Dear Mayor and Council Members,
On behalf of City Manager Ed Shikada, please see staff responses below for questions from Council Member Tanaka on the Monday, April 15 Council Meeting.
Item 5: Approval of Construction Contract C24190225 with Graham Contractors, Inc. in an Amount Not-to-Exceed $1,594,195 and Authorization for the City Manager or Their Designee to Negotiate and Execute Change Orders for Related Additional but Unforeseen Work that may Develop During the Project Up to a Not-to-Exceed Amount of $159,420 for the Fiscal Year 2024 Streets Preventive Maintenance Project, Capital Improvement Program Projects PE- 86070, and PO-11001; CEQA status – exempt under CEQA Guidelines Section 15301(c)
1. In light of Graham Contractors, Inc.'s legal dispute detailed in the case of Graham Contracting, Ltd. v. City of Federal Way, which has exposed vulnerabilities in managing contractual obligations and dispute resolutions that ultimately resulted in a lawsuit as a result of contractual delays, how does the city propose to mitigate these risks in the administration of the Fiscal Year 2024 Streets Preventive Maintenance Project? Please provide detailed strategies that will be employed.
Staff response: First, it should also be noted that the contract award pertains to Graham Contractors, Inc., a California corporation, and not Graham Contracting, Ltd., a Washington corporation, as referenced in the legal case. In the Graham Contracting, Ltd. v. City of Federal Way case, a court found against Graham Contracting and in favor of the City of Federal Way because Graham did not follow the dispute resolution procedures included in the relevant contract. As is common practice in staff’s administration of all construction contracts, in the event of a dispute staff will insist that the contract dispute resolution procedures are followed and will not waive the City’s rights under the contract.
2. Given the current economic climate and the pressing needs of our community in other critical areas such as housing, how does the city justify prioritizing this particular street preventive maintenance project over other potentially more urgent community needs? Furthermore, what comprehensive assessment confirms that the current condition of the streets involved in this project indeed warrants this level of immediate investment, or could these funds be more effectively allocated to address other immediate challenges facing our community?
Staff response: The prioritization of funding for City needs is conducted by the City Council through the annual budget process. The City Council has budgeted an annual amount in the capital improvement program’s Street Maintenance project to further the City’s goal of maintaining an average citywide pavement condition index score of 85. As described in the staff report, staff conducts biennial surveys of all City streets to determine pavement condition index scores that, along with planned utility work and bicycle facilities, are used to
prioritize which streets are selected for this annual project as well as the annual street resurfacing project.
3. In light of the discrepancy between Graham Contractors, Inc.'s bid and the engineer's estimate, which suggests a significant undervaluation or possible oversight in the project's complexity and required resources, can you explain how the city plans to ensure that this contract will not encounter unforeseen cost overruns or require additional funding beyond the allocated budget? Specifically, what measures are in place to prevent the project from exceeding its financial boundaries due to the initial underestimation, and how will these measures protect the city's financial interests without compromising on the quality and timeline of the project?
Staff response: The engineer’s estimate is based on previous project pricing with consideration to inflation to come up with an estimated total project cost. In this instance, the bid from Graham Contractors, Inc. came in 5% below the engineer’s estimate. The budgeted contract amount will be fixed to the amount of $1,753,615 which includes a 10% contingency amount to account for any unforeseen circumstances. Historically for this annual project, staff has not encountered issues staying within these financial boundaries.
For any adjustments to the Contract Value, the contractor is required to follow City processes outlined in the construction contract. Requests are reviewed by project staff and approved or rejected accordingly.
Item 6: Staff Recommends Increasing the Budget for the Advanced Heat Pump Water Heater Pilot Program by $846,000 to Increase Participation with Higher Rebates, and Amend the Fiscal Year Budget Appropriation for the Gas Fund; CEQA Status: Not a Project under CEQA Guidelines Section 15378(b)(5)
1. Considering the significant allocation of $846,000 from the Gas Fund's Cap and Trade Reserve for the HPWH Pilot Program, could you elaborate on how this investment compares, in terms of projected environmental impact and cost-effectiveness, with other potential uses of these funds? Specifically, how does this initiative align with our broader sustainability goals compared to alternative projects that these funds could support, ensuring we maximize the environmental benefit and equity per dollar spent across the community?
Staff Response: To meet the City’s S/CAP goals, staff is working to implement a number of programs targeting GHG emissions reductions in both residential and nonresidential building sectors as well as the transportation sector. Within the residential building sector, water heating in single family homes accounts for 40% of the GHG emissions and is the second most cost-effective GHG emissions potential, behind central HVAC system with cooling, which accounts for only 10% of the GHG emissions in single family homes (see chart below). While there are other strategies that are more cost effective than electrification of
water heating in single family homes, the City will not be able to meet its 80x30 goals by solely relying on GHG emission reductions in the transportation sector.
source: 2022 Sustainability/Climate Action Plan
2. Considering that nearly 44.1% of Palo Alto's population are renters and may face barriers to participating in the HPWH Pilot Program, how does the city plan to ensure equitable access to the program's benefits across all income levels and housing situations, particularly for those who may not have the authority to make such installations in their homes?
Staff Response: Staff agrees that renters should have equal access to electrification programs and their benefits. The current turnkey HPWH program is open to participation by renters with consent by their landlords. Because the program is designed to provide the service of a pre-screened contractor that can cover the electrical and plumbing work as well as the permit coordination, with an upfront cost to replace a gas water heater with a HPWH that is lower than a like-for-like gas water heater replacement, this makes the program
attractive from a landlord perspective. Low-income residents in single-family homes are eligible to participate in the Residential Energy Assistance Program (REAP), which offers a HPWH retrofit at no cost, in addition to other no cost efficiency retrofits. The City continues to receive generous state incentives for HPWH retrofits for income-qualified customers, with up to $4,885 for each HPWH installed plus an additional $4000 for electrical upgrades.
3. How does the city justify the expectation to double the program's installation rates from 350 to 700 participants with the proposed incentives, which are notably less generous than those offered after November 1, 2023? Specifically, what strategies are in place to ensure that the reduced incentives will still effectively motivate a significant increase in participant uptake, despite the increased financial commitment required from them?
Staff Response: The new incentives, while slightly lower than the previous incentives that included the state's TECH funds before they were expended, will continue to offer a new HPWH retrofit that is price-competitive with a like-for-like gas water heater replacement.
With the new incentive level, the average customer cost for a new permitted HPWH will be $2,300, or $1,100 if they choose the zero interest on bill financing option. After taking into account the 30% federal tax credit for heat pump installation, the net customer cost is just $1,600. By comparison, a gas tank water heater replacement is between $2,000 to $2,500 before the permit cost. This means the customer will continue to get substantial savings by choosing the turnkey HPWH program.
Item 10: Approval of Contract Amendment Number 2 to Seven On-call Consulting Contracts to Increase in the Amount by $500,000 to a Total Not to Exceed to $3.5 Million and Extend Term by Three Months to Provide Expertise for Long Range Planning Projects, Application Processing, Environmental Review, and Other Planning Analysis in the Planning and Development Services Department
1. Given the proposal to increase the budget for on-call consulting contracts by $500,000, the staff report fails to provide a precise, itemized breakdown of this allocation, offering only broad implications of its use across various projects and services. Considering the importance of fiscal responsibility and transparency to our constituents, what is a detailed justification for this increase? Specifically, how will each segment of the increase directly contribute to the city's strategic priorities and deliver tangible benefits to our community? We are seeking more specifics rather than the broad strokes provided in the staff report.
Staff response: The proposed amendment seeks to augment contract capacity only, without the need for an additional increase to the budget. The budget to support this work has already been approved in the FY2024 Operating Budget. The additional contract capacity will support: current planning application processing, the next phase of the parklet prototype study, continuation of the retail study, Housing Element program
implementation, and any Council priorities that are initiated between now and September 2024. Approval of this item is directly in support of providing planning services to the community and addressing the City’s strategic priorities. The budget and work associated with these contracts have already been approved by Council, and no additional budget will be allocated without Council consideration and approval.
2. Given the proposed $500,000 increase in the budget for on-call consulting contracts, and recognizing the critical need for the city to maintain and develop its internal planning and development expertise, how does the city plan to address the potential long-term negative impacts of this dependency on external consultants? Specifically, how will the city mitigate the erosion of in-house expertise, manage escalating costs associated with prolonged consultant use, and ensure operational consistency amid potential risks introduced by relying heavily on external entities? Is there a strategic plan in place to balance the benefits of external expertise with the development of our city staff's capabilities to safeguard our fiscal health and strategic autonomy?
Staff response: The use of on-call consultants offers a flexible solution to the City’s evolving needs, enabling staff to respond to the changing needs of the community while maintaining fiscal prudence. Through the use of on-call consultants, the City has the ability to scale services up or down based on workload, staffing level, technical expertise, and economic conditions. This approach ensures the continuity of services during staffing vacancies or peak application volume and provides specialized expertise required for policy consideration as it relates to Council priorities. Utilizing on-call consultants allows the department to avoid overstaffing for peak application volume and specialized technical support, thereby contributing to the City’s financial health and operational flexibility.