An independent legal review released Friday highlights several key missteps by the City of Prince George in handling the construction of a new underground parkade downtown that ended up going millions of dollars overbudget without city council knowing about it.
On Friday, the city released the report to the public. The preliminary budget for the project was $12.6 million, but the final cost came to $34.16 million – $22.46 million for the parkade, $597,138 to connect the parkade to the city's district energy system, and $11.1 million for water and sewer upgrades in the area, and other off-site works.
In his report to the city, lawyer and municipal law expert Sukhbir Manhas outlined a number of occasions when city council could have been informed of the real cost of the project, prior to December 2020, when a report came to city council after a request by Coun. Brian Skakun.
The lack of disclosure to council started in November 2017, when council was briefed during a closed meeting on the proposed partnership agreement with project developer A &T Project Developments.
"The costs of the Parkade under the Arrangement of $12.6 million was made up of a cost of $12,012,054 plus 5% profit," Manhas wrote. "The November 10, 2017, Closed Session Staff Report to Council did not include this breakdown, and the City Council was not aware of it."
While the report to council in 2017 did make it clear that the city would be responsible for the cost of construction and any off-site services or other works, the report "does not contain any explicit cautions relating to the uncertainty around those costs; the report presents a best-case scenario," Manhas wrote.
"As mentioned earlier, the agreement increases the number of underground parking stalls from approximately 266 to approximately 288, with that increase not being expressly brought to the City Council’s attention," he added. "When that increase was included in the agreement, it should have at least been queried whether that increase would result in an increase in cost."
When the agreement was brought to an open city council meeting on Dec. 11, 2017, the staff report to city council made no mention of a potential increase in cost because of the extra underground parking stalls.
City staff were informed by project developer A &T Project Developments on July 4, 2018 that the project would be roughly $7 million over budget, Manhas wrote. Approximately $1.5 million of that increase was attributed to the increase in the number of stalls.
"There is no record of the former City Manager advising Mayor Hall, or any other member of Council, of the contents of this email from the Developer," Manhas wrote. "From our review of the available records, it appears to us that the former City Manager had determined that the escalation in costs would be addressed through a reprioritization of current and future capital projects."
A report to city council in March 2019 continued to use the $12.6 million preliminary budget number, he wrote.
"There is no reference in the March 1, 2019, Staff Report to Council of the estimated $7 million increase in the costs of the Parkade advised by the Developer," which was prepared by general manager of planning and development Ian Wells and reviewed and approved by former city manager Kathleen Soltis.
In May 2019, changes brought forward to council by city administration allowed Soltis to authorize cost overruns up to five per cent of the city's overall operational budget.
"In a November 5, 2019, Staff Report to Finance and Audit Committee, the Director of Finance provided a financial report on significant capital projects, which included a line item for the Parkade indicating that the approved budget for the Parkade was $16,372,186.00, with that amount spent to date," Manhas wrote, adding there was no explanation for the increase and the report was reviewed and approved by Soltis.
Manhas later wrote that the November 2019 financial report "addressed a broad range of projects and the costs escalation for the Parkade was not brought to the Committee's attention, nor was it readily apparent in the report."
"Based on our review of this matter, other than in the November 2019, Staff Report to Finance and Audit Committee, at no time did the former City Manager bring the escalation in the costs of construction of the Parkade to the attention of City Council," Manhas wrote. "This lack of disclosure in relation to such a significant financial matter is troubling..."
LACK OF DUE DILIGENCE
The city went against best practices when it awarded the project from A & T, instead of putting the it out to tender, Manhas wrote.
"In 2016, the City identified the Developer as a possible partner for the Housing Project and entered into a Letter of Intent with the Developer for such purposes. Even after it was clear that the goals of the Letter of Intent could not be achieved, the City continued to work solely with the Developer to move the Housing Project forward," Manhas wrote. "In the circumstances, it would have been prudent for the City to engage the broader development community through a Request for Proposals process to identify a number of possible arrangements for the provision of the Parkade and the Housing Project and the financial models associated with them."
The city did undertake some due diligence while negotiating with A & T Project Developments Inc., Manhas wrote. The city engaged a surveyor and obtained a report providing an initial estimate for the cost of the project.
"With respect to due diligence in relation to the costs of construction of the Parkade, the City did not undertake sufficient due diligence to protect itself," Manhas said. "Reliance on the advice of a quantity surveyor that was based on a preliminary design alone carried with it significant risk. The quantity surveyor had indicated that the costs of construction of the Parkade would be in the range of $14.6 million if undertaken through the City’s usual tender processes. It would have been reasonable for the City to anticipate costs may increase, and the fact that the Developer was indicating costs of $2 million less than the quantity surveyor’s estimate should have been a red flag for the City."
The city also initially estimated the cost of off-site works and providing services at $1 million – less than 10 per cent of the final cost to the city for the work. It is unclear how that estimate was developed, and the city should have done "greater due diligence in determining what work needed to be done and the cost of doing it," Manhas said.
Under the contract negotiated with A & T, approved by city council in 2017, the city assumed responsibility for all the financial risk of the project, he wrote.
"(T)o put it simply, the increased costs incurred by the City for the Parkade directly flow from the decision made by the City very early on to accept all risk associated with the Parkade as the Developer had indicated that the economics of the Housing Project were questionable otherwise. Having made that fundamental decision, the City saddled itself with the additional costs it incurred," Manhas wrote.
The contract "was prepared by the Developer, was not vetted by City staff responsible for procurement matters, and was not brought to the City Council for consideration or approval."
It "obligated the City to pay to the Developer the actual costs of construction of the Parkade, plus 5% on account of the Developer's overhead costs, plus an additional 5% on account of profit" and "did not include any limit on the maximum amount payable by the City to the developer."
"There was no real disincentive to the Developer ensuring that costs remained reasonable," Manhas added later in the report.
Manhas is a lawyer with the Vancouver-based firm of Young Anderson, and an adjunct professor at UBC's Faculty of Law, specializing in municipal law. In addition, he frequently gives lectures on local government law and civil litigation issues at events hosted by the Continuing Legal Education Society, the Local Government Management Association and the Justice Institute of British Columbia.
