Santa Margarita Water District Paid Dearly for Contract Change : Management: Termination of a contract awarded through competitive bidding resulted in $3.6 million in cost overruns and $2.4 million in a court judgment.

The general manager of the Santa Margarita Water District terminated a multimillion-dollar construction contract that had been awarded through competitive bidding and recommended it be given to a rival firm later shown to have overcharged the district more than $1 million.

The action by General Manager Walter W. (Bill) Knitz, whose acceptance of gifts from contractors and lavish expense accounts were defended with statements that praised him for being a highly efficient manager, ultimately resulted in $3.6 million in cost overruns--including the overcharges--and a $2.4-million judgment the district lost in a court fight with the first contractor.

Thomas A. Pistone, who represented the water district in its unsuccessful suit to recover additional costs associated with bringing in a new contractor, said that there was nothing improper about the change in contractors and that all overcharges were inadvertent and eventually recovered. He disputed the contention that the district was overcharged by $1 million.

Although the district had hired an outside firm to oversee the South County Pipeline project, court documents reveal that Knitz acted without seeking that firm’s advice when he notified Hood Construction Co. of Whittier that its contract to install a three-mile portion of the pipeline beneath four streets in Lake Forest was being terminated.

Without seeking fresh bids on the remaining work, Knitz recommended that a $12.9-million contract be awarded to Wal-Con Construction Corp. of Surfside, which placed second to Hood in the original bidding process. Rebidding was not practical, Pistone said, because the job was behind schedule and a new contract had to be awarded quickly.

The district then filed a lawsuit against Hood, claiming $5 million in damages. But a jury ruled against the district, finding that it should pay Hood and its attorneys $2.4 million.

During the legal battle, Hood Construction’s attorney uncovered evidence that Wal-Con had double-billed, even triple- and quadruple-billed the district for some labor costs, and in one instance submitted a labor cost claim for an employee who was no longer on the firm’s payroll.

Moreover, Wal-Con, too, failed to complete the job on schedule, finishing 5 1/2 months late and submitting a string of “change order” requests that drove up the project’s cost by $3.6 million.

Many of the requested change orders were rejected by MacDonald-Stephens Engineers, the outside construction management firm paid $2 million to oversee the pipeline construction project. But MSE’s recommendations were overruled by higher-ups at the district, one of the firm’s employees testified during the trial.

Although everyone denies that it had any impact on the process, the Wal-Con employee who prepared the change order requests was the daughter of the assistant project manager at MacDonald-Stephens Engineers, who passed first judgment on them. The assistant project manager said there was nothing improper about his daughter being hired.

Similarly, all concerned say it was merely a coincidence that Wal-Con hired the son of Knitz’s special assistant at the time, Robert J. Regan, while a final claim for $1.39 million was being processed. Regan is now the district’s operations director and approved some of Wal-Con’s claims for higher payment.

Contacted by The Times, the water district’s finance director, James W. Clark, and its controller, Carol Megara, said they were never notified of these irregularities and would initiate immediately an audit of Wal-Con’s billings to the district for possible recovery of any overcharges.

Clark and Megara said invoices were approved by the district’s top engineering officials, including chief engineer William Dye, as well as Regan before they were forwarded to the accounting department.

A joint task force formed by the Orange County district attorney’s office and the Federal Bureau of Investigation has demanded documents relating to all of the water district’s construction records, including Wal-Con and Hood, as part of a broader investigation into the water agency.

The pipeline project was a public relations nightmare from its start in November, 1989. By February, 1990, homeowner groups were loudly complaining about the trench work that was disrupting traffic on city streets.

Hood Construction, which had fallen behind schedule by that date, was fired from the job. In a letter to Hood, Knitz said the district was terminating Hood’s contract on three of the four city streets for failing to complete the work under the “agreed-upon schedule” but allowed it to continue on a fourth. A month later, however, Knitz informed Hood that it was being replaced on all remaining work.

A month after Hood was fired, the district sued the company for $5 million over the delays, and Hood countersued for more than $2 million--the amount the company said it was owed.

During the resulting trial, which took place in Orange County Superior Court last year, an expert hired by Hood testified that it would have been easy for the district to solicit several immediate bids for the work.

Instead, Knitz recommended to the district board that the contract be awarded to Wal-Con, which was already working in the area. The work was supposed to be completed by September, 1990.

By January, 1991, homeowners in the area were fed up with construction, which was still incomplete. Robert D. Jones, general manager of the Lake Forest Community Assn., complained to Knitz about Wal-Con, saying the contractor had destroyed plants, trees, shrubs and ground cover near several streets.

The work was finally completed in March, 1991, after the district approved Wal-Con’s request for 153 additional days of work without penalty and added $3.6 million more in change orders to its contract.

According to the attorney who represented the district in its lawsuit with Hood, Wal-Con’s charges increased because of a district decision to reduce traffic disruption by installing more of the pipeline through tunneling, which is much more costly than trench work.

But a Hood attorney said the $3.6 million in change orders contained nearly $1 million in duplicate payments, disputed claims and excessive labor charges, including $220,027 in duplicate labor bills. Lee Gire, the attorney, said he brought some of the excessive payments to the attention of both the district and Wal-Con during the trial.

In trial testimony, district and Wal-Con officials admitted some overpayment but said it was taken care of in Wal-Con’s final $1.85-million bill for extra work, which eventually was reduced to $1.39 million.

A final bill of $1.39 million was approved by the Board of Directors in July, 1991, months after work had ended. Details of what made the difference between $1.85 requested and the $1.39 million paid are not contained in the district’s Wal-Con files.

At about this time, Wal-Con hired Robert J. Regan Jr., the 26-year-old son of the district’s current director of operations, as a truck driver.

In his trial testimony, Knitz said that he did not specifically recall what made up the final $1.39-million change order and that he had not heard of overbilling until just before the trial began in April, 1992, nine months after final payments were approved. The district’s own expert in the Hood trial contradicted Knitz, saying he had personally informed the general manager of the duplicate payments.

Gire said the duplicated bills and sloppy bookkeeping were unprecedented in his long experience in such matters.

“I have represented contractors in public construction matters for 27 years,” he said. “I have never seen anything close to the total lack of support for amounts paid to Wal-Con . . . where the documents . . . contain repeated and consistent duplications and overcharges.”

Frank J. Granich, Wal-Con’s manager on the project, said last week that Gire has an interest in portraying Wal-Con in a bad light but said district officials scrutinized all records carefully to make sure all charges were justified.

“There are no improprieties at all. Everything that was submitted was proper and correct,” Granich said. “All bills were correct, or corrected.”

During the four-week trial last year, Granich testified that $220,027 in duplicate labor billings were discovered during the project. In some cases, there were examples of double, triple and even quadruple billing for laborers, Granich testified.

In one instance, a laborer was listed as working 18 hours on July 2, 1990, while he had actually been laid off several days earlier, Granich acknowledged.

Granich testified that there were so many areas of work involving 60 laborers that it was difficult to calculate who was working where, when and for how long at all times.

“That’s why we elected that if there were duplications, why, we would adjust them at a later date,” Granich testified.

During another part of the trial, an expert witness testifying for the district said Wal-Con got paid twice for manholes, valves and other material. The duplications amounted to $140,000, Gire said.

Gire also said he discovered that Wal-Con charged the district $93,006 more than it paid its subcontractor for tunneling work, yet this was not a cost-plus contract that would permit such markups.

In several cases, the district ignored the advice of MacDonald-Stephens Engineers, the company overseeing the construction job.

Donald Roberson, the contract administrator for MacDonald-Stephens, testified that he was often overruled by district officials when he rejected or questioned hundreds of thousands of dollars in Wal-Con payment requests.

Roberson testified that the contract was unique because district officials often engaged in direct negotiations with Wal-Con and mediated final decisions.

In one case, Roberson determined that Wal-Con had overstated the amount of tunneling work and owed the district a $235,000 refund. Wal-Con disputed Roberson’s findings and eventually got $412,782, Gire said.

Gire asserted that Wal-Con also overcharged the district $25,000 through inflated labor claims for overtime, although Granich disputed those claims during the trial.