Auditors revealed in a follow-up audit that Denver risks paying more than it needs to on construction projects due to a misunderstanding of contracting costs.

A September 2021 audit by the Denver Auditor’s Office looked at the city’s method for managing its large general contractor projects.

“We found risks involving inadequate management of the Northfield Fire Station construction project, a fundamental misunderstanding of payment terms, and ineffective monitoring of construction costs,” auditors said in a news release.

In a follow-up audit, auditors said the city’s Department of Transportation and Infrastructure (DOTI), the city’s anchor for construction projects and transportation, made improvements to its monitoring methods, but “one area of concern has gotten even worse since the original audit,” auditors said.

Those involved with overseeing construction contracts “continue to fundamentally misunderstand the difference between a lump-sum price and a guaranteed maximum price in a contract,” the news release added.

Lump sums are a specific amount of money paid to construction contractors when the work is complete. A guaranteed maximum is a set “up to” price that may decrease if construction costs are lower.

Denver is losing out on savings when projects treat a guaranteed maximum price as a lump sum price, when the actual cost is less than the original approved price, according to auditors.

“We expanded employee training and partnered with industry experts to develop a best practices guidance document that fosters consistent delivery practices across the department, along with implementing various other processes and independent cost validation improvements,” DOTI told The Denver Gazette in a statement.

Auditors also expressed concern that project managers are not verifying the cost of work and managers are not being actively involved in monitoring contractors’ subcontractor hiring processes.

“Managers seem to be doubling down on their plans to pay the maximum amount possible on contracts, regardless of actual construction costs,” Denver Auditor Timothy O’Brien said. “It’s important to protect every taxpayer dollar to make the city’s limited resources stretch as far as possible.”

A DOTI spokesperson said the department is complying with the audit report recommendations.

“DOTI remains committed to maximizing the value of taxpayer investments in capital construction projects,” the spokesperson said. “As current projects reach various milestones, DOTI will have an opportunity to demonstrate compliance with additional recommendations contained in the audit report.”