Newly released reports show federal monitors were warning that contingency cash reserves for the $5.26 billion Honolulu rail project had dropped "below accepted control levels" even before a costly ruling by the Hawaii Supreme Court halted construction in August.

That disclosure in documents related to the city’s application for federal funding underscores continuing concerns about the size of the cash cushion maintained by the largest public works project in Hawaii history.

The reports released by the city last week and earlier this month show that consultant Jacobs Engineering Group Inc. was sounding the alarm as early as April about the "rapid use of cost contingency funds."

Jacobs was hired by the Federal Transit Administration to oversee the Honolulu rail project, and the consultant noted that the city launched an effort earlier this year to make engineering and other changes to beef up the project’s contingency cash reserves.

That effort began months before the unexpected Aug. 24 Supreme Court decision that halted all rail construction.

Now the Honolulu Authority for Rapid Transportation estimates the new delays caused by that court ruling will cost the city an extra $64 million to $95 million, which are expenses the city never planned to pay.

Despite those unexpected costs, city officials say the overall $5.26 billion price tag for the project is not expected to increase.

That’s because the extra expense from the court ruling can be covered by the rail project’s $644 million "contingency" budget, which is a cash reserve fund that is supposed to ensure the city has enough money to complete construction.

However, accelerating use of that contingency cash reserve is exactly what prompted the April warning from Jacobs about "rapid" spending.

Daniel Grabauskas, executive director of HART, said the comments by Jacobs in the September and October reports to the FTA are nothing new. Grabauskas has made it clear since he came to Honolulu six months ago that he wants to slow the use of contingency funding by controlling costs.

Grabauskas also said it is important to note that despite the concerns cited in the reports to the FTA, Jacobs is recommending that the FTA approve a full funding grant agreement that would award the city $1.55 billion.

That recommendation by Jacobs for federal funding of the Honolulu project was made after the Supreme Court ruling, and the court ruling is discussed in an October report by Jacobs.

"What you need to focus on is the result, and the result is nothing new," Gra­bauskas said. "It is recog­nition that it’s an area that we need to focus on, but it’s not changing the bottom line."

HART expects to spend almost all of the $644 million in remaining contingency funds during construction of the 20-mile rail line, but city officials say they need to control the "burn rate," or the rate at which the cash reserves are spent down, to be sure the project does not run out of money.

Jacobs noted that the contingency budget declined at a rapid rate from $866 million last year to $644 million when the city submitted its final financial plan for rail in June.

The contingency budget declines as the city allocates money to cover known expenses, which reduces the cash cushion needed for the project.

Jacobs is recommending the city maintain a larger contingency cash cushion of $658 million and noted the city had tapped contingency funding "to a point where contingency is below accepted control levels."

"Strong controls must be put in place immediately to avoid future rapid contingency reduction," Jacobs wrote in a report this month.

The city is working to improve its tracking and control of contingency spending, but "diligence and vigilance must be applied to this effort to avoid a high rate of contingency use that could ultimately leave the project unprotected," according to a separate Jacobs report issued in September.

Grabauskas said the city boosted the contingency reserves by taking steps such as eliminating an opening for one of the phases of the project. Instead of having three openings of different sections of the 20-mile rail line, the city is now planning for only two openings to cut costs, he said.

"On contingency, at least in my time, I’ve been very consistent in saying it’s a focus of concern, it’s a focus of our energy" to make engineering and other changes to reduce expenses, he said.

The city has also been repackaging contracts to achieve economies of scale, which also helps reduce overhead costs, Grabauskas said.

For example, the city recently decided to fold the construction contracts for the airport segment of the guideway together with the city center segment, and that work will be awarded as a single contract instead of as two contracts.

Jacobs also urged the city to develop a list of "secondary mitigation" items that can be used to reduce costs in the event the rail project runs short of cash. Secondary mitigation steps are supposed to cut costs without making dramatic changes in major features of the train system.

The target set by Jacobs was $149 million, but the consultant calculated that the steps proposed by the city were worth only about $106 million.

Jacobs recommended that HART be required to develop more detailed secondary mitigation proposals before the FTA awards full federal funding to the city for rail, and be required to add new secondary mitigation strategies that approach the $149 million target.

Grabauskas said secondary mitigation proposals may include items such as reducing the number of station entrances, eliminating escalators or reducing the size of the canopies that are planned to cover the stations and tracks.

He said the city hopes it will never have to impose those steps because of a cash shortfall, but said every project is required to compile a similar secondary mitigation list.

"Right now what we’re doing is trying to identify those with FTA," he said.

Some of the change orders and other costs that caused the reduction in the contingency reserve that drew the attention of Jacobs have been made public, but the city has never released an exact breakdown of how the money from the contingency budget was being distributed.

Contingency drawdowns that have been made public so far include:

» $32.5 million in change orders in connection with the 2009 contract with Kiewit Infrastructure West Co. Inc. to build the first six miles of rail line from East Kapolei to Pearl Highlands.

At least $22.2 million of that cost is from change orders because of delays in that first contract. That first construction contract was awarded to Kiewit even before the environmental impact statement for rail was completed. The city was supposed to authorize Kiewit to begin work in spring 2010, but final approval of the environmental impact and other permits were delayed.

The city did not actually authorize heavy construction to begin until earlier this year. Additional Kiewit delay claims are pending, but the city has so far declined to disclose how much those claims could cost because the final amounts are still being negotiated.

Rail opponents have strongly criticized the city for awarding that and other contracts too early and incurring delay claims by Kiewit.

» Another $15.9 million change order was approved by the city in April to cover increases in the cost of steel and other materials required for the 20-mile rail project.

Kiewit/Kobayashi Joint Venture, which is building the rail maintenance and storage facility near Leeward Community College, filed that claim because prices for steel and other materials increased in the two years since the joint venture originally expected to begin work.

The joint venture’s original proposal to provide the materials assumed the company would begin work in April 2010. In fact, the joint venture was not given authorization to actually order steel until last January.

Kiewit/Kobayashi has also claimed additional profit and overhead costs related to the steel and materials purchases, but the city has not disclosed the amount of those claims.

The city expects the first load of steel rail for the Ho­no­lulu project will be shipped next month.

» On Oct. 9, Grabauskas submitted a letter to the City Council explaining that another $70 million in "known changes" were transferred out of the contingency budget.

He described those transfers as "pending change orders that are still in negotiation."

The city has said it cannot release the exact breakdown of those costs because it does not want to tip its hand in negotiations with contractors by revealing the exact amounts it has budgeted for each claim.

» The new costs from the Hawaii Supreme Court ruling are not included in any of those change orders or estimates.

On Aug. 24 the court ruled that the State Historic Preservation Division violated its own rules by approving the rail project before an archaeological survey was completed for the 20-mile rail route.

In a unanimous ruling, the court found the city was required by the SHPD rule to complete the survey before construction began to determine if there are Native Hawaiian burials or other archaeological resources in the path of the rail line.

The city has been surveying the rail route in sections and still has not completed the portion of the route in urban Honolulu, where experts agree that burials are most likely to be found.

As of last week the city still needed to excavate 100 sites to complete the survey, which is expected to be finished early next year.

The city has advised the FTA that the halt in construction will likely delay the rail project by nine months to a year, and the city estimates each month of delay will cost an extra $7 million to $10 million.

However, that does not include additional costs from the escalation of future contracts because of delays, or extra city and personnel costs.

Grabauskas said last week the first month of delays from the ruling cost the city about $7.1 million.