Military Construction: Observations on Mismanagement of the Kaiserslautern Military Community Center
Released: 2007-06-28T00:00:00

Letter

KMCC Currently Experiencing Substantial Cost, Schedule, and Performance Problems

The KMCC currently faces significant cost, schedule, and performance problems, and it is unclear as to when the project will be completed and at what cost. Despite being originally scheduled to open in early 2006, neither LBB-Kaiserslautern nor the Air Force can estimate a completion date for the project because of the widespread construction management problems. In addition, estimated costs associated with the KMCC have already exceeded original estimates and will continue to grow. LBB- Kaiserslautern mismanagement has caused numerous problems with the KMCC. Examples include poor designs, substandard workmanship on key building components, and a significant reduction in the number of workers on-site. Furthermore, there may be fraud within the project, which is supported by the fact that there are ongoing criminal and civil investigations by AFOSI and German police.

The latest official design schedule completed by LBB-Kaiserslautern and provided to the Air Force in September 2006 indicated that the KMCC would be completed by April 2007. However, during our visit to the KMCC in May 2007, LBB-Kaiserslautern and Air Force officials stated that key milestone dates from the most recent design schedule had obviously slipped. In fact, neither LBB-Kaiserslautern nor Air Force officials could provide a new estimated project completion date during our audit of the project. Also, both LBB-Kaiserslautern and the Air Force provided us current cost estimates of about $200 million, which have already exceeded the original estimate of about $150 million. We found that these cost estimates did not include substantial costs related to the expected roof repair and replacement discussed later, as well as hindrance claims associated with the project. Furthermore, the Air Force contract with LBB-Kaiserslautern is denominated in euros and therefore the U.S. cost equivalent varies with the exchange rate. For example, the original cost estimate of about $150 million was developed in 2003 when 1 dollar was able to purchase significantly more in euros than 1 dollar can currently purchase. Figure 1 below shows the trend in the strengthening of the euro against the U.S. dollar over the past several years.

The schedule delays associated with the KMCC have compounded cost problems because of the appreciation of the euro versus the U.S. dollar. Given the substantial costs associated with repairs to the roof, schedule delays, and potential hindrance claims by contractors, assuming currency rates remain higher than they were for the original project budget, the appreciation of euros versus the U.S. dollar compounds the effect of cost overruns on this project.

Since the start of construction in 2003, the KMCC has experienced numerous problems including poor design, substandard workmanship, poor coordination of the different contractors, and a reduction of workers on the site. Some of the more notable problems associated with this project include the following: Roof: The roof is experiencing water leaks causing considerable damage to the walls and the floors of the complex. According to Air Force officials, since the contractor responsible for roof construction went bankrupt, KMCC funding sources from the United States (AAFES, Air Force Services Agency, and Military Construction funds) will likely be used to pay the estimated millions of dollars in costs required to repair or replace the entire roof along with any internal damage. Figure 2 shows some damage in the KMCC resulting from the leak in its roof.

Exhaust ducts: The kitchen exhaust ducts installed in the KMCC do not comply with fire code standards established by the National Fire Protection Association. According to Air Force officials, it will take several months to make the exhaust ducts compliant with the fire codes at a cost of hundreds of thousands of dollars.

Bathroom faucets: Design plans called for some of the bathroom faucets in the KMCC to be automatic where water would turn on when a motion sensor indicated the presence of a person. However faucets and walls were installed prior to the electrical contractor installing wires needed to power the automated faucets.

Vandalism: In April 2006, vandalism occurred in over 200 rooms inside the KMCC. The cost to repair damage caused by the vandalism is estimated to be over $1 million. To make matters worse, as shown in figure 3, due to poor project coordination, a German contractor installed light fixtures on top of the vandalized walls. These lights will need to be removed to enable wall repairs to be made and then reinstalled.

Reduction of construction workers: In the past several months, the KMCC has faced a drastic reduction of the number of workers on-site. LBB-Kaiserslautern officials attributed this decrease to slow payment for services and reduced payment amounts from the Air Force due to increased scrutiny of invoices by the Air Force. The Air Force has delayed the payments to certain contractors because the total amount of charges billed to the Air Force has already risen to the contract cost ceiling for the specific contractor. Therefore, the Air Force has been unable to pay those contractors for work performed without a contract change order to increase the contract ceiling. As a result, many of the contractors either reduced the number of workers or have quit working altogether on the project. Prior to September 2006, the number of workers on the site was normally several hundred. Currently, the number of workers on the site is routinely less than 50.

In addition to the construction problems faced by the KMCC, there have been a number of personnel who have been removed or have resigned from the project. In the past year, project management officials from LBB- Kaiserslautern have been replaced. Also, JSK, the firm hired by LBB- Kaiserslautern to manage the KMCC, was fired. Finally, a senior Air Force civilian in charge of the project resigned from the position and left the Air Force in 2006. On top of those personnel changes, both the AFOSI and the German Police have ongoing investigations into the project. The investigations span a variety of issues, both criminal and civil, including the investigations of Air Force project management officials as well as German government officials. In the past year, both Air Force and LBB- Kaiserslautern offices have been searched and documentation seized by both AFOSI and German police in relation to these investigations.

KMCC Problems Caused by Overseas Construction Risks, LBB-Kaiserslautern Management Deficiencies, and Lack of Air Force Controls

Current problems facing the KMCC have been caused by the additional risks associated with overseas construction, project management deficiencies by LBB-Kaiserslautern, and the Air Force’s lack of effective controls to mitigate project risks. Guidelines set forth in ABG-75 add risk to the contract management process for U.S. forces construction in Germany. In addition, during the design and construction of the KMCC, the German government construction agent, LBB-Kaiserslautern, did not effectively carry out its project design and construction management duties. Finally, the Air Force failed to recognize risks associated with the KMCC and develop control procedures to minimize project risks. Because the most significant control that the United States can exercise over construction projects in Germany is financial control, the Air Force should have increased the project oversight controls to identify any invalid, unsupported, or inaccurate costs before money was spent. Instead, the Air Force did not have basic oversight and in some cases has circumvented controls in order to expedite payments.

Overseas Construction Risks

The KMCC presented increased risk from the beginning because U.S. forces are not in direct control of construction projects in Germany. Under the terms of ABG-75, most U.S. military construction projects are required to be executed by German government construction agencies, in this case LBB-Kaiserslautern, in accordance with German laws. This includes all contractual authority for design, bid tender and award, project execution, construction supervision, and inspection for all military projects within Germany. As such, the German government construction agency contracts directly with the design and construction companies responsible for a given project. As a result, the United States is required to work through this indirect contracting method, and does not have any direct legal relationship with the contractors for construction projects that are to be built on their behalf.

According to Air Force officials, because ABG-75 gives the German government such broad powers in the construction of military projects, the United States has limited influence on how construction projects are built. For example, Air Force officials stated that they were initially resistant to use a trade lots acquisition strategy for the construction of the KMCC because of the complexity involved with coordinating and managing the contractors associated with this strategy. Air Force officials stated that they relented to German government demands for trade lots after it was pointed out that the method of contracting was clearly within the German government’s prerogative under ABG-75. ABG-75 stipulates that the U.S. government pay German government construction agencies (e.g., LBB-Kaiserslautern) between 5 and 7 percent of the project cost for administering the contract regardless of the total project costs with no incentives for early completion. As a result, no incentive exists to minimize costs or encourage early completion.

Despite additional risks associated with ABG-75, U.S. forces do have some leverage in managing construction projects in Germany. Specifically, under ABG-75, the United States is granted the authority to approve designs and provide prior consent to any modifications to the construction contract (also known as “change orders”) that affect the scope, quality, or cost of the project. Any excess costs must be approved in advance by U.S. forces, and the forces are not liable for costs proved to be the fault of German officials or contractors. Thus, U.S. forces do have the “power of the purse” which can be used to pay only for costs within the scope of the contract. According to Air Force officials, the Air Force has the ability to cut off funding for its projects. However, since the projects are needed for base operations, such a step would only be used as a last resort.

Finally, general risks associated with overseas construction projects add to an already risky situation. Increased complexities of overseas projects include differences in languages, culture, construction laws, safety regulations, and exposure to changes in currency exchange rates. Changes in currency exchange rates can pose a significant risk when project costs must be paid in the host country’s currency, especially when projects take substantially longer to complete than originally planned. Despite risks associated with overseas construction, the Air Force did not institute sufficient controls to manage the project.

LBB-Kaiserslautern Did Not Effectively Perform Required Duties for the KMCC

During the design and construction of the KMCC, LBB-Kaiserslautern did not effectively carry out its project design and construction management duties. LBB-Kaiserslautern’s deficiencies in these areas have contributed to additional costs, schedule delays, and increased financial risk to the U.S. government for the KMCC project.

Flawed Project Design and Implementation

The design of the KMCC was inadequate and resulted in numerous instances of rework costing millions of dollars to fix. LBB-Kaiserslautern hired an architect-engineer firm, JSK, to draft plans for the KMCC, and subsequently contracted with JSK to be the construction manager. According to Air Force and AAFES officials, numerous design flaws were identified by the Air Force in the initial design review of the KMCC and were communicated to both LBB-Kaiserslautern and JSK. However, according to these U.S. officials, neither LBB-Kaiserslautern nor JSK incorporated many of their comments into the final design, which later resulted in additional work and costs. Air Force officials stated that, as of June 2007, they have identified millions of dollars of additional work required because of identifiable design flaws, which the Air Force plans to pay for in order to keep construction work moving forward.

The following are some examples of design and construction flaws for the KMCC project: Exhaust ducts: During review of the initial KMCC design, Air Force identified and commented to LBB-Kaiserslautern and JSK that the exhaust ducts used in the restaurant kitchens did not meet U.S. fire safety standards. However, LBB-Kaiserslautern and JSK failed to ensure the change was addressed by contractors responsible for duct construction. As a result, the exhaust ducts installed at the KMCC were not compliant with U.S. fire safety standards. In addition, when we toured the KMCC, an Air Force official showed us the material used to seal the exhaust ducts. According to the official, this material was flammable and, as such, posed a safety risk when hot gasses are vented through the exhaust ducts. Because of the poor design of the exhaust ducts, the Air Force has recently approved a change order for hundreds of thousands of dollars to fix the problem. Figure 4 below is a picture of the flammable sealant used in the kitchen exhaust ducts.

Retail space ceiling: The design of the ceiling in the AAFES retail area was not adequate to support light fixtures. The design detailed an open- grid suspended ceiling (not fitted with tiles) with light fixtures fitted into some of the openings. However, during installation, workers discovered that the ceiling grid was not strong enough to support the light fixtures. Ceiling tiles stabilize the grid to keep it from shifting, so omitting the tiles weakened the grid to the point where the light fixtures could not be supported. As a result of this design error, a contract change was necessary in order to provide additional steel supports for the ceiling grid.

Escalator/escalator pit: Poor design and construction coordination caused problems with installation of the building’s escalator. The escalator pit was initially built as part of the contract to construct the building’s concrete floor. A subsequent contract was issued for installation of the escalator itself. However, the contract specifications for the escalator installation did not sufficiently detail the size and location of the escalator pit, and the escalator provided by the contractor did not fit in the previously-built pit. As a result, rework was necessary to build a new pit in the proper location.

Ineffective Project Management

LBB-Kaiserslautern did not effectively manage the KMCC project. Instead of using a general contractor who would be contractually responsible to build the project, LBB-Kaiserslautern attempted to execute the project by managing more than 30 separate trade lot contracts by itself. Each trade lot contractor was only responsible for its section of work, and no one party, other than LBB-Kaiserslautern, was responsible for the overall completion of the project. In addition, the LBB-Kaiserslautern’s decision to use trade lot contracts also meant that LBB-Kaiserslautern would be required to properly coordinate the effort of all the contractors, adequately staff the project, and appropriately monitor construction schedule and costs, so that work could progress. As described below, LBB- Kaiserslautern did not carry out its requirements in the following areas: Poor project coordination: LBB-Kaiserslautern did not effectively coordinate the work of the more than 30 construction contractors on-site. This resulted in inefficiencies in construction as well as damage to finished work. For example, one contractor responsible for installing a tile floor was forced to delay work while the contractor responsible for installing the ceiling finished work over the area where the floor was to be installed. In another case, the contractor responsible for laying the paving stones outside the building was allowed to finish its work before major exterior construction was completed. This resulted in damage to the paving stones when heavy cranes were subsequently used on top of the stones to install exterior bracing to the building.

Inadequate staffing: In our interviews, LBB-Kaiserslautern officials told us that their office was understaffed. LBB-Kaiserslautern officials stated that this lack of staffing hindered LBB-Kaiserslautern’s ability to provide assurance that the project design was adequate and improve contractor coordination discussed previously. In part, as a result of the above listed design and coordination problems, numerous contract change orders were necessary. Again, the lack of staffing hindered LBB-Kaiserslautern’s ability to process necessary change orders as required by ABG-75. According to Air Force officials, there are hundreds of change orders that LBB- Kaiserslautern has approved, yet has not submitted documentation to the United States for approval. Many of these change orders also had corresponding invoices submitted and certified by LBB-Kaiserslautern that the Air Force subsequently paid. LBB-Kaiserslautern was only able to provide us a listing of the change orders involved. This was far less than the detailed specifications required for review by the Air Force prior to the approval of the change and payment.

Air Force officials also stated that this failure to process change orders was a major problem because this processing serves as the basis for increasing the obligation authority for the contract. In addition, LBB- Kaiserslautern officials stated they had approved the work for most of these change orders and thus the contractors performed the work and were expecting payment. According to Air Force officials, in some cases when the Air Force refused to make payment on the unapproved changes, contractors halted work and sent notices to the LBB-Kaiserslautern that they would be liable for any costs associated with delays in payment. In many cases, the Air Force chose to reduce controls and make payments on these items despite not having appropriate change order documents in an attempt to keep the work on the project progressing.

The lack of staff also hindered LBB-Kaiserslautern’s ability to sufficiently monitor the quality of the contractors work. For example, as stated previously, the KMCC roof is leaking substantially because LBB- Kaiserslautern did not properly monitor the contractor’s work. Because of this, the Air Force is facing potentially millions of dollars in additional costs to replace the poorly built roof.

Unreliable construction schedule and cost estimates: LBB- Kaiserslautern is responsible for providing the Air Force with up-to-date detailed construction schedules and cost estimates. According to Air Force officials, the latest official construction schedule provided by LBB- Kaiserslautern was in September 2006 and showed a completion date of March 2007 for the visiting quarters and April 2007 for the mall portion of the KMCC. During our visit in May 2007, LBB-Kaiserslautern officials stated that they do not have a current construction schedule or completion date established for the project. Despite the lack of an estimated completion date, LBB-Kaiserslautern officials had developed an estimate of the total KMCC cost at completion. This estimate currently projects that costs will be higher than original estimates of approximately $150 million. According to LBB-Kaiserslautern officials, this cost estimate does not include certain expected costs, which we consider significant. For example, as stated earlier, the roof on the facility is continually leaking and likely will need to be replaced. Air Force and AAFES officials estimate that the cost to replace the roof will be in the millions of dollars. In addition to roof estimates, there are additional costs associated with hindrance claims that were not included in the cost estimate. In fact, in May of 2007, LBB-Kaiserslautern officials stated they received a single claim for several million dollars, which has not been substantiated, from just one of the more than 30 contractors. Finally, LBB-Kaiserslautern cost estimates do not include adjustments for future cost increases on existing contracts. Although past experience on this project has shown that many of the contract amounts have increased due to change orders or quantity increases, LBB-Kaiserslautern did not include any estimates for these expected future increases.

Air Force Did Not Appropriately Minimize Risks

The Air Force did not incorporate sufficient controls to minimize the significant project risks involved with the KMCC. Control deficiencies included inadequate staffing, poor policies, and a lack of effective control processes in place. By not utilizing controls that were available to them through the ABG-75 agreement, the Air Force has given up any leverage it had on keeping project costs within budget. These control weaknesses contributed to schedule and performance problems without a sufficient reaction from the Air Force. In addition, after problems were identified, the Air Force did not take appropriate corrective actions.

Air Force Lacked Necessary Staffing and Expertise for Adequate Oversight

Air Force officials did not have adequate staff with appropriate expertise needed to oversee the KMCC. In 2002, the Air Force elected not to use the USACE as the servicing agent for the KMCC project. According to the Air Force officials, they were not required to use the USACE on this project because only a small percentage of the KMCC funds were based on appropriated military construction funding. However, in foregoing USACE oversight, the Air Force did not establish adequate staffing or contracting and construction management expertise needed for a project as complex as the KMCC. According to Air Force officials, at the inception of the project, there were approximately eight full time personnel assigned to the KMCC from the Air Force. In addition, the limited number of Air Force staff did not have adequate expertise in the areas of contracting or construction management. As of May 2007, no contracting officers or certifying officials have been assigned to the KMCC. These experts are trained and certified to obligate and spend funds on behalf of the U.S. government and would typically be found in any military construction- funded project.

As a result of the lack of staffing with adequate contracting and construction management expertise, many invoices came into the Air Force office, overwhelming the ability of the staff to adequately review invoices prior to payment. According to Air Force officials, no invoices were disputed prior to September 2006. However, after September 2006 when significant problems with the KMCC were recognized, some staffing improvements were made. For example, the Air Force increased the number of personnel to approximately 17 full time personnel currently on site, because it became apparent that they did not have sufficient personnel to conduct adequate reviews of invoices. Since the increase in staff, the Air Force has been able to review invoices more thoroughly, and according to Air Force officials, the percentage of recent invoices disputed increased to 75 percent.

Air Force Policies and Control Procedures were Inadequate

The Air Force did not have adequate policies and control procedures in place for the management of the KMCC. At the beginning of the project, project management officers lacked a standard operating procedure to follow. According to Air Force officials, the only written process in place was a simple one-page process flow chart to delineate how the entire process was supposed to work. Since the recognition of numerous problems associated with the KMCC, the Air Force has instituted additional control procedures, such as increased invoice reviews, but has not formalized those procedures into a written operating procedure.

We were unable to determine if there were any specific procedures in place prior to September 2006. However, the project schedule slippage and lack of disputes of invoices by the Air Force indicates that the controls in place were not fully effective. When we asked the Air Force officials about control procedures in place prior to September 2006, several officials, who were working on the project during the time in question, stated they were unable to answer questions based on advice from their legal counsel. The same officials who declined to answer questions stated that the project was under investigation by AFOSI. In addition, a senior Air Force civilian on the project prior to September 2006 had resigned and was therefore unable to answer questions. Without written procedures or explanations from Air Force staff, we could not determine what controls, if any, existed prior to September 2006.

In September 2006, Air Force officials recognized that significant problems faced the project. One problem specifically recognized was that numerous payments were made on invoices for work that had been billed on the 400 contract changes, which lacked documentation and had not been previously approved by the Air Force. Upon this recognition, the Air Force attempted to institute controls going forward. For example, the Air Force instituted a closer review of invoices to identify items that were billed but were not approved by the United States through change orders. However, under pressure to keep the project moving forward to completion, the Air Force subsequently relinquished much of this control by expediting the payment of invoices upon receipt from LBB-Kaiserslautern including charges for unapproved work. Examples of the relaxing of these controls include: paying invoices submitted after September 2006 on work billed to the Air Force related to the 400 contract changes which had not been submitted by LBB-Kaiserslautern, and approving invoices even though the line item quantities greatly exceed contracted amounts.

The Air Force stated the decision to relax the controls was made so that construction proceeded as expeditiously as possible on the KMCC. Despite the removal of these controls, the number of workers on-site has still decreased significantly. In addition, Air Force officials stated that they viewed these payments on unapproved work as “partial payments” of expenses, and that any disputes in payments could be recouped upon project completion. However, we have reported in the past that such “pay and chase” strategies are not effective and increase risks substantially to recover the unapproved amounts. The Air Force was unable to provide any examples were the United States had successfully recouped overpayments in German courts.

KMCC Problems May Adversely Affect Military Members and Future Construction Projects

The substantial schedule and cost overruns of the KMCC may affect military personnel and have major implications for future projects in Germany. The effects of these cost increases are likely to be shouldered by our men and women in the military. AAFES, the largest financial contributor to the KMCC, has stated that cost overruns have reduced the return of investment (e.g., the amount of profit they plan to receive from the project). As a result, AAFES and Air Force Services Agency funding of morale, welfare, and recreational activities for U.S. military members may be reduced. In addition, the escalation in costs may also affect the ability of AAFES and the Air Force Services Agency to finance future capital projects from its nonappropriated funds. Further, because of the delay in the completion of the visiting quarters portion of the KMCC, service members on travel to other locations, including Iraq and Afghanistan, may have to stay off-base. In addition to the inconvenience that this places on service members, the Department of Defense—and thus taxpayers—must fund the additional cost of any required temporary lodging off-base, which the Air Force estimates to be approximately $10,000 per day or $300,000 per month.

In addition to the effect on military members and their families, the current Air Force project management weaknesses may have implications for future Air Force construction in Germany. The Air Force planned construction within the Federal Republic of Germany for the next 5 fiscal years totals more than $400 million. These construction projects include small operations and maintenance projects (such as school renovations and road repairs) and major military construction projects (such as a $50 million clinic and a $50 million base exchange and commissary). Absent better Air Force controls, these projects may experience the same types of heightened risks associated with KMCC.

Concluding Comments

Although one of the major problems with KMCC related to ineffective project management by LBB-Kaiserslautern, the Air Force did not effectively institute oversight to mitigate the high-risk nature of the entire project. By the time the Air Force started making an attempt at oversight, the project was already several months past the original construction deadline of early 2006. With mounting problems including contractors walking off the job, the Air Force faces the dilemma of instituting controls far too late in the process and further extending the completion of the project versus paying whatever it costs to get the job done as quickly as possible. The likely substantial cost overruns and potential years of schedule slippage will negatively affect morale, welfare, and recreation programs for DOD service members, civilians, and their families for years. The Air Force needs to seriously consider substantial changes in oversight management capabilities for the hundreds of millions of dollars of planned construction projects planned in Germany over the next several years.

Mr. Chairman and Members of the committee, this concludes our statement. We would be pleased to answer any questions that you or other members of the committee may have at this time.

GAO Contacts

For further information about this testimony, please contact Gregory Kutz at (202) 512-7455 or kutzg@gao.gov or Terrell Dorn at (202) 512-6293 or dornt@gao.gov. Contacts points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this testimony.

Appendix I: Scope and Methodology

To assess the current problems facing Kaiserslautern Military Community Center (KMCC), we interviewed agency officials from the Air Force at Ramstein Air Force Base in Germany. We physically inspected the KMCC facility with an Air Force project manager and documented construction problems. We also reviewed financial records and statements in the form of contracts, change orders, and invoices to the extent that they were available.

To examine the effect the Auftragsbaugrundsaetze 1975 (ABG-75) had on the management of the KMCC project, we reviewed the ABG-75 agreement, which outlines construction requirements for U.S. forces stationed in Germany. In addition, we conducted interviews with officials from the Air Force, Landesbetrieb Liegenschafts- und Baubetreuung (LBB) the German government construction agency, and the U.S. Army Corps of Engineers.

In order to determine the management weaknesses of LBB and the Air Force, we interviewed officials from both organizations, conducted interviews with other organizations affected by the KMCC project including the Air Force Office of Special Investigations (AFOSI), Air Force Audit Agency, Air Force Services Agency, and the Army and Air Force Exchange Service. We also reviewed applicable Department of Defense Financial Management Regulations as well as the National Fire Protection Association standards.

To assess the effect that control weaknesses found in the KMCC project could have on future the Air Force projects in Germany, we obtained information from the Air Force on future construction plans in Germany. We also interviewed Air Force officials to determine what changes in processes had been made that would affect future construction projects.

We performed our audit work from May 2007 through June 2007. Audit work was conducted in accordance with generally accepted government auditing standards.

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