2024-001 The City did not have adequate internal controls and did not comply with federal wage-rate requirements. Assistance Listing Number and Title: 20.205 Highway Planning and Construction Federal Grantor Name: Federal Highway Administration, U.S. Department of transportation Federal Award/Contract Number: SRTS 5906 (001) SRTS 9909 (004) NHPP-5908 (010) NHFP- 5908 (013) Pass-through Entity Name: Washington State Department of Transportation (WSDOT) Pass-through Award/Contract Number: SRTS 5906 (001) SRTS 9909 (004) NHPP-5908 (010) NHFP- 5908 (013) Known Questioned Cost Amount: $ Prior Year Audit Finding: N/A Background The purpose of the Highway Planning and Construction grant funds is to provide funds for the planning, design, construction and rehabilitation of highways and bridge transportation systems. During fiscal year 2024, the City spent $4,571,702 in program funds. Federal regulations require recipients to establish and maintain internal controls that ensure compliance with program requirements. These controls include understanding program requirements and monitoring the effectiveness of established controls. Under federal wage rate requirements, also known as Davis-Bacon Act, contractors and subcontractors that work on projects financed with more than $2,000 of federal funds must pay laborers and mechanics wage rates that the U.S. Department of Labor considers similar to what local workers have been paid for similar projects. For construction contracts subject to these wage rate requirements, the City must include a provision that the contractors and subcontractors must comply with those requirements and the Department of Labor’s regulations. This includes a requirement that the contractors and its subcontractors must submit certified payrolls reports to the City weekly, for each week that laborers performed contract work. These reports must include a copy of the payroll and a signed statement of compliance. The City may use a contracted project manager to collect certified payroll reports from contractors and subcontractors, but ultimately, it is the City’s responsibility to comply with these requirements and maintain documentation demonstrating compliance. Description of Condition The City spent $4,571,702 for payments to three contractors for four projects for various improvements and repairs to its roads. Our audit found the City did not have adequate internal controls for ensuring compliance with federal wage rate requirements. Specifically, the City did not collect, or ensure project managers collected, weekly certified payroll reports from the contractors and their subcontractors to confirm they paid laborers proper prevailing wages. We consider this deficiency in internal controls to be a material weakness that led to material noncompliance. Cause of Condition City staff relied on the contracted engineer to collect weekly certified payrolls and did not fully understand the requirements for monitoring the contracted engineer and collecting this documentation. Effect of Condition Without adequate internal controls to ensure it collects all weekly certified payroll reports, the City cannot demonstrate it complied with federal wage rate requirements. The City could also be liable for paying any additional wages if the contractors and subcontractors did not pay prevailing wage rates to laborers working on the contracts. The City did not collect 40 out of 110 weekly certified payroll reports. Recommendation We recommend the City strengthen internal controls to ensure compliance with federal wage rate requirements. This should include obtaining the federal certified payroll reports, as well as implementing effective monitoring processes to collect and review all weekly certified payroll reports from contractors and subcontractors. Additionally, we recommend the City provide training to ensure staff overseeing compliance with federal program are aware of all applicable requirements. City’s Response All the projects audited this period are still in progress and have not been closed out or accepted by the City. As a result, the final project files were not available, leading to the audit evaluating “working” files. Auditing these files with the expectation that they would be in a finalized state is both misrepresenting the City’s standard of care for accepted projects and created an added financial burden to provide support from working files. The City would like it noted the audit did not find any payments to have been processed that did not include payment of prevailing wage. Additionally, as stated above, these projects are all still in progress and will not be fully closed out until all certified payrolls are received. In a theoretical case where there was an instance of a contractor not paying prevailing wage on one of these projects, the City would address it prior to closeout, which would ensure it is not liable for paying additional wages. The City hires consultants to administer these projects in accordance with all relevant statutes and best practices. The City also provided the SAO with emails showing the City’s consultants requesting overdue certified payrolls as a part of the pay estimate preparation process. To mitigate any risk that may exist in the City’s current process the City will develop a cover sheet to accompany pay estimates on federally funded projects that will require the consultant to certify that certified payrolls from all contractors are up to date, tracks how far overdue any non-submitted certified payrolls are, and ensure the City verifies certified payrolls in a timely manner. The City will also look further into the applicable statutes to determine whether it needs to establish a policy outlining when to withhold payment from a contractor due to outstanding certified payrolls. The City does not believe that an audit finding is necessary on this issue. These certified payrolls will be collected prior to the projects being accepted, ensuring that any noncompliance from contractors are not the financial responsibility of the City. As outlined above, the City acknowledges that there are areas that it could improve its process and will implement policies and systems to continue delivering the best possible projects for taxpayers. Auditor’s Remarks We reaffirm our finding. It is the responsibility of the City to maintain internal controls that ensure all certified payroll reports are collected weekly from all contractors and subcontractors as outlined in the federal regulations referenced below. Our audit is conducted in accordance with the criteria established by the federal government. We appreciate the steps the City is taking to resolve this issue and will review the condition during our next audit. Applicable Laws and Regulations Title 2 U.S. Code of Federal Regulations (CFR) Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance), section 516, Audit findings, establishes reporting requirements for audit findings. Title 2 CFR Part 200, Uniform Guidance, section 303, Internal controls, describes the requirements for auditees to maintain internal controls over federal programs and comply with federal program requirements. The American Institute of Certified Public Accountants defines significant deficiencies and material weaknesses in its Codification of Statements on Auditing Standards, section 935, Compliance Audits, paragraph 11. Title 29 CFR, Section 3.3 – Weekly statement with respect to payment of wages, and Section 3.4 – Submission of weekly statements and the preservation and inspection of weekly payroll records, establishes requirements for contractor or subcontractor submission of weekly certified payroll reports. Title 29 CFR, Section 5.5 – Contract provisions and related matters establishes the requirements for the contracting officer to insert in full in any contract in excess of $2,000 which is entered into for the actual construction, alteration and/or repair, including painting and decorating, of a public building or public work, or building or work financed in whole or in part with federal funds the clauses listed, which includes but is not limited to the minimum wages to be paid and payrolls and basic records to be maintained (submission of weekly certified payrolls).