VA Real Property: Action Needed to Improve the Leasing of Outpatient Clinics
Published: 2014-04-30T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: VA operates one of the nation's largest health-care delivery systems. To help meet the changing medical needs of the veteran population, VA has increasingly leased medical facilities to provide health care to veterans. As of November 2013, VHA's leasing program has long-term costs of $5.5 billion and growing. Given previous problems that GAO has identified with VA's hospital construction program, GAO was asked to review VA's leasing program.
This report examined (1) the extent to which schedule and costs changed for selected VA outpatient clinics' leased projects since they were first submitted to Congress and factors contributing to the changes and (2) actions, if any, VA has taken to improve its leasing practices for outpatient clinics and any opportunities for VA to improve its project management. GAO analyzed agency documents as well as VA data for 41 ongoing major outpatient-clinic lease projects, for which a prospectus was submitted to Congress with an average annual rent of more than $1 million as of January 2014. We also interviewed VA officials and representatives from private companies, involved in VA leasing projects.
section_title: What GAO Found
paragraphs: Schedules were delayed and costs increased for the majority of the Department of Veterans Affairs' (VA) leased outpatient projects reviewed. As of January 2014, GAO found that 39 of the 41 projects reviewed—with a contract value of about $2.5 billion—experienced schedule delays, ranging from 6 months to 13.3 years, with an average delay of 3.3 years. The large majority of delays occurred prior to entering into a lease agreement, in part due to VA's Veterans Health Administration (VHA): 1) providing project requirements late or changing them or 2) using outdated guidance. Costs also increased for all 31 lease projects for which VA had complete cost data, primarily due to delays and changes to the scope of a project. First-year rents increased a total of $34.5 million—an annual cost which will extend for 20 years (the life of these leases).
VA has begun taking some actions to address problems managing clinic-leased projects. First, it established the Construction Review Council in April 2012 to oversee the department's real property programs, including the leasing program. Second, consistent with the council's findings and previous GAO work (December 2009, January 2011, and April 2013), VA is planning the following improvements:
Requiring detailed design requirements earlier in the facility-leasing process . VA issued a guidance memorandum in January 2014 directing that beginning with fiscal year 2016, VA should develop detailed space and design requirements before submitting the prospectus to Congress.
Developing a process for handling scope changes. In August 2013, VA approved a new concept to better address scope changes to both major construction and congressionally authorized lease projects. According to VA officials, among other improvements, this process ensures a systematic review of the impact of any ad-hoc changes to projects in scope, schedule, and cost.
VA's 2014 budget submission did not clarify that its estimates for future lease projects included only one year's rent, which does not reflect the total costs over the life of the leases, costs that VA states cannot be accurately determined in early estimates. VA officials clarified this estimate beginning with VA's 2015 budget submission.
However, these improvements are in the early stages, and their success will depend on how quickly and effectively VA implements them.
Finally, VA is also taking steps to refine and update guidance on some aspects of the leasing process, for example the VA's design guides, but VHA has not updated the overall guidance for clinic leasing (used by staff involved with projects) since 2004. Specifically, VHA's Handbook on Planning and Activating Community Based Outpatient Clinics , which established planning criteria and standardized expectations for outpatient clinics, was based on past planning methodologies that no longer exist. Standards for Internal Control in the Federal Government calls for federal agencies to develop and maintain internal control activities, which include policies and procedures, to enforce management's directives and help ensure that actions are taken to address risks.
section_title: What GAO Recommends
paragraphs: GAO recommends that VA update VHA's guidance for the leasing of outpatient clinics. VA concurred with GAO's recommendation and discussed actions under way to implement the recommendation. VA also provided technical comments, which GAO incorporated as appropriate.

section_title: Letter
paragraphs: The Department of Veterans Affairs (VA) operates one of the largest  integrated health care networks in the United States through the Veterans  Health Administration (VHA), serving more than 8-million enrolled  veterans each year at over 1,600 health care sites, including hospitals  and outpatient clinics. To help meet the changing medical needs of the  veteran population, including a greater need for outpatient services, VA  has increasingly leased the facilities from which it provides its health care  services. According to VA, leasing medical facilities rather than owning  them allows VA to provide more veterans with accessible health-care  services and gives VA the flexibility to respond to changing service  demands, demographic shifts, and improvements in medical technology.  Depending on the facility’s size and scope of services, VA outpatient  clinics can provide primary care; dental care; pharmacy, laboratory, and  radiology services; nutritional medicine; women’s health care; mental  health and suicide prevention services; and other types of specialty care.
VA is required to submit a prospectus to Congress for all major medical- facility leases and construction projects. A major medical-facility lease  project is one with average annual rent of more than $1 million. VA may  contract for space either by leasing space in an existing building or the  construction of new facilities that VA then leases back from the  developer.
In April 2013, we found that costs substantially increased and schedules  were delayed for VA’s largest medical-center construction projects. To  address the factors contributing to this situation and help VA better  manage its construction projects, we recommended that VA (1) develop  and implement agency guidance for assigning medical equipment  planners to major medical-construction projects; (2) develop and  disseminate procedures for communicating to contractors clearly defined  roles and responsibilities of VA officials who manage major medical- facility projects, particularly the change-order process; and (3) issue and  take steps to implement guidance on streamlining the change-order  process. VA has implemented each of the recommendations by taking  such actions as (1) issuing a memorandum for each major medical  facilities construction project involving the procurement of medical  equipment to be installed during construction ensure that the  architectural-engineering firm retain the services of a medical equipment  planner and (2) requiring for each major medical facilities construction  project a VA Contracting Officer appointment letter to the contractor that  clearly delineates the responsibilities and limits of authority to execute  project changes; and (3) issuing a handbook for construction change- order processing that includes milestones for completing processing of  change orders based on their dollar value.
Because of the cost increases and schedule delays for VA’s major  construction projects, you asked us to review how VA manages its major  leasing projects. This report examines (1) the extent to which schedule  and costs changed for selected VA leased outpatient clinic projects and  the factors that have contributed to any changes, and (2) actions, if any,  VA has taken to improve its leasing practices for outpatient clinics, and  any opportunities that may exist for VA to improve its management of  project schedules and costs.
To address these objectives, we selected 41 current major medical  leases that are outpatient clinic projects for which a prospectus has been  submitted to Congress, as required by law. The total contract value of  these 41 projects is $2.5 billion. These projects were authorized by  Congress from 1997 to 2011. We reviewed VA data as of January 2014  on each of these projects. We reviewed and analyzed original cost  estimates and completion dates from when a project’s prospectus was  first submitted to Congressassessed the reliability of VA’s leasing data through interviews with  knowledgeable VA officials and a review for completeness and any  unexpected values. We determined that the VA’s leasing data were  sufficiently reliable for the purposes of this report. We reviewed VA’s  leasing guidance and directives, VA’s Strategic Plan Fiscal Year 2011 to  2015, and other relevant documents. In addition, we reviewed prior GAO  reports, Office of Management and Budget guidance on leasing practices,  and relevant legislation pertaining to VA’s leasing authority and amounts  appropriated for these projects. We interviewed VA officials from the  Office of Construction and Facilities Management (CFM), CFM’s Real  Property Service (RPS) division, and VHA. We also interviewed  representatives from private companies, involved in VA leasing projects,  including a general contractor construction firm, and development leasing  firm. Our findings from these select sites should not be used to make  generalizations about VA sites agency-wide.   and the projects’ current status. We  To examine specific outpatient projects in greater detail, we selected 11  clinic projects in 8 locations: (1) Jacksonville, Florida; (2) Baltimore,  Maryland; (3) Las Vegas, Nevada (four facilities); McAllen, Texas; (6) Corpus Christi, Texas; (7) Parma, Ohio; and (8) Ft.  Wayne, Indiana. We selected these projects and locations based on the  following criteria: (1) projects status; (2) project costs; (3) scope and cost  changes; and (4) schedule delays.officials either on site or by phone discussing the reasons for changes in  costs and schedules and possible improvements for VA’s leasing  program. Our findings from our site visits are illustrative and provide  examples of the issues faced by specific projects; our findings should not  be used to make generalizations about VA sites agency-wide. See  appendix I for more information about our scope and methodology.   (4) Austin, Texas; (5)
In Las Vegas, Nevada, we visited four clinics that were accepted by VA from between  September 2011 to January 2012 and interviewed officials from each site.
We conducted this performance audit from May 2013 to April 2014 in  accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.
subsections: section_title: Background
paragraphs: VA generally provides inpatient care at large VA medical facilities that are  owned by the federal government and provides outpatient care at leased  facilities. As of fiscal year 2013, VA had 1,889 leases, of which 1,192  were medical outpatient clinics and other medical facilities, varying in size  and cost. Leased medical space generally consists of outpatient clinics,  mental health clinics, readjustment-counseling centers, research, and  other types of clinical leases. Non-medical space generally consists of  administrative, warehouse, data center, parking, and regional office  leases. According to VA, much of the non-medical space is integral to  providing medical services in other locations. See table 1 for the numbers  of VA leased properties from fiscal years 2004 through 2013.
VA has recognized the need to modernize its facilities and realign its real  property portfolio to provide accessible, high-quality, and cost-effective  services. However, much of VHA’s infrastructure was designed and built  decades ago when there was a greater focus on hospital-centered,  inpatient care. VA officials recognize that VHA’s infrastructure does not  fully align with the health care needs of the current veteran population  and that VHA faces challenges in updating its infrastructure, such as: providing medical services for returning veterans from Afghanistan  and Iraq, who increasingly require specialized care for injuries such as  the treatment of spinal cord and traumatic brain injuries;  keeping pace with advancements in health care services and  technologies that often dramatically change the physical infrastructure  requirements of hospitals and clinics; and addressing changes in veteran demographics, including the differing  treatments and care required for veterans of different generations and  the shifts in veteran populations among different areas of the country  that place continued demands on the capital-asset portfolio.
To plan for future infrastructure needs, VA established its Strategic  Capital Investment Planning (SCIP) process for its fiscal year 2012  budget submission to Congress. As part of this planning effort, VA  annually reviews its real property priorities and conducts a gap analysis to  identify its need for medical facilities. The SCIP process includes major  construction projects and leasing projects. Local plans are centrally  validated, evaluated, and consolidated into a prioritized national project  list. VA also uses this planning process to develop a 10-year long-range  plan, which prioritizes a list of projects targeted to reduce service gaps. submit a prospectus to Congress for all major medical facility leases. VA  submits a prospectus for new projects (property that it has never before  leased) as well as succeeding or follow-up leases that have expired or will  soon expire. VA’s annual budget submissions provide Congress with the  prospectuses for all proposed new major-medical lease projects for which  VA is seeking authorization for the next fiscal year, including life-cycle  costs.However, according to VA officials, VA does not submit a prospectus  when exercising pre-negotiated options to extend the lease within the  stipulated maximum lease term.
In addition, VA provides estimates for future leasing needs.
VA’s process for procuring major leases is two-part: (1) CFM and VHA  plan and prepare for a leasing project prior to entering into a lease  agreement, and (2) CFM oversees the build out of the leasing project, not  the administration of the lease. CFM has the overall responsibility for  managing VA’s nationwide leasing program, including negotiating and  executing development of the lease project. After completion of the  facility, VHA activates it to provide medical care. See table 2 for  information on VA’s two-part leasing process.
section_title: Project Delays and Cost Increases for Outpatient Leases Mostly Occurred Prior to Entering into the Lease Agreement
subsections: section_title: Project Delays
paragraphs: VA has experienced substantial delays in executing new outpatient clinic  lease projects, nearly all of them occurred prior to entering into a lease  agreement with the developer. We found that 39 of the 41  congressionally authorized outpatient clinic projects we reviewed  experienced schedule delays, ranging from 6 months to 13.3 years, with  an average delay of 3.3 years, while 2 projects experienced schedule  time decreases. Our data analysis showed that 94 percent of these  delays occurred prior to entering into the lease agreement. For all but one  of the projects that experienced a delay, the delay occurred during the  pre-lease agreement stage. We also compared the length of delays that  occurred during the pre-lease agreement stage to the length of delays  that occurred once a lease agreement was entered into with the  development firm. We found that the average delay during the pre-lease  agreement stages for all 41 projects totaled nearly 3.1 years.Conversely, the average project delay once a lease agreement was  finalized totaled approximately 2.5 months, and 11 outpatient clinic  projects actually experienced schedule decreases during this stage. VA  officials at 6 of our 11 outpatient clinic projects selected for detailed  review mentioned that the large majority of schedule delays occur during  the period prior to entering into a lease agreement. See figure 1 for an  overview of schedule changes experienced by the 41 outpatient clinic  projects we reviewed during the pre-lease agreement stage. (See app. II  for schedule information for individual clinic projects.)
For the 41 lease projects we reviewed, we found that several factors  contributed to delays:  VHA’s Late or Changing Requirements. According to data we analyzed  and VA officials we interviewed, late or changing requirements were the  most common reasons for delays. Requirements can pertain to facility  size, types of treatment rooms, types of medical equipment, electrical  voltage needs, and other details. We found that in many instances, CFM  either did not receive VHA’s requirements on time, or VHA changed its  requirements during the solicitation of offers, necessitating a re-design  that affected the schedule. In evaluating VA data, we found that 23 of the  41 leasing projects (56 percent) experienced delays because VHA was  late in submitting space requirements to CFM, or VHA changed space  requirements and thus the scope of the project. For example, the size of  the Jacksonville outpatient clinic had increased by 29 percent, and the  Austin outpatient clinic site we visited had increased by 36 percent from  the time the prospectuses for these projects were submitted to Congress.  Furthermore, officials at the Austin outpatient clinic said delays or  changes to VHA’s requirements necessitated the project’s re-design,  which, in turn, caused a delay of 19 months. Specifically, the initial  authorization request for the Austin project was for 85,000 square feet  and 400 parking spaces. VHA revised the space plan to 135,322 square  feet to accommodate projected increases in patient visits, and  subsequently approved a second revised space plan of 185,822 square  feet and 1,200 parking spaces. VA did notify Congress of its intent to  increase the size of clinic by more than 10 percent. The completed  solicitation for offers was not finalized until July 2009, though several  amendments were issued in October 2009 due to revised specifications.  Consequently, VA had to extend the due date for the offers to provide  bids.
Site Selection Challenges. In analyzing VA data, we found that 20 of the  41 outpatient clinic projects we reviewed (49 percent) experienced delays  due to difficulties in locating or securing a suitable site. For example, an  increase in scope to the Jacksonville project resulted in a larger building  design that then required more land. To accommodate these changes,  the landowner worked to acquire additional properties around the already  selected site. Although the developer was ultimately successful in  obtaining additional land for the project, this process led to delays.  According to VA officials, prior to entering into the lease agreement, there  were delays associated with difficult negotiations with the developer. In  addition, there were significant environmental clean-up requirements at  the site, which needed to occur before construction began. The original  site’s location was obtained in December 2002, but the larger site was not  obtained until December 2009, a delay of 7 years. VA officials said that  without these negotiations, it is likely that the project would have been  significantly more expensive. Site selection challenges were also noted  by VA officials in Las Vegas. According to those officials, the site VA  selected for a new outpatient clinic was located under the Nellis Air Force  Base fly-over space, and VA discovered contamination issues on the  property. These problems forced VA to alter the location of the outpatient  clinic on the property, contributing to delays.
Outdated Guidance. We found that outdated policy and guidelines  resulted in challenges for VA staff in completing leasing projects on time  at the sites we reviewed. For example, officials from the four Las Vegas  outpatient sites we visited stated that VA’s policies for managing leases  seem to change for each project, creating uncertainty regarding CFM job  responsibilities. An official from the Ft. Wayne outpatient clinic also stated  that VA’s leasing process is confusing and seems to frequently change. A  contracting official from one of the Las Vegas clinics said she had to call  various VA headquarters officials while involved in the planning phase to  obtain the latest management procedures, because some of VA’s  guidance had not been updated since 1998. VA is now drafting its leasing  Handbook Guidance 7815, which VA officials said they plan to finalize by  the end of fiscal year 2014. As we will discuss in more detail later in the  report, this handbook covers the authorities, roles and responsibilities,  policies, procedures, administration, and management of VA’s real  property leasing program.
In commenting on our draft, VA noted that many lease delays resulted  from external influences to VA’s leasing process and out of VA’s control.  VA also noted that other factors could cause delays including site  selection issues involving the National Environmental Policy Act  requirements, stakeholder concerns, procurement and lessor issues,  solicitation/award protects, and post-award contracting issues.  Furthermore, these comments stated that some projects required updates  to space requirements to accommodate improved delivery of care for  veterans. VA noted that as delays to a lease occur, VHA re-evaluates and  updates the design and space program to ensure the contemplated lease  project will meet VA’s latest requirements and optimally serve veterans.
subsections: section_title: Project Cost Increases
paragraphs: In addition to substantial delays, VA also experienced cost increases to  its outpatient clinic projects when compared to the costs in the projects’  prospectuses. VA provided cost data for its outpatient clinic lease projects  in January 2014. Table 3 includes a description of the key cost data  elements we reviewed.
When compared to the prospectus costs for the 31 projects with complete  cost data,million to $172.2 million, an increase of nearly $19 million (12 percent).  For the 31 projects, the total prospectus’ first year rent was estimated at  $58.2 million, but the total awarded first-year rent for these projects  equaled $92.7 million as of January 2014, an increase of $34.5 million (59  percent). Such increases in rent have long term implications for VA,  because the Department must pay the higher rent over the lifetime of the  lease agreement. For example, all 31 VA lease projects included in this  cost analysis have lease terms of 20 years, and the increase in rent must  be paid for the duration of the contract.   we found that total first-year costs increased from $153.4  The causes of the total cost increase can be attributed primarily to  increases in the projects’ awarded first-year rent due to the schedule  delays and changes to the design or scope of a project that we discussed  previously. Schedule delays can increase costs because of changes in  the local leasing market during the period of the delay. Therefore, when  VA estimates costs as part of the prospectuses submitted to Congress in  the annual budget request, an automatic annual escalation is applied to  each project to account for rising costs and market forces that make  construction and leased space more expensive over time. VA officials  said the escalation ensures that the authorized cost of the project is in  line with the realities of the real estate and construction markets. As  discussed earlier, the average schedule delay for the 41 outpatient clinics  we reviewed was approximately 3.3-years per project. Because VA  annually adjusts a project’s cost by an increase of 4 percent for each year  the project is delayed, project delays directly result in cost increases.  Additionally, we found that projects we reviewed increased in total size by  203,000 square feet. Changes in a project’s size expand the scope of the  project, requiring design changes, which can result in schedule delays,  further adding to costs. More specifically, the VA outpatient clinic in  Austin, Texas, discussed above, increased in size by 36 percent and first  year rent and build-out costs increased from $6.2 million to $19.8 million,  a total increase of $13.6 million, or 219 percent.
Although first year rents increased for the 31 projects—increasing overall  total costs—VA’s total build-out costs were lower than reported in the  projects’ prospectuses. As described in table 3, build-out costs are one- time, lump-sum payments VA makes to developers for special purpose,  medically related improvements to buildings when VA accepts the  projects as completed. For example, once a building is constructed to  provide standard office space, changes to transform the building to a  medical clinic, such as providing a nurses’ station, would be considered a  build-out cost. In the prospectuses, VA estimated that build-out costs for  the 31 projects would total $95.2 million, but the total awarded build-out  costs totaled $79.5 million as of January 2014, a decrease of $15.7  million (16.5 percent). VA officials said the decrease in build-out costs  from those originally estimated in the prospectuses was due to the  national downturn in the commercial real estate market starting in 2008.  According to VA officials, this created more competition among  developers and helped VA realize more competitive pricing on its medical  build-out requirements than was anticipated in the prospectuses. Figure 2  provides an overview of first year rent and build-out costs for VA’s 31  outpatient clinics with complete cost data. (See app. III for cost  information for individual clinic projects.)
section_title: VA Has Taken Some Actions to Improve Its Leasing-Management Practices for Outpatient Clinics; However, Its Guidance Could Be Improved
paragraphs: VA has made some progress in addressing issues with its major medical- facilities leasing program. In 2012, VA formed a high level council, the  Construction Review Council, to oversee its capital asset program,  including leasing. Based on the findings of the council and our work, VA is  planning the following improvements to the major medical facilities  leasing program:  requiring detailed design requirements earlier in the design process to  help avoid the delays, scope changes, and cost increases, and providing Congress with more complete information on the cost of  proposed future lease projects.
However, we also found that while VA has updated and refined some  guidance for specific aspects of lease projects—including design  guidance for the construction of outpatient clinics—to better support VA’s  leasing staff and prevent project delays; it has not updated its overall  guidance for staff involved in leasing projects.
subsections: section_title: Creating a Review Council
paragraphs: In April 2012, the Secretary of Veterans Affairs established a Construction  Review Council (CRC) to serve as the single point of oversight and  performance accountability for the planning, budgeting, execution, and  delivery of the VA’s real property capital-asset program, including the  leasing program. The council issued an internal report in November  2012 that contained findings and recommendations resulting from  meetings it held from April 2012 to July 2012. The CRC also held a  meeting specifically focused on VA’s leasing program in June 2012.The objectives for that meeting were to create an efficient and effective  leasing process that would help make projects available to the veteran  community more quickly and improve collaboration between leasing- program stakeholders (such as CFM and VHA officials and contractors),  thus reducing the risk of projects’ experiencing the previously described  cost increases and delays. The CRC report, along with GAO’s past work  on VA leasing,below.
section_title: Requiring More Detailed Design Requirements Earlier in the Process
paragraphs: In part based on CRC findings, VA recognizes that firm design  requirements need to be established earlier to help major lease projects  avoid delays and cost increases. As part of the review of the leasing  program, the CRC reviewed three leasing-project case studies where it  found that VA was taking too long to initiate leasing projects after VA had  submitted the required prospectus to Congress, and that VA’s multiple  changes to requirements before or during the acquisition and construction  process contributed to delays. As noted earlier in the report, we also  found that delays occurred prior to entering into a lease agreement, due  in part to changing requirements. To limit the need for making changes to  design requirements, VA is moving forward with plans to provide detailed  requirements prior to submitting a prospectus to Congress for major  construction and lease projects for congressional authorization. During  our review in January 2014, VA issued a guidance memorandum  directing that beginning with fiscal year 2016, VA would develop more  detailed space requirements before a prospectus is submitted to  Congress for major construction and major leased projects.to VA officials, the more detailed requirements should be prepared as part  of a business case for each major construction and lease project during  the SCIP planning process that occurs before a prospectus is prepared.  The business case will be required to include a detailed Space and  Equipment Planning System plan documenting space requirements to a  more detailed level than previously required. Officials stated that this  process should help ensure that the prospectus is supported by more  detailed space planning and thus provides more accurate scope and cost  information to Congress. We did not evaluate the effectiveness of this  new process because it has not been fully implemented.
section_title: Developing a Process for Handling Scope Changes
paragraphs: VA has also taken steps to better manage scope changes to project  leases. The CRC’s review of the three leasing projects noted that certain  changes in requirements, such as to facility size or layout, required  additional approvals and notifications, which consequently delayed the  signing of the lease. During our review, on August 30, 2013, the  Secretary of Veterans Affairs approved a new concept—the Capital  Program Requirements Management Process—to better address scope  changes to both major-construction and “prospectus-level” lease  projects that have been approved through the SCIP process. According to  VA officials, this process will help ensure review and approval of any  proposed scope changes by the appropriate department officials and will  require a systematic review of projects at pre-defined stage-gates, as well  as reviews of the effects of any changes to scope, schedule, and cost.  We did not evaluate the effectiveness of this new process because it has  not been fully implemented.
section_title: Providing Congress with More Complete Information on Costs for Proposed Projects
paragraphs: VA provided incomplete information to Congress on the estimate of total  costs for proposed future projects as a part of the SCIP Long Range  Capital Plan program. VA’s 2014 budget submission includes an  estimate of total costs for proposed future lease projects for the next 10  years; however, this estimate only provides the first year’s annual rent  and build-out costs, and not the complete lifecycle costs for these leases.  Thus, in the budget submission, VA reported that future leasing costs for  more than 221 leasing projects were $779 million—less than the  estimated total lifecycle cost of the Myrtle Beach outpatient clinic alone.
Because many of VA’s leases are 20 year leases, reporting only one  year’s rent underestimates the cost considerably. VA officials stated that  the lifecycle costs cannot be accurately determined until the leases are  closer to being entered into because of potential changes in market  conditions and demographic demand that could affect terms of the lease.  However, at the time of our review, it was not clear what was included  and excluded from the estimate of total costs for proposed future lease  projects presented to Congress. In January 2014, VA officials told us they  plan to clarify information presented on these leases beginning in the  fiscal year 2015 budget submission. VA’s 2015 budget submission stated  that estimated costs presented are first year annual rent and build-out  costs, and do not include future annual rent payments.
section_title: Refining and Updating Leasing Guidance
paragraphs: The CRC report recognized the need to improve the guidance for  planning and implementing major construction projects. In addition, our  past work has documented that insufficient guidance can cause confusion   VA decided to apply this lesson  among VA officials and contractors.learned to its leasing program and is taking steps to update and refine  some of its guidance.
VA is updating its solicitation for offers, which describes the  requirements for the leases. during the planning phase. According to CFM officials, these efforts  are scheduled to conclude in 2014.
Subsequently, VA reviews the offers, accepts an offer, and then enters into a lease  agreement. including providing leasing officials with new checklists, having VA  officials provide peer reviews, and having leadership clear project  documents before awarding leases.
VA has created standardized project schedules to ensure uniformity in  reporting, tracking, and managing projects, in an effort to provide  realistic timelines across all leased facilities.
VHA efforts have primarily focused on updating guidance on specific  aspects of the leasing process, such as design and offer solicitation,  rather than the overall guidance that is used by all headquarters and field  staff involved in leasing projects. Although VA has taken steps to improve  guidance on specific aspects of the leasing program, it has not made  changes to its handbook for planning outpatient clinics. We reviewed  VHA’s 2004 Handbook on Planning and Activating Community Based  Outpatient Clinics, which is VHA’s overall guidance for leasing outpatient  clinics. The Handbook is intended to establish consistent planning criteria  and standardized expectations. The handbook is widely used by VA  officials and provides important guidance, in particular, clarifying the  differing responsibilities of officials and departments and the legal  authorities of the leasing process. However, this guidance is so out of  date that it no longer adequately reflects the roles and responsibilities of  the various VA organizations involved in major medical facilities leasing  projects. According to VA officials, the close collaboration of these  offices is necessary for a successful lease project. The lack of updated  guidance can affect coordination among stakeholders, which could  contribute to schedule delays and cost increases. Using outdated  guidance can lead to miscommunications and errors in the planning and  implementing of veterans’ leased clinics. Furthermore, the policy,  planning criteria, and business plan format were developed based on an  old planning methodology that VA no longer uses, thus the guidance  does not reflect VA’s current process.
As of November 2013, VHA’s leasing program has a long-term liability of  $5.5 billion and growing, but its guidance on outpatient clinics is a decade  old and no longer relevant. Standards for Internal Control in the Federal  Government calls for federal agencies to develop and maintain internal  control activities, which include policies and procedures, to enforce  management’s directives and help ensure that actions are taken to  address risks. Such activities are an integral part of an entity’s planning,  implementing, reviewing, and accountability for stewardship of  government resources and achieving effective results.
section_title: Conclusions
paragraphs: Similar to VA’s largest medical-center construction projects, we found that  its major leasing projects have experienced substantial delays as well as  cost increases. In looking closer at the leasing program, we found that VA  is taking steps toward improving its management of the program; steps  that may help address these issues. Most notably, VA’s Construction  Review Council should improve management of both the construction and  leasing program. Furthermore, the improvements VA is planning based  on the findings of the council and our work—1) requiring more detailed  design requirements, 2) improving the process for handling scope  changes, and 3) providing Congress with more complete information— represent a good start. However, these efforts are still in the early stages,  and some were undertaken during the course of our review. Thus, the  success of those efforts will depend on how quickly and effectively VA  implements them. Furthermore, the guidance used by all staff involved in  planning and implementing leasing projects is outdated and does not  reflect recent organizational changes affecting the way leasing projects  are managed. Without current guidance, stakeholders may have difficulty  knowing with whom to coordinate, and projects could continue to  experience delays and cost increases resulting from late-stage design  changes.
section_title: Recommendation for Executive Action
paragraphs: To improve the management of VA’s leased outpatient-clinic projects, we  recommend that the Secretary of Veterans Affairs update VHA’s guidance  for leasing outpatient clinics to better reflect the roles and responsibilities  of all VA staff involved in leasing projects.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to VA for review and comment. In its  written comments, VA concurred with our recommendation and discussed  actions under way to implement it. However, VA cited concerns that the  report did not fully reflect the reasons for lease delays. VA noted that  many lease delays resulted from influences external to VA’s leasing  process and out of VA’s control. For example, other factors that could  cause delays include site selection issues involving the National  Environmental Policy Act’s requirements, stakeholders’ concerns,  procurement and lessor issues, solicitation/award protects, and post- award contracting issues. Furthermore, these comments stated that some  projects required updates to the space requirements to accommodate  improved delivery of care for veterans. VA also noted that as delays to a  lease occur, VHA re-evaluates and updates the design and space  program to ensure the contemplated lease project will meet VA’s latest  requirements and optimally serve veterans. We added this information in  the section of the report that discussed contributing factors to delays at  VA projects. VA suggested a number of technical corrections, which we  incorporated as appropriate. VA’s letter is reprinted in appendix IV.
As agreed with your offices, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  report date.  At that time, we will send copies to the appropriate  congressional committees, the Secretary of Veterans Affairs, and other  interested parties. In addition, the report will be available at no charge on  GAO’s website at http://www.gao.gov.
If you or your staff have any questions regarding this report, please  contact me at (202) 512-2834 or stjamesl@gao.gov. Contact points for  our Offices of Congressional Relations and Public Affairs may be found  on the last page of this report. GAO staff who made key contributions to  this report are listed in appendix V.
section_title: Appendix I: Scope and Methodology
paragraphs: To determine the extent to which costs and schedules changed for  selected Department of Veterans Affairs’ (VA) outpatient clinic lease  projects, we obtained and analyzed data that VA provided on VA’s 41  authorized major outpatient-clinic projects as of January 2014.included a short project description, project location, the original and  current total estimated cost of the project, and the original and current  completion date. We analyzed the current cost and completion dates to  determine any increases in costs and the extent to which projects may  have exceeded original schedules and summarized the results. We also  collected VA information on reasons for cost increases and schedule  changes to VA’s outpatient-clinic leased projects. We assessed the  reliability of the data through interviews with knowledgeable VA officials  and a review for completeness and any unexpected values. We  determined that the data were sufficiently reliable for the purpose of this  report.
In Las Vegas, Nevada, we visited four clinics that were accepted by VA between  September 2011 and January 2012 and interviewed officials from each site. (2) project costs; (3) scope and cost changes; and (4) schedule delays.We conducted site visits to the projects in Las Vegas (four projects),  Baltimore, and Austin based on the status, size, and costs for these  projects. For these projects, we talked to officials either on site or by  phone discussing the reasons for changes in costs and schedules and  possible improvements for VA’s leasing program. We obtained specific  information for VA’s ongoing major outpatient- clinic lease projects as of  January 2014. The information from our site visits is illustrative of issues  affecting particular sites and should not be used to make generalizations  about VA sites agency-wide.
To identify any actions VA has taken to improve its leasing management,  and any opportunities that exist for VA to further improve its management  of leased projects, we reviewed VA’s management practices of leased  projects at the 11 locations we selected. We interviewed VA  headquarters’ officials from the Veterans Health Administration, Office of  Construction and Facilities Management, Office of General Counsel, as  well as contract specialists and senior resident engineers at the leased  sites we visited. We reviewed and analyzed leasing documents,  directives, agency policy and guidance, previous VA reports, and  interviewed representatives from a project development firm and general  contractor construction firm. We also reviewed the Office of Management  and Budget’s (OMB) Capital Programming Guide, Supplement to Office of  Management and Budget Circular A-11, VA’s Strategic Plan, VA Office of  Inspector General (OIG), Congressional Budget Office, and GAO’s past  reports related to federal leasing issues.
We conducted this performance audit from May 2013 to April 2014 in  accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.
section_title: Appendix II: Changes in Schedule for Department of Veterans Affairs’ Major Medical Facility Leases
paragraphs: In January 2014, VA provided us with data for its 41 ongoing major  outpatient-clinic lease projects. We calculated the “total years changed”  column by counting years from the prospectus acceptance date, which  was the date first submitted to Congress, to the actual or anticipated  acceptance date, as reported by VA. There are no reported data for VA  outpatient clinic projects submitted as part of VA’s fiscal year 2014 budget  submission because these projects have yet to be authorized. Of the  outpatient clinic projects reviewed, 39 of 41 (95 percent) experienced  schedule delays. Table 4 provides a summary of schedule data for each  of VA’s 41 major medical facility lease projects.
section_title: Appendix III: Changes in Cost for Department of Veterans Affairs’ Major Medical Facility Leases
paragraphs: In January 2014, VA provided us with data for its 41 ongoing major  outpatient-clinic lease projects. Of these 41 projects, 31 projects  contained complete cost data. We compared the prospectus cost  submitted to Congress for authorization to the total current estimated first  year cost for the 31 projects with complete cost data. We found that the  costs for these projects increased from $153.4 million to $172.2 million,  an increase of nearly $19 million (12 percent). Table 5 provides a  summary of cost data for the 31 projects.
section_title: Appendix IV: Comments from the Department of Veterans Affairs
section_title: Appendix V: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
paragraphs: Lorelei St. James, (202) 512-2834 or stjamesl@gao.gov.
section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, Ed Laughlin, Assistant Director;  Nelsie Alcoser; George Depaoli; Raymond Griffith; Amy Rosewarne; and  Crystal Wesco made key contributions to this report.