Subway Builder’s Tenacity Pays Off in Cost Disputes : Transit: Auditors say Tutor-Saliba has inflated expenses. But the firm’s leader insists he merely demands what’s fair.

Fired in 1991 from the Los Angeles subway project, Mike Hoffman didn’t take long to get a new job.

Hoffman had been a well-placed player in the project’s most expensive feuds. Acting on behalf of transit officials, he evaluated the demands of builders for costly contract increases. And he was privy to the officials’ private judgments of those demands.

But shortly after being terminated as a contracts administrator, Hoffman began putting his insight to work for a new boss--the biggest subway contractor in Los Angeles.

The hiring of Hoffman, described by transit officials as legal, is just one example of how contractor Ronald N. Tutor has sought every advantage in fighting for the financial interests of his company.

Tutor’s company and his partners won more competitively bid contracts--$220 million worth--than any other subway builder on the first segment of the project. And they won $76 million in contract increases--twice as much as any competitor--for everything from patching water leaks to laying floor tiles.

In several instances, Tutor overcame longstanding opposition from transit officials to win contract concessions worth more than $1.5 million, The Times has found. Records also show that government auditors have criticized his company for allegedly inflating personnel and equipment costs when seeking contract increases.

Tutor said any overcharging was unintentional and that the officials who opposed his requests for contract increases, called change orders, were misguided.

“I told ‘em to go to hell,” he said. “You’ve got to remember one thing: This is America. (They) can’t just say to me, ‘We’re not paying.’ ”

But by winning more contracts and more contract increases than his competitors, Tutor has gained a label, pinned on him in 1992 by then-Los Angeles Mayor Tom Bradley: The greatest change-order “artist”--someone who bids low to win contracts, then makes his profit on contract amendments.

Tutor said the label is undeserved. And records do show that his company’s proportion of change orders is no higher than that of the other firms that helped build the 4.4-mile Red Line subway.

He said his Sylmar-based company, Tutor-Saliba Corp., has merely sought money it is owed and has always tried to operate within the rules. Most of the subway contract increases, he said, were caused by factors beyond his control:

There were access delays at underground sites, requests to perform work that exceeded the scope of construction contracts, and the engineering errors of subway designers. Some contract increases paid for accelerated work requested by officials who were rushing to open the subway by January, 1993.

“You try to beat me out of money you owe me, I take it personally,” said Tutor, whose projects have included the Bradley Terminal at Los Angeles International Airport, the restored Los Angeles Central Library and freeways throughout California. “. . . You give me a change order, in the course of the work . . . I’m not a hypocrite. I don’t object.”

The Times studied extra payments to Tutor-Saliba and other builders to help identify how the price of the recently opened, 4.4-mile Downtown subway ballooned about $200 million over a budget of $1.25 billion. Most of the overrun was caused by construction contracts that grew by 35% over the competitively bid price, according to transit authority records.

In addition to the contracts they won for stations and tunnels now open to passengers, Tutor-Saliba and its partners have already won another $269 million worth of contracts on the ongoing construction of the second subway segment.

Edward McSpedon, president of the Metropolitan Transportation Authority’s rail construction subsidiary, defended the handling of the concessions granted to Tutor-Saliba. McSpedon also said that he has instituted improved procedures for the next phase of subway construction, and that the volume of change orders is being curbed.

The Red Line is the first tunneling project for Tutor-Saliba, one of the nation’s largest public works contracting firms, with $239.7 million in revenue last year. The company has experienced some high-profile problems on the Metro Rail project:

An accidental fire in July, 1990, did $3 million in damage to one tunnel, at the north entrance to Union Station. And the federal government opened an investigation in September, after The Times reported that the concrete walls of other segments of tunnel were built thinner than designed. Tutor has said that his firm performed quality work and that any defects resulted from unintentional mistakes.

Without question, public works construction is a competitive, contentious business. Contractors must meet quality standards and completion schedules while trying to turn a profit. Public transit officials, on the other hand, try to keep projects within budget and on schedule.

But, even in the rough-and-tumble realm of heavy construction, Tutor is known as a tenacious advocate.

In San Diego, Tutor-Saliba accepted a $17-million settlement from the city’s port authority last month, three years after suing for $52 million in a dispute over the costs of building a convention center. “They’re a miserable bunch of lowlifes,” Tutor said of the port authority. “And when the smoke cleared, the lowlifes wrote me a check.” An attorney for the port declined to respond.

In a dispute over a highway job near Eureka, Tutor-Saliba and a partner, Perini Corp., are seeking $78 million from the California Department of Transportation. A Caltrans hearing board rejected Tutor-Saliba-Perini’s claim earlier this year, concluding that about $17 million of the contractor’s claimed costs were “fallacious and, in fact, inflated in the magnitude of approximately 700%.”

The joint venture is contesting the findings and Tutor, whose company holds a 60% interest, said he expects that a panel of retired judges will rule in his favor. Tutor termed the previous hearing a “kangaroo court.” Caltrans, he said, has been “a lying bunch of dogs.” A Caltrans spokesman, Jim Drago, declined to comment other than to say the agency seeks to “protect the interests of taxpayers and to make sure contractors are treated fairly.”

In Los Angeles, Tutor-Saliba also has drawn fire for alleged overcharging, records show.

The company overstated equipment and personnel costs when seeking contract increases on two subway contracts, according to a 1989 audit report.

“We have found numerous instances of double charging, mischarging, (and) use of inflated labor and overhead rates,” said the report by the Southern California Rapid Transit District’s office of the inspector general. “We are concerned that the examples cited may constitute a deliberate pattern of abuse.”

Another transit agency audit alleged that the company in 1990 had counted disallowed costs, such as a personal trainer’s services, when calculating overhead to be reimbursed through some change orders.

Tutor, 53, said his company has never deliberately sought payment for improper costs. “We’re doing $400 or $500 million worth of (subway) work,” he said. “. . . Nobody in their right mind would ever try to do anything dishonest.”

Tutor also said the transit auditors have lacked expertise to examine rail construction transactions. “They’re way-down-on-the-totem-pole auditors who in many cases don’t even know what they’re looking at,” he said.

Some of Tutor’s largest demands for contract increases arose from construction of the twin mile-long tunnels that connect Union Station and Pershing Square, the same tunnels now under scrutiny because of the thin concrete.

The company argued in oral and written presentations last year that transit officials had failed to warn of large boulders and hard soil that slowed tunneling. The transit agency’s engineering consultants countered that Tutor-Saliba was seeking the extra payments to compensate for what they described as the company’s errors in bidding and inexperience in tunneling.

In challenging the merit of Tutor-Saliba’s $22.4-million claim, transit officials alleged to an arbitration panel that many of the costs listed by the contractor were “manufactured” or “grossly exaggerated.”

Tutor-Saliba ultimately accepted a $2.4-million payment recommended by the panel, which Tutor termed “a devastating loss.”

In seeking that and other contract increases, Tutor-Saliba has been assisted by Hoffman, who previously had overseen all change orders on behalf of the county’s transit agency. Hoffman worked from early 1989 to July, 1991, for Parsons-Dillingham, the company hired by the agency to inspect subway construction and to manage change orders.

Hoffman’s role, according to Parsons-Dillingham construction manager George B. Morschauser, was to review, analyze and to make recommendations regarding the merit of contractors’ requests for change orders. Parsons-Dillingham officials confirmed that Hoffman was terminated but would not discuss the reason.

Hoffman advised Tutor-Saliba on a number of matters that he had dealt with in his capacity at Parsons-Dillingham, records and interviews show. Charles W. Stark, subway project manager for the MTA, said he was troubled that Hoffman went to work for Tutor-Saliba.

“It’s being looked at by our legal staff,” Stark said. “It’s almost like the U.S. trade representative becoming a consultant to the Japanese Trade Ministry the next day. It’s not illegal, but it raises concerns.”

Hoffman, now manager of project controls for Tutor-Saliba, said there is nothing improper about his change of employment. He said he decided to join Tutor-Saliba only after being terminated from his Metro Rail job over unspecified disagreements. “I have to make a living and support my family,” Hoffman said. “. . . I was good at my work. That’s why Tutor hired me.”

Tutor said Hoffman provided insight regarding the transit agency’s positions on various disputes. For example, he said, Hoffman told the company that both he and two other transit officials previously had advised the agency that Tutor-Saliba’s $22.4-million claim had merit. And Tutor-Saliba submitted a memo from Hoffman to support its claim.

“Naturally I’m going to use that (information),” Tutor said. “. . . When I hired Hoffman, I didn’t know what kind of insider information they perceived him to have. (But) they went absolutely to pieces. But all he had to offer, in fact, was that they always knew they owed us.”

The longest-disputed change orders came to a head last fall, when the opening of the subway was just a few weeks away. After a series of negotiating sessions, officials agreed to pay $9.5 million through a package of “urgent” contract increases.

Public records and interviews show that Tutor-Saliba overcame longstanding opposition to win these extra payments and concessions:

Tunnel Locomotives

The machines are used during construction to tow loads of dirt and debris out of tunnels. But because Los Angeles has pockets of explosive methane gas, contractors were required to use spark-arresting locomotives that conform to federal health and safety regulations.

Tutor-Saliba and another tunnel contractor, Shank-Ohbayashi, complained. Both said that the requirement forced them to use lower-powered locomotives that slowed the work. Each firm demanded more than $200,000 in change orders. But only Tutor-Saliba would get paid extra.

From 1987 through early 1992, transit agency engineers, consultants and lawyers had recommended that Tutor-Saliba be denied any extra money.

“The (agency) is 100% correct in rejecting this claim,” wrote tunnel consultant A. S. Wattson in a February, 1992, memorandum. “. . . The claim has no merit. Legal counsel has twice concurred.”

Last fall, officials nonetheless paid Tutor-Saliba $130,000, plus interest.

Michael L. Shank, whose company was denied any extra compensation, said the payment to Tutor-Saliba was an example of “an uneven playing field.”

Stark said he could not explain why Shank was not paid but said the payment to Tutor-Saliba was intended to compensate Tutor-Saliba for “the effect of . . . forcing the use of smaller locomotives.”

Tutor said he did not receive special treatment. “All that tells you is, the only two guys that drove tunnels had the same bitch,” he said.

Electricity

For construction at Union Station, a temporary source of power was required. The transit agency agreed to pay for temporary electricity from portable generators--on the condition that Tutor-Saliba would promptly erect facilities to supply electricity for the long run.

When city inspectors refused to approve Tutor-Saliba’s plans, a fight ensued. Transit agency engineers argued that Tutor-Saliba was causing a delay in installing the power facilities and should pay for the temporary electricity.

The contractor disagreed and demanded $200,000.

Officials in April, 1990, offered $16,000 to resolve the dispute, but it was not accepted.

Last fall a new team of transit administrators abandoned the position the agency had held for years. They approved a change order that paid Tutor-Saliba $200,000 for the cost of using three generators to supply temporary power.

Subway project manager Stark, who recommended the payment, said in an interview that he simply disagreed with the engineers and administrators who earlier had rejected Tutor-Saliba’s claim.

Tutor blamed the dispute on the Southern California Rapid Transit District, the agency that controlled the subway project until mid-1990. “RTD would just say, ‘To hell with you, we don’t owe you anything for everything.’ . . . They were the worst ever,” he said.

Tunneling Machine

For three years, transit officials had sought a $400,000 reimbursement from Tutor-Saliba for its use of a tunneling machine bought with public funds. Last September, a new set of officials dropped that demand.

“They (the transit agency) should have gotten a reimbursement or some sort of offset” from Tutor-Saliba, said William W. Marsh, a former contracts administrator with the RTD.

Marsh and other officials agreed in 1988 to purchase the machine, called a shield, for Tutor-Saliba. They took this extraordinary step, hoping that the extra shield, used simultaneously with two others, would allow the contractor to accelerate tunneling between Union Station and Pershing Square.

Officials soon learned, however, that Tutor-Saliba was not using the third shield on that contract, but had instead moved the equipment to another subway tunnel site. They demanded an explanation from the company--and reimbursement.

In September, 1989, transit engineer Roger C. Vitti told Tutor-Saliba in a letter that moving the taxpayer-purchased shield to another job “is a material departure . . . and has resulted in significant savings” to the company. Auditors with the RTD recommended in a June, 1990, internal report that the agency “continue to seek reimbursement (of) roughly $400,000.”

Tutor refused to pay and in a letter termed the request an “absurdity.” He then demanded an additional $253,000 to compensate his company for deploying another tunnel shield on the same Union Station-to-Pershing Square contract.

Because they are so unwieldy, the 60-ton machines usually are left buried in the earth once a tunnel has been completed.

In September, 1992, the new transit officials dropped the demand for the $400,000. Stark concluded that Tutor should not be forced to pay for the third shield because he had to expend two, instead of just one, of his own shields on the job.

And, after transit officials ruled that Tutor’s claim for the extra $253,000 had no merit, he dropped the matter.

“I played a game with ‘em,” Tutor said in an interview. “. . . They had no right to the money. . . . So I reduced myself to their level. And when they dropped (their demand), I dropped mine.”

Leak Repairs

The project was designed so that methane gas or corrosive water could not flow inside. At an extra cost of $2 million a mile, the stations and tunnels were wrapped in a membrane of thick black plastic.

Yet for three years, much of the system has leaked.

Transit officials and Tutor-Saliba began clashing over leaks at the Civic Center Station in early 1990, three years before it would open.

Officials wrote letters, cited contract language and said that Tutor-Saliba was responsible for fixing the leaks. However, Tutor-Saliba said the design, not any shortcomings by the company, caused the leaks in the station. Tutor demanded extra payment for the repairs.

In a compromise one year later, a new team of officials, led by then-Executive Director Neil Peterson of the Los Angeles County Transportation Commission, paid the contractor an additional $353,000 to fix the leaks.

At the same time, Peterson authorized paying Tutor-Saliba $1.7 million for two other leak-related change orders involving construction at Union Station and the firm’s building of a station at MacArthur Park. Peterson, who resigned last March, did not return calls seeking his comment.

Tutor said his company deserved the change orders because the leaks were caused by the transit agency’s faulty design. “You have a system that is designed to leak,” he said. “It leaks like a sieve.”

Design engineers have said in memos that leaks throughout the project are caused by construction contractors’ faulty installation of the thick plastic membrane.

Delay Costs

Another of the change orders gave Tutor-Saliba $2.3 million for delay-related costs in building the Civic Center Station. The payment was $400,000 more than transit engineering consultants had said could be justified, according to records.

Morschauser, the Metro Rail construction manager, said that $1.9 million “was an equitable settlement, especially since (Tutor-Saliba and its partner) had not submitted any proof of actual cost,” according to minutes of a negotiating session on Sept. 24, 1992. Tutor said during the same session that he would not accept less than $2.4 million.

Then, after a short break, transit officials relented: Stark agreed to pay $2.33 million, “taking into consideration that some of the previously arguable issues” would have to be conceded to reach an agreement, the minutes said.

Tutor said that if he had not won the additional $400,000, he would have pursued a lawsuit. He said he responds as reasonably as he is treated.

“Nobody says I’ve got to win ‘em all,” Tutor said. “But I can’t lose ‘em all. . . . I didn’t get where I am by rolling over and dying. And I don’t.”

Contract Concessions

During the past two years, Los Angeles transportation administrators granted Tutor-Saliba Corp., a builder of the Red Line subway, contract concessions that had earlier been rejected. Here are five examples:

* Tunnel Locomotives: Contractor objected to health-and-safety requirement for use of spark-resisting locomotives for dirt hauling during tunneling. Officials overrode previous findings and paid Tutor-Saliba to offset the costs of using smaller locomotives.

* Amount: $130,000.

* Electricity: Contractor demanded extra payment for supplying temporary electricity that powered its tunneling operations. Officials for four years refused to pay the amount demanded, but ultimately sided with contractor.

* Amount: $200,000.

* Tunneling Machine: Transit officials for three years requested a credit from contractor for a 60-ton tunneling machine purchased by taxpayers. Contractor refused and officials last year dropped request.

* Amount: $400,000.

* Leak Repairs: Contractor demanded extra payment to repair water leaks at Civic Center station. Transit engineers refused to pay, saying repairs were contractor’s responsibility. Agency officials sided with contractor.

* Amount: $353,000.

* Delay Costs: Contractor demanded extra compensation for delays while building Civic Center station. After concluding last fall that contractor was entitled to maximum of $1.9 million, officials agreed to pay $400,000 more to reach agreement.

* Amount: $2.33 million.

Source: Metropolitan Transportation Authority records