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

Letter

Background

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.

Costs Have Increased for 18 of the 32 Construction Projects and Schedules for 11 Construction Projects Have Been Delayed

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.

Several Projects Have Experienced Cost Increases

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.

Schedule Delays Have Occurred in 11 Projects

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.

Cost Increases and Schedule Delays Result from a Number of Factors

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.

Some Cost Estimates Were Not Thorough

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.

Some Cost Estimates and Schedules Were Affected by Scope Changes

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.

Some Cost Estimates Were Affected by Market Conditions and Some Schedules Were Affected by Unforeseen Events

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.

VA Is Working to Improve Estimates but Could Better Assess Risks to Costs and Schedules

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.

VA Is Working to Improve Initial Estimates, but Needs to Analyze Cost Risks

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.

VA Generally Follows Best Practices for Construction Schedules at the Projects We Visited, but Does Not Conduct a Schedule Risk Analysis

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.

VA Does Not Have an Integrated Master Schedule for Major Construction Projects

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.

Conclusions

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.

Recommendations for Executive Action

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.

Agency Comments and Our Evaluation

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.

Appendix I: Scope and Methodology

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.

Appendix II: Comments from the Department of Veterans Affairs

Appendix III: Consolidation and Expansion of Medical Centers in Cleveland, Ohio

Project Overview

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.

Reasons for the Project

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.

Project Cost

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.

Project Schedule and Changes in Scope

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.

Appendix IV: Construction of Spinal Cord Injury/Disease Center in Syracuse, New York

Project Overview

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.

Reasons for the Project

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.

Project Cost

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.

Project Schedule

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.

Appendix V: Construction of New Medical Center Complex in Las Vegas, Nevada

Project Overview

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.

Reasons for the Project

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.

Project Cost

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.

Project Schedule

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.

Schedule Risk Analysis

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.

Identified risks

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.

Prioritizing risks and risk mitigation

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.

Schedule issues

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.

Appendix VI: Cost Increases and Schedule Delays

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.

Appendix VII: GAO Contact and Staff Acknowledgments

GAO Contact

Staff Acknowledgments

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.