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WASTE, FRAUD, AND ABUSE AT K-TOWN: HOW

MISMANAGEMENT HAS DERAILED DOD’S LARGEST SINGLE FACILITY CONSTRUCTION PROJECT

HEARINGS

BEFORE THE

COMMITTEE ON OVERSIGHT

AND GOVERNMENT REFORM

HOUSE OF REPRESENTATIVES

ONE HUNDRED TENTH CONGRESS

FIRST AND SECOND SESSIONS

JUNE 28, 2007 AND JUNE 25, 2008

Serial No. 110–77

Printed for the use of the Committee on Oversight and Government Reform

(

Available via the World Wide Web: http://www.gpoaccess.gov/congress/index.html

http://www.house.gov/reform

(II)

COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM

HENRY A. WAXMAN, California, Chairman

TOM LANTOS, California

EDOLPHUS TOWNS, New York

PAUL E. KANJORSKI, Pennsylvania

CAROLYN B. MALONEY, New York

ELIJAH E. CUMMINGS, Maryland

DENNIS J. KUCINICH, Ohio

DANNY K. DAVIS, Illinois

JOHN F. TIERNEY, Massachusetts

WM. LACY CLAY, Missouri

DIANE E. WATSON, California

STEPHEN F. LYNCH, Massachusetts

BRIAN HIGGINS, New York

JOHN A. YARMUTH, Kentucky

BRUCE L. BRALEY, Iowa

ELEANOR HOLMES NORTON, District of

Columbia

BETTY MCCOLLUM, Minnesota

JIM COOPER, Tennessee

CHRIS VAN HOLLEN, Maryland

PAUL W. HODES, New Hampshire

CHRISTOPHER S. MURPHY, Connecticut

JOHN P. SARBANES, Maryland

PETER WELCH, Vermont

TOM DAVIS, Virginia

DAN BURTON, Indiana

CHRISTOPHER SHAYS, Connecticut

JOHN M. MCHUGH, New York

JOHN L. MICA, Florida

MARK E. SOUDER, Indiana

TODD RUSSELL PLATTS, Pennsylvania

CHRIS CANNON, Utah

JOHN J. DUNCAN, JR., Tennessee

MICHAEL R. TURNER, Ohio

DARRELL E. ISSA, California

KENNY MARCHANT, Texas

LYNN A. WESTMORELAND, Georgia

PATRICK T. MCHENRY, North Carolina

VIRGINIA FOXX, North Carolina

BRIAN P. BILBRAY, California

BILL SALI, Idaho

JIM JORDAN, Ohio

PHIL SCHILIRO, Chief of Staff

PHIL BARNETT, Staff Director

EARLEY GREEN, Chief Clerk

DAVID MARIN, Minority Staff Director

(III)

C O N T E N T S

Page

Hearing held on:

June 28, 2007 .................................................................................................... 1

June 25, 2008 .................................................................................................... 199

Statement of:

Dorn, Terrell G., Director, Physical Infrastructure, Government Accountability Office; Gregory D. Kutz, Managing Director, Forensic Audits

and Special Investigations, Government Accountability Office; and

Bruce A. Causseaux, Senior Level Contract and Procurement Fraud

Specialist, Forensic, Government Accountability Office ............................ 224

Dorn, Terrell G. ......................................................................................... 224

Kutz, Gregory D. ....................................................................................... 225

Garber, Judith, Deputy Assistant Secretary of State, Bureau of European

and Eurasian Affairs, U.S. Department of State ....................................... 214

Kutz, Gregory D., Managing Director, Forensic Audits and Special Investigations, Government Accountability Office and Terrell G. Dorn, Director, Physical Infrastructure, Government Accountability Office; Bruce

A. Causseaux, Senior Level Contract and Procurement Fraud Specialist, Forensic Audits and Special Investigations, Government Accountability Office; and Brigadier General Danny K. Gardner, Director of

Installations and Mission Support, U.S. Air Forces in Europe ................. 140

Dorn, Terrell G. ......................................................................................... 141

Gardner, Brigadier General Danny K. .................................................... 168

Kutz, Gregory D. ....................................................................................... 140

Rogers, Major General Marc E., USAF, Vice Commander, U.S. Air Forces

in Europe ....................................................................................................... 214

Letters, statements, etc., submitted for the record by:

Davis, Hon. Tom, a Representative in Congress from the State of Virginia, prepared statements of................................................................... 138, 210

Dorn, Terrell G., Director, Physical Infrastructure, Government Accountability Office; Gregory D. Kutz, Managing Director, Forensic Audits

and Special Investigations, Government Accountability Office; and

Bruce A. Causseaux, Senior Level Contract and Procurement Fraud

Specialist, Forensic, Government Accountability Office, prepared statement of ........................................................................................................... 143

Gardner, Brigadier General Danny K., Director of Installations and Mission Support, U.S. Air Forces in Europe, prepared statement of ............. 171

Kutz, Gregory D., Managing Director, Forensic Audits and Special Investigations, Government Accountability Office and Terrell G. Dorn, Director, Physical Infrastructure, Government Accountability Office, prepared statement of ........................................................................................ 228

Rogers, Major General Marc E., USAF, Vice Commander, U.S. Air Forces

in Europe, prepared statement of ................................................................ 217

Watson, Hon. Diane E., a Representative in Congress from the State

of California, prepared statement of ........................................................... 277

Waxman, Chairman Henry A., a Representative in Congress from the

State of California:

Fact sheet and audit report ...................................................................... 4

Letter from Hubert Heimann ................................................................... 213

Prepared statements of ......................................................................... 127, 202

(1)

WASTE, FRAUD, AND ABUSE AT K-TOWN: HOW

MISMANAGEMENT HAS DERAILED DOD’S

LARGEST SINGLE FACILITY CONSTRUCTION

PROJECT

THURSDAY, JUNE 28, 2007

HOUSE OF REPRESENTATIVES,

COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM,

Washington, DC.

The committee met, pursuant to notice, at 10 a.m. in room 2154,

Rayburn House Office Building, Hon. Henry A. Waxman (chairman

of the committee) presiding.

Present: Representatives Waxman, Cummings, Davis of Illinois,

Tierney, Watson, Higgins, Davis of Virginia, Shays, Platts, Duncan,

Issa, and Sali.

Staff present: Phil Schiliro, chief of staff; Phil Barnett, staff director and chief counsel; Karen Lightfoot, communications director

and senior policy advisor; David Rapallo, chief investigative counsel; John Williams, deputy chief investigative counsel; Margaret

Daum and Suzanne Renaud, counsels; Molly Gulland, assistant

communications director; Earley Green, chief clerk; Teresa Coufal,

deputy clerk; Caren Auchman, press assistant; Zhongrui ‘‘JR’’

Deng, chief information officer; Leneal Scott, information systems

manager; Sam Buffone, staff assistant; David Marin, minority staff

director; Larry Halloran, minority deputy staff director; Jennifer

Safavian, minority chief counsel for oversight and investigations;

John Brosnan, minority senior procurement counsel; Emile

Monette, minority counsel; Patrick Lyden, minority parliamentarian and member services coordinator; Brian McNicoll, minority

communications director; and Benjamin Chance, minority clerk.

Chairman WAXMAN. The meeting of the committee will please

come to order.

I would like to ask unanimous consent that the chairman and

the ranking member or his designee each have 10 minutes of time

for questioning when we begin this morning.

Today’s hearing will be the seventh hearing the Oversight Committee has held this year on waste, fraud, and abuse in the Federal

Government. We are holding this hearing to examine what has

gone wrong at the K-Town Mall, a $200 million Defense Department construction project.

On September 28, 2006, this committee held a hearing on the

Baghdad Police College. This was a U.S. project to build new barracks and classrooms to educate and train Iraqi police forces. As

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we learned at that hearing, the project was in shambles. I have

some pictures of that project which I would like to show.

At the hearing we heard testimony from the Special Inspector

General for Iraq Reconstruction that construction was so deficient

that toilets were draining through the reinforced concrete floors

and literally raining on the cadets. Auditors told us about light fixtures so full of urine and feces that they would not operate.

The excuse from the Defense Department was that this was a

war zone.

Today we consider a different construction project. This project

is not in a war zone. It is not in Iraq or Afghanistan. This project

is being built on a U.S. military base in Germany. U.S. project officials live and work every day next to the facility. It is called the

Kaiserslautern Military Community Center, also referred to as the

K-Town Mall. Yet, it is also over budget, behind schedule, and falling apart.

The K-Town Mall is the Pentagon’s largest single facility construction project in the world. It will have a hotel, sports bar, slot

machines, and over 800,000 square feet of retail space. But, just

like the Baghdad Police College, the construction has been deficient, and U.S. oversight has been wholly inadequate.

I have some pictures of this project, and the similarities are

striking. Here is one showing how the roof is leaking continually

and is causing damage to the finished construction underneath.

This will cost millions of dollars to replace. Here are some additional pictures of the faulty construction, and here is another picture showing how flammable sealant was used in kitchen exhaust

ducts.

How could this have happened? How could construction of a modern-day facility in a western country on a U.S. military base resemble the shoddy and makeshift practices of a war zone? That is what

we are here to find out.

Certainly there are problems with the contractor on this project,

which is a German government-controlled entity called LBB, and

we will hear about some of these deficiencies today. But the bottom

line is that this is a U.S. Government project. We are spending

over $200 million in U.S. funds to build the K-Town Mall, yet the

Air Force has failed in its responsibilities to conduct proper planning and oversight. The project is millions of dollars over budget,

has no validated cost estimate. The project was supposed to be

done last year, but now there is no working completion date in

sight.

I want to introduce for the record an audit issued by the Air

Force Audit Agency just last week on June 22nd. This audit report

is the European Area Audit Office, June 22, 2007. This report details literally dozens of oversight defects by the U.S. Government

in the K-Town Mall project. Let me just read a few from it.

‘‘The Air Force did not provide adequate oversight of the planning procedures. The Air Force did not establish a process for the

contractors to provide contractor qualification for U.S. review. The

Air Force did not establish procedures directing project managers

to review and validate cost estimates and did not properly monitor

and approve contractor payments. The U.S. Air Force paid for maVerDate 11-MAY-2000 11:28 Jan 14, 2009 Jkt 000000 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 C:\DOCS\44635.TXT KATIE PsN: KATIE
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terials in excess of approved contract quantities and did not properly appoint certifying and accountable officials.’’

This is a long report, over 100 pages, so I asked my staff to prepare a short fact sheet with the key auditor findings, and that fact

sheet is available to Members, and I ask unanimous consent it be

included in the record. Without objection.

[The information referred to follows:]

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Chairman WAXMAN. GAO investigators also visited the K-Town

Mall. We are fortunate that they can be here today to tell us what

they learned. As we will hear, they saw irresponsible management,

shoddy work, and millions of dollars in waste. The Federal Government spent a record amount, over $400 billion, on Federal contracts last year. Over 40 cents of every discretionary Federal dollar now goes to a private company, but far too

much of this spending is being squandered.

The report I released yesterday identified 187 contracts worth over $1 trillion that had been plagued by waste, fraud, abuse, or

mismanagement since 2000. The same pattern happens over and

over again. The contractors get rich, the work doesn’t get done, and

the taxpayers get soaked.

As the main oversight committee in the House we have an essential job to do. We need to examine what went wrong so we can hold

officials accountable and enact reforms, and that is what I hope we

can begin to do today by holding this important hearing.

[The prepared statement of Chairman Henry A. Waxman follows:]

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Chairman WAXMAN. I want to recognize Representative Shays,

who will deliver the opening statement on behalf of Congressman

Tom Davis, the ranking member.

Mr. SHAYS. Thank you, Mr. Waxman. This is, in fact, Representative Tom Davis’ statement.

Good morning. Let me first commend Chairman Waxman for

holding a hearing on acquisition issues that does not involve Halliburton. We hope today’s broader perspective marks the beginning

of a trend.

As the chairman said, we need today to discuss the challenges

facing the Department of Defense’s largest ongoing facilities construction project, the Kaiserslautern Military Community Center at

Ramstein Air Base in Germany. The facility was designed as a

massive, multi-use complex featuring retail, hotel, and entertainment space to service American personnel stated in Germany and

for others passing through Ramstein, but today the project stands

unfinished after chronic delays, lax management and oversight,

huge cost overruns, dangerous design flaws, vandalism, and allegations of corruption.

According to the Government Accountability Office, which

brought this matter to the committee’s attention, these problems go

well beyond the risks inherent in foreign construction projects. This

acquisition effort seems to have collapsed under the combined

weight of several daunting but not altogether unique complications.

First, the project is supported by four different funding sources, each with different spending rules, currently valued at over $170

million. The acquisition requires coordination of expenditures from

Air Force working capital funds, other non-appropriated accounts,

and $21 million in appropriated military construction funding.

Second, the facility is being built under a riskier fast track design/build process.

Third, the project must be constructed in accordance with a

NATO status of force agreement which requires the German government to manage construction using German contractors to perform the work.

Fourth, the Air Force decided not to use the U.S. Army Corps of

Engineers, the Defense Department’s resident construction management experts, to oversee the project.

And, finally, to top it all off, the Air Force Project Management

Office was under-staffed. The result was a high-risk, high-visibility

project managed by too few people.

Any one of these factors presents significant management challenges. Together, they spell disaster in the form of inadequate and

unfocused high-level leadership, poor planning, poor design requirements, and an inadequate number of trained personnel overseeing the project.

The Air Force recognizes the project has serious problems in

management and oversight, and it is in the process of taking steps

to get control of the situation. Some of the identified challenges

have been mitigated; others remain works in progress.

There is still a great deal of money committed to the project and

substantial funding remains in the pipelines in Germany for other

construction endeavors. We need to be sure this project is completed properly and that the future projects do not fall prey to the

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same oversight mistakes that steered this project into a cost and

scheduling ditch.

I hope this hearing will focus on what needs to be done to get

this project back on track and what should be done to protect the

integrity of future projects built under the existing status of force

agreement in Germany. We need to know what has gotten better,

what is still being fixed, and what is still broken, and we need to

refine our understanding of the difference between interim findings

that may make this complex process look bad now, and the real

problems that will actually affect the cost to taxpayers in the end.

I do need to sound a note of caution, however. The GAO audit

findings being presented today are only preliminary. Criminal and

administrative investigations of the project are still underway.

Without the final results of those efforts, we are not in a position

to get the full story in this hearing. It might have been wiser to

wait, but as we proceed today we should take care not to jeopardize

the hard work of the Department of Justice and the Air Force in

pursuing serious allegations of civil and criminal violations in connection with this project.

Investigators from the GAO are here today to provide their initial views on these issues, and we commend them for their hard

work. We also value the experience and the perspectives our Air

Force witnesses bring to this discussion of the critical challenges

faced by this construction project.

Much is at stake in terms of U.S. tax dollars and in terms of ensuring our troops get the best possible services and accommodations while deployed overseas.

We look forward to the testimony of all the witnesses and to a

frank, constructive discussion.

That is the end of his statement.

[The prepared statement of Hon. Tom Davis follows:]

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Chairman WAXMAN. Thank you very much.

I want to welcome now our witnesses for this hearing, Greg

Kutz, who is joined by Bruce Causseaux and Terrell Dorn from the

Government Accountability Office, who will present the interim results of their investigation into deficiencies at the K-Town Mall.

We also want to welcome Brigadier General Danny Gardner, who

is the Director of Installations and Mission Support for the U.S. Air

Forces in Europe.

Hopefully we will get an explanation of what has been happening

at the K-Town Mall.

I thank you all very much for being here. It is the practice of this

committee to ask all witnesses to take an oath before they testify.

[Witnesses sworn.]

Chairman WAXMAN. The record will indicate that each of the witnesses answered in the affirmative.

Your prepared statements are going to be in the record in their

entirety. We would like to ask you to proceed in any way you wish

in your oral presentation to us.

Mr. Kutz.

STATEMENTS OF GREGORY D. KUTZ, MANAGING DIRECTOR,

FORENSIC AUDITS AND SPECIAL INVESTIGATIONS, GOVERNMENT ACCOUNTABILITY OFFICE; TERRELL G. DORN, DIRECTOR, PHYSICAL INFRASTRUCTURE, GOVERNMENT ACCOUNTABILITY OFFICE; BRUCE A. CAUSSEAUX, SENIOR

LEVEL CONTRACT AND PROCUREMENT FRAUD SPECIALIST,

FORENSIC AUDITS AND SPECIAL INVESTIGATIONS, GOVERNMENT ACCOUNTABILITY OFFICE; AND BRIGADIER GENERAL

DANNY K. GARDNER, DIRECTOR OF INSTALLATIONS AND

MISSION SUPPORT, U.S. AIR FORCES IN EUROPE

STATEMENT OF GREGORY D. KUTZ

Mr. KUTZ. Mr. Chairman and members of the committee, thank

you for the opportunity to discuss our initial findings relating to

the KMCC project. The bottom line of our testimony today is that

the KMCC project is in serious trouble. Ineffective management

and oversight have resulted in a situation with no good solutions.

Our testimony has three parts: first, the current problems; second, the causes of these problems; and, third, the effects of the

problems and implications for future projects in Germany.

First, it was initially estimated that the KMCC would cost about

$150 million and be completed in early 2006. Today neither the Air

Force nor the German construction agency, LBB, have a reliable

cost estimate or completion date.

KMCC currently faces a multitude of problems that threaten the

completion of this important project. For example, German contractors are leaving the constructionsite in part because they aren’t

getting paid. The number of workers has dwindled from hundreds

to what we understand to be about 50 today. Construction flaws include significant water leaks, as you mentioned, related to the roof,

which will require millions of dollars to fix.

Examples of other problems include vandalism in over 200 of the

hotel rooms, turnover in key LBB personnel, and the firing of a

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company that LBB hired to manage the project, and ongoing fraud

investigations.

Under the causes of the problems, from the beginning KMCC

was a high-risk overseas project. Key risk factors, which are also

shown on the monitor, include an accelerated schedule due to the

need for the 350 hotel rooms; LBB having control over contracting

and management; in effect, a cost-plus percentage of cost agreement; scheduling and coordination of over 30 German trade contractors; currency exposure due to a Euro-denominated contract;

and financial risks borne by the Air Force and its funding partners.

However, rather than beef up financial contract and construction

oversight, the Air Force provided minimal oversight. For example,

it appears that millions of dollars of invoices and alleged change orders were paid for by the Air Force with little or no supporting documentation. We refer to this as a pay-and-chase process, which is

highly vulnerable to fraud, waste, and abuse.

Unfortunately, LBB failed to effectively design the project and

oversee the work of the trade contractors. Ironically, LBB will receive a 5.6 percent fee on top of every dollar of construction cost

overruns for this project.

Let me now turn to Terry Dorn, who will discuss the effects of

the problems and implications for future projects in Germany.

STATEMENT OF TERRELL G. DORN

Mr. DORN. Mr. Chairman, failure of the Air Force and LBB to

meet the project’s construction schedule affects all of the funding

partners. For example, Air Force estimates it is losing $10,000 per

day because the hotel rooms being built by this project are not

available, requiring many transiting service members from places

such as Iraq and Afghanistan to stay off base in higher-cost German hotels.

AAFES, which uses non-appropriated funds, bears the heaviest

burden. Not only is their proportional share of both current and future construction and possible delay costs the largest, but because

they are a retail operation they also suffer from lost profits and lost

opportunities. Their ability to plan future operations also suffers

without a firm opening date, because they don’t know when to

stock the shelves and they don’t know when to hire new employees.

Additionally, AAFES is returned a portion of those profits as

dividends, which are used to support morale and welfare activities

for our service members and their families. Because of the double

hit of increased construction cost from this project and lost sales,

AAFES will not be able to return as much money to morale and

welfare activities as they had planned. They may also have to delay

construction of two shopping centers on other military bases and

delay renovation of other facilities.

Air Force officials estimate that there is at least $400 million in

additional military construction and operations and maintenance

projects slated for Germany over the next 5 years. Absent better

controls, these projects face the same type of heightened risks associated with the Kaiserslautern construction project.

In summary, the Kaiserslautern Military Community Center

project is in serious trouble and needs serious attention by Air

Force and LBB to mitigate the risks. While both recognize some of

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the issues and are taking some steps to address them, due to inadequate internal controls and mounds of unprocessed change requests, there is an increased risk of fraud and waste.

Due to reported design issues, the lack of a construction schedule, shoddy construction work requiring rework, work stoppages,

and the large backlog of unprocessed change requests, the project’s

schedule and consequently its budget are at risk of large increases.

The largest share of those budget increases will be passed along

by Air Force to AAFES, affecting their available capital for new

projects and reducing the amount of dividends they can provide for

the morale and welfare funds for our service members and their

families serving overseas.

Mr. Chairman. that concludes our opening statement this morning. We are prepared to answer any questions for the committee.

[The prepared statement of the Government Accountability Office

follows:]

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Chairman WAXMAN. Mr. Causseaux, you are here to answer

questions?

Mr. CAUSSEAUX. Yes, sir.

Chairman WAXMAN. OK. Thank you.

General Gardner.

STATEMENT OF BRIGADIER GENERAL DANNY K. GARDNER

General GARDNER. Good morning, Chairman Waxman and distinguished members of the committee. It is an honor for me to be here

today.

Mr. Chairman, I have a brief opening statement, but my written

statement presents the facts of this situation to the best of my

knowledge.

In opening, I would like to state that the Kaiserslautern Military

Community Center project [KMCC], remains a cornerstone requirement for U.S. Enduring Presence in the European Theater. It will

help provide quality of life transit capability to America’s finest

going to, coming from, or supporting any EUCOM or CENTCOM

area of responsibility.

This project is governed by the ABG–75 administrative agreement, a bilateral agreement between the United States and the

Federal Republic of Germany. This agreement details the roles, responsibilities, and procedures of all parties in the acquisition of

U.S. facilities projects in Germany.

As you are all aware, this project is experiencing management,

technical, and fiscal issues which are significantly delaying its completion.

Mr. Chairman, if you will indulge me for a moment, I would like

to explain the contractual relationships of the parties involved in

construction in the Federal Republic of Germany in terms of a football team, something we can all relate to. This is not to suggest,

Mr. Chairman, that this is a game, but the analogy will serve to

better illustrate the roles and responsibilities of the various parties.

In my analogy, the players are the contractors. The quarterback

is the construction manager, JSK. The coach is our German construction agent, LBB Kaiserslautern. The owners and investors are

the German and U.S. Government, respectively. Our quarterback,

or our construction manager, is our key player. JSK is responsible

for orchestrating the plays while working the field.

Our coach, LBB Kaiserslautern, developed a strategy to be successful on the field and responsible for evaluating and adjusting

performance of the quarterback and players. The owners and investors provide resources for the coach to hire players, develop strategy, and succeed in the field. The owners and investors can be

somewhat involved in the pre-game strategy, but in Germany once

the game begins or contracts are awarded the success of the team

lies with the coach, the quarterback, and the players.

In the case of KMCC, we have experienced several weaknesses,

and in some cases complete failure in our quarterback, JSK, and

our coach, LBB Kaiserslautern. These weaknesses and failures

have brought us to where we are today. The owners and U.S. officials are working hand-in-hand to determine solutions to the challenges our team is facing.

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It is my belief that the challenges surrounding the KMCC project

are deeply rooted in an irreversible decision by our German construction agent to use an acquisition methodology known as trade

lots. Although the decision was well intended, it was ill fated. Simply defined, trade lots dispense with the use of single general contractor normally fiscally responsible for all aspects of single contract. Instead, trade lots award numerous contracts to individual

trades, such as electrical, mechanical, and architectural, to finish

this.

This method was touted as offering two strategic advantages.

First, it would better serve the local economy surrounding

Ramstein Air Base by allowing smaller, local firms to bid and perform on numerous smaller contracts. Second, this method of contracting would afford the opportunity to fast track construction.

Early trades such as site work, foundation, structural work could

therefore be designed and constructed while subsequent trades continued with design efforts. Barring a very costly full termination

and re-solicitation, this decision cannot be undone.

With few exceptions, most of the project challenges can be linked

to the weaknesses of our construction agent to properly develop

and manage the execution of this project. One manifestation was

an exceptional number of construction change orders due to design

errors and omissions. This led to the agent’s inability to orchestrate

the schedule and maintain quality control on more than 35 different contracts across seven projects and four funding sources.

Further, they were not structured or resourced to process this large

number of change orders in a manner that would keep construction

on time and within budget.

The resulting haste in change order processing then led to accountability issues. In December 2005 I began to see indications

that the project was not going as smoothly as we had hoped, specifically in regards to scheduling work. We began engaging with

our agent to find ways to influence changes on the constructionsite.

In September 2006 LBB replaced JSK and assumed the role of

a general contractor. Simultaneously, we ramped up our oversight

to a level not required by our ABG–75. Though some effective corrections have been made, there are still many challenges ahead.

We have learned many lessons from this project that we have applied to other projects across USAFE.

Returning to my football analogy, great effort has been exerted

by USAFE and our German partners to turn this team around. Our

commander and vice commander, as well as our embassy staff,

have personally engaged with senior German officials to find solutions in order to complete this project as quickly as possible and

within United States and German laws governing construction.

These efforts have led to additional changes within the leadership of the project and promise to bring fresh game plan to the

players on the field.

It is my belief that our current strategy represents the most attractive course of action. We must continue construction to avoid

extensive delay costs and to bring the facilities to a point where

they can generate income and provide vital mission support.

Mr. Chairman, we appreciate your genuine concern in this effort

and I respectfully request the committee’s support as we work

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through the remaining challenges to complete this project as quickly as possible and bring this badly needed mission support facility

online.

Thank you. I look forward to your questions.

[The prepared statement of General Gardner follows:]

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Chairman WAXMAN. Thank you very much for your testimony.

We are going to proceed now, without objection, with questions

in the regular order, 5 minutes each Member. I am going to start.

General Gardner, on page 3 of your written statement you say

that the K-Town Mall project was put on a fast track. I would like

to ask you about this.

According to your testimony, the Air Force had a major interest

in completing the project by 2005. Why was this project so important?

General GARDNER. Sir, we have a Rhein Main transition program

where we were closing our base in Frankfort, Rhein Main Air Base,

and the objective was to close that base, transfer the missions from

Rhein Main and duplicate those missions to the extent that we

could at Ramstein and at Spangdahlem. The closure of that base

was to happen in December 2005. It did happen in December 2005.

And the opening of the facilities, the VQ area, the visiting quarters

area of that facility was to open simultaneously with that.

But I also point out to you, Mr. Chairman, that the December

2005 date was a desired date by USAFE for the facilities. It was

never a contractual date that was set up by our contracting agent.

Chairman WAXMAN. The Air Force audit also referred to this

pressure. On page 3 the audit states, ‘‘The senior management emphasis was on expediting design and schedule, rather than ensuring personnel conducted appropriate design reviews.’’ What I don’t

understand is how a project that was so important could go so off

course.

Mr. Kutz, how would you answer this question? How did we end up with a $200 million white elephant when we were supposed to

have an urgently needed facility for our troops?

Mr. KUTZ. Well, our testimony talks about three parts to that.

There are inherent risks involved with overseas contracting. There

is the limitations based upon the agreement with the German government. You have currency risks. Then, with respect to the actual

German agency, LBB, they failed to provide effective oversight and

management of the design and implementation. The third part of

this is Air Force not having effective and proactive controls in place

and oversight to identify and deal with the problems earlier, and

we see it as all three being a combination of the perfect storm, if

you will, creating this situation.

Chairman WAXMAN. Was one of the factors the pressure to cut

corners in order to get the job done quickly? If this were the case,

this approach certainly produced the exact opposite result. What do

you think about that?

Mr. KUTZ. I do believe that a lot of the oversight was relaxed,

in part because they wanted to get it done, and so there was a

tendency to want to pay the bill, and, as we mentioned in our

statement, even if there was no support for the invoices or change

orders. That was because of the schedule-driven project.

Chairman WAXMAN. General Gardner, did any official involved in

this project ever object to the proceeding on this risky fast track

approach?

General GARDNER. There were some communications between

the partners on the fast track approach, but in the end, in order

to get the facility open in December 2005, all parties agreed that

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the fast track was an acceptable manner, with some stipulations

that were identified in the long run.

Chairman WAXMAN. We have a memo. We will make it available

to you. This was sent in September 2004 to the civil engineer and

the Director of Services for the U.S. Air Forces in Europe. This

memo was sent by the two other key stakeholders in this project,

the Army and Air Force Exchange Services and the Air Force Services Agency. In this memo they warn that the fast track process

was eliminating ‘‘the time needed to adequately review and resolve

critical design issues.’’

Have you ever seen this memo before?

General GARDNER. Yes, sir, I have seen it.

Chairman WAXMAN. Let me read the next sentence. ‘‘This accelerated process has contributed to critical design process omissions,

design coordination problems, and schedule complications that may

cause cost increases and project delays.’’

General, this memo was written in 2004, well before the majority

of the construction had taken place. Can you tell us why the Air

Force disregarded the objections of these key officials and proceeded with this approach, despite these warnings?

General GARDNER. Yes, sir. This was before my time, but let me

try to give you what I think happened based upon what I have

been able to research.

The individuals involved in this, we did actually go through a

process of looking at it, analyzing it, and determined that the risk

was—we knew that there was a risk involved. We would not have

the idea it would be as risky as it has turned out, but we did know

there would be a risk, and that all parties, again, involved agreed

that the fast track method was an appropriate method to start this

particular project.

Chairman WAXMAN. Mr. Kutz, what is your view of the memo

and the way it proceeded?

Mr. KUTZ. My staff had seen this memo before, and, again, I

think it just showed that, I guess, the incentive was to get it done

quickly rather than to get it done with the all controls and additional caution. You know that high-pressure schedules are oftentimes a problem that causes failure in a project.

Chairman WAXMAN. Thank you.

Mr. Davis.

Mr. DAVIS OF VIRGINIA. Thank you, Mr. Waxman, for holding

this hearing. This is a kind of microcosm of what goes wrong in

contracting.

Mr. Kutz, your statement here weaves a pretty woeful tale. You

say the German government entity charged with managing the

project performed poorly, as did many of the German contractors.

You don’t spare the Department of Defense, either, stated that the

Air Force oversight was grossly inadequate for such a large, highrisk program. Did anyone or any entity perform well here?

Mr. KUTZ. I suppose some of trade contractors did because,

again, I understand German trade contractors do good work generally and there is more of a history with German construction that

I am not as well aware of, but certainly I am sure some of them

did good work. I think it was more the oversight, the fast track,

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the design had flaws, and, of course, Air Force did not provide any

oversight.

Mr. DAVIS OF VIRGINIA. Is this a problem throughout the Air

Force in the way they oversee these, or is this just one isolated

case where the contracting officer, or whoever was responsible, just

fell asleep?

Mr. KUTZ. I can’t speak beyond this.

Mr. CAUSSEAUX. No. We have no indication that this is indicative

of systemic problems, but, again, we only looked at this project so

we can only speak for this particular one at this time.

Mr. DAVIS OF VIRGINIA. How much do you think American taxpayers are out on this? How much did we lose?

Mr. KUTZ. Only a fraction of this is coming from the MILCON

appropriations. Most of this is not appropriated money.

Mr. DAVIS OF VIRGINIA. Coming from where?

Mr. KUTZ. Soldier morale programs at the end of the day.

Mr. DAVIS OF VIRGINIA. So how much was lost when you put all

that through?

Mr. KUTZ. At the end of the day I don’t think anybody knows.

I mean, there is no estimate of the cost of the project right now,

and the original estimate, Mr. Davis, was $150 million. There is no

estimate today.

Mr. DAVIS OF VIRGINIA. Let me ask you this: did anybody get

fired over this?

Mr. KUTZ. I would defer to Air Force on that.

Mr. DAVIS OF VIRGINIA. Anybody fired?

General GARDNER. No, sir. Not to my knowledge anyone has been

fired. But I would like to say, if I could——

Mr. DAVIS OF VIRGINIA. Anybody promoted?

General GARDNER. Sir, could I set the record straight on the

money?

Mr. DAVIS OF VIRGINIA. Sure.

General GARDNER. We are within our budget authority on this project. We still have $55 million that we haven’t spent on this

project. The prognosis, even with the repairs of the roof, which is

substantial, even with the prognosis we will be under our project

program amount.

Mr. DAVIS OF VIRGINIA. But you admit this wasn’t very well handled, don’t you? Or are you going to defend it?

General GARDNER. I am not defending our contracting agent. No,

sir, I am not.

The other thing, though, I will tell you——

Mr. DAVIS OF VIRGINIA. Did the contracting agent do their job in

this case or did they fall down?

General GARDNER. The contracting agency obviously fell in this

case.

Mr. DAVIS OF VIRGINIA. Was anybody reprimanded for this?

General GARDNER. Sir, they have been——

Mr. DAVIS OF VIRGINIA. Was anybody demoted or fired?

General GARDNER. Sir, there have been people. I am sorry. I

thought you were talking about the U.S. side being fired. No one

on the U.S. side has been fired that I am aware of. On the contracting agent’s side, yes, sir. JSK, which was a contracting agent for

the LBB, was totally removed from the project. Four individuals

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have also been fired. Senior management onsite have been removed

from the site, as well, per my assistants.

Mr. DAVIS OF VIRGINIA. But from the government side, the people

overseeing it, no heads rolled? Nothing?

General GARDNER. The individual, the contracting agent is a

German organization, so yes, government organizations have——

Mr. DAVIS OF VIRGINIA. On the German side.

General GARDNER. Yes.

Mr. DAVIS OF VIRGINIA. But I am saying——

General GARDNER. Not on the U.S. side.

Mr. DAVIS OF VIRGINIA. Right.

Mr. Kutz, you point out that the Air Force provided minimal

oversight, and in some cases actually circumvented payment processes. A major reason behind this seems to have been a Air Force’s

desire to complete the project on schedule; is that correct?

Mr. KUTZ. Yes.

Mr. DAVIS OF VIRGINIA. Was the key element behind this mess

an unreasonably ambitious schedule for project completion?

Mr. KUTZ. That was certainly one of the key elements. Again, I

think there were a multitude of factors that contributed to this, including some that aren’t under the control, like the currency exchange. The Euro dollar has gone up by 30 percent since the beginning of the project, so that is outside of anyone’s control.

Mr. DAVIS OF VIRGINIA. Right, and probably you could argue that

wasn’t even foreseeable.

To your knowledge, nobody on the American side of this thing,

though, was reprimanded, demoted?

Mr. KUTZ. No, none that we were aware of. I think the Air Force

would know better, but we are not aware of any.

Mr. DAVIS OF VIRGINIA. Do you think the problems were caused

by the complexity of the various funding streams, which included

both, as we noted, appropriated and non-appropriated funds, as

well as some money from the German government?

Mr. KUTZ. Yes, that contributed.

Mr. DAVIS OF VIRGINIA. Do you think the fact that a majority of

the funds here were not DOD appropriated funds was a cause of

some of the lax oversight?

Mr. KUTZ. That was one of the reasons they didn’t engage the

Corps of Engineers. Apparently, in most projects like this the Corps

of Engineers would be engaged to provide oversight, at least certain elements of financial and construction oversight. Because it

was not appropriated, in part, that was not done in this case.

Mr. DAVIS OF VIRGINIA. My time is up. Thanks.

Chairman WAXMAN. Thank you, Mr. Davis.

Mr. Cummings.

Mr. CUMMINGS. I am confused. Mr. Kutz, you said from the very

beginning there was no good solutions to this problem. General

Gardner tells us that apparently he has a plan that this thing is

going to come in under budget. I mean, do you agree with that?

Mr. KUTZ. No. Not at all.

Mr. CUMMINGS. Why not?

Mr. KUTZ. The project is already 18 months behind schedule and

there is no estimate for cost and schedule. I am not sure how you

can say you are going to be under budget. There is going to be sigVerDate 11-MAY-2000 11:28 Jan 14, 2009 Jkt 000000 PO 00000 Frm 00186 Fmt 6633 Sfmt 6633 C:\DOCS\44635.TXT KATIE PsN: KATIE
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nificant litigation, claims responding. There is re-work, and there

are replacement of the roof, not just to fix the leaks. They are going

to have to tear out the roof, put a new roof in. I think it is very

ambitious to say this is going to be within any budget at this point.

Mr. CUMMINGS. General, I am under the impression from your

testimony that you believe the German agency and the German

contractors are to blame for the problems with the project. I don’t

see one sentence in this testimony that acknowledges any fault on

the part of the Air Force. Is that correct? You don’t believe the Air

Force did anything wrong here? I understand nobody has been demoted or dismissed.

General GARDNER. Sir, with the advantage of 20/20 hindsight,

there are things that we could have done better or would do differently, and those things are what we call lessons learned that we

have already instituted across USAFE in project management.

But overall, again, we have trust in our contracting agent, which

is LBB in this case, in accordance with international agreements,

and in accordance with international agreements they are authorized or expected to build these facilities with their own right and

under their own responsibilities, so we follow. We sit on the sideline once the game gets started, as I was pointing to earlier.

Mr. CUMMINGS. But—there is a big but here—we hold the

money; is that right?

General GARDNER. That is correct.

Mr. CUMMINGS. We hold the money.

General GARDNER. That is correct, sir.

Mr. CUMMINGS. And so, because we hold the money, I assume

there are certain controls that we should have; is that correct?

General GARDNER. We have that, sir. The oversight that was alluded to earlier, we have a program management office onsite. The

program management office is the ones that identified the leak

problems, for example, on the roof, and they are the ones that have

identified the kitchen duct problem.

Mr. CUMMINGS. Are you telling this committee this morning that

it is adequate, this oversight is adequate or has been adequate?

General GARDNER. The oversight, again in hindsight, we could

have maybe have increased the number of people in the program

office, but——

Mr. CUMMINGS. Let’s talk about it. You don’t seem to want to

admit that there are some major problems here with the Air Force,

but I would like to ask about when the Air Force first became

aware of the problems with construction and finances and the

scheduling. On page 3 of your written testimony you state that the

project indicators, both financial and schedule, began slipping in

September 2006; is that correct?

General GARDNER. No. The schedule had already started skipping [sic] before September 2006.

Mr. CUMMINGS. I am sorry. And is——

General GARDNER. But that is when we began to realize that

there were more issues than just schedule slippage, because that

is when we realized that we had a—well, actually it was before

that when we had a number of change orders that our contracting

agent had approved.

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Mr. CUMMINGS. I would hope so, Brigadier General, because the

hotel was supposed to be done by December 2005; is that correct?

General GARDNER. That is right. Yes, sir.

Mr. CUMMINGS. Yet you seem to be asserting that the Air Force

had no idea there was anything wrong until after the date this

project was supposed to be 100 percent complete. Can you explain

that statement?

General GARDNER. The project was scheduled to be completed,

the hotel was completed contractually April 2006. I began to realize

that we were having some major issues with schedules in——

Mr. CUMMINGS. You just got slipped a note. I want to make sure

we are accurate here. Why don’t you read your note.

General GARDNER. VQ was scheduled to open in April 2006.

Mr. CUMMINGS. OK. Let me ask you this, then, General. There

was a press story running in Bloomberg News yesterday in which

you were quoted. In it you made this statement, ‘‘There had been

an environment of trust between the U.S. forces and LBB until

about 18 months ago, when significant coordination and scheduling

problems on LBB’s part became apparent.’’ Eighteen months ago

was December 2005, so according to your statement in Bloomberg

yesterday, the Air Force became aware of the significant coordinating and scheduling problems in 2005, a year before the date you

assert in your testimony today. Which statement is accurate? Did

the Air Force become aware of these problems in September 2006

or were there indicators in 2005?

General GARDNER. As I stated in my verbal testimony, I became

aware of significant problems with scheduling in December 2005.

In the beginning of January 2006 is when I began to have a series

of meetings with our contracting agent in order to determine what

is the magnitude of these problems.

Mr. CUMMINGS. And so why do you take action then?

General GARDNER. We did take action.

Mr. CUMMINGS. What did you do?

General GARDNER. We worked with our contracting agent to determine why are we behind schedule and began to take action as

to how we were going to get back on schedule.

Chairman WAXMAN. The gentleman’s time has expired.

Mr. Shays.

Mr. SHAYS. Thank you.

General Gardner, I want to be fair to you, and I know this committee does, as well. Sometimes when people testify they don’t do

as well as they should, but this is almost bizarre to me, and so I

want you to stop and maybe explain to us. Maybe we are thinking

of something different than you are thinking.

When was this facility supposed to be complete?

General GARDNER. The VQ was scheduled to be completed in

April 2004. That is when we were to get BOD.

Mr. SHAYS. April of——

General GARDNER. I am sorry, April 2006.

Mr. SHAYS. Let me say something to you. You do not need to

speak quickly.

General GARDNER. April 2006.

Mr. SHAYS. April 2006. And what you are saying to us is in December 2005 you began to be aware that there were some chalVerDate 11-MAY-2000 11:28 Jan 14, 2009 Jkt 000000 PO 00000 Frm 00188 Fmt 6633 Sfmt 6633 C:\DOCS\44635.TXT KATIE PsN: KATIE
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lenges in completing the project. It seems to me if it is supposed

to be done just 5 months later, for you to be aware of it so late is

stunning. Explain to me why you would be aware so late that there

were delays.

General GARDNER. Because we were being told by our contracting

agent that everything was on schedule.

Mr. SHAYS. Well, being told by your contractor and having people

there seeing that the contractor must be smoking something—in

other words, did you not have anyone who was following this

project and watching it and checking out to make sure that at least

the contractor was saying things correctly?

General GARDNER. Sir, that is exactly what we were doing. That

is, again, the reason we had a series of meetings with them.

Mr. SHAYS. No, you weren’t doing it, because you should have

known before December 2005. Clearly you should have known.

The other thing that just leaves me uncomfortable, and it is an

impression that you wanted to leave with us but it doesn’t make

sense to me. I mean, when we read the document from GAO, this

looks like a disaster of a project that is going to have significant

cost overruns, and you are trying to give us the impression that

you are under-budgeted. The way I think you are doing it is by not

adding in the cost that will be needed just to get us up to a certain

state of correction before you complete the project.

For instance, the claims, what are the kinds of claims against

this building right now? In other words, if you don’t pay a contractor, you have money in the bank, but that is money that is allocated somewhere. I mean, are you trying to give us the impression

that you have unallocated dollars that will make you feel comfortable and Air Force comfortable that you are going to be under

budget?

General GARDNER. Sir, our prognosis, based upon our contracting

agent, as well as the other government officials that looked at this,

we agree that at this particular point in time we are under the

budget. That is to include the repairs that have been identified in

this committee this far. It does not include, however, the unknowns. We don’t know what claims are out there yet as far as

what the Germans would refer to as hindrance. We don’t know

what those may be and how that will account in here. But many

of those claims costs, we are working with our German counterparts in order to recover some of those claims.

Mr. SHAYS. Well, I became the general contractor of my house

when my contractor left me a few years ago, and I would never feel

comfortable saying that we are going to be under cost, because the

fact is you have problems with your contractor because you are

over cost. Rarely do you have problems with a contractor when you

are under cost.

Mr. Kutz, walk me through. And I want you to be candid on how

you are reacting to General Gardner’s response to us.

Mr. KUTZ. It is just optimistic. I mean, I just don’t see facts behind it from what we can see.

Let me give you an example. There are tens of millions of dollars

of change orders in the pipeline that have not been reviewed. There

is no support for most of those, or many of those. Some of them

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have been paid for, some of them haven’t, and that is based on our

own——

Mr. SHAYS. You have one change order, you have added cost and

the change order they can charge you top dollar because it is a

change order. How many change orders are there?

Mr. KUTZ. I don’t know today, but as of February there were 500

or 600 that were in the pipeline, according to their consultant.

Mr. SHAYS. 500 or 600 change orders?

Mr. KUTZ. That is what we understand, yes.

Mr. SHAYS. Yes. OK. Mr. Dorn.

Mr. DORN. I would like to comment first to add to what Greg

said. If you don’t know the cost of the change orders and the cost

of the claims that still haven’t come in yet, there is no way you can

know that you are going to be under budget under your programmed amount. Being under the programmed amount doesn’t

mean that there hasn’t been any waste; it just means that your

programmed amount was a lot higher than your initial contract.

Mr. SHAYS. Well, my time has run out, but basically two issues

right now. You are going to have claims and you are going to have

change orders and, third, you are going to have repairs. Those

three things are going to increase your cost, so you are going to

have to find where did you save money in your project.

At any rate, thank you, Mr. Chairman.

Chairman WAXMAN. Thank you very much.

Mr. Davis.

Mr. DAVIS OF ILLINOIS. Thank you very much, Mr. Chairman. I

want to thank you for calling this hearing.

Following up pretty much the same line of questioning, Mr. Kutz,

I want to try and understand exactly how much this project is

going to ultimately cost. I am looking at the Air Force audit report,

and it says that in 2003 the K-Town Mall project would cost $132

million. Is that correct?

Mr. KUTZ. That could be one of the early numbers. There are a

number of numbers of what it was going to originally cost. Our best

guess was 150, from what we could tell.

Mr. DAVIS OF ILLINOIS. Then by January 2006 the audit says that the cost of the project had risen to about $180 million, and by

September 2006 the estimate was $201.6 million. Now, I understand that some of that increase was because of the change in the

value of the Euro, but a lot of that increase was for increased contractor cost; is that not correct?

Mr. KUTZ. That could be rework and other types of things, or just

changes in quantity and other types of prices of materials.

Mr. DAVIS OF ILLINOIS. General Gardner, do you agree with the

Air Force auditors that the latest estimate for the cost of this

project is approximately $200 million?

General GARDNER. I am glad you asked me that question, Mr.

Congressman. If I could clear the record, the current amount is the

PA amount. The program amounts for this project is $181,997. The

cost prognosis, including all the repairs, all of the change orders,

the 776 change orders, including all those, we are looking at roughly $174 million.

I will tell you, however, that does not include the claims that we

were referring to here. We have not gotten around to the claims.

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There is Article 18 of the ABG–75 says that the U.S. Air Force

or U.S. Government will not be held, cannot be held responsible for

faults caused by the German government or their representatives

that they hire. Article 40 of ABG–75 says those discrepancies and

disputes will be handled at the ministerial level. That is what we

are in the process of doing. We are trying to work those disputes

that were referred to, the claims that we are talking about, at the

ministerial level. We have no idea what those numbers are going

to be just yet.

But I just wanted to make sure that the record is straight. These

are prognoses from everybody who has looked at this other than

our GAO and audit agency, is $174 million is where we are at the

present time based on our best prognosis.

Mr. DAVIS OF ILLINOIS. Now, are you getting any money for the

project from the German government?

General GARDNER. There is a small amount. For the claims, no,

but there is a small portion of this, about $11 million, that we get

through a Rhein Main transition program which is paid for by the

partners. This money is used to pay for 200 of the rooms in the VQ

area, at least portions of the VQ area.

Mr. DAVIS OF ILLINOIS. Mr. Kutz, in your testimony you say that

even $200 million is an estimate that is too low. Do you still——

Mr. KUTZ. We don’t really have an estimate, but it is hard to believe there could be a valid estimate when there is no schedule

completion date. I mean, no one has. Maybe the General has a new

schedule completion date that he would like to go on record with,

because I just don’t know how you can make an estimate of cost

when you don’t know when it will be done.

Mr. DAVIS OF ILLINOIS. General, let me ask you, is there a time

for reassessing the ultimate cost of the project where you can come

in with an amount that probably would get agreed to by the GAO

or auditors who would look at it?

General GARDNER. We are constantly looking at funding because,

contrary to what some might believe, we are good stewards of

American dollars. We are constantly looking at our expenses,

where do we need to make adjustments, and so forth.

As we speak today, I can’t predict what is going to happen into

the future, but as we sit today the prognosis is just as I have just

read it to you. That is where we are. And the $200 million that you

have seen floating around is a figure that we use when we take

people around visiting, this is a $200 million project. It is not a

$200 million project. It is really about a $181 million project, but

we have used the $200 million as a kind of a round figure for our

tourists.

Mr. DAVIS OF ILLINOIS. Could it be that you really don’t know

what the cost of the project is going to be?

General GARDNER. Ultimately, including the claims and the unknowns, no, we do not know.

Mr. DAVIS OF ILLINOIS. Thank you, Mr. Chairman.

Chairman WAXMAN. Thank you, Mr. Davis.

Mr. Issa.

Mr. ISSA. Thank you, Mr. Chairman. I want to thank you for

holding this hearing. It is always refreshing when we can have a

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totally bipartisan hearing, one in which we are looking at the kind

of mistakes that are endemic in our large bureaucracy.

I don’t claim to be an expert on contracting. The biggest building

I ever built was 200,000 square feet. But it will tell you that, given

a budget of $200 a square foot, given the ability—General Gardner,

let’s start it off. Were you there at the start of the project?

General GARDNER. No, sir, I was not.

Mr. ISSA. OK. Where were you at the start of the project?

General GARDNER. I was on another assignment in Brussels.

Mr. ISSA. What were you doing?

General GARDNER. I was the Deputy U.S. military representative

to NATO.

Mr. ISSA. OK. So you weren’t in contracting? It wasn’t a skill set

you brought here today except what you have learned on the job?

General GARDNER. That is correct, sir.

Mr. ISSA. Isn’t that one of the problems of the U.S. military is,

with the exception of the Corps of Engineers, for the most part putting on that uniform doesn’t give you the qualifications, graduating

from the Air Force Academy with an engineering degree in aeronautical engineering doesn’t make you a general contractor? Isn’t

that generally one of the problems of men and women in uniform?

General GARDNER. Sir, I can’t comment to that.

Mr. ISSA. OK. We will take that as a yes.

Did anyone ever consider doing a PPV type project, in fact, having a partnership? You know, Paris Hilton is in the news, but

Baron Hilton built a lot of hotels with 350 rooms and he came in

on time and under budget. Was this ever considered in the contracting?

Mr. Kutz, did you see anything in the record that said that at

the time the Germans and the Americans were figuring it out they

considered the idea that they would go to somebody skilled in producing hotels? Mr. Dorn. Anybody? Because I will tell you I don’t

believe for a minute that you are going to do better the next time

unless you start off with a different attitude on how we approach

the project to begin with.

Go ahead, sir.

Mr. CAUSSEAUX. The U.S. Forces are obliged, under the ABG–75

agreement, to contract through using essentially an indirect process where a German agent—in this case LBB—represents the

American interest. That does not mitigate the U.S. obligation to

provide general oversight of that venture.

Mr. ISSA. So you get to be in the airplane, but you don’t get to

touch the controls, but you get to complain about the altitude and

direction?

Mr. CAUSSEAUX. The German government——

Mr. ISSA. I am not a football guy. I am going to have to do this

in Air Force terms.

Mr. CAUSSEAUX. Well, in all deference to the General, while——

Mr. ISSA. This is a fly by wire with no connections. [Laughter.]

Mr. CAUSSEAUX. With all respect to the General, I agree with his

analogy that this is not a game; what I don’t agree necessarily,

however, is that the German government was an owner. I believe

the United States is the owner. It is our money. We have a vested

interest.

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The fact that this was a fast track process, there was a decision

made not to engage a general contractor, driven, I believe, primarily by the fact that it was a fast track. The Air Force opted not

to have the Corps of Engineers engaged. There were designers. The

design was incomplete. And there were multiple funding sources

collectively and, given the size and order of magnitude of the

project, made this a high-risk project.

The Air Force needed to have adequate oversight and they did

not.

Mr. ISSA. OK. You know, did any of you see anywhere in the contract history somebody looking at what it would cost to buy Euros

at the front end of the project, since this was clearly known as a

Euro-denominated project? Does anybody think for a minute that

they simply write checks for fuel around the world and they don’t

hedge it in any way, shape, or form?

Mr. KUTZ. I don’t believe the Federal Government hedges, but

any business would have hedged this kind of a project. There is no

question about that.

Mr. ISSA. You mean the Federal Government just calls up every

day and says what it is going to cost us for fuel?

Mr. KUTZ. I believe that is correct.

Mr. ISSA. There is no contracting ahead, no forcing the vendor to

hedge?

Mr. KUTZ. I am pretty sure that is the case.

Mr. ISSA. OK. So for this committee, we should understand that

all that talk about world class private sector type thinking is just

bull; that, in fact, that is not going on; that what would normally

go on—Southwest Airlines doesn’t have a problem when they are

dealing in buying fuel. They are going to have to buy at variable

prices. They hedge it. They set a contract.

You didn’t do that. You didn’t fix the contract cost or exposure,

you didn’t deal with the German government and say, Because we

don’t control this we are going to put a cap on meeting the performance. We will pay for change orders but we are not going to pay

for the basic question of whether you build this right. Is that true

that the basic contract the day it was signed was flawed and that

the Air Force doesn’t know how to write a contract that protects

the interest of the American people? Is that true?

Mr. CAUSSEAUX. Again, this was not a contract——

Mr. ISSA. Yes or no. I don’t have much time. Please.

Mr. CAUSSEAUX. No.

Mr. ISSA. OK. Let’s go through a couple more.

I heard you say that you need more people, General Gardner.

How much do those people cost and how are they scored? You need

more people to do oversight, but I understand from the testimony

that you don’t really have control, so you can look at it and you

can complain, but you can’t get there. And don’t answer that because I think it answers itself.

I am looking at pictures from just a couple of weeks ago. Now,

again, I haven’t done a project of this size, but this is not within

3 months of completion today, even if it wasn’t damaged. So I ask

you, General Gardner, tell me why 3 months before the project was

to be done was the first time you knew it wasn’t 3 months of completion, because this is a recent picture. This means that today it

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is not within 3 months. Could you answer that for us, please, if the

chairman will allow?

General GARDNER. Yes. The picture you are looking at is the mall

portion of the complex. The VQ, itself, is in January of——

Mr. ISSA. Wait a second. Just correct, if I can, this section here,

this is the hotel. This high-rise section is not a mall.

Chairman WAXMAN. Your time has expired——

Mr. ISSA. Would the ranking member give me some of his time?

Chairman WAXMAN [continuing]. But I want to give him the opportunity to answer the question.

General GARDNER. In December 2005 the hotel was still on

schedule for BOD at the end of April. The hotel is different from

the mall complex there. The mall complex we knew would be about

4 to 6 months later.

Chairman WAXMAN. Thank you very much, Mr. Issa.

Mr. Tierney.

Mr. TIERNEY. Thank you, Mr. Chairman.

I am curious when the General indicates that nobody on the Air

Force side has been held accountable and no one has been disciplined or fired on that. We talked about the extraordinary number of change orders, many of which the Air Force didn’t even know

about.

Mr. Kutz, in your report you mentioned that there were only

eight offices in the U.S. project management office, none of whom,

I understand, were warranted contract officers; is that right?

Mr. KUTZ. That is correct.

Mr. TIERNEY. You then mentioned that the director of the office

may have been responsible for some of the decisions that led to the

situation today, correct?

Mr. KUTZ. Correct.

Mr. TIERNEY. And in retrospect, when they were offered the help

of the Army Corps of Engineers, the people who have expertise on

that, that was rejected?

Mr. KUTZ. That was rejected. Yes.

Mr. TIERNEY. Do you know if the director of the program management office played any role in recommending against seeking

the additional contracting resources from the Army Corps of Engineers?

Mr. KUTZ. I don’t know.

Mr. CAUSSEAUX. My understanding was that the Air Force requested or decided not to engage the Army Corps of Engineers from

a cost factor and because there had been indications that they had

some difficulties dealing with the Corps of Engineers, and because

this project is largely funded by non-appropriated funds versus

MILCON or appropriated funds, it was not required that the Corps

of Engineers be engaged. But they did have that option.

Mr. TIERNEY. OK. And do we know what role the director of the

program management office played in all those decisions?

Mr. CAUSSEAUX. I do not.

Mr. TIERNEY. I just want to explore the idea of this official that

I would think that in that position that he had he had some responsibility in those decisions. When I look at page 11, Mr. Kutz,

of your testimony, you say he left his position and left the Air Force

in 2006; is that right?

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Mr. KUTZ. That is correct.

Mr. TIERNEY. Do you know why he left and what the circumstances were around his departure?

Mr. KUTZ. For another job with the contractor in Dubai, I believe.

Mr. TIERNEY. I understand the Air Force is involved in a criminal investigation in this matter?

Mr. KUTZ. Of this individual, yes.

Mr. TIERNEY. So I think we have to be a little delicate how we

discuss it, but your testimony says that the Air Force officers have

been searched and documents have now been seized; is that correct?

Mr. KUTZ. Correct.

Mr. TIERNEY. General Gardner, do you know where this official

is today?

General GARDNER. I believe he is somewhere in the Middle East,

sir.

Mr. TIERNEY. Do you know where he is specifically in the Middle

East?

General GARDNER. I believe he is in Dubai, but I am not sure.

Mr. TIERNEY. He is in Dubai? And I guess committee staff had

the opportunity to track him down. They were interested in having

him here today to testify. Do you happen to know what company

he is working for in Dubai, General?

General GARDNER. I believe he is working with Jacobs.

Mr. TIERNEY. And, in fact, isn’t that the same company that the

Air Force hired to help oversee this project?

General GARDNER. We do have two employees from Jacobs that

work with our quality control assurance guys.

Mr. TIERNEY. Well, this is serious stuff and I think we ought to

let the Air Force and the investigators carry on their own investigation on that, but we push fast track schedule, we hire minimal

oversight staff, reject the help of experienced agencies. It just

seems to me like a recipe for disaster on that, and I would expect

that somebody is going to take responsibility. I don’t see a lot of

responsibility acknowledged in your testimony, General.

But just on the point of missing change orders, the 427 change

orders I think is something of a stunning number for a project on

this.

Mr. Kutz, just so we understand that process, the Government

has approved the overall scope of the work on the project, and if

the contractor thinks a change is needed it submits a change order,

then the U.S. Government has to approve that change order before

the work can be done, and certainly before any bills are paid; is

that right?

Mr. KUTZ. Actually, LBB would submit the change order. They

would work on those with the contractors that they had effectively

subcontracted with.

Mr. TIERNEY. OK.

Mr. KUTZ. And then they would submit that to the Air Force.

Mr. TIERNEY. And then the Air Force decides whether or not to

approve it and to pay it?

Mr. KUTZ. Correct, although in many cases they paid before they

got the change order.

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Mr. TIERNEY. Well, if they did that, that is not normal course of

business, right?

Mr. KUTZ. No, not at all.

Mr. TIERNEY. All right. I was going to say you caught me up

there for a second. Because in general you submit it, it gets approved, only if it is approved it gets paid.

Mr. KUTZ. Well, keep in mind some of the change orders really

aren’t change orders. They are like one line that says something

was done. They are still waiting for hundreds of supporting change

orders for work that was supposed to have been done.

Mr. TIERNEY. So the documentation was supposed to accompany

it; it never did show up or hasn’t shown up to this date on it?

Mr. KUTZ. Correct.

Mr. TIERNEY. OK. I am looking through your report here. You

found in a lot of cases the Air Force didn’t even know about some

of these change orders before they were paid.

Mr. KUTZ. That is correct.

Mr. TIERNEY. At all.

Mr. KUTZ. Yes, because a large number of them came in, we understand, in the summer of 2006. Some of those dated back into

2005.

Mr. TIERNEY. OK. Tell us a little bit about what kind of documentation would really usually accompany a change order request.

General GARDNER. The change orders, they can vary in size, but

they are normally about this size.

Mr. TIERNEY. It is hard to believe that somebody would miss that

or not realize that it hadn’t shown up at some point.

Chairman WAXMAN. The gentleman’s time is up, but you may answer that question.

Mr. TIERNEY. It really wasn’t a question. Thank you, Mr. Chairman. I guess I am just so stunned that over 400 of these fairly significant items here were just missed somewhere along the line.

I yield back. Thank you.

Chairman WAXMAN. Mr. Duncan.

Mr. DUNCAN. Thank you, Mr. Chairman.

I just want to see if I can come a little closer to an understanding

about the cost of all this, because I think Mr. Kutz said he couldn’t

give an estimate of what the cost would end up being.

We have a fact sheet given to us by the committee that says, as

a result of these deficiencies, that auditors estimated that costs for

the K-Town Mall have increased from $131.3 million to at least

$201.6 million. Although the project was originally scheduled to be

operational by the end of 2005, the auditors reported it is only 65

percent finished and has no determined completion date.

Is that all correct and accurate?

Mr. KUTZ. That is the Air Force Audit Agency’s report, I believe.

We have not done sufficient work to have our own estimate.

Mr. DUNCAN. And you said that only a small fraction, you said,

of the money was coming from the MILCON program?

Mr. KUTZ. That is correct.

Mr. DUNCAN. And I think I read someplace else where $21 million had come from that program?

Mr. KUTZ. Something along those lines, yes. U.S. dollars.

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Mr. DUNCAN. But then you said some of the rest of it or all of

the rest of it or something was from soldier morale programs?

What was the term you used?

Mr. KUTZ. Army/Air Force Exchange was the largest funding

partner, and then Air Force Services is the second largest. Between

the two of them, it is 75 or 80 percent. To the extent that there

are issues with this program, it will impact soldier morale programs.

Mr. DUNCAN. So the largest funds were coming from the Army

and Air Force Exchange Program, which is subsidized by the taxpayers?

Mr. KUTZ. Most of that comes from profits from——

Mr. CAUSSEAUX. Revenue generated from the exchanges.

Mr. KUTZ [continuing]. Operating exchange programs.

Mr. DUNCAN. Well, you know, I think what disturbs so many people is that when we hear about these cost overruns in almost every

department of the Federal Government, but particularly in the Defense Department, nobody really seems to care because it is not

coming out of their own pockets. I mean, you care when you are

sitting here in front of the congressional committees and testifying

because you don’t like being here, but really, as several Members

have pointed out, nothing seems to ever happen to anybody. As the

term is, nobody seems to ever be held accountable and nobody

seems embarrassed, nobody ever seems ashamed, nobody ever

seems to—you know, we hold these hearings, but then we just have

these things happen over and over and over again.

And then what we hear, whenever we find a program in the Federal Government that is messed up, they always say one of two

things or both. They always say they were under-funded, they need

more people, or they need more money—you know, they need more

money so they can lose even more—or their technology was out of

date, their computers were out of date. You hear that over and over

again. Yet, the technology owned by the Federal departments and

agencies is far better and far more expensive and far advanced over

what the private sector has. But when things like this happen in

the private sector, things happen.

Anyway, thank you. Thank you, Mr. Chairman.

Chairman WAXMAN. Thank you, Mr. Duncan.

Ms. Watson.

Ms. WATSON. I want to thank all of you gentlemen and the chairman for being here, but I think we are gagging at a gnat and swallowing an elephant. I have sat in this committee and I have heard

and spoken of $9 billion missing in Iraq and moneys that were to

be used for contracts and to be handed out to the workers and so

on, and no one can explain. We even had the Ambassador who was

there during that time said it was only Iraqi money.

I am very, very familiar with this area of Germany. In fact, I

worked for the Air Force and I was in France and spent my weekends over in Germany, so I am familiar with this area and I think

it is commendable that we are building this mall. However, I am

very, very upset about taxpayers’ money disappearing. This is not

even a war zone, not even a war zone, but I am talking about in

theater, and taxpayers’ money disappearing without the oversight,

without the management, and so on.

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So, Mr. Kutz, I thank you for the work you do, but this is exemplary of a bigger, bigger problem that we are using this money

without the proper management, oversight, and without people

who have the expertise in place.

You know, I don’t have really any problem with this because, you

know, we are trying to service the civilians and the military in a

foreign country, and I am all for that, but what I have the problem

with is the mismanagement of our moneys and the fact that currently tax cuts, where are we going to get the pool of money to really provide the construction and the needs and whatever domestically and in theater and in other places?

So none of you have to respond, but I am frustrated, because

when we talk about real dollars on projects that really would be

meaningful in terms of outcomes, we don’t get the answers.

I want you to continue to give your reports. I want you to give

us strong recommendations as to how we can look at the overall

system of management accountability.

We are the committee that looks at fraud, waste, and abuse, but

we need to have some over-arching principles, and we need to have

answers why they are not being followed.

Thank you so very much. I give back my time, Mr. Chairman.

Chairman WAXMAN. Thank you very much, Ms. Watson.

Mr. Platts.

Mr. PLATTS. Thank you, Mr. Chairman. I appreciate your holding

this hearing. I appreciate our witnesses being here today. I apologize for coming in late from another commitment as this issue was

addressed.

When I look at the problems that are clearly identified with this

project, it is kind of two-fold. One is the waste of those tax dollars

and other dollars related to the operation of our facilities that support our men and women in uniform and their families, the exchanges and the projects that can be built, or in this case maybe

not done because of the loss of money on this project.

I see a double hit, that loss of money and the fact that the quality of life for our men and women who are courageously serving us

along with their families and those who either pass through Germany or are there has not yet been improved because this project

is far from completion.

In my numerous visits overseas I have come through Ramstein

a number of times and have seen this project underway, and the

fact that we are now a year past when it was supposed to have

been done, that is a year of lost quality of life improvements for

our men and women in uniform and their families, and no date certain yet of when it will be done, so it is both a dollar issue and

a quality of life.

What I wanted to focus on specifically is my understanding from

the audit that was done that there are recommendations, and specifically that—and, General, if you could address this—that there

were recommendations from the auditors that would address internal controls relating to some of the change orders, as well as to the

process for reviewing the invoices submitted and when the work

was done, that recommendations were made, but those in charge

of the project refused to accept those recommendations and act on

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them and said, No, we think we are doing what we need to do,

even though the evidence tells us otherwise.

I guess it is two-fold. One is, to the best of your knowledge, who

made those decisions not to accept the recommendations of the

auditors? And any basis for why they did not accept that, given the

information we know today of the wrongs that were being committed?

General GARDNER. We are in the process of trying to figure out

how do we get this project completed. We have contractors that

have walked off the site because we haven’t paid them. Our guys

have refused to pay them because change orders have not been

completed. We know now that these change orders that we are

talking about, the work was done, the work was needed, and we

will eventually pay for those change orders. We know that.

What we did was set up a process to try to get money to the contractors to get them back to work so that we could finish up the

project. For every day that these contractors are off the site they

are actually charging us money, so we are incurring hindrance

costs, delays, and all types of other types of costs as a result of contractors not being at work.

So what we have done is tried to find ways within the law. This

has all been coordinated with our legal staff, coordinated with our

FM staff, and that was the process that we have used. So I feel

comfortable with what we have done with that.

Mr. PLATTS. You are addressing where change orders were reviewed and were accurately fulfilled and payment, but my understanding is there is significant evidence of improper oversight, of

perhaps—I think one number is $13 million that could not be accounted for, expenditures, and at least $13.7 million in construction

change orders that the auditors reported that the Air Force was

not able to validate. Is that an inaccurate statement?

General GARDNER. I don’t know the exact part that you are reading from, but it is true that in the summer timeframe of last year

we received a register of modifications—the number was 549—of

change orders that our agent had approved or someone had approved that we were not aware of. There were 549 of them.

We have since gone back out on the site and worked with our organization or the German contracting agent to verify that the work

had been done on these.

The process to do a change order, according to the ABG–75,

should take 30 days. Some cases, because the way you go through

the process of the change order, verifying, negotiating the prices,

checking the prices and so forth, especially when you have a

change order this size—17,000 line items in this document here—

it takes a while. That is what has happened, is that we have been

trying to figure out a way. We know the work has been done. We

can verify that. But we do not have a means to pay the contractor,

get them onsite, so they are walking off. So we are in this catch–

22.

Mr. PLATTS. Mr. Chairman, could I do a followup here, if I may?

Chairman WAXMAN. Yes.

Mr. PLATTS. Thank you. I want to followup quickly with our GAO

officials.

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General, one, I appreciate your efforts and your staff in trying to

get this project back and for your and your fellow men and women

in uniform’s service. We want you to be successful getting this

project back and success for the benefit of the taxpayers and for the

families and our men and women in uniform.

General GARDNER. Thank you.

Mr. PLATTS. I do want to followup on that issue of the auditors’

recommendation. In your review, are there still significant recommendations of the auditors to prevent further problems that are

not yet being implemented and accepted and pursued by those

overseeing the project?

Mr. KUTZ. We don’t know that. Our work is still ongoing.

I would say this: this is the situation. There is no real good solution necessarily. Just as important as this project is really the hundreds of millions of additional projects that are going to be happening, and at the front end—now you are not the front end any more.

You are now at the back end of this, trying to deal with a real kind

of a mess. For the projects going forward, it would be more important to deal with the front end so we don’t have these kinds of discussions.

Granted, you could still have problems, but you have a better

chance of preventing at the front end. Now you are really in a situation of having, in many cases, to pay, regardless of whether you

are going to get the money back, for rework or other types of problems here.

So the only thing I would just comment on is the General said

that the work has been done, and I expect hopefully most of it has,

but I am not sure how he can conclusively state that where there

are change orders with—supposed change orders. I said alleged in

my opening statement—with no support. Again, I trust that most

of it has been done, but also some of the people that are involved

in this process are under investigation for fraud. So to the extent

of saying that the work has been done, you don’t know for sure.

General GARDNER. I beg to differ with you, but we do know.

Mr. PLATTS. I think your point that the work not being done up

front. And, General, I understand that was prior to your time——

General GARDNER. Right.

Mr. PLATTS [continuing]. In your position, this change order with

thousands of line items. If there had been a more thorough vetting

and oversight up front we probably wouldn’t have that type document. You are always going to have change orders, but probably

not to this degree maybe if it was better laid out and overseen from

the beginning. I think that is part of your point.

Thank you, Mr. Chairman, for the time.

Chairman WAXMAN. Thank you, Mr. Platts.

As we conclude this hearing, General, I want to make it very

crystal clear why this committee is so concerned with the failure

of the Air Force. It doesn’t matter who the contractor is, whether

it is an Iraqi contractor or German contractor or an American contractor. As I understand, there are special rules for international

agreements, but you are the U.S. Government. You hold the

money, and with it you hold the responsibility to ensure that it is

not wasted.

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Your written testimony says you are the third line of defense in

protecting U.S. interests and resources. I disagree. You write the

checks. You are the first line of defense for the American taxpayers. When you compare your testimony here today with this

112-page audit, you get a completely different picture. This Air

Force audit report details at least 30 critical failures, not by contractors but by Air Force officials who were supposed to oversee

this project, and these are fundamental, core responsibilities that

have been disregarded.

I don’t have any further questions for you, but I just want you

to take that back and understand that is why Congress is concerned. It is not just for you to point fingers; it is to make sure

these kinds of things never happen again.

Thank you very much. That concludes our hearing today. We

stand adjourned.

[Whereupon, at 11:30 a.m., the committee was adjourned.]

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WASTE, FRAUD AND ABUSE AT K-TOWN: ONE

YEAR LATER

WEDNESDAY, JUNE 25, 2008

HOUSE OF REPRESENTATIVES, COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM, Washington, DC.

The committee met, pursuant to notice, at 10:05 a.m., in room

2154, Rayburn House Office Building, Hon. Henry A. Waxman

(chairman of the committee) presiding.

Present: Representatives Waxman, Cummings, Kucinich,

Tierney, Watson, Sarbanes, Davis of Virginia, Shays, Platts, Duncan, and Sali.

Staff present: Phil Barnett, staff director and chief counsel; Kristin Amerling, general counsel; Karen Lightfoot, communications director and senior policy advisor; David Rapallo, chief investigative

counsel; John Williams, deputy chief investigative counsel; Margaret Daum, counsel; Earley Green, chief clerk; Jen Berenholz, deputy clerk; Caren Auchman and Ella Hoffman, press assistants;

Lawrence Halloran, minority staff director; Steve Castor, minority

counsel; Ali Ahmad, minority deputy press secretary; Patrick

Lyden, minority parliamentarian and member services coordinator;

Emile Monette, minority professional staff director; and John Ohly,

minority professional staff member.

Chairman WAXMAN. The committee will please come to order.

On June 28, 2007, almost exactly a year ago today, this committee held an oversight hearing on the Defense Department’s single

largest construction project in the world, a massive 840,000 square

foot mall being built in Germany called the Kaiserslautern Military

Community Center, also referred to as the K-Town Mall. This facility will have an 8-story, 350-room hotel. It will have a movie theater with stadium seating and large retail areas. A military spokeswoman called the K-Town Mall a smaller version of the Mall of

America in Minnesota.

Last year, GAO testified that this project was in ‘‘serious trouble.’’ They told us it was millions of dollars over budget, had no

validated cost estimate, and had no working completion date. GAO

told us about the mall’s defective and continuously leaking roof,

which was going to cost millions of dollars to repair, and GAO told

us about serious construction mistakes, like kitchen exhaust ducts

sealed with flammable insulation.

We also obtained a report from the Air Force Audit Agency detailing 35 different deficiencies in the Air Force’s management of

this project, and we were informed of several ongoing criminal investigations of U.S. officials involved in this project, including one

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official who fled to Dubai instead of agreeing to testify before this

committee.

During last year’s hearing, officials from the Air Force essentially

told us not to worry. They said that despite problems identified by

GAO and the auditors, the project was under control. They promised that even if the project came in late, it would still be under

budget.

Part of good congressional oversight is sustained congressional

oversight. So today we are having our second hearing on the KTown Mall. Today we will hear from the GAO team that has been

tracking this project closely. Unfortunately, their testimony will

sound like the movie Groundhog Day. The project has gone further

over budget and has been further delayed. Here is what today’s

GAO report says: ‘‘With few visible changes, no reliable construction completion date, rising repair costs and continuing construction quality problems, the KMCC will continue to be a high-risk

project.’’

What is most troubling about this year’s report is that new problems are compounding the old ones. In addition to the faulty roof

and the dangerous kitchen exhaust ducts, GAO has now identified

long cracks in the concrete foundation of the building. Nobody yet

knows the full extent of this damage, how long it will take to repair, or how much these repairs will cost.

Another new concern that GAO raises is that the Air Force is not

counting millions of dollars of costs in its budget estimates. These

include costs to design portions of the mall, cost to rework deficiencies like the roof and the foundation, and costs to assign additional Air Force personnel to this project. GAO has also raised serious questions about $38 million in German funds that have been provided for the project. Although the

Air Force believes this is a grant from the German Government,

the Germans believe apparently that it is only a loan and they expect to be repaid.

Finally, GAO reports that the criminal investigations of U.S. officials involved with this project ‘‘have matured significantly’’ since

our last hearing and that several officials are being investigated for

dereliction of duty and bribery.

Here is the bottom line. This facility was supposed to cost $120

million and be open by 2006. But today, GAO projects that the

project will cost well over $200 million and may not be open for

business until sometime in 2009. Even at that point, GAO predicts,

‘‘it will likely take years before all issues related to this project, including litigation and potential construction quality problems, are

resolved.’’

As a result, 50,000 servicemen and women who live and work on

or near Ramstein Air Base lack modern facilities. Soldiers traveling

to and from Iraq and Afghanistan are deprived of promised amenities. And service members around the world have reduced funding

for morale, welfare and recreation.

At yesterday’s hearing on Afghan ammunition contracts, I said

that over the last 8 years there has been a complete breakdown in

the procurement process. Today’s hearing is more evidence of a pervasive dysfunction in Federal contracting. And this hearing is particularly frustrating because the glaring problems that we identiVerDate 11-MAY-2000 11:28 Jan 14, 2009 Jkt 000000 PO 00000 Frm 00204 Fmt 6601 Sfmt 6601 C:\DOCS\44635.TXT KATIE PsN: KATIE
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fied a year ago have not been fixed. We need accountability for

problems like the ones that we have found at the K-Town Mall,

and those responsible ought to face appropriate consequences.

We urgently need a new approach that welcomes oversight and

demonstrates a commitment to fixing problems and protecting taxpayers from waste, fraud and abuse.

I look forward to working with all of my colleagues to make this

goal a reality, and I want to recognize Mr. Davis.

[The prepared statement of Chairman Henry A. Waxman follows:]

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Mr. DAVIS OF VIRGINIA. Thank you, Mr. Chairman. Good morning and thank you for returning to the subject of the Air Force’s

major construction project in Germany dubbed the K-Town Mall

where I had the opportunity to visit a few months ago. This building has become such a lingering and costly mess, I think perhaps

we should start calling it the Capitol Visitor Center NATO annex.

A year ago we heard testimony on significant problems plaguing

the massive, multi-purpose complex designed to feature retail,

hotel and entertainment space for use by American personnel stationed in Germany and for others passing through Ramstein en

route to and from other parts of the world. At that hearing, the

GAO witnesses said mismanagement and lack of oversight had resulted in significant cost overruns, schedule delays and construction deficiencies. While any foreign construction effort is bound to

involve unusual complexities and risks, those in charge of this development seem to have fallen into all of those inherent traps, and

then they kept digging. Predictable difficulties were compounded

by inadequate and unfocused high-level leadership early on, poor

planning, badly designed requirements and an inadequate number

of trained personnel overseeing the project.

Now, that was last year. GAO went back to K-Town earlier this

year and the new observations they bring us today don’t describe

a clear path out of this expensive international morass. Steps by

the Air Force to augment oversight staff and strengthen internal

controls have helped to gain some measure of control over the

project, but those measures aren’t enough to untangle the knot

formed by—and we need to understand this—multiple funding

sources, vaguely worded international agreements, and the need to

navigate diplomatic process to resolve complex disputes involving

German contractors and U.S. dollars.

To break the logjam that stalled the project for so long, the Ger- man Government provided 25 million euro, or almost $39 million,

to get construction workers back on the job. While all parties recognize the influx of money was necessary to get the project going and

the status of that funding is not altogether clear, GAO has characterized it as a loan. The Air Force claims money—the United

States won’t have to pay back the money. The bilateral agreement

between the United States and the German Governments calls the

money prefinancing. No one is quite sure what it means. I hope

this hearing will shed some additional light on that. But this lingering confusion about key issues doesn’t bode well for completing

construction by the end of this year, a forecast both the Air Force

and the GAO already consider highly unlikely.

In any case, we have a great deal of money invested in the

project and substantial funds remain at risk. We need to be sure

this project is completed properly and that future projects don’t fall

prey to the same oversight lapses and mistakes that steered this

project into the ditch and kept it there.

I hope this hearing will focus on what needs to be done to get

this project back on track and the hard lessons that the Air Force

and others need to learn to ensure the integrity of any future

agreements governed by the terms of the current status of force

agreement in Germany. And I think that is what is critical, is that

you have international agreements here that have made this far

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more complex than ordinary—being just a government contracts

problem.

Investigators from the GAO are here today to provide their views

on this issue. We commend them for their hard work. We also

value the experience and the perspectives that the Air Force witnesses bring to this discussion. Much is at stake in terms of the

U.S. tax dollars and in terms of providing our troops with the best

possible overseas accommodations while deployed overseas. We

look forward to today’s testimony and to a frank and constructive

discussion.

Thank you, Mr. Chairman.

[The prepared statement of Hon. Tom Davis follows:]

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Chairman WAXMAN. Thank you, Mr. Davis. We are pleased to

welcome the following witnesses to our hearing today. Judith

Garber is Deputy Assistant Secretary of the European and Eurasian Affairs Bureau at the Department of State. Major General

Mark E. Rogers is the Vice Commander of the U.S. Air Forces in

Europe. Greg Kutz is the Managing Director of the Office of Forensic Audits and Special Investigations at the Government Accountability Office. Bruce A. Causseaux is a Senior Level Contract and

Procurement Fraud Specialist in the Office of Forensic Audits and

the Special Investigations at GAO. And Terrell G. Dorn is the Director of Physical Infrastructure at GAO.

The committee also requested testimony from Hubert Heimann,

the managing director of LBB, the German Government office that

supervises the KMCC construction project. Mr. Heimann wrote the

committee a letter stating that he would not be able to participate

in today’s hearing. I ask unanimous consent that Mr. Heimann’s

letter be placed in the hearing record. And without objection, that

will be the order.

[The information referred to follows:]

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Chairman WAXMAN. We welcome all of our panelists, witnesses

today. We welcome all of you today to testify. It is the policy of this

committee that all witnesses testify under oath. I’d like to ask you

if you would, please, rise and raise your right hands.

[Witnesses sworn.]

Chairman WAXMAN. The record will indicate that each of the witnesses answered in the affirmative. Your prepared statements will

be made part of the record in full. We would like to ask you, if you

would, to limit your oral presentation to 5 minutes. And we will

have a clock. It will be green. At the last minute it will turn yellow.

And then after the 5 minutes is up, it will turn red. And when you

see the red light, we would like to ask you to conclude.

Ms. Garber, why don’t we start with you? There is a button on

the base of the mic. Be sure to press it and pull the mic close

enough to you.

STATEMENT OF JUDITH GARBER, DEPUTY ASSISTANT SECRETARY OF STATE, BUREAU OF EUROPEAN AND EURASIAN

AFFAIRS, U.S. DEPARTMENT OF STATE

Ms. GARBER. I’m pleased to be here today and I’ll be ready to answer any questions. I do not have an oral statement.

Chairman WAXMAN. You don’t have a statement?

Ms. GARBER. No.

Chairman WAXMAN. OK. General Rogers.

STATEMENT OF MAJOR GENERAL MARC E. ROGERS, USAF,

VICE COMMANDER, U.S. AIR FORCES IN EUROPE

General ROGERS. Thank you, Mr. Chairman. Members of the

committee, the U.S. Air Forces in Europe appreciates the opportunity to appear today and update you on the KMCC. This facility

is important to ensure that future retail goods, services, morale

and recreation activities and mission-related lodging facilities are

available to our military members and their families who live in

the Kaiserslautern military community. These services are all currently available to our forces, but the quality of service is hampered by early cold war era facilities. They are old, dispersed, have

high maintenance costs, frustrating parking deficiencies and space

limitations.

I first became engaged on the KMCC in December 2006 when I

chaired the KMCC Oversight Council for the first time as the new

Vice Commander of the USAFE. By that time, the project was

months late, quality defects had been identified and arguments

were ongoing between the USAFE Project Office and LBB, the construction agent, because USAFE was not paying invoices and contractors were continuing to walk off the site due to nonpayment.

Additionally, I was briefed on a draft audit by the Air Force

Audit Agency that USAFE personnel had improperly paid invoices

and that the Air Force Office of Special Investigations was investigating two personnel for possible wrongdoing. The Commander of

USAFE at that time directed me to take charge of an effort to do

three things: Investigate the reason for the delays and failures in

KMCC; find out who is accountable for any failures, mismanagement or wrongdoing and; three, lead an effort with our German

partners to find a strategic solution to completing the KMCC.

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I found that USAFE personnel had indeed improperly paid invoices. According to the GAO, those funds have been recovered. Investigations continue; and once complete, responsible individuals

will be held accountable.

I also found that Air Force internal controls found the initial

wrongdoing, properly identified quality defects, and preserved our

taxpayer money. And I found many previous decisions by USAFE

leaders were fortuitous and positioned us to keep costs under control and enforce quality performance.

We stood up a task force and have been conducting root cause

analysis on about 35 different potential causes for delays and failures. This analysis is complex and continues; however, many conclusions have already proven useful in working with our German

partners for solutions.

Some work has continued over the past years—past year, and I

brought a few photos to show there are bright spots in the

progress. So if you’ll put up the first photo.

Just so we all know, Mr. Chairman, what we’re talking about, is

there is an image of the KMCC. The tall portion, of course, is the

hotel portion and all of the green area you see is the green roof

over the mall portion. It is a very complex and, as you said, huge

facility, reputed to be DOD’s largest single facility project in the

world.

Next slide, please. There is an image of the front entry to the

mall.

Next. That is an image of the hotel portion as it stands today.

Next, please. That is an image inside the hotel lobby.

Next. That is one of the rooms in the hotel that has been outfitted with furniture. All of the rooms are essentially complete. There

are 27 rooms that have finishes to be done and we’ve outfitted one

with furniture for visitors who want to see what this is going to

look like.

Next. That is the Ramstein tickets and tours office, one of the

morale welfare and recreation offices in the building.

Next. This is the mall concourse showing the entryways to some

of the vendor shops.

Next. And that photo is 90 degrees out, but it is office space in

the building.

Next. I think that is the last slide. So there has been some

progress over the past year, although minimal because contractors

were essentially trying to not be in default of a contract. German

leadership has worked hard to pick up the management and administrative train wreck of the KMCC and get construction on

track and, due to their personal leadership, both Federal and state

level, is now picking up more steam with more workers onsite and

contractors have signed up to a new schedule.

We want to thank our German counterparts for demonstrating

commitment to our great partnership by standing up to responsibilities under the international agreement, stepping out with strong

leadership, and I’m convinced the German Government wants to

get this facility finished as much as we do.

There has been numerous rumors surrounding the cost and quality, extended delays on this project in the past year. And since the

committee’s hearing, we have strengthened the management, corVerDate 11-MAY-2000 11:28 Jan 14, 2009 Jkt 000000 PO 00000 Frm 00219 Fmt 6601 Sfmt 6601 C:\DOCS\44635.TXT KATIE PsN: KATIE
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rected all the discrepancies and the GAO has not found any new

ones. We are frustrated and disappointed, but we’re doing everything we can, sir, to get this done.

That concludes my opening statement. And as you mentioned, I

have a written statement for the record. We appreciate your interest, sir. Thank you.

[The prepared statement of General Rogers follows:]

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Chairman WAXMAN. Thank you very much, General Rogers. Mr.

Kutz, why don’t we hear from you next and your colleagues? Just

a minute.

Mr. KUTZ. Mr. Dorn can start and I’ll finish.

STATEMENTS OF TERRELL G. DORN, DIRECTOR, PHYSICAL INFRASTRUCTURE, GOVERNMENT ACCOUNTABILITY OFFICE;

GREGORY D. KUTZ MANAGING DIRECTOR, FORENSIC AUDITS AND SPECIAL INVESTIGATIONS, GOVERNMENT ACCOUNTABILITY OFFICE; AND BRUCE A. CAUSSEAUX, SENIOR

LEVEL CONTRACT AND PROCUREMENT FRAUD SPECIALIST,

FORENSIC, GOVERNMENT ACCOUNTABILITY OFFICE

STATEMENT OF TERRELL G. DORN

Mr. DORN. Thank you, Mr. Chairman, Mr. Davis, members of the

committee.

Construction projects can be broken down into three fundamental

areas: Cost, schedule and quality. Optimization of those three areas

is the goal of good project management. But in the case of KMCC,

none of the three went Air Force’s way. There have been serious

quality issues, escalating and still uncertain project costs, and a

schedule that is likely to deliver the project at least 3 years late.

This morning I will cover the construction quality and schedule

issues, and then Mr. Kutz will discuss the cost issues.

A year ago, the serious KMCC quality issues we discussed included a defective roof and kitchen exhaust duct work that did not

comply with U.S. Fire Code standards. Both needed to be ripped

out and replaced. Schedule-wise, no one knew when the project

would be finished, and in fact the contractors had all but abandoned the site. Project management and internal controls were inadequate and there were allegations of fraud. Since then, there has

been a lot of progress in some areas and almost none in others.

First the good news. Since the committee’s last oversight hearing, the Air Force has made great progress in addressing internal

controls and has quadrupled the size of its KMCC Project Management Office with particular focus on staff training and acquisition

management, construction management and financial management. In addition, General Rogers, assisted by State Department,

met with high-level German officials to cooperatively work out the

details necessary to improve oversight of the project by LBB, who

is the German Government’s construction agent in RheinlandPfalz. They also laid the groundwork for the German Government

to pay its contractors and to get them back to work.

Now the not-so-good news. The new internal controls and the

new processes and the new Project Management Office have hardly

been tested because insignificant progress has been made in construction over the last 12 months. Our review of the latest construction schedule furnished to Air Force by LBB was not encouraging. The schedules for the mall portion and the hotel portion of

the project were not integrated to show how they might affect each

other. It was also not clear from the schedule what contractor resources, such as crew sizes, were necessary to keep the project on

time.

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The project’s critical path, which is supposed to show what tasks

need to be completed by certain dates to keep the project on schedule, was not clear. However, it was clear from the schedule that

some tasks were already late. Given those issues, finishing all construction and fire alarm testing in the mall and hotel by the end

of the January 2009 is very unlikely. And given that AAFES may

need as many as 4 months to take the building from the Air Force’s

definition of complete to the day the first customer buys a pair of

shoes, it is foreseeable that we may be waiting at least 1 year from

today before the buildings are fully occupied.

Here are a few slides to better illustrate the lack of construction

progress over the last year. This first slide is a side-by-side comparison of the food court area just inside the mall’s entrance. On

the left 2007 and on the right 2008.

This next slide shows a similar lack of progress in the mall’s

name-brand restaurant. If progress can be defined as ripping out

defective work, then some progress has been made on the kitchen

exhaust duct work and the roof. Demolishing and replacing the

KMCC’s roof began this spring, but the work is extensive, must be

done in sections, and will not be completed for some time.

In addition, we have identified that the KMCC project was not

an isolated failure. Several other projects constructed more or less

concurrently for the Air Force by LBB Kaiserslautern also experienced significant cost, schedule and quality issues.

On this slide, you will see a logistics distribution facility designed

to be an open bay and to not have interior columns. It now has 43

temporary columns running down the center of the building to keep

the roof from collapsing. A forklift operator running into one of

those columns and collapsing a portion of the roof was the nightmare scenario of one official we interviewed.

This last photo is from our return visit to Ramstein in March of

this year. It shows large pond that formed next to a runway extension that was built by LBB as part of the Rheinland transition program. The pond not only attracted waterfowl, which is something

you don’t want around an airfield, but also repeatedly shorted out

the runway lights, causing the possible diversion of aircraft to

other bases.

Clearly LBB’s recent track record of construction for the Air

Force indicates that increased oversight to protect U.S. tax dollars

is required now and in the foreseeable future.

And now Mr. Kutz will highlight the KMCC’s cost issues.

STATEMENT OF GREGORY D. KUTZ

Mr. KUTZ. Given the problems Mr. Dorn just described, you

might be wondering what the total cost of this project will be. Unfortunately, because certain costs have not been tracked by the Air

Force, nobody will ever fully know. If you could put the pie chart

up for us.

This pie chart on the monitor shows the elements of total cost,

including that red slice that is referred to as unknown costs. The

amounts shown are estimates by the Air Force and the German

construction agency of the total U.S. dollar cost at completion. The

biggest piece of the pie or the black piece there is construction

costs. This $163 million represents primarily charges for trade conVerDate 11-MAY-2000 11:28 Jan 14, 2009 Jkt 000000 PO 00000 Frm 00229 Fmt 6601 Sfmt 6601 C:\DOCS\44635.TXT KATIE PsN: KATIE
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tractor work. Other costs shown relate to foreign currency, rework

design and other contracted services and furniture and equipment.

When added up, the total estimate for this amount or these

amounts here is $214 million. The unknown or the red piece there

represents millions of dollars of contingencies and other costs that

are not tracked as part of the KMCC.

For example, the cost of Air Force staff overseeing the project are

not captured. Other unknown include hindrance claims and estimates of cost to repair the new cracks in the floor. In addition to

the $214 million estimate and the unknowns there are other real

costs resulting from the problems and delays. For example, for

every month of delay, it is estimated that $500,000 of profits are

lost from operation of the shopping mall and the restaurants. In

total, if the project opens 3 years late, which is the best case scenario, these lost profits and additional costs will approach $20 million.

As the chairman mentioned, last year the Air Force testified that

KMCC was under budget. Many of the members of the committee

expressed concern and wondered how that could possibly be true.

Last week, Air Force officials briefed your staffs and told you the

same thing. Let me clarify some of the facts related to this representation.

For this project, what you have is a 35 percent increase in the

euro-dollar exchange rate, at least 3 years of delay, over $10 million of rework and millions of dollars of improper payments. Further, funding partner records reveals substantial cost overruns. For

example, the largest funding source for KMCC is the Army and Air

Force Exchange Service. According to their records, their piece of

the construction pie you see alone is $24 million, or 45 percent over

budget. Their worst case estimate is a $59 million, or 110 percent

cost overrun.

Clearly, KMCC will cost substantially more than the Air Force

and its funding partners envisioned at the beginning of this project.

Their budget number they are speaking about, it represents the

congressionally authorized spending limits for the construction

piece of the pie.

Last year I testified that KMCC was from the beginning a high

risk overseas project with minimal Air Force oversight. As Mr.

Dorn mentioned, Air Force has since your hearing last year substantially increased its oversight. Improvements include more and

better trained staff, standardized procedures and enhanced disbursement controls. We believe these improved controls reduce the

risk of fraudulent and improper payments.

In conclusion, the people most impacted by the problems at

KMCC are military members and their families. The tens of millions of dollars of cost overruns and lost profits have reduced the

money that is available for morale, welfare and recreation programs worldwide. We are encouraged that the Air Force has beefed

up its oversight of this project. Given the problems with other large

projects at Ramstein, we believe they should provide this enhanced

oversight for all future projects.

Mr. Chairman, this ends our statement. We look forward to your

questions.

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Chairman WAXMAN. Thank you very much. Mr. Causseaux you

are here to answer questions?

Mr. CAUSSEAUX. They took care of it.

[The prepared statement of Messrs. Kutz, Dorn, and Causseaux

follows:]

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Chairman WAXMAN. Without objection, we’ll proceed for 10 minutes on each side, 10 minutes controlled by the majority and then

10 minutes controlled by the minority, and I will start off the questions.

Mr. Kutz, when you testified before us last year, you identified

several severe construction deficiencies at this K-Town Mall. One

of these was the roof. And as you said last year, this roof had major

defects and leaked continually. As a result, the water was damaging other aspects of the construction; is that right?

Mr. KUTZ. Correct.

Chairman WAXMAN. Now, last year you couldn’t tell us how

much it was going to cost to fix this roof, but in your report today

you have a number. You say it is going to cost $10.8 million; is that

right?

Mr. KUTZ. That is an Air Force estimate, yes.

Chairman WAXMAN. That is a major setback. The original cost

estimate for the whole project was $131 million and now it is going

to cost more than 8 percent of that just to repair the roof. Is it possible that this number could go up?

Mr. KUTZ. Yes, it is. Because as I mentioned, the exchange rate

we are talking with for the euro—you know they’re being built in

euros. Since your hearing last year, it has gone up 16 percent and

certainly materials have gone up and other costs have gone up. So

it is possible that it will come in higher. That is yet to be determined. They are in the first and second phases of a multi-phase

roof replacement.

Chairman WAXMAN. Last year, you gave us your testimony and

this year you found even more problems. Your report describes

major cracks in the concrete. And I think we have a picture of an

example of that. Can you tell us more about these cracks? Where

else did you find them?

Mr. DORN. These cracks were in the floor. And what you are

looking at is probably defective concrete. The Germans working

with the Air Force have a consultant, who—a proof engineer they

call them in Germany who is investigating to see why that concrete

is that way. It was probably a bad mix or too much water or not

enough water. At this point, I would say it is not structural because it is on the floor. It is like a topping slab over the existing

slab. But it could affect whatever floor finishes go in over top of

that.

Chairman WAXMAN. Does this raise new concerns about construction quality?

Mr. DORN. Absolutely, Mr. Chairman. I would recommend that

the—in this relative lull in construction, that the Air Force and

their consultants go over that facility with a fine toothed comb

looking for other quality control issues.

Chairman WAXMAN. Some of these defects we heard about last

year, some of these are new. Are you worried that there might be

other defects that aren’t readily visible? In other words, defects

that you wouldn’t see just by walking around?

Mr. DORN. That’s correct. I do expect that they will find latent

defects.

Chairman WAXMAN. General, how much is it going to cost to repair the concrete?

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General ROGERS. Sir, I don’t know. That is in the German courts

and Germany is fixing the cracks.

Chairman WAXMAN. I understand that contractors make mistakes, but these are serious flaws. The Air Force should have people inspecting the architectural plans before the designs are approved and they should have people overseeing construction, before

things are installed incorrectly, but that didn’t happen here.

I would like to ask a few questions about when the K-Town mall

project will be completed. General, as I understand it, the Air Force

broke ground on this project in the summer of 2004. At that time,

the plan was for the hotel to open in December 2005 and the mall

to open July 2006; isn’t that right?

General ROGERS. That sounds right, sir.

Chairman WAXMAN. But this deadline was missed, so the next

deadline the Air Force set was April 2007; isn’t that right?

General ROGERS. Sir, the Air Force did not set those deadlines.

2005 in December was the mission due date. But when the German

construction agent told us that couldn’t be met, they established

April. We accepted that because we don’t control their schedule

really. Later slippages were the same way. They basically do this

work since we have no contracts with the construction workers

company. So every time they give us a slippage, it is a slippage.

We can complain, but it is up to them to respond and fix schedules.

Chairman WAXMAN. Mr. Kutz, according to your report, the current plan is for the project to be turned over in January 2009. Is

that your estimate?

Mr. KUTZ. No. We really don’t have an estimate. We haven’t seen

a legitimate estimate. As Mr. Dorn mentioned in his opening statement, middle to late 2009 is probably the best case scenario where

you’ll actually see people shopping and staying at the hotel. But

there is no estimate right now that we’re comfortable has legitimate support behind it.

Chairman WAXMAN. Is that an estimate of the completion of the

project?

Mr. KUTZ. The General is going to have to answer that. We don’t

really know if there is a legitimate estimate. I don’t think there is

a legitimate—that may be the last date that they’ve thrown out

there, is January 2009. But that isn’t even really when they are

going to have people in. That was when the keys kind of get turned

over. You would have to add several months to that to do the final

finishing and to get the restaurants ready and the hotels ready. So

that would be plus 3 or 4 months and that would be certainly the

best case scenario.

Chairman WAXMAN. Well, General, let me understand this. The

project was supposed to take 2 years, 2004 to 2006. Now the best

case scenario is that it will take at least 5 years, 2004 to 2009. Is

that the situation, best case?

General ROGERS. That’s about right, sir.

Chairman WAXMAN. Mr. Kutz, in your written testimony you

raise concerns that the project may not be finished even by this

newest projected completion date. And you just indicated some of

these a minute ago. We just don’t know for sure then when this

project is going to be completed.

Mr. KUTZ. That’s correct, Mr. Chairman.

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Chairman WAXMAN. Is that correct, General?

General ROGERS. Yes, sir. I would say that the January 2009

completion date given to us by the construction agent probably has

more fidelity than any we have seen in over 2 years. But whether

or not the construction agent is able to actually pull that off, I don’t

know. I do have more faith in it than in the past, but probably

wouldn’t bet on it being complete by then. Maybe in a few months

delay.

Chairman WAXMAN. We also want to explore the total cost of this

project. We seem to have a disagreement among the panelists

about how much the K-Town Mall will actually cost. General Rogers, you state in your testimony that your budget estimate is

$162.9 million, which is below the amount authorized by Congress.

But, Mr. Kutz, in your report you conclude that tens of millions of

dollars of other project costs are not included in the Air Force cost

estimates. So let us just walk through these. General, construction costs paid out so far are $121.7 million and you estimated it will take about $41.2 million more to complete

construction. That is how you got to your number of $162.9; isn’t

that right?

General ROGERS. Yes, sir.

Chairman WAXMAN. Mr. Kutz, you say this excludes other costs. For example, it doesn’t count $16.3 million for furniture and equipment; is that right?

Mr. KUTZ. That’s correct.

Chairman WAXMAN. And, General, why don’t you count the cost

of the furniture? Are you going to get that furniture for free?

General ROGERS. Oh, no, sir. That was planned all along, but it

was never reported in the same channels. And questions in the

past have not been about such things as furniture. They have been

about construction. But the Air Force has tracked these costs all

along for secondary services, furniture and equipment, any other

kinds of costs that are normal in standing up a facility. And we

don’t report those numbers routinely in any construction project,

although we have them budgeted and we know what they’ll cost.

In September 2005, we submitted a new 1391, which is the form

that comes over to Congress to get approval for a total cost of a

facility. That was approved by Congress in January 2006. And we

said at that time that total costs for construction and furniture

equipment, secondary services, design, the entire bit would be a

$210 million ceiling.

Chairman WAXMAN. Mr. Kutz, does that explain what appears to

be the discrepancies in your testimony?

Mr. KUTZ. Yeah. I think last year it was confusing, too, because

the Air Force representative simply focused on a construction piece.

But that is not the project. The project does include, as you mentioned, furniture and equipment. There are additional foreign currency translation charges that have gone against certain other appropriations and there is other things like rework, design—those

are really costs of the project. So you have to look at this in a more

holistic approach. And when you look at the whole thing, you’re

talking about over $200 million.

Chairman WAXMAN. And when you look at the whole thing, that

includes fixing the kitchen ducts for $1.2 million at the cost of curVerDate 11-MAY-2000 11:28 Jan 14, 2009 Jkt 000000 PO 00000 Frm 00263 Fmt 6601 Sfmt 6601 C:\DOCS\44635.TXT KATIE PsN: KATIE
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rency fluctuation because of these delays for another $8.6 million.

And when you add all these up, you get an estimate of $213.9 million. That is 63 percent more than the original cost estimate of

$131.1 million; isn’t that right?

Mr. KUTZ. About, yes, that’s about correct.

Chairman WAXMAN. You’ve also estimated how much the Air

Force pays to house officials in other hotels while this facility is

still being built. On page 16 of your testimony you say this amount

will be $2.9 million by January 2009, the best case estimate for

completion date. You also estimate the amount of revenue lost from

retail sales to be another $14 million. So if you include these

amounts, by my calculations, you’re up to more than $230. And

that doesn’t even include other costs like all of the additional Air

Force staff assigned to this contract or the cost to fix the cracks in

the concrete foundation; is that correct?

Mr. KUTZ. Yeah, those are related costs. Certainly they are a little bit different in their nature. But, yes, they are resulting from

the problems and delays we are talking about. And they do—much

of that impacts soldier morale, welfare, recreation programs, as we

both mentioned in the opening there.

Chairman WAXMAN. General Rogers, I don’t understand how you

can continue to tell this committee that the project is under budget.

It seems that you’re deliberately excluding millions of dollars worth

of costs just so that we get this somewhat misleading statement.

And I think the taxpayers deserve more of a clear explanation if—

could you respond to that?

General ROGERS. Yes, sir. There is no deliberate shading here,

sir. Those kind of costs to send these people off base, for example,

exist today. They existed in the past. What is lost here is an opportunity cost to save that money because it is not open. The cost

today to send people off base is not nearly what it was, say, a couple of years ago. For the first 4 months of this year, for example,

the cost to send people off base to lodging was about $1,200 a

month. It surged in May and—yeah, April/May because of an exercise we had, but it is back to normal now.

Chairman WAXMAN. Well, when you take all of those costs into

consideration—you said we would incur them anyway—do you

agree with the estimate of all of them combined, $230 million?

General ROGERS. Yes, sir. But it is not the same as—it is not the

issue we’re talking about here. We’re talking about the controllable

parts of construction and other management controls we can have.

A lot of these costs are things that you would include in the cost

of doing business of opening any facility. We don’t include the cost

of the roof rework, the hindrance claims, concrete repair, etc., because we are under no liability to pay those.

Currency fluctuation is a major portion of this problem. Since this project began, we’ve experienced a total of $47 million of expenses due to currency fluctuation alone. And as you know, we

can’t control that. If the project was delivered on time top quality

in 2006, we would have paid out $32 million in foreign currency

fluctuation. The delays so far have been worth $15 million of additional foreign currency fluctuation costs. Those parts—this is the

equivalent of buy low, sell high. We set these contracts when the

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struction contracts could be had for a minimum. Today in Germany, there is what I would call a Katrina effect. Contracts are

very high, materials are up and it is difficult to bring anything in

very cheaply today. It is one reason the construction manager has

had such a difficulty in getting contractors back to work because

there are much more lucrative contracts out there to be had and

they are tied to this one settled back in 2004.

Chairman WAXMAN. Thank you very much. We’re going to have

other questions. I’m sure other Members will ask questions.

Mr. Davis.

Mr. DAVIS OF VIRGINIA. General Rogers, let me just understand.

Basically the fact that the euro has risen so much against the dollar accounts for an important part of the cost rise?

General ROGERS. Very important part, sir.

Mr. DAVIS OF VIRGINIA. You have no control over that. Now, how

about in hiring the construction contractors? That wasn’t the Air

Force, was it?

General ROGERS. No, sir. We do business with the German Government under the international agreement known as ABG–75.

Mr. DAVIS OF VIRGINIA. Let me ask Ms. Garber. It looks like a

huge part of this problem was that the construction—the contractors in this case were German contractors hired by the German

Government and our only job was to approve the work and pay. Is

that a fair understanding or am I missing something?

Ms. GARBER. ABG–75 provides a framework for these military

construction activities to take place.

Mr. DAVIS OF VIRGINIA. Can you speak into the microphone?

Ms. GARBER. ABG–75 provides a framework for these military

construction contracts to take place.

Mr. DAVIS OF VIRGINIA. I understand that. And it is my understanding that framework, correct, that basically the hiring of the

contractors, the German Government does that, we basically approve the work and pay the government, who then pays the contractors. Isn’t that the way it works?

Ms. GARBER. Article 49 of the U.S.——

Mr. DAVIS OF VIRGINIA. Just yes or no. I don’t need to get into

all of the article. Is that a correct understanding?

Ms. GARBER. The supplemental provides that the military construction for the benefit of foreign forces stationed in Germany

should be carried out by German authorities. That is correct.

Mr. DAVIS OF VIRGINIA. So a lot of this problem just goes back

to the German Government, who they hired and—is that fair to

say? Let me ask GAO.

Mr. CAUSSEAUX. That’s——

Mr. DAVIS OF VIRGINIA. I understand that there was some work

at one point—this is before General Rogers got into it. There was

some work that was approved and accepted that probably shouldn’t

have been accepted.

Mr. CAUSSEAUX. That’s true, sir. As far as the U.S. influence or

control over the process, the United States can request a contracting approach. In this case, the United States did not opt for or did

not go for a general contractor approach. So the Germans went

with what they call trade lots. It is essentially 40 small business

or trade-lot contractors, individuals and then they attempted the—

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LBB attempted to manage that. That was a significant problem for

them. They were effectively overwhelmed.

Mr. DAVIS OF VIRGINIA. And some of these contractors walked off

the job, didn’t they?

Mr. CAUSSEAUX. They walked off the job because they weren’t

getting paid.

Mr. DAVIS OF VIRGINIA. They weren’t getting paid because they

weren’t doing good work.

Mr. CAUSSEAUX. It wasn’t—I don’t believe that was necessarily

the case. It was that the invoices that they were—ultimately when

they were providing their invoices and they were coming through—

because the change orders had not been approved—this is when

the Air Force stepped in and said we’re not going to pay any invoices for unapproved change orders. When that occurred, the funding stopped, the contractors walked off the job. That is certainly a

control that the United States had. The question——

Mr. DAVIS OF VIRGINIA. And if they had paid these contractors

and with unapproved change orders, they would probably be up before this committee trying to answer why you paid unapproved

change orders.

Mr. CAUSSEAUX. Absolutely. And there were improper payments

that had been made at a—up until a certain point and then it was

finally discovered. But the question is whether or not the United

States had the ability or the authority to inject greater oversight

and control in the process from the beginning. And the answer to

that under the ABG–75 is clearly yes.

Mr. DAVIS OF VIRGINIA. But that horse is long since out of the

barn. I mean, that’s—we are where we are today.

Mr. CAUSSEAUX. That’s correct.

Mr. DAVIS OF VIRGINIA. So, you know, we are where we are. I

don’t know—I mean, it should be a lesson learned for the Air Force

and State and everybody else in terms of future projects, in terms

of what can go wrong. I guess the question is today, as we look at

this today, and we see where we are in trying to get this completed

as rapidly as possible, given all of the other factors, the fact that

construction costs are high, that you still have a rising euro against

the dollar, that we don’t have direct control under the contractual

arrangement that we have, what is the fastest way to get this

thing wrapped up as quickly as we can at the best costs? And is

the Air Force doing a satisfactory job on that? That is the question.

Mr. CAUSSEAUX. I think certainly the Air Force has instituted effective controls at this point. As Mr. Dorn indicated——

Mr. DAVIS OF VIRGINIA. So they are doing a satisfactory job at

this point?

Mr. CAUSSEAUX. That’s correct. But the question is those controls

have not really been tested yet because there hasn’t been sufficient

progress. But have they—do they have adequate infrastructure and

oversight in place——

Mr. DAVIS OF VIRGINIA. From your perspective of looking forward, are they doing everything they can do?

Mr. CAUSSEAUX. It appears so, yes. And I think the Air Force in

terms of—is to be commended for the actions in terms of engaging

the German Government and getting them to put forth funds to

stem the process and get it going.

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Mr. DAVIS OF VIRGINIA. Yeah. I mean, the German Government

can’t feel too good about this project. I’m not going to ask you to

comment in terms of what they feel. But just looking at this, I’m

sure it is a source of embarrassment to them, which is probably

why they kicked in some money at this point to get it going.

What is the status of those dollars that the German Government

put in? Do they expect to get that back at this point? Do they just

kind of add it to the cost? Can anybody on the record—Ms. Garber,

I’ll start with you as far as the State Department. Any idea what

this—the money they kicked in, what is the status of that? What

do we expect to get back? Would that be an added reimbursement

for us? If it is an added reimbursement, do we have to do it under

the euro as it rises? Can you give me a feel for that?

Ms. GARBER. The State Department was not involved in that particular piece. I think the Air Force is the best place to answer that

question.

Mr. DAVIS OF VIRGINIA. So you don’t have the answer to that,

OK. General Rogers.

General ROGERS. Sir, when we went to the Germans and laid out

failures of their agents, we asked them for solutions to this problem. They agreed with us that the real problem is lack of flow of

money. If you don’t keep the money flowing, construction doesn’t

proceed.

Mr. DAVIS OF VIRGINIA. Contractors don’t work for free, in other

words?

General ROGERS. Yes, sir.

Mr. DAVIS OF VIRGINIA. They aren’t liquid enough to carry any

costs and——

General ROGERS. Yes, sir. This money that has been injected by

the Germans is prefinancing, was their solution to that problem to

sustain liquidity in the project.

Mr. DAVIS OF VIRGINIA. Now, did we sign a note for that, that

they advance this and we sign a note and we pay them later?

General ROGERS. No, sir. We never signed any paperwork. We

didn’t get any of the money. We have no control over the money.

Mr. DAVIS OF VIRGINIA. So they went ahead and paid their own

contractors ahead of time with no understanding from us that we’d

reimburse them as far as you know?

General ROGERS. Yes, sir. And they—you know, we really don’t

know exactly what they’re doing with the money. There are contractors involved. There are previous costs involved. And we are

staying out of it because under advisement by our legal staff, if we

stick our finger in it, we could create liability. So we’ve stayed out

of that completely.

Mr. DAVIS OF VIRGINIA. What do you see the—how do you see

this moving forward at this point? There are still—as we saw from

the pictures that were put up there, there has been no progress in

some areas over the last year.

General ROGERS. True.

Mr. DAVIS OF VIRGINIA. We have a plan now that—GAO has testified that you have controls in place that they are satisfied with

at least to date. They haven’t been tested and we all understand

that, but at least you have them in place. They’ve given you good

marks for moving ahead. How do you see this progressing on a

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timeline or getting contractors back in there working? Can you

walk us through what we can expect from——

General ROGERS. Yes, sir. The real test on whether we are making good progress is to have the worker count adequate to meet the

construction schedule they have created.

Mr. DAVIS OF VIRGINIA. Have enough workers to get the job

done?

General ROGERS. Yes, sir. We have not seen that yet. The German authority——

Mr. DAVIS OF VIRGINIA. You don’t control that either, do you?

General ROGERS. No, sir. The German authorities are doing what

they can with the contractors. But as I mentioned about the constructing environment in Germany, they have some challenges in

dealing with these contractors. To put it bluntly, they are holding

the cards with the government. The measures the government is

taking are to be commended, but not all the problems are solved

yet. We have seen work progress on the roof. We have seen kitchen

ducting removed. But we understand there are additional details

they are having difficulty working out with the contractors.

Mr. DAVIS OF VIRGINIA. So the big variable, the big delta here

in terms of being able to get this thing done on time and cutting

our losses is getting the workers there to perform to standards in

a timely manner?

General ROGERS. And yes, sir.

Mr. DAVIS OF VIRGINIA. And that is something we don’t control.

Does everybody agree with that?

Mr. DORN. I would agree with that.

Mr. DAVIS OF VIRGINIA. And is there anything else we can do to

make this happen? Obviously don’t go this route in the future when

you’re constructing this type of building because this is one case of,

you know, if it can go wrong, it will go wrong. But is there anything else we could be doing at this point, except for maybe a

phone call from the President to Ms. Merkel or something like

that? I mean, what else can you do at this point to get the contractors?

Mr. CAUSSEAUX. Short of writing a blank check to bring more

workers in and pay them more than they are contracted to do, no,

I don’t think so.

Mr. DAVIS OF VIRGINIA. OK. So we still have the unresolved issue

of trying to get the contractors in in a timely manner to get this

thing done, and that is the variable that nobody controls here. You

think we are doing everything we can. It goes back, then, to the

initial agreement that is before anybody was here on this panel,

was here in terms of the contractual vehicle that would handle this

where we allowed the German Government to basically hire the

contractors to make this go and things started going bad from

there. We made a mistake along the way at one point evidently in

accepting some work that wasn’t acceptable, but that is not the

major part of the problem. Is that fair to say?

Mr. CAUSSEAUX. I think that is fair to say, but I think the agreement itself also has provisions that the United States did not take

full advantage of in terms of its risk mitigation. There are opportunities that the United States has to inject itself into the process for

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oversight control, checking and checks and balances and that type

of thing.

Mr. DAVIS OF VIRGINIA. But we’re doing that now?

Mr. CAUSSEAUX. Yes, sir.

Mr. DAVIS OF VIRGINIA. OK. Thank you very much.

Chairman WAXMAN. Thank you, Mr. Davis.

Mr. Sarbanes.

Mr. SARBANES. Thank you, Mr. Chairman. Can I pick up right

where you just left off? What—because that is the—the suggestion

is that we are now at a place where we are sort of being held hostage by these German contractors and so forth. But like you said,

it didn’t have to come to that. And I’m curious as to—well, first of

all, how typical or atypical is it for this kind of situation to arise

where work stops and then a third party enters the scene apparently without objection and starts funding the project that we are

supposed to have control or oversight on and then creating expectations of some kind of disposition of that outlay of funds down the

line, which apparently is not totally resolved yet. This strikes me

as out of the ordinary. Am I correct in that?

Mr. CAUSSEAUX. That is our understanding, yes. It is I believe

the first time the Germans have engaged in this type of a prefinancing loan, however you want to—whatever semantic term you

want to——

Mr. SARBANES. Well, even just going beyond the Germans, on a

project of this kind you wouldn’t expect to see that kind of situation

arise, right?

Mr. CAUSSEAUX. No, I don’t believe so.

Mr. SARBANES. OK. And you suggested that it is because we

didn’t take advantage of earlier warning signs, things we could

have done presumably before it got to a stage where the contractors felt they had to walk off—well, before it got to a stage where

we had to do a stop work——

Mr. CAUSSEAUX. Correct.

Mr. SARBANES [continuing]. Order and then force these contractors in effect to walk off the job because they weren’t getting paid

and then invite the third party, German Government, to come into

the situation. What are some of the things—what are some of the

earlier stages that we could have taken advantage of to avoid that?

Mr. CAUSSEAUX. Well, at the very outset of the arrangement or

the agreement, the United States has the ability to inject itself in

terms of reviewing the construction, onsite quality control, oversight of the process, the invoices, all the change orders. The fact

that there were such a huge backlog of change orders and that the

invoices were being paid associated with those before the change

orders had been approved suggests that, you know, the government—the United States was not, you know, adequately monitoring the process at that time. That all caught up when the surge

of change orders hit and it was finally realized, you know, holy

cow, we’re paying for stuff that we haven’t approved of yet. So then

it was we are not going to process any further payments. That obviously created the dilemma. So injecting the adequate amount of

oversight resources up front would have mitigated that risk.

Mr. SARBANES. How fast based on your—when you do reviews of

these kinds of projects and other instances as well and have a genVerDate 11-MAY-2000 11:28 Jan 14, 2009 Jkt 000000 PO 00000 Frm 00269 Fmt 6601 Sfmt 6601 C:\DOCS\44635.TXT KATIE PsN: KATIE
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eral sense of how a contract proceeds over time and when—where

the trigger mechanisms are. So—I mean, how fast if you have an

efficient oversight and monitoring role in place, how fast should

you be able to detect things that you need to weigh in on? I mean,

this project started when—what was the start time when this

project——

General ROGERS. Fall of 2004.

Mr. SARBANES. So on a project of this size and complexity, you

know, granted—if you have a good oversight function in place, how

quickly could you expect to know? I mean, 2 months out, 3 months

out, 6 months out? I mean, here we are 4 years out. We looked at

this last year. So say 3 years out. But, I mean, a good oversight

operation should be able to judge whether things are going in the

right direction or not how quickly?

Mr. DORN. A couple of months, Mr. Sarbanes.

Mr. SARBANES. A couple of months. A couple of months you’re

going to know if you’ve got——

Mr. DORN. That’s correct. Construction is normally 30 days in arrears. So—but if you’re out there every day, you’re going to see

what is going on. One of the things that they didn’t do early, and

I’ll be brief, is they didn’t have a schedule that they could trust.

The Germans are giving them Excel spreadsheets instead of network schedule that showed what resources were needed. So they

didn’t have the tools necessary to even know how many people

were going to be on the site. And they don’t have that tool today.

They still couldn’t tell you how many people need to be on the site

today to make sure you’re on schedule.

Mr. SARBANES. So tracing back to—I mean, if I were interested

in knowing exactly how the oversight role broke down, where does

that path lead? Was it that there should have been 10 people overseeing this and there was only one, that there should have been

somebody with more experience and background doing this sort of

thing, and there wasn’t anyone? What was the breakdown in terms

of the failure to do the early oversight? Specific.

Mr. DORN. It’s—again, it gets to back to what Mr. Causseaux

said. In the beginning we had the option to insist on one general

contractor, for example, and instead we had over 20 general contractors effectively; and trying to manage that many contractors

is——

Mr. SARBANES. I’m out of time, but it sounds like, right out of

the gate, the structure of this was such that it was going to lead

to confusion, missed oversight, and all the rest of it; and here we

are.

Mr. DORN. Made it a high-risk job, as Mr. Causseaux said.

Chairman WAXMAN. Thank you, Mr. Sarbanes.

Mr. Tierney.

Mr. TIERNEY. Thank you, Mr. Chairman.

Thank you, folks, for coming in to testify.

Mr. Kutz, particularly, I want to thank GAO for helping us understand what went wrong with this particular project. But in your

report you also warned that there may be some construction problems that were also discovered in other places when you were looking at the installation in Germany.

267

First, you showed us a picture of a runway at Ramstein Air

Base. I think there’s a photo on the screen there. Your report says

this runway was built to help support an increase in U.S. mission

to Iraq and Afghanistan. You said that the runway’s lights don’t

work when it gets wet. And you said a construction defect allows

groundwater to damage lights and cause power outages. As a result, the base actually has to divert aircraft to other bases in Europe.

Am I understanding that correctly?

Mr KUTZ. Yes, that is correct.

Mr. TIERNEY. And now they’re forced to use portable lights, and

they have to pump water from the manholes on an ongoing basis?

Mr. KUTZ. Yes.

Mr. TIERNEY. I don’t understand how this could have happened.

Should there not have been some oversight that identified the contractor who installed these lights and some required repairs by

them?

Mr. KUTZ. Yes. It was the same LBB agency, I believe, that is

overseeing the KMCC, which is why we looked at them. We looked

to see if there were other similar types of issues in that immediate

area that LBB Kaiserslautern was involved with.

And so we see the same kinds of things we saw with KMCC on

a little bit smaller projects, but still important projects.

Mr. TIERNEY. So no one inspected the work before it was accepted by the U.S. Government?

Mr. KUTZ. We don’t know that.

Mr. TIERNEY. Does anybody on the panel know that?

General ROGERS. Say again the question, sir.

Mr. TIERNEY. Did not somebody inspect the work before it was

accepted by the government?

General ROGERS. Yes, sir. Some of these projects were managed

by another government agency. LBB as the German construction

agent, a German government organization, accepts from contractors on behalf of the forces. So when LBB accepted it, there was

the first breakdown.

Mr. TIERNEY. Back to Mr. Kutz’s report, it says, When it rains,

ponds that are as big as acres across develop between the runways

because of poor drainage. So I think you’re saying that again we

accepted that particular situation of the construction without its

ever being properly graded.

Mr. KUTZ. Yes. And that is the picture you see. That was in

March of this year.

Mr. TIERNEY. What’s going on with the runway now?

Mr. KUTZ. These guys were there last month, Mr. Dorn and

Bruce.

Mr. TIERNEY. Mr. Dorn, what’s happening now?

Mr. Dorn. As of last month, they’ve started grading operations to

fill in those low spots, but they’re still having trouble; and we

watched them pump water out of the manholes.

Mr. TIERNEY. So was that same company that was responsible

brought back to do the repairs, or is some additional or new company in there doing the work?

Mr. DORN. I’m not aware of that. The Air Force probably is.

268

General ROGERS. Those are items that we identified to the Germans as unacceptable. The construction agent and the German

Government is working with the contractors to repair these deficiencies.

In the meantime, it’s true that they impact certain capabilities

out there. We’ve got measures in place to ensure safety and mission are not impacted more than necessary, but we’re holding their

feet to fire to make sure we get good results on this one.

Mr. TIERNEY. So we’re not paying additional to have that done;

they’re coming back under the original contract and completing

that. Is there any penalty involved?

General ROGERS. So far, we haven’t paid anything. They haven’t

told us we’re going to pay anything. Because we have identified

most—in fact, all of the known ones that were shown here we identified prior to when it was accepted. Because you can accept the

runway for usage while other pieces can be repaired later, a punch

list.

Mr. TIERNEY. So it was accepted for use, but not accepted in

terms of all responsibility; and they own the problem of fixing it

and the cost of doing that?

General ROGERS. Yes, sir.

Mr. TIERNEY. Ms. Garber, is that generally the recourse that the

U.S. Government has from the German Government or the German

contractors when a situation like this arises?

Ms. GARBER. I think the Air Force is the best place to answer

that question. The State Department generally does not get involved in the technical construction issues and questions.

Mr. TIERNEY. And it never gets to a diplomatic level of concern?

Ms. GARBER. In this particular case, because there were problems with the LBB agent, the embassy did play a facilitative role

in trying to arrange meetings to facilitate and support, to help

bring the parties to agreement at the Federal level. So in that

sense, yes, but generally it was handled by the Air Force directly.

Mr. TIERNEY. Mr. Kutz, could you tell us what you found when

you went to the warehouse in terms of the structure there and deficiencies in the steel frame?

Mr. KUTZ. Well, there were the beams that were inserted. I guess

that is the picture there. And there was originally issues where

this had to be evacuated because there was concern that the roof

would cave in. So, again, Mr. Dorn and Mr. Causseaux saw that

last month; and I believe that is a recent picture.

Mr. TIERNEY. So the building can’t be used to capacity. In some

areas, I think you said, a forklift couldn’t get into it anymore, correct?

Mr. CAUSSEAUX. That’s correct.

Mr. TIERNEY. So what’s happening with that?

Mr. CAUSSEAUX. They have work-arounds.

Mr. TIERNEY. And now we are just going to have a building that

is not up to the capacity originally designed?

Mr. CAUSSEAUX. It’s essentially a huge basketball court with pillars in it, and it’s a little difficult to play basketball in that scenario. But they have forklifts moving equipment and other things

around, and in some cases they can’t get to certain locations easily

so they have to use either hand facilities or work-arounds. But as

269

Mr. Dorn alluded, one of the officers that we spoke with there said

one of the things that he worries about significantly is a forklift

backing into one of those pillars and the pillar falling or affecting

the structure of the roof.

Mr. DORN. They are using that facility. There are operations, but

they are degraded by the interior columns.

Mr. TIERNEY. So have we accepted that? Are we paying for it?

Are we going to pay in full? Is somebody going to assist on that?

What’s going on?

General ROGERS. That facility was accepted about 3 years ago by

another government agency, and the Germans notified us of the defects in the building because they weren’t visible to us. It has to

do with the defective metal that was used in multiple government

facilities throughout Germany, some German Government projects,

some U.S. Army projects; and in conjunction with that, they found

some defective welds in this one.

It is now in the hands of German courts, and we’re standing by

for the German officials to tell us what their solution is.

Mr. TIERNEY. They’ll tell us what our recourse is?

General ROGERS. Yes, sir.

And this is, of course, dragged out with the court process over

there.

Mr. TIERNEY. I see my time is up, Mr. Chairman. Thank you.

Ms. WATSON. I just want to followup the questioning of my colleague, Mr. Tierney.

The committee staff received a briefing on June 30th from the

Air Force Office of Special Investigations. And at this briefing, Air

Force investigators gave us some additional information, and they

said we could share it with certain limitations.

They told us that they believed that two Air Force officers and

two Air Force civilians and a fifth individual, who was a contract

employee, falsely certified almost $8 million in payments to German contractors. So this is a question for General Rogers.

Are you familiar with this investigation and these allegations?

General ROGERS. Yes, ma’am, I am.

Ms. WATSON. And let me ask you this. Have you reprimanded or

removed any of the Air Force personnel that were involved in the

payments?

General ROGERS. I would put it this way, ma’am. One of them

self-removed. The others, the investigations are not complete yet,

but when they are complete and if it’s warranted, we will take appropriate action and hold them accountable.

To date, it appears that it’s more process foul and lack of training versus intentional——

Ms. WATSON. Criminal activity?

General ROGERS. Yes, ma’am.

Not absolving them of responsibility to know, but the individual

who self-eliminated also happened to run that office, who had an

interest in them not necessarily knowing exactly how to do this job.

Ms. WATSON. Because the case is being investigated now. I think

they’re in court.

If there are criminal activities, it will be adjudicated there? Is

that what you’re saying?

General ROGERS. Yes, ma’am.

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A civilian employee, it would go through the civilian process, the

Department of Justice. Military ones do the Universal Code of Military Justice.

Ms. WATSON. It seems like there has been very poor conduct by

U.S. officials, so this question is to Mr. Kutz.

Program managers have an obligation to protect the taxpayers’

funds, don’t they?

Mr. KUTZ. That’s correct, yes.

Ms. WATSON. And do you think a government supervisor needs

to prove beyond a reasonable doubt that someone engaged in criminal activity before taking any administrative action?

Mr. KUTZ. We don’t believe that because we come across it. We

refer hundreds of thousands of cases to agencies for criminal investigation and administrative action because, as you’re probably well

aware, criminal virtually never happens, but administrative should

happen when someone does things.

So that’s our view. And if it’s proven, if someone is still being investigated, then that is one thing. But if you know that they did

a poor job in their work, they should be reprimanded. Their ratings

should reflect that, their performance ratings and things like that.

And you’re talking here about individuals who were rubberstamping, if you will, the bills that came in versus other individuals who are under investigation for fraud. There are other cases

of fraud.

Ms. WATSON. Well, when we see the pictures that were up on the

screen and the shoddy kind of construction, and we look away or

we wait for somebody to maybe give us a clue that things are not

right, it just is very troubling.

We’re the oversight committee, and we’re here to protect the general public, the taxpayers’ dollars, protect Americans; and when we

have these kinds of projects that seem to be not worthy of who we

are, it’s very troubling.

And we have all of you out there, and I appreciate your coming

here today and being willing to testify. We need to get to the truth,

and we need to remove those people who are demonstrating very

poor judgment and poor, shall I say, conduct—maybe because they

expect a fiduciary reward in the end. That is always our concern.

So I yield back my time, Mr. Chairman, and thank you very

much, witnesses.

Thank you, Mr. Chairman.

Chairman WAXMAN. Thank you, Ms. Watson.

I want to ask a few questions.

Mr. Kutz, last year, you testified before us on this project and

you told us that the Air Force’s program office had lost control of

project finances and was paying invoices for work they weren’t sure

was done.

At last year’s hearing, the witness for the Air Force was Brigadier General Danny Gardner, who was in charge of the project at

that time. He acknowledged some problems with the project, but he

basically said the Air Force had addressed these problems.

Mr. Kutz, if I recall correctly, you didn’t agree with those assertions; is that correct?

Mr. KUTZ. That’s correct.

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Chairman WAXMAN. It doesn’t seem the Air Force believed them

either, because after our hearing the Commander of Air Forces in

Europe, General Hobbins, formed a high-level task force to troubleshoot the project; and by the following month, July 2007, it presented its findings to top Air Force officials supporting GAO’s findings. Here is what the Air Force’s own internal review stated, ‘‘Air

Force did not properly monitor or approve contractor payments. Air

Force did not have adequate policies and controls in place. And Air

Force did not have sufficient staffing to oversee complex project.’’

General Rogers, you’re here in the Air Force seat today. Do you

agree that the Air Force did not adequately oversee this project,

and do you agree with GAO’s findings in that regard?

General ROGERS. Sir, as I mentioned earlier, I have been investigating this thing for 18 months, and I probably know more about

it than anybody.

What I found is—of course, I participated in this piece of it. The

task force was directed by General Hobbins even prior to the hearing. We just had logistic difficulties getting stood up quick enough.

The internal findings that you speak of by the Air Force, the

source for that was members from here in the Air Staff in the Pentagon. Those members were there for 2 weeks and had a short look.

Their opinion, I do not agree with. Initially I did, but now I know

better.

As it turns out, the main crux of the problem was transparency

from our construction agent. As an example, to know about change

orders, the construction agent has to tell you they’re there, because

we’re not in their offices. In terms of controls, we have to know

something is not quite right to ramp it up.

Initially, the Air Force knew that this project was going to be

more complex. And because we had tried to get a general contractor—actually written an official letter to the Germans and couldn’t

get it supported by the Minister of Defense of Germany, who also

wrote letters saying, you have to put a general contractor on this—

we lost that fight, and LBB did not put a general contractor on it.

So based on that, the Air Force doubled its normal oversight

team size to eight in the beginning.

Chairman WAXMAN. But you disagree with the Air Force’s own

findings?

General ROGERS. Sir, those—you can’t classify those as the Air

Force’s own findings. Those were members of the team who generated their briefing when they came back here, and they had far

less information.

So I don’t. There are pieces of it that have some credibility, but

you can’t count those as the findings.

Chairman WAXMAN. This was at the request of General Hobbins,

they put together this inquiry?

General ROGERS. He directed me to lead it, sir.

Chairman WAXMAN. On the chart, the type of findings, it says,

these are the findings pursuant to an internal Air Force review.

General ROGERS. Yes, sir.

We’re talking two different things here. This is not the task

force; this is the Air Force Audit Agency findings.

Chairman WAXMAN. I see. And there are findings and you agree

with those findings?

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General ROGERS. We agreed with those when the audit agency

came up with them. What I now know is that when an audit agency looks at a project in Europe, they can only look at the U.S. side.

That is like looking at the tip of an iceberg and judging the whole

iceberg.

Chairman WAXMAN. GAO created some findings as well. Do you

disagree with their findings?

General ROGERS. Depends which ones you’re talking about sir.

Chairman WAXMAN. With regard to the work of the Air Force

and their having sufficient staffing to oversee the complex, to properly monitor and approve the contractor payments, and adequate

policies and controls in place, address those as well.

General ROGERS. Here is what happened. If the question on any

given day through the process of building this facility, what do you

know at the time?

In this project LBB hired another firm to act as a surrogate general contractor because they were directed not to have a general

contractor. That general contractor served and failed miserably and

did not inform LBB of all the situation on the site. The LBB subsequently did not inform the Air Force. So the story——

Chairman WAXMAN. Does the Air Force have any responsibility

or is it all the contractor’s fault?

General ROGERS. Sir, I will tell you that the Air Force has responsibility. We execute the responsibility based on what we know

at the time.

As I look back at those times, the question becomes, what was

reasonable at the time based on what you knew. I have reams of

facts that show that the efforts made by Air Force people at the

time seemed reasonable. Now that I have more information from

the surrogate GC, the general contractor, and from LBB, what

their internal memo said at the time, I realize the situation the Air

Force people were trying to manage was completely different from

reality.

Chairman WAXMAN. Let me ask Mr. Kutz. It seems to me that

we don’t have an acknowledgement from General Rogers to what

the findings were from the internal audit of the Air Force, that

there were some mistakes by the Air Force.

Do you agree that those findings were incorrect and General Rogers is correct?

Mr. KUTZ. We would agree with the Air Force Audit Agency’s

findings. And last year you asked, I think, General Gardner, when

they first became aware that there were real problems. He told you

December 2005, a couple of months before the project was supposed

to be done.

How could you say you didn’t have Air Force oversight problems

when you became aware of the problems a couple of months before

the ribbon-cutting ceremony? It doesn’t make any sense, Mr. Chairman.

Chairman WAXMAN. Well, General Rogers, what has passed is

past. But it seems to me it’s important to have some acknowledgement of the problems that existed and how they came to be the responsibility of the Air Force.

It sounds like the Air Force is in denial mode, and that is not

very comforting. If you deny what happened in the past, I fear you

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might be likely—not you yourself, but the Air Force—might be likely to make some of the mistakes again.

General ROGERS. Sir, I’m not in a denial mode. I acknowledge

what happened in the past. My job is to figure out why it happened.

I do now understand why the Air Force Audit Agency and GAO

could come up with these findings, that we also would agree with—

there were inadequate controls, etc. The issue is, why did it happen.

For example, Mr. Kutz says, why did we learn in December 2005

that this facility is going to be late when it’s only a couple of

months from delivery. The delivery date being promised in December 2005 by the construction agent and showed to the KMCC council with all of the stakeholders, German Government officials, AFE

services, everybody at the table, was April or May 2006.

At that time, there was 16 weeks of construction work remaining, and if you look at the clock, you would say, Well, there is the

building, it is standing, looks right, 16 weeks from now—they’re

telling us 16 weeks, it’s going to open in 16 weeks. You don’t have

a reason to question that, and when you go out and look at the site,

you can correspond work to invoices you are getting.

So as you can see, the issue here was one of transparency.

My finding is that once this construction project broke ground,

there was a difference in the rate of information that flowed from

the surrogate general contractor to LBB, and from LBB to the Air

Force. And as you went through time, that lag in situation awareness continually grew to the point that even in November or December 2005, I now have internal memos from LBB showing that

project was not going to be delivered until—the hotel portion until

July or August. Yet the entire council, which is where they’re reporting out the status to the oversight, to all the stakeholders, that

council was briefed, this will be here in May.

Chairman WAXMAN. Let me ask Mr. Kutz the last question I

have.

If we hold a hearing next year at this time, are we going to find

that we’ve learned some lessons and they’re going to correct the situation, or do you think that there is a denial going on, and it’s as

troubling to you as it appears to be to me.

Mr. KUTZ. It’s too late for KMCC. It is what it is at this point.

It’s a mess. There is a lot of issues and a lot out of our control at

this point.

The real question is for new projects going forward, at the very

beginning, before we start spending the money, will we have the

people in place, will we make sure that a general contractor whatever makes sense here, we’ll make sure we’re not schedule driven,

driven based upon milestones, etc. That is the real test here.

I think KMCC, it’s really too late.

Hopefully, there are lessons learned going forward, and at the

very beginning of the project they will learn from what has happened here and, hopefully, not repeat the same situation.

Mr. DAVIS OF VIRGINIA. Do you want to ask any questions Mr.

Duncan?

Mr. DUNCAN. Well, very briefly. Thank you, Mr. Chairman.

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I was sitting here reading this memo that the staff provided us,

and it says, ‘‘Unfortunately, this recent report from GAO is not

good. Little work has been completed in the year that has passed

since the first hearing, and while the U.S. Air Force and the German Government have recently reached an agreement on a plan to

complete the project by January 2009, neither the Air Force nor

GAO has confidence that completion date will be met. The project

is now more than 2 years overdue and the building will suffer from

significant structural problems, including a defective roof that is in

the process of being replaced.’’

If neither the Air Force nor the GAO has confidence that the

completion date of January 2009 will be met, General Rogers, when

is the completion date? When is this going to be completed?

General ROGERS. Sir, we count on our German construction

agent to give us the schedule, in terms of—you know, they figure

out how long it’s going to take and level of effort. And they have

offered January—not offered; they have told us that January 2009

is when they expect to turn it over.

We see indications that do not—while they’re performing better

than in the past, it’s not like we should count on January 2009.

But as I mentioned earlier, I at least have a little more confidence

in this schedule in only slipping a few months versus years because

contractors have at least signed up to this schedule. And it’s the

first hard schedule, after years of begging, that LBB has given us

since November 2004.

Mr. DUNCAN. And in this memo also says that ‘‘Total cost to complete the project is unclear. The Air Force contends it will spend

$162 million, but the GAO estimates the cost to complete the

project will be over $200 million.’’

What do you say about that? Where is the disagreement between

the Air Force and the GAO?

General ROGERS. The Air Force and the GAO are really saying

the same thing here, sir. The $163 alludes to pure construction

costs. That one should be about $7 to $7.5 million, under the agency approved amount for construction. The other costs that take

over $200 million include furniture and equipment, secondary services, design fees that are not included in construction that are normal in any construction project; and just about all of those would

have been spent even if we completed it on time.

Last year, the discussion seemed to be all about the construction

costs being out of control, so those other costs weren’t really

brought up. The Air Force tracks them carefully, which is why

we’re able to provide them to the GAO when they ask. But we’re

basically saying the same thing.

Mr. DUNCAN. But do you have somebody now who is in charge

of this, who has major construction experience?

General ROGERS. Yes, sir. We had to delay a little bit last year

to stand up and consolidate the management office, because our

colonel was deployed to Iraq. We got him back, and as soon as he

came back, he plowed into this and he is doing a great job.

Mr. DUNCAN. Thank you very much. I yield back.

Mr. SHAYS. I’m not going to take the full 5 minutes because I

wasn’t here. But could we have it clarified for the record why there

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was no general contractor, a U.S. general contractor, overseeing

this?

General ROGERS. Yes, sir, I can.

During investigation of this project, I found letters from previous

vice commanders of USAFE, and meeting minutes, where USAFE

officially and repeatedly asked for a general contractor.

Additionally, the Minister of Defense in Germany wrote letters to

German Government agencies saying, you’re going to need a general contractor or this thing is going to go afoul. However, there

were other German bureaus and political interests who insisted on

trade lot contracts because they, like us, have rules and laws that

ensure that small business has opportunities, etc.

And in those initial days, when told we wouldn’t get a general

contractor, the people overseeing the project accepted it in the

sense that there were only about four trade lots envisioned at the

time. But nobody had a clue that it was going to grow to over 42.

Mr. SHAYS. Just a question: We had a project manager on this

project? Someone?

General ROGERS. Yes, sir.

Mr. SHAYS. Thank you, Mr. Chairman.

Mr. DAVIS OF VIRGINIA. Let me sum up.

We just don’t want to be here next year going through the same

thing. And I guess the real variable here is Germans and the contractors and how they act. And we have the controls in at the Air

Force, I understand. So the real question is, are the German contractors going to show up? Are they going to be able to do the job?

Are they going to show in the numbers that we need to get this

thing done?

Am I missing some something, or is that the essence of where we

are right now?

Mr. KUTZ. Yes. And I think the other thing that has been discussed here, too, is whether that German amount is a loan or a

grant or whatever the case may be, because that will have to be

sorted out later as to who will pay for what.

But with respect to physical progress, getting it done, we agree

with that.

Mr. DAVIS OF VIRGINIA. Just tell me, we’re not going to use this

procedure again. General?

General ROGERS. Sir, under ABG 75, we’re obligated to use a

German construction agent which in that region is LBB. What we

intend to do is——

Mr. DAVIS OF VIRGINIA. Is this is State Department agreement

or a military agreement?

I’ll ask Ms. Garber.

Ms. GARBER. It’s an agreement between the forces and the Germans.

Mr. DAVIS OF VIRGINIA. Does that agreement have a 10-year

timeframe? Is that just part of the agreement for our bases being

there?

General ROGERS. Yes, sir. The Germans conclude agreements

like this with all forces, all nations. It will be changed if the forces

at some point decide to renegotiate.

Mr. DAVIS OF VIRGINIA. But we did note we did have other options with this?

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Mr. CAUSSEAUX. There are clearly provisions in the ABG 75 for

the United States to—in some cases to demand, insist and request;

and the option for using a general contractor, I think the United

States could have insisted on the use of a general contractor.

Mr. DAVIS OF VIRGINIA. My question is, we have learned from

this so that next time we will handle it differently, within the confines of that agreement.

General ROGERS. Yes, sir. As a matter of fact, the Germans agree

because this didn’t work for them either, and it’s now costing. Believe me, the impact on them is more than us.

Mr. DAVIS OF VIRGINIA. Good. Thank you very much.

Chairman WAXMAN. Well, I thank you all for advising us where

we stand with this project, and I appreciate your being here today.

That concludes our business, and the committee stands adjourned.

[Whereupon, at 11:34 a.m., the committee was adjourned.]

[The prepared statement of Hon. Diane E. Watson follows:]

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