Why Actual Costs of Military Construction Projects Vary From Their Estimates

GAO was asked to review the Department of Defense's (DOD) reprogramming of funds for military construction projects. It was pointed out that the DOD need for additional project funds above that initially appropriated was increasing. Specifically, GAO was asked to determine: (1) whether cost estimating procedures, including guidelines for inflation were adequate; (2) how the DOD actual costs for fiscal year 1979 projects compared to its budget estimates and how its experience compared to that of other Federal agencies; and (3) whether changes in legislative policy for reprogramming were warranted.

GAO found that many of the factors responsible for differences between estimated and actual costs were not related to the adequacy of the services' cost estimating procedures. Differences occurred because of the degree of bidder interest in a particular project, fluctuations in certain material and labor costs, changes in the originally anticipated bid-opening date, changes in requirements or design, or both, after the budget submission, and changes in site location for geographical and environmental reasons. For fiscal years 1978 and 1979, the inflation factors used were much lower than actual costs. GAO also found that, based on projected inflation, each military service escalates its cost estimates for budget purposes to a different point in time. GAO believes DOD should have all the services escalate estimates to the same point in time. GAO found that 98 of the 160 projects were being constructed for less than budgeted amounts, and 62 projects were experiencing overruns. The increase in the military services' reprogramming requests being received by Congress appears to be largely the result of several factors other than inadequate cost estimating procedures. GAO learned that other Federal agencies used procedures which were similar to those the services used. GAO believes a more stringent legislative policy on reprogramming would not result in a significant improvement in cost estimating. Such a policy may cause the services to make more frequent and/or greater changes in projects' scopes to assure that projects can be built within budgeted and authorized amounts.