San Francisco International Airpork

How the SFO construction program went $1 billion over budget. Yes, billion. With a B.

By Peter Byrne

published: March 22, 2000

In the fall of 1997, a year after construction had started on a new international terminal at San Francisco International Airport, airport officials decided they had to change plans. Highly complex architectural drawings would need to be rethought and redrawn. Engineers would have to reroute electrical, ventilation, and plumbing systems, some of which had already been installed. Contractors would be required to remove walls and reconstruct steel framing, as they struggled to adapt a design reached through years of painfully precise planning to accommodate a new priority. United Airlines wanted a lounge for its first-class passengers.

Through last year, airport contractors scrambled to keep up with a seemingly constant stream of lounge-related requests from United. The logistical havoc that resulted has delayed completion of the international terminal and added more than $2 million to its costs.

In the realm of SFO construction projects, however, a $2 million overrun is pocket change lost in the couch cushions.

Although SFO officials have repeatedly painted rosy pictures when discussing a massive airport construction program that includes the new international terminal, government documents show that the project — known, in SFO-speak, as "the master plan" — is $1 billion over budget and years behind schedule. The cost overruns and delays have been caused by a variety of factors, some unavoidable.

But a review of airport budgets, contracts, audits, and other internal documents shows that much of the delay and overspending is attributable to what can only be described as bad management. Large sections of the terminal were redesigned — and even rebuilt — after work had begun. Construction contract after construction contract was gradually increased, through change orders, until the cost of the international terminal building leaped from $495 million to $805 million. And the management structure for the SFO project appears to be teeming with conflicts of interest, as construction managers supervise themselves and set policy for a project where the bill for construction management — not construction itself, but the overseeing of construction contractors — has grown by more than 150 percent, and now tops $196 million.

During the last year, when news media have scrutinized the SFO construction program, they have focused almost entirely on an FBI investigation of apparent irregularities in the minority components of airport construction contracts. Depending on the outcome of the federal probe, these seeming irregularities, which involve firms whose owners have been associates of Mayor Willie Brown, could have serious legal and political ramifications. But SFO's piece of the city's affirmative action contracting scandal (such as it is) centers on two relatively small contractors, and a few million dollars in contracts.

The total bill for the airport master plan, on the other hand, is heading toward $3 billion, up from an original budget of $1.9 billion. Even with $1 billion in cost overruns, the new international terminal complex will not be fully operational for its announced opening bash this fall -- an opening that has been delayed by more than a year -- in part because the concrete aprons that let airplanes dock at the terminal's new gates will not be ready.

And yes, another VIP passenger lounge -- a lounge not foreseen in the original terminal plans -- is also in the works.

In 1991, Jason Yuen retired, after working as a city architect at SFO for 31 years. Flying through the revolving door, he immediately returned to SFO as a consultant. He now works out of an airport office building that is cubbyholed with the offices of private consultants and city engineers.

Yuen is no publicity-seeker. In a recent interview, he mentioned, in a joking way, that as a member of the Kiwanis Club, every time his name appears in print he has to pay the club $100. Still, an airport public relations officer says the relatively unknown Yuen is the "genius" behind the SFO master plan, and it is clear he has had remarkable influence over its conception and progress. And he certainly seems to enjoy building airport terminals. He's the man who is generally credited with building SFO's current international terminal, which opened in 1983 and is now obsolete. And yet another international terminal will be needed in about 10 years, says Yuen, as the Bay Area outgrows the new one now being built.

Yuen chairs the Master Plan Advisory Board, a 10-member group appointed by airport Executive Director John Martin. Besides Yuen, the board includes five of Martin's deputy directors, an official from the Airline Liaison Office, which advocates for the collective interests of 68 airlines, and representatives of two of the construction management firms hired to oversee the master plan construction. The board's official role is to advise Martin and the Airport Commission.

As far as the master plan goes, however, the advisory board acts as a kind of shadow Airport Commission. The advisors make both broad policy suggestions and nuts-and-bolts recommendations to the commission. The commission has never disagreed with a major advisory board recommendation, Yuen says.

But under the San Francisco city charter, the five citizens serving on the Airport Commission, who are appointed by the mayor and approved by the Board of Supervisors, control the airport's $350 million annual operating budget and billions of dollars more in capital improvement construction. In policy terms, then, the Airport Commission is ultimately responsible for whatever goes on at SFO.

And whatever goes up.

According to the airport's internal cost report for November 1999, the total budget forecast for the airport master plan, which started out at $1.9 billion, now approaches $2.8 billion. Public records show that the budget could soon reach the $3 billion mark. Additional financing costs, largely attributable to construction delays, bring the total estimated cost of the plan to about $3.3 billion, much of which passengers will pay off through concession purchases and a ticket tax the airport appears ready to institute.

These astonishing cost increases happened gradually, and came largely in the form of change orders.

When construction contractors bid for public works jobs, they represent, generally, that they can complete a specific project for a particular amount of money. When unforeseen events, or mistakes, or changes in design increase or decrease the cost of a construction project, that difference in cost is typically documented through an alteration of the original contract that is known as a "change order." These orders are negotiated among representatives of the "owner" of the project -- in this case the city government -- and the contractor working on the project. Experts say that change orders on a public works job typically run between 10 and 20 percent. The SFO master plan's growing bill for architecture, construction, and consulting, however, is now about 50 percent above original contract amounts.

Yuen says the endless rains of El Niño in 1998 and the decision to extend BART rail service to the airport added to the cost of the master plan. But airport records show that the damage caused by unexpected El Niño storms amounted to $30 million and 40 workdays lost. Bringing BART into the new terminal added about $113 million to the master plan's costs, public documents show. That leaves about $730 million in cost escalation that cannot be attributed to God or BART.

Airport records show the overruns are the result of change orders that have both increased construction costs and delayed completion of the project; in an expensive Catch-22, the delays have exacted additional costs related to financing.

The master plan is being funded by revenue bonds. The bonds will be paid off over 30 years with rent from concessionaires, such as restaurants, bookstores, and car rental companies. Every time construction costs rise, so does the amount the airport must borrow. To pay off the additional debt, the airport has decided to include more revenue-generating concession space in the new international terminal. The extra space costs money, which means more borrowing ... on and on, in a spiral of cost escalation. As delays keep pushing the opening date into the future, the airport has been forced to borrow money to meet interest payments due before any revenue is made.

And delay has afflicted the project from its beginning.

In September 1995, Dillingham Construction N.A. Inc. of Pleasanton bid $20 million to gain a contract to drive the piles that anchor the foundation of the international terminal building. Because the airport sits on top of bay fill, which is prone to liquefy in an earthquake, it is necessary to pound concrete piles hundreds of feet into the ground, until they strike bedrock or penetrate deeply enough to support thousands of tons of weight. Bundles of driven piles are capped with concrete rafts. Steel beams are laid across the caps to support the floor of the building.

Change orders show that some piles for the new international terminal were driven too far into the ground; other piles were too short to go the needed distance. Bob Opie, a Dillingham engineer, says these problems stemmed from difficulties with determining precisely where bedrock lay under the terminal. Geotechnical studies done by the airport proved to be insufficient guides, he says, and it became necessary to drive many piles on a hit-or-miss basis. Change orders added about $10 million to Dillingham's price. Because of problems with driving the piles accurately, airport staffers say, the foundations had to be redesigned as they were being constructed.

Taken together, these foundation problems caused a five-month delay, right off the starting block.

John Martin's written replies to a series of questions submitted by SF Weekly and an interview with Bruce Swanson, project manager for SFO Associates, the lead construction management firm, make it clear that changes related to airline requests and to concession areas have been the main factors in driving up the cost of the international terminal. In fact, said Swanson, much of the steel structure was already in place when the airport decided to expand the concessions to generate more revenue. Due to pile-driving and foundation problems and adding lounges and concession areas, just about every bit of the terminal has had to be redesigned or rebuilt, Swanson said.

The international terminal and the two long boarding concourses that flank it comprise the largest projects in the master plan. When the first big construction contracts in the master plan were let in 1996, the terminal/boarding area complex was scheduled for operation in early summer 1999. Martin claims the terminal building will be ready to open in late September 2000, but SFO's internal reports indicate that full service -- including a light rail system that would connect the new terminal with others -- will have to wait up to two more years. And the delay in completing the new terminal has been accompanied by staggering cost increases.

The biggest construction contracts for the master plan -- including those for the international terminal building, a boarding area, parking garages, the light rail tracks and stations, and the airport's BART station -- are held by a joint venture called the Tutor-Saliba Corp., Perini Corp., and Buckley & Company Inc. (Richard Blum, husband of U.S. Sen. Dianne Feinstein, is a major stockholder in the Perini Corp. Blum and the Perini Corp. also are partners with the Tutor-Saliba Corp. on the construction of the Los Angeles subway, which is also over budget and late.) Overall, Tutor-Saliba holds some $880 million in SFO construction contracts.

And overall, Tutor-Saliba has gained approval of $250 million in change orders for its airport contracts.

Controversy over change orders is nothing new for the Tutor-Saliba Corp. During construction of the chronically delayed Los Angeles subway system, the company racked up more than $130 million in change orders. The late mayor of Los Angeles, Tom Bradley, publicly labeled Ron Tutor, the owner of the Tutor-Saliba Corp., a "change order artist," suggesting he submitted an artificially low bid to get the job and then made up the difference with change orders.

The Tutor-Saliba/Perini/Buckley venture started to build the SFO international terminal in October 1996. The original $248 million contract for the building shell now is forecast to have grown by $240 million, or nearly 100 percent, by completion. Some of this growth was anticipated, but about $175 million of these change orders relates to costs incurred for delays, redesigns, "shortcomings in construction documents," and changes requested by the airlines that will use the new terminal.

An $8 million contract modification submitted in January 1998 by Tutor-Saliba includes the following unusual or unexplained change orders:

" In mid-1999, Tutor-Saliba charged nearly $5 million for fixing two concrete floors that were not poured level. In a change order, SFO Associates said the mistake may have happened because measurements were "inexact." They also expressed concern about the design of the structural steel beams below the slabs. The airport says that it is investigating who is at fault for the floor problem.

" Tutor-Saliba charged $647,000 to fill a series of roof-support column frames with concrete. According to an airport spokesperson, "Either the architects or engineers forgot to indicate that the [wood] column frames needed to be filled with concrete." Apparently, the original plans called for constructing empty frames. It is odd that such a large oversight could make it past teams of architects, engineers, construction managers, and the contractors who methodically scrutinize plans to calculate their bids. In an interview last week, Ron Tutor said that it is not the contractor's responsibility to identify errors in the bid specifications. No one has been penalized for the oversight.

" Tens of thousands of dollars were spent to rebuild steel and concrete openings for escalators. The slots for the escalators were built before the airport decided what size moving stairs would be bought. A similar situation occurred when the airport spent $1 million to retrofit steel beams that support the terminal floor: The beams were set in place before the size of pipes fitting under the floor were known.

And that's just a few of the more than 400 change orders Tutor-Saliba has submitted for its airport work. Tracking those change orders, however, is no easy task. In response to an SF Weekly public records request, an airport lawyer said that many change orders could not be found -- even though the airport has paid construction managers several million dollars for "document control" related to the master plan.

The change orders the airport did make public, however, raise numerous questions about oversight of costs at the airport. In August 1997, Tutor-Saliba charged the airport $240,000 for a furnished triple-wide office trailer for use by SFO Associates, the construction management firm that oversees Tutor-Saliba's work. A representative of GE Capital Modular Space, which manufactures construction office trailers in the Bay Area, says his firm charges $97,200 for a similar brand-new trailer, and rents such models for $1,731 a month.

As part of its contract to build the terminal, Tutor-Saliba also billed the airport $330,000 to build indoor office space for the construction management consultants. It even billed the airport $1,000 a month for cleaning these offices.

In October 1998, a joint venture known as Myers/Condon Johnson, which is building new freeway ramps to serve the airport, received a change order listing more than $2 million for "additional unidentified work." When asked about this change order, airport staffers said that use of the word "'unidentified' may be misleading. It is used in the context of scope that could not be fully defined during design and is therefore 'unidentified' on the contract documents." In other words, the airport acknowledged, it signed a contract that included provisions requiring the airport to pay for undefined amounts and types of work.

Perhaps the most troubling change orders are those relating to many millions of dollars spent to revise the positions of structural, mechanical, electrical, and plumbing systems that were already in place at the new terminal. As structural steel beams were cut and rewelded to fix mistakes, or to expand concession space, or to accommodate special changes requested by the airlines, the placement of environmental support sys-tems behind ceilings and walls was shifted, adding tremendous cost to the project. In effect, significant portions of the terminal were built twice.

And then there is the mother of all change orders: the change order to write change orders. Tutor-Saliba billed $428,000 to pay for staff to write and process the blizzard of change orders Tutor-Saliba eventually submitted. Tutor says that he "does not get rich off of change orders," which, he contends, include only a 5 percent profit margin for his firm. But he declined to reveal the amount his company will profit from its SFO contracts.

One of the bigger wellsprings of SFO change orders is requests from the airlines that use the airport's terminals, led by United Airlines, which has one of its hubs at SFO. The airlines have a contract with the airport that limits the amount of construction costs that can be passed through to them. Through its position on the airport advisory committee, the Airline Liaison Office, which represents the airlines' interests, has considerable influence over the master plan. During the international terminal project, this combination of contractual limits and administrative influence has led to a situation in which millions of dollars of design and construction work was apparently done more than once.

Long after the construction contracts for the international terminal complex were let, the airlines, led by United, decided they wanted several exclusive lounges for use by first-class passengers. The Airport Commission approved these dramatic, costly changes, which include a $2.2 million lounge added to one boarding wing of the terminal. A similar lounge is in the works for the terminal's other boarding wing. All in all, there will be 14 lounges and clubhouses scattered about the new terminal.

Neither United Airlines nor SFO's Airline Liaison Office returned telephone calls seeking comment for this article. But, according to change order documents, inserting United Airlines' lounge required structural changes to the building's steel frames, including the addition of elevators and escalators, the removal of walls, and the relocation of electrical conduits, water and sewage pipes, ventilation ducts, and fire control systems. It took years to bend the buildings around the airlines' new clubhouses. Overall, the airport attributes $91 million in change orders to direct requests from the airlines and concessionaires.

There are other seemingly less than vital odd items larded into master plan change orders approved by the Airport Commission. When travelers are not eating fast food, or buying liquor in duty-free shops, SFO provides a scattering of mini-art museums for viewing pleasure. Over the years, these temporary exhibits have ranged in content from ancient boating artifacts to a retrospective of post-World War II children's lunch pail art. Now, however, the new international terminal will be home to a permanent, $4 million Aviation Archive, Library, and Museum, housed in a 6,000-square-foot replica of SFO's first terminal, built in 1937.

The archive will include rare books, purchased for $200,000 from a collector in New York City, that focus on airplanes. These books are not part of the spending on art that must, by law, be included in San Francisco's public works projects; they were added to the master plan in March 1999, even as the budget was closing in on being $1 billion overdrawn.

Every SFO change order was approved first by the construction managers overseeing the master plan, then by the advisory board, and finally by the Airport Commission. Any of the changes could have been stopped at any stage of the approval process. Instead of denying the airlines what they wanted, or holding architects and contractors responsible for what appear to be mistakes or substandard work, the commission generally decided to go deeper into debt to fund the cascades of change orders. And the change orders led to delays.

For instance, the two long concourses connected to the cavernous international terminal -- boarding areas A and G -- are more than a year behind schedule. And the concrete aprons surrounding them -- the airplane parking lots -- will not be fully ready for airplane traffic until after the terminal's recently revised opening date. One apron will not be ready until December 2000, two months beyond the opening. The other is on hold until December 2001, 14 months past the opening.

SFO Associates' Bruce Swanson says that most of the gates will be in operation by September, if all goes as planned.

But it seems that very little goes as planned at SFO. During construction, the costs of boarding area G rose from $64 million to $91 million, a 68 percent increase. Some of this additional cost was caused by adding extra concession space, which is needed to pay for such added items as the airlines' new first-class lounges.

VIP lounges aside, the airport has fined Tutor-Saliba $1.5 million for delays in building boarding area G. But this fine is the exception, not the rule. An airport spokesperson says this is the only penalty charged to date against a master plan contractor, architect, or engineer.

The San Francisco airport has hired 12 construction management partnerships, composed of 25 firms in various couplings, to oversee the airport master plan contracts. As agents of the airport, these firms are responsible for keeping the master plan on budget and on time. The leading construction manager is SFO Associates, a joint venture formed specifically for the SFO job. Its partners include Pasadena-based Parsons Infrastructure and Technology Group Inc.; AGS Inc., consulting engineers in San Francisco; EPC Consultants Inc., San Francisco-based office engineers with several city contracts; and Business Development Inc. of San Francisco, which specializes in hiring out its "odor control specialist" for city sewer contracts.

Jason Yuen and the airport advisory board keep tabs on the construction managers and make recommendations to the Airport Commission concerning those managers' fees. One member of the advisory board is Robert Luster, president of Luster CM Inc. of San Francisco. His firm is a partner in four of the interlocking private joint ventures that have contracts to manage elements of the master plan. Another member, Loren Smith, is a vice president of Parsons Infrastructure and Technology Group Inc.

As members of the advisory board, Luster and Smith are in charge of monitoring the quality of their own firms' work. They sign off on budget overruns, including fee increases for their own firms. Yuen says this is not a conflict of interest for the two construction managers. Luster, says Yuen, is so "high up" that he does not get involved in the daily business of his company, and can be objective and disinterested when voting on issues that affect it.

Neither Luster nor Smith returned telephone calls from SF Weekly. A Luster representative said that tying construction management fees to budget overruns is "an anomaly of the system."

The upper limit that construction managers overseeing SFO master-plan projects can charge is set as a percentage of construction costs. Therefore, every delay and change order that increases construction costs means that the total amount construction managers can bill also increases. As the master plan budgets have expanded, the Airport Commission has not punished the construction managers; rather, they have apparently been rewarded for failing to control costs. The commission has voted to nearly double the management consortiums' potential fee, from 5 percent to 9.2 percent of construction costs, bringing the projected fee to more than $196 million. So far, construction management fees are 150 percent above the $80 million originally budgeted.

The system in which construction managers and contractors supervise themselves, and gain with every cost overrun, has raised questions both large and small.

In January 1997, an airport auditor named George Suter flamed at SFO Associates, refusing to approve requests for reimbursement for valet parking tips and laundry for consultants who were already billing the airport $1,500 a day. He objected to "similar small sundry amounts for meals, paper towels, bottled water and the like." He axed multithousand-dollar requests for lunches and dinners submitted without copies of the restaurant bills. He killed credit card purchases, and a $2,612 bill for improper car rentals. He laughed at $22.25 for "donuts for meeting."

Regarding what he seemed to view as gouging, Suter wrote: "The amounts become incongruous in the context of the millions the airport is spending, and must be as embarrassing to submit as they are to turn down."

Swanson says he remembers Suter's rejection of SFO Associates invoices, but he cannot recall their ultimate fate.

Other internal audits reveal construction managers double-billing for office supplies, and seeking $125 an hour as reimbursement for copy machine clerks. One of the construction management joint ventures was criticized for change-ordering a $335,000 "procedures manual" that had not been authorized. The auditors also found that some construction manager time sheets contained $100,000 errors -- in favor of the managers.

The extra costs of the airport master plan -- now at about $1 billion and rising -- will be passed on to passengers through concession prices and a new "passenger facility charge" that, according to airport staff and public records, the Airport Commission is likely to use as a way to pay off its growing debt load. This tax -- ranging from $4.50 to $18 per round trip -- would be added to airplane ticket prices and generate up to $360 million per year, according to airport spokesperson Ron Wilson. In contrast, the commission has set the airplane landing fees -- paid by the airlines -- at one of the lowest rates in the country.

John Martin, the airport's executive director, has repeatedly and publicly insisted that the master plan is on time; public records show it is years behind the construction schedules as originally contracted. Martin's claim that the original master plan budget is not a billion dollars in the red relies upon redefinitions of the budget itself. In 1996, after the dominant construction contracts had been bid and signed, the airport suddenly revised the official budget from $1.9 billion to a $2.4 billion "baseline," a move that does not eliminate a half-billion-dollar overrun of the original budget. Since then, the airport has siphoned hundreds of millions of dollars from capital improvement funds originally intended for other uses into the master plan project. In reality, the master plan expenses long ago used up the revenue bond funds that were to fully finance it.

The president of the Airport Commission, Henry E. Berman, referred all questions about master plan costs and schedules to Martin. The commission's vice president, Larry Mazzola, refused to comment on cost overruns and delays.

But public documents make it clear that, to cover the $1 billion overrun on master plan projects, what was originally designed as an aesthetically grand glass-and-steel terminal building will be chock-full of concession stands. In the words of Rod Stewart -- not the rock star, but the retired air traffic controller who advises Foster City on airport matters -- "John Martin isn't building an airport. He's building a giant shopping mall."

Martin recently authorized payment of $150,000 to a party production company to start planning a "bash" that will celebrate the September opening of the most cost-intensive international terminal in North America.

The dinner party will be open not to the general public, but to people who worked on the master plan and a select group of VIPs. The party's price tag?

One million dollars.

Before change orders, of course.