Central Subway estimated to be 15 percent over $1.6 billion budget

SFMTA board approves $48.8 million package of 671 change orders, with more to come

The San Francisco Municipal Transportation Agency will need to find as much as $130 million more to complete construction on the troubled Central Subway project, money it doesn’t have to spare amidst an ongoing budget crisis that threatens to cripple Muni’s workforce and service long-term.

An ambitious project that seeks to extend the underground Muni Metro T Third Line from the Fourth Street Caltrain Station to Chinatown and provide a direct link between downtown and some of The City’s most congested areas, the Central Subway has become a runaway train with a final tally estimated to be roughly 15 percent over its $1.6 billion budget.

SFMTA Director of Sustainable Streets Tom Maguire delivered the estimated final cost overrun to the Board of Directors Tuesday, marking one of the few times transit agency staff have provided such a number in front of the public in recent years.

“There was not nearly enough public transparency and board transparency with how the project was going, and that’s a mistake we can fix right now,” SFMTA Board member Steve Heminger said of previous discussions.

Changes to the contract with Tutor Perini Corporation are largely to blame for the project going over budget, as evidenced by the omnibus package of 671 such orders approved by the board Wednesday. The change orders totaled $48.8 million in expenses footed by SFMTA, but the first payment of $18.9 million went out in February. The balance was negotiated over the course of the last five months.

During construction of major capital projects, it’s common for the contractor to encounter unexpected conditions that require changes to the work order itself, whether that’s unforeseen site conditions or the realization that certain design details won’t function as well as planned, for example.

“A project of this complexity is always going to be a little bit of a living being,” Maguire said.

When these scenarios arise in the field, SFMTA typically allows the contractor, in this case Tutor Perini, to complete the work and send the agency the bill after the fact. SFMTA then assesses the invoice retroactively, and, if there’s discrepancy between the two, negotiates a final price.

Director Sharon Lai calls this practice “back-billing,” and it can take months, or even years to actually reach agreement on what the agency owes the contractor and see the fiscal impact on the project’s budget.

The group of change orders approved Wednesday applied to work from Nov. 2013 through Sept. 2019.

“This is not right. It’s not a secret. This is not how business should be done,” Lai said. “We’re basically forced to pay for work that they actually did, but it just eliminates our process and our ability to make financial decisions in a responsible way.”

Staff is currently working on a second and third omnibus package for board approval.

The final cost of the second is currently being negotiated, but it includes a collection of 350 change orders issued from October 2019 to October 2020. The third will include the remainder of change orders issued between November 2020 and the completion of the project.

“I have a fundamental issue with how these contracts and change orders happen,” Lai said. “This is not a practice that we should continue to have moving forward.”

SFMTA leadership and board members agreed much could and should have been done differently with the Central Subway, inclusive of but certainly not limited to contract change orders. Maguire said staff should have brought change orders to the board more regularly, and advocated for increased transparency moving forward.

Staff did take a moment to point out, though, that the project was hamstrung from the start.

One reason they say it was doomed? A 4 percent contingency, meager by industry standards.

Capital project budgets include a built-in cushion for the type of unanticipated expenses dealt with by the contract change orders. Essentially backup funds, contingency line items are there to ensure an agency such as the SFMTA can avoid the need for extra funding should something go awry.

Maguire said if the project had something closer to a 15 or 20 percent contingency in its budget, which is recommended by the Federal Transit Administration, it’s likely the Central Subway would actually be coming in under budget.

“That’s something I would definitely do differently next time,” he said.

The FTA has pledged $984.4 million, the bulk of the project budget, along with financial support from a number of other state and local revenue sources.

But the funding agreement with the FTA precludes SFMTA from going back to the federal agency for help crossing the finish line, which means it must fill the funding hole on its own.

Currently, construction on the Central Subway is expected to be complete by March 2021. Testing will follow, and it’s expected to be open to riders in spring of the following year, nearly four years late.

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