Waukesha Says It Has Not Budgeted $25 Million For A Diversion Payment To Milwaukee

I had posted yesterday an item about an the City of Waukesha reporting to the Wisconsin Department of Natural Resources that projected costs associated with the City's Lake Michigan diversion application included an estimated $25+ million for a one-time payment to the City's preferred water supplier, the City of Milwaukee.


Waukesha says that statement is incorrect.

The posting was in reference to page 8 of this section of a submission of information to the DNR last week by Waukesha (the "Comment" being a question from the DNR and the "Response" being the answer from Waukesha):

Comment WS13

The application contains no estimate of “sunk costs” or “one time” payments to Milwaukee, Oak Creek or Racine. The City of Waukesha has stated that the sunk costs are included as “contingency” costs in the May 2010 Waukesha Diversion Application. Please present the “sunk” or “one time” costs as a separate, specific cost item in the application.

Response

It is impossible to know if a “one-time” payment will be required from water suppliers before negotiations are concluded. If a one-time payment were to be required, it is impossible to know a dollar amount before negotiations are concluded. Industry cost estimating standards for dealing with unknown conditions such as this are to use a contingency as a percentage of the construction cost. This also applies to other unknown situations, such as the changing cost of materials and local market conditions in the construction industry. The contingency is more than $25 million for the Milwaukee water supply alternative, plus an allowance of more than $15 million for permitting, legal, and administrative costs. This $40 million amount is sufficient to cover future unknown conditions that may or may not occur.

My intention was not to mischaracterize the purpose of the potential expense, and I am glad in a separate posting to correct the record with his wording:

Your claim that we have $25 million projected for a one-time payment is untrue.  We have not ever stated a budget for any potential one-time payment.  The contingency is for many items, one of which could be a one-time payment.  Again, as you are aware, many unforeseen issues arise during the course of construction.  These items may include: unknown soil conditions, unforeseen construction issues, adjustments for other utilities, etc.  Having been through many large construction projects, it is very reasonable to encounter construction issues that were not anticipated.  That is why it is standard industry practice to include contingency as a percentage of construction in cost estimates.  The contingency is included in the estimates for all the water supply alternatives.  In fact, the contingency is larger for the other alternatives because the construction costs are higher than they are for a Lake Michigan water supply.  In the answer to the DNR question, we were merely pointing out that we could potentially pay a possible but unknown amount to a water supplier from this construction contingency.  We did not project a $25 million one-time payment to a water supplier and to report it that way is irresponsible.