Embassy Construction: Additional Actions Are Needed to Address Contractor Participation
Published: 2009-01-16T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: To provide safe and secure workplaces for overseas posts, the Department of State (State) has built 64 new embassy compounds (NEC) and other facilities since 1999, has 31 ongoing projects, and plans to build at least 90 more. In 2007, State reported the U.S. contractor pool for building NECs had reached its limit and proposed legislation to amend the criteria to qualify for NEC awards. GAO was asked to examine (1) how contractor participation in the NEC program changed in recent years, (2) the degree to which State assessed the need for and potential outcomes of its proposed amendment, (3) factors contractors consider when deciding to participate in the program, and (4) actions State has taken to address reported declines in contractor participation. GAO examined two indicators of contractor participation; reviewed State documents and proposed legislation; and interviewed State officials and U.S. firms that won NEC awards from 2001-2007.
section_title: What GAO Found
paragraphs: State received at least two bids--the legislatively specified minimum for adequate competition--for 60 of the 61 NEC projects it awarded from 1999-2008, and received three or more bids for at least 49 of the 61. Nonetheless, there was a statistically significant decline in the number of bids per NEC project from 2002 to 2008. GAO also found that the number of firms prequalified to bid on NEC projects also declined during this period. While many factors could affect contractor participation, GAO found the declines in the number of prequalifying firms and bids received were due, in part, to rising construction costs, which made it more difficult for some firms to meet qualification criteria. In addition, officials from five firms cited insufficient profits and State management practices as reasons for their recent withdrawals from the program. State has not systematically assessed the need for, or the possible outcomes of, its legislative proposal that would open competition for NEC awards to construction firms that cannot meet current qualification criteria. Although State identified several factors it believed reduced contractor participation, it has not assessed whether a sufficient number of contractors capable of meeting current requirements exists or how its legislative proposal would affect the NEC program. Specifically, State has not assessed the potential benefits or identified the potential risks of its legislative proposal, and has not stated how the risks would be mitigated. Absent these analyses, it is unclear whether the proposed amendment, including its December 2008 revision, would benefit State's embassy construction program. Contractors interviewed by GAO cited various incentives and challenges that affected their decision to participate in the NEC program. Although making profits was cited as the primary incentive for participating, contractors reported losing money on 42 percent of the contracts they performed. Contractors also cited several significant challenges that affected their decisions to submit contract proposals, including meeting State's shortened construction schedules, supplying labor and material to remote locations, finding and retaining cleared American workers, managing financial constraints, and dealing with foreign governments. Firms also expressed concerns with State's processes, including unclear solicitation documents and contract requirements, laborious design reviews, and State's 2001 decision to end formal partnering relationships with contractors. State has made several recent efforts to encourage contractors' participation in the NEC program. State has begun new outreach efforts to improve relations with contractors, and undertaken several changes to its management practices and organizational structures, including lengthening project schedules, improving clarity of contract requirements, and establishing a project management group to provide coordination and oversight throughout each phase of a project. While these changes address some contractor complaints, their full effects may not be apparent for a number of years.

section_title: Letter
paragraphs: Following the 1998 terrorist bombings of the U.S. Embassies in Nairobi,  Kenya, and Dar es Salaam, Tanzania, which killed 220 people and injured  thousands more, the Department of State (State) began an unprecedented  effort to replace more than 180 overseas diplomatic facilities. From 1999- 2008, State awarded contracts worth approximately $5.8 billion to  construct new embassy and consulate compounds (NEC) and diplomatic  annexes at 79 overseas posts, with the majority of these facilities being  built under management and construction reforms first implemented in  2001. State reported that, as of December 2008, it had constructed 64 new  embassies, consulates, and annexes; had another 31 projects under way;  plans to construct 90 more facilities from 2009 to 2023; and, after 2023,  would need to replace facilities at approximately 50 overseas posts.  However, in the summer of 2007, State’s Bureau of Overseas Buildings  Operations (OBO) told several congressional committees that the current  pool of American contractors qualified and able to carry out diplomatic  construction projects overseas had nearly reached its capacity and that the  subsequent reduced competition for contracts would result in increased  contract costs. To increase competition for NEC contracts, State proposed  legislation to amend the Omnibus Diplomatic Security and Antiterrorism  Act of 1986 to give State the discretion to allow more participation by  construction firms which currently cannot meet the qualifying criteria for  NEC awards.
At your request, this report addresses the status of the contractor base for  State’s embassy construction program, including: (1) how contractor  participation in the NEC program has changed in recent years, (2) the  degree to which State has assessed the need for or potential outcomes of  its proposed amendment to the Omnibus Diplomatic Security and  Antiterrorism Act of 1986, (3) factors that affect contractors’ decisions to  participate in the program, and (4) actions State has taken to address the  reported decline in the number of contractors willing to participate in the  program.
To complete our review, we examined two indicators of contractor  participation in the NEC program: (1) the number of companies  prequalifying to bid on projects per year from 2002-2008 and (2) the  number of firms that submitted bids on NEC projects from 2002-2008.  These two indicators help to measure contractors’ willingness to  participate in State’s program since both prequalifying for and bidding on  contracts require active efforts on the contractor’s part. We also reviewed  State’s proposed amendment to the Omnibus Diplomatic Security and  Antiterrorism Act of 1986, reviewed documents and interviewed State  officials on analyses the agency conducted in support of the proposed  amendment, and researched ongoing overseas construction operations of  the 100 largest U.S. design-build construction firms. We determined that  the data used to complete these analyses were sufficiently reliable for our  purposes. To determine factors affecting contractors’ decisions to  participate in the program, we completed structured interviews with 17  U.S. contractors awarded NEC or diplomatic annex construction contracts  from 2001 to 2007 to obtain information about State’s construction process  and the incentives that encourage contractors to participate in the  program. These contractors had completed, or were in the process of  completing, a total of 78 separate construction contracts valued at  approximately $4 billion dollars. Finally, to assess actions State has taken  to expand its NEC contractor base, we reviewed (1) reports on State’s  embassy construction program issued by GAO and State’s Office of the  Inspector General; (2) OBO’s past six annual Long-Range Overseas  Buildings Plans; (3) relevant laws and regulations, including the Omnibus  Diplomatic Security and Antiterrorism Act of 1986, federal acquisition  regulations, and State reports and decision memos; and (4) delivery  methods and partnering policies employed by other federal agencies and  supported by leading industry groups. We also attended OBO’s quarterly  Industry Advisory Panel meetings, met with State staff familiar with  contracting and construction processes, and spoke with representatives of  the Associated General Contractors of America and the American Council  of Engineering Companies. This report does not contain all of the  responses to our interview questions. The full responses to our questions  can be viewed at GAO-09-47SP.
We conducted this performance audit from October 2007 to January 2009,  in accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.
subsections: section_title: Background
paragraphs: From 1987-1997, U.S. diplomatic facilities overseas were attacked on more  than 200 occasions. On August 7, 1998, terrorist bombings of the U.S.  embassies in Dar es Salaam, Tanzania, and Nairobi, Kenya, killed 220  people and injured thousands more. Subsequent investigations into these  attacks and on the conditions of U.S. overseas facilities determined that  U.S. embassies and consulates worldwide were insecure, unsafe,  overcrowded, deteriorating, and “shockingly shabby.” Unless security  vulnerabilities were addressed, employees and the public using these  facilities would remain at risk of terrorist attacks.
In the wake of these reports, State embarked on an unprecedented effort  to construct diplomatic facilities at 214 overseas posts. The goal of this  effort is to replace insecure, dilapidated, and dysfunctional embassies,  consulates, and other overseas diplomatic office buildings with safe,  secure, functional, and modern facilities as quickly as possible. As of  December 2008, OBO had completed construction for 64 new embassies,  consulates, and annexes and had relocated more than 19,500 U.S.  employees into these new facilities. State has 31 additional ongoing  construction contracts for new facilities and plans to build approximately  90 more facilities from 2009 to 2023. Beyond this effort, State officials said  that after 2023, OBO would need to replace facilities at approximately 50  posts. The total award value for all construction contracts for new office  facilities awarded since 1999 is approximately $5.8 billion.
subsections: section_title: Efforts to Speed Construction and Contain Costs
paragraphs: In 1986, in response to terrorist threats, State began an embassy  construction program, known as the Inman program, to better protect U.S.  personnel and facilities overseas. However, due to systemic weaknesses in  program management, as well as subsequent funding limitations, State  completed only 24 of the 57 construction projects planned under the  Inman program. Following the demise of the Inman program in the early  1990s, State initiated very few new construction projects, until the 1998  embassy bombings in Africa prompted additional funding for security  upgrades and the construction of secure embassies and consulates.
In response to the performance problems experienced under the Inman  program, State implemented numerous reforms to its management  structure and contracting, planning, and construction processes. These  reforms were designed to speed completion of projects, reduce costs, and  standardize processes, and they had the cumulative effect of reducing the  average construction cycle time by 2 years and 9 months. Among the  most prominent reforms were    elevating the former Office of Foreign Buildings Operations to OBO; relying on the design-build delivery method, which reduces the number of  solicitation, proposal, and award processes from two to one and allows  contractors to begin basic construction before the design process is  completed;    convening the Industry Advisory Panel on a quarterly basis to advise OBO  on industry best practices in the construction sector; and    holding an annual industry day event to solicit a broader pool of  contractors.
Starting in 2002, OBO also implemented the Standard Embassy Design  (SED) to expedite the planning, awarding, design, and construction of  NECs. The SED is a series of documents that outline site and building  plans, specifications, and design criteria, and explain how to adapt these  specifications to a particular project and contract requirements. The SED  is not an actual building design but rather a template that standardizes the  basic plans for the structural, spatial, safety, and security requirements for  each NEC, including the following:     main office buildings and annexes;    security features, such as the Compound Access Control (CAC) buildings    utility buildings, warehouses, and General Services annex;  living quarters for Marine Security Guards (MSGQ); and    employee and visitor parking.
The SED also identifies ways to allow for future building expansion on the  site; establishes minimum permissible baseline standards for materials and  interior finishes; and factors in environmental concerns such as  temperature, humidity, dust, rain, and air quality when designing and  selecting mechanical equipment. Figure 1 shows the general features for a  standard design NEC.
Since 2002, there have been three primary classes of standard design  embassy and consulate compounds—small, medium, and large—based on  the size and cost of the facility, each of which have predefined  construction schedules and total project durations associated with them.   In 2004, State introduced a fourth class of SED, called Extra Large or  Special SEDs, which generally exceed the size and cost of large SEDs.  Finally, in 2007, State introduced the Standard Secure Mini Compound,  which is generally smaller and less costly than a small SED. In addition,  OBO has developed standard designs for MSGQs, and stand-alone  unclassified annexes. Table 1 shows the allowable size and construction  time frames for each of the five classes of NECs constructed using the  standard embassy design.
section_title: Qualifications for Submitting Contract Proposals
paragraphs: The Omnibus Diplomatic Security and Antiterrorism Act of 1986 states  that, where adequate competition exists, only U.S. persons and qualified  U.S. joint-venture persons may (1) bid on diplomatic construction or  design projects with estimated total project values exceeding $10 million  and (2) bid on diplomatic construction or design projects involving  technical security, unless the project involves low-level technology, as  determined by the Secretary of State. The act defines adequate  competition as the presence of two or more qualified bidders submitting  responsive bids for a specific project. In this context, a U.S. person is  defined, in part, as a company that  is incorporated or legally organized under the laws of the United States;    has its principal place of business in the United States;   has performed within the United States or at a U.S. diplomatic or consular  establishment abroad administrative and technical, professional, or  construction services similar in complexity, type, and value to the project  being bid;    has total business volume equal to or greater than the value of the project  being bid in 3 years of the 5-year period before the specified date;    employs U.S. citizens (1) in at least 80 percent of its principal management  positions in the United States and (2) in more than half of its permanent,  full-time positions in the United States;     will employ U.S. citizens in at least 80 percent of the supervisory positions  on the project site; and    has the existing technical and financial resources in the United States to  perform the contract.
Contracts for construction projects that do not involve technical security  requirements may be awarded to foreign firms. However, the Percy  Amendment to the Foreign Buildings Act of 1926 enables American firms  to be more competitive with foreign firms by reducing the evaluated price  of offers from American firms by 10 percent for such projects expected to  exceed $5 million.
section_title: State’s Proposed Amendment to the Omnibus Diplomatic Security and Antiterrorism Act of 1986
paragraphs: In 2007, State proposed an amendment to the Omnibus Diplomatic  Security and Antiterrorism Act of 1986 that would allow the Secretary of  State to waive financial, U.S. citizenship, and other requirements for NEC  awards, when necessary and appropriate. According to State, the  proposed amendment was necessary because “the current pool of  American contractors qualified and able to carry out diplomatic  construction projects overseas has nearly reached its capacity” and the  subsequent reduced competition for contracts would result in increased  contract costs. When proposing the amendment, State argued that  amending the law would increase competition for NEC awards by opening  the contractor pool to smaller U.S. construction companies and to foreign  companies that previously could not qualify for NEC projects. Congress  did not act on the proposed amendment. In December 2008, State officials  told us the department plans to revise the 2007 proposal by opening  competition for NECs only to U.S. companies that meet the specified  security requirements.
section_title: State’s Contracting and Construction Processes
paragraphs: State uses a two-phase solicitation process for awarding contracts for  NECs. In the first phase, the prequalification of offerors, contractors  submit documentation attesting how they meet the legal, technical, and  financial qualifications for each project on which they wish to bid. State  then reviews this documentation to certify whether contractors do, in fact,  meet the criteria. Once State completes these reviews, it issues a list of  contractors eligible to bid for each contract award. Only companies that  State certifies as prequalified under the first phase receive, and may  respond to, subsequent requests for proposals (RFP) for major  construction awards. In the second phase, RFPs, State solicits and  evaluates contractors’ bids for construction awards, including technical  and price proposals. Contractors bid a firm, fixed price for a project;  therefore, the winning contractor will deliver the defined scope of the  project for the price of the contract.
After State awards a design-build contract, the contractor must develop a  project design and work plan that incorporates all construction and  security features outlined in the RFP and contract documents. During this  design phase, the contractor must also begin preparing for construction by  obtaining local building permits, buying or ordering materials, and  mobilizing workers. In addition, under the design-build delivery method,  contractors can begin construction of some buildings and systems that do  not require security clearances—such as perimeter walls, warehouses, and  mechanical support buildings—before the full design is approved.  However, construction of the main office building—the chancery or  consulate—generally does not proceed until the design is approved and  State certifies to Congress that it meets all security requirements. During  the construction phase, OBO monitors contractors’ schedules, inspects  and reviews contractors’ work, and certifies that construction is  substantially complete once contractors meet all requirements of the  contract. Once construction is certified as being substantially complete,  State conducts final commissioning to ensure that building systems—such  as fire protection, electrical, and mechanical—were installed properly and  operate according to design criteria and manufacturer specifications. Once  all systems pass the commissioning process, the building is certified to be  occupied and post staff may move in.
section_title: State Reports That NEC Costs Are Rising
paragraphs: In September 2008, State reported that construction costs had increased  dramatically since 2001 and that the trend was likely to continue. State  reported that from 2001-2008 total construction costs for new embassy and  consulate compounds increased, on average, 9 percent per year, from  approximately $5,000 per gross square meter in 2001 to more than $13,000  per gross square meter in 2008. In an earlier analysis, State attributed the  overall cost increases to two factors: inflation for construction materials  and the decrease in the value of the dollar. State reported that, overall,  prices for construction materials rose 44 percent from December 2003 to  July 2008. In addition, State reported that the significant decline in the  value of the dollar resulted in additional construction-cost increases of  approximately 2 percent per year since 2003.
section_title: State Has Generally Met the Adequate Competition Requirement for Awarding NEC Contracts, but the Level of Contractor Participation Has Declined
paragraphs: Although State has generally received at least two bids for NEC projects  since 1999, which meets the adequate competition clause, the number of  contractors participating in the State’s program has declined. State  documents show, and State officials reported, that from 1999 to 2008, the  department received at least two bids for all but one of the 61 NEC  projects awarded through a competitive process, and three or more bids  for at least 49 of the 61 awards. Table 2 shows the number of firms  prequalifying to bid on NEC projects and the number of bids submitted for  each NEC project from 2002 to 2008. Despite having adequate  competition for all but one NEC award, we found a statistically significant  decline in the number of bids State received per NEC contract from 2002  to 2008. We also found that the number of firms per project prequalified to  bid also declined during that period. These results demonstrate that the  level of contractor participation in the NEC program has declined.
In addition, from 2002 to 2008, noticeable fluctuations occurred in both the  annual average numbers of firms per project that prequalified to bid on  NECs and bids received. From 2002 to 2005, the annual average number of  firms that prequalified to bid ranged from approximately 6 to  approximately 8 (see table 2). In 2006, the average increased to more than  13, then declined by 69 percent to about 4 in 2008. The average number of  bids submitted per project from 2002 to 2005 ranged from 3.5 to  approximately 4, increased to 5 bids per project in 2006, then decreased by  38 percent, to approximately 3 bids per project in 2008.
Although the declines in contractor participation can be attributed to  many factors, we found that project costs partly explained the declines. In  statistical analyses, we found that State’s estimated NEC project cost is a  strong predictor of the actual number of firms that prequalify to bid on  projects, such that higher estimated costs result in fewer prequalifying  firms and lower estimated costs result in more prequalifying firms. We also  found that the actual number of prequalifying firms per project showed a  strong positive correlation with the number of bids submitted per project.  Thus, estimated project costs directly affect the number of prequalifying  firms and indirectly affect the number of bids submitted.
To illustrate these relationships, we compared the annual average  estimated costs for NECs with the annual average numbers of  prequalifying firms and bids submitted. As noted previously, State  reported that NEC costs have more than doubled from 2001 to 2008.
Although there were yearly variations between 2002 and 2005 in the  average estimated costs for NECs and the average numbers of  prequalifying firms and bids submitted, the changes during these years  were not large. However, from 2005 to 2006, the average estimated costs  for NECs declined by 28 percent from $69 million to $50 million. Because  the financial criteria in 2006 were lower than in 2005, it was easier for  firms to demonstrate the capacity to meet those requirements. As a result,  the number of prequalifying firms per project rose from approximately 7 in  2005 to more than 13 in 2006, and the number of bids per project increased  from 3.7 to 5. However, from 2006 to 2008, the average estimated NEC  project cost more than doubled, rising to approximately $110 million per  project. This increase made it more difficult for firms to meet the financial  requirements to bid for and win NEC awards. As a result, fewer firms  prequalified for and bid on NEC projects in those years.
The profitability of NEC projects for contractors and State’s overall  management of the NEC program may also have affected contractor  participation, particularly in recent years. For example, the decline in the  prequalification rate also reflects five firms, which, combined, built a total  of 27 embassies, consulates, and annexes for a total value of $1.63 billion,  withdrawing from the NEC program from 2006 to 2008. Although each of  these five firms prequalified to bid on NECs in 2005, none of them chose to  prequalify for 2008 projects, with one company withdrawing in 2006, two  in 2007, and the remaining two in 2008. Officials from these companies  cited insufficient profits and disagreements with State’s management of  the program as factors contributing to decisions to withdraw. However,  three of the firms indicated they would consider participating in future  years but would base such decisions on the resolution of outstanding  issues with current and past contracts and State’s willingness to reform its  management practices.
section_title: State Has Not Systematically Assessed the Need for or Possible Outcomes of Its Legislative Proposal
paragraphs: State has conducted no systematic analyses in support of its proposed  amendment to the Omnibus Diplomatic Security and Antiterrorism Act of  1986, including whether such legislative changes are needed to maintain  an adequate contractor base or how such changes would affect the  program. Although State asserts that the declining contractor base has  created a less competitive and less cost-effective program, the department  reported no systematic efforts to analyze the relationship between  competition for NEC contracts and actual contract awards. State officials  did report that from 1999-2008, the department received at least two  bids—the legislatively defined minimum number for adequate  competition—for all but one NEC project solicited as an open  competition. However, they did not comment on whether this minimum  standard was sufficient to receive optimal prices for the government.
In support of its initial legislative proposal, in October 2007, State  identified several factors that it believed discouraged contractors from  participating in the program, including: (1) working with State was not as  profitable as working with private companies or with other federal  agencies, (2) the challenging and sometimes dangerous locations of NEC  projects, (3) the high cost of skilled American workers with security  clearances, (4) dissatisfaction with firm fixed-price contracts for NECs,  and (5) the relatively abundant domestic construction market. However,  State did not provide any detailed analyses in support of these  conclusions.
State’s initial legislative proposal indicates that the number of U.S.  companies capable of meeting the current requirements to qualify for NEC  awards is nearing capacity. However, State has not systematically  analyzed the extent to which the U.S. contractor community can meet  these requirements. Therefore, we reviewed the degree to which some of  the largest U.S. construction companies have participated in the NEC  program. We compared the list of the top 100 U.S. design-build firms for  2008 compiled by Engineering News Record with the list of firms that  have either prequalified for or won NEC awards since 2002.  The ranking  is based on companies’ total 2007 revenues from design-build contracts  where the projects were designed and constructed by employees of the  company in whole or in joint-venture partnership with other firms and  subcontractors. The total revenues for these firms ranged from $104  million to $11.2 billion.
We found that only 14 of the top 100 companies prequalified for NECs in at  least one year from 2002-2008, and only 7 won at least one NEC award. In  addition, only 3 of the top 100 companies prequalified for 2008 NEC  projects—B.L. Harbert International, LLC; Caddell Construction Co. Inc.;  and Weston Solutions Inc.  While not all of the 100 companies may be  interested in pursuing overseas construction, some firms not currently  engaged in the NEC program are capable of working in overseas locations.  For example, the top 100 list shows that 34 of the 100 firms derived  income from overseas construction contracts. Ten of these 34 firms  prequalified to bid on at least one occasion from 2002-2008, and two of  these 34 firms prequalified to bid for 2008 NEC projects.
In addition, we examined company Web sites and conducted Lexis-Nexis  searches to determine the extent to which companies listed among the top  100 design-builders for 2008 and that have never won NEC awards have  experience in countries where State plans to build NECs in 2009. We  found that at least 16 of the 93 companies that have not received NEC  contracts under the current program have ongoing operations in eight of  the nine locations planned for 2009 (see table 3). However, none of those  16 companies prequalified to bid on State’s 2008 projects, and only two of  those companies prequalified for projects in past years.
A greater reliance on foreign firms, as specified in State’s 2007 legislative  proposal, could increase security risks for NECs. Currently, foreign  companies may not bid on projects that involve technical security unless it  involves only low-level technology. State’s initial legislative proposal  would provide the Secretary with discretion to waive the preference for  U.S. contractors so long as the Secretary determined that it is more  economical or efficient to do so and that the security of the project would  not be compromised in doing so. However, State has not yet reported how  it would ensure project security would not be compromised, including  providing a clear explanation of how the controlled access areas would be  securely constructed and identifying the additional safeguards needed to  oversee construction.
Finally, amending the requirements to allow greater access to small U.S.  companies and foreign companies could also affect construction  management on site. However, because small firms may not have the  technical capacity to construct all facets of NECs and, because foreign  firms cannot currently construct controlled access areas of embassies and  consulates, it is unclear how construction of highly technical areas would  be accomplished. Although State has not yet determined how to resolve  these items, it could choose to award multiple contracts to complete  targeted areas of work. State has taken an approach somewhat similar to  this for some NEC contracts, to date, by awarding small projects, primarily  annexes, to small U.S. and foreign construction firms, which sometimes  proceed simultaneously with a larger NEC project previously awarded to  other companies. State has also awarded separate contracts to construct  unclassified and classified areas of some NECs, such as for the Baghdad,  Iraq, and Suva, Fiji, embassies. OBO officials noted that this multiple  contracting is inefficient and leads to frequent conflicts between  contractors over precedence of work. Relying on small contractors in a  similar approach, with multiple contracts, to complete a typical NEC  project may multiply these problems, and State has not yet reported how it  would mitigate this concern.
In December 2008, State informed us that it has drafted a revised  legislative proposal to allow for more U.S. firms to qualify as U.S. persons,  noting that all U.S. companies that can meet the specified security  requirements should be permitted to bid for and win NEC contracts. In  addition, State said that it would no longer pursue greater access to NEC  contracts for foreign firms. State’s revised proposal would, in effect, open  competition for NEC awards to smaller U.S. firms. However, according to  State officials, the projects planned through the remainder of the program  are expected to be more complex and more costly, in general, than the  projects awarded to date. Given that State’s experience with multiple  contractors working independently at a construction site has not worked  well, it is unclear how State could increase smaller firms’ participation  without significantly increasing the government’s risk. However, as of the  date of its comments, State had conducted no analyses in support of its  proposal, including on the benefits and risks of a greater reliance on  smaller firms.
section_title: Financial Incentives, Risks of Overseas Construction, and State’s Management Practices Affect Contractors’ Willingness to Participate in the NEC Program
paragraphs: U.S. contractors we interviewed ranked financial incentives as the most  important factor in determining their participation in the construction  program; however, many contractors told us they were not making as  much profit as anticipated. Once participating in the program, all  contractors reported encountering significant challenges, such as the  logistics of getting labor and materials to a construction site, meeting  State’s construction schedules, coping with currency fluctuations and  price increases, finding skilled American workers with security  clearances, and handling relations with foreign governments. In addition, a  majority of contractors favored using the combination of design-build  delivery and the standard embassy design, and stated that neither firm  fixed-price contracting nor the domestic and international construction  markets affect their participation in the program. Most contractors also  expressed concerns about State’s on-site project directors, the  implementation of the design-build process, and the project guidance  provided by State.
subsections: section_title: Financial Incentives Ranked as Highest Factor in Decision to Participate in the NEC Program, but Profits Did Not Meet Expectations
paragraphs: Most of the 17 contractors we interviewed cited most often the potential to  make money, the expectation that State would be a reliable customer, and  the steady continuity of State’s building projects, even during difficult  economic times, as the top three incentives to participate in the program  (15 of the 17 contractors for each incentive). The desire to serve the  United States and the prestige of building for the United States were also  cited as strong incentives for some contractors (see table 4).
In spite of the importance of reliably earning money as an incentive for  program participation, many contractors said that making a profit had  become difficult under the NEC program. The contractors defined profit  as the monetary returns received after all charges have been paid,  including regular salaries. Ten of 14, or 71 percent of the contractors also  said that, in general, State projects were less profitable than their other  construction projects. Specifically, contractors told us that 22 of the 53  total contracts they completed lost money, and two more did not earn a  profit; they expected to lose money or break even on 11 of the 26 projects  that were being built at the time of our fieldwork. In all, 13 of the 17  contractors, or more than 76 percent, reported they lost money or  expected to lose money on at least one contract. Some contractors noted,  however, that depending on the resolution of open requests for contract  modifications—also called requests for equitable adjustment (REA)— some of the projects that lost money or broke even could show a profit.
section_title: Contractors Cite Major Challenges Including Logistics and Time
paragraphs: Although contractors have potentially meaningful incentives to participate  in the program, they each reported facing significant challenges once in  the program and when building the facilities. Contractors ranked the  greatest challenges as (1) the logistics of getting labor and material to the  construction sites, which are often in very remote locations; (2) meeting  State’s construction schedules; (3) financial considerations, such as  managing currency fluctuations; (4) labor issues, such as finding qualified  workers with security clearances (cleared workers); and (5) relations with  foreign governments (see table 5). These challenges reflect contractors’  comparatively greater risk when constructing facilities for State,  compared to other clients. Thirteen of 16 contractors, or over 80 percent,  said that their firms’ profits from the NEC program have not been  commensurate with the risks involved.
Twelve of 17 contractors said handling the logistics of getting labor and  materials to the construction site was a major challenge while four said it  was a moderate challenge. Many of the construction sites are in relatively  remote locations and are difficult to access from the United States.  However, despite logistics being cited by contractors as a challenge and, in  many cases, a consideration to bid for specific projects, none of the  contractors cited it as a determining factor when considering whether to  participate in State’s construction program. Contractors did not report  project locations as a disincentive to participate in the program. On the  contrary, the challenge of building to high standards in often difficult  environments was cited by 12 of the 17 contractors as an incentive for  participating in the program. Contractors did confirm that location can be  a factor in deciding to bid on specific projects, but it also was a  consideration generally for the purpose of assessing the competition for  projects. For example, a company may avoid bidding on projects in  locations where it believes another company has a clear competitive  advantage, such as by already being mobilized in the country or having  extensive experience in a given region.
subsections: section_title: Schedule
paragraphs: Fourteen of the 17 contractors viewed meeting State’s construction  schedules for new embassies as a major challenge. The two contractors  who rated meeting the schedules as a moderate challenge, and the one  contractor who said the schedules were a minor challenge had not yet  completed a building project for State. Even a successful contractor,  whose entire business model is built around meeting State’s schedules,  said they are a major challenge. Contractors described the building  schedules as unrealistic, a “problem,” “absolutely insane,” “warped,” and  “ridiculous.”
Some of the contractors stated that completing the design of the facilities,  together with building the facilities took more time than was allowed by  State. The goal of the NEC program is to get U.S. government employees  overseas out of hazardous, insecure buildings and into safe and secure  buildings as quickly as possible. From 2002 to 2007, State aggressively  shortened the time allowed to complete the buildings. The contractors  raised concerns that State reviews designs in greater detail and later in the  process than is typical for design-build construction. Nearly all the  contractors said that they were challenged to meet State’s shortened  project schedules, considering, among other factors, the difficulty of  producing an approved design that will enable State to provide the  necessary security certification to Congress. According to these  contractors, designs were often certified for construction significantly  later than planned due to complex and extensive project requirements, the  application and delivery of which had to be validated through State’s  design reviews. According to several contractors, much of the allowed  construction time is spent obtaining approval of the completed design,  leaving less time for the actual construction of the facility, and increasing  the contractors’ risk of not meeting project completion dates. A few  contractors said that if they were building in cities of the high-income  countries in the world, they could more reliably meet the schedules.  However, most of the NEC locations are in lower-middle and lower- income countries where finishing a design acceptable to State, getting  materials and equipment to remote locations, and actually building the  structure may take more time than State allows. If anything goes wrong,  according to contractors, they are likely to miss the deadlines.
section_title: Financial Considerations
paragraphs: Financial considerations, including currency fluctuations, rising costs for  construction materials, and the need to obtain performance bonds to fulfill  U.S. government requirements provide another set of challenges to  contractors. As previously noted, in September 2008, State reported that  the price increases for construction materials and the weakening of the  dollar more than doubled NEC construction costs since 2001. A few  contractors referred specifically to rising costs for construction materials  as a concern. Contractors reported on strategies to mitigate inflation, such  as factoring inflation into their contract proposals or purchasing materials  in advance. Moreover, given that labor and materials procured overseas  generally must be paid in local currencies, and that the dollar has  weakened against many other world currencies, managing currency  fluctuations has become a significant challenge, according to contractors  with whom we spoke. As with inflation, contractors regularly manage this  risk by including a contingency for potential dollar devaluation in their  bids. Several contractors also seek protection from currency fluctuations  by purchasing exchange rate futures to lock in a rate. However, these  measures can not fully ease the effect of wider-than-expected currency  swings. Ten contractors told us that currency fluctuations are a  determining factor in their decision to compete for State building  contracts. Five others said that currency fluctuations had not been a factor  that determined whether or not to compete for a given contract in the past.  However, currency fluctuations could become a factor in the future, given  the relative strength or weakness of the U.S. dollar.
Obtaining performance bonds was seen as either a major or moderate  challenge by 9 of the 17 contractors we interviewed, and its importance  may be growing. Factors determining whether a contractor needs  performance bonding include the contractor’s revenues and State’s  experience with the contractor. Larger contractors, in general, can more  easily obtain a performance bond than smaller contractors. Also, there  have been instances where State has waived the need for a performance  bond for contractors with whom it has extensive, successful experience,  according to the contractors. As of the date of this report, no bonding  company has ever had to assume responsibility for a contractor’s failure to  perform on an NEC project. Nonetheless, smaller contractors told us  about problems obtaining performance bonds for State contracts, and  State told us that at least one bonding company had begun refusing to  provide performance bonds to State contractors. If State succeeds in  changing the law to allow smaller contractors to prequalify for  competition, the availability of performance bonds could become a more  prevalent concern.
section_title: Labor Issues
paragraphs: Labor issues, in general, were rated high on the list of challenges.  Contractors said that finding and keeping workers willing to work  overseas poses a challenge. In particular, contractors explained that  “cleared” workers —those with security clearances—who are willing to  live overseas in often unappealing locations are in relatively short supply.  Moreover, because of the low supply and high demand, these cleared  workers command the labor market. For example, several contractors  complained that cleared workers will frequently move to another  contractor for a higher salary or a more appealing location, even if their  current project is not finished. To complete work, contractors must  sometimes match or exceed competing offers from other contractors to  keep the cleared workers on site. Contractors also rated finding and  retaining workers who do not have clearances as a challenge, though not  as critical a challenge as finding and retaining cleared workers.
section_title: Relations with Foreign Governments
paragraphs: Contractors also cited problems dealing with foreign governments as a  challenge. Understanding and dealing with issues related to obtaining  building permits, clearing materials through customs, or paying tariffs on  imported goods, as well as obtaining reliable information about the local  country, are challenges and risks of building overseas. However,  contractors generally accept these challenges and a majority of  contractors said they believe that State could provide more helpful  information about the locality. For more challenges faced by contractors,  see appendix II.
section_title: Majority of Contractors Favored Design-Build Delivery and Standard Embassy Design
paragraphs: We asked contractors to characterize State’s approach to the design-build  delivery of NECs, using the standard embassy design and firm fixed-price  contracts, in terms of effectiveness and economy. With many caveats,   11 contractors favored the combination of design-build delivery and the  standard embassy design as a good method for building new embassies.  Although contractors cited problems with aspects of the design-build  delivery method and SED, they generally expressed support for both. Two  contractors stated that bidding on the completed NEC design would  improve the accuracy of bids and allow contractors to better predict how  long building would take. Having contractors bid on a completed design  would be essentially using a design-bid-build process, a delivery method  that separates design and construction activities into two distinct  contracts. The majority of contractors did not raise concerns about firm  fixed-price contracts, and only one contractor reported not bidding on one  occasion because of the type of contract.
section_title: Domestic and International Construction Markets Have Little Effect on Contractor Participation
paragraphs: Neither a relatively robust domestic construction market nor an active  international construction market were cited as factors causing  contractors to leave the program. We asked contractors how much the  activity level of the construction industry in the United States affects  firms’ decisions to compete for State building projects. Ten of the   17 contractors said the domestic construction market had some or no  effect on their decisions to participate in overseas construction, in general,  or compete for State projects, specifically. A few contractors added that  their firms were either primarily international or that they worked in the  international division of their firms and that they would be in the  international market regularly, regardless of domestic market conditions.  Some of the contractors agreed that the domestic market affected their  decisions to bid for State projects but only because important resources,  such as performance bonding capacity or staff, were already allocated to  domestic projects and, therefore, not available for competition in the  international market. Thus, it was these firms’ current commitments for  domestic-based work, rather than the U.S. construction market in general,  that influenced their firms’ decisions to bid on State projects. We also  asked contractors how much the activity level of the construction industry  overseas affects firms’ decisions to compete for State building projects. In  this case, 13 of the 17 contractors said the international construction  market had some or no effect on their decisions to compete for State  projects. For a few contractors, State projects are their preference in  overseas work.
section_title: State’s Management Practices Also Affect Contractors’ Decisions
paragraphs: Fourteen contractors characterized State’s management of its embassy  construction program as fair or poor. Several management practices  adopted after the 1998 bombings may have contributed to problems cited  by the contractors, including (1) strengthening the role of the project  director and limiting access to State management by contractors, (2) the  design-build project delivery method as implemented by State, and   (3) unclear project guidance within various documents that detail  construction requirements. Moreover, contractors reported these  practices inhibit their ability to complete projects on time and with a  profit.
subsections: section_title: Project Director
paragraphs: Beginning in 2001, State took measures to limit partnering with  contractors as it had existed, including strengthening the role of the on- site project directors. However, the action may have had unanticipated  effects on the NEC program. A few long-standing contractors reported that  the customer-client atmosphere at State changed and that distrust  between contractors and State’s staff, particularly project directors,  frequently resulted in adversarial relationships. Overall, 10 of the 17  contractors we interviewed rated State as a poor or fair business partner— 6 rated State as poor, 4 as fair. In addition, 4 of the 7 contractors who rated  State as a good or excellent business partner had not completed a  construction project as of the dates of their interviews.
Project directors are the targets of many contractors’ concerns about the  State process. Most contractors we spoke with said that, because of the  project director’s role in providing information to and from Washington  and making or, at least, conveying project execution decisions, project  success is greatly dependent on the project directors. The contractors  provided mixed views on their levels of satisfaction with individual project  directors. Contractors also expressed concerns about the professional  qualifications of project directors and their experience managing  construction and said they would like project directors to have significant  construction experience. In discussing relationships with project  directors, two contractors noted they will avoid bidding on projects they  know will be headed by a particular project director with whom they or  other contractors have had past troubles.
We asked contractors a number of questions regarding their experiences  with various State bureaus and offices. Contractors were asked to what  extent they had experienced project delays because of various State  officers and entities, and they responded that project directors are the  greatest source of delays. Contractors also rated the State project  directors on the timeliness of their decisions in a variety of areas and on  the level of authority that project directors currently have for making  certain types of decisions. A majority of contractors reported that project  directors are generally timely in responding to requests for information,  and contractors were about evenly split on whether project directors are  timely in providing answers to work approvals and general decision  making. However, for timeliness on contract modifications or REAs,  project directors were perceived by the majority of contractors to be only  sometimes, rarely, or never timely.
Even as project directors are the targets of many contractors’ concerns,  they often have no authority to make decisions in specific areas cited by  contractors. Contractors rated project directors’ decisions and authorities  for a number of types of contract modifications. For example, a majority  of the contractors, typically 10 to 12, rated project directors’ decisions as  fair or poor in areas such as modifications exceeding $25,000, technical  changes, and changes that require more time. In fact, project directors do  not have the authority to make decisions on changes above $25,000 for any  single modification, on accepting technical changes, or on providing  more time, as each of these decisions must be made in Washington.  However, according to what contractors told us, as many of them were  satisfied as were not with the authority given project directors on changes  above $100,000, material substitutions, or accepting technical changes.  State officials said that, under the former director’s policy of limiting  contractors’ access to various offices at State, all requests had to be  communicated to the project director. The project director would then  either take individual action, or seek assistance or approvals from  Washington and, subsequently, deliver and enforce decisions made by  others. As a result, it appears that project directors, rightly or wrongly,  bear the brunt of contractors’ concerns and disapproval of decisions that  negatively affect contractors.
section_title: Design-Build Delivery Process
paragraphs: A majority of the 17 contractors also said that State’s implementation of  the design-build process is flawed, and some said that the time required to  complete design and design reviews significantly affects the project  delivery schedule. Eleven contractors had favorable views of the design- build process in general because it is supposed to erect buildings more  quickly, and some indicated the method can result in lower construction  costs. In addition, as previously noted, contractors thought design-build  delivery worked well with the standard embassy design. However, during  our interviews, contractors offered the following concerns about State’s  implementation of the design-build method:     State’s protracted design phase is lengthier than that of their other  government clients (four contractors);    State becomes too heavily involved in the project design (three    State’s design review comments—which range from 500 to 1,000  comments per project, each of which must be addressed—are excessive  (four contractors);    Some contractors feel unable to proceed with construction until they have  received a fully approved, 100 percent design from State (six contractors);  and    Contractors do not have sufficient time to actually build once State has  finally approved a design, given the time limits on completing the projects  (four contractors).
section_title: Project Guidance
paragraphs: In addition, 13 contractors expressed concerns about unclear and  contradictory guidance and information within and among critical  components of State solicitation and design documentation. Eight  contractors reported a number of problems with the RFPs, including  sections where information and requirements were unclear, inconsistent,  or in conflict with other sections and, in some cases, incorrect. Five  contractors cited examples of poor project documentation, including  inaccurate space plans, and incomplete information provided on existing  site conditions related to local utility service layouts and soil conditions.  In addition, 2 of the 11 contractors said State’s answers to contractors’  technical questions about specific RFPs were not incorporated as  amendments to the solicitations, even though those answers were  considered binding.
Finally, contractors told us that guidance often conflicts with actual  practice. Most contractors raised specific complaints about being unable  to substitute local materials for U.S. or U.S.-standard materials. Although  the RFP states that local materials may be substituted for U.S. materials;  however, in practice, this occurs only after State has approved the specific  substitution, based on the contractor’s documenting that the substitute  meets U.S. standards. According to what 13 contractors told us and what  we have reported in the past, obtaining approval to use substitute  material is difficult. Six of these 13 contractors told us that the process for  obtaining approval is too onerous and time-consuming to be worth the  effort—for example, one said that money saved through using local  materials is essentially lost by the time spent getting the approval. In a  specific example of guidance on another issue conflicting with practice,  according to contractors, the SED allows contractors to install either a  wedge barrier or a sliding gate at the vehicle entrance. (See fig. 2 for an  illustration of a wedge barrier.) Although State prefers to have the wedge  barrier, contractors prefer the sliding gates because they are less  expensive. However, State routinely overrules this choice and requires  wedge barriers, even though the sliding gate meets the requirement. State  officials reported they are attempting to reconcile the guidance and  practice on vehicle barriers.
section_title: State Has Acted to Encourage Incumbent Contractors’ Continued NEC Program Participation
paragraphs: In recent months, State has reached out to the contractor community in an  effort to repair strained relationships and to encourage contractors’  continued participation in the NEC program. To support improved  relationships with contractors, State has implemented, or is in the process  of implementing, several procedural changes to increase the effectiveness  of its project delivery and contract management processes and to mitigate  project risks. In addition, State has created a new project management   group within OBO to improve internal coordination and communication  and enhance its accountability to contractors and all other project  stakeholders.
subsections: section_title: State Is Reaching Out to Contractors
paragraphs: State has taken steps to reach out to the contractor community to improve  relationships. In February 2008, for example, State officials met with the  president of the Associated General Contractors of America (AGC), along  with a group of five contractors who had completed NEC projects to  discuss specific concerns of the industry. The discussions sought to  identify reasons for contractors ending their participation in the NEC  program and covered several industry concerns with technical and  administrative aspects of State’s contractor prequalification, contract  procurement, and project management practices. At the conclusion of the  meeting, the parties identified several follow-up items and agreed to hold  future task force meetings to discuss the issues.
In another outreach effort, State reported it intends to examine partnering  concepts and to consider the extent to which they may be reintroduced to  future contracts. While State discussed its intent to examine partnering in  September 2008, it has not yet drafted guidance or policy on how  partnering would be reintroduced into its processes in general or applied  to specific projects. Prior to 2001, State had used partnering on some  contracts and found that it generally contributed to project success.  State’s use of partnering agreements on these contracts helped facilitate  the government and contractors working together as a cohesive team to  complete projects on time and in accordance with State requirements,  while providing contractors opportunity to earn a fair profit. In particular,  partnering agreements were used to ensure such outcomes as timely  decisions and the resolution of problems at the lowest level possible. As  previously discussed, OBO’s Director eliminated the formal use of  partnering in 2001, in part because he thought contractors had taken  advantage of partnering to gain access to OBO’s upper management,  which served to bypass the project directors and undermined their ability  to effectively manage projects. During OBO’s September 2008 Industry  Advisory Panel meeting, OBO and AGC began a preliminary discussion on  partnering and how its principles could be incorporated into contracts and  used to foster better collaboration between State and contractors on  current projects. At the conclusion of the discussion, OBO’s Director  acknowledged that State needed to do more work and obtain a better  understanding of how partnering could be applied in contracts.
section_title: State Is Making Procedural Changes to Improve Its Management Processes and Mitigate Project Risks
paragraphs: To respond to contractors’ concerns identified through its outreach  efforts, State has implemented, or is in the process of implementing,  several procedural changes to increase the effectiveness of its project  delivery and contract management processes and to mitigate project risks.  The changes being made by State—which are influenced by  recommendations of an internal working group that was established in  July 2008 to review State’s capital project acquisition process—include  improving design-build project delivery,    streamlining RFPs and staggering their issue dates so contractors have  more time to respond to each solicitation,     developing a database of non-U.S. materials that meet project    being more responsive to contractors’ requests for equitable adjustments.
OBO began implementing some of these changes in its fiscal year 2008  NEC program. Other changes are ongoing, and improvements will not be  achieved until fiscal year 2009 and later.
subsections: section_title: Improving Design-Build Project Delivery
paragraphs: At the recommendation of its internal working group and after discussions  with its industry advisors, State intends to modify its approach to design- build project delivery. Because of security concerns, State requires that its  projects pass a rigorous design review prior to being certified for  construction. Under State’s former approach to design-build delivery,  contractors needed to complete design, respond to review comments— which typically numbered several hundred—and await State’s certification  of the design for construction. As previously discussed, some contractors  said that they expended comparatively more time completing a design for  State and having it certified for construction than on a design for other  owners’ projects, which precluded them from beginning construction as  early as they wanted and prevented State from fully realizing the time- saving potential of design-build delivery.
In its revised approach, State will use the “bridging” design method to  provide more focused design detail to construction contractors. By  providing more design detail up front, State expects to more effectively  translate project requirements to contractors, speed the design  certification process, and enable construction to begin sooner. Under the  bridging method, State would first contract with a design firm—referred to  as either the bridging architect, criteria architect, or the owner’s design  consultant—to develop an initial design that incorporates critical  requirements and that can be certified for construction. State would then  contract with a design-build contractor to complete the design for the  project—which should take less time than it did under State’s former  process because more up-front design work will have been completed— and carry out its construction. According to industry experts, the  advantage to this approach is that an owner, in this case, State, can initiate  design sooner and ensure critical requirements are incorporated into a  bridging design. Moreover, because the bridging architect will have  developed the project to the point of being ready for construction  certification, and because contractors can begin construction activities  shortly following contract award, rather than having to wait for State to  certify the project for construction, design-build contract durations can be  shorter. In addition, industry experts indicate that an owner may  potentially receive a better price for design-build services by using this  method. Because there would be fewer unknowns regarding the owner’s  intent as a result of requirements being more clearly delineated in the  bridging design, contractors’ proposals should contain fewer allowances  for uncertainties.
Prior to implementing this approach to its fullest effect, OBO must reach  an agreement with the Bureau of Diplomatic Security on how this bridging  design approach would address the security requirements associated with  NEC facilities and construction—such as building setback, Forced  Entry/Ballistic Resistant (FE/BR) requirements, and technical security  systems, among others—and whether the bridging designs would be  certified to Congress as meeting all security requirements. Moreover,  State’s working group noted that State must also ensure that the portions  of the design that are certified as meeting all security requirements are  contractually binding and preserved through the continuation of design  and completion of construction by the design-build contractor. Keeping  the bridging architect involved with the project through the design-build  phase, for example, is one option that State may consider using to ensure  the integrity of security features, upon which certifications made to  Congress are preserved during the final design and construction by the  design-build contractor.
section_title: Adjusting Schedules
paragraphs: Starting with the fiscal year 2008 contract awards, State is generally  extending the time frame within which projects must be built. Instead of  basing a project’s schedule on its SED size classification, State’s new  approach will set the schedule based on a variety of factors. In particular,  this approach will draw upon recent experience from completed projects  of similar scope and size, as well as project-specific considerations such as  geographic location and host country conditions to tailor schedules for  new projects. As a result of having more time to complete projects,  contractors are more likely to meet contract completion dates and will  bear less risk of having to pay liquidated damages for delayed completion.
section_title: Streamlining RFPs and Staggering Their Issuance
paragraphs: At the recommendation of its internal working group, State is examining  options to streamline its RFPs to better integrate requirements and convey  information to contractors that respond to them. A typical RFP consists of  over 6,000 pages and contains elements such as the Space Requirements  Program, which details square footage space needs of planned occupants,  and test-fit drawings, which provide a notional layout of floor space.  Because of their sheer size, RFP documents are difficult to maintain and  often contain conflicting information that can inhibit contractors’  understanding of requirements and increase project risks. For example,  the Space Requirements Program and the blocking and stacking  documents—the latter providing a notional vertical stacking and floor-by- floor layout of office suites—provided in the RFP for the Managua NEC  project misrepresented the actual size of the building. As a result of this  discrepancy, State settled with the contractor on a $4.3 million  modification that included a 165-day time extension.
The working group also recommended that State establish a single RFP  coordinating entity to maintain a “model RFP,” with appropriate document  change control mechanisms from which project-specific RFPs would be  developed. Individual model RFPs specific to certain project types and  delivery methods may also be developed. In addition, State intends to  leverage technology by using automated applications to consolidate,  update, and maintain its RFP documents—creating what it terms an   “e-RFP.” State officials believe that the majority of improvements may not  be seen until State’s fiscal year 2010 RFPs are issued because  implementation will require enhancements to State’s information  technology processes and applications. In the longer term, State intends to  explore ways to make greater use of evolving Building Information  Modeling (BIM) technologies—to include the migration of all RFP design  and criteria data into a structure conducive to these technologies—to  allow for more integration and exchange of project-specific information  between State and contractors throughout every stage of the project.
In addition, State established a goal to stagger the RFPs for its fiscal year  2008 projects so that contractors would have more time to respond to each  solicitation. For its fiscal year 2008 projects, State staggered RFP issuance  between May and July. In addition, when contractors asked for additional  time, State generally granted their request by providing a 10-day extension  to the standard 45-day response time.
section_title: Developing a Database of Acceptable Local Materials
paragraphs: State is working to develop a database of acceptable materials from  foreign sources that contractors could use in construction. We first  reported on this effort in 2006. State construction contracts require  contractors to use U.S. materials and products unless contractors can  demonstrate the proposed substitute meets U.S. performance standards.  Benefits to contractors of using materials available within the country  include, for example, reduced shipping costs. However, to maintain  schedule, contractors must obtain a timely approval from State to use and  to procure materials within that schedule. A few contractors we spoke  with note that State neither consistently approves the use of substitutes,  nor consistently provides timely decisions, even in cases where certain  products or materials have been approved for use on another State  project. While State reports it is continuing with its efforts to develop such  a database, contractors have yet to see evidence that State’s approach to  approving substitutions is more efficient and timely.
section_title: Being More Responsive to Requests for Equitable Adjustment
paragraphs: In 2006, State issued policy and procedures for processing a contractor’s  request for equitable adjustments (REA). State reports it has recently  implemented a new centralized system of receiving, processing, and  tracking all REAs at OBO headquarters. REAs are visible to senior  managers—REA status is reviewed monthly at Program Performance  Review meetings—who hold project directors accountable for providing a  timely response. Under this process, State seeks to receive, assess the  merits of, and respond to contractors’ REAs within 55 days. However, if  State requires additional information following the receipt of an REA, the  time needed for the ensuing information exchange and related discussions  may affect State’s ability to achieve final resolution within 55 days. Given  that State may, in certain instances, be unable to address an REA within 55  days, some contractors with whom we spoke said that State still takes too  long in responding to REAs. In addition, one contractor indicated that  State purposely defers its decisions on REAs so that it can use them as  leverage in future negotiations. For example, State might negotiate  waiving or reducing liquidated damages that it could assess for a  contractor’s late completion in exchange for the contractor withdrawing  its REA. While we did not examine the merits of these allegations,  contractors’ concerns suggest that State’s continued attention to REA  management is needed.
section_title: State Is Making Organizational Changes to Improve Internal Coordination and Communication and Enhance Accountability
paragraphs: In September 2008, State created a dedicated project management group  responsible for providing coordination and oversight from planning  through construction and commissioning. State initiated this effort based  on a recommendation of its internal working group that was based, in part,  on State’s Office of the Inspector General’s finding that OBO’s former  organizational structure—in which project management responsibility  passed sequentially from a planning office to an executing office— allowed for marginally effective coordination, communication, and  accountability. Under the former organizational structure, project  executives responsible for construction and commissioning were not  heavily involved in planning efforts conducted by planning managers.  Similarly, planning managers who typically spent at least a year developing  project requirements prior to the contract award were normally not  involved in design and construction oversight efforts managed by project  executives. As a result, no one in OBO maintained comprehensive  knowledge of a project from start to finish, which may have contributed to  accountability gaps when a project passed from one office to the next.
The new project management group, the Project Development and  Coordination (PDC) Division, resides within the Office of Program  Development, Coordination, and Support—formerly called the Office of  Project Execution. Project managers in the PDC Division—who will be  required to obtain project management certification, in accordance with  Office of Management and Budget (OMB) requirements—will lead a  multidisciplinary team of subject matter experts in performing project  management functions. During the project’s planning and design phases,  project managers will be responsible for efforts such as developing the  RFP, overseeing procurement of the design bridging contract, chairing  design review meetings, and approving design changes. During the  construction phase, project managers will coordinate with construction  executives from the Office of Construction, Commissioning, and  Maintenance to support on-site project directors in administering NEC  construction contracts. The working group noted that during construction  the three individuals—project director, project manager, and construction  executive—must have clearly defined roles that are properly coordinated  to avoid confusion and to ensure that resources are being used efficiently.  Under the new organizational structure, the project director is State’s on- site representative who routinely interfaces with the contractor and serves  in the key role of contracting officer’s representative. The construction  executive is the Washington-based focal point for all communications  from the project director and performs key functions, such as serving as  the alternate COR, and processing invoices and project change requests.  At the same time, the project manager serves as leader of the Washington- based team and is responsible for tasks such as leading integrated design  reviews; managing contract documents; and, in conjunction with the  construction executive, reporting to senior management on project  performance at monthly review meetings. However, because the  organizational change was only recently implemented, it is too early to  determine whether it enables project directors, project managers, and  construction executives to effectively coordinate efforts and optimize  project management efficiencies.
section_title: Conclusions
paragraphs: From 1999 to December 2008, State constructed 64 new embassies,  consulates, and annexes and relocated more than 19,500 U.S. government  employees to safe, secure, and functional state-of-the-art office buildings.  In 2007, State concluded that “the current pool of American contractors  qualified and able to carry out diplomatic construction projects overseas  has nearly reached its capacity.” In 2007, State proposed amendments to  the Omnibus Diplomatic Security and Antiterrorism Act of 1986 that would  allow smaller U.S. companies and foreign companies to compete for  projects for which they currently would not qualify. Congress did not act  on the proposed amendment. In December 2008, State indicated it would  modify that proposal to extend greater opportunities only to U.S.  construction firms that currently cannot meet the U.S. persons definition.  However, State has completed no systematic analysis in support of its  conclusion and legislative proposal, including assessments of the  significance and cause of changes in contractor willingness to participate  in the NEC program, how these changes have affected its construction  program, how its proposed amendments would address those causes and  effects, the risks associated with its proposed amendments, or how it  would mitigate those risks. In addition, State has not assessed the extent  to which companies comprising the U.S. construction sector are capable  of meeting the current criteria. Absent such support, it is unclear how  State’s proposed amendment would affect the NEC program.
In our analysis, we found that contractor participation declined in recent  years for two reasons. First, increasing construction costs have made it  more difficult for some firms to qualify for awards. Second, contractors  reported that State management and construction processes undermine  their ability to turn a profit, which is their primary incentive for  participating in the program. State has recently implemented a number of  changes to its management of the NEC program by improving  communications with the contractor community, refining some of its  management practices by implementing process reforms and mitigating  some of the risks associated with NEC projects, and reorganizing its  management structure. These efforts are designed to improve State’s  overall management of the NEC program, including increasing the number  of firms willing to participate in the program, and they address some of the  important factors contractors reported as affecting their decisions to  participate in the NEC program. While these changes may increase  contractor participation, their full effects on the NEC construction process  may not be apparent for a number of years, and State will need to monitor  their effectiveness.
section_title: Recommendations for Executive Action
paragraphs: We recommend that the Secretary of State conduct a systematic review of  the embassy construction contractor base that (1) demonstrates whether  the U.S. contractor base that is both capable of meeting current  requirements and willing to participate in the NEC program is adequate;  (2) estimates the expected benefits and identifies the potential risks  associated with the legislative proposal; and (3) details how the risks  would be mitigated.
section_title: Agency Comments and Our Evaluation
paragraphs: In written comments on a draft of this report, State said that although the  contractor base has been adequate in the fact that it has met the  legislatively specified minimum level of competition, the program could  benefit from expanding competition. Additionally, State said it would  revise its proposed amendment to the Omnibus Diplomatic Security and  Antiterrorism Act of 1986 by opening competition for NECs only to U.S.  companies that meet the specified security requirements for a project,  rather than requiring them to meet the current statutory definition of a  U.S. person. State also said that since full and open competition is a  central principle for federal acquisitions, a cost-benefit analysis is  unnecessary. We disagree with State’s view. State initiated a process to  revise the qualifying criteria for NEC awards, but it has provided no  compelling analytical support for why the criteria should be amended,  how such an amendment would be implemented, the expected benefits  and potential risks associated with the changes, or how any identified  risks would be mitigated. Absent such support, it is unclear how the  proposed changes would affect State’s program. We, therefore, believe our  recommendation remains valid.
In a draft of this report, we had a second recommendation that State  assess how its efforts to improve communication with contractors,  implement process reforms and mitigate project risks, and reorganize its  organizational structure affect contractor participation. In a December  2008 meeting with State officials and in State’s written comments, the  department noted that it would continue to actively engage with  contractors and assess its performance. However, State also noted that it  may take a number of contract cycles for its recent outreach efforts and  procedural and organizational reforms to achieve their full impact. We  agree that it may take time before the overall effectiveness of State’s  recent efforts can be fully assessed. Therefore, we decided to delete the  recommendation.
State’s comments, along with our responses to specific points, are  reprinted in appendix III. State also provided technical comments, which  were incorporated into the report, as appropriate.
As agreed with your office, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  report date. At that time, sending copies of this report to interested  congressional committees and the Secretary of State. The report also is  available at no charge on the GAO Web site at http://www.gao.gov.
If you or your staffs have any questions about this report, please contact  Jess T. Ford at (202) 512-4128 or fordj@gao.gov, or Terrell G. Dorn at (202)  512-6923 or dornt@gao.gov. Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page  of this report. Key contributors to this report are listed in appendix IV.
section_title: Appendix I: Scope and Methodology
paragraphs: To address the first objective—how the contractor participation in the  NEC program changed in recent years—we assessed the number of firms  that prequalified and the number of contract proposals (bids) submitted  for each new embassy compound (NEC), new consular compound (NCC),  and new office building (NOB) awarded from 2002 to 2008. Collectively,  we refer to this class of projects as NECs. Data for prequalifying firms  were derived from the Department of State’s (State) Office of Logistics  Management and were cross-referenced with prequalification records  derived from the Federal Business Opportunities Web site  (http://www.fbo.gov). Data for the number of bids were also derived from  State’s Office of Logistics Management and, to the extent possible, were  corroborated with contract information and State analyses obtained  during previous GAO work. In cases where discrepancies occurred  between the two sources, or where we could not confirm the data, we  used the data provided by State. Data for the number of prequalifying  firms and number of bids submitted for all 10 NECs awarded from 1999 to  2001, as well as for three projects from 2002 onward, were unavailable;  thus, they were excluded from the analyses. Non-NEC projects, including  those labeled by State as interim office buildings (IOB), newly acquired  buildings (NAB), new office annexes (NOX), and Standard Secure Mini  Compounds (SSMC), were also excluded from the analyses. Table 2 shows  the NEC projects included in our analyses, and the numbers of  prequalifying firms and bids submitted for each NEC award (see page 16 of  this report). We determined that these data on the numbers of  prequalifying firms and bids received were sufficiently reliable for our  purposes.
To determine how contractor participation has changed over time, we  tracked the variations in the yearly average number of firms per project  that prequalified to bid for NECs and the yearly average number of bids  submitted per NEC project. We also compared these averages with the  yearly average estimated NEC project costs. Data for estimated costs  derive from two sources. For fiscal years 2005 to 2008, the estimated costs  for NECs derived from notices of solicitations for contractors to submit  prequalification packages. In cases where a range was provided for the  estimated cost, we used the maximum estimated value for our analysis.  Estimated costs for 2002 to 2004 were calculated based on (1) a 2005 OBO  analysis of variances between contractor bid prices and the government  estimated prices for each NEC project and (2) the actual original value of  the contract award. We determined that these cost data were sufficiently  reliable for our purposes.
We also developed two regression models to understand the factors that  influence contractor participation. Each model was based on the  individual NEC contracts (NEC, NOB, and NCC) that were awarded from  2002 to 2008 (see table 2 on page 16 of this report). The first model used  fiscal year and estimated project cost as independent variables to predict  the number of firms that prequalify to bid per NEC project. We found a  statistically significant inverse relationship between the estimated NEC  project cost and the number of prequalifying firms (coefficient   estimate = -0.09, p-value = 0.000), such that higher estimated costs result in  fewer prequalifying firms, and lower estimated costs result in more  prequalifying firms. However, the relationship between fiscal year and the  number of prequalifying firms was not statistically significant (coefficient  estimate = 0.34, p-value = 0.108). In the second model, we used the fiscal  year and the number of prequalifying firms for each NEC project as  dependent variables to predict the number of bids received per NEC  project. We found a statistically significant inverse relationship between  fiscal year and the number of bids per project (coefficient estimate = -0.19,  p-value = 0.020), such that the number of bids per NEC project declined  significantly from 2002 to 2008. We also found that the number of  prequalifying firms per project are significant predictors of the number of  bids received (coefficient estimate = 0.18, p-value = 0.002), such that more  bids are received when more firms prequalify to do so. In our modeling,  we considered statistical significance to help specify the variables to  include in our models.
To address the second objective—the degree to which State has assessed  the need for or potential outcomes of its proposed amendment to the  Omnibus Diplomatic Security and Antiterrorism Act of 1986—we reviewed  State documents on legal requirements to qualify for NEC awards, State’s  proposed amendments to these legal requirements, and State’s contract  solicitation and award processes. We also conducted interviews with State  staff on the level of analyses State completed in support of the proposed  amendment, the likely benefits that would be gained, how risks to the  government would change, and how those risks would be mitigated. To  test State’s assertion that sufficient capacity no longer exists among the  U.S. contractor base to complete NEC awards, we compared the extent to  which firms listed by Engineering News Record (ENR) in its compilation  of the top 100 U.S. design-build firms for 2008 had prequalified for NEC  awards from 2002 to 2008, and received awards from 2002 to 2008. The  top 100 list is determined by ranking companies’ total 2007 revenues  derived from design-build contracts where those construction projects are  designed and built by its own workforce or in conjunction with joint- venture partners and subcontractors. We also searched Web sites of, and  conducted Lexis-Nexis searches on, the top 100 companies to determine  whether these firms have ongoing operations in countries where State’s  Bureau of Overseas Buildings Operations (OBO) plans to build NECs in  2009, as listed in OBO’s Long-Range Overseas Buildings Plan, FY 2008- 2013. Underlying these analyses is our assumption that the companies on  this list could meet at least the financial criteria, as outlined in the  Omnibus Diplomatic Security and Antiterrorism Act of 1986, to qualify for  NEC awards since (1) the 96th-ranked firm prequalified to bid for NEC  awards in fiscal year 2008 that were in excess of its 2007 revenues and   (2) at least four other firms not on the list—American International  Contractors Inc. (Special Projects), Aurora LLC, Environmental Chemical  Corporation International, and Framaco International—prequalified for  the 2008 awards. We did not independently confirm the validity of ENR’s  methodology for developing its top 100 ranking, nor did we independently  verify the accuracy of information derived from the company Web sites or  Lexis-Nexis searches. However, because our analysis was designed to  illustrate a potential for untapped contractor capacity, we determined that  the data we used were sufficiently reliable.
To address the third objective—factors that affect contractors’ decisions  to participate in State’s construction program—we identified the universe  of 21 U.S. construction firms that won awards to build U.S. embassies,  consulates, and diplomatic annexes since 2001. Foreign firms and U.S.  firms awarded only contracts for construction other than office buildings,  such as Marine Security Guard quarters, staff housing, and other  construction projects were not included in our census. Three of the 21 U.S.  firms were excluded from our interviews for various reasons—one  company is no longer in business, while two others received sole-source  contracts that would make them unable to respond to a number of the  competitiveness questions in our interview instrument. A fourth company  was excluded because we could not arrange a meeting with that company.  As a result, we interviewed 17 U.S. contractors from March-June 2008 (see  table 6). From 2001 to 2007, these 17 companies were awarded 78 NEC  and related contracts with original values totaling approximately $4  billion. This latter value represents 81 percent of all embassy, consulate,  and annex construction contracts awarded through 2007.
To obtain consistent information from the contractors, we developed a  structured interview instrument that included approximately 70 closed-  and open-ended questions designed to assess contractor views and  experiences on a wide range of construction-related topics, including,   (1) construction experience and experience with State and other federal  agencies; (2) State’s program-level and on-site construction management  policies and processes; (3) incentives for pursuing construction awards;  (4) challenges in completing NEC and related construction projects; and  (5) profitability of NEC and related projects. To ensure that respondents  understood the questions in the same way, that we had phrased the  questions appropriately for this population, and that we had covered the  most important issues, we pretested our instrument with three contractors  and made revisions based on their input. Prior to fully implementing the  instrument, it was reviewed by the staff from the U.S. Naval Facilities  Engineering Command and State’s Office of the Inspector General. In  addition, we briefed staff from OBO and State’s Office of Logistics  Management on the instrument’s content, implementation schedule, and  intended respondents.
To address the fourth objective—actions State has taken to address the  reported decline in contractors willing to participate in the NEC  program—we reviewed documentation and conducted interviews with  knowledgeable State officials on (1) rules and regulations outlining the  embassy construction process, including public laws, Federal Acquisition  Regulations, the Foreign Affairs Manual, and State reports and decision  memos; (2) delivery methods and partnering policies employed by other  federal agencies and supported by leading industry groups; (3) State’s  efforts to improve communications with the contractor community,  including meetings with industry groups and individual contractors;   (4) State’s reorganization of planning offices, including the development of  a new project management group and project manager positions; and   (5) State efforts to improve construction processes, including lengthening  project schedules, streamlining the contract solicitation process, and  clarifying contract documents. We also attended State’s monthly program  performance meetings, its quarterly Industry Advisory Panel meetings, and  its annual Industry Day meeting, at which information about contract  opportunities was presented to firms who attended the event. Finally, we  reviewed past GAO work on embassy construction and met with and  reviewed the report of a State Inspector General inspection team  reviewing OBO operations.
We conducted this performance audit from October 2007 to January 2009,  in accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.
section_title: Appendix II: Contractor-Reported Challenges to Completing State Construction Projects
paragraphs: Contractors rated 24 challenges as “Major,” “Moderate,” “Minor,” or “Not a  Challenge.” Then, they rank-ordered their major challenges. We created  the challenge categories to facilitate analysis and discussion. Table 5 in the  main text shows the rank-ordered major challenges. Table 7 displays how  contractors rated all the challenges.
section_title: Appendix III: Comments from the Department of State
paragraphs: The following are GAO’s comments on the Department of State’s letter  dated December 31, 2008.
subsections: section_title: GAO Comments
paragraphs: 1.  We have adjusted the title of this report to reflect State’s comments  that although State has taken actions designed, in part, to increase  contractor participation, the addition of more interested, responsible  bidders for State projects would benefit the program. 2.  State notes that it has recently increased the construction schedules  for each class of SED, and streamlined the RFP process and reformed  some design processes to help contractors better understand  requirements and begin construction more quickly. State also said that  contractors should be aware of the period of performance when  preparing bids for State projects. We acknowledge in the body of the  report that State has increased the time allotted to construct the  various categories of SEDs. We agree with State that, based on the  RFP documents, contractors should be aware of the planned  construction time frame and the associated risk prior to submitting  contract proposals. The report acknowledges State’s efforts to  streamline RFP documents and improve the design process; however,  it may take a number of years and completed projects to determine  how the changes affect contractors’ ability to complete construction  according to schedule. 3.  State said that its methodology for estimating risk and salary increases  is not arbitrary, but rather based on demonstrated financial criteria.  Since we did not analyze how risks and salaries are estimated, we  make no explicit or implicit statement on the validity of the  methodology used. State also said that a solution to less competition  for NEC awards could be to draw in larger U.S. firms that have the  financial capacity for the work, in accordance with GAO  recommendations. As a result, it has recently reached out to one of the  largest U.S. construction contractors and would continue outreach  efforts with other large firms. Although we do present an analysis that  shows a significant number of large contractors with overseas  experience have not been part of the NEC program, we do not  recommend that State rely solely on large contractors. 4.  State questioned why we chose to highlight the declines in the number  of firms prequalifying to bid on NECs from 2006 to 2008 when that  decline was not statistically significant. We explain within the text that  there was an overall decline in the number of firms prequalified to bid  on NEC projects from 2002 to 2008. We also state that the large  number of firms that prequalified in 2006 is likely explained by the  relatively low cost for the projects awarded that year. We also note  that from 2006 to 2008, the average number of firms prequalfied per  project decreased by 69 percent from 13 to 4. When considered with  the declines in the number of firms bidding on projects, these declines  indicate a decrease in contractor participation, especially in recent  years. 5.  State commented that the results of our contractor interviews could be  biased from our exclusion of a small contractor with a limited-sized  claim and our inclusion of a large contractor with current claims of  more than $90 million. We do not believe our analysis was affected by  contractor bias. The draft report incorrectly stated the reason for  excluding the first contractor State cited from the structured  interviews. The contractor was excluded primarily because its only  contract from 2001 to 2007 was awarded as a sole-source contract.  Because the contractor received a sole-source contract, we believed it  could not address many of the questions involving competition for  NEC awards. We have made this correction in appendix I. We note this  same contractor was terminated from its contract for nonperformance  and subsequently filed for and received bankruptcy protection as a  result of the termination. As a result, we felt its inclusion could risk  biasing our work, but the contractor was not excluded for this reason.  The second contractor State cited was a major participant in the NEC  program, having completed 17 NEC and other projects from 1999 to  2008. We are aware of the claims the contractor has filed for a number  of projects it performed, but we do not believe the existence of those  claims biased our discussions with that firm or our findings, in general. 6.  State disagreed with many of our comments in a draft of this report on  the role of the new project manager positions. In particular, State  commented that project managers are not intended in any way to  replace existing oversight during the construction phase as stated in  our report. Our draft report did not, in fact, indicate that project  managers should replace existing oversight. Rather, our intent was to  question whether the project manager’s effectiveness in performing  lifecycle oversight of a project could be compromised by sharing  reporting responsibilities with the construction executive during  construction phase. Nonetheless, in light of State’s comments, and to  avoid confusion, we deleted the paragraph on which State’s comments  are based.  7.  State clarified that project directors could approve contract  modifications of up to $25,000 per change and up to $250,000 per year.  Changes were made to the text based on State’s comment.
section_title: Appendix IV: GAO Contacts and Staff Acknowledgments
paragraphs: Jess T. Ford, (202) 512-4128 or fordj@gao.gov,   Terrell G. Dorn, (202) 512-6923 or dornt@gao.gov.
subsections: section_title: Staff Acknowledgments
paragraphs: In addition to the individuals named above, Michael Courts, Assistant  Director; Michael Armes; John Bauckman; Sam Bernet; Eugene Beye;  Paola Bobadilla; and Joseph Carney made key contributions to this report.
Ashley Alley, Martin De Alteriis, Colleen Candrl, Jonathon Fremont,  Elizabeth Helmer, Cardell Johnson, Dae Park, and William Tuceling  provided key technical support to this report.