Cost Increases and Schedule Delays at the Denver Facility and Other Projects

		Cost Increases and Schedule Delays

We reported in April 2013 that costs increased and schedules were  delayed considerably for all four of VA’s largest medical-facility  construction projects, when comparing November 2012 construction  project data with the cost and schedule estimates first submitted to  Congress. Cost increases ranged from 59 percent to 144 percent,representing a total cost increase of nearly $1.5 billion and an average  increase of approximately $366 million per project. The schedule delays  ranged from 14 to 74 months with an average delay of 35 months per  project. Of these four medical-facility construction projects VA had  underway, Denver had the highest cost increase and the longest  estimated years to complete. We reported that the estimated cost for the  Denver project increased from $328 million in June 2004 to $800 million.  VA’s initial estimated completion date for the project was February 2014.  Subsequently, VA estimated the project would be completed in May 2015.  However, in an update provided to Congress in March 2015, VA did not  provide an updated completion date.
VA provided an update in April for the total estimated cost and estimated completion date  for some of its projects. The data was as of March 2015.
Total  estimated  years to  complete 11.25   66    December 2014  February 2016 14  The column titled “total estimated years to complete” is reported to the nearest quarter year and is  calculated from the time VA approved the architecture and engineering firm to the current estimated  completion date. We calculated the “number of months extended” column by counting the months  from the initial estimated completion date to the current estimated completion date, as reported by  VA. According to VA, the dates in the initial estimated completion dates are from the initial budget  prospectus, which assumed receipt of full construction funding within 1 to 2 years after the budget  submission. In some cases, construction funding was phased over several years and the final funding  was received several years later. Naval Facilities Engineering Command officials we spoke with told  us that historically, medical facility projects take approximately 4 years from design to completion. We  calculated the percentage change in cost by using the initial total estimated costs and total estimated  costs, as reported by VA.  The main medical center was completed in April 2012 and patients began utilizing the facility in  August of 2012. However, as of March 2015, the final phase of the Las Vegas project to expand the  emergency department is projected to be completed in the summer of 2015. For the purpose of our  analysis above, we calculated the number of months extended and the total years to complete using  the date of June 2015. However, schedule delays would increase if the project was completed later in  the summer of 2015.  In its March 2015 update, VA did not provide the total estimated cost for the Orlando project.
According to VA’s March 2015 update, the New Orleans project has a construction completion date  of February 2016, except for Dixie/Research building which will be completed by late 2016.
In commenting on a draft of our April 2013 report, VA stated that using  the initial completion date from the construction contract would be more  accurate than using the initial completion date provided to Congress;  however, using the initial completion date from the construction contract  would not account for how VA managed these projects before it awarded  the construction contract. Cost estimates at this earlier stage should be  as accurate and credible as possible because Congress uses these initial  estimates to consider authorizations and make appropriations decisions.  We used a similar methodology to estimate changes to cost and schedule  of construction projects in a previous report issued in 2009 on VA  construction projects. We believe that the methodology we used in our April 2013 and December 2009 reports on VA construction provides an  accurate depiction of how cost and schedules for construction projects  can change from the time they are first submitted to Congress. It is at this  time that expectations are set among stakeholders, including the  veterans’ community, for when projects will be completed and at what  cost. In our April 2013 report, we made recommendations to VA to help  address these cost and schedule delays which are discussed later in this  statement.

		Scope Modifications and Other Reasons for Cost Increases and Schedule Delays at Denver

In our April 2013 report, we identified two primary factors that contributed  to cost increases and schedule delays at the Denver facility: (1) decisions  to change plans from a shared university/VA medical center to a stand- alone VA medical center and (2) unanticipated events.
Decision to change plans from a shared university/VA medical  center to a stand-alone VA medical center. VA revised its original  plans for shared facilities with a local university to stand-alone  facilities after proposals for a shared facility could not be finalized.  Plans went through numerous changes after the prospectus was first  submitted to Congress in 2004. In 1999, VA officials and the  University of Colorado Hospital began discussing the possibility of a  shared facility on the former Fitzsimons Army base in Aurora,  Colorado. Negotiations continued until late 2004, at which time VA  decided against a shared facility with the University of Colorado  Hospital because of VA concerns over the governance of a shared  facility. In 2005, VA selected an architectural and engineering firm for  a stand-alone project, but VA officials told us that the firm’s efforts  were suspended in 2006 until VA acquired another site at the former  Army base adjacent to the new university medical center. Design  restarted in 2007 before suspending again in January 2009, when VA  reduced the project’s scope because of lack of funding. By this time,  the project’s costs had increased by approximately $470 million, and  the project’s completion was delayed by 14 months. The cost  increases and delays occurred because the costs to construct  operating rooms and other specialized sections of the facility were  now borne solely by VA, and the change to a stand-alone facility also  required extensive redesign.
Unanticipated events. VA officials at the Denver project site  discovered they needed to eradicate asbestos and replace faulty  electrical systems from pre-existing buildings. They also discovered  and removed a buried swimming pool and found a mineral-laden  underground spring that forced them to continually treat and pump the  water from the site, which impacted plans to build an underground  parking structure.

	VA Took Steps to Implement New Construction Management Design Practices, But Did Not Implement Changes Early Enough to Positively Impact the Denver Project

In our April 2013 report, we found that VA had taken steps to improve its  management of major medical-facility construction projects, including  creating a construction-management review council. In April 2012, the  Secretary of Veterans Affairs established the Construction Review  Council to serve as the single point of oversight and performance  accountability for the planning, budgeting, executing, and delivering of  VA’s real property capital-asset program. The council issued an internal  report in November 2012 that contained findings and recommendations  that resulted from meetings it held from April to July 2012. The report  stated that the challenges identified on a project-by-project basis were not  isolated incidents but were indicative of systemic problems facing VA.
In our 2013 report we also found that VA had taken steps to implement a  new project delivery method—called the Integrated Design and  Construction (IDC) method. In response to the construction industry’s  concerns that VA and other federal agencies did not involve the  construction contractor early in the design process, VA and the Army  Corps of Engineers began working to establish a project delivery model  that would allow for earlier contractor involvement in a construction  project, as is often done in the private sector.
We found in 2013 that VA did not implement IDC early enough in Denver  to garner the full benefits. VA officials explained that Denver was initiated  as a design-bid-build project and later switched to IDC after the project  had already begun. According to VA officials, the IDC method was very  popular with industry, and VA wanted to see if this approach would  effectively deliver a timely medical facility project. Thus, while the intent of  the IDC method is to involve both the project contractor and architectural  and engineering firm early in the process to ensure a well coordinated  effort in designing and planning a project, VA did not hire the contractor  for Denver until after the initial designs were completed. According to VA,  because the contractor was not involved in the design of the projects and  formulated its bids based on a design that had not been finalized, these  projects required changes that increased costs and led to schedule  delays. VA staff responsible for managing the project said it would have  been better to maintain the design-bid-build model throughout the entire  process rather than changing mid-project because VA did not receive the  value of having the contractor’s input at the design phase, as the IDC  method is supposed to provide. For example, according to Denver VA  officials, the architectural design called for curved walls rather than less  expensive straight walls along the hospital’s main corridor. The officials  said that had the contractor been involved in the design process, the  contractor could have helped VA weigh the aesthetic advantages of  curved walls against the lower cost of straight walls.
Since our April 2013 report was issued, in 2014, the United States Civilian  Board of Contract Appeals found that VA materially breached the  construction contract with the construction contractor by failing to provide  a design that could be built for the contracted amount of $582.8 million.
In its decision, one of the Board’s findings was that VA did not use the  IDC design mechanism properly from the start. The Board noted that  when the construction contractor was brought into the project, the  architectural engineering design team had been under contract with VA  since 2006 and that by 2010, the design was 50 percent complete and  funding decisions had already been made. According to the Board, this  limited VA’s flexibility to make modifications based on the construction  contractor’s pre-construction advice. The Board also noted a September  2011 review by the Army Corps of Engineers, commissioned by VA,  found that the IDC contract type may not have been appropriate for the  Medical Center Replacement in Denver. In that review, the Army Corps of  Engineers explained that proceedings from design development to major  design milestones prior to the procurement of the IDC contractor did not  permit the contractor to integrate with the designer to achieve the benefits  related to this contract type. The Army Corps of Engineers concluded that  the current methodology appeared to be counterintuitive to the  government’s ability to achieve best value.

	VA Has Taken Actions to Implement GAO Recommendations

In our April 2013 report we identified systemic reasons that contributed to  overall schedule delays and cost increases, and recommended that VA  take actions to improve its construction management of major medical  facilities: including (1) developing guidance on the use of medical  equipment planners; (2) sharing information on the roles and  responsibilities of VA construction project management staff; and (3)  streamlining the change order process.aimed at addressing issues we identified at one or more of the four sites  we visited during our review. VA has implemented our recommendations;  however, the impact of these actions may take time to reflect  improvements, especially for ongoing construction projects, depending on  several issues, including the relationship between VA and the contractor.  Since completing our April 2013 report, we have not reviewed the extent   Our recommendations were  to which these actions have affected the four projects, or the extent to  which these actions may have helped to avoid the cost overruns and  delays that occurred on each specific project.

		Using Medical Equipment Planners

On August 30, 2013, VA issued a policy memorandum providing  guidance on the assignment of medical equipment planners to major  medical construction projects. The memorandum states that all VA major  construction projects involving the procurement of medical equipment to  be installed in the construction will retain the services of a Medical  Equipment Specialist to be procured through the project’s architectural  engineering firm.
Prior to issuance of this memorandum, VA officials had emphasized that  they needed the flexibility to change their heath care processes in response to new technologies, equipment, and advances in medicine.Given the complexity and sometimes rapidly evolving nature of medical  technology, many health care organizations employ medical equipment  planners to help match the medical equipment needed in the facility to the  construction of the facility. Federal and private sector stakeholders  reported that medical equipment planners have helped avoid schedule  delays. VA officials told us that they sometimes hire a medical equipment  planner as part of the architectural and engineering firm’s services to  address medical equipment planning. However, in our April 2013 report  we found that for costly and complex facilities, VA did not have guidance  for how to involve medical equipment planners during each construction  stage of a major hospital and has sometimes relied on local Veterans  Health Administration (VHA) staff with limited experience in procuring  medical equipment to make medical equipment planning decisions. Thus,  we recommended that the Secretary of VA develop and implement  agency guidance to assign medical equipment planners to major medical  construction projects. As mentioned earlier, in August 2013, VA issued  such guidance.

		Sharing Information on the Roles and Responsibilities of VA’s Construction- Management Staff

In September 2013, in response to our recommendation, VA put  procedures in place to communicate to contractors the roles and  responsibilities of VA officials who manage major medical facility  construction projects, including the change order process. Among these  procedures is a Project Management Plan that requires the creation of a  communications plan and matrix to assure clear and consistent  communications with all parties.
Construction of large medical facilities involves numerous staff from  multiple VA organizations. Officials from the Office of Construction and  Facilities Management (CFM) stated that during the construction process,  effective communication is essential and must be continuous and involve  an open exchange of information among VA staff and other key  stakeholders. However, in our April 2013 report, we found that the roles  and responsibilities of CFM and VHA staff were not always well  communicated and that it was not always clear to general contracting  firms which VA officials hold the authority for making construction  decisions. This lack of clarity can cause confusion for contractors and  architectural and engineering firms, ultimately affecting the relationship  between VA and the general contractor. Participants from VA’s 2011  industry forum also reported that VA roles and responsibilities for  contracting officials were not always clear and made several  recommendations to VA to address this issue. Therefore, in our 2013  report, we recommended that VA develop and disseminate procedures  for communicating—to contractors—clearly defined roles and  responsibilities of the VA officials who manage major medical-facility  projects, particularly those in the change-order process. As discussed  earlier in this statement, VA disseminated such procedures in September  2013.

		Streamlining the Change- Order Process

On August 29, 2013, VA issued a handbook for construction contract  modification (change-order) processing which includes milestones for  completing processing of modifications based on their dollar value. In  addition, as of September 2013, VA had also hired four additional  attorneys and assigned on-site contracting officers to the New Orleans,  Denver, Orlando, Manhattan and Palo Alto major construction projects to  expedite the processing and review of construction contract modifications.
By taking steps to streamline the change order process, VA can better  ensure that change orders are approved in a prompt manner to avoid  project delays.
Most construction projects require, to varying degrees, changes to the  facility design as the project progresses, and organizations typically have  a process to initiate and implement these changes through change  orders. Federal regulations and agency guidance state that change  orders must be made promptly, and agency guidance states in addition  that there be sufficient time allotted for the government and contractor to  agree on an equitable contract adjustment. VA officials at the sites we  visited as part of our April 2013 review, including Denver, stated that  change orders that take more than a month from when they are initiated  to when they are approved can result in schedule delays, and officials at  two federal agencies that also construct large medical projects told us  that it should not take more than a few weeks to a month to issue most  change orders.involved in VA and contractors’ coming to agreement on the costs of  changes and the multiple levels of review required for many of VA’s  change orders. As discussed earlier, VA has taken steps to streamline  the change order process to ensure that change orders are approved in a  prompt manner to avoid project delays.
Processing delays may be caused by the difficulty  Chairman Isakson, Ranking Member Blumenthal, and Members of the  Committee, this completes my prepared statement. I would be pleased to  respond to any questions that you may have at this time.

	Contacts and Acknowledgments

If you have any questions about this testimony, please contact Mark L.  Goldstein at 202-512-2834 or goldsteinm@gao.gov. Other key  contributors to this testimony include Ed Laughlin (Assistant Director),  Nelsie Alcoser, George Depaoli, Raymond Griffith, Hannah Laufe,  SaraAnn Moessbauer, and Michael Clements.
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Summary:
Why GAO Did This Study

VA operates one of the nation's largest health care delivery systems. In April 2013, GAO reported that VA was managing the construction of 50 major medical-facility projects costing between $10 million and hundreds of millions of dollars, including the ongoing project in Denver. This statement discusses VA construction management issues, specifically, (1) the extent to which the cost, schedule, and scope at Denver and other major medical-facility projects has changed and the reasons for these changes, (2) actions VA has taken since 2012 to improve its construction management practices, and (3) VA's response to GAO's recommendations for further improvements in its management of these construction projects.
This statement is based on GAO's April 2013 report ( GAO-13-302 ), May 2013 ( GAO-13-556T ), April 2014 ( GAO-14-548T ), and January 2015 ( GAO-15-332T ) testimonies, and selected updates on VA projects—located in Denver, Colorado; Las Vegas, Nevada; New Orleans, Louisiana; and Orlando, Florida. To conduct these updates, GAO obtained documentation from VA in April 2015.

What GAO Found

In April 2013, GAO found that costs substantially increased and schedules were delayed for Department of Veterans Affairs' (VA) largest medical-facility construction projects, located in Denver, Colorado; Las Vegas, Nevada; New Orleans, Louisiana; and Orlando, Florida. In comparison with initial estimates, the cost increases for these projects now range from 66 percent to 427 percent and delays range from 14 to 86 months. Since the 2013 report, some of the projects have experienced further cost increases and delays because of design issues. For example, as of April 2015, the cost for the Denver project increased by nearly $930 million, and the completion date for this project is unknown.
In its April 2013 report, GAO found that VA had taken some actions since 2012 to address problems managing major construction projects. Specifically, VA established a Construction Review Council in April 2012 to oversee the department's development and execution of its real property programs. VA also took steps to implement a new project delivery method, called Integrated Design and Construction, which involves the construction contractor early in the design process to identify any potential problems early and speed the construction process. However, in Denver, VA did not implement this method early enough to garner the full benefits of having a contractor early in the design phase.
VA has taken actions to implement the recommendations in GAO's April 2013 report. In that report, GAO identified systemic reasons that contributed to overall schedule delays and cost increases at one or more of four reviewed projects and recommended ways VA could improve its management of the construction of major medical facilities. In response, VA has
issued guidance on assigning medical equipment planners to major medical facility projects who will be responsible for matching the equipment needed for the facility in order to avoid late design changes leading to cost increases and delays;
developed and disseminated procedures for communicating to contractors clearly defined roles and responsibilities of the VA officials who manage major medical-facility projects to avoid confusion that can affect the relationship between VA and the contractor; and
issued a handbook for construction contract modification (change-order) processing that includes milestones for completing processing of modifications based on their dollar value and took other actions to streamline the change order process to avoid project delays.
While VA has implemented GAO's recommendations, the impact of these actions may take time to show improvements, especially for ongoing construction projects, depending on several issues, including the relationship between VA and the contractor.

What GAO Recommends

In its April 2013 report, GAO recommended that VA (1) develop and implement agency guidance for assignment of medical equipment planners; (2) develop and disseminate procedures for communicating to contractors clearly defined roles and responsibilities of VA officials; (3) issue and take steps to implement guidance on streamlining the change-order process. VA implemented GAO's recommendations.