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7 City Council
Staff Report
From: City Manager
Report Type: CONSENT CALENDAR
Lead Department: Public Works
Meeting Date: September 14, 2026
Report #:2609-6719
TITLE
Approval of Increase of Construction Contingency for Contract No. C211781123B with Swinerton Builders in the Amount Not-to-Exceed $7,374,367 and Amendment to the Fiscal Year 2027 Budget Appropriation for the Capital Improvement Fund for the New Public Safety Building Capital Improvement Program Project (PE-15001), to Support a Settlement Agreement With Swinerton Builders; CEQA Status – Environmental Impact Report for the New Public Safety Building and New California Avenue Area Parking Garage (Resolution No. 9772)
RECOMMENDATION
Staff recommends that the City Council:
1. Approve an increase of construction contingency for Contract No. C21178123B with Swinerton Builders in the amount of $7,374,367 for a total contract contingency amount of $20,767,167; and
2. Amend the Fiscal Year 2027 Budget Appropriation for the Capital Improvement Fund by (requires a 2/3 vote):
a. Decreasing the Infrastructure Plan Reserve by $3,600,000; b. Decreasing the Capital Fund Infrastructure Reserve by $2,599,367; and c. Increase the New Public Safety Building project (PE-15001) appropriation by $6,199,367.
EXECUTIVE SUMMARY
This report outlines key aspects of the City’s settlement with Swinerton Builders resolving the Public Safety Building construction dispute. Also addressed are ongoing best practices enhancements for City construction projects. The Public Safety Building is now operational with Police, Fire administration, Office of Emergency Services work groups, and 911 Dispatch set to switchover operations by October 1.
The settlement terms include City payment of $8 million and Swinerton having now completed work on critical building systems that was preventing full-building occupancy and move-in.
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7 Additionally, Swinerton will dismiss their arbitration filing, release all claims, and extend warranties of certain building systems.
City review of construction management practices has identified process improvements, risk mitigation measures, and changes to project schedule approaches that are now being implemented or are under development for current and future major projects. This includes third-party design review in addition to constructability review, strategies to reinforce partnering and expedited escalation of project issues and resolution of project change orders.
Other key practices being implemented or explored include reviewing insurance requirements for errors and omissions for design professionals to scale based on the size of the project; evaluating alternatives to design-bid-build project delivery such as design-build or construction manager at risk or progressive design-build; and, reviewing City liabilities introduced by the current Public Contracting Code and professional liability statutes and consider advocating for legislative solutions.
BACKGROUND
The New Public Safety Building (PSB) is the largest and most complex of ten key projects included in the 2014 Council Infrastructure Plan. The PSB was identified as the plan’s highest priority project, and its environmental impacts were analyzed with the 350 Sherman Avenue parking garage project for the purpose of complying with California Environmental Quality Act (CEQA). Following opening of the Sherman Avenue parking garage in December 2020, on February 1, 2021, Council approved the award of the construction contract for the PSB to Swinerton Builders (Swinerton) and authorized execution and delivery of one series of Certificates of Participation in an amount not to exceed $120 million to finance PSB construction, of which $101 million in debt was subsequently issued.1 The initial contractual date for substantial completion was July 29, 2023. Over the course of the project, there were over 1,000 Change Order Requests submitted by the contractor, many of which resulted in Contract Change Orders that increased the contract amount. City Council previously approved three increases to the authorized construction contingency, adding a total of $5,000,000 to the initial contingency of $8,392,800. The approved Change Orders extended the substantial completion date to September 29, 2023, and delays by Swinerton in completing project work extended completion into 2026.
On July 31, 2026, Public Works accepted the project as complete, and a Notice of Completion was filed with Santa Clara County Recorder’s Office on August 5, 2026. Phase 2 of the PSB move-in began on August 18 and was completed on August 27. As of August 27, 2026, all public 1 City Council, February 1, 2021; Agenda Item #3, SR #11752 https://recordsportal.paloalto.gov/WebLink/DocView.aspx?id=81421&dbid=0&repo=PaloAlto&cr=1 1 0
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7 safety workgroups except Dispatch are operational at the PSB, with Dispatch switchover planned by October 1, 2026.
ANALYSIS
Settlement Agreement
During construction of the PSB there were a number of Change Order Requests that were rejected by the City, which were then submitted by Swinerton as Claims that went through the contractual dispute resolution process. The City and Swinerton engaged in four mediation sessions addressing unresolved Claims, with the last mediation occurring on June 2, 2026. At that mediation, Swinerton’s claims totaled $24.7 million, comprising direct costs, delay costs, prompt payment penalties, and interest. The majority of the claims consisted of delay costs.
The City had already approved Change Orders for direct costs (the actual cost of performing work) where justified, but staff strongly disagreed with the great majority of the remaining direct costs and delay costs included in Swinerton’s Claims.
At the June 2, 2026 mediation, City Attorney’s Office and Public Works Department staff negotiated a settlement agreement framework that included a settlement payment to Swinerton, commitments by Swinerton to rapidly complete outstanding work needed for project completion, and other items related to warranties and releases. The City Council approved the settlement in Closed Session on August 17, 2026, and the agreement was executed on September 10, 2026.
The settlement includes:
City payment of $8 million settlement amount
Swinerton agreement to complete work on the detention area smoke control system, fume hood certification and emergency generator work that was preventing full building occupancy and move-in of all public safety departments (completed) Extended warranties of those three systems through July 31, 2027 Swinerton dismissal of arbitration filed against the City of Palo Alto Release of all claims by Swinerton
Staff disagreed with most of Swinerton’s claims. Swinerton’s claimed amounts were believed by the City team to be inflated, and experts retained by the City developed scheduling analysis to demonstrate that most delays were not the City’s responsibility, because they were either caused by Swinerton or were concurrent with other delays caused by Swinerton. Nevertheless, there were some claims, including the largest delay Claim relating to the specification of an incorrect insulation material that had to be replaced after installation, where at least partial City responsibility was clear. The City Attorney’s Office and Public Works staff recognized that the City could have significant exposure during the binding arbitration process, where a panel of three arbitrators would rule on all outstanding Claims. Additionally, the legal and expert consultant support through arbitration was estimated at $1 million. The $8 million settlement, 1 0
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7 while adding about 6% to the total cost of the PSB project, was determined to be prudent to resolve the dispute with Swinerton and avoid the risk of a potential significant arbitration decision in Swinerton’s favor.
Approval of the settlement agreement was also informed by the statutory allocation of risk between public entities and contractors under public construction contracts. Public contracting is a highly structured process governed by the California Public Contract Code and other laws, such as the Civil Code and Labor Code. As part of that structure, the Legislature has allocated certain risks to public entities, even at times when they are not at “fault” when the risks are realized. For example, public entities “own” a project site and generally are responsible for paying the costs when a contractor encounters a site condition that differs from what should have been expected. Similarly, public entities “own” the design provided to a contractor such that, when errors or omissions are found in the design, the public entity is responsible for paying the costs to correct or complete the design.
This responsibility includes situations where the design flaw is not serious enough to allow the public entity to recover the costs from the design professional. Impacts of delays may also be allocated to public entities that are not necessarily at fault for a delay. State statutes prohibit a “no damage for delay” clause that denies contractors all remedies if they experience a delay that is not due to their conduct. These allocations of risk are done, in part, to reduce contractors’ risk and allow bidders to bid lower, knowing that they have the ability to be compensated if risks are realized. Stated another way, public entity responsibility for added costs may occur without fault by either party, and part of the overall calculated balance mandated in public contracting.
Application of Experience to Future Projects
The construction experience of the PSB has provided several lessons applicable to future projects, including process improvements already implemented, risk mitigation measures, and project scheduling strategies.
Follow-up items being implemented or under development include:
Implementing a policy to require formal partnering on major construction projects citywide. Partnering is a process through which the construction contractor, City staff, and design team commit to building effective relationships at multiple levels in the respective organizations, allowing for more effective flagging and resolution of issues before they become significant. Partnering has been used in the past on City projects and is currently used with construction of Fire Station #4, so a formal City policy will ensure application in the future.
Early escalation and engagement with contractor’s regional management to discuss project issues and potential solutions. This item would be facilitated by the partnering process where applicable but may also be applicable to smaller projects. Inclusion in the policy referenced above of additional constructability review by a third- party contractor and/or architect for internal consistency, completeness of plans and 1 0
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7 constructability of details. The Fire Station #4 plans were reviewed by a third-party contractor.
Organizing construction team resources to allow capacity to expedite review of change order requests to avoid potential delays. Review of change order requests is justifiably focused on ensuring entitlement and fair costs for any approved change orders, but the resources involved in the reviews when there are large amounts of change order requests, as on the PSB project, can delay work progress. Staff has taken this approach on the Fire Station #4 project.
Reviewing insurance requirements for errors and admissions for design professionals to scale based on size of project. City requirements are currently uniform regardless of the size of the project.
Evaluating major projects for applicability of alternatives to design-bid-build project delivery, such as design-build or construction manager at risk, or progressive design- build. Alternatives to design-bid-build can shift the liability for design issues away from the City and lead to a more collaborative relationship between the construction, design, and City teams. It can also increase costs and in some instances limit flexibility to respond to changing needs or community concerns.
Reviewing City liabilities introduced by current Public Contracting Code and professional liability statutes, and consider advocating for any potential legislative solutions identified.
Staff has already incorporated the first three bullets into the Fire Station #4 project and will continue to implement lessons learned on future projects.
FISCAL/RESOURCE IMPACT
The settlement payment to Swinerton under the agreement is $8 million. Staff recommends increasing the Fiscal Year 2027 budget appropriation for the New Public Safety Building project (PE-15001) by $6,199,367, of which $3,600,000 will be funded by the Infrastructure Plan Reserve and $2,599,367 will be funded by the Capital Fund Infrastructure Reserve. The Infrastructure Plan Reserve is intended to fund increased costs on the 2014 Council Infrastructure Plan projects, and the use of $3,600,000 from the reserve leaves $1,200,000 available for the upcoming Downtown Parking Garage project. The remaining $1,800,633 needed for the settlement payment is available in the project as contract savings or unspent construction contingency. The revised project budget for the PSB (excluding salary and benefits) will total $128,831,431.
STAKEHOLDER ENGAGEMENT
Public Works has coordinated with key staff from departments involved with the PSB. 1 0
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7 ENVIRONMENTAL REVIEW
An Environmental Impact Report for the PSB and the New California Avenue Area Parking Garage was prepared and certified by Council on June 11, 2018, by adoption of Resolution No. 9772.3
APPROVED BY:
Brad Eggleston, Director Public Works/City Engineer
3 Resolution 9772
https://recordsportal.paloalto.gov/WebLink/DocView.aspx?id=54175&dbid=0&repo=PaloAlto&searchid=cae46e6d -0803-41ff-a88c-5ce06b51af30