Outsourcing Bond Work Is Expensive; Is It Necessary?

The Outsiders

by Roseana Auten



illustration by Jason Stout

When you ask Austin Independent School District (AISD) officials why they've hired an outside firm to manage the $369 million bond program to renovate old schools and build new ones, they always say the same thing: Don't dwell on the fact that we're paying Sverdrup, a St. Louis-based program management firm, $25.6 million to manage our bonds. Notice instead that our non-construction costs, of which bond management is a part, are only 1% higher than the non-construction costs of the two previous bond programs. That kind of logic may seem like an obvious dodge, but it persuaded AISD board president Kathy Rider -- at first. She voted to approve Sverdrup's contract last November. Now she wishes that she could take it back. But because that's not possible, she vows to do her best to kill it. "I'm going to bird-dog it," Rider says. "If I can."

All along, AISD officials have been quick to deflect criticism of the high cost of outside management with their "only 1% more" mantra, but those non-construction figures -- which do show that perhaps AISD is being more frugal with regards to such things as land acquisition fees, permitting, furniture, and fixtures -- hide more pertinent numbers, Rider says. The numbers that alarm her are those that show that about 2% of the previous two bond packages -- one in 1990 and the other in 1983 -- was spent on bond management, whereas this time around, the total management fees are nearly 8% of the total bond package -- that's quadruple the percentage amount from before. (The last two bond packages together amounted to $290 million, $4.7 million of which went to managing the bonds. Of the current $369 million bond program, AISD is spending $25.6 millon on Sverdrup's fees, $1.7 million in direct costs -- including travel and office space -- and $2.7 million for AISD's own staff role, for a grand total of $30 million.)

Rider objects to the way that AISD presented Sverdrup's contract, complaining that the nonconstruction cost percentages were misleading, but ultimately she knows it was her own fault. She says that she did not realize that AISD's percentages didn't tell the whole story about the actual costs of program management (see box). "Do I feel stupid?" she asks. "Yes."

Rider is just one among several critics -- including a prominent education activist and three former AISD staffers -- who are now questioning the district's decision to hire outside help. The two previous bond programs were handled in-house by AISD's construction management staff, at a fraction of the current costs. "Why do we have a middle man?" asks Rider. Little or no additional benefit to AISD students and families will be gained by using an outside firm, critics say, and it could even mean that some projects will be shortchanged.

The question of why to go outside may boil down to one man: AISD superintendent Jim Fox. Critics say that it's Fox's philosophical preferences -- as a businessman enamored with corporate culture -- that has steered AISD to hire one of the largest management firms in the country rather than beefing up the in-house permanent construction staff enough to handle the job.

Fox counters that his appreciation for corporate culture has no bearing on this situation. "I like to have fresh blood," Fox says. "But I like to have a mix" of new and experienced employees.

AISD officials add that, although it costs more initially, using an outside firm helps them get a truer picture of AISD's facility needs, which, in turn, helps them carry out the bond program more equitably across the district. And when the current bond program is fully implemented, AISD won't have a roster of construction department employees it no longer really needs.

It's all part of an ongoing debate about whether AISD is delivering the most smartly executed bond package ever, which is heart-wrenchingly dubbed "Children First," or just spending money like it was going out of style.


Why an Outside Firm?

AISD officials say that whatever decision they made -- whether to go in-house or outside to implement the hard-fought bond program -- would have been criticized, because there are pluses and minuses to both strategies. The pros of staying with an internal group of managers include the fact that many had a history with AISD and prior working relationships with all the various local entities involved in construction and engineering, as well as with the school community. Former parent volunteer Chris Moore, a school activist who worked on the development of the bond package and tirelessly promoted its passage, blames Fox for not placing a higher value on AISD's own in-house staff. "Anybody who has any history with the district is run off," Moore says.

Three former AISD staffers, who all requested that their names be withheld, add that the district needs a cache of experienced people to keep apace with AISD's growth and expansion. Edging them out only wipes out AISD's institutional memory, "and that's one of the major values, already built-in," laments one.

Most agree that's a major drawback of going with an outside firm. Sverdrup's people have no history with AISD, and have much to learn about the community in which they're expected to work; there's a lot of relationship building that needs to happen between them and the local consultants and contractors with whom they team up. And their expertise is not cheap. "Short term, it is more costly," admits A.C. Gonzalez, AISD deputy superintendent for administrative support services.

But to carry out a program as large as AISD's current bond package would have required a "ramping up" of internal staff as well, Gonzalez adds. And in the long run, he argues, that means the district would have been stuck with construction management employees (mostly architects) it would eventually not need, after the bond package was completed, just as they were at the completion of the last two bond packages. By contrast, using external management offers more flexibility in staffing, Gonzalez says. Sverdrup brings its personnel in and takes them out, as the need for different services arises.

However, the three former AISD staffers say it's a fallacy that the district was stuck with a stable of architects at the end of both previous bond issues, and they point out that these employees can be terminated at any time by eliminating their positions -- unlike teachers and principals, who have contracts. (Fox disputes the claim that all in-house bond management staff is employed at-will.)

Gonzalez says that with all the above in mind, AISD decided to use "a blend of strategies," combining a pared-down AISD construction department and Sverdrup's crew to carry out the bond issue -- although Sverdrup is supplying the bulk of the labor. There was some community sentiment that the bond package should be viewed through new eyes, Gonzalez says. On the other hand, he concedes, "some wanted to keep it just the way it was (using AISD staff)."

AISD superintendent Fox defends the decision to hire outside managers. The size of the bond issue makes it too unwieldy for in-house staff, he says, and he reiterates the district's position that hiring an outside firm gives AISD staffing flexibility.


Who Are
These People?

Sverdrup is one of the nation's largest construction consulting and management firms. A committee of key AISD staff selected it (with AISD Board of Trustee approval) from among six other national firms in an RFP (request for proposal) process in June 1996. Lending the project the all-important local angle by teaming up with Austin-based architectural firm BLGY, Sverdrup entered into an initial contract with AISD for $475,000. From then until November 1996, their charge was to develop a program management plan for the entire bond issue; a final contract was contingent upon the quality of that plan.

In November 1996, trustees unanimously agreed to sign a letter of intent extending Sverdrup's services until February 1997. In March, the agreement was extended again until the end of May. This agreement, which preceded a final contract, outlines the fact that Sverdrup was to submit "detailed invoices and receipts" for its travel. AISD could dispute items on the invoices -- whenever that was deemed necessary -- but the agreement did not specify how much time the district had to do that, nor the types of items that could be disputed. It also called for the costs of Sverdrup's office space, furniture, computers, and supplies to be borne by AISD -- items the district continues to pay for now, practically eliminating any overhead for Sverdrup.

How would AISD benefit? One of the main services Sverdrup provided within this four-month period was "functional equity and scope to budget site visits, cost estimates and reports, and related recommendations..." In other words, the company determined whether the $369 million bond package, passed by voters in April 1996, had been tallied up correctly for each campus, and was divvied up fairly so that all children get the same level of facilities.

It is this aspect of the agreement for services that caused Sverdrup employees to travel frequently between their homes out-of-state and Austin, or else reside in apartments and hotels (all at the district's expense), as they combed all of AISD's 94-plus facilities from top to bottom in order to make this determination. The tab for travel and meals alone between June 1996 and June 1997? Over $182,000. Gonzalez readily acknowledges that people may find the expenditure "money not well spent." But, he adds, "What happened was a lot of work that is fairly fundamental work that we're now using for the rest of the [bond] implementation."

For example, the Sverdrup teams determined that about $9 million could be saved on the entire bond program; but on the other hand, the $15 million originally set aside for "functional equity" was woefully inadequate. To achieve true parity of all facilities would require between $80.3 million and $127.5 million, according a Sverdrup report in July. Lacking a spare $65 million (of course) to shift over to functional equity, AISD did what it could, using some of the identified savings and boosting the functional equity budget to $21.9 million.

The result of this is that some schools will get more than they actually asked for when the bond program was put to a vote. One of these is Dobie Middle School in Northeast Austin, a campus whose student body is majority African-American and Hispanic, and had been chronically labeled low-performing until this year. Dobie will get some sorely needed science labs and an expansion of its library, in addition to what it was already getting under the bond program. Dobie principal Patrick Patterson (who assumed that position after the passage of the bonds) says he is delighted, because there are deficiencies in the facility. He says the way Sverdrup went about its work at Dobie "was pretty impressive, actually."

It isn't that an in-house staff couldn't have performed this same sort of survey, says Gonzalez, but having an outsider's point of view lends a degree of objectivity, and allays fears in some communities that they will be shortchanged. "I understood in the past [there] had been concerns and complaints and angst about, `This school [is] getting a better deal than my school,'" says Gonzalez. "We've taken out a lot of that concern, because there's a standard that's been applied throughout the district.

"Now, what is that worth, to get that kind of analysis and that kind of review such that we have more comfort that things are being done in an equitable way?" he poses. "I don't know that you could easily put a price tag on it."

But indeed, a price tag had to be put on it. When the AISD Board of Trustees at last approved a final contract with Sverdrup in June, the total tab for manpower alone was placed at $25.6 million -- nearly 7% of the $369 million bond issue. The contract also allows for another $1.7 million in direct costs, office space, and supplies for Sverdrup employees and their subconsultants, and for travel expenses.


That's Some Service!

But lest the public be misled in the belief that it cost them over $25 million to ensure that one side of town didn't get screwed in the bond issue, consider this: $14.8 million of that fee goes to "basic services," including such things as scheduling the selection of architects and engineers, selecting construction managers, conducting meetings on facilities design, assisting AISD in the bid/award process, and conducting weekly construction manager meetings. That's around 4% of the total bond package -- not out-of-line with what other school districts pay for outside program management.

The remainder -- $10.8 million -- is devoted to the aforementioned functional equity and scope-to-budget analyses, along with a new effort to include historically underutilized businesses, communications, community outreach (or "partnering"), and the establishment of an owner-controlled insurance program. And not all of the fee is going out-of-state, either. Besides BLGY, a number of area businesses have contracted as sub-consultants with Sverdrup, including The Nyfeler Organization, Estilo Communications, The Barr Company, Adisa Communications, and Duke C. Garwood Architects.

In addition to the high cost of outside program management, there is growing frustration in the community about the apparent slow progress of construction, but AISD's Gonzalez says that the careful approach will avert big trouble in the future; moreover, he says, it was the board's desire to plan slow and steady before building. "It's kind of `pick your poison,' because everybody's going to be able to see something negative in any approach," says Gonzalez. "And some people will say, `Why can't you just spend that money on building schools?' Unless you manage those expenditures correctly, you will waste that money -- and more -- on problems that will be created through lack of good supervision."

A well-designed plan for implementation, a promise of parity of facilities, minority and women-owned business participation -- what more could the residents of AISD ask for?

Well, they could -- and did -- ask for the same things in the past. And they got them -- for far less, charge critics. Under the 1983 bond package of $210 million, 12 new schools were built and over 80 facilities were renovated. According to documents from the AISD construction management department, the entire project was managed in-house for about $3.7 million. Under the 1990 bond package of $80 million, six new schools were built and 24 facilities were renovated; that project was managed for $1.6 million. (See Box.)


Did We Vote For This?

AISD's defense of the current strategy -- that it's pay now or pay later when it comes to bond management -- is bunk, say the three former AISD staffers. What's more, the district hasn't learned anything it didn't already know as a result of spending more, they say. The scope-to-budget survey, the much-vaunted functional equity analysis, and community partnering -- all were part of their jobs when they worked for AISD, they claim. Sverdrup "haven't reinvented the wheel," says one. Time and money is a-wasting, and not one new school is open yet, nearly 18 months after the passage of the bonds. "That $25 million should be spent on bricks and mortar, and instead it's going to feel-good stuff," complains another. "I don't think that's what the public voted on."

No, it isn't what the public voted on, agrees school activist Moore. "There wasn't $25 million in it for an outside person," she says. The bond advisory committee (on which Moore served) only accounted for in-house management of the bond program, at a cost between $5 million and $8 million, she says. Another committee member, Max Woodfin, concurs, saying, "The assumption was the management would take place in-house, and that was what we based our cost projections on." The committee chair, Mel Waxler, says he remembers "considerable" discussion about outsourcing versus in-house management, but says the committee did not recommend either strategy to the board of trustees.

Like the group of former employees, Moore contends that nothing new has been gleaned from recent months of surveying, studying, and planning, and precious time has been lost. "Tell me what they're doing differently than what we planned," she snaps. "That bond package should have hit the ground running." So-called surprises of inequity like the one at Dobie Middle School are no revelation to her. "We were told they didn't need much. We said, `Yes, they do,'" she says. Moore says she's angry about the way things are going now after she worked to ensure the bonds' passage, and feels "totally used" by AISD Superintendent Jim Fox. "Don't ask me to support another bond package, because this one has been a disaster," she says.

"Disaster" may be a strong word for it, but there are signs of strain afoot. At the September 22 meeting of the AISD Board of Trustees, board members learned that construction budgets for the two new elementary schools on which the district has already broken ground are $1.2 million short due to redesign expenses. This calls into question whether that $9 million in bond program "savings" will still exist by the time the entire program is completed by 2001 -- and whether other projects will face the same crisis. "I see a large sum of money being devoted to this and what we're going to end up with is less than what we intended," predicts one of the ex-AISD staffers. "As a taxpayer, I resent it."

If critics are right and AISD is engaging in an expensive exercise in creative management that won't amount to much, that still leaves one question: Why? What's the motivation? Critics point to one man -- Jim Fox -- and his love of imposing a corporate culture on AISD. They say he doesn't like to work with a staff he didn't hire -- and can't control. "It's ego. Power. Being able to brag at conventions. Boosts his arrogance," says one of the former AISD employees.

If the critics are wrong, and AISD is molding a program that will astonish everyone long after Fox is gone from AISD, then the discussion about how it came to be will cease. The proof, as the proverb goes, will be in the pudding. But we may not truly know until we're scraping the plate whether the district actually succeeded in putting "children first."