On July 15, 2011, the USDOT’s Office of Inspector General (DOT-OIG) issued a final report on the Federal Highway Administration’s (FHWA) oversight of federal-aid and Recovery Act projects administered by Local Public Agencies (LPA).  You can download a copy of the report here [pdf].

The DOT-OIG initiated the audit because the FHWA previously acknowledged that LPAs were an internal control weakness, particularly in light of the fact that LPAs received up to $8 billion in Recovery Act highway funds.  The purpose of the audit was to assess: (1) the extent of LPA compliance with Federal requirements; and (2) the effectiveness of FHWA’s actions in ensuring that states have adequate LPA oversight programs. 

The DOT-OIG found at least one instance of noncompliance with Federal requirements in 88% of the LPA projects reviewed in four states.  Amazingly, identified were $5 million in unsupported costs.  According to the report, the most prevalent shortcomings were related to construction management requirements. 

Finally, the report made four recommendations for improving FHWA oversight.  FHWA officials concurred with all of them:

  1. Implement a policy establishing uniform procedures and criteria for Division Offices to use when assessing the ability of states to ensure LPAs meet Federal requirements. The policy should also require FHWA Headquarters to validate the accuracy of Division Office assessments.
  2. Develop a Headquarters process to assess the effectiveness of Division and state LPA corrective action plans to ensure deficiencies are promptly resolved. The process should specify the planned actions, milestones, level of government responsible for implementation, and ensure actions are completed as planned and on schedule.
  3. Develop a Division Office-based plan that will increase state oversight in the seven project activities in which we identified a high level of noncompliance with Federal requirements (change orders and claims, project bidding, utility agreements and reimbursements, consultant selections and billings, construction pay quantities and progress payments, project reporting and tracking, and quality assurance procedures).
  4. Assess the project transactions related to the $5 million in unsupported project costs we identified in California and Texas and review similar transactions within these projects for unsupported costs. The assessment would include developing an action plan to collect all unsupported costs or identify FHWA’s rationale for acceptance of these costs.

FHWA has 30 days to respond with its plan for addressing these items.