VA Construction: VA Is Working to Improve Initial Project Cost Estimates, but Should Analyze Cost and Schedule Risks
Published: 2009-12-14T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The Department of Veterans Affairs (VA) operates one of the largest health care systems in the country. As of August 2009, VA's Veterans Health Administration (VHA) had 32 major ongoing construction projects with an estimated total cost of about $6.1 billion and average cost per project of about $191 million. Some of these projects were initiated as part of VA's Capital Asset Realignment for Enhanced Services (CARES) process, which was a comprehensive assessment of VHA's capital asset requirements. In response to a congressional request, GAO (1) described how costs and schedules of current VHA major construction projects have changed, (2) determined the reasons for changes in costs and schedules, and (3) described the actions VA has taken to address cost increases and schedule delays. To do its work, GAO reviewed construction documents, visited three construction sites, and interviewed VA officials.
section_title: What GAO Found
paragraphs: While about half of the 32 major ongoing construction projects are within their budget, 18 projects have experienced cost increases and 11 have experienced schedule delays since they were first submitted to Congress. Five projects have experienced a cost increase of over 100 percent. For example, the cost of a new medical center in Las Vegas rose from an initial estimate of $286 million to over $600 million, an increase of about 110 percent. Thirteen projects have experienced cost increases of between 1 and 100 percent. In addition, 11 projects have experienced schedule delays, 4 of which are more than 24 months. There are several reasons for construction project cost increases and schedule delays, including VA preparing initial cost estimates that were not thorough, significant changes to project scope after the initial estimate was submitted, and unforeseen events such as an increase in the cost of construction materials. According to VA officials, VA prepared numerous estimates during the CARES process, and some of these estimates used rudimentary estimating techniques such as average cost-per-square-foot and were completed by VA staff that did not have cost estimating expertise. The scope of some projects changed after VA submitted an estimate to Congress, which increased the projects' costs. For example, the scope for the original design for a new medical center in Las Vegas did not fully account for the amount of medical services the center would need to provide. As a result, the original estimate of $286 million rose to over $600 million. VA has taken steps to improve initial construction project cost estimates, but could better assess the risks to costs and schedules. VA plans to prepare more comprehensive estimates after approving projects and before submitting them to Congress. It is not clear how effective this new process will be, but it could improve VA's estimates. While VA contractors follow construction scheduling procedures that generally meet best practices, VA does not conduct cost or schedule risk analyses, which use statistical techniques to predict risks that can lead to cost increases and schedule delays. Thus, VA cannot quantify the largest risks to a project or mitigate those risks. For example, GAO conducted a schedule risk analysis for a medical center in Las Vegas and found that there is a 50 percent chance that the project won't be finished until more than 6 months after its estimated completion date. VA also does not require an integrated master schedule that includes VA and contractor efforts for all project phases, which can be critical to a project's success.

section_title: Letter
paragraphs: The Department of Veterans Affairs (VA) operates one of the largest health  care systems in the country. VA, through its Veterans Health  Administration (VHA), provided health care to almost 5.5 million veterans  in 2008. VA constructs new medical facilities and also maintains and  renovates existing medical facilities. Any major medical facility  construction project over $10 million must be specifically authorized by  law. As part of that approval process, VA sends a prospectus to Congress  that contains information about each planned major project. This  information includes an initial estimate of the overall cost of the project  and, in some cases, a completion date of the project. As of August 2009,  VHA had 32 ongoing major construction projects with an estimated total  cost of about $6.1 billion and average project cost of about $191 million.
While VA has undertaken a number of major construction projects in  recent years, you have expressed concern that some of these projects have  increased in cost, are behind schedule, or both. To provide you with  information on the costs and schedules of VA’s major construction  projects, this report (1) describes how costs and schedules of current VHA  major construction projects have changed since they were first submitted  to Congress, (2) determines the reasons for changes in costs and  schedules, and (3) describes the actions VA has taken to address cost  increases and schedule delays as well as the challenges VA faces in  managing its major construction program.
To do our work, we reviewed VA data on current major construction  projects, including the original cost estimates and completion dates  submitted to Congress and the project’s current status. We reviewed and  analyzed construction documents and interviewed VA officials. To obtain  detailed information on specific projects, we selected three major  construction sites to visit based on their phase of construction and overall  estimated cost. We visited construction sites in Cleveland, Ohio, Las  Vegas, Nevada, and Syracuse, New York to determine the reasons for  changes in costs and schedules. In addition, we researched and reviewed  relevant laws relating to the amounts that were authorized and  appropriated for these projects. We also performed a risk analysis of the  construction schedule for a new medical center in Las Vegas—one of VA’s  largest ongoing projects—to determine, among other things, the likelihood  of its being completed on time. We selected each site based on their  relatively high construction costs and the fact that construction was in  progress. The information from our site visits is illustrative and cannot be  generalized to sites agencywide.
We conducted this performance audit from October 2008 through  December 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  determined the data were sufficiently reliable for the purposes of this  report. Appendix I contains a detailed description of our scope and  methodology.
subsections: section_title: Background
paragraphs: Most VA major construction projects are for VHA medical facilities. To  determine potential new major construction projects, VHA officials  identify gaps in health service during their strategic planning process, and  VHA officials in field offices develop capital needs plans to fill these  service gaps. These capital plans are then reviewed by a Capital  Investment Panel that gives each proposed project a score based on a  number of factors, including, among other things, the plan’s effect on  health care, safety, and energy use. The Capital Investment Panel then  produces a priority list of projects, and the Secretary of VA determines  how many projects to request for funding each year and works with the  Office of Management and Budget (OMB) to produce VA’s part of the  President’s budget. Some large projects, such as the construction of a new  medical center, can be divided into distinct phases and funded over  several years. When the President submits VA’s budget to Congress, the  budget includes a prospectus for each proposed major construction  project. This prospectus includes, among other things, a cost estimate for  the project that VA staff has assembled. In addition, some prospectuses  include an estimated month and year that the project will be completed,  although this is not required by law. This prospectus is the initial estimate  that VA sends to Congress. Congress uses this information to authorize  and appropriate funds for the project.
In 1999, we reported that with better management of its large, aged capital  assets, VA could significantly reduce the funding used to operate and  maintain underused, unneeded or inefficient properties. We further noted  that the savings could be used to enhance health care services for  veterans. Thus, we recommended that VA develop market-based plans for  realigning its capital assets. In response, VA initiated a process known as  the Capital Asset Realignment for Enhanced Services (CARES)—a  comprehensive, long-range assessment of its health care system’s capital  asset requirements. As a result of CARES, VA requested funding for about  30 new major construction projects in fiscal years 2004 and 2005. While 8  of these projects have been completed, many are among the 32 ongoing  projects. This effort required VA to prepare initial estimates for each  project over the course of a few months. In the 2 years prior to CARES, VA  proposed fewer than five major construction projects each fiscal year.  According to VA, the CARES process was a onetime major initiative.  However, its lasting result was to provide a set of tools and processes that  allow VA to continually determine the future resources needed to provide  health care to our nation’s veterans.
VA’s Office of Construction and Facilities Management (CFM) is  responsible for administering major construction projects. Once a project  has been authorized by law and Congress appropriates funds for it, CFM  staff contracts with an architect/engineering (A/E) firm to design the  project. The A/E firm develops an architectural design for the project and  also produces a cost estimate for the entire project. This cost estimate is  generally more detailed and accurate than the initial cost estimate. After  the project has been designed, CFM then solicits bids for project  construction and awards a construction contract. The construction  contractor is responsible for developing a detailed construction schedule.  CFM reviews the construction schedule and also assigns CFM engineers to  work on-site as project managers to monitor the construction process  until the facility is ready to be turned over to local VA staff. Once  construction begins, the construction company is generally responsible for  cost increases and schedule overruns under the terms of the fixed-price  contract, unless VA and the contractor agree to a change order to the  construction contract to modify scope, account for unforeseen conditions,  or remedy a design error.
We have reported that cost estimates that are completed when a project is  in the conceptual stage have a high degree of uncertainty. As a project  progresses, this degree of uncertainty decreases because risks are  mitigated or realized. However, we have also found that cost estimates  tend to be lower than the final project costs because program managers  and decision-makers do not always consider all of the potential risks to a  project and tend to be optimistic when planning a project.
Cost estimating requires both science and judgment. Since answers are  seldom—if ever—precise, the goal is to find a reasonable “answer.” Cost  estimates are based on many assumptions, including the rate of inflation  and when construction will begin. Generally, the more information that is  known about a project and is used in the development of the estimate, the  more accurate the estimate is expected to be. OMB’s guidance for  preparing budget documents identifies many types and methods of  estimating project costs. The expected accuracy of the resulting project  cost estimates varies, depending on the estimating method used.
section_title: Costs Have Increased for 18 of the 32 Construction Projects and Schedules for 11 Construction Projects Have Been Delayed
paragraphs: While about half of VHA’s ongoing major construction projects are within  budget, 18 projects have experienced cost increases and 11 have  experienced schedule delays. The cost for one project has decreased since  the original estimate for it was submitted to Congress.
subsections: section_title: Several Projects Have Experienced Cost Increases
paragraphs: Eighteen of the 32 ongoing VHA major construction projects have  experienced cost increases. When a project’s cost increases, VA can  receive a new authorization and an additional appropriation from  Congress. Without additional funds from Congress, VA must alter the  scope of the project to ensure that the project does not exceed the amount  Congress has appropriated for the project by more than 10 percent. The  cost increases that these 18 projects have experienced since the estimates  were initially submitted to Congress range from 2 to 285 percent. In  addition to those 18 projects, the costs of 13 projects have not changed,  and 1 project has experienced a cost decrease. Figure 1 shows the range of  cost changes in ongoing VHA major construction projects.
Five projects have experienced a cost increase of more than 100 percent.  These projects include new construction and seismic corrections (which  are improvements to a structure to make it less susceptible to  earthquakes). For example, in its fiscal year 2006 budget submission, VA  submitted a $286 million estimate to Congress for a new medical center in  Las Vegas, Nevada. However, VA estimated in 2007 that the project would  cost just over $600 million (an increase of 110 percent) and in 2008 the  project’s authorization was modified and the project received an  additional appropriation from Congress. However, VA now estimates that  the project will cost about $100 million less than it anticipated. More  information about the new medical facility in Las Vegas is in appendix V.
Seven projects experienced a cost increase between 51 and 100 percent  and six projects experienced a cost increase between 0 and 50 percent.  These projects vary in size and type, from a modernization of patient  wards in Georgia that is estimated to cost about $24.5 million to a new  medical center in Louisiana that is estimated to cost $925 million. All  projects that experienced a cost increase are listed in table 1.
As of August 2009, the costs of 13 projects have not changed from their  initial estimated cost. We found that VA reduced the scope of some  projects so that the projects would not exceed their budget. For example,  one project we visited in Cleveland, Ohio, is designed to consolidate two  medical centers and construct a new facility at one of the medical centers.  According to VA officials in Cleveland, VA reduced the original scope of  the project by excluding room for 30 new patient beds in the new facility  so that the project could stay within its budget. However, VA will make  space for the 30 beds by expanding part of its existing facility through  separate facility funds. VA staff made other changes to the original plan for  the new facility, such as deleting balconies from patient’s rooms and using  more concrete and less steel in the structure, so that the facility could be  completed within budget. More information about the medical center  consolidation in Cleveland is in appendix III. In addition to those projects  that did not experience a cost increase, one project experienced a cost  decrease. Specifically, the cost to construct a data center in West Virginia  decreased from $35 million to $33.7 million, or about 4 percent.
section_title: Schedule Delays Have Occurred in 11 Projects
paragraphs: Eleven of the 32 ongoing projects are projected to be completed later than  originally estimated. Even if the cost of a project has not increased, a  schedule delay can lead to an increased cost to VA because CFM project  managers must stay on to monitor the project as it is being built. A  schedule delay can also affect veterans’ access to medical care, since VA  constructs facilities where they are needed to serve the local veteran  population and a schedule delay results in veterans waiting longer for the  services to be available. Of the 11 projects that have experienced a  schedule delay, 2 are scheduled to be completed within 2 months of their  originally scheduled end date, 5 are scheduled to be completed between 12  and 24 months of their originally scheduled end date, and 4 are scheduled  to be completed more than 24 months after their originally scheduled end  date. These projects range from an electrical upgrade in Florida that is  estimated to end less than a month after its initial estimated completion  date to seismic corrections at a facility in Puerto Rico that are estimated to  end about 7 years after their initial estimated completion date. The original  estimated completion dates, the latest estimated completion dates, and the  change in dates for those projects are in table 2. Information on the  number of projects that experienced both a schedule delay and a cost  increase is in appendix VI.
section_title: Cost Increases and Schedule Delays Result from a Number of Factors
paragraphs: Cost increases and schedule delays have been caused by factors that have  generally occurred before construction of the project begins. These  factors include initial estimates that were not thorough because they were  completed quickly, scope changes that occurred after the initial estimate,  and unforeseen events and market conditions such as a rise in  construction costs.
subsections: section_title: Some Cost Estimates Were Not Thorough
paragraphs: The CARES process required VA to quickly provide initial cost estimates  for about 30 major construction projects. Specifically, in 2004 VA had  about 3 months to provide initial cost estimates to Congress so that  Congress could consider authorizing these projects and appropriating  funds for them in fiscal years 2004 and 2005. According to VA, a number of  VA staff worked to produce these initial estimates, including staff that had  limited cost estimating expertise. The 30 projects included three new large  medical centers in Las Vegas, Nevada; Denver, Colorado; and Orlando,  Florida. Estimates prepared for these 30 projects were prepared quickly  and sometimes based on rudimentary designs. For example, VHA officials  in Syracuse told us that they had about 6 weeks to prepare their initial  estimate for a new spinal cord injury center, which they did by using  analogous estimating techniques such as the cost-per-square foot of new  construction in Syracuse. As a result, the initial estimate was only a rough  order-of-magnitude estimate. We have reported that, while it is possible to  develop a rough order-of-magnitude estimate in days, a first-time budget- quality estimate would likely require many months. VA officials in  Syracuse who worked to prepare this estimate told us that they were  surprised when the project was included in VA’s fiscal year 2005 budget  request because they knew that the estimate was only a rough order-of- magnitude estimate.
section_title: Some Cost Estimates and Schedules Were Affected by Scope Changes
paragraphs: In two of our case studies, the scope of the project changed substantially  after VA submitted its estimate to Congress. VA officials also told us that  scope changes have occurred in other projects. In Las Vegas, the initial  estimate to Congress was based on plans for a large VA clinic. However,  VA later determined that a much larger medical center was needed in Las  Vegas after it became clear that an inpatient medical facility it shares with  the Department of Defense would not be adequate to serve the medical  needs of local veterans. This decision greatly increased the cost, delayed  the completion date of the project, and required a modified authorization  and an additional appropriation from Congress. Since the estimate for the  Las Vegas medical center was based on a preliminary design for an  expanded clinic, additional functions had to be added to the clinic design  to provide the services necessary for the medical center. This expansion of  the scope of the project resulted in both a cost increase and schedule  delay for the project.
In Syracuse, New York, the original design of a new Spinal Cord  Injury/Disease (SCI/D) center that is being built on the campus of the VA  medical center did not include money for additional parking. However,  after the project had been authorized by Congress and was in design, VA  officials in Syracuse commissioned a study to examine future parking  needs at the medical center. The study concluded that, based on the new  SCI/D center and projected demand from patients and staff, there should  be an additional 429 to 528 parking spaces at the medical center. As a  result of this study, VA officials in Syracuse decided to add two floors to  the existing parking garage at an estimated cost of $10 million. Based on  the parking garage addition and other changes to the project, VA received  a modified authorization in 2006 and an appropriation of $23.8 million in  fiscal year 2008 for the SCI/D center. More information about the new  SCI/D center in Syracuse is in appendix IV.
Failure to involve stakeholders early in the process can also lead to  changes in scope. In Syracuse, the Paralyzed Veterans of America (PVA)  objected to some aspects of the design of the SCI/D center. For example,  PVA advocated for a dedicated entrance from the parking garage to the  SCI/D center, which is being built on the fourth floor of the medical center.  This dedicated entrance would allow veterans with spinal cord injuries to  enter the center directly from the parking garage, without requiring the  veterans to go down to the street from the parking garage, outside to the  main entrance of the medical center, then up to the 4th floor of the  medical center for treatment. According to VA staff in Syracuse, VA agreed  to make changes that would improve access to the facility, and this  increased the cost of the project.
section_title: Some Cost Estimates Were Affected by Market Conditions and Some Schedules Were Affected by Unforeseen Events
paragraphs: Changes in construction market conditions can escalate the costs of VA  construction projects. The cost of many materials used in construction— from concrete to electrical equipment—increased more than the consumer  price index (indicating that construction costs increased more than other  costs) from 2003 through 2007. Specifically, the cost of these construction  materials increased over 28 percent between 2003 and 2007, whereas the  consumer price index increased about 13 percent over the same period.  Hurricane Katrina drove up the cost of construction materials nationwide  because the high demand for construction in the New Orleans region  strained supplies of material and labor. In Las Vegas, several large billion- dollar projects created competition for construction services, and this area  experienced an even greater cost increase as the demand for new  construction exceeded supply of materials and labor.
The schedule for one of our case studies was delayed by land acquisition  issues. In Cleveland, while the project remains within budget, the project  schedule was delayed 9 months because a property acquisition took longer  than expected. Part of the land that the bed tower is being built on had  been donated to the City of Cleveland for use as parkland. The city could  not give the land to VA until the city was able to change the designated use  of the donated land from parkland to a more general use. More  information about the construction project in Cleveland is in appendix III.
section_title: VA Is Working to Improve Estimates but Could Better Assess Risks to Costs and Schedules
paragraphs: VA has developed a new process for determining its initial estimates that  allows for more time between VA approving a project and submitting a  cost and schedule estimate to Congress. However, VA does not analyze  cost risks to examine the changing assumptions on the cost estimate.  VA  also does not have an integrated master schedule, which includes both VA  and contractor effort for all phases of the entire project, and does not  conduct a schedule risk analysis to help determine when projects will be  completed. While VA is not required to develop an integrated master  schedule and cost and schedule risk analyses, we have identified these  steps as best practices in project scheduling and cost estimating.
subsections: section_title: VA Is Working to Improve Initial Estimates, but Needs to Analyze Cost Risks
paragraphs: VA has developed a new process to improve its initial estimates for major  construction projects. This new process allows VA to increase the time  between VA approving a project and submitting that project, and its initial  estimate, to Congress. According to VA officials, with this additional time,  VHA will be able to gather more information about a project and begin  preliminary design work. These officials noted that VA will ideally have as  much as 35 percent of the design work completed before the project’s first  estimate is submitted to Congress. Cost estimators can then use these  designs to develop the initial cost estimate that VA sends to Congress.  According to VA officials, the initial estimate should be more precise than  estimates provided to Congress in the past because the scope of the  project will be more developed.
Until the fiscal year 2010 budget cycle, field staff in VHA produced the first  estimate for a project. Beginning with the fiscal year 2010 budget cycle, for  any project in the top 10 of the priority list, CFM will work with VHA staff  in the field to produce the first estimate of the project’s cost. CFM staff  includes professionals with estimating and construction engineering skills,  whereas VHA staff in the field generally does not possess these skills.
These new requirements were not in effect when the projects we studied  were developed. Therefore, we were not able to evaluate the process.  While it is unclear how much design work will actually occur before VA  submits a project and its estimate to Congress, the new process holds  promise to improve VA’s initial estimates, particularly if the new process  requires early stakeholder input on a proposed project so that any  resulting changes in the project scope can be incorporated into the  estimate before it is submitted to Congress.
After a project has been authorized and funded based on VA’s initial  estimate, VA hires an architect/engineering firm to design the major  construction project. The firm hires a contractor to develop a cost  estimate for the project. We visited three major construction sites— Cleveland, Ohio, Las Vegas, Nevada, and Syracuse, New York. At these  sites, we found that these cost estimates were generally comprehensive  and well documented. Specifically, the estimate included an estimating  plan, structure, purpose, and documentation. However, we also found that  the cost estimates for projects in Cleveland and Las Vegas were not  adequately maintained during construction because they did not include  updated information based on actual costs as the project progressed.
We also found that the estimates for projects in Syracuse and Las Vegas  did not include a cost risk analysis to examine the effect of changing  assumptions on the cost estimate. Conducting a cost risk analysis is  particularly important because only by quantifying cost risk can  management make informed decisions about risk mitigation strategies.  Quantifying cost risk also provides a benchmark for measuring future  progress. We identified best practices for estimating and managing  program costs in a cost assessment guide we issued in 2009. As we note  in our cost assessment guide, agencies should begin to follow these best  practices at the earliest stages of the cost estimation process, which  includes the preparation of the initial estimate submitted to Congress. Our  cost estimating guide has been endorsed by OMB. More information on the  cost estimates for these three sites is in appendices III through V.
section_title: VA Generally Follows Best Practices for Construction Schedules at the Projects We Visited, but Does Not Conduct a Schedule Risk Analysis
paragraphs: After the design is complete, VA hires a contractor to construct the project  by the completion date set in the contract. The contractor then develops a  construction schedule that details all of the activities that the contractor  plans to finish by the completion date. Generally, the contractor must  finish by the completion date or face financial penalties. At the sites we  visited, we found that these schedule estimates, which occur after VA has  submitted its initial estimate to Congress, generally followed best  practices for scheduling. For example, we found that the contractor  regularly updated the construction schedule with actual dates as the work  progressed. All best practices for schedules, and the extent that they were  met at our site visits, are in table 3. More detailed information is included  in appendices III through V.
Although VA met or partially met nearly all scheduling best practices at the  three sites, VA does not conduct a schedule risk analysis of its major  construction projects, and therefore cannot predict a project’s completion  date with confidence. A schedule risk analysis, which is one of our best  practices in project scheduling, uses statistical techniques to predict a  level of confidence in meeting a project’s completion date. The objective  of the analysis is to develop a probability distribution of possible  completion dates that reflect the project and its quantified risks. This  analysis can help project managers both understand the most important  risks to the project and to focus on mitigating these risks. We conducted a  schedule risk analysis of the construction schedule for the new medical  center in Las Vegas, Nevada, that is scheduled to be completed on August  22, 2011. We conducted on-site interviews with staff who are working on  the project in Las Vegas and asked them to discuss potential risks to the  project, including how the risk would affect the project’s timeline and the  likelihood of the risk occurring. Using this information, we developed a list  of risks to the project (such as the chance that the design is inadequate or  that labor is not available) and how each risk would impact the duration of  specific activities in the schedule. We then used modeling software to run  a Monte Carlo simulation, which consisted of the computer-generated  results of 3,000 estimates of the future schedule based on the activities in  the schedule, the chance that some activities would be affected by some  risks, and the predicted affect of those risks on the duration of each  activity. This analysis showed that there is a 50 percent probability that the  project will be completed by March 1, 2012 (about 6 months after the  current estimated completion date) and an 80 percent probability that the  project will be completed by May 17, 2012 (about 9 months after the  current estimated completion date). Although we did not conduct a  schedule risk analysis for other VA major construction projects, the result  of our analysis for the Las Vegas Medical Center project shows the types  of risks that major construction projects face and the impact those risks  can have on meeting project milestones. More information on our  schedule risk analysis can be found in appendix V.
We shared the results of our schedule risk analysis with CFM staff in Las  Vegas. Specifically, we noted that we found the two biggest risks to the  project are that the design may be inadequate and that the occupancy  needs may change. CFM staff in Las Vegas told us that they are working to  mitigate the risk of inadequate design and have discovered architectural  drawings that do not include utilities. As a result, CFM has directed the  architect/engineer firm to revise the drawings to include utilities. CFM  staff also stated that they can deny any changes to the project scope and  that they can choose not to allow changes that will affect the scheduled  completion date.
section_title: VA Does Not Have an Integrated Master Schedule for Major Construction Projects
paragraphs: VA does not require an integrated master schedule for major construction  projects that encompasses both VA and contractor effort for all phases of  the entire project and shows the relationships between various project  phases (such as design, construction, and when the project is “activated”  for occupancy and use). However, we have stated that the success of any  project depends, in part, on having an integrated and reliable schedule.  Without a fully integrated and reliably derived schedule, it is difficult to  estimate the overall cost and schedule of a project. In addition, individual  phases of a multiphase project can be completed on time, but the project  as a whole can be delayed and construction phases that are not part of an  integrated master schedule may not be completed in the most efficient  manner. For example, a VA nursing home in Las Vegas was completed in  2009 but cannot be put into service until another phase of the construction  project—the on-site medical center—is completed and can provide  medical care to residents of the nursing home. The medical center is  scheduled to be completed in 2011. According to VA officials, VA decided  to construct the new nursing home because construction costs in Las  Vegas were escalating quickly, and VA officials thought that they could  save money by constructing the nursing home as soon as possible.  However, construction costs have recently decreased in the Las Vegas  area, and VA must pay to maintain the new nursing home from 2009 to  2011 even though the nursing home will not be used for VA patients.
section_title: Conclusions
paragraphs: Estimates for major construction projects, like any estimate of a future  activity, can never be exact. Some of VA’s past estimates have been off- base, although the reasons for this are sometimes outside of VA’s control.  These imprecise estimates resulted in Congress authorizing and  appropriating millions of dollars for projects based on estimates that  proved to be inaccurate. In some of these cases, VA was forced to change  the scope of the project in order to stay within the original estimate or the  projects’ authorizations were modified and Congress has had to  appropriate more funds to allow VA to finish some projects.
VA is taking steps to make its initial estimates more accurate in the future.  VA is working to complete some preliminary design work on projects and  improve initial estimates so that they are more likely to be closer to the  actual costs and schedules of a project, but the effect of these changes on  VA’s initial estimates remains to be seen. While VA is taking steps to  improve its initial estimates, it does not always conduct a cost risk  analysis, which would allow project managers to better identify issues that  could lead to cost escalation and improve managers’ ability to make  informed decisions on how to minimize cost risks. VA has also not used a  schedule risk analysis to determine the likelihood of a major project being  completed on time. We recognize that conducting a cost risk and schedule  risk analysis takes both financial resources and some time and that it may  only be appropriate to conduct these analyses when a project is  particularly costly, complex, or has a compressed schedule. However, the  overall effect of the analyses is to provide VA, congressional  decisionmakers, and other stakeholders with more precise information  about when a project will be completed and the main risks to a project  being completed on time. With this information, VA could provide more  accurate schedule estimates to stakeholders and could also work to  mitigate risks to the project and ensure that the project is completed on  time. We have identified cost risk and schedule risk analysis as best  practices in our cost assessment guide, which has been endorsed by OMB.
While the construction schedules we reviewed generally met best  practices, VA’s lack of an integrated master schedule—which would  integrate VA and contractor effort for all phases of a project, including all  design and construction work—hampers VA’s ability to provide accurate  information on the schedule for a project. Many factors that can delay a  project, such as changes in scope and unforeseen site conditions, occur  before construction begins. The use of an integrated master schedule  could assist VA in monitoring the progress of a major construction project  before construction begins and allow VA to increase the accuracy of its  schedule estimates.
section_title: Recommendations for Executive Action
paragraphs: To improve estimates of the cost of a major construction project as well as  the risks that may influence the cost and how these risks can be mitigated,  GAO recommends that the Secretary of Veterans Affairs direct CFM to  conduct a cost risk analysis of major construction projects.
To provide a realistic estimate of when a construction project may be  completed as well as the risks to the project that could be mitigated, we  recommend that the Secretary of Veterans Affairs direct CFM to take the  following two actions. First, require the use of an integrated master  schedule for all major construction projects. This schedule should  integrate all phases of project design and construction. Second, conduct a  schedule risk analysis, when appropriate, based on the project’s cost,  schedule, complexity, or other factors. Such a risk analysis should include  a determination of the largest risks to the project, a plan for mitigating  those risks, and an estimate of when the project will be finished if the risks  are not mitigated.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to VA for review and comment.  VA  generally agreed with our conclusions and concurred with our  recommendations.  In reference to our statement that some cost increases  and schedule delays were attributable to scope changes, VA stated that it  is important to note that VA followed all applicable laws and congressional  notification requirements during the execution of the projects, and  maintained the integrity and intent of each project as authorized by  Congress.  While we did not find any instances where VA did not follow  applicable laws or congressional notification requirements, we did not  specifically evaluate VA’s compliance with such laws and requirements  because this was outside the scope of our review. VA’s letter is contained  in appendix II.  In addition, VA made a number of technical corrections,  which we incorporated as appropriate.
We are sending copies of this report to the Secretary of Veterans Affairs.  Additional copies will be sent to interested congressional committees. The  report will also be available at no charge on the GAO Web site at  http://www.gao.gov.
If you have any questions about this report, please contact me at (202) 512- 2834 or at dornt@gao.gov. Contact points for our Offices of Congressional  Relations and Public Affairs may be found on the last page of this report.  GAO staff who made key contributions to this report are listed in appendix  VII.
section_title: Appendix I: Scope and Methodology
paragraphs: In this report, we examined: (1) how costs and schedules of current  Veterans Affairs (VA) major medical construction projects have changed  since they were first submitted to Congress, (2) the reasons for cost and  schedule changes in VA’s major medical construction projects, and (3) the  actions VA has taken to address cost increases and schedule delays as well  as the challenges VA faces in managing its major medical construction  program.
To address these issues, we reviewed pertinent laws relating to  construction, authorization and appropriation of VA projects. We also  examined the documents VA submitted to Congress, including the Office  of Management and Budget’s form 300 provided with VA’s budget that has  been required since 2006 and a project prospectus. We obtained and  analyzed data that VA provided on the status of VA’s active major medical  construction projects, as of August, 2009. We also reviewed VA’s  management of construction projects at three locations and interviewed  VA headquarters’ officials from the Veterans Health Administration (VHA)  and the Office of Construction and Facilities Management (CFM) as well  as project managers at the construction sites we visited.
To determine how costs and schedules of current VA major medical  construction projects have changed since they were first submitted to  Congress, we reviewed VA data on current major medical construction  projects, including the original cost estimates and completion dates  submitted to Congress and the projects’ current status as of August 2009.  We analyzed the current cost and completion dates against the information  provided to Congress to determine the increase in costs and the extent to  which projects exceeded or were expected to exceed the original time  allotted and summarized the results. VA officials confirmed the reliability  of the data provided for these projects.
To identify the reasons for cost and schedule changes in VA’s construction  projects, we interviewed VA headquarters officials regarding the status of  all projects and examined project documents and interviewed on-site  managers and engineers at three projects we selected. We selected  projects based on VA-provided data on all of VA’s ongoing major medical  construction projects as of March 2009. The data included a short project  description, project location, the original and current total cost of the  project, the original and current completion date, and the percent of  construction completed. VA officials confirmed the reliability of the data  provided. We selected projects for site visits based on the following  criteria and the results cannot be applied to all of VA’s major construction  projects:    Construction projects were between 20 percent and 70 percent completed.
Projects were estimated to cost $75 million or more.
Projects were among those experiencing the greatest cost increases or  schedule delays relative to other VA major medical construction projects.
Projects were of different types of major construction projects because  there could be factors in cost and scheduling that relate to one project  type or factors that are systemic trends that occur across all project types.  Project types include new construction, renovation of existing structures,  expansion, or a combination of project types.
Projects were selected from each of VA’s three regions to account for  differences in management at VA regional offices that could impact cost  increases and schedule delays.
Based on our criteria, we selected three major medical construction sites:    consolidation of the Brecksville Veterans Affairs Medical Center and the  Wade Park Veterans Affairs Medical Center and construction of a new 90- bed tower for patient care in Cleveland, Ohio, estimated to cost $102.3  million and to be completed by September 2009 and now scheduled for  February 2011;    construction of Spinal Cord Injury Center, surgical suite renovation, and  expansion of the parking garage in Syracuse, New York, originally  estimated to cost $53.4 million and be completed by December 2009 and  now estimated to cost $84,969,000 and be completed by May 19, 2012; and    construction of a new, comprehensive Medical Center Complex in Las  Vegas, Nevada, that will include a nursing home, ambulatory care center,  primary and specialty care, surgery, mental health, rehabilitation, geriatric  and extended care. Originally estimated to cost $286 million and be  completed by September 2009, it is now expected to open in March 2012  and cost $600.4 million. The Las Vegas project will also include  administrative and support functions and Veterans Benefits  Administration offices.
To identify the actions VA has taken to address cost increases and  schedule delays as well as the challenges VA faces in managing its major  medical construction program we reviewed the procedures that VA’s  Office of Construction and Facilities Management put in place beginning  in 2007. We also reviewed documentation and interviewed VA  headquarters officials and project managers for the sites we visited to  determine how estimated costs and schedules had been prepared. We then  analyzed the cost estimates and schedules prepared for the three projects  we visited and interviewed VA project managers and engineers,  contractors, and cost estimators and schedulers to ascertain the extent to  which their estimates and schedules compared with the best practices  identified in previous GAO work.
We used the GAO Cost Estimating and Assessment Guide (GAO-09-3SP),  as criteria to analyze cost estimates. For this guide, GAO cost experts  assessed 12 measures consistently applied by cost-estimating  organizations throughout the federal government and industry and  considered best practices for developing reliable cost-estimates. We  analyzed the cost estimating practices used by VA in developing its cost  estimates against these 12 best practices. After reviewing documentation  submitted by the VA and information obtained during interviews, we  determined the extent that the cost estimates met the characteristics of  cost estimating best practices for the three projects we reviewed. For the  purpose of this review, we grouped these practices into four  characteristics of a high-quality and reliable cost estimate. They are    Comprehensive: The cost estimates should include both government and  contractor costs of the project over its full life cycle, from inception of the  project through design, development, deployment, and operation and  maintenance to retirement of the project. They should also provide a level  of detail appropriate to ensure that cost elements are neither omitted nor  double counted, and they should document all cost-influencing ground  rules and assumptions.
Well-documented: The documentation should address the purpose of the  estimate, the project background and system description, its schedule, the  scope of the estimate (in terms of time and what is and is not included),  the ground rules and assumptions, all data sources, estimating  methodology and rationale, the results of the risk analysis, and a  conclusion about whether the cost estimate is reasonable. Therefore, a  good cost estimate—while taking the form of a single number—is  supported by detailed documentation that describes how it was derived  and how the expected funding will be spent in order to achieve a given  objective. For example, the documentation should capture in writing such  things as the source data used and their significance, the calculations  performed and their results, and the rationale for choosing a particular  estimating method or reference. Moreover, this information should be  captured in such a way that the data used to derive the estimate can be  traced back to, and verified against their sources. Finally, the cost estimate  should be reviewed and accepted by management to ensure that there is a  high level of confidence in the estimate and the estimating process.
Accurate: The cost estimates should provide for results that are unbiased,  and they should not be overly conservative or optimistic. Estimates are  accurate when they are based on an assessment of most likely costs,  adjusted properly for inflation, and contain few, if any, minor mistakes. In  addition, the estimates should be updated regularly to reflect material  changes in the project, such as when schedules or other assumptions  change so that the estimate is always reflecting current status. Among  other things, the estimate should be grounded in documented assumptions  and a historical record of cost estimating and actual experiences on other  comparable projects.
Credible: The cost estimates should discuss any limitations of the  analysis because of uncertainty or biases surrounding data or  assumptions. Major assumptions should be varied, and other outcomes  recomputed to determine how sensitive they are to changes in the  assumptions. Risk and uncertainty analysis should be performed to  determine the level of risk associated with the estimate. Further, the  estimate’s results should be crosschecked, and an independent cost  estimate conducted by a group outside the acquiring organization should  be developed to determine whether other estimating results produce  similar results.
Our review of project schedules was based on research that identified a  range of best practices associated with effective schedule estimating. In  addition, we obtained the consulting services of David Hulett, Ph.D., to  assist in our risk analysis of the Las Vegas Medical Center project  schedule. We analyzed documentation submitted by the VA project office  and construction staff for three of VA’s major medical construction  projects. We also conducted multiple interviews with project managers,  contractors, and schedulers to determine the extent that projects’ current  schedule met the best practice criteria. These practices include    Capturing all activities: The schedule should reflect all activities (steps,  events, outcomes, etc.) as defined in the project’s work breakdown  structure, to include activities to be performed by both the government  and its contractors.
Sequencing all activities: The schedule should be planned so that it can  meet project critical dates. To meet this objective, activities need to be  logically sequenced in the order that they are to be carried out. In  particular, activities that must finish prior to the start of other activities  (i.e., predecessor activities) as well as activities that cannot begin until  other activities are completed (i.e., successor activities) should be  identified. Identifying interdependencies among activities that collectively  lead to the accomplishment of events or milestones can be used as a basis  for guiding work and measuring progress.
Assigning resources to all activities: The schedule should realistically  reflect what resources (i.e., labor, material, and overhead) are needed to  do the work, whether all required resources will be available when they  are needed, and whether any funding or time constraints exist.
Establishing the duration of all activities: The schedule should reflect  how long each activity will take to execute. In determining the duration of  each activity, the same rationale, data, and assumptions used for cost  estimating should be used for preparing the schedule. Further, these  durations should be as short as possible and should have specific start and  end dates. Excessively long periods needed to execute an activity should  prompt further decomposition of the activity so that shorter execution  durations will result.
Integrating schedule activities horizontally and vertically: The  schedule should be horizontally integrated, meaning that it should link the  products and outcomes associated with already sequenced activities (see  previous section). These links are commonly referred to as “hand offs” and  serve to verify that activities are arranged in the right order to achieve  aggregated products or outcomes. The schedule should also be vertically  integrated, meaning that traceability exists among varying levels of  activities and supporting tasks and sub-tasks. Such mapping or alignment  among levels can enable different groups to work to the same master  schedule.
Establishing the critical path for all activities: Using scheduling  software the critical path—the longest duration path through the  sequenced list of activities—should be identified. The establishment of a  project’s critical path is necessary for examining the effects of any activity  slipping along this path. Potential problems that may occur on or near the  critical path should also be identified and reflected in the scheduling of the  time for high-risk activities (see float below).
Identifying float between activities: The schedule should identify  float—the time that a predecessor activity can slip before the delay affects  successor activities—so that schedule flexibility can be determined. As a  general rule, activities along the critical path typically have the least  amount of float.
Conducting a schedule risk analysis: A schedule risk analysis uses a  good critical path method schedule and data about project schedule risks  as well as Monte Carlo simulation techniques to predict the level of  confidence in meeting a project’s completion date, the amount of time  contingency needed for a level of confidence, and the identification of  high-priority risks. This analysis should focus not only on critical path  activities but also on other schedule paths that may become critical. A  schedule/cost risk assessment recognizes the inter-relationship between  schedule and cost and captures the risk that schedule durations and cost  estimates may vary due to, among other things: limited data, optimistic  estimating, technical challenges, lack of qualified personnel, and other  external factors. As a result, the baseline schedule should include a buffer  or a reserve of extra time. Schedule reserve for contingencies should be  calculated by performing a schedule risk analysis. As a general rule, the  reserve should be held by the project manager and applied as needed to  those activities that take longer than scheduled because of the identified  risks. Reserves of time should not be apportioned in advance to any  specific activity since the risks that will actually occur and the magnitude  of their impact is not known in advance.
Updating the schedule using logic and durations to determine the  dates: The schedule should use logic and durations in order to reflect  realistic start and completion dates for project activities. The schedule  should be continually monitored to determine when forecasted  completion dates differ from the planned dates, which can be used to  determine whether schedule variances will affect downstream work.  Maintaining the integrity of the schedule logic is not only necessary to  reflect true status, but is also required before conducting a schedule risk  analysis. The schedule should avoid logic overrides and artificial  constraint dates that are chosen to create a certain result on paper.  Individuals trained in critical path method scheduling should be  responsible for updating the schedule.
Based on our work, we determined the extent that estimates and  schedules for the three projects we selected met the best practices  criteria.
Not Met—Project officials provided no evidence that satisfies any of the    Minimally Met—Project officials provided evidence that satisfies a small  portion of the criterion,   Partially Met—Project officials provided evidence that satisfies about half    Substantially Met—Project officials provided evidence that satisfies a large  portion of the criterion, and   Met—Project officials provided complete evidence that satisfies the entire  criterion.
We conducted this performance audit from October 2008 through  December 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 meets these standards.
section_title: Appendix II: Comments from the Department of Veterans Affairs
section_title: Appendix III: Consolidation and Expansion of Medical Centers in Cleveland, Ohio
subsections: section_title: Project Overview
paragraphs: The major construction project in Cleveland includes consolidating the  Brecksville Veterans Affairs Medical Center and the Wade Park Veterans  Affairs Medical Center, which are 26 miles apart. As part of this  consolidation, a new bed tower is being built at the Wade Park Medical  Center. This bed tower will contain a nursing home and space for  psychiatric patients. The project is divided into two phases. Phase I  includes the construction of an energy center and phase II includes the  construction of a bed tower addition.
section_title: Reasons for the Project
paragraphs: The project was first initiated by the VA under the Capital Asset  Realignment for Enhanced Services (CARES) process in 2004 to save  money through consolidation and to provide better health care for  veterans. According to VA officials, the two medical centers frequently  worked together to provide health care for veterans. The Brecksville  medical center was primarily a nursing home care unit and psychiatric  care facility and the Wade Park medical center was primarily a surgical  care facility. According to VA, it was very expensive to operate and  maintain the two physical locations. Patients needing immediate care at  the Brecksville medical center were sometimes taken to local area  hospitals instead of the Wade Park medical center because of the distance  between the two medical centers. Maintaining the two medical centers  resulted in duplication of services, decreased operational efficiencies, and  issues of continuity of care between the two medical centers. Other  inefficiencies included ambulance and wheelchair van costs and outdated  modes of providing health care.
VA also intended for the project to meet rising demand for services in the  Cleveland area and noted that the total number of unique patients at these  2 medical centers had increased. After considering four alternatives, the  medical center staff determined that consolidating the two medical  centers at Wade Park would lead to better health care for veterans and  provide significant cost savings and other efficiencies. Specifically,  consolidation would allow VA to avoid approximately $41 million in non- recurring maintenance and infrastructure improvements at the Brecksville  medical center and gain approximately $10.6 million in operational savings  per year.
section_title: Project Cost
paragraphs: The cost estimate to consolidate the two facilities and construct a new bed  tower at Wade Park has remained constant at $102.3 million. According to  VA officials, the cost estimate is still reasonable for the project through  completion. Of the $102.3 million, $15 million was appropriated in fiscal  year 2004 and $87.3 million was appropriated in fiscal year 2008. To keep  costs within budget, the VA closely monitored and reduced the scope of  the major construction project. Some of the work was also shifted to a  minor construction project. The medical center modified the design plans  to eliminate 30 beds and one floor from the bed tower. The 30 beds will  instead be relocated in the main hospital where space is being renovated  to accommodate them. The funding for the 30 beds will not come from the  appropriated construction funds. Rather, the 30 beds will be funded out of  non-recurring maintenance (NRM) funds, which can be used to renovate  spaces and purchase equipment needed as a result of that renovation. Our  analysis of how the cost estimate met best practices is in table 4.
section_title: Project Schedule and Changes in Scope
paragraphs: The project was originally a one-phase project and scheduled to be  completed in September 2008 but is now a two-phase project and is  scheduled to be completed in February 2011. Before construction began,  the project was broken into two phases because there was insufficient  power capacity to keep the existing hospital functioning while the  construction was being completed. As a result, an energy center was  added to the design plan and its construction was separated from that of  the bed tower. In addition, a property acquisition that took longer than  expected delayed the project schedule by nine months. Part of the land  that the bed tower is being built on was donated to the City of Cleveland  for use as parkland. The acquisition process was prolonged because the  City had to change the use of the donated land before the VA could begin  construction. Phasing the project and the delayed property acquisition  fostered a change in scope of the project and the project’s original  completion date was moved from September 1, 2008, to November 9, 2010.  The projected completion date was again extended to February 1, 2011,  due to unforeseen site conditions. Specifically, during the construction of  the bed tower, crews discovered and had to move a sewer line before they  could continue. According to VA officials, February 1, 2011, is still the  projected date for project completion. However, it was not possible for us  to determine if the completion date is reasonable because the project’s  construction schedule has not undergone a schedule risk analysis. We  have identified a schedule risk analysis as a best practice in scheduling. As  of August 2009, VA has completed the energy center and is constructing  the bed tower addition.
The construction schedule for this project generally followed best  practices but, as stated, did not include a schedule risk analysis.  Specifically, while the schedule met eight of nine scheduling best  practices, the schedule did not undergo a risk analysis to determine the  major risks to the schedule and the likelihood of the project being  completed on time. Our analysis of how the schedule met best practices is  in table 5.
section_title: Appendix IV: Construction of Spinal Cord Injury/Disease Center in Syracuse, New York
subsections: section_title: Project Overview
paragraphs: This project includes the construction of a 30-bed center for treating spinal  cord injuries to be attached to the current VA medical center in Syracuse,  New York. The project also includes adding two levels to the current  parking garage. The project is divided into two phases. Phase I includes  the addition on the parking garage and Phase II includes the construction  of the Spinal Cord Injury/Disease (SCI/D) center.
section_title: Reasons for the Project
paragraphs: VA initiated this project under the Capital Asset Realignment for  Enhanced Services (CARES) process in February 2004 because the  Veterans’ Integrated Service Network (VISN) did not have the ability to  treat acute spinal cord injuries. Syracuse had the only in-patient  rehabilitation unit and SCI/D expertise within the VISN; so, VA decided to  put the new SCI/D center in Syracuse.
section_title: Project Cost
paragraphs: The project cost has increased from the original estimate submitted to  Congress of $53.9 million to $84,969,000 (an increase of 58 percent).  According to VA officials in Syracuse, this estimate was developed in  about 6 weeks and was based on the total square footage required  multiplied by the cost per square foot of new construction. Congress  authorized $53.9 million for the project in 2004 and appropriated about  $53.4 million in funds in the Consolidated Appropriations Act for FY 2005.
According to VA officials in Syracuse, the main reason for the cost  increase is that the initial estimate did not fully consider several factors.  The original design of a new SCI/D center did not include money for  additional parking. However, when the project had been approved by  Congress and was in design, VA officials in Syracuse commissioned a  study to examine future parking needs at the Syracuse medical center. The  study concluded that, based on the new SCI/D center and projected  demand from patients and staff, there should be an additional 429 to 528  parking spaces at the medical center. As a result of this study, VA officials  in Syracuse decided to add two floors onto the existing parking garage at  an estimated cost of $10 million.
In addition to parking, stakeholders identified needed scope changes in  the project. Specifically, the Paralyzed Veterans of America (PVA) insisted  that there be a dedicated entrance from the parking garage to the SCI/D  center, which is being built on the 4th floor of the medical center. This  dedicated entrance would allow veterans with spinal cord injuries to enter  the center directly from the parking garage, without requiring the veterans  to go down to the street from the parking garage, outside to the main  entrance of the medical center, then up to the 4th floor of the medical  center for treatment. According to VA staff in Syracuse, VA agreed to make  changes that would improve access to the facility, and this increased the  cost of the project and delayed the project’s schedule. As a result of these  changes to the project’s scope, VA received an additional $23.8 million  from Congress in fiscal year 2008. Our analysis of how the cost estimate  for the SCI/D center met best practices is in table 6.
section_title: Project Schedule
paragraphs: VA initially estimated that the project would be completed by December 6,  2009. VA awarded the contract to construct the SCI/D center on August 12,  2009, and estimates that the SCI/D center will be completed in May 2012,  or 29 months after the first estimated completion date.
The schedule delays and cost increases occurred before construction  began, and once construction commenced we found that the construction  schedule for this project generally followed best practices. Specifically,  the schedule met eight of nine scheduling best practices but did not  include a schedule risk analysis. The schedule did not undergo a risk  analysis to determine the major risks to the schedule and the likelihood of  the project being completed on time. Our analysis of how the schedule met  best practices is in table 7.
section_title: Appendix V: Construction of New Medical Center Complex in Las Vegas, Nevada
subsections: section_title: Project Overview
paragraphs: This project involves construction of a comprehensive Medical Center  Complex in Las Vegas, Nevada. The complex will consist of up to 90  inpatient beds, a 120-bed Nursing Home Care Unit, Ambulatory Care  Center, primary and specialty care, surgery, mental health, rehabilitation,  geriatrics and extended care, as well as administrative and support  functions. VA also plans to include Veterans Benefits Administration  offices attached to the medical center. The project is divided into four  phases. Phase I includes the construction of a new utility building and  related infrastructure such as streets, sewers, and connections to electric  and water utilities that are miles away from the construction site. Phase II  includes the construction of the foundation of the new medical center.  Phase III includes the construction of the Nursing Home Care Unit and  Phase IV includes the construction of the medical center and the Veterans  Benefits Office.
section_title: Reasons for the Project
paragraphs: VA initiated the medical center project under the Capital Asset  Realignment for Enhanced Services (CARES) process between 2003 and  2004 because, according to VA officials, the increase in the number of Iraq  war veterans needing medical care combined with the growth in the Las  Vegas area supported building a large medical center. Out-patient medical  care for veterans in the area was provided at 15 leased primary care clinics  located throughout the Las Vegas area. In-patient services were provided  under a joint venture with the Air Force’s Mike O’Callaghan Federal  Hospital located at Nellis Air Force Base. However, some VA patients had  to be sent to other VA hospitals for care that could not be provided at the  Mike O’Callaghan hospital such as spinal cord injuries. VA officials said  they initially sought to expand its medical services and construct a nursing  home at Nellis Air Force Base in 2004, but the Air Force would not agree  to such an expansion and advised VA that the number of veterans’ in- patient beds would likely have to be reduced in the future. As a result, VA  decided to construct a new comprehensive medical complex, including a  nursing home care unit.
section_title: Project Cost
paragraphs: The cost of the medical center has increased from an initial estimate of  $286 million in 2004 to a current estimate of $600.4 million (an increase of  110 percent). In accordance with these increased cost estimates, Congress  has appropriated $600.4 million for the medical center, providing $60  million for fiscal year 2004, an additional $199 million for fiscal year 2006,  and $341.4 million for fiscal year 2008. The original estimate to Congress  was based on plans for a large VA clinic. However, VA later determined  that a much larger medical center was needed in Las Vegas after it became  clear that an inpatient medical facility it shares with DOD would not be  adequate to serve the medical needs of local veterans. Since the estimate  for the Las Vegas medical center was based on a preliminary design for an  expanded clinic, additional functions had to be added to the clinic design  to provide the services necessary for the medical center. This expansion of  the scope of the project resulted in both a cost increase and schedule  delay for the project. According to VA officials, a lack of planning and the  omission of key facilities contributed to the cost increases. Specifically,  VA officials stated that the original cost estimate did not correctly  anticipate the amount of preparation that the site needed. For example,  the original estimate did not include funding for the roads and street lights  required for the facility. In addition, the medical center could not  anticipate that the Department of Homeland Security would institute new  requirements for federal facilities as part of its continuing response to the  events of September 11, 2001, which resulted in further cost increases. VA  officials also explained that the nationwide increase in construction, the  rebuilding in the New Orleans area since hurricane Katrina, and the local  building boom in Las Vegas have driven up the cost of material and labor.  The Las Vegas area had several multi-billion dollar projects underway.  Locally, construction costs increased over 20 percent in 2006 and 2007  while the standard that VA uses for contingencies is 5 percent. To  illustrate, VA staff told us that Las Vegas builders had tied up almost 80  percent of the nation’s large cranes used to build tall buildings.
According to VA officials, in response to the increasing costs, the VA and  the architectural/engineering firm preparing the medical center design  reduced the scope of work for the final phase of the project. Gross square  footage was reduced from about 900,000 square feet to 785,000 square feet  and they eliminated extra space between floors for mechanical and  electrical cables that would have made maintenance easier. They also  reduced warehouse space and space for administrative offices because  estimators were concerned that the project could not be completed with  the funds available. The medical center warehouse, which is used to store  maintenance and medical supplies, was reduced to one-third of its  originally proposed size. As, a result, the hospital will need to acquire  warehouse storage and procure warehouse management services from  contractors outside of the VA facility.
The economic recession that began in 2008 led several companies to  suspend their construction projects in Las Vegas, and there was greater  competition among construction firms to construct the hospital. This  change in the construction market led to a significantly lower cost of  construction than VA staff had anticipated, and VA now estimates that the  total project will cost about $100 million less than estimated. As a result,  VA officials explained they are taking steps to add these features back into  the medical center prior to completion. For example, a utility tunnel  running from the utility building to the medical center was added back to  the project once the construction contract was awarded and VA saw they  had funds available. Adding this tunnel will reduce operating and  maintenance costs for the medical center. VA officials are also reviewing  their options for adding back features that had been eliminated such as  administrative offices. This would save operating costs by eliminating the  need to lease office space. Our analysis of VA’s current cost estimate for  the construction of the medical center is in table 8.
section_title: Project Schedule
paragraphs: The first two phases of the project have been completed and, according to  VA officials, Phase III will be completed in February 2010. However, the  nursing home completed in Phase III of the project will not be open for  patient care until the medical center becomes operational in 2012, as the  nursing home relies upon the hospital for patient medical care and food  service. Since the nursing home will be vacant for about 2 years before the  medical center opens, VA may use part of the nursing home for  administrative offices.
The final phase of the project, the construction of the new medical center,  is underway with completion scheduled for August 2011. According to VA  officials, the medical center is scheduled to become operational in the  spring of 2012, depending upon how quickly the equipment for the hospital  can be purchased and the additional personnel can be hired. Our analysis  of the construction schedule of the medical center is in table 9.
section_title: Schedule Risk Analysis
paragraphs: The sole best practice that the schedule did not meet is conducting a  schedule risk analysis (SRA), which is not required by the VA schedule  specifications. VA officials told us that they do not conduct SRAs and that  a risk analysis is typically not performed in the construction industry. In  August and September 2009, we performed our own schedule risk analysis  on the construction schedule. Specifically, we analyzed the C07P  schedule, which was the latest statused version available to us at the time  of the analysis.
A schedule risk analysis uses statistical techniques to predict a level of  confidence in meeting a program’s completion date. This analysis focuses  on critical path activities and on near-critical and other activities, since any  activity may potentially affect the program’s completion date. The objective  of the simulation is to develop a probability distribution of possible  completion dates that reflect the program and its quantified risks. From the  cumulative probability distribution, the organization can match a date to its  degree of risk tolerance. For instance, an organization might want to adopt a  program completion date that provides a 70 percent probability that it will  finish on or before that date, leaving a 30 percent probability that it will  overrun, given the schedule and the risks. The organization can thus adopt a  plan consistent with its desired level of confidence in the overall integrated  schedule. This analysis can give valuable insight into what-if drills and  quantify the impact of program changes.
In developing a schedule risk analysis, probability distributions for each  activity’s duration have to be established. Further, risk in all activities  must be evaluated and included in the analysis. Some people focus only on  the critical path, but because we cannot know the durations of the  activities with certainty, we cannot know the true critical path.  Consequently, it would be a mistake to focus only on the deterministic  critical path when some off-critical path activity might become critical if a  risk were to occur. Typically, three-point estimates—that is, best, most  likely, and worst case estimates—are used to develop the probability  distributions for the duration of workflow activities.
Once the distributions have been established, a Monte Carlo simulation  uses random numbers to select specific durations from each activity  probability distribution and calculates a new critical path and dates,  including major milestone and program completion. The Monte Carlo  simulation continues this random selection thousands of times, creating a  new program duration estimate and critical path each time. The resulting  frequency distribution displays the range of program completion dates  along with the probabilities that these dates will occur. Table 10 provides a  range of dates and the probability of the project completing on those dates  or earlier, based on our 3,000-iteration Monte Carlo simulation. For  example, according to our SRA, there is a 5 percent chance that the  project will finish on or before December 1, 2011. Likewise, there is an 80  percent chance that the project will finish on or before May 17, 2012.
Because completion on any date is uncertain, it is more realistic to show a  range of possible completion dates than to focus on a single date. In  deciding which percentile to use for prudent scheduling, there is no  international best practice standard. The chosen percentile depends on the  riskiness and maturity of the project. For some projects we emphasize the  80th percentile as a conservative promise date. While the 80th percentile  may appear overly conservative, it is a useful promise date if a number of  new but presently unknown risks (i.e., “unknown unknowns”) are  anticipated. The 50th percentile date may expose the project to overruns.
In the case of the medical center construction schedule, our analysis  concludes that VA should realistically expect turnover from the general  contractor between March 1, 2012, and May 17, 2012, the 50th and 80th  percentiles, respectively. The must finish date of August 29, 2011, is very  unlikely. Our analysis shows the probability of completing medical center  turnover by October 20, 2011, is less than 1 percent with the current  schedule without risk mitigation.
section_title: Identified risks
paragraphs: The project executive identified 22 different risks as a preliminary exercise  to our SRA. Using these risks as a basis for discussion, we interviewed 14  experts familiar with the project, including VA resident engineers, general  contractor officials, and A/E consultants. Each interviewee was asked four  general questions:  1.  To provide an estimate of the probability an identified risk will  occur on the project in such a way that some activity durations are  affected. The estimated probability is translated into the percentage of  the iterations that are chosen at random during the simulation. For  example, if the expert believed weather has a 10 percent chance of  affecting some activities, then, on average, weather risk will occur in  10 percent of the Monte Carlo iterations. 2.  If the interviewee believed the risk could occur, the interviewee was  asked to identify which activities’ durations would be affected. For  example, activities related to steel erection or concrete pouring may be  affected if the weather risk occurs. 3.  Upon identifying affected activities, interviewees were then asked to  provide a 3-point estimate for the impact on duration. These are low,  most likely, and high impact estimates. Estimates were provided as  percentages, which were applied to the activity durations in the Monte  Carlo simulation if the risk occurred. For example, if the weather risk  occurs, a 10-day steel erection activity may be affected a minimum of  110 percent, a most likely of 150 percent, or a maximum of 200 percent  (i.e., the 3-point estimates for steel erection if weather risk occurs are  11 days minimum, 15 days most likely, and 20 days maximum). If the  risk does not occur, there is no change to the original estimated  duration. 4.  Finally, interviewees were asked to identify any risks they believe  we did not account for.
We began the interviews with 22 risks and through the interview process  identified 11 more risks. During data analysis, some risks were  consolidated with others or eliminated due to a low amount of data. In all,  20 risks were identified and incorporated into the Monte Carlo simulation.  These include 18 risk drivers, 1 schedule duration risk, and 1 overall  system commissioning activity that was not included in the baseline  schedule. The final risk drivers used in the SRA are:    Occupancy needs may change.    Design may be inadequate.    Steel design may be inadequate.
Medical technology may change.    Work may be misfabricated.    Equipment may not meet design requirements.    Subcontractors may fail.    Suppliers may not deliver equipment on time.    Resident Engineer (RE) staffing may be inadequate.    Contractor field office staffing may be inadequate.    Architect/Engineer (A/E) staffing may be inadequate.    Labor may not be available.    Contractor coordination problems may exist.    Communication between RE, contractor, and A/E may be ineffective.    May experience problems testing systems.    Construction disciplines may not be coordinated.    Vendor drawings may not be submitted on time.    Change orders under $100,000 may affect schedule.
Most risks received multiple responses during the interviews. During data  analysis, we combined and analyzed data from the interviews to create  ranges and probabilities for each of the 18 risk drivers.
Because risks are multiplicative, several risks occurring on the same  activity may overestimate the true risk. That is, in the Monte Carlo  simulation, risks occur in a series, one after another, so that an activity  that has several risks may be unrealistically extended if all risks occur. For  example, drawing approval activities may possibly be affected by RE,  contractor field office, or A/E staffing being inadequate, as well as the  schedule duration risk. If all risks occurred, drawing approval activities  will most likely be overestimated. In reality, an activity may successfully  recover from two or more risks simultaneously, so that the actual risk is  not multiplicative. Therefore, to avoid overestimation of risk, the impact  ranges of risks that occur together are reduced. That is, the 3-point  duration estimates for risks that occur together frequently were reduced;  in this particular analysis, we decreased the estimated duration impact  ranges by a factor of 0.3. This adjustment helps temper any over-estimated  risk caused by a multiplication of risk factors.
Of the 6,098 activities in the schedule, 3,193 had risk drivers assigned to  them. Some activities had one or two risks assigned, but some had as  many as seven assigned.
section_title: Prioritizing risks and risk mitigation
paragraphs: Risks can impact the schedule in several ways: they can have a high  probability of occurring, have a large percentage impact on the durations  of the activities they affect, and/or they can apply to risk-critical paths,  which may differ from the baseline deterministic critical path. Beyond  applying 20 risks to the schedule, we are interested in identifying the  marginal impact of each risk. That is, we are interested in identifying  which risks have the largest impact on the schedule, because these are the  risks that should be targeted first for mitigation.
To find the marginal impact of a risk on the total project risk at a certain  percentile, the Monte Carlo simulation is performed with the risk  removed. The difference between the finish dates of the simulation with all  the risks and the simulation with the missing risk yields the marginal  impact of the risk. Table 11 gives the priority of risks at the 80th percentile  and the marginal impact of each risk.
The marginal impact directly translates to potential calendar days saved if  the risk is mitigated. Once risks are prioritized at the percentile desired by  management, a risk mitigation workshop can be implemented to deal with  the high-priority risks in order. The prioritized list of risks will form the  basis of the workshop, and risk mitigation plans can be analyzed using the  risk model to determine how much time might be saved. Project managers  cannot expect to completely mitigate any one risk nor is it reasonable to  expect to mitigate all risks. In addition, risk mitigation will add to the  project budget. However, some opportunities may be available to partially  mitigate risks.
section_title: Schedule issues
paragraphs: During our interviews with the local VA office in North Las Vegas, we  identified several missing activities:    Redesign for ductwork.
Submittal, approval, fabrication, and delivery of all Division 16 (electrical  equipment).
Effort related to building the tunnel from the central plant to the hospital  basement.
VA-furnished equipment delivery to the general contractor.
Systemwide testing.
Effort related to telecommunications.
Missing activities will lead to an underestimation of schedule risk because  these activities may become critical either in the baseline schedule or the  SRA. In particular, the missing fabrication and delivery of electrical  equipment assumes that the equipment will be at the construction site  when needed. Since the schedule does not contain activities for the  delivery of this equipment, risks leading to delays in delivery of electrical  equipment are not reflected in the SRA results.
Additionally, during our analysis, we identified 58 remaining activities with  finish dates that did not drive successor activities. That is, the activities  are open ended. This is a potential problem because the open-ended  activity can have an extended duration and not drive any successor in the  SRA simulation. However, officials stated that they were aware of these  open ends and they did not believe them to be an issue.
section_title: Appendix VI: Cost Increases and Schedule Delays
paragraphs: We found some projects that experienced both cost increases and  schedule delays, while other projects experienced only a cost increase and  still others experienced only a schedule delay. All projects, and whether  they experienced a cost increase, a schedule delay, or both, are in table 12.
section_title: Appendix VII: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the contact person named above, Tisha Derricotte, Colin  Fallon, Hazel S. Gumbs, Ed Laughlin, Jason T. Lee, Susan Michal-Smith,  Karen Richey, John W. Shumann, and Frank Taliaferro also made key  contributions to this report.