Embassy Construction
Additional Actions Are Needed to Address Contractor Participation Gao ID: GAO-09-48 January 16, 2009To provide safe and secure workplaces for overseas posts, the Department of State (State) has built 64 new embassy compounds (NEC) and other facilities since 1999, has 31 ongoing projects, and plans to build at least 90 more. In 2007, State reported the U.S. contractor pool for building NECs had reached its limit and proposed legislation to amend the criteria to qualify for NEC awards. GAO was asked to examine (1) how contractor participation in the NEC program changed in recent years, (2) the degree to which State assessed the need for and potential outcomes of its proposed amendment, (3) factors contractors consider when deciding to participate in the program, and (4) actions State has taken to address reported declines in contractor participation. GAO examined two indicators of contractor participation; reviewed State documents and proposed legislation; and interviewed State officials and U.S. firms that won NEC awards from 2001-2007.
State received at least two bids--the legislatively specified minimum for adequate competition--for 60 of the 61 NEC projects it awarded from 1999-2008, and received three or more bids for at least 49 of the 61. Nonetheless, there was a statistically significant decline in the number of bids per NEC project from 2002 to 2008. GAO also found that the number of firms prequalified to bid on NEC projects also declined during this period. While many factors could affect contractor participation, GAO found the declines in the number of prequalifying firms and bids received were due, in part, to rising construction costs, which made it more difficult for some firms to meet qualification criteria. In addition, officials from five firms cited insufficient profits and State management practices as reasons for their recent withdrawals from the program. State has not systematically assessed the need for, or the possible outcomes of, its legislative proposal that would open competition for NEC awards to construction firms that cannot meet current qualification criteria. Although State identified several factors it believed reduced contractor participation, it has not assessed whether a sufficient number of contractors capable of meeting current requirements exists or how its legislative proposal would affect the NEC program. Specifically, State has not assessed the potential benefits or identified the potential risks of its legislative proposal, and has not stated how the risks would be mitigated. Absent these analyses, it is unclear whether the proposed amendment, including its December 2008 revision, would benefit State's embassy construction program. Contractors interviewed by GAO cited various incentives and challenges that affected their decision to participate in the NEC program. Although making profits was cited as the primary incentive for participating, contractors reported losing money on 42 percent of the contracts they performed. Contractors also cited several significant challenges that affected their decisions to submit contract proposals, including meeting State's shortened construction schedules, supplying labor and material to remote locations, finding and retaining cleared American workers, managing financial constraints, and dealing with foreign governments. Firms also expressed concerns with State's processes, including unclear solicitation documents and contract requirements, laborious design reviews, and State's 2001 decision to end formal partnering relationships with contractors. State has made several recent efforts to encourage contractors' participation in the NEC program. State has begun new outreach efforts to improve relations with contractors, and undertaken several changes to its management practices and organizational structures, including lengthening project schedules, improving clarity of contract requirements, and establishing a project management group to provide coordination and oversight throughout each phase of a project. While these changes address some contractor complaints, their full effects may not be apparent for a number of years.
RecommendationsOur recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director: Team: Phone:GAO-09-48, Embassy Construction: Additional Actions Are Needed to Address Contractor Participation
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Report to Congressional Committees:
United States Government Accountability Office:
GAO:
January 2009:
Embassy Construction:
Additional Actions Are Needed to Address Contractor Participation:
GAO-09-48:
GAO Highlights:
Highlights of GAO-09-48, a report to congressional committees.
Why GAO Did This Study:
To provide safe and secure workplaces for overseas posts, the
Department of State (State) has built 64 new embassy compounds (NEC)
and other facilities since 1999, has 31 ongoing projects, and plans to
build at least 90 more. In 2007, State reported the U.S. contractor
pool for building NECs had reached its limit and proposed legislation
to amend the criteria to qualify for NEC awards. GAO was asked to
examine (1) how contractor participation in the NEC program changed in
recent years, (2) the degree to which State assessed the need for and
potential outcomes of its proposed amendment, (3) factors contractors
consider when deciding to participate in the program, and (4) actions
State has taken to address reported declines in contractor
participation. GAO examined two indicators of contractor participation;
reviewed State documents and proposed legislation; and interviewed
State officials and U.S. firms that won NEC awards from 2001-2007.
What GAO Found:
State received at least two bids”the legislatively specified minimum
for adequate competition”for 60 of the 61 NEC projects it awarded from
1999-2008, and received three or more bids for at least 49 of the 61.
Nonetheless, there was a statistically significant decline in the
number of bids per NEC project from 2002 to 2008. GAO also found that
the number of firms prequalified to bid on NEC projects also declined
during this period. While many factors could affect contractor
participation, GAO found the declines in the number of prequalifying
firms and bids received were due, in part, to rising construction
costs, which made it more difficult for some firms to meet
qualification criteria. In addition, officials from five firms cited
insufficient profits and State management practices as reasons for
their recent withdrawals from the program.
State has not systematically assessed the need for, or the possible
outcomes of, its legislative proposal that would open competition for
NEC awards to construction firms that cannot meet current qualification
criteria. Although State identified several factors it believed reduced
contractor participation, it has not assessed whether a sufficient
number of contractors capable of meeting current requirements exists or
how its legislative proposal would affect the NEC program.
Specifically, State has not assessed the potential benefits or
identified the potential risks of its legislative proposal, and has not
stated how the risks would be mitigated. Absent these analyses, it is
unclear whether the proposed amendment, including its December 2008
revision, would benefit State‘s embassy construction program.
Contractors interviewed by GAO cited various incentives and challenges
that affected their decision to participate in the NEC program.
Although making profits was cited as the primary incentive for
participating, contractors reported losing money on 42 percent of the
contracts they performed. Contractors also cited several significant
challenges that affected their decisions to submit contract proposals,
including meeting State‘s shortened construction schedules, supplying
labor and material to remote locations, finding and retaining cleared
American workers, managing financial constraints, and dealing with
foreign governments. Firms also expressed concerns with State‘s
processes, including unclear solicitation documents and contract
requirements, laborious design reviews, and State‘s 2001 decision to
end formal partnering relationships with contractors.
State has made several recent efforts to encourage contractors‘
participation in the NEC program. State has begun new outreach efforts
to improve relations with contractors, and undertaken several changes
to its management practices and organizational structures, including
lengthening project schedules, improving clarity of contract
requirements, and establishing a project management group to provide
coordination and oversight throughout each phase of a project. While
these changes address some contractor complaints, their full effects
may not be apparent for a number of years.
What GAO Recommends:
GAO recommends the Secretary of State systematically review the
adequacy of the NEC contractor base, the benefits and risks of its
proposed legislation, and how it would mitigate the risks. State
commented that the contractor base is adequate but could benefit from
expansion, and that a recent revision of its legislative proposal
removes the need for a cost-benefit analysis. GAO believes the
recommendation is still valid.
To view the full product, including the scope and methodology, click on
[hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-09-48]. For more
information, contact Jess T. Ford at (202) 512-4128 or fordj@gao.gov or
Terrell G. Dorn at (202) 512-6923 or dornt@gao.gov. To view the-e-
supplement online, click on [hyperlink,
http://www.gao.gov/cgi-bin/getrpt?GAO-09-47SP].
[End of section]
Contents:
Letter:
Results in Brief:
Background:
State Has Generally Met the Adequate Competition Requirement for
Awarding NEC Contracts, but the Level of Contractor Participation Has
Declined:
State Has Not Systematically Assessed the Need for or Possible Outcomes
of Its Legislative Proposal:
Financial Incentives, Risks of Overseas Construction, and State's
Management Practices Affect Contractors' Willingness to Participate in
the NEC Program:
State Has Acted to Encourage Incumbent Contractors' Continued NEC
Program Participation:
Conclusions:
Recommendations for Executive Action:
Agency Comments and Our Evaluation:
Appendix I: Scope and Methodology:
Appendix II: Contractor-Reported Challenges to Completing State
Construction Projects:
Appendix III: Comments from the Department of State:
Appendix IV: GAO Contacts and Staff Acknowledgments:
Tables:
Table 1: Size and Construction Time Frames for the Five Classes of
Standard Design Embassies:
Table 2: Number of Prequalifying Firms and Number of Bids Received for
NEC Projects, Fiscal Years 2002-2008:
Table 3: Number of Top 100 Design-Build Firms with Existing Operations
in Planned 2009 NEC Project Countries:
Table 4: Rank-Ordered Incentives to Participate in the NEC Program, as
Reported by 17 Contractors.
Table 5: Contractor-Reported Challenges to Completing State
Construction Projects:
Table 6: U.S. Construction Firms Participating in GAO Structured
Interviews:
Table 7: Contractor-Reported Challenges to Completing State
Construction Projects:
Figures:
Figure 1: Features of Notional New Embassy Compounds Constructed Under
Standard Embassy Design:
Figure 2: Wedge Barrier at Entrance to a U.S. Facility:
Abbreviations:
AGC: Association of General Contractors of America:
CAC: compound access control:
COR: Contracting Officer's Representative:
ENR: Engineering News Record:
FAC-P/PM: Federal Acquisition Certification for Program and Project
Managers:
FAR: Federal Acquisition Regulations:
FE/BR: forced entry/ballistic resistant:
GSM: gross square meters:
IOB: interim office building:
LROBP: Long-Range Overseas Buildings Plan:
MSGQ: Marine Security Guard Quarters:
NAB: newly acquired building:
NCC: new consulate compound:
NEC: new embassy compound:
NOB: new office building:
NOX: new office annex:
OBO: Bureau of Overseas Buildings Operations:
OMB: Office of Management and Budget:
PDC: Project Development and Coordination Division:
PCS: Office of Program Coordination and Support:
PRE: Office of Planning and Real Estate:
REA: request for equitable adjustment:
RFP: request for proposals:
SED: Standard Embassy Design:
SSMC: Standard Secure Mini Compound:
USAID: U.S. Agency for International Development:
[End of section]
United States Government Accountability Office:
Washington, DC 20548:
January 16, 2009:
The Honorable John F. Kerry:
Chairman:
The Honorable Richard G. Lugar:
Ranking Member:
Committee on Foreign Relations:
United States Senate:
The Honorable Howard L. Berman:
Chairman:
The Honorable Ileana Ros-Lehtinen:
Ranking Member:
Committee on Foreign Affairs:
House of Representatives:
Following the 1998 terrorist bombings of the U.S. Embassies in Nairobi,
Kenya, and Dar es Salaam, Tanzania, which killed 220 people and injured
thousands more, the Department of State (State) began an unprecedented
effort to replace more than 180 overseas diplomatic facilities. From
1999-2008, State awarded contracts worth approximately $5.8 billion to
construct new embassy and consulate compounds (NEC) and diplomatic
annexes at 79 overseas posts, with the majority of these facilities
being built under management and construction reforms first implemented
in 2001.[Footnote 1] State reported that, as of December 2008, it had
constructed 64 new embassies, consulates, and annexes; had another 31
projects under way; plans to construct 90 more facilities from 2009 to
2023; and, after 2023, would need to replace facilities at
approximately 50 overseas posts. However, in the summer of 2007,
State's Bureau of Overseas Buildings Operations (OBO) told several
congressional committees that the current pool of American contractors
qualified and able to carry out diplomatic construction projects
overseas had nearly reached its capacity and that the subsequent
reduced competition for contracts would result in increased contract
costs. To increase competition for NEC contracts, State proposed
legislation to amend the Omnibus Diplomatic Security and Antiterrorism
Act of 1986 to give State the discretion to allow more participation by
construction firms which currently cannot meet the qualifying criteria
for NEC awards.[Footnote 2]
At your request, this report addresses the status of the contractor
base for State's embassy construction program, including: (1) how
contractor participation in the NEC program has changed in recent
years, (2) the degree to which State has assessed the need for or
potential outcomes of its proposed amendment to the Omnibus Diplomatic
Security and Antiterrorism Act of 1986, (3) factors that affect
contractors' decisions to participate in the program, and (4) actions
State has taken to address the reported decline in the number of
contractors willing to participate in the program.
To complete our review, we examined two indicators of contractor
participation in the NEC program: (1) the number of companies
prequalifying to bid on projects per year from 2002-2008 and (2) the
number of firms that submitted bids on NEC projects from 2002-2008.
[Footnote 3] These two indicators help to measure contractors'
willingness to participate in State's program since both prequalifying
for and bidding on contracts require active efforts on the contractor's
part. We also reviewed State's proposed amendment to the Omnibus
Diplomatic Security and Antiterrorism Act of 1986, reviewed documents
and interviewed State officials on analyses the agency conducted in
support of the proposed amendment, and researched ongoing overseas
construction operations of the 100 largest U.S. design-build
construction firms.[Footnote 4] We determined that the data used to
complete these analyses were sufficiently reliable for our purposes. To
determine factors affecting contractors' decisions to participate in
the program, we completed structured interviews with 17 U.S.
contractors awarded NEC or diplomatic annex construction contracts from
2001 to 2007 to obtain information about State's construction process
and the incentives that encourage contractors to participate in the
program.[Footnote 5] These contractors had completed, or were in the
process of completing, a total of 78 separate construction contracts
valued at approximately $4 billion dollars.[Footnote 6] Finally, to
assess actions State has taken to expand its NEC contractor base, we
reviewed (1) reports on State's embassy construction program issued by
GAO and State's Office of the Inspector General; (2) OBO's past six
annual Long-Range Overseas Buildings Plans; (3) relevant laws and
regulations, including the Omnibus Diplomatic Security and
Antiterrorism Act of 1986, federal acquisition regulations, and State
reports and decision memos; and (4) delivery methods and partnering
policies employed by other federal agencies and supported by leading
industry groups. We also attended OBO's quarterly Industry Advisory
Panel meetings, met with State staff familiar with contracting and
construction processes, and spoke with representatives of the
Associated General Contractors of America and the American Council of
Engineering Companies. This report does not contain all of the
responses to our interview questions. The full responses to our
questions can be viewed at GAO-09-47SP.
We conducted this performance audit from October 2007 to January 2009,
in accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe that
the evidence obtained provides a reasonable basis for our findings and
conclusions based on our audit objectives.
Results in Brief:
State documents show, and State officials reported, that from 1999 to
2008, the department received at least two bids for all but one of the
61 NEC projects awarded through a competitive process, and three or
more bids for at least 49 of the 61 awards.[Footnote 7] Despite
generally having adequate competition for NEC projects, we found a
statistically significant decline in the number of bids State received
per NEC contract from 2002 to 2008. We also found that the number of
firms per project prequalified to bid also declined during this period.
Noticeable fluctuations occurred in both the annual average numbers of
firms per project that prequalified to bid on NECs and bids received
from 2002-2008, including a 69 percent decline (from 13 to 4) from 2006
to 2008 in the annual average number of prequalifying firms per
project, and a 38 percent decline (from 5 to 3) from 2006 to 2008 in
the annual average number of bids received per project.[Footnote 8]
Many factors could have influenced the decline in contractor
participation. Among them, we found that as State's estimated project
costs increased, both the actual numbers of firms prequalifying for NEC
awards and the actual number of bids received decreased. In addition,
from 2006 to 2008, five firms--which, combined, built a total of 27
embassies, consulates, and annexes--reported they would no longer bid
for OBO projects, citing as reasons insufficient profits and State's
overall management of the program.
State has not systematically assessed the need for or possible outcomes
of its proposed amendment to the Omnibus Diplomatic Security and
Antiterrorism Act of 1986. According to State, the proposed amendment
is intended to expand competition for NEC awards to companies that
currently cannot meet financial, technical, and security requirements
prescribed by the Act. In October 2007, State identified for Congress
several factors it believed discouraged contractors from participating
in the program, such as the profitability of State's projects compared
with other clients, the challenging and sometimes dangerous locations
of NEC projects, the high cost of skilled American workers with
security clearances, dissatisfaction with firm, fixed-priced contracts,
and the then relatively robust domestic construction market. However,
State has completed no systematic analyses that demonstrate whether a
sufficient number of contractors capable of meeting current
requirements exist or how its legislative proposal would affect the NEC
program. Specifically, State has not assessed the potential benefits or
identified the potential risks of its legislative proposal, and has not
stated how the risks would be mitigated. Absent these analyses, it is
unclear how the proposed amendment would affect State's embassy
construction program.
Contractors we interviewed cited various incentives and challenges that
affect their decision to participate in the NEC program, including the
potential for profits, the risks associated with NEC projects, and
State's overall management of the program.[Footnote 9] Most contractors
indicated that making a profit was the strongest incentive for
participating in State's NEC projects; however, most contractors we
interviewed stated that their profits on State projects were not
commensurate with the risks of building in challenging overseas
locations. For example, contractors reported they lost money on 22 of
the 53 completed NEC and annex projects and broke even on two other
projects. In addition, more than three-quarters of the contractors
reported they lost, or expected to lose, money on at least one project.
Contractors also cited several significant challenges that affect their
decisions to submit contract proposals, including meeting OBO's
shortened construction schedules; supplying material to remote
locations; finding and retaining cleared workers; managing financial
constraints, such as currency fluctuations, material cost escalation,
and performance bonding; and dealing with foreign governments. In
addition, although State has made a number of changes to the
construction processes, resulting in a greater number of projects being
completed in less time than in past embassy construction programs,
[Footnote 10] these reforms may have diminished incumbent contractors'
willingness to continue participating in the NEC program. For example,
firms indicated that they cannot meet the reduced construction
schedules due to unclear solicitation documents and contract
requirements, laborious design reviews, and State's 2001 decision to
end formal partnering with contractors.[Footnote 11] As a result, 14 of
the 17 firms we interviewed rated State's management of the NEC program
as poor or fair, and 10 of the firms rated State as a poor or fair
business partner.[Footnote 12]
In recent months, State has acted to encourage contractors'
participation in the NEC program by working to improve communications
with contractors, refining its management practices by implementing
process reforms and mitigating project risks, and reorganizing OBO's
management structure. State has taken steps to improve communications
with the contractor community in an effort to repair strained relations
that stemmed from its management of the program. For example, State
engaged with industry groups and individual contractors to solicit
specific concerns about its management practices. Although State
indicated it would examine whether it should reestablish partnering
agreements with contractors, it has made no decision if or how such
agreements would be implemented. In addition, State has made procedural
changes to improve its construction and project management processes
and to mitigate project risks. For example, State lengthened the
schedules for NEC projects and has begun to address conflicts within
project documents that define requirements. State also recently
announced changes to its design-build delivery method that would, upon
awarding an NEC contract, provide the contractor with a "bridging"
design, which provides greater detail and incorporates critical
requirements to expedite the contractor's final design. State believes
this new approach would enable contractors to complete the project's
design and begin construction in less time than under State's previous
process. However, OBO has not yet reached agreement with State's Bureau
of Diplomatic Security on how the bridging design would address
critical security requirements so that congressionally-required
security certifications will be met and preserved through the course of
construction. Finally, to improve its project management and enhance
its accountability to contractors and other stakeholders, State
established a new project management group. According to OBO, the role
of the new Project Development and Coordination Division is to
coordinate and provide oversight throughout each phase of the project,
from planning through construction and commissioning; however, it
remains to be seen whether this division will provide continuity
throughout project phases, as intended. Moreover, while the actions
State has taken address a number of contractors' complaints and could
improve contractor participation, the full effects of these changes on
the NEC construction process may not be apparent for a number of years.
We are recommending that the Secretary of State conduct a systematic
review of the embassy construction contractor base that (1)
demonstrates whether the U.S. contractor base that is both capable of
meeting current requirements and willing to participate in the NEC
program is adequate; (2) estimates the expected benefits and identifies
the potential risks associated with State's legislative proposal; and
(3) details how the risks would be mitigated.
In commenting on a draft of this report, State said it believes its
contractor base is adequate, but could benefit from expansion. It also
commented it plans to revise its legislative proposal by opening
competition for NECs only to U.S. companies that meet the specified
security requirements. State also said that, since full and open
competition is a central principle for Federal acquisitions, a cost-
benefit analysis is unnecessary. We disagree with State's view. State
initiated a process to revise the qualifying criteria for NEC awards,
but it has provided no compelling analytical support for why the
criteria should be amended, how such an amendment would be implemented,
or the expected benefits and potential risks associated with the
changes. Absent such support, it is unclear how the proposed changes
would affect State's program. We, therefore, believe our recommendation
remains valid. State's comments, along with our responses to specific
points, are reprinted in appendix III. State also provided technical
comments which were incorporated into the report, as appropriate.
Background:
From 1987-1997, U.S. diplomatic facilities overseas were attacked on
more than 200 occasions. On August 7, 1998, terrorist bombings of the
U.S. embassies in Dar es Salaam, Tanzania, and Nairobi, Kenya, killed
220 people and injured thousands more. Subsequent investigations into
these attacks and on the conditions of U.S. overseas facilities
determined that U.S. embassies and consulates worldwide were insecure,
unsafe, overcrowded, deteriorating, and "shockingly shabby." Unless
security vulnerabilities were addressed, employees and the public using
these facilities would remain at risk of terrorist attacks.[Footnote
13]
In the wake of these reports, State embarked on an unprecedented effort
to construct diplomatic facilities at 214 overseas posts. The goal of
this effort is to replace insecure, dilapidated, and dysfunctional
embassies, consulates, and other overseas diplomatic office buildings
with safe, secure, functional, and modern facilities as quickly as
possible. As of December 2008, OBO had completed construction for 64
new embassies, consulates, and annexes and had relocated more than
19,500 U.S. employees into these new facilities. State has 31
additional ongoing construction contracts for new facilities and plans
to build approximately 90 more facilities from 2009 to 2023. Beyond
this effort, State officials said that after 2023, OBO would need to
replace facilities at approximately 50 posts. The total award value for
all construction contracts for new office facilities awarded since 1999
is approximately $5.8 billion.[Footnote 14]
Efforts to Speed Construction and Contain Costs:
In 1986, in response to terrorist threats, State began an embassy
construction program, known as the Inman program, to better protect
U.S. personnel and facilities overseas. However, due to systemic
weaknesses in program management, as well as subsequent funding
limitations, State completed only 24 of the 57 construction projects
planned under the Inman program. Following the demise of the Inman
program in the early 1990s, State initiated very few new construction
projects, until the 1998 embassy bombings in Africa prompted additional
funding for security upgrades and the construction of secure embassies
and consulates.
In response to the performance problems experienced under the Inman
program, State implemented numerous reforms to its management structure
and contracting, planning, and construction processes. These reforms
were designed to speed completion of projects, reduce costs, and
standardize processes, and they had the cumulative effect of reducing
the average construction cycle time by 2 years and 9 months.[Footnote
15] Among the most prominent reforms were:
* elevating the former Office of Foreign Buildings Operations to OBO;
* relying on the design-build delivery method, which reduces the number
of solicitation, proposal, and award processes from two to one and
allows contractors to begin basic construction before the design
process is completed;
* convening the Industry Advisory Panel on a quarterly basis to advise
OBO on industry best practices in the construction sector;[Footnote 16]
and:
* holding an annual industry day event to solicit a broader pool of
contractors.[Footnote 17]
Starting in 2002, OBO also implemented the Standard Embassy Design
(SED) to expedite the planning, awarding, design, and construction of
NECs. The SED is a series of documents that outline site and building
plans, specifications, and design criteria, and explain how to adapt
these specifications to a particular project and contract requirements.
The SED is not an actual building design but rather a template that
standardizes the basic plans for the structural, spatial, safety, and
security requirements for each NEC, including the following:
* main office buildings and annexes;
* security features, such as the Compound Access Control (CAC)
buildings and perimeter walls;
* utility buildings, warehouses, and General Services annex;
* living quarters for Marine Security Guards (MSGQ); and:
* employee and visitor parking.
The SED also identifies ways to allow for future building expansion on
the site; establishes minimum permissible baseline standards for
materials and interior finishes; and factors in environmental concerns
such as temperature, humidity, dust, rain, and air quality when
designing and selecting mechanical equipment. Figure 1 shows the
general features for a standard design NEC.
Figure 1: Features of Notional New Embassy Compounds Constructed Under
Standard Embassy Design:
[Refer to PDF for image]
This figure is an illustration of the features of notional new embassy
compounds constructed under standard embassy design.
Source: State Department.
[End of figure]
Since 2002, there have been three primary classes of standard design
embassy and consulate compounds--small, medium, and large--based on the
size and cost of the facility, each of which have predefined
construction schedules and total project durations associated with
them. In 2004, State introduced a fourth class of SED, called Extra
Large or Special SEDs, which generally exceed the size and cost of
large SEDs. Finally, in 2007, State introduced the Standard Secure Mini
Compound, which is generally smaller and less costly than a small SED.
In addition, OBO has developed standard designs for MSGQs, and stand-
alone unclassified annexes. Table 1 shows the allowable size and
construction time frames for each of the five classes of NECs
constructed using the standard embassy design.
Table 1: Size and Construction Time Frames for the Five Classes of
Standard Design Embassies[A]:
Class: Standard Secure Mini Compound;
Size, cost, and time frames:
* Size: 3,000 gsm[B] and 45 desks.
* Construction duration: 24 months.
Class: Small;
Size, cost, and time frames:
* Size: 3,001-4,300 gsm.
* Construction duration: 28 months.
Class: Medium;
Size, cost, and time frames:
* Size: 4,301-7,400 gsm.
* Construction duration: 30 months.
Class: Large;
Size, cost, and time frames:
* Size: 7,401-11,300 gsm.
* Construction duration: 32 months.
Class: Extra large and special;
Size, cost, and time frames:
* Size: greater than 11,300 gsm.
* Construction duration: 36 months.
Source: OBO.
[A] Construction duration, inclusive of design, includes the period of
time between the issuance of the Limited Notice to Proceed with
Construction to the date that construction is certified as
substantially complete.
[B] Gross square meters.
[End of table]
Qualifications for Submitting Contract Proposals:
The Omnibus Diplomatic Security and Antiterrorism Act of 1986 states
that, where adequate competition exists, only U.S. persons and
qualified U.S. joint-venture persons may (1) bid on diplomatic
construction or design projects with estimated total project values
exceeding $10 million and (2) bid on diplomatic construction or design
projects involving technical security, unless the project involves low-
level technology, as determined by the Secretary of State.[Footnote 18]
The act defines adequate competition as the presence of two or more
qualified bidders submitting responsive bids for a specific project. In
this context, a U.S. person is defined, in part, as a company that:
* is incorporated or legally organized under the laws of the United
States;
* has its principal place of business in the United States;
* has performed within the United States or at a U.S. diplomatic or
consular establishment abroad administrative and technical,
professional, or construction services similar in complexity, type, and
value to the project being bid;
* has total business volume equal to or greater than the value of the
project being bid in 3 years of the 5-year period before the specified
date;
* employs U.S. citizens (1) in at least 80 percent of its principal
management positions in the United States and (2) in more than half of
its permanent, full-time positions in the United States;
* will employ U.S. citizens in at least 80 percent of the supervisory
positions on the project site; and:
* has the existing technical and financial resources in the United
States to perform the contract.
Contracts for construction projects that do not involve technical
security requirements may be awarded to foreign firms. However, the
Percy Amendment to the Foreign Buildings Act of 1926 enables American
firms to be more competitive with foreign firms by reducing the
evaluated price of offers from American firms by 10 percent for such
projects expected to exceed $5 million.[Footnote 19]
State's Proposed Amendment to the Omnibus Diplomatic Security and
Antiterrorism Act of 1986:
In 2007, State proposed an amendment to the Omnibus Diplomatic Security
and Antiterrorism Act of 1986 that would allow the Secretary of State
to waive financial, U.S. citizenship, and other requirements for NEC
awards, when necessary and appropriate. According to State, the
proposed amendment was necessary because "the current pool of American
contractors qualified and able to carry out diplomatic construction
projects overseas has nearly reached its capacity" and the subsequent
reduced competition for contracts would result in increased contract
costs. When proposing the amendment, State argued that amending the law
would increase competition for NEC awards by opening the contractor
pool to smaller U.S. construction companies and to foreign companies
that previously could not qualify for NEC projects. Congress did not
act on the proposed amendment. In December 2008, State officials told
us the department plans to revise the 2007 proposal by opening
competition for NECs only to U.S. companies that meet the specified
security requirements.
State's Contracting and Construction Processes:
State uses a two-phase solicitation process for awarding contracts for
NECs.[Footnote 20] In the first phase, the prequalification of
offerors, contractors submit documentation attesting how they meet the
legal, technical, and financial qualifications for each project on
which they wish to bid. State then reviews this documentation to
certify whether contractors do, in fact, meet the criteria. Once State
completes these reviews, it issues a list of contractors eligible to
bid for each contract award. Only companies that State certifies as
prequalified under the first phase receive, and may respond to,
subsequent requests for proposals (RFP) for major construction awards.
In the second phase, RFPs, State solicits and evaluates contractors'
bids for construction awards, including technical and price proposals.
Contractors bid a firm, fixed price for a project; therefore, the
winning contractor will deliver the defined scope of the project for
the price of the contract.
After State awards a design-build contract, the contractor must develop
a project design and work plan that incorporates all construction and
security features outlined in the RFP and contract documents. During
this design phase, the contractor must also begin preparing for
construction by obtaining local building permits, buying or ordering
materials, and mobilizing workers. In addition, under the design-build
delivery method, contractors can begin construction of some buildings
and systems that do not require security clearances-- such as perimeter
walls, warehouses, and mechanical support buildings--before the full
design is approved. However, construction of the main office building--
the chancery or consulate--generally does not proceed until the design
is approved and State certifies to Congress that it meets all security
requirements.[Footnote 21] During the construction phase, OBO monitors
contractors' schedules, inspects and reviews contractors' work, and
certifies that construction is substantially complete once contractors
meet all requirements of the contract.[Footnote 22] Once construction
is certified as being substantially complete, State conducts final
commissioning to ensure that building systems--such as fire protection,
electrical, and mechanical--were installed properly and operate
according to design criteria and manufacturer specifications. Once all
systems pass the commissioning process, the building is certified to be
occupied and post staff may move in.
State Reports That NEC Costs Are Rising:
In September 2008, State reported that construction costs had increased
dramatically since 2001 and that the trend was likely to continue.
State reported that from 2001-2008 total construction costs for new
embassy and consulate compounds increased, on average, 9 percent per
year, from approximately $5,000 per gross square meter in 2001 to more
than $13,000 per gross square meter in 2008.[Footnote 23] In an earlier
analysis, State attributed the overall cost increases to two factors:
inflation for construction materials and the decrease in the value of
the dollar. State reported that, overall, prices for construction
materials rose 44 percent from December 2003 to July 2008. In addition,
State reported that the significant decline in the value of the dollar
resulted in additional construction-cost increases of approximately 2
percent per year since 2003.
State Has Generally Met the Adequate Competition Requirement for
Awarding NEC Contracts, but the Level of Contractor Participation Has
Declined:
Although State has generally received at least two bids for NEC
projects since 1999, which meets the adequate competition clause, the
number of contractors participating in the State's program has
declined. State documents show, and State officials reported, that from
1999 to 2008, the department received at least two bids for all but one
of the 61 NEC projects awarded through a competitive process, and three
or more bids for at least 49 of the 61 awards. Table 2 shows the number
of firms prequalifying to bid on NEC projects and the number of bids
submitted for each NEC project from 2002 to 2008.[Footnote 24] Despite
having adequate competition for all but one NEC award, we found a
statistically significant decline in the number of bids State received
per NEC contract from 2002 to 2008. We also found that the number of
firms per project prequalified to bid also declined during that period.
These results demonstrate that the level of contractor participation in
the NEC program has declined.
Table 2: Number of Prequalifying Firms and Number of Bids Received for
NEC Projects, Fiscal Years 2002-2008A:
Year: 2002;
Project: Abuja, Nigeria;
Number of prequalifying firms: 5;
Number of bids received: 3.
Year: 2002;
Project: Cape Town, South Africa;
Number of prequalifying firms: 9;
Number of bids received: 6.
Year: 2002;
Project: Conakry, Guinea;
Number of prequalifying firms: 6;
Number of bids received: 4.
Year: 2002;
Project: Phnom Penh, Cambodia;
Number of prequalifying firms: 9;
Number of bids received: 4.
Year: 2002;
Project: Tashkent, Uzbekistan;
Number of prequalifying firms: 10;
Number of bids received: 6.
Year: 2002;
Project: Tbilisi, Georgia;
Number of prequalifying firms: 10;
Number of bids received: 4.
Year: 2002;
Project: Yaounde, Cameroon;
Number of prequalifying firms: 6;
Number of bids received: 3.
Year: 2002; Per project average:
Number of prequalifying firms: 7.9;
Number of bids received: 4.3.
Year: 2003;
Project: Astana, Kazakhstan;
Number of prequalifying firms: 7;
Number of bids received: 5.
Year: 2003;
Project: Bamako, Mali;
Number of prequalifying firms: 6;
Number of bids received: 3.
Year: 2003;
Project: Beijing, China;
Number of prequalifying firms: 4;
Number of bids received: 3.
Year: 2003;
Project: Freetown, Sierra Leone;
Number of prequalifying firms: 8;
Number of bids received: 3.
Year: 2003;
Project: Kingston, Jamaica;
Number of prequalifying firms: 7;
Number of bids received: 4.
Year: 2003; Per project average;
Number of prequalifying firms: 6.3;
Number of bids received: 3.5.
Year: 2004;
Project: Accra, Ghana;
Number of prequalifying firms: 5;
Number of bids received: 5.
Year: 2004;
Project: Algiers, Algeria;
Number of prequalifying firms: 5;
Number of bids received: 2.
Year: 2004;
Project: Belmopan, Belize;
Number of prequalifying firms: 10;
Number of bids received: 6.
Year: 2004;
Project: Berlin, Germany;
Number of prequalifying firms: 5;
Number of bids received: 4.
Year: 2004;
Project: Kathmandu, Nepal;
Number of prequalifying firms: 5;
Number of bids received: 4.
Year: 2004;
Project: Lome, Togo;
Number of prequalifying firms: 4;
Number of bids received: 4.
Year: 2004;
Project: Managua, Nicaragua;
Number of prequalifying firms: 7;
Number of bids received: 5.
Year: 2004;
Project: Panama City, Panama;
Number of prequalifying firms: 7;
Number of bids received: 4.
Year: 2004;
Project: Rangoon, Burma;
Number of prequalifying firms: 4;
Number of bids received: 4.
Year: 2004; Per project average;
Number of prequalifying firms: 5.8;
Number of bids received: 4.2.
Year: 2005;
Project: Ciudad Juarez, Mexico;
Number of prequalifying firms: 9;
Number of bids received: 4.
Year: 2005;
Project: Khartoum, Sudan;
Number of prequalifying firms: 5;
Number of bids received: 2.
Year: 2005;
Project: Kigali, Rwanda;
Number of prequalifying firms: 5;
Number of bids received: 4.
Year: 2005;
Project: Mumbai, India;
Number of prequalifying firms: 8;
Number of bids received: 4.
Year: 2005;
Project: Port-au-Prince, Haiti;
Number of prequalifying firms: 6;
Number of bids received: 4.
Year: 2005;
Project: Quito, Ecuador;
Number of prequalifying firms: 8;
Number of bids received: 5.
Year: 2005;
Project: Skopje, Macedonia;
Number of prequalifying firms: 6;
Number of bids received: 3.
Year: 2005; Per project average;
Number of prequalifying firms: 6.7;
Number of bids received: 3.7.
Year: 2006;
Project: Johannesburg, South Africa;
Number of prequalifying firms: 14;
Number of bids received: 4.
Year: 2006;
Project: Libreville, Gabon;
Number of prequalifying firms: 12;
Number of bids received: 4.
Year: 2006;
Project: Surabaya, Indonesia;
Number of prequalifying firms: 15;
Number of bids received: 6.
Year: 2006;
Project: Suva, Fiji;
Number of prequalifying firms: 12;
Number of bids received: 6.
Year: 2006; Per project average;
Number of prequalifying firms: 13.3;
Number of bids received: 5.0.
Year: 2007;
Project: Addis Ababa, Ethiopia;
Number of prequalifying firms: 6;
Number of bids received: 3.
Year: 2007;
Project: Antananarivo, Madagascar;
Number of prequalifying firms: 8;
Number of bids received: 3.
Year: 2007;
Project: Brazzaville, Republic of Congo;
Number of prequalifying firms: 12;
Number of bids received: 4.
Year: 2007;
Project: Jeddah, Saudi Arabia;
Number of prequalifying firms: 6;
Number of bids received: 3.
Year: 2007;
Project: Karachi, Pakistan;
Number of prequalifying firms: 6;
Number of bids received: 2.
Year: 2007;
Project: Ouagadougou, Burkina Faso;
Number of prequalifying firms: 6;
Number of bids received: 2.
Year: 2007;
Project: Riga, Latvia;
Number of prequalifying firms: 7;
Number of bids received: 3.
Year: 2007;
Project: Sarajevo, Bosnia;
Number of prequalifying firms: 5;
Number of bids received: 3.
Year: 2007;
Project: Tijuana, Mexico;
Number of prequalifying firms: 10;
Number of bids received: 1.
Year: 2007;
Project: Valletta, Malta;
Number of prequalifying firms: 9;
Number of bids received: 5.
Year: 2007; Per project average;
Number of prequalifying firms: 7.5;
Number of bids received: 2.9.
Year: 2008;
Project: Bucharest, Romania;
Number of prequalifying firms: 5;
Number of bids received: 3.
Year: 2008;
Project: Djibouti, Djibouti;
Number of prequalifying firms: 5;
Number of bids received: 4.
Year: 2008;
Project: Dubai, United Arab Emirates;
Number of prequalifying firms: 5;
Number of bids received: 4.
Year: 2008;
Project: Guangzhou, China;
Number of prequalifying firms: 3;
Number of bids received: 2.
Year: 2008;
Project: Kyiv, Ukraine;
Number of prequalifying firms: 2;
Number of bids received: 2.
Year: 2008;
Project: Lusaka, Zambia;
Number of prequalifying firms: 5;
Number of bids received: 4.
Year: 2008; Per project average;
Number of prequalifying firms: 4.2;
Number of bids received: 3.2.
Source: GAO analysis of State data.
[A] The table includes only projects labeled by State as NECs, NCCs,
and NOBs.
[End of table]
In addition, from 2002 to 2008, noticeable fluctuations occurred in
both the annual average numbers of firms per project that prequalified
to bid on NECs and bids received. From 2002 to 2005, the annual average
number of firms that prequalified to bid ranged from approximately 6 to
approximately 8 (see table 2). In 2006, the average increased to more
than 13, then declined by 69 percent to about 4 in 2008. The average
number of bids submitted per project from 2002 to 2005 ranged from 3.5
to approximately 4, increased to 5 bids per project in 2006, then
decreased by 38 percent, to approximately 3 bids per project in 2008.
Although the declines in contractor participation can be attributed to
many factors, we found that project costs partly explained the
declines. In statistical analyses, we found that State's estimated NEC
project cost is a strong predictor of the actual number of firms that
prequalify to bid on projects, such that higher estimated costs result
in fewer prequalifying firms and lower estimated costs result in more
prequalifying firms. We also found that the actual number of
prequalifying firms per project showed a strong positive correlation
with the number of bids submitted per project. Thus, estimated project
costs directly affect the number of prequalifying firms and indirectly
affect the number of bids submitted.[Footnote 25]
To illustrate these relationships, we compared the annual average
estimated costs for NECs with the annual average numbers of
prequalifying firms and bids submitted. As noted previously, State
reported that NEC costs have more than doubled from 2001 to 2008.
Although there were yearly variations between 2002 and 2005 in the
average estimated costs for NECs and the average numbers of
prequalifying firms and bids submitted, the changes during these years
were not large. However, from 2005 to 2006, the average estimated costs
for NECs declined by 28 percent from $69 million to $50 million.
Because the financial criteria in 2006 were lower than in 2005, it was
easier for firms to demonstrate the capacity to meet those
requirements. As a result, the number of prequalifying firms per
project rose from approximately 7 in 2005 to more than 13 in 2006, and
the number of bids per project increased from 3.7 to 5. However, from
2006 to 2008, the average estimated NEC project cost more than doubled,
rising to approximately $110 million per project. This increase made it
more difficult for firms to meet the financial requirements to bid for
and win NEC awards. As a result, fewer firms prequalified for and bid
on NEC projects in those years.
The profitability of NEC projects for contractors and State's overall
management of the NEC program may also have affected contractor
participation, particularly in recent years. For example, the decline
in the prequalification rate also reflects five firms, which, combined,
built a total of 27 embassies, consulates, and annexes for a total
value of $1.63 billion, withdrawing from the NEC program from 2006 to
2008. Although each of these five firms prequalified to bid on NECs in
2005, none of them chose to prequalify for 2008 projects, with one
company withdrawing in 2006, two in 2007, and the remaining two in
2008. Officials from these companies cited insufficient profits and
disagreements with State's management of the program as factors
contributing to decisions to withdraw. However, three of the firms
indicated they would consider participating in future years but would
base such decisions on the resolution of outstanding issues with
current and past contracts and State's willingness to reform its
management practices.[Footnote 26]
State Has Not Systematically Assessed the Need for or Possible Outcomes
of Its Legislative Proposal:
State has conducted no systematic analyses in support of its proposed
amendment to the Omnibus Diplomatic Security and Antiterrorism Act of
1986, including whether such legislative changes are needed to maintain
an adequate contractor base or how such changes would affect the
program. Although State asserts that the declining contractor base has
created a less competitive and less cost-effective program, the
department reported no systematic efforts to analyze the relationship
between competition for NEC contracts and actual contract awards. State
officials did report that from 1999-2008, the department received at
least two bids--the legislatively defined minimum number for adequate
competition--for all but one NEC project solicited as an open
competition. However, they did not comment on whether this minimum
standard was sufficient to receive optimal prices for the government.
In support of its initial legislative proposal, in October 2007, State
identified several factors that it believed discouraged contractors
from participating in the program, including: (1) working with State
was not as profitable as working with private companies or with other
federal agencies, (2) the challenging and sometimes dangerous locations
of NEC projects, (3) the high cost of skilled American workers with
security clearances, (4) dissatisfaction with firm fixed-price
contracts for NECs, and (5) the relatively abundant domestic
construction market. However, State did not provide any detailed
analyses in support of these conclusions.
State's initial legislative proposal indicates that the number of U.S.
companies capable of meeting the current requirements to qualify for
NEC awards is nearing capacity. However, State has not systematically
analyzed the extent to which the U.S. contractor community can meet
these requirements. Therefore, we reviewed the degree to which some of
the largest U.S. construction companies have participated in the NEC
program. We compared the list of the top 100 U.S. design-build firms
for 2008 compiled by Engineering News Record with the list of firms
that have either prequalified for or won NEC awards since 2002.
[Footnote 27] The ranking is based on companies' total 2007 revenues
from design-build contracts where the projects were designed and
constructed by employees of the company in whole or in joint-venture
partnership with other firms and subcontractors. The total revenues for
these firms ranged from $104 million to $11.2 billion. [Footnote 28]
We found that only 14 of the top 100 companies prequalified for NECs in
at least one year from 2002-2008, and only 7 won at least one NEC
award. In addition, only 3 of the top 100 companies prequalified for
2008 NEC projects--B.L. Harbert International, LLC; Caddell
Construction Co. Inc.; and Weston Solutions Inc. While not all of the
100 companies may be interested in pursuing overseas construction, some
firms not currently engaged in the NEC program are capable of working
in overseas locations. For example, the top 100 list shows that 34 of
the 100 firms derived income from overseas construction contracts. Ten
of these 34 firms prequalified to bid on at least one occasion from
2002-2008, and two of these 34 firms prequalified to bid for 2008 NEC
projects.
In addition, we examined company Web sites and conducted Lexis-Nexis
searches to determine the extent to which companies listed among the
top 100 design-builders for 2008 and that have never won NEC awards
have experience in countries where State plans to build NECs in 2009.
[Footnote 29] We found that at least 16 of the 93 companies that have
not received NEC contracts under the current program have ongoing
operations in eight of the nine locations planned for 2009 (see table
3).[Footnote 30] However, none of those 16 companies prequalified to
bid on State's 2008 projects, and only two of those companies
prequalified for projects in past years.
Table 3: Number of Top 100 Design-Build Firms with Existing Operations
in Planned 2009 NEC Project Countries:
2009 project country: Afghanistan;
Number of top 100 firms operating in the country: 6.
2009 project country: Azerbaijan;
Number of top 100 firms operating in the country: 3.
2009 project country: Dominican Republic;
Number of top 100 firms operating in the country: 4.
2009 project country: Equatorial Guinea;
Number of top 100 firms operating in the country: 2.
2009 project country: Mauritania;
Number of top 100 firms operating in the country: 1.
2009 project country: Mozambique;
Number of top 100 firms operating in the country: 4.
2009 project country: Senegal;
Number of top 100 firms operating in the country: 0.
2009 project country: South Africa;
Number of top 100 firms operating in the country: 6.
2009 project country: Thailand;
Number of top 100 firms operating in the country: 8.
Source: GAO analysis of State data and company Web sites.
[End of table]
A greater reliance on foreign firms, as specified in State's 2007
legislative proposal, could increase security risks for NECs.
Currently, foreign companies may not bid on projects that involve
technical security unless it involves only low-level technology.
State's initial legislative proposal would provide the Secretary with
discretion to waive the preference for U.S. contractors so long as the
Secretary determined that it is more economical or efficient to do so
and that the security of the project would not be compromised in doing
so. However, State has not yet reported how it would ensure project
security would not be compromised, including providing a clear
explanation of how the controlled access areas would be securely
constructed and identifying the additional safeguards needed to oversee
construction.
Finally, amending the requirements to allow greater access to small
U.S. companies and foreign companies could also affect construction
management on site. However, because small firms may not have the
technical capacity to construct all facets of NECs and, because foreign
firms cannot currently construct controlled access areas of embassies
and consulates, it is unclear how construction of highly technical
areas would be accomplished. Although State has not yet determined how
to resolve these items, it could choose to award multiple contracts to
complete targeted areas of work. State has taken an approach somewhat
similar to this for some NEC contracts, to date, by awarding small
projects, primarily annexes, to small U.S. and foreign construction
firms, which sometimes proceed simultaneously with a larger NEC project
previously awarded to other companies. State has also awarded separate
contracts to construct unclassified and classified areas of some NECs,
such as for the Baghdad, Iraq, and Suva, Fiji, embassies. OBO officials
noted that this multiple contracting is inefficient and leads to
frequent conflicts between contractors over precedence of work. Relying
on small contractors in a similar approach, with multiple contracts, to
complete a typical NEC project may multiply these problems, and State
has not yet reported how it would mitigate this concern.
In December 2008, State informed us that it has drafted a revised
legislative proposal to allow for more U.S. firms to qualify as U.S.
persons, noting that all U.S. companies that can meet the specified
security requirements should be permitted to bid for and win NEC
contracts. In addition, State said that it would no longer pursue
greater access to NEC contracts for foreign firms. State's revised
proposal would, in effect, open competition for NEC awards to smaller
U.S. firms.[Footnote 31] However, according to State officials, the
projects planned through the remainder of the program are expected to
be more complex and more costly, in general, than the projects awarded
to date. Given that State's experience with multiple contractors
working independently at a construction site has not worked well, it is
unclear how State could increase smaller firms' participation without
significantly increasing the government's risk. However, as of the date
of its comments, State had conducted no analyses in support of its
proposal, including on the benefits and risks of a greater reliance on
smaller firms.
Financial Incentives, Risks of Overseas Construction, and State's
Management Practices Affect Contractors' Willingness to Participate in
the NEC Program:
U.S. contractors we interviewed ranked financial incentives as the most
important factor in determining their participation in the construction
program; however, many contractors told us they were not making as much
profit as anticipated. Once participating in the program, all
contractors reported encountering significant challenges, such as the
logistics of getting labor and materials to a construction site,
meeting State's construction schedules, coping with currency
fluctuations and price increases, finding skilled American workers with
security clearances, and handling relations with foreign governments.
In addition, a majority of contractors favored using the combination of
design-build delivery and the standard embassy design, and stated that
neither firm fixed-price contracting nor the domestic and international
construction markets affect their participation in the program. Most
contractors also expressed concerns about State's on-site project
directors, the implementation of the design-build process, and the
project guidance provided by State.
Financial Incentives Ranked as Highest Factor in Decision to
Participate in the NEC Program, but Profits Did Not Meet Expectations:
Most of the 17 contractors we interviewed cited most often the
potential to make money, the expectation that State would be a reliable
customer, and the steady continuity of State's building projects, even
during difficult economic times, as the top three incentives to
participate in the program (15 of the 17 contractors for each
incentive). The desire to serve the United States and the prestige of
building for the United States were also cited as strong incentives for
some contractors (see table 4).
Table 4: Rank-Ordered Incentives to Participate in the NEC Program, as
Reported by 17 Contractors.
Incentives: State projects allow us (the contractor) to make money;
Major or moderate incentive: 15;
Minor or not an incentive: 2.
Incentives: State is a reliable customer;
Major or moderate incentive: 15;
Minor or not an incentive: 2.
Incentives: State projects continue through difficult times in the rest
of the economy;
Major or moderate incentive: 15;
Minor or not an incentive: 2.
Incentives: Desire to serve our country;
Major or moderate incentive: 12;
Minor or not an incentive: 5.
Incentives: Prestige of building something for our country;
Major or moderate incentive: 10;
Minor or not an incentive: 7.
Incentives: Challenge of building to high standards in often difficult
environments;
Major or moderate incentive: 9;
Minor or not an incentive: 8.
Incentives: Experience with State projects may improve access to other
government contracts;
Major or moderate incentive: 7;
Minor or not an incentive: 10.
Incentives: Working with State provides opportunities to train project
managers in challenging situations;
Major or moderate incentive: 6;
Minor or not an incentive: 11.
Incentives: Potential for generating new business in overseas markets;
Major or moderate incentive: 6;
Minor or not an incentive: 11.
Incentives: Experiences learning about and using different construction
methods or materials in different parts of the world;
Major or moderate incentive: 5;
Minor or not an incentive: 12.
Source: GAO.
[End of table]
In spite of the importance of reliably earning money as an incentive
for program participation, many contractors said that making a profit
had become difficult under the NEC program.[Footnote 32] The
contractors defined profit as the monetary returns received after all
charges have been paid, including regular salaries.[Footnote 33] Ten of
14, or 71 percent of the contractors also said that, in general, State
projects were less profitable than their other construction projects.
[Footnote 34] Specifically, contractors told us that 22 of the 53 total
contracts they completed lost money, and two more did not earn a
profit; they expected to lose money or break even on 11 of the 26
projects that were being built at the time of our fieldwork. In all, 13
of the 17 contractors, or more than 76 percent, reported they lost
money or expected to lose money on at least one contract.[Footnote 35]
Some contractors noted, however, that depending on the resolution of
open requests for contract modifications--also called requests for
equitable adjustment (REA)--some of the projects that lost money or
broke even could show a profit.[Footnote 36]
Contractors Cite Major Challenges Including Logistics and Time:
Although contractors have potentially meaningful incentives to
participate in the program, they each reported facing significant
challenges once in the program and when building the facilities.
[Footnote 37] Contractors ranked the greatest challenges as (1) the
logistics of getting labor and material to the construction sites,
which are often in very remote locations; (2) meeting State's
construction schedules; (3) financial considerations, such as managing
currency fluctuations; (4) labor issues, such as finding qualified
workers with security clearances (cleared workers); and (5) relations
with foreign governments (see table 5). These challenges reflect
contractors' comparatively greater risk when constructing facilities
for State, compared to other clients. Thirteen of 16 contractors, or
over 80 percent, said that their firms' profits from the NEC program
have not been commensurate with the risks involved.[Footnote 38]
Table 5: Contractor-Reported Challenges to Completing State
Construction Projects:
Challenges: Logistics (getting labor and materials to the site);
Major or moderate challenge: 16;
Minor or not a challenge: 1.
Challenges: Meeting State construction schedule;
Major or moderate challenge: 16;
Minor or not a challenge: 1.
Challenges: Currency fluctuations;
Major or moderate challenge: 16;
Minor or not a challenge: 1.
Challenges: Finding qualified workers with security clearances;
Major or moderate challenge: 15;
Minor or not a challenge: 2.
Challenges: Dealing with foreign governments (permitting issues,
clearing materials through customs, paying tariffs);
Major or moderate challenge: 11;
Minor or not a challenge: 6.
Source: GAO.
[End of table]
Logistics and Location:
Twelve of 17 contractors said handling the logistics of getting labor
and materials to the construction site was a major challenge while four
said it was a moderate challenge. Many of the construction sites are in
relatively remote locations and are difficult to access from the United
States. However, despite logistics being cited by contractors as a
challenge and, in many cases, a consideration to bid for specific
projects, none of the contractors cited it as a determining factor when
considering whether to participate in State's construction program.
Contractors did not report project locations as a disincentive to
participate in the program. On the contrary, the challenge of building
to high standards in often difficult environments was cited by 12 of
the 17 contractors as an incentive for participating in the program.
Contractors did confirm that location can be a factor in deciding to
bid on specific projects, but it also was a consideration generally for
the purpose of assessing the competition for projects. For example, a
company may avoid bidding on projects in locations where it believes
another company has a clear competitive advantage, such as by already
being mobilized in the country or having extensive experience in a
given region.
Schedule:
Fourteen of the 17 contractors viewed meeting State's construction
schedules for new embassies as a major challenge. The two contractors
who rated meeting the schedules as a moderate challenge, and the one
contractor who said the schedules were a minor challenge had not yet
completed a building project for State. Even a successful contractor,
whose entire business model is built around meeting State's schedules,
said they are a major challenge. Contractors described the building
schedules as unrealistic, a "problem," "absolutely insane," "warped,"
and "ridiculous."
Some of the contractors stated that completing the design of the
facilities, together with building the facilities took more time than
was allowed by State. The goal of the NEC program is to get U.S.
government employees overseas out of hazardous, insecure buildings and
into safe and secure buildings as quickly as possible. From 2002 to
2007, State aggressively shortened the time allowed to complete the
buildings. The contractors raised concerns that State reviews designs
in greater detail and later in the process than is typical for design-
build construction. Nearly all the contractors said that they were
challenged to meet State's shortened project schedules, considering,
among other factors, the difficulty of producing an approved design
that will enable State to provide the necessary security certification
to Congress. According to these contractors, designs were often
certified for construction significantly later than planned due to
complex and extensive project requirements, the application and
delivery of which had to be validated through State's design reviews.
According to several contractors, much of the allowed construction time
is spent obtaining approval of the completed design, leaving less time
for the actual construction of the facility, and increasing the
contractors' risk of not meeting project completion dates. A few
contractors said that if they were building in cities of the high-
income countries in the world, they could more reliably meet the
schedules. However, most of the NEC locations are in lower-middle and
lower-income countries where finishing a design acceptable to State,
getting materials and equipment to remote locations, and actually
building the structure may take more time than State allows. If
anything goes wrong, according to contractors, they are likely to miss
the deadlines.
Financial Considerations:
Financial considerations, including currency fluctuations, rising costs
for construction materials, and the need to obtain performance bonds to
fulfill U.S. government requirements provide another set of challenges
to contractors. As previously noted, in September 2008, State reported
that the price increases for construction materials and the weakening
of the dollar more than doubled NEC construction costs since 2001. A
few contractors referred specifically to rising costs for construction
materials as a concern. Contractors reported on strategies to mitigate
inflation, such as factoring inflation into their contract proposals or
purchasing materials in advance. Moreover, given that labor and
materials procured overseas generally must be paid in local currencies,
and that the dollar has weakened against many other world currencies,
managing currency fluctuations has become a significant challenge,
according to contractors with whom we spoke. As with inflation,
contractors regularly manage this risk by including a contingency for
potential dollar devaluation in their bids. Several contractors also
seek protection from currency fluctuations by purchasing exchange rate
futures to lock in a rate. However, these measures can not fully ease
the effect of wider-than-expected currency swings. Ten contractors told
us that currency fluctuations are a determining factor in their
decision to compete for State building contracts. Five others said that
currency fluctuations had not been a factor that determined whether or
not to compete for a given contract in the past. However, currency
fluctuations could become a factor in the future, given the relative
strength or weakness of the U.S. dollar.[Footnote 39]
Obtaining performance bonds was seen as either a major or moderate
challenge by 9 of the 17 contractors we interviewed, and its importance
may be growing.[Footnote 40] Factors determining whether a contractor
needs performance bonding include the contractor's revenues and State's
experience with the contractor. Larger contractors, in general, can
more easily obtain a performance bond than smaller contractors. Also,
there have been instances where State has waived the need for a
performance bond for contractors with whom it has extensive, successful
experience, according to the contractors.[Footnote 41] As of the date
of this report, no bonding company has ever had to assume
responsibility for a contractor's failure to perform on an NEC project.
Nonetheless, smaller contractors told us about problems obtaining
performance bonds for State contracts, and State told us that at least
one bonding company had begun refusing to provide performance bonds to
State contractors. If State succeeds in changing the law to allow
smaller contractors to prequalify for competition, the availability of
performance bonds could become a more prevalent concern.
Labor Issues:
Labor issues, in general, were rated high on the list of challenges.
Contractors said that finding and keeping workers willing to work
overseas poses a challenge. In particular, contractors explained that
"cleared" workers --those with security clearances--who are willing to
live overseas in often unappealing locations are in relatively short
supply. Moreover, because of the low supply and high demand, these
cleared workers command the labor market. For example, several
contractors complained that cleared workers will frequently move to
another contractor for a higher salary or a more appealing location,
even if their current project is not finished. To complete work,
contractors must sometimes match or exceed competing offers from other
contractors to keep the cleared workers on site. Contractors also rated
finding and retaining workers who do not have clearances as a
challenge, though not as critical a challenge as finding and retaining
cleared workers.
Relations with Foreign Governments:
Contractors also cited problems dealing with foreign governments as a
challenge. Understanding and dealing with issues related to obtaining
building permits, clearing materials through customs, or paying tariffs
on imported goods, as well as obtaining reliable information about the
local country, are challenges and risks of building overseas. However,
contractors generally accept these challenges and a majority of
contractors said they believe that State could provide more helpful
information about the locality. For more challenges faced by
contractors, see appendix II.
Majority of Contractors Favored Design-Build Delivery and Standard
Embassy Design:
We asked contractors to characterize State's approach to the design-
build delivery of NECs, using the standard embassy design and firm
fixed-price contracts, in terms of effectiveness and economy.[Footnote
42] With many caveats, 11 contractors favored the combination of design-
build delivery and the standard embassy design as a good method for
building new embassies. Although contractors cited problems with
aspects of the design-build delivery method and SED, they generally
expressed support for both. Two contractors stated that bidding on the
completed NEC design would improve the accuracy of bids and allow
contractors to better predict how long building would take. Having
contractors bid on a completed design would be essentially using a
design-bid-build process, a delivery method that separates design and
construction activities into two distinct contracts.[Footnote 43] The
majority of contractors did not raise concerns about firm fixed-price
contracts, and only one contractor reported not bidding on one occasion
because of the type of contract.
Domestic and International Construction Markets Have Little Effect on
Contractor Participation:
Neither a relatively robust domestic construction market nor an active
international construction market were cited as factors causing
contractors to leave the program. We asked contractors how much the
activity level of the construction industry in the United States
affects firms' decisions to compete for State building projects. Ten of
the 17 contractors said the domestic construction market had some or no
effect on their decisions to participate in overseas construction, in
general, or compete for State projects, specifically. A few contractors
added that their firms were either primarily international or that they
worked in the international division of their firms and that they would
be in the international market regularly, regardless of domestic market
conditions. Some of the contractors agreed that the domestic market
affected their decisions to bid for State projects but only because
important resources, such as performance bonding capacity or staff,
were already allocated to domestic projects and, therefore, not
available for competition in the international market. Thus, it was
these firms' current commitments for domestic-based work, rather than
the U.S. construction market in general, that influenced their firms'
decisions to bid on State projects. We also asked contractors how much
the activity level of the construction industry overseas affects firms'
decisions to compete for State building projects. In this case, 13 of
the 17 contractors said the international construction market had some
or no effect on their decisions to compete for State projects. For a
few contractors, State projects are their preference in overseas work.
State's Management Practices Also Affect Contractors' Decisions:
Fourteen contractors characterized State's management of its embassy
construction program as fair or poor. Several management practices
adopted after the 1998 bombings may have contributed to problems cited
by the contractors, including (1) strengthening the role of the project
director and limiting access to State management by contractors, (2)
the design-build project delivery method as implemented by State, and
(3) unclear project guidance within various documents that detail
construction requirements.[Footnote 44] Moreover, contractors reported
these practices inhibit their ability to complete projects on time and
with a profit.
Project Director:
Beginning in 2001, State took measures to limit partnering with
contractors as it had existed, including strengthening the role of the
on-site project directors.[Footnote 45] However, the action may have
had unanticipated effects on the NEC program. A few long-standing
contractors reported that the customer-client atmosphere at State
changed and that distrust between contractors and State's staff,
particularly project directors, frequently resulted in adversarial
relationships. Overall, 10 of the 17 contractors we interviewed rated
State as a poor or fair business partner--6 rated State as poor, 4 as
fair. In addition, 4 of the 7 contractors who rated State as a good or
excellent business partner had not completed a construction project as
of the dates of their interviews.
Project directors are the targets of many contractors' concerns about
the State process. Most contractors we spoke with said that, because of
the project director's role in providing information to and from
Washington and making or, at least, conveying project execution
decisions, project success is greatly dependent on the project
directors. The contractors provided mixed views on their levels of
satisfaction with individual project directors. Contractors also
expressed concerns about the professional qualifications of project
directors and their experience managing construction and said they
would like project directors to have significant construction
experience.[Footnote 46] In discussing relationships with project
directors, two contractors noted they will avoid bidding on projects
they know will be headed by a particular project director with whom
they or other contractors have had past troubles.
We asked contractors a number of questions regarding their experiences
with various State bureaus and offices. Contractors were asked to what
extent they had experienced project delays because of various State
officers and entities, and they responded that project directors are
the greatest source of delays. Contractors also rated the State project
directors on the timeliness of their decisions in a variety of areas
and on the level of authority that project directors currently have for
making certain types of decisions. A majority of contractors reported
that project directors are generally timely in responding to requests
for information, and contractors were about evenly split on whether
project directors are timely in providing answers to work approvals and
general decision making. However, for timeliness on contract
modifications or REAs, project directors were perceived by the majority
of contractors to be only sometimes, rarely, or never timely.
Even as project directors are the targets of many contractors'
concerns, they often have no authority to make decisions in specific
areas cited by contractors. Contractors rated project directors'
decisions and authorities for a number of types of contract
modifications. For example, a majority of the contractors, typically 10
to 12, rated project directors' decisions as fair or poor in areas such
as modifications exceeding $25,000, technical changes, and changes that
require more time.[Footnote 47] In fact, project directors do not have
the authority to make decisions on changes above $25,000 for any single
modification,[Footnote 48] on accepting technical changes, or on
providing more time, as each of these decisions must be made in
Washington. However, according to what contractors told us, as many of
them were satisfied as were not with the authority given project
directors on changes above $100,000, material substitutions, or
accepting technical changes. State officials said that, under the
former director's policy of limiting contractors' access to various
offices at State, all requests had to be communicated to the project
director. The project director would then either take individual
action, or seek assistance or approvals from Washington and,
subsequently, deliver and enforce decisions made by others. As a
result, it appears that project directors, rightly or wrongly, bear the
brunt of contractors' concerns and disapproval of decisions that
negatively affect contractors.
Design-Build Delivery Process:
A majority of the 17 contractors also said that State's implementation
of the design-build process is flawed, and some said that the time
required to complete design and design reviews significantly affects
the project delivery schedule. Eleven contractors had favorable views
of the design-build process in general because it is supposed to erect
buildings more quickly, and some indicated the method can result in
lower construction costs. In addition, as previously noted, contractors
thought design-build delivery worked well with the standard embassy
design. However, during our interviews, contractors offered the
following concerns about State's implementation of the design-build
method: [Footnote 49]
* State's protracted design phase is lengthier than that of their other
government clients (four contractors);
* State becomes too heavily involved in the project design (three
contractors);
* State's design review comments--which range from 500 to 1,000
comments per project, each of which must be addressed--are excessive
(four contractors);
* Some contractors feel unable to proceed with construction until they
have received a fully approved, 100 percent design from State (six
contractors); and:
* Contractors do not have sufficient time to actually build once State
has finally approved a design, given the time limits on completing the
projects (four contractors).
Project Guidance:
In addition, 13 contractors expressed concerns about unclear and
contradictory guidance and information within and among critical
components of State solicitation and design documentation. Eight
contractors reported a number of problems with the RFPs, including
sections where information and requirements were unclear, inconsistent,
or in conflict with other sections and, in some cases, incorrect. Five
contractors cited examples of poor project documentation, including
inaccurate space plans, and incomplete information provided on existing
site conditions related to local utility service layouts and soil
conditions. In addition, 2 of the 11 contractors said State's answers
to contractors' technical questions about specific RFPs were not
incorporated as amendments to the solicitations, even though those
answers were considered binding.
Finally, contractors told us that guidance often conflicts with actual
practice. Most contractors raised specific complaints about being
unable to substitute local materials for U.S. or U.S.-standard
materials. Although the RFP states that local materials may be
substituted for U.S. materials; however, in practice, this occurs only
after State has approved the specific substitution, based on the
contractor's documenting that the substitute meets U.S. standards.
[Footnote 50] According to what 13 contractors told us and what we have
reported in the past,[Footnote 51] obtaining approval to use substitute
material is difficult. Six of these 13 contractors told us that the
process for obtaining approval is too onerous and time-consuming to be
worth the effort--for example, one said that money saved through using
local materials is essentially lost by the time spent getting the
approval. In a specific example of guidance on another issue
conflicting with practice, according to contractors, the SED allows
contractors to install either a wedge barrier or a sliding gate at the
vehicle entrance. (See figure 2 for an illustration of a wedge
barrier.) Although State prefers to have the wedge barrier, contractors
prefer the sliding gates because they are less expensive. However,
State routinely overrules this choice and requires wedge barriers, even
though the sliding gate meets the requirement. State officials reported
they are attempting to reconcile the guidance and practice on vehicle
barriers.
Figure 2: Wedge Barrier at Entrance to a U.S. Facility (photograph):
[Refer to PDF for image]
Source: GAO.
[End of figure]
State Has Acted to Encourage Incumbent Contractors' Continued NEC
Program Participation:
In recent months, State has reached out to the contractor community in
an effort to repair strained relationships and to encourage
contractors' continued participation in the NEC program. To support
improved relationships with contractors, State has implemented, or is
in the process of implementing, several procedural changes to increase
the effectiveness of its project delivery and contract management
processes and to mitigate project risks. In addition, State has created
a new project management group within OBO to improve internal
coordination and communication and enhance its accountability to
contractors and all other project stakeholders.
State Is Reaching Out to Contractors:
State has taken steps to reach out to the contractor community to
improve relationships. In February 2008, for example, State officials
met with the president of the Associated General Contractors of America
(AGC), along with a group of five contractors who had completed NEC
projects to discuss specific concerns of the industry. The discussions
sought to identify reasons for contractors ending their participation
in the NEC program and covered several industry concerns with technical
and administrative aspects of State's contractor prequalification,
contract procurement, and project management practices. At the
conclusion of the meeting, the parties identified several follow-up
items and agreed to hold future task force meetings to discuss the
issues.
In another outreach effort, State reported it intends to examine
partnering concepts and to consider the extent to which they may be
reintroduced to future contracts. While State discussed its intent to
examine partnering in September 2008, it has not yet drafted guidance
or policy on how partnering would be reintroduced into its processes in
general or applied to specific projects. Prior to 2001, State had used
partnering on some contracts and found that it generally contributed to
project success. State's use of partnering agreements on these
contracts helped facilitate the government and contractors working
together as a cohesive team to complete projects on time and in
accordance with State requirements, while providing contractors
opportunity to earn a fair profit. In particular, partnering agreements
were used to ensure such outcomes as timely decisions and the
resolution of problems at the lowest level possible. As previously
discussed, OBO's Director eliminated the formal use of partnering in
2001, in part because he thought contractors had taken advantage of
partnering to gain access to OBO's upper management, which served to
bypass the project directors and undermined their ability to
effectively manage projects. During OBO's September 2008 Industry
Advisory Panel meeting, OBO and AGC began a preliminary discussion on
partnering and how its principles could be incorporated into contracts
and used to foster better collaboration between State and contractors
on current projects. At the conclusion of the discussion, OBO's
Director acknowledged that State needed to do more work and obtain a
better understanding of how partnering could be applied in contracts.
State Is Making Procedural Changes to Improve Its Management Processes
and Mitigate Project Risks:
To respond to contractors' concerns identified through its outreach
efforts, State has implemented, or is in the process of implementing,
several procedural changes to increase the effectiveness of its project
delivery and contract management processes and to mitigate project
risks. The changes being made by State--which are influenced by
recommendations of an internal working group that was established in
July 2008 to review State's capital project acquisition process
[Footnote 52]--include:
* improving design-build project delivery,
* adjusting project schedules,
* streamlining RFPs and staggering their issue dates so contractors
have more time to respond to each solicitation,[Footnote 53]
* developing a database of non-U.S. materials that meet project
requirements, and:
* being more responsive to contractors' requests for equitable
adjustments.
OBO began implementing some of these changes in its fiscal year 2008
NEC program. Other changes are ongoing, and improvements will not be
achieved until fiscal year 2009 and later.
Improving Design-Build Project Delivery:
At the recommendation of its internal working group and after
discussions with its industry advisors,[Footnote 54] State intends to
modify its approach to design-build project delivery. Because of
security concerns, State requires that its projects pass a rigorous
design review prior to being certified for construction. Under State's
former approach to design-build delivery, contractors needed to
complete design, respond to review comments--which typically numbered
several hundred--and await State's certification of the design for
construction. As previously discussed, some contractors said that they
expended comparatively more time completing a design for State and
having it certified for construction than on a design for other owners'
projects, which precluded them from beginning construction as early as
they wanted and prevented State from fully realizing the time-saving
potential of design-build delivery.
In its revised approach, State will use the "bridging" design method to
provide more focused design detail to construction contractors.
[Footnote 55] By providing more design detail up front, State expects
to more effectively translate project requirements to contractors,
speed the design certification process, and enable construction to
begin sooner. Under the bridging method, State would first contract
with a design firm--referred to as either the bridging architect,
criteria architect, or the owner's design consultant--to develop an
initial design that incorporates critical requirements and that can be
certified for construction. State would then contract with a design-
build contractor to complete the design for the project--which should
take less time than it did under State's former process because more up-
front design work will have been completed--and carry out its
construction. According to industry experts, the advantage to this
approach is that an owner, in this case, State, can initiate design
sooner and ensure critical requirements are incorporated into a
bridging design. Moreover, because the bridging architect will have
developed the project to the point of being ready for construction
certification, and because contractors can begin construction
activities shortly following contract award, rather than having to wait
for State to certify the project for construction, design-build
contract durations can be shorter. In addition, industry experts
indicate that an owner may potentially receive a better price for
design-build services by using this method. Because there would be
fewer unknowns regarding the owner's intent as a result of requirements
being more clearly delineated in the bridging design, contractors'
proposals should contain fewer allowances for uncertainties.
Prior to implementing this approach to its fullest effect, OBO must
reach an agreement with the Bureau of Diplomatic Security on how this
bridging design approach would address the security requirements
associated with NEC facilities and construction--such as building
setback, Forced Entry/Ballistic Resistant (FE/BR) requirements, and
technical security systems, among others--and whether the bridging
designs would be certified to Congress as meeting all security
requirements. Moreover, State's working group noted that State must
also ensure that the portions of the design that are certified as
meeting all security requirements are contractually binding and
preserved through the continuation of design and completion of
construction by the design-build contractor. Keeping the bridging
architect involved with the project through the design-build phase, for
example, is one option that State may consider using to ensure the
integrity of security features, upon which certifications made to
Congress are preserved during the final design and construction by the
design-build contractor.
Adjusting Schedules:
Starting with the fiscal year 2008 contract awards, State is generally
extending the time frame within which projects must be built. Instead
of basing a project's schedule on its SED size classification, State's
new approach will set the schedule based on a variety of factors. In
particular, this approach will draw upon recent experience from
completed projects of similar scope and size, as well as project-
specific considerations such as geographic location and host country
conditions to tailor schedules for new projects. As a result of having
more time to complete projects, contractors are more likely to meet
contract completion dates and will bear less risk of having to pay
liquidated damages for delayed completion.
Streamlining RFPs and Staggering Their Issuance:
At the recommendation of its internal working group, State is examining
options to streamline its RFPs to better integrate requirements and
convey information to contractors that respond to them. A typical RFP
consists of over 6,000 pages and contains elements such as the Space
Requirements Program, which details square footage space needs of
planned occupants, and test-fit drawings, which provide a notional
layout of floor space. Because of their sheer size, RFP documents are
difficult to maintain and often contain conflicting information that
can inhibit contractors' understanding of requirements and increase
project risks. For example, the Space Requirements Program and the
blocking and stacking documents--the latter providing a notional
vertical stacking and floor-by-floor layout of office suites--provided
in the RFP for the Managua NEC project misrepresented the actual size
of the building. As a result of this discrepancy, State settled with
the contractor on a $4.3 million modification that included a 165-day
time extension.
The working group also recommended that State establish a single RFP
coordinating entity to maintain a "model RFP," with appropriate
document change control mechanisms from which project-specific RFPs
would be developed. Individual model RFPs specific to certain project
types and delivery methods may also be developed. In addition, State
intends to leverage technology by using automated applications to
consolidate, update, and maintain its RFP documents--creating what it
terms an "e-RFP." State officials believe that the majority of
improvements may not be seen until State's fiscal year 2010 RFPs are
issued because implementation will require enhancements to State's
information technology processes and applications. In the longer term,
State intends to explore ways to make greater use of evolving Building
Information Modeling (BIM) technologies--to include the migration of
all RFP design and criteria data into a structure conducive to these
technologies--to allow for more integration and exchange of project-
specific information between State and contractors throughout every
stage of the project.[Footnote 56]
In addition, State established a goal to stagger the RFPs for its
fiscal year 2008 projects so that contractors would have more time to
respond to each solicitation. For its fiscal year 2008 projects, State
staggered RFP issuance between May and July. In addition, when
contractors asked for additional time, State generally granted their
request by providing a 10-day extension to the standard 45-day response
time.
Developing a Database of Acceptable Local Materials:
State is working to develop a database of acceptable materials from
foreign sources that contractors could use in construction. We first
reported on this effort in 2006.[Footnote 57] State construction
contracts require contractors to use U.S. materials and products unless
contractors can demonstrate the proposed substitute meets U.S.
performance standards. Benefits to contractors of using materials
available within the country include, for example, reduced shipping
costs. However, to maintain schedule, contractors must obtain a timely
approval from State to use and to procure materials within that
schedule. A few contractors we spoke with note that State neither
consistently approves the use of substitutes, nor consistently provides
timely decisions, even in cases where certain products or materials
have been approved for use on another State project. While State
reports it is continuing with its efforts to develop such a database,
contractors have yet to see evidence that State's approach to approving
substitutions is more efficient and timely.
Being More Responsive to Requests for Equitable Adjustment:
In 2006, State issued policy and procedures for processing a
contractor's request for equitable adjustments (REA). State reports it
has recently implemented a new centralized system of receiving,
processing, and tracking all REAs at OBO headquarters. REAs are visible
to senior managers--REA status is reviewed monthly at Program
Performance Review meetings--who hold project directors accountable for
providing a timely response. Under this process, State seeks to
receive, assess the merits of, and respond to contractors' REAs within
55 days. However, if State requires additional information following
the receipt of an REA, the time needed for the ensuing information
exchange and related discussions may affect State's ability to achieve
final resolution within 55 days. Given that State may, in certain
instances, be unable to address an REA within 55 days, some contractors
with whom we spoke said that State still takes too long in responding
to REAs. In addition, one contractor indicated that State purposely
defers its decisions on REAs so that it can use them as leverage in
future negotiations. For example, State might negotiate waiving or
reducing liquidated damages that it could assess for a contractor's
late completion in exchange for the contractor withdrawing its REA.
While we did not examine the merits of these allegations, contractors'
concerns suggest that State's continued attention to REA management is
needed.
State Is Making Organizational Changes to Improve Internal Coordination
and Communication and Enhance Accountability:
In September 2008, State created a dedicated project management group
responsible for providing coordination and oversight from planning
through construction and commissioning. State initiated this effort
based on a recommendation of its internal working group that was based,
in part, on State's Office of the Inspector General's finding that
OBO's former organizational structure--in which project management
responsibility passed sequentially from a planning office[Footnote 58]
to an executing office[Footnote 59]--allowed for marginally effective
coordination, communication, and accountability. Under the former
organizational structure, project executives responsible for
construction and commissioning were not heavily involved in planning
efforts conducted by planning managers. Similarly, planning managers
who typically spent at least a year developing project requirements
prior to the contract award were normally not involved in design and
construction oversight efforts managed by project executives. As a
result, no one in OBO maintained comprehensive knowledge of a project
from start to finish, which may have contributed to accountability gaps
when a project passed from one office to the next.
The new project management group, the Project Development and
Coordination (PDC) Division, resides within the Office of Program
Development, Coordination, and Support--formerly called the Office of
Project Execution.[Footnote 60] Project managers in the PDC Division--
who will be required to obtain project management certification, in
accordance with Office of Management and Budget (OMB) requirements
[Footnote 61]--will lead a multidisciplinary team of subject matter
experts in performing project management functions. During the
project's planning and design phases, project managers will be
responsible for efforts such as developing the RFP, overseeing
procurement of the design bridging contract, chairing design review
meetings, and approving design changes. During the construction phase,
project managers will coordinate with construction executives from the
Office of Construction, Commissioning, and Maintenance to support on-
site project directors in administering NEC construction contracts. The
working group noted that during construction the three individuals--
project director, project manager, and construction executive--must
have clearly defined roles that are properly coordinated to avoid
confusion and to ensure that resources are being used efficiently.
Under the new organizational structure, the project director is State's
on-site representative who routinely interfaces with the contractor and
serves in the key role of contracting officer's representative.
[Footnote 62] The construction executive is the Washington-based focal
point for all communications from the project director and performs key
functions, such as serving as the alternate COR, and processing
invoices and project change requests. At the same time, the project
manager serves as leader of the Washington-based team and is
responsible for tasks such as leading integrated design reviews;
managing contract documents; and, in conjunction with the construction
executive, reporting to senior management on project performance at
monthly review meetings. However, because the organizational change was
only recently implemented, it is too early to determine whether it
enables project directors, project managers, and construction
executives to effectively coordinate efforts and optimize project
management efficiencies.
Conclusions:
From 1999 to December 2008, State constructed 64 new embassies,
consulates, and annexes and relocated more than 19,500 U.S. government
employees to safe, secure, and functional state-of-the-art office
buildings. In 2007, State concluded that "the current pool of American
contractors qualified and able to carry out diplomatic construction
projects overseas has nearly reached its capacity." In 2007, State
proposed amendments to the Omnibus Diplomatic Security and
Antiterrorism Act of 1986 that would allow smaller U.S. companies and
foreign companies to compete for projects for which they currently
would not qualify. Congress did not act on the proposed amendment. In
December 2008, State indicated it would modify that proposal to extend
greater opportunities only to U.S. construction firms that currently
cannot meet the U.S. persons definition. However, State has completed
no systematic analysis in support of its conclusion and legislative
proposal, including assessments of the significance and cause of
changes in contractor willingness to participate in the NEC program,
how these changes have affected its construction program, how its
proposed amendments would address those causes and effects, the risks
associated with its proposed amendments, or how it would mitigate those
risks. In addition, State has not assessed the extent to which
companies comprising the U.S. construction sector are capable of
meeting the current criteria. Absent such support, it is unclear how
State's proposed amendment would affect the NEC program.
In our analysis, we found that contractor participation declined in
recent years for two reasons. First, increasing construction costs have
made it more difficult for some firms to qualify for awards. Second,
contractors reported that State management and construction processes
undermine their ability to turn a profit, which is their primary
incentive for participating in the program. State has recently
implemented a number of changes to its management of the NEC program by
improving communications with the contractor community, refining some
of its management practices by implementing process reforms and
mitigating some of the risks associated with NEC projects, and
reorganizing its management structure. These efforts are designed to
improve State's overall management of the NEC program, including
increasing the number of firms willing to participate in the program,
and they address some of the important factors contractors reported as
affecting their decisions to participate in the NEC program. While
these changes may increase contractor participation, their full effects
on the NEC construction process may not be apparent for a number of
years, and State will need to monitor their effectiveness.
Recommendations for Executive Action:
We recommend that the Secretary of State conduct a systematic review of
the embassy construction contractor base that (1) demonstrates whether
the U.S. contractor base that is both capable of meeting current
requirements and willing to participate in the NEC program is adequate;
(2) estimates the expected benefits and identifies the potential risks
associated with the legislative proposal; and (3) details how the risks
would be mitigated.
Agency Comments and Our Evaluation:
In written comments on a draft of this report, State said that although
the contractor base has been adequate in the fact that it has met the
legislatively specified minimum level of competition, the program could
benefit from expanding competition. Additionally, State said it would
revise its proposed amendment to the Omnibus Diplomatic Security and
Antiterrorism Act of 1986 by opening competition for NECs only to U.S.
companies that meet the specified security requirements for a project,
rather than requiring them to meet the current statutory definition of
a U.S. person. State also said that since full and open competition is
a central principle for federal acquisitions, a cost-benefit analysis
is unnecessary. We disagree with State's view. State initiated a
process to revise the qualifying criteria for NEC awards, but it has
provided no compelling analytical support for why the criteria should
be amended, how such an amendment would be implemented, the expected
benefits and potential risks associated with the changes, or how any
identified risks would be mitigated. Absent such support, it is unclear
how the proposed changes would affect State's program. We, therefore,
believe our recommendation remains valid.
In a draft of this report, we had a second recommendation that State
assess how its efforts to improve communication with contractors,
implement process reforms and mitigate project risks, and reorganize
its organizational structure affect contractor participation. In a
December 2008 meeting with State officials and in State's written
comments, the department noted that it would continue to actively
engage with contractors and assess its performance. However, State also
noted that it may take a number of contract cycles for its recent
outreach efforts and procedural and organizational reforms to achieve
their full impact. We agree that it may take time before the overall
effectiveness of State's recent efforts can be fully assessed.
Therefore, we decided to delete the recommendation.
State's comments, along with our responses to specific points, are
reprinted in appendix III. State also provided technical comments,
which were incorporated into the report, as appropriate.
As agreed with your office, unless you publicly announce the contents
of this report earlier, we plan no further distribution until 30 days
from the report date. At that time, sending copies of this report to
interested congressional committees and the Secretary of State. The
report also is available at no charge on the GAO Web site at
[hyperlink, http://www.gao.gov].
If you or your staffs have any questions about this report, please
contact Jess T. Ford at (202) 512-4128 or fordj@gao.gov, or Terrell G.
Dorn at (202) 512-6923 or dornt@gao.gov. Contact points for our Offices
of Congressional Relations and Public Affairs may be found on the last
page of this report. Key contributors to this report are listed in
appendix IV.
Signed by:
Jess T. Ford:
Director, International Affairs and Trade:
Signed by:
Terrell G. Dorn:
Director, Physical Infrastructure:
[End of section]
Appendix I: Scope and Methodology:
To address the first objective--how the contractor participation in the
NEC program changed in recent years--we assessed the number of firms
that prequalified and the number of contract proposals (bids) submitted
for each new embassy compound (NEC), new consular compound (NCC), and
new office building (NOB) awarded from 2002 to 2008. Collectively, we
refer to this class of projects as NECs. Data for prequalifying firms
were derived from the Department of State's (State) Office of Logistics
Management and were cross-referenced with prequalification records
derived from the Federal Business Opportunities Web site [hyperlink,
http://www.fbo.gov]. Data for the number of bids were also derived from
State's Office of Logistics Management and, to the extent possible,
were corroborated with contract information and State analyses obtained
during previous GAO work. In cases where discrepancies occurred between
the two sources, or where we could not confirm the data, we used the
data provided by State. Data for the number of prequalifying firms and
number of bids submitted for all 10 NECs awarded from 1999 to 2001, as
well as for three projects from 2002 onward, were unavailable; thus,
they were excluded from the analyses. Non-NEC projects, including those
labeled by State as interim office buildings (IOB), newly acquired
buildings (NAB), new office annexes (NOX), and Standard Secure Mini
Compounds (SSMC), were also excluded from the analyses. Table 2 shows
the NEC projects included in our analyses, and the numbers of
prequalifying firms and bids submitted for each NEC award (see page 16
of this report). We determined that these data on the numbers of
prequalifying firms and bids received were sufficiently reliable for
our purposes.
To determine how contractor participation has changed over time, we
tracked the variations in the yearly average number of firms per
project that prequalified to bid for NECs and the yearly average number
of bids submitted per NEC project. We also compared these averages with
the yearly average estimated NEC project costs. Data for estimated
costs derive from two sources. For fiscal years 2005 to 2008, the
estimated costs for NECs derived from notices of solicitations for
contractors to submit prequalification packages. In cases where a range
was provided for the estimated cost, we used the maximum estimated
value for our analysis. Estimated costs for 2002 to 2004 were
calculated based on (1) a 2005 OBO analysis of variances between
contractor bid prices and the government estimated prices for each NEC
project and (2) the actual original value of the contract award. We
determined that these cost data were sufficiently reliable for our
purposes.
We also developed two regression models to understand the factors that
influence contractor participation. Each model was based on the
individual NEC contracts (NEC, NOB, and NCC) that were awarded from
2002 to 2008 (see table 2 on page 16 of this report). The first model
used fiscal year and estimated project cost as independent variables to
predict the number of firms that prequalify to bid per NEC project. We
found a statistically significant inverse relationship between the
estimated NEC project cost and the number of prequalifying firms
(coefficient estimate = -0.09, p-value = 0.000), such that higher
estimated costs result in fewer prequalifying firms, and lower
estimated costs result in more prequalifying firms. However, the
relationship between fiscal year and the number of prequalifying firms
was not statistically significant (coefficient estimate = 0.34, p-value
= 0.108). In the second model, we used the fiscal year and the number
of prequalifying firms for each NEC project as dependent variables to
predict the number of bids received per NEC project. We found a
statistically significant inverse relationship between fiscal year and
the number of bids per project (coefficient estimate = -0.19, p-value =
0.020), such that the number of bids per NEC project declined
significantly from 2002 to 2008. We also found that the number of
prequalifying firms per project are significant predictors of the
number of bids received (coefficient estimate = 0.18, p-value = 0.002),
such that more bids are received when more firms prequalify to do so.
In our modeling, we considered statistical significance to help specify
the variables to include in our models.
To address the second objective--the degree to which State has assessed
the need for or potential outcomes of its proposed amendment to the
Omnibus Diplomatic Security and Antiterrorism Act of 1986--we reviewed
State documents on legal requirements to qualify for NEC awards,
State's proposed amendments to these legal requirements, and State's
contract solicitation and award processes. We also conducted interviews
with State staff on the level of analyses State completed in support of
the proposed amendment, the likely benefits that would be gained, how
risks to the government would change, and how those risks would be
mitigated. To test State's assertion that sufficient capacity no longer
exists among the U.S. contractor base to complete NEC awards, we
compared the extent to which firms listed by Engineering News Record
(ENR) in its compilation of the top 100 U.S. design-build firms for
2008 had prequalified for NEC awards from 2002 to 2008, and received
awards from 2002 to 2008.[Footnote 63] The top 100 list is determined
by ranking companies' total 2007 revenues derived from design-build
contracts where those construction projects are designed and built by
its own workforce or in conjunction with joint-venture partners and
subcontractors. We also searched Web sites of, and conducted Lexis-
Nexis searches on, the top 100 companies to determine whether these
firms have ongoing operations in countries where State's Bureau of
Overseas Buildings Operations (OBO) plans to build NECs in 2009, as
listed in OBO's Long-Range Overseas Buildings Plan, FY 2008-2013.
Underlying these analyses is our assumption that the companies on this
list could meet at least the financial criteria, as outlined in the
Omnibus Diplomatic Security and Antiterrorism Act of 1986, to qualify
for NEC awards since (1) the 96TH-ranked firm prequalified to bid for
NEC awards in fiscal year 2008 that were in excess of its 2007 revenues
[Footnote 64] and (2) at least four other firms not on the list--
American International Contractors Inc. (Special Projects), Aurora LLC,
Environmental Chemical Corporation International, and Framaco
International--prequalified for the 2008 awards. We did not
independently confirm the validity of ENR's methodology for developing
its top 100 ranking, nor did we independently verify the accuracy of
information derived from the company Web sites or Lexis-Nexis searches.
However, because our analysis was designed to illustrate a potential
for untapped contractor capacity, we determined that the data we used
were sufficiently reliable.
To address the third objective--factors that affect contractors'
decisions to participate in State's construction program--we identified
the universe of 21 U.S. construction firms that won awards to build
U.S. embassies, consulates, and diplomatic annexes since 2001. Foreign
firms and U.S. firms awarded only contracts for construction other than
office buildings, such as Marine Security Guard quarters, staff
housing, and other construction projects were not included in our
census. Three of the 21 U.S. firms were excluded from our interviews
for various reasons--one company is no longer in business, while two
others received sole-source contracts that would make them unable to
respond to a number of the competitiveness questions in our interview
instrument. A fourth company was excluded because we could not arrange
a meeting with that company. As a result, we interviewed 17 U.S.
contractors from March-June 2008 (see table 6). From 2001 to 2007,
these 17 companies were awarded 78 NEC and related contracts with
original values totaling approximately $4 billion. This latter value
represents 81 percent of all embassy, consulate, and annex construction
contracts awarded through 2007.
Table 6: U.S. Construction Firms Participating in GAO Structured
Interviews:
Firm: B.L. Harbert International, LLC;
Location: Birmingham, Ala.;
Number of awards: 17;
Total original award value: 2001-2007: $941.4 million.
Firm: Fluor Intercontinental, Inc.;
Location: Greenville, S.C.;
Number of awards: 17;
Total original award value: 2001-2007: $773.1 million.
Firm: Caddell Construction Co., Inc.;
Location: Montgomery, Ala.;
Number of awards: 14;
Total original award value: 2001-2007: $768.7 million.
Firm: H. B. Zachary Company;
Location: San Antonio, Tex.;
Number of awards: 5;
Total original award value: 2001-2007: $462.9 million.
Firm: Aurora, LLC;
Location: Rockville, Md.;
Number of awards: 3;
Total original award value: 2001-2007: $221.7 million.
Firm: Kellogg, Brown & Root, Inc.;
Location: Arlington, Va.;
Number of awards: 2;
Total original award value: 2001-2007: $178.4 million.
Firm: American International Contractors (Special Projects), Inc.;
Location: Arlington, Va.;
Number of awards: 2;
Total original award value: 2001-2007: $173.3 million.
Firm: Hensel Phelps Construction Co.;
Location: Greeley, Col.;
Number of awards: 2;
Total original award value: 2001-2007: $126.1 million.
Firm: Framaco International;
Location: Rye Brook, N.Y.;
Number of awards: 4;
Total original award value: 2001-2007: $87.9 million.
Firm: W. G. Yates & Sons Construction Co.;
Location: Philadelphia, Miss.;
Number of awards: 1;
Total original award value: 2001-2007: $86.9 million.
Firm: Telesource International, Inc.;
Location: Lombard, Ill.;
Number of awards: 1;
Total original award value: 2001-2007: $42.6 million.
Firm: Gilford Corporation;
Location: Beltsville, Md.;
Number of awards: 2;
Total original award value: 2001-2007: $26.2 million.
Firm: Contracting, Consulting, Engineering, LLC;
Location: Annapolis, Md.;
Number of awards: 2;
Total original award value: 2001-2007: $23.3 million.
Firm: Desbuild, Inc.;
Location: Hyattsville, Md.;
Number of awards: 2;
Total original award value: 2001-2007: $23.0 million.
Firm: Dynamic Corp.;
Location: Hyattsville, Md.;
Number of awards: 1;
Total original award value: 2001-2007: $21.2 million.
Firm: HITT Contracting;
Location: Fairfax, Va.;
Number of awards: 1;
Total original award value: 2001-2007: $14.8 million.
Firm: Montage, Inc.;
Location: Washington, D.C.;
Number of awards: 2;
Total original award value: 2001-2007: $6.8 million.
Source: GAO.
[End of table]
To obtain consistent information from the contractors, we developed a
structured interview instrument that included approximately 70 closed-
and open-ended questions designed to assess contractor views and
experiences on a wide range of construction-related topics, including,
(1) construction experience and experience with State and other federal
agencies; (2) State's program-level and on-site construction management
policies and processes; (3) incentives for pursuing construction
awards; (4) challenges in completing NEC and related construction
projects; and (5) profitability of NEC and related projects. To ensure
that respondents understood the questions in the same way, that we had
phrased the questions appropriately for this population, and that we
had covered the most important issues, we pretested our instrument with
three contractors and made revisions based on their input. Prior to
fully implementing the instrument, it was reviewed by the staff from
the U.S. Naval Facilities Engineering Command and State's Office of the
Inspector General. In addition, we briefed staff from OBO and State's
Office of Logistics Management on the instrument's content,
implementation schedule, and intended respondents.
To address the fourth objective--actions State has taken to address the
reported decline in contractors willing to participate in the NEC
program--we reviewed documentation and conducted interviews with
knowledgeable State officials on (1) rules and regulations outlining
the embassy construction process, including public laws, Federal
Acquisition Regulations, the Foreign Affairs Manual, and State reports
and decision memos; (2) delivery methods and partnering policies
employed by other federal agencies and supported by leading industry
groups; (3) State's efforts to improve communications with the
contractor community, including meetings with industry groups and
individual contractors; (4) State's reorganization of planning offices,
including the development of a new project management group and project
manager positions; and (5) State efforts to improve construction
processes, including lengthening project schedules, streamlining the
contract solicitation process, and clarifying contract documents. We
also attended State's monthly program performance meetings, its
quarterly Industry Advisory Panel meetings, and its annual Industry Day
meeting, at which information about contract opportunities was
presented to firms who attended the event. Finally, we reviewed past
GAO work on embassy construction and met with and reviewed the report
of a State Inspector General inspection team reviewing OBO operations.
We conducted this performance audit from October 2007 to January 2009,
in accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe that
the evidence obtained provides a reasonable basis for our findings and
conclusions based on our audit objectives.
[End of section]
Appendix II: Contractor-Reported Challenges to Completing State
Construction Projects:
Contractors rated 24 challenges as "Major," "Moderate," "Minor," or
"Not a Challenge." Then, they rank-ordered their major challenges. We
created the challenge categories to facilitate analysis and discussion.
Table 5 in the main text shows the rank-ordered major challenges. Table
7 displays how contractors rated all the challenges.
Table 7: Contractor-Reported Challenges to Completing State
Construction Projects:
Challenge category: Logistics;
Challenge: Logistics (getting labor and materials to the site);
Major challenge: 12;
Moderate challenge: 4;
Minor challenge: 1;
Not a challenge: 0.
Challenge category: Logistics;
Challenge: Obtaining housing for workers;
Major challenge: 0;
Moderate challenge: 5;
Minor challenge: 10;
Not a challenge: 2.
Challenge category: Schedule;
Challenge: Meeting State/OBO's construction schedule;
Major challenge: 14;
Moderate challenge: 2;
Minor challenge: 1;
Not a challenge: 0.
Challenge category: Financial;
Challenge: Currency fluctuations;
Major challenge: 12;
Moderate challenge: 4;
Minor challenge: 0;
Not a challenge: 1.
Challenge category: Financial;
Challenge: Obtaining performance bonds;
Major challenge: 5;
Moderate challenge: 4;
Minor challenge: 2;
Not a challenge: 5.
Challenge category: Financial;
Challenge: Timeliness of payment;
Major challenge: 0;
Moderate challenge: 2;
Minor challenge: 5;
Not a challenge: 9.
Challenge category: Labor;
Challenge: Finding qualified workers (cleared);
Major challenge: 10;
Moderate challenge: 5;
Minor challenge: 1;
Not a challenge: 1.
Challenge category: Labor;
Challenge: Keeping qualified workers (cleared);
Major challenge: 10;
Moderate challenge: 4;
Minor challenge: 2;
Not a challenge: 1.
Challenge category: Labor;
Challenge: Finding qualified workers (noncleared);
Major challenge: 8;
Moderate challenge: 6;
Minor challenge: 3;
Not a challenge: 0.
Challenge category: Labor;
Challenge: Keeping qualified workers (noncleared);
Major challenge: 2;
Moderate challenge: 8;
Minor challenge: 7;
Not a challenge: 0.
Challenge category: Foreign government relations;
Challenge: Dealing with foreign governments (permitting issues,
clearing materials through customs, paying tariffs);
Major challenge: 6;
Moderate challenge: 5;
Minor challenge: 6;
Not a challenge: 0.
Challenge category: Foreign government relations;
Challenge: Obtaining reliable information about local country
conditions (e.g., requirements to register firm, value added tax
reimbursement, availability of local workers and materials);
Major challenge: 5;
Moderate challenge: 6;
Minor challenge: 5;
Not a challenge: 1.
Challenge category: Foreign government relations;
Challenge: Obtaining visas for contractor employees;
Major challenge: 3;
Moderate challenge: 7;
Minor challenge: 6;
Not a challenge: 1.
Challenge category: State approvals;
Challenge: Obtaining approval to use substitute materials;
Major challenge: 5;
Moderate challenge: 8;
Minor challenge: 2;
Not a challenge: 1.
Challenge category: State approvals;
Challenge: Obtaining timely design reviews from OBO or the Bureau of
Diplomatic Security;
Major challenge: 7;
Moderate challenge: 4;
Minor challenge: 5;
Not a challenge: 1.
Challenge category: State approvals;
Challenge: Obtaining timely response from State/OBO on accepting site
changes;
Major challenge: 5;
Moderate challenge: 6;
Minor challenge: 3;
Not a challenge: 2.
Challenge category: State approvals;
Challenge: Obtaining timely response from State/OBO staff on material
submittals;
Major challenge: 4;
Moderate challenge: 5;
Minor challenge: 7;
Not a challenge: 0.
Challenge category: State approvals;
Challenge: Excessive changes requested by State/OBO;
Major challenge: 4;
Moderate challenge: 5;
Minor challenge: 5;
Not a challenge: 3.
Challenge category: State approvals;
Challenge: Obtaining timely response from State/OBO on final
commissioning inspections;
Major challenge: 3;
Moderate challenge: 4;
Minor challenge: 2;
Not a challenge: 6.
Challenge category: State approvals;
Challenge: Obtaining timely response from State/OBO staff on requests
for information;
Major challenge: 2;
Moderate challenge: 5;
Minor challenge: 8;
Not a challenge: 1.
Challenge category: State approvals;
Challenge: Obtaining timely responses from State/OBO on progress
inspections;
Major challenge: 1;
Moderate challenge: 3;
Minor challenge: 7;
Not a challenge: 4.
Challenge category: SED/design requirements;
Challenge: Resolving instances of differing site conditions;
Major challenge: 6;
Moderate challenge: 4;
Minor challenge: 6;
Not a challenge: 1.
Challenge category: SED/design requirements;
Challenge: Conforming to the standard embassy design;
Major challenge: 6;
Moderate challenge: 3;
Minor challenge: 7;
Not a challenge: 1.
Challenge category: SED/design requirements;
Challenge: Adapting the standard design to accommodate site conditions;
Major challenge: 3;
Moderate challenge: 5;
Minor challenge: 6;
Not a challenge: 3.
Source: GAO.
[End of table]
[End of section]
Appendix III: Comments from the Department of State:
Note: GAO comments supplementing those in the report text appear at the
end of this appendix.
United States Department of State:
Assistant Secretary for Resource Management and Chief Financial
Officer:
Washington, DC 20520:
Ms. Jacquelyn Williams-Bridgers:
Managing Director:
International Affairs and Trade:
Government Accountability Office:
441 G Street, N.W.
Washington, D.C. 20548-0001:
Dear Ms. Williams-Bridgers:
We appreciate the opportunity to review your draft report, "Embassy
Construction: Actions Are Needed to Address Contractor Participation,"
GAO Job Code 320560.
The enclosed Department of State comments are provided for
incorporation with this letter as an appendix to the final report.
If you have any questions concerning this response, please contact
Christina Maier, Program Management Analyst, Bureau of Overseas
Buildings Operations at (703) 875-5752.
Sincerely,
Signed by:
Sid Kaplan (Acting):
cc: GAO - Sam Bernet:
OBO - Richard Shinnick:
State/OIG - Mark Duda:
Department of State Comments on GAO Draft Report:
Embassy Construction: Actions Are Needed to Address Contractor
Participation (GAO-09-48, GAO Code 320560):
Introduction:
The Department of State appreciates the opportunity to review the
subject draft report. Overall, the report is informative and supportive
of OBO's on-going initiatives to increase participation in the Embassy
Construction Program and facilitate contract execution. We will use the
findings and information to further our efforts to improve the
efficiency and effectiveness of OBO's operations and increase the
participation of contractors. We offer the following comments:
* The Department of State asks that the title of the report be changed
to "Additional Actions Are Needed to Address Contractor Participation."
The report highlights a number of actions previously initiated by State
to reduce contractor risk by streamlining the contract documents,
adjusting the contract period of performance, and to improve outreach
to the contractor community. State agrees that the addition of more
interested, responsible bidders for State projects would benefit the
program and continues to strive towards enlarging the contractor pool,
but the conclusions drawn in the report regarding a reduced number of
bidders and a need for many of the actions recommended in the body of
the report are not currently supported by the facts presented. We would
like the "history" to be separated from the present. [See comment 1]
Comments on Text:
Construction Schedules:
The report states "firms indicated that they cannot meet the reduced
construction schedules due to unclear solicitation documents and
contract requirements, laborious design reviews ... " (Page 6); [State
notes that these schedules have already been extended.]
*The Department would like to emphasize that the period of performance
for contracts were explicitly spelled out in the Request for Proposals
(REPO and the contractors considered that when preparing the proposals
that ultimately became contracts. Consequently, the RFP and the
subsequent contract include the requirements for design reviews and
provide an established timeframe within which the US Government is to
perform this function. If the government exceeds this timeframe, it is
liable for the delay assuming no culpability on the contractor's part
(i.e. an incomplete design submission). As a result, the Department's
initiative to streamline the RFP documents and use bridging should
reduce the conflicts within the contract documents, any confusion of
interpretive requirements, and perhaps reduce the number of design
comments. We have reviewed the historical performance of the projects
completed between 2001 and 2007 and increased the durations for future
projects to more closely align with both historical averages and our
trend towards better performance. We have developed a standard form to
use to develop the duration for each of our design/build projects,
however, as starting points, we give an unclassified annex or an SSmC
24 months, a small SED 28 months, a medium 30 months, a large 32
months, and a extra large/special 36 months for design and
construction. [See comment 2]
Cleared Workers:
The report states "contractors explained that "cleared" workers - those
with security clearances - who are willing to live overseas in often
unappealing locations are in relatively short supply." (Page 31)
* OBO can provide the GAO with additional information on how OBO
captures risk and increase in salaries to demonstrate that the
"estimating" is not arbitrary but rather a calculation based on a
demonstrated financial criteria. Less competition arguably results in
higher pricing, however, higher pricing results in fewer firms meeting
the financial criteria. Perhaps, a solution would be to draw in larger
contractors that have the financial capacity for the work, in
accordance with GAO's recommendations. We have reached out to one of
the largest U.S. construction contractors, and will continue outreach
efforts to other large U.S. construction firms. [See comment 3]
Project Location:
The report suggests "contractors believe that State could provide more
helpful information about the locality."
* The Department welcomes the opportunity to work with the contractor
community to identify information that would be helpful to them and
structure our initial planning phase to collect and package information
for their use. However, it will ultimately be our contractors'
responsibility to establish the local conditions upon which they base
their bids.
Recommendations for Executive Action:
The GAO recommends that the Secretary of State take two actions:
* Conduct a systematic review of the embassy construction contractor
base that (1) demonstrates whether the US contractor base that is both
capable of meeting current requirements and willing to participate in
the NEC program is adequate, (2) estimates the expected benefits of
State's legislative proposal to allow greater participation by foreign
and smaller US firms, including how such an expanded contractor base
would affect actual NEC awards, and (3) identifies the potential risks
associated with the proposal and details how they would mitigated; and
[N.B. - as explained below, State will not pursue legislative action to
allow more participation by foreign firms.]
* Assess how State's actions to improve communications with
contractors, implement process reforms and mitigate project risks, and
reorganize its organizational structure affect contractor
participation.
Construction Contractor Base:
* Recognizing the continuing need to ensure NEC project security, we
have reconsidered our pursuit of the legislative proposal to allow
foreign firms greater levels of participation in our projects. We
would, however, propose to seek amendment of Section 402 of the Omnibus
Diplomatic Security and Antiterrorism Act of 1986 to allow more U.S.
firms to qualify as a "United States person" for work on diplomatic
construction projects overseas in order to increase competition and
decrease costs. All responsible U.S. firms who can meet the specified
security requirements should be permitted to bid, rather than requiring
firms to meet the current complicated statutory definition of "U.S.
person." Since competition on such a basis would follow the full and
open competition principles central to Federal acquisition, we do not
think it should be necessary to present a cost-benefit analysis
justifying such a change.
* We believe that the contractor base has been adequate, in that it has
consistently met the legislatively specified minimum level of
competition. However, we agree with the GAO's findings that the program
would benefit from expanding the pool of participating contractors,
thereby increasing the level of competition. We will continue to work
actively towards expanding our bidding pool, and we are reaching out to
industry for recommendations. For example, we have recently held a
series of meetings with one of the largest American contractors, who is
not currently bidding our projects, to review our contract documents
and solicit feedback to reduce and/or properly apportion risk in our
contracts. This review is ongoing.
* We agree that it is important to improve communications with
contractors and will continue to actively engage our contractors and
assess our performance in these areas. We believe it may take several
contract cycles for the recent changes at OBO to achieve their full
impact.
The report says that State has met the legislatively required minimum
number of bidders for all but one of 61 of its NEC projects from 1999 -
2008.
* State is not pleased that one of its projects received only one bid,
but in this particular case, the project had 10 pre-qualified firms.
This is more than most of the other projects in the same year (2007)
and the contractors may have lost interest due to the perceived level
of competition.
* It is important to note that although there is apparently a decrease
in the number of bids for OBO capital projects, this is likely also due
to the deteriorating condition of the global economy and its impact on
the construction industry. State understands that many owner
organizations have seen similar, or worse, levels of decreased
competition for their work.
* State questions why GAO, in the executive summary, chose to highlight
the dramatic change in the number of pre-qualifying firms between 2006
and 2008, while also stating in Appendix 1 that "the relationship
between fiscal year and the number of pre-qualifying firms was not
statistically significant?" State believes that 2006 may be an anomaly
and that it could be misleading to draw any conclusions based on a
spike in a single year. [See comment 4]
According to GAO in Appendix 1, one of our contractors was excluded
from the population of contractors interviewed because "significant
legal issues between it and OBO that we deemed would likely inject bias
into the results."
* Presumably this was a particular smaller firm, who is in litigation
with State over a $3.7M claim. One of our former large contractors was
not excluded from the contractors interviewed despite the fact that
this contractor currently has more than $96M in claims against State,
comprising 92% of all of State's current certified claims. Note that
this former large contractor has performed 19.5% of the work listed in
GAO table 6. State has no access to the actual responses made by this
large contractor and cannot determine whether bias has been introduced,
but does ask that the consideration of bias be consistently applied.
[See comment 5]
Assessing State's Actions and Reforms:
GAO has characterized State's poor performance with the Inman program
projects and the reasons for this poor performance, to include
"systemic weaknesses in program management." GAO has also highlighted
some of the reforms made by OBO to its management structure and
contracting, planning and construction processes as the current
construction program was initiated just after the bombings of the
Embassies in East Africa. Comparison of the Inman era project
performance and the project performance during the 2001-2008 by any
measure strongly validates the effectiveness of these reforms.
* Two of the most important aspects of these reforms were the
elimination of formal partnering and of the project management function
as they existed during the Inman era. This does not mean that the
principles of partnering or project management were eliminated, but
that the lines of communication, responsibility, authority, and
accountability within the organization were improved and clarified.
Partnering, as it was then implemented, tended to undermine the Project
Directors' ability to manage the projects in the field. The project
management function, as implemented by the Project Management Division
at the time, had become ineffective.
* State does not agree with many of the comments included in the latter
part of the report regarding the recent creation of the Project
Development and Coordination Division (PDC) and the role of the new
Project Coordinators/Managers. State believes that the creation of PDC
will bring much needed leadership to the development phase of our
projects and result in better bidding documents - a constant complaint
cited by the contractors both directly and as part of this survey.
State's convinced that Project Coordinators will help ensure that the
project teams in planning and design functions stay engaged on the
project throughout the entire execution cycle. Project Coordinators are
not intended in any way to replace existing oversight during the
construction phase as stated in the report, but to stay engaged in
Washington to the extent necessary to provide effective support to the
Project Director in the field, and ensure that lessons learned can be
brought into future projects quickly. State believes that the roles
established for the Project Coordinators, Construction Executives, and
Project Directors will prove effective, eliminate accountability gaps,
and bring improvements to a program that results demonstrate is already
performing well in moving foreign affairs staff to safer facilities.
Only by maintaining distinct lines of accountability between the
Project Coordinators responsible for the RFP and the Project
Director/Contracting Officer representative responsible for executing
the contract in the field can the accountability for errors be
maintained. [See comment 6]
* State has noted the contractor's responses regarding their level of
satisfaction with the Project Directors. Interestingly, they appear
satisfied with the Project Directors on issues within the Project
Directors' authority and ability to control. State believes that the
Project Coordinators will help by providing improved support from
Washington. State will also review the current level of the standard
contracting officer's warrant provided to the Project Directors. It is
currently set at $25,000 per change, $250,000 per year for most of our
Project Directors (as it has been for more than 20 years) and it is
possible that raising this amount would be beneficial to execution of
the projects. [See comment 7]
* State is somewhat surprised at the level of the losses being reported
by our contractors on our projects. However, State believes, and has
received confirmation from some of its contractors, that the primary
reasons for these losses are the devaluation of the dollar and the
inflation of construction material costs over the last few years. State
has seen significant increases in bid costs over the last two years
that reflect these market changes.
* State reiterates its request for copies of the contractors' responses
to the open-ended questions. State has received the multiple choice
responses, but has reason to believe that there may be valuable
insights in the actual comments made by the contractors and is very
interested in reviewing them to glean lessons learned.
The following are GAO's comments on the Department of State's letter
dated December 31, 2008.
GAO Comments:
1. We have adjusted the title of this report to reflect State's
comments that although State has taken actions designed, in part, to
increase contractor participation, the addition of more interested,
responsible bidders for State projects would benefit the program.
2. State notes that it has recently increased the construction
schedules for each class of SED, and streamlined the RFP process and
reformed some design processes to help contractors better understand
requirements and begin construction more quickly. State also said that
contractors should be aware of the period of performance when preparing
bids for State projects. We acknowledge in the body of the report that
State has increased the time allotted to construct the various
categories of SEDs. We agree with State that, based on the RFP
documents, contractors should be aware of the planned construction time
frame and the associated risk prior to submitting contract proposals.
The report acknowledges State's efforts to streamline RFP documents and
improve the design process; however, it may take a number of years and
completed projects to determine how the changes affect contractors'
ability to complete construction according to schedule.
3. State said that its methodology for estimating risk and salary
increases is not arbitrary, but rather based on demonstrated financial
criteria. Since we did not analyze how risks and salaries are
estimated, we make no explicit or implicit statement on the validity of
the methodology used. State also said that a solution to less
competition for NEC awards could be to draw in larger U.S. firms that
have the financial capacity for the work, in accordance with GAO
recommendations. As a result, it has recently reached out to one of the
largest U.S. construction contractors and would continue outreach
efforts with other large firms. Although we do present an analysis that
shows a significant number of large contractors with overseas
experience have not been part of the NEC program, we do not recommend
that State rely solely on large contractors.
4. State questioned why we chose to highlight the declines in the
number of firms prequalifying to bid on NECs from 2006 to 2008 when
that decline was not statistically significant. We explain within the
text that there was an overall decline in the number of firms
prequalified to bid on NEC projects from 2002 to 2008. We also state
that the large number of firms that prequalified in 2006 is likely
explained by the relatively low cost for the projects awarded that
year. We also note that from 2006 to 2008, the average number of firms
prequalfied per project decreased by 69 percent from 13 to 4. When
considered with the declines in the number of firms bidding on
projects, these declines indicate a decrease in contractor
participation, especially in recent years.
5. State commented that the results of our contractor interviews could
be biased from our exclusion of a small contractor with a limited-sized
claim and our inclusion of a large contractor with current claims of
more than $90 million. We do not believe our analysis was affected by
contractor bias. The draft report incorrectly stated the reason for
excluding the first contractor State cited from the structured
interviews. The contractor was excluded primarily because its only
contract from 2001 to 2007 was awarded as a sole-source contract.
Because the contractor received a sole-source contract, we believed it
could not address many of the questions involving competition for NEC
awards. We have made this correction in appendix I. We note this same
contractor was terminated from its contract for nonperformance and
subsequently filed for and received bankruptcy protection as a result
of the termination. As a result, we felt its inclusion could risk
biasing our work, but the contractor was not excluded for this reason.
The second contractor State cited was a major participant in the NEC
program, having completed 17 NEC and other projects from 1999 to 2008.
We are aware of the claims the contractor has filed for a number of
projects it performed, but we do not believe the existence of those
claims biased our discussions with that firm or our findings, in
general.
6. State disagreed with many of our comments in a draft of this report
on the role of the new project manager positions. In particular, State
commented that project managers are not intended in any way to replace
existing oversight during the construction phase as stated in our
report. Our draft report did not, in fact, indicate that project
managers should replace existing oversight. Rather, our intent was to
question whether the project manager's effectiveness in performing
lifecycle oversight of a project could be compromised by sharing
reporting responsibilities with the construction executive during
construction phase. Nonetheless, in light of State's comments, and to
avoid confusion, we deleted the paragraph on which State's comments are
based.
7. State clarified that project directors could approve contract
modifications of up to $25,000 per change and up to $250,000 per year.
Changes were made to the text based on State's comment.
[End of section]
Appendix IV: GAO Contacts and Staff Acknowledgments:
GAO Contacts:
Jess T. Ford, (202) 512-4128 or fordj@gao.gov, Terrell G. Dorn, (202)
512-6923 or dornt@gao.gov.
Staff Acknowledgments:
In addition to the individuals named above, Michael Courts, Assistant
Director; Michael Armes; John Bauckman; Sam Bernet; Eugene Beye; Paola
Bobadilla; and Joseph Carney made key contributions to this report.
Ashley Alley, Martin De Alteriis, Colleen Candrl, Jonathon Fremont,
Elizabeth Helmer, Cardell Johnson, Dae Park, and William Tuceling
provided key technical support to this report.
[End of section]
Footnotes:
[1] GAO, Embassy Construction: State Department Has Implemented
Management Reforms, but Challenges Remain, [hyperlink,
http://www.gao.gov/products/GAO-04-100] (Washington, D.C.: Nov. 4,
2003).
[2] Where adequate competition exists, construction projects estimated
at over $10 million or that include technical security require that
firms meet the definition of a U.S. person or U.S. joint-venture person
to bid on a project. See 22 U.S.C. 4852.
[3] State utilizes a two-phase process for awarding construction
contracts. In the first phase, prequalification, State certifies that
companies interested in bidding for construction awards meet the legal,
technical, and financial requirements associated with such projects. In
the second phase, State reviews contract proposals from companies that
submitted bids and awards the contract. Only companies certified as
prequalified in the first phase may submit bids in the second phase.
[4] Ranking is based on 2007 revenues from design-build contracts where
the project is designed and constructed by employees of the company in
whole or in joint-venture partnership with other firms and
subcontractors. See McGraw-Hill Construction, Engineering News Record,
(June 9, 2008).
[5] We interviewed 17 of the 21 U.S. contractors awarded contracts to
construct major diplomatic facilities from 2001-2007. See appendix I of
this report for further details on our methodology.
[6] Although our census included only companies winning a NEC award
from 2001 to 2007, some of these companies had received NEC contracts
dating back to 1999. The contractors in our census represent more than
81 percent of the total value for NEC and related construction projects
awarded from 1999 to 2007.
[7] Data on the number of bids received were unavailable for the
Baghdad, Iraq; Kabul, Afghanistan; and Luanda, Angola; projects. The
Dushanbe, Tajikistan, project was excluded from the analysis because it
was originally awarded as a sole source contract.
[8] These analyses focus only on projects labeled as NECs, new
consulate compounds (NCC), and new office buildings (NOB). We excluded
projects labeled by State as interim office buildings (IOB), newly
acquired buildings (NAB), new office annexes (NOX), and standard secure
mini compounds (SSMC). In addition to excluding the NEC projects for
Baghdad, Iraq; Dushanbe, Tajikistan; Kabul, Afghanistan; and Luanda,
Angola; we excluded 9 additional NEC projects awarded from 1999-2001
and the 2002 NEC projects for Abidjan, Cote d'Ivoire, due to unreliable
or missing data on the number of prequalifying firms per NEC project or
the number of bids submitted per NEC project. As a result, there were
48 total projects included in these analyses.
[9] See appendix I for details of our methodology.
[10] GAO, Embassy Construction: State Has Made Progress Constructing
New Embassies, but Better Planning Is Needed for Operations and
Maintenance Requirements, [hyperlink,
http://www.gao.gov/products/GAO-06-641] (Washington, D.C.: June 30,
2006).
[11] Partnering is an agreement in principle between a contractor and
the government to share risks, promote favorable attitudes, and create
a cooperative environment.
[12] Firms were asked to rate State's management of the program on a
four point scale. Response categories included poor, fair, good, and
excellent.
[13] Department of State, Report of the Accountability Review Boards on
the Embassy Bombings in Nairobi, Kenya and Dar es Salaam, Tanzania on
August 7, 1998 (Washington, D.C.: January 1999); and Admiral William J.
Crowe, Press Briefing on the Report of the Accountability Review Boards
on the Embassy Bombings in Nairobi and Dar es Salaam (Washington, D.C.:
Jan. 8, 1999).
[14] This value represents the sum of the original contract awards for
each project. Actual total values typically change through the course
of construction.
[15] See [hyperlink, http://www.gao.gov/products/GAO-06-641].
[16] OBO hosts a quarterly Industry Advisory Panel meeting that brings
together private sector and State design, construction, and facilities
management experts to discuss leading practices applicable to OBO's
embassy construction and management responsibilities. OBO assigns both
government and industry leads for each of the panel discussion topics
for the purpose of discussing challenges and issues, examining how
industry may be managing similar issues, and integrating lessons
learned into OBO policies and procedures, as appropriate.
[17] See [hyperlink, http://www.gao.gov/products/GAO-04-100] and
[hyperlink, http://www.gao.gov/products/GAO-06-641].
[18] 22 U.S.C. § 4852.
[19] The reduction is applied only to determine competitive status of
American firms. It does not affect the value of an offer should the
reduction result in a winning bid for an American firm. See 22 U.S.C. §
302 (b)(2). These requirements do not apply if the foreign country's
laws prohibit the use of U.S. contractors on the project.
[20] Contracts for overseas construction, including capital
improvements, alterations, and major repairs, may be excepted, where
necessary, from the provisions of the Federal Acquisition Regulations
(FAR), with the approval of the OBO Director.
[21] Section 160 of the Foreign Relations Authorization Act, Fiscal
Years 1988 and 1989, as amended, requires that, before undertaking a
new construction project intended for the storage of classified
materials, State shall certify to the Committee on Foreign Relations,
U.S. Senate, and the Committee on Foreign Affairs, House of
Representatives, that appropriate steps have been taken to ensure the
security of the project to include: (1) protection of classified
information and national security-related activities, (2) protection
for the personnel working in the facility, and (3) a plan for the
continued evaluation and maintenance of security at such facility. See
22 U.S.C. § 4851 note, Pub. L. No. 100-204, § 160 (Dec. 22, 1987), 12
FAM 360 "Construction Security Certification Program," and 15 FAM
1012.3 "Construction Security."
[22] Although State certifies that a contractor has met all
requirements of the contract, minor items may still need completion.
[23] We did not independently verify State's methodology or
conclusions.
[24] State did not provide data on the number of prequalifying firms
and bids submitted for 13 NEC projects, including the 10 projects
awarded from 1999 to 2001, the 2002 NEC projects for Abidjan, Cote
d'Ivoire, and Kabul, Afghanistan, and the 2006 project for Baghdad,
Iraq. Although State documents and State officials indicated that two
or more bids were submitted for all 13 of these projects, and three or
more bids were received for at least 8 of the 13 projects, we could not
confirm the actual numbers; thus, they were excluded from the table.
The Dushanbe, Tajikistan, NEC project was also excluded because it was
awarded as a sole-source contract.
[25] See appendix I for a description of these analyses.
[26] See the third and fourth sections of this report for discussion of
factors affecting contractors' decisions to participate in the program
and State's efforts to improve contractor participation.
[27] See footnote 4, p. 2.
[28] In this analysis, we assume that companies on the top 100 list
would meet the total business volume requirements to prequalify to bid
on NECs, given the magnitude of their 2007 revenues and given that
Weston Solutions Inc., the 96TH ranked firm with 2007 total revenues of
$108 million, prequalified for at least three of the 2008 NEC projects
with estimated award values ranging from $80 million to $120 million.
We note that at least four companies not on the top 100 list
prequalified for these same 2008 projects. However, our analysis is
based solely on whether a company was certified as prequalified to bid
for at least one NEC award in any year from 2002 to 2008. We did not
confirm how many, if any, of the companies applied for, but were
denied, prequalification.
[29] The analysis excludes the seven companies that previously won at
least one NEC award.
[30] Planned projects include those outlined in OBO's Long-Range
Overseas Buildings Plan, FY 2008-2013. In technical comments on a draft
of this report, State reported that projects listed in the Long-Range
Overseas Buildings Plan are subject to change. State also said that
while the projects used in the analysis were current at the time of the
analysis, table 3 does not reflect the current list of 2009 planned
projects. State suggested inserting this qualification, rather than
redoing the analysis with the current list.
[31] As of December 2008, State was reviewing the draft language of
this modified proposal, and planned to submit it for consideration for
its next authorization bill.
[32] We did not attempt to confirm contractor claims of profits and
losses.
[33] Some contractors told us they do not determine profits until after
the one-year warranty period following construction.
[34] Three contractors reported having no basis to judge.
[35] However, 71 percent of the contractors reported earning money or
expecting to earn money on at least one contract.
[36] REAs are requests by contractors for compensation for expenses or
delays incurred due to the actions or lack of action of the owner or
other occurrences. If approved, REAs result in changes to the contract
price or duration.
[37] In our discussions with contractors, we asked both closed-ended
questions, the responses to which could be easily counted, and open-
ended questions, which generated many useful comments.
[38] One contractor who did not know was not included in the analysis.
[39] When we conducted the interviews in May and June 2008, the dollar
was at a low point in relationship to other currencies.
[40] In qualifying for NEC projects, U.S. contractors must demonstrate
they are backed by a bonding agency.
[41] The Miller Act permits the waiver of bonding requirements for
contracts performed overseas. See 40 U.S.C. § 3131 (d). According to
State officials, contracting officers have the option to waive the
performance bond at their discretion.
[42] In our discussions with contractors, we asked both closed-ended
questions, the responses to which could be counted, and open-ended
questions, which generated many useful comments.
[43] See 48 C.F.R. 36.102.
[44] In our discussions with contractors, we asked both closed-ended
questions, the responses to which could be counted, and open-ended
questions, which generated many useful comments.
[45] OBO assigns a full-time, on-site project director and technical
support staff for capital construction projects. The project director
is responsible for the construction management and engineering
oversight of the project and is the Contracting Officer's
Representative (COR). The project director also coordinates all project-
related communications between the construction site and Washington.
[46] State generally requires its project directors to have an
engineering degree and at least one full year of specialized
professional engineering experience so that they are equipped with the
particular knowledge, skills, and abilities to successfully perform the
duties of a construction engineer. These individuals are typically
first hired as construction engineers and, as they gain experience, can
advance into a project director position.
[47] In contrast, contractors generally approved of project directors'
decisions on no-cost changes.
[48] Project directors may approve up to $25,000 per modification and
up to $250,000 in modifications per year.
[49] These comments arose from explanatory answers to closed-ended
questions. The comments were unstructured and wide-ranging.
[50] OBO generally requires that U.S. materials be used; however,
substitute products and materials that are locally sourced may be
economically advantageous for contractors if necessary approvals can be
achieved in a timely manner.
[51] [hyperlink, http://www.gao.gov/products/GAO-06-641].
[52] In response to industry feedback and reports from State's Office
of the Inspector General and GAO concerning operational problems
affecting the bureau, the OBO Director established a working group on
July 24, 2008, to review the capital projects acquisition process.
Subject matter experts in programming, planning, design, contracting,
and construction management comprised the 29-person team. The team
reported its findings and recommendations in September 2008. OBO's
Director immediately approved some organizational and procedural
changes and deferred decisions on other recommendations to allow for
further study of underlying issues.
[53] Previously, RFPs--which contractors have 45 days to respond to--
had been released on back-to-back days, making it difficult for
contractors to effectively respond to multiple solicitations.
[54] Industry groups that OBO coordinated with include AGC, Design-
Build Institute of America, American Institute of Architects, and the
American Council of Engineering Companies.
[55] The bridging method provides a high level of design for those
requirements that are the most important to the owner and provides the
design-build contractor flexibility for the design associated with less
critical project requirements.
[56] BIM uses computer-based models to increase the efficiency of
exchanging information such as design drawings, "as-built" construction
details, and building systems' operations and maintenance instructions
among all project stakeholders. BIM supports both the initial design
and construction, as well as the follow-on operation and maintenance of
a facility. Within the federal government, its use is led by the
General Services Administration, with input and support from the
National Institute of Building Sciences and private industry partners.
[57] [hyperlink, http://www.gao.gov/products/GAO-06-641].
[58] The project planning and RFP development process resided within
the Office of Planning and Real Estate. The planners within that office
were the principal project proponents responsible for gathering and
formulating the planning information required to support the RFPs.
These planners coordinated with stakeholders at the post and regional
bureau and with other interested agencies. The planning manager was the
effective accountable person for this front-end project planning and
RFP development phase.
[59] Construction and commissioning efforts were managed by the
Construction and Commissioning Division within the Office of Project
Execution. Two OBO staff members--the project executive in Washington
and the project director at post--worked jointly to manage the project
from design-build contract award through construction and
commissioning.
[60] Some of the new positions in the PDC Division may be staffed by
former planning managers who have been transferred from the Office of
Planning and Real Estate (PRE) to the new Office of Program
Coordination and Support (PCS). The organizational realignment
effectively moves detailed project development and coordination
functions from PRE to PCS. PRE will retain responsibilities for
strategic planning functions, such as the development of the Long-Range
Overseas Building Plan (LROBP).
[61] OMB Circular No. A-11, Part 7, Planning, Budgeting, Acquisition,
and Management of Capital Assets (June 2008) requires that project
managers meet training and experience requirements defined by Federal
Acquisition Certification for Program and Project Managers (FAC-P/PM)
guidelines. Agencies must be compliant with FAC-P/PM beginning in
fiscal year 2008. OBO staff performing project management functions in
the PDC Division will hold the title of "project coordinator" until
they meet the OMB requirements to be designated as a "project manager."
[62] The COR directly supports the Contracting Officer. The COR is
typically involved in coordinating the development of project
requirements, certifying that funds are available for contract award,
participating in preaward negotiations with prospective contractors,
and performing other activities to support the contracting officer in
soliciting offers from contractors and making an award. Following the
contract award, the COR, among other activities, monitors a
contractor's cost and schedule performance, advises on contract change
requests, conducts quality assurance inspections, approves contractor
invoices for payment, and accepts completed work.
[63] See footnote 4, p. 2.
[64] Our analysis is based solely on whether a company was certified as
prequalified to bid for at least one NEC award in any year from 2002 to
2008. It is unclear whether the companies that have not prequalified to
bid have shown interest in participating in the NEC program, or whether
some companies, if any, were denied prequalification in some years.
[End of section]
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