accelerate the construction contractors’ financial commitment to the project in an effort to influence the voter recall election and/or make the outcome of the election a moot point. It was said by District staff, who MWH was advising, that any financial obligations incurred prior to the recall election would make it too costly to “change course”.

On August 24, 2005, two days after the formal NTP, the contractors invoiced the LOCSD for $1.616M. The construction contract has specific requirements that must be met before MWH could recommend approval of the invoices. In an egregious violation of the payment provisions, MWH did not require the contractors to submit the required construction schedules, certified payrolls, a work payment schedule and other mandatory required documents and certifications. Instead of using the contractually provided seven day progress payment review period provided for MWH to review the submitted payment requests, MWH immediately approved the invoice the same day and without any of the required support documentation or payment justification. In light of the recent disclosure of MWH’s $10,000 contribution to the anti-recall effort and the fact that MWH would have financially benefited if termination of the project had not occurred, it is apparent that MWH seriously and egregiously breached its fiduciary responsibility to protect the citizens of Los Osos from any and all actions that could potentially or reasonably be expected to do so.

It is worth noting that MWH and one of the three contractors (Barnard Construction) also donated $10,000 each to the campaign committee called “Save the Dream” to fight against the recall election, in a further effort to influence the outcome of the vote – both would have benefited financially if the recall had not been successful.

The contractors invoiced the District for $1.616M on August 24, 2005, two days after the August 22 formal NTP was issued; and MWH immediately approved the invoices the same day, without MWH performing their contractually required review of the invoices. MWH, working in cooperation with the former General Manager, then rushed the payment through. MWH blatantly ignored the contract requirements that all invoices are due and payable no earlier than 30 days after invoice approval. The contract documents and daily logs clearly show that the first payment clearly should have been due for payment on October 27, 2005. All of these expedited actions were done prior to the recall election held on 9/27/2005 and were intended to make termination of the project extremely costly and difficult. MWH would have benefited financially if termination of the project had not occurred. MWH’s rush to get those payments through solely benefited the contractors, was grievous to the District’s financial security, violated numerous contractual protections and was solely designed to influence the outcome of the pending recall election.

MWH was the only District consultant with the necessary technical expertise to assess the merits of the various technical issues that arose on the project. The District relied on MWH’s professional advice and representations that they were the subject matter expert on all aspects of the project. The District morally and contractually expected MWH to act in District’s best interest. As such, it is obvious that MWH has egregiously failed in their fiduciary obligation to represent the best interest of the District and the Citizens of Los Osos.

It is the District’s contention that MWH had a clear conflict of interest when they made recommendations or took actions which they knew or should have even minimally known were in clear violation of contract provisions, their fiduciary responsibility and State and Federal statutes. Most of all, MWH’s actions were patently not in the best interest of their “client”. MWH’s actions and repeated disregard for their client’s best interest were knowingly and willingly designed to expedite the award of the controversial construction contracts in advance of the recall election. It was in MWH’s financial interest to see the project go forward, but it clearly was to the absolute detriment of the District and the Citizens of Los Osos.

We strongly request that you investigate MWH’s actions in the matter. Our staff has voluminous additional proof of MWH’s shameful actions and ethics violations (correspondence, emails, board meeting tapes and minutes). I am available for additional questions at any time.


Sincerely,



Lisa Schicker, President
Board of Directors
Los Osos Community Services District