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Faulty towers: How will Medford pay $6 million in cost overruns for police and fire stations?

A contentious bidding process that started in 2013 was supposed to hold costs down and develop a “guaranteed maximum price” for new police headquarters and three fire stations in Medford.

Instead, the city is looking at a $6 million cost overrun and may have to borrow money, delay the projects or scale them back.

“I was stunned,” Councilor Dick Gordon said, after returning from vacation Monday and hearing the news.

The City Council will discuss its options Thursday at both the noon and 6:15 p.m. meetings at City Hall, 411 W. Eighth St., Medford. Councilors are looking at $5 million more than estimated for both the police and fire stations, plus another $900,000 for a parking garage facade.

The contractor says one of the main reasons for the extra $5 million is that the bids from subcontractors have come in far higher than anyone expected — 30 percent higher, according to the city.

During the design phase of the projects, the council received assurances that a collaborative arrangement with the architect, the contractor and the city would help contain costs and achieve a guaranteed maximum price. However, the city has relied on cost estimates for the past three years and only recently received firm bids on the projects, even though the police station construction is well under way.

In 2013, the city wanted different architects and construction companies for the police and fire stations. Instead, despite objections by some local contractors and other issues, the city settled on one architect, Ogden Roemer Wilkerson, and one construction company, Adroit Construction of Ashland, for all of the projects.

Last year, the council received assurances from city staff, the contractor and the architect that adding another 5,000 square feet to the police station would not push the cost beyond previous estimates.

“They said we would still come within budget,” Gordon said. “I think we got sold a bill of goods.”

During various council meetings, Gordon and other councilors received continued assurances the projects would live up to the mantra of “on time and under budget.”

A review of city documents shows the “guaranteed maximum price” for the police station was given as $23.75 million, about 8 percent over the $22 million in bond proceeds available to pay for the project. That leaves about a $1.7 million shortfall — not including an extra $900,000 for a police parking garage facade.

The police station has grown considerably since 2012, when the police department was looking at a 35,000-square-foot facility.

In March 2013, the police station size was increased to 42,423 square feet and a 78,050-square-foot garage was added to the project. By July 2014, the police station had swollen to 47,292 square feet and the garage to 90,610 square feet.

The fire stations' “guaranteed maximum price” now is $14 million, about 32 percent over bond proceeds of $10.6 million, creating an almost $3.4 million shortfall.

The type of bidding process used by the city is known in the industry as CMGC, or construction manager/general contractor. The contractor works on the project from the initial design phase all the way through to completion under this type of contract.

Many cities and counties have used it successfully, but the Oregon Department of Transportation typically designs the project then sends it out to bid.

“We normally don’t use the CMGC method,” said Gary Leaming, ODOT spokesman. “We use the low-bid method.”

The only instance he can recall recently that ODOT used CMGC was on the Willamette River bridge on Interstate 5 in Eugene. He said having the general contractor on board at an early stage helps get the project done faster and helps with cost control.

“It’s good for unique and complex projects,” he said.

Tom Walker with Adroit Construction said his firm has seen other projects increase in cost recently.

Walker said Adroit had seen a continued rise in subcontractor bids this year, but he said the price increases in the past few months have been on the extreme end.

“It certainly is an instance of the subcontractor market being hot,” he said. “This year was an extreme anomaly.”

Prices go up during the summer, and typically settle down in the winter, Walker said.

If the city chooses to wait to build the projects, market conditions could improve or deteriorate.

“That is certainly a gamble that the city could be willing to take,” he said.

Other building contracts over the past 10 years have successfully used the type of bidding process that Medford has undertaken, Walker said.

However, he said the idea of a “guaranteed maximum price” has been misunderstood. Walker said the guaranteed price comes only at the end of the design phase of a project, just before construction.

Even though Adroit is the general contractor, it still has to bid for some pieces of the job. In the case of the police and fire stations, Adroit has bid on the concrete and footing work, he said.

He said many people misunderstand the CMGC process and assume it doesn’t go out to competitive bid. In this case, each aspect of the project is bid out before construction begins, he said.

If the city isn’t willing to increase funding toward the project, then it could change the appearance, the function or the type of features inside the building to cut costs, Walker said.

“It comes down to tough decisions on the part of the owner,” he said.

Russ Batzer of Batzer Construction said he has noticed a scarcity of subcontractors on some jobs, saying he had a difficult time finding drywallers for a project in Redding, Calif.

“You’re going to pay a little more when you have scarcity,” he said.

Material prices have not increased significantly, but labor has gone up, Batzer said.

City Councilor Kevin Stine, who wasn’t on the council when it agreed to build the police and fire stations, said he thought the whole point of this bidding process was to prevent cost overruns.

Stine said the city should drop the police parking garage facade. “I don’t care about the facade,” he said. “It’s $900,000 to doll it up.”

Stine said he’s also not sold on the idea of borrowing $5 million because the city will have to take revenues from somewhere to repay it.

He said the council has continued to hear repeated references to a guaranteed maximum price.

“I guess it’s guaranteed after they’re $6 million over budget,” he said.

Reach reporter Damian Mann at 541-776-4476 or dmann@mailtribune.com. Follow on Twitter at @reporterdm.

Medford police and fire station overruns by Mail Tribune

The steel structure for the new Medford police headquarters at 10th and Holly streets was erected before the total cost of the project was known. Mail Tribune / Bob Pennell