Army Corps of Engineers: Factors Contributing to Cost Increases and Schedule Delays in the Olmsted Locks and Dam Project
Released: 2017-02-16T00:00:00

Letter

Background

This section discusses the Corps’ organizational structure; the Olmsted Locks and Dam project; the project’s timeline, maximum project cost, funding, and construction method; and the economic benefits and costs of navigation projects.

Corps Organizational Structure

Located within the Department of Defense, the Corps has both military and civilian responsibilities. Through its Civil Works program, the Corps plans, designs, constructs, operates, and maintains a wide range of water resources projects for purposes such as navigation, flood control, and environmental restoration. The Civil Works program is organized into three tiers: headquarters in Washington, D.C.; eight regional divisions that were established generally according to watershed boundaries; and 38 districts nationwide. The eight divisions, commanded by military officers, coordinate civil works projects in the districts within their respective geographic areas. Corps districts, also commanded by military officers, are responsible for planning, engineering, constructing, and managing projects in their districts. Each project has a project delivery team of civilian employees that manages the project over its life cycle. Each team is led by a project manager and comprises members from the planning, engineering, construction, operations, and real estate functions. The Louisville District, located within the Great Lakes and Ohio River Division, is responsible for managing the Olmsted project.

In addition, the Civil Works program maintains a number of centers of expertise to assist Corps division and district offices. One of these centers is the Cost Engineering and Agency Technical Review Mandatory Center of Expertise located in Walla Walla, Washington. This center provides technical support and assistance to the districts on cost engineering issues, such as developing cost estimates and performing agency technical reviews of cost estimates included in all decision documents.

Project Description

The Olmsted Locks and Dam project is located at Ohio River Mile 964.4 between Ballard County, Kentucky, and Pulaski County, Illinois (see fig. 1). The project replaces Locks and Dams 52 and 53, which were completed in 1928 and 1929, respectively. Temporary 1,200-foot-long lock chambers were added in 1969 at Locks and Dam 52, and in 1979 at Locks and Dam 53. Because of their antiquated design and age, these structures are unable to meet current traffic demands without significant delays, according to Corps documents. Corps documents also stated that the existing structures have deteriorated and are overstressed during normal operating conditions. The temporary locks at Locks and Dams 52 and 53 have significantly passed their 15-year design life.

The Olmsted project consists of two 110-by-1,200-foot locks adjacent to the Illinois bank, and a dam composed of five 110-foot-wide tainter gates, a 1,400-foot-wide navigable pass controlled by 140 boat- operated wickets, and a fixed weir extending to the Kentucky bank (see fig. 2). A lock and dam enable vessels to navigate through a shallow or steep section of river. A lock is an enclosed chamber in a waterway with watertight gates at each end, for raising or lowering vessels from one water level to another by admitting or releasing water. A dam is a barrier that is built across a stream or river to obstruct the flow of water, creating a pool of water deep enough to allow boats and barges to move upstream or downstream. Once the Olmsted dam is completed, the wickets will be raised during periods when the river is low to maintain the upper pool and lowered at other times to form a navigable pass, allowing river traffic to pass through without going through a lock. The tainter gates can be raised or lowered to adjust water flow without adjusting the dam.

Project Timeline

Figure 3, an interactive graphic, shows a timeline of key events in the Olmsted Locks and Dam project.

WRDA 1988 authorized construction of the Olmsted project at a cost of $775 million (in October 1987 price levels) based on the report of the Chief of Engineers, dated August 20, 1986. The authorized cost was based on the detailed baseline cost estimate for the recommended plan presented in the 1985 Lower Ohio River Navigation Feasibility Report. At the time of authorization, the Corps estimated that construction would take 7 years. As with all civil works projects, the authorized cost does not include inflation and is based on the assumption that the project will receive the maximum amount of appropriations that can be efficiently and effectively used each year. The Corps received its first appropriation for construction in fiscal year 1991, and awarded the first major construction contract in 1993 for the construction of the lock cofferdam.

Maximum Project Cost

When Congress authorizes a specific amount of money for a project, this authorized project cost provides the basis for the project’s maximum cost. Section 902 of WRDA 1986, as amended, defines the maximum project cost as the sum of (1) the authorized cost, with the costs of unconstructed project features adjusted for inflation; (2) the costs of modifications that do not materially alter the scope of the project, up to 20 percent of the authorized cost (without adjustment for inflation); and (3) the cost of additional studies, modifications, and actions authorized by WRDA 1986 or any later law or required by changes in federal law. The maximum cost is known as the 902 limit.

Each district with an ongoing construction project is to update the 902 limit established for the project to account for inflation every time the district calculates a new cost estimate or benefit-to-cost ratio. If the project’s estimated costs are approaching the 902 limit, the project delivery team may start preparing a PACR to seek an increase in the project’s authorized cost. If the project’s actual costs reach its 902 limit before congressional action, construction must stop until the project gets a new authorization that increases its costs and therefore its 902 limit.

Funding

The Corps’ Civil Works program typically receives an appropriation annually through the Energy and Water Development Appropriations Act or an omnibus appropriations act. These acts have typically appropriated a sum to each civil works appropriation account, including investigations, construction, and operation and maintenance, to fund projects related to the nation’s water resources. Accompanying congressional reports often specifically list individual projects and the amount directed to each project.

When the Olmsted project was first authorized in WRDA 1988, its construction costs were to be shared equally between funds appropriated to the Corps and from the Inland Waterways Trust Fund. The trust fund receives a portion of the revenue from a fuel tax levied on commercial towing companies using the inland and intracoastal waterways. The trust fund is administered by the U.S. Department of the Treasury. However, after congressional appropriation of revenues from the fuel tax and Office of Management and Budget apportionment, the Corps is responsible for determining the timing and amount of trust fund expenditures. By 2009, however, the Olmsted project was using the majority of trust fund appropriations, which constrained the amount available for other projects on the inland navigation system. In 2014, two laws were enacted that reduced the trust fund’s contribution for Olmsted construction costs from 50 to 25 percent in fiscal year 2014 and then to 15 percent in subsequent years.

In-the-Wet versus In-the- Dry Construction Methods

The Olmsted dam is being constructed using a construction method called in-the-wet, in which concrete sections of the dam, known as shells, are built on shore and then carried out into the river and set in place in the riverbed. At Olmsted, the shells are lifted by a wheel-mounted super gantry crane—the largest crane of its kind in the world and capable of lifting 5,100 tons—along rails and taken to the shore. The shells are then floated out onto the river by a catamaran barge that has a capacity of 4,500 tons and lowered onto foundations installed in the riverbed.

This method differs from traditional in-the-dry construction, which uses cofferdams to drain the riverbed to allow work, such as building the Olmsted locks. A cofferdam is a temporary, watertight structure that surrounds a construction site to prevent water from flooding the area. Cofferdams can vary in design from simple earthen dikes heaped up around a construction site, to more complicated and costly structures constructed of steel sheet piling.

Economic Benefits and Costs of Navigation Projects

Federal guidance serves as the key source for the Corps’ analyses of the benefits and costs associated with alternative plans for achieving water and related land resource objectives. Based on this guidance, the Corps is to identify the project plan that would provide the greatest net benefit to society. Moreover, the Corps is to identify and clearly describe areas of risk and uncertainty so that it can make decisions knowing the reliability of the estimated benefits and costs and of the effectiveness of alternative plans.

To estimate benefits and costs, the Corps compares the economic conditions expected under the proposed alternatives with those expected without the project (i.e., business as usual) during the period of analysis (e.g., 50 years). Potential benefits include any reduction in the transportation cost for barge traffic expected to use the waterway over the analysis period. Potential costs include the outlays made to construct the project (e.g., for labor and materials) and interest during construction, which represents the hypothetical return or “benefit” that could have been earned by investing the money in some other use. To calculate the interest cost, compound interest is added to the construction costs incurred during the construction period, at the applicable project discount rate, from the date the expenditures are incurred to the beginning of the period of analysis (i.e., the date the project begins to generate benefits). Federal policy establishes the discount rate for this purpose. According to Corps planning guidance for civil works projects, the total investment cost of the project equals construction cost plus interest during construction.

The Corps has conducted several analyses of the Olmsted project’s benefits and costs, beginning with a feasibility study in 1985. The Corps later updated its estimates in 1990 (Benefit Update) and in 2012 (PACR). According to Corps economists, the PACR analysis of benefits and costs was thoroughly reviewed, within the Corps and by an independent peer review panel. Also in 2012, the Corps used the PACR analysis to examine the benefits and costs associated with changing the construction method for the dam from the in-the-wet method to the more traditional in-the-dry method.

The Corps and Consultant Reports Identified the Construction Method, Contract Type, and Other Factors as Primary Contributors to Cost Increases and Schedule Delays

Reports by the Corps and others identified the in-the-wet construction method, the contract type, and other factors as primary contributors to cost increases and schedule delays in the Olmsted project, most of which were associated with constructing the dam. The PACR and the 2012 consultant report identified the selection of the in-the-wet method to construct the dam as contributing to cost increases and schedule days. In addition, the Corps’ decision to use a cost-reimbursement contract contributed to increased management costs, according to the PACR and the 2008 consultant report. The reports by the Corps and others also identified other key factors that contributed to cost increases and schedule delays, including limited funding, changes in market conditions, and design changes.

Selection of the In-the-Wet Method and Accompanying Construction Challenges Identified as Contributing to Project Cost Increases and Schedule Delays

The Corps’ 1997 decision to construct the Olmsted dam using the in-the- wet method was based on projections that this method would cost less and would allow the project to be completed more rapidly than the traditional in-the-dry method. The Corps had originally planned to construct the Olmsted project using an in-the-dry method using four cofferdams. However, the Olmsted project was the subject of many studies and reviews seeking to improve on the authorized plan by incorporating innovative design and construction methods, according to the PACR. One of these methods was in-the-wet construction, which had been used to construct tunnels and bridges in a marine environment, but which had not been used to construct a project such as Olmsted in a river environment.

In the early to mid-1990s, the Corps commissioned several studies to look at different ways to construct the dam, including using the in-the-wet method. One study examined using a mobile cofferdam instead of a conventional fixed cofferdam. Another study looked at alternate methods for constructing the tainter gate section of the dam. A third study performed a life cycle cost analysis of five different alternatives of dam types and construction methods, including in-the-dry, in-the-wet, and a combination of the two methods. A fourth study, issued in December 1997, evaluated and compared using the in-the-wet and in-the-dry construction methods, as well as using a combination of both methods to provide a basis for deciding between the methods. This study found that using the in-the-wet method under two different construction schedule scenarios would cost either $54.9 million less and allow the project to be completed 2 years earlier or about $63.2 million less and be completed 5- 1/2 years earlier.

Prior to the issuance of the 1997 study, the Corps established a team of Corps engineers, program managers, and others to review the study and recommend a construction method. The team members evaluated specific project components, including structural engineering, cost estimating, and design. The team said in a July 1997 document that it would be feasible to construct the dam with either the in-the-wet or in-the- dry method. However, using the in-the-wet method option would more likely allow the project to be completed 1-1/2 to 2 years earlier than using the in-the-dry method and the estimated cost savings would be approximately $40 million. Some team members expressed concerns with the in-the-wet method, including three engineers, one of whom stated that the in-the-wet method’s foundation would be more expensive than the foundation required for the in-the-dry method, another who expressed doubts over whether the project would be finished according to schedule, and another who noted that the Corps’ Louisville District had little or no experience using the in-the-wet method. The Corps district decided to use the in-the-wet method, citing four reasons—lower cost, shorter construction schedule, less impact on navigation during construction, and the potential for fewer negative environmental impacts. At the time, the Corps’ decision to select in-the-wet as the method of construction was not required to undergo an agency technical review or an independent external peer review.

The PACR stated that the independent government estimate for the in- the-wet dam construction was low and that cost increases resulted from several factors that were not known at the time of the contract award. These include certain river conditions that slowed construction, the effect of the site’s seismic conditions on fabricating the shells, and funding constraints. Also, the 2012 consultant report stated that the independent government estimate, prepared in 2003, inadequately characterized the uncertainty and risk in pursuing an innovative in-the-wet construction method and set expectations of project cost and duration far too low. The Corps agreed with the consultant’s findings and recommendation that the agency undertake research and development to generate more robust cost and schedule estimates when using novel technology such as in-the-wet construction.

According to the PACR, the construction challenges associated with the in-the-wet construction method were overcome but required “a lot more effort than ever could have been envisioned.” Also, according to a Corps official, there was a learning curve associated with the in-the-wet method and one-of-a kind infrastructure that cost more than the Corps thought. For example, according to the PACR, as the project design continued following the 1989 General Design Memorandum, the Corps planned to construct a hydraulic wicket dam. In May 1994, the Corps awarded a contract to construct a full-sized prototype of the dam to test how the gate would operate and to test maintenance procedures, and this contract was completed in December 1995. This modeling revealed the complexity of the design, and the Corps revised the design to construct tainter gates and boat-operated wickets instead. In addition, the PACR stated that the in-the-wet method required specialized equipment that increased costs, such as the super gantry crane and the catamaran barge, which have minimal salvage value.

In January 2012, the Corps’ Deputy Commanding General for Civil and Emergency Operations directed the Great Lakes and Ohio River Division to explore alternative construction methods and to present recommendations to Corps headquarters by June 1, 2012. In providing this direction, the Deputy Commanding General stated that the in-the-wet construction method had proven more expensive and time-consuming than originally envisioned. Among other things, the division was to develop concept-level designs for in-the-dry construction that could be used to develop a reliable cost estimate, and to compare that estimate to the in-the-wet estimate.

The Corps completed its review of the in-the-wet versus in-the-dry methods in a May 2012 study, which underwent agency technical review and was certified by its Cost Engineering and Agency Technical Review Mandatory Center of Expertise. The study concluded that constructing the dam components using the in-the-dry method was a technically feasible alternative. The study found that continuing to use the in-the-wet method would cost more than switching to the in-the-dry method, but it would allow the project to be operational sooner. Specifically, the study estimated that the in-the-dry method would cost $2.810 billion compared to the PACR’s $2.918 billion estimate of performing the work with the in- the-wet method. However, the study found that using the in-the-dry method would result in the project not being operational until 2022, which is 2 years later than the PACR’s estimated operational date of 2020.

A June 2012 Corps internal memorandum stated that based on the findings of the in-the-dry study, the Great Lakes and Ohio River Division recommended continuing to use the in-the-wet construction method for Olmsted. The memorandum stated that if the Corps changed course and used the in-the-dry method, it would require that a new contract be awarded. As a result, potentially two contracts would be ongoing for a period of time, which would likely exceed available funds and cause a delay. The memorandum also stated that because the Corps does not have the authority to use incremental funding or a continuing contracts clause, it would need to award another cost-reimbursement contract for the in-the-dry construction. The Deputy Commanding General for Civil and Emergency Operations directed the division to explore the possibility of soliciting opinions of industry rather than prescribing the construction method. In response, a Corps official presented the study’s findings in an August 2012 meeting of the Inland Waterways Users Board, which is composed of members of industry. This official said that the division recommended using the in-the-wet construction method, in part based on the Corps having learned from its experience with the construction and having become more efficient at setting shells. This official also stated that the contractor was about to begin setting shells for the navigable pass and, compared to the shells for tainter gates, these shells were smaller, lighter, and uniform in size, which would allow the contractor to set them more quickly. Board members stated that they deferred to the Corps as the engineering experts to decide on the method of construction. A Corps official said that the Corps decided to continue using the in-the-wet method in November 2012.

Corps’ Decision to Use a Cost-Reimbursement Contract Seen as a Source of Increasing Management Costs

The Corps’ decision to use a cost-reimbursement contract for the dam construction after not receiving offers for a firm fixed-price contract contributed to increased administrative and overhead costs, according to the PACR and the 2008 consultant report. In September 2002, the Corps requested proposals for the dam construction contract as a firm fixed-price contract—the contract type the agency typically uses for civil works projects—but received no offers. According to the 2008 Corps report and the 2012 consultant report, the agency received no offers because the construction method was innovative, the river conditions were too risky, and the contractor could not get bonding. The Corps amended the request for proposals to include, among other things, a provision that the government would pay a stipend for satisfactory and reasonable contractor proposals, but received no offers.

After considering different options, the Corps decided to request proposals for a cost-reimbursement contract rather than a firm fixed-price contract. According to a district official, the construction of Olmsted dam was not practical for a firm fixed-price contract because of the risks to the contractor in undertaking a complex project and the unknowns associated with the in-the-wet construction method. Specifically, the Corps requested proposals for a cost-plus-award-fee contract, rather than a cost-plus- incentive-fee or a cost-plus-fixed-fee contract, because according to a Corps official, it was the best fit for the project. According to the Federal Acquisition Regulation, an award fee contract is suitable for use when the work to be performed is such that it is neither feasible nor effective to devise predetermined objective incentive targets applicable to cost, technical performance, and schedule. Alternatively, an incentive fee contract should be used when cost and performance targets are objective and can be predetermined, allowing a formula to adjust the negotiated fee based on variations relative to the targets. A district official stated that a cost-plus-incentive-fee contract was not appropriate because targets could not have been reasonably determined since the in-the-wet construction method had never been attempted before. Difficult river conditions provided additional risks to the contractor. According to the Corps official, a cost-plus-fixed-fee contract would not have provided sufficient incentive for the contractor because the fee would not change.

In May 2003, the Corps requested proposals for the dam construction as a cost-plus-award-fee contract and received two offers, and awarded the contract in January 2004 to a joint venture. According to a Corps cost analysis of the proposals, the winning proposal included a lower maximum award fee of 5 percent, capped overhead costs, and had more overall budgeted cost savings than the other proposal. The winning proposal was $564 million, which was more than 25 percent higher than the independent government estimate. However, the Corps’ Office of the Chief Counsel said that the statutory prohibition on the Corps awarding a contract for river and harbor improvements with a price that exceeds 125 percent of the independent government estimate did not apply to the Olmsted dam contract because it was a cost-reimbursement contract.

The PACR and the 2008 consultant report noted that the effort to manage a cost-reimbursement contract is more cost- and time-intensive than managing a firm fixed-price contract. For example, the PACR stated that there are additional activities associated with a cost-reimbursement contract, such as audit services, voucher reviews, and award fee evaluation boards. The PACR estimated that the Corps’ cost of construction management for these additional activities increased by more than $74 million (in October 2011 price levels), in part because the change in completion date had extended the construction schedule. The 2008 consultant report stated that the cost-reimbursement contract necessitated a substantial amount of administrative effort to track, record, and evaluate the contractor’s performance, and that doing so increased the Corps’ staff needs by approximately 40 percent. A district official said that the Corps hired 3 additional staff and the contractor hired 10 to 15 additional staff to perform these administrative tasks.

In 2009, we reviewed federal agencies’ use of cost-reimbursement contracts and found that they involve significantly more government oversight than do fixed-price contracts, which means the government incurs additional administrative costs on top of what it is paying the contractor. For example, we found that the government must determine that the contractor’s accounting system is adequate for determining costs related to the contract and update this determination periodically. In addition, we found that contractor costs need to be monitored—known as cost surveillance—to provide reasonable assurance that efficient methods and effective cost controls are used.

Another cost associated with the cost-reimbursement contract is evaluating the contractor’s award fee. For each evaluation period, the Corps is to assess the contractor’s performance against explicit criteria relating to cost, schedule, quality, and safety and environmental compliance, as set forth in the award fee plan. The 2012 consultant report found that the Olmsted project team did not have the experience to manage a cost-reimbursement contract, but that the team had instituted management methods and techniques to control project costs, many of which were industry best practices and consistent with Corps and Department of Defense guidance. The Corps agreed with the report’s recommendation that if the Corps plans to use a cost-reimbursement contract for other civil works projects, the agency needs to identify training required for project members when it develops the acquisition strategy. The report also concluded that the Corps’ management of the cost-reimbursement contract was not a significant factor in explaining the project’s cost and schedule overruns, and Corps officials we interviewed agreed.

Within the last few years, the Corps has taken actions to help improve its management of civil works projects, including Olmsted. In 2012, the Corps designated Olmsted as a mega-project because of its cost, importance, and complexity, among other things. The Corps issued guidance in 2012 on managing mega-projects. According to the 2012 guidance, the Great Lakes and Ohio River Division is to provide progress reports to Corps headquarters and an integrated project schedule and cost estimate that the project team updates monthly. Corps officials said that the Corps created its Integrated Project Office in 2012 to help increase its management focus on Olmsted. In 2016, the Corps updated its mega-project guidance to require quarterly reports on such things as analysis of risk. The Corps also has daily, weekly, and monthly meetings to discuss how the dam contractor is staying on schedule, controlling cost, and managing risks. In 2014, the Corps adopted a recommendation from a 2010 report prepared by navigation industry representatives and Corps navigation experts to prioritize new construction and rehabilitation projects based on an examination of factors such as economic return, risk-based analysis, and the estimated cost and construction schedule. As a result, the Corps made Olmsted its top priority construction project. In the Corps’ March 2016 capital investment plan, prepared in response to WRRDA 2014, Olmsted remained its top priority construction project.

Other Key Factors Identified as Contributing to Cost Increases and Schedule Delays

The reports by the Corps and others also identified other key factors that contributed to cost increases and schedule delays, including limited funding, changes in market conditions, and design changes.

The Olmsted project’s authorized cost was based on the Corps’ assumption that each year the agency would receive the maximum amount of funding that it could efficiently and effectively spend. However, according to the reports by the Corps and others, the Olmsted project was significantly underfunded in some years, which contributed to cost increases and schedule delays. Specifically, according to these reports, the amount the Corps allocated for the Olmsted project from its annual appropriation, together with the amount appropriated from the Inland Waterways Trust Fund, was less than optimal for construction, and in 2004 and 2005, the Corps reprogrammed appropriations from Olmsted to another project. Incremental funding from the Inland Waterways Trust Fund also contributed to delays and increased costs, according to the 2012 consultant report.

According to the Corps reports, limited funding resulted in delayed contract awards and increased contract durations to conform to the funding received. For example, according to the PACR, the approach wall contract was awarded 2 years later than originally planned because of limited funding, which delayed the award of the dam contract by 2 years. About 2 months before the award of the Olmsted dam construction contract, the Corps told the offerors to develop revised estimates based on the assumption that $17.5 million would be available the first year, with $80 million available each year thereafter, which increased proposal costs by $18.2 million and added 1 year to the completion date, according to the PACR. However, according to the reports by the Corps and others, during the first 2 years of the dam contract, the project had less funding than assumed. Specifically, according to the 2012 consultant report, the dam contract received approximately $5 million of the anticipated $17.5 million in 2004. The other funds were reprogrammed to the McAlpine locks, which the Corps viewed as urgent because their failure would cause the Ohio River navigation system to fail. In 2005, funds were again reprogrammed, with the dam contract receiving approximately $47 million of the anticipated $80 million for the year. However, according to the 2008 Corps and 2012 consultant reports, reprogramming was curtailed significantly in fiscal year 2006 in accordance with the Energy and Water Development Appropriations Act and accompanying congressional committee reports.

Also, according to a Corps headquarters official, in fiscal year 2003, the balance of the Inland Waterways Trust Fund, which generally pays half of the construction costs of navigation and rehabilitation projects, started to decline because so many projects were under construction. The official said that from fiscal years 2005 to 2009, there was a sharp decrease in the balance of the trust fund as fuel tax revenues started to decline, and that by fiscal year 2009, the fund was nearly depleted. As a result, expenditures from the fund were limited to the amount of annual fuel tax revenues collected for that particular year. According to the 2012 consultant report and the headquarters official, the Olmsted project was funded on a monthly basis, and this incremental funding also contributed to delays and increased costs. For example, incremental funding caused the 2009 shell fabrication season to be split between 2009 and 2010, according to the 2012 consultant report.

According to the reports by the Corps and others, changes in construction market conditions contributed to increases in the cost of the dam. After the Corps awarded the dam contract in January 2004, unexpected and significant increases in the price of construction equipment and materials occurred. According to the PACR and the consultant reports, the 2005 hurricane season, which included Hurricanes Katrina and Rita, created a scarcity of barges and cranes at the time when the contractor was trying to mobilize the necessary equipment to construct the dam. Specifically, according to the 2012 consultant report, most of the barges scheduled for use in building the dam were under construction in shipyards along the Gulf Coast when the hurricanes struck. As a result, barge production slowed tremendously and prices doubled as the demand for existing barges increased because of the hurricane restoration efforts.

Also, according to the reports by the Corps and others, domestic and international construction booms created a high demand for construction materials after the award of the construction contract. The Corps reports presented data from the U.S. Department of Labor’s Bureau of Labor Statistics, which showed that the price of construction materials increased significantly after 2004. According to the 2008 consultant report, from 2002 to 2007, the price of fabricated steel increased about 300 percent, the price of cement increased about 90 percent, the price of riprap increased by 100 to 200 percent, and the price of fuel increased about 300 percent. In addition, insurance and bonding cost increased about 230 percent. Since the dam construction contract was awarded in January 2004, the contractor’s proposal did not include these increases in the cost of materials.

The reports by the Corps and others identified design changes during the dam construction as contributing to increased costs. However, the reports do not provide the amount by which the changes increased costs. Examples of design changes included the following:

The consultant reports cited the use of a super gantry crane instead of sleds to move the precast shells into the river as a design change that contributed to increased cost. The Corps’ 2016 Lessons Learned Report stated that the change was made because design issues related to sled deflection could not be overcome.

The PACR and the 2012 consultant report cited the need to reinforce the site for the shell precast yard and the marine skidway as contributing to increased cost. According to the PACR, after awarding the construction contract, it was determined that the soil conditions at the site for the precast yard and the marine skidway were inadequate to support the foundation loads and that an extensive amount of piling was required to support their weight.

The Corps reports and the 2012 consultant report cited the need to address slope stability issues on the shore as contributing to increased cost. The Corps reports stated that an active slide was observed during monitoring of the Illinois bank at the site of the locks. A district official said that the Corps observed the slide. Defining the extent of the slide problem and determining the best solution required additional effort. The Corps reports stated that these problems also added to the effort required to design and build the precast yard and marine launching facility.

The PACR cited the need to increase the length of the foundation piles for the tainter gate portion of the dam and to conduct additional excavation because of sand waves as contributing to increased cost. According to a district official, sand waves are constantly migrating downriver to the construction site, and as sand collects on the footprint of the foundation, the riverbed has to be excavated so that shells can be set correctly, which increases cost.

Total Cost of Benefits Foregone from Project Delays at Olmsted Is Uncertain

The total cost of benefits foregone from project delays that have occurred at Olmsted is uncertain, primarily because the estimates that the Corps developed for the project are no longer relevant or are of limited use for estimating the benefits that might have been generated had the project become operational as planned in 2006. The extent to which the project incurs another type of benefit foregone—the additional interest during construction incurred because of the longer construction period— depends on economic factors, such as the project discount rate.

Benefits That the Olmsted Project Would Have Generated Had It Become Operational as Planned Are Uncertain

The benefits that the Olmsted project would have generated had it become operational as planned in 2006 are uncertain, primarily because the estimates that the Corps has made are no longer relevant or are of limited use for this purpose. The Corps analyzed the benefits and costs associated with the project several times, including in a 1990 study. In that study, for example, the Corps estimated that the project would begin generating average annual benefits of about $920 million in 2006. According to the PACR, the Olmsted locks and dam project once operational would reduce the cost of shipping products on the Ohio River by processing barge shipments more efficiently than the two existing locks and dams. Corps officials said, however, that this estimate is no longer relevant for estimating the benefits foregone from past project delays. In particular, as noted in the PACR, the 1990 study did not anticipate the regulatory and market factors that reduced the demand for coal and coal shipments on the Ohio River, beginning in the 1990s. In addition, because the 1990 study did not assess the uncertainty associated with key assumptions, such as the barge traffic forecast, it cannot be used to assess what the benefits might have been, beginning in 2006, under lower barge traffic forecast assumptions. In general, fewer barge shipments mean less congestion and delay and lower benefits from replacing the existing locks and dams, if all else remains the same.

In 2012, the Corps updated its analysis of the benefits and costs associated with the Olmsted project, based on a revised operational date of 2020. The Corps estimated, for example, that the project would generate average annual benefits of about $875 million per year over 50 years, beginning in 2020. The Corps used the analysis to estimate the benefits foregone from potential delays in the future, should the project opening be delayed again. In a June 2012 presentation before the Inland Waterways Users Board, for example, the Corps indicated that a pause in construction at Olmsted (e.g., to shift funding to other Corps projects) could delay its opening 4 years to 2024, which could result in benefits foregone of about $3.5 billion ($875 million each year).

The updated estimates from the PACR could be viewed as rough estimates of the benefits foregone since the delayed 2006 opening, but the estimates are of limited use for this purpose for several reasons. First, the PACR economic analysis assesses whether the potential benefits of the Olmsted project would outweigh its remaining costs. Corps economists said that the analysis was not designed to estimate the benefits foregone from project delays that occurred in the past, and as a result, the benefit estimates would be less reliable when used for that purpose.

Second, the PACR estimates were based on assumptions about economic conditions expected in the future and may not represent the economic conditions that existed when past project delays occurred. For the PACR analysis, the Corps assumed that the existing locks and dams would need to be closed for repairs several times over the period of analysis (i.e., beginning in 2020) and that this would reduce the volume of shipments that could transit the locks during those closures. As a result, transportation cost savings could be generated by replacing the existing facilities with the Olmsted project, which is expected to be closed less often. These assumptions, however, may not align with the actual performance of the existing locks and dams in the past. For example, Corps economists said that the existing facilities have performed more reliably than expected, in part because funds were expended to maintain them in an operating condition. Moreover, changes in the PACR assumptions about the reliability of the existing locks and dams can significantly affect the benefit estimates. As a result, the PACR benefit estimates would be less reliable as a measure of benefits foregone if the assumptions about the expected performance of the existing facilities do not align with their actual performance in the past.

Third, the benefit estimates, which are based on forecasts of barge shipments through the locks beginning in 2020, may not represent the actual traffic that transited the locks and dams in the past. For example, the PACR assumed that barge shipments through Locks and Dam 52 would reach about 113 million tons in 2020 and grow thereafter. This tonnage is greater than the roughly 94 million tons that the PACR indicates were shipped through the same locks in 2006—the year that the Olmsted project was projected to open. In addition, according to Corps documentation, barge shipments through the existing locks have generally fallen since 2006. Barge traffic is a key input in the benefit analysis because it is used in estimating the effect of congestion and delay at the locks and the transportation cost savings expected to be generated by replacing the existing structures with the Olmsted project. The PACR indicated that the benefit estimates are extremely sensitive to changes in barge traffic assumptions, but did not present the benefits associated with alternative traffic forecasts.

Finally, the barge traffic forecasts on which the PACR benefit estimates are based were developed in the early 2000s. However, the forecasts do not incorporate factors that have reduced the demand for barge shipments, particularly for coal, since the forecasts were developed. According to the PACR, for example, coal is the dominant commodity in terms of volume on the Ohio River System. In 2015, we found that coal’s share of electricity generation had declined from 2001 through 2013, partly because of plant retirements brought about by comparatively low natural gas prices and the potential need to invest in new equipment to comply with environmental regulations. In addition, in 2014, we found that power companies plan to retire an even greater percentage of coal- fired generating capacity than expected earlier. The panel that conducted the peer review of the PACR in 2010 found that the traffic forecasts should be updated to include more recent actual barge traffic (i.e., for years 2006 through 2009) and that additional sensitivity testing should be conducted to analyze uncertainty associated with coal-related environmental issues. In addition, Corps officials said that barge shipments containing coal are expected to continue to decline over the short and medium terms, but that shipments for some other commodities, such as those related to natural gas production, have increased.

Another Type of Benefit Foregone—Additional Interest Incurred during Construction—Depends on Factors Such as the Project Discount Rate

According to Corps economists, another type of benefit foregone is the additional interest during construction incurred as a result of project delays. Corps guidance states that costs incurred during the construction period should be increased by adding compound interest at the applicable project discount rate from the date that expenditures are incurred up to the year the project begins operation. The interest represents the hypothetical return or “benefit” that could have been earned by investing the money in some other use. Delays that increase the construction period can also increase the interest because interest is compounded over a longer construction period. The Corps’ 1990 study assumed that the construction period would last from 1991 to 2006, and the PACR extended the time frame for the construction to 2024.

To illustrate the potential effect of past delays on the interest cost during construction, we compared the Corps’ estimate of interest during construction from the PACR with its estimate of the interest during construction from the 1990 study. The interest estimate in the PACR represents the interest cost expected over the entire construction period estimated by the Corps, including delays, from 1991 through 2024. The interest estimate from the 1990 study represents the interest expected over a shorter construction period, from 1991 through 2006 (i.e., updated in terms of price level and present value using a 4 percent project discount rate). We found the difference in interest to be about $400 million, which represents the additional interest associated with factors such as changes in the project design, spending levels, and market conditions that led to the construction delays and increased construction costs. For the PACR analysis, for example, the Corps estimated that the Olmsted project would incur about $1.3 billion in interest during construction by the time construction was completed in 2024. Based on the 1990 study, the Olmsted project was expected to incur about $900 million in interest during construction. Nonetheless, the estimate of additional interest would change if factors such as the project discount rate were changed. For example, the additional interest cost would be about $300 million, based on the 7 percent discount rate that Office of Management and Budget economic guidance indicates should be used for evaluating proposed federal investments.

Agency Comments

We provided a draft of this report to the Department of Defense for review and comment. We received a written response from the department, reprinted in appendix II. The department said it appreciates the opportunity to review the report and it has no comments to add to the report.

We are sending copies of this report to the appropriate congressional committees, the Secretary of Defense, and other interested parties. In addition, the report is available at no charge on the GAO website at http://www.gao.gov.

If you or your staff members have any questions about this report, please contact me at (202) 512-3841 or fennella@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 members who made key contributions to this report are listed in appendix III.

Appendix I: Full Text for Figure 3, Timeline of Key Events in the Olmsted Locks and Dam Project, 1985–2014

The following information appears as interactive content in figure 3 when viewed electronically.

1985: Lower Ohio River Navigation Feasibility Report The Louisville District of the U.S. Army Corps of Engineers (Corps) completed the Lower Ohio River Navigation Feasibility Report. The report recommended replacing Locks and Dams 52 and 53 with a single project consisting of a new set of locks and a new dam. Construction was estimated to take 7 years.

1986: Chief of Engineers Report The Chief of Engineers completed a report recommending that Congress authorize the construction of the Olmsted project. The report provided a detailed baseline cost estimate for the recommended plan presented in the 1985 feasibility report.

1988: Water Resources Development Act of 1988 The Water Resources Development Act of 1988 authorized construction of the Olmsted project at a cost of $775 million based on the Chief of Engineers Report, with the costs of construction shared equally between funds appropriated to the Corps and from the Inland Waterways Trust Fund. At the time of authorization, the Corps estimated that construction would take 7 years.

1989: General Design Memorandum The Louisville District issued its design plan for the Olmsted project. The plan estimated the total project cost to be $801 million (October 1988 price levels) and construction to take about 12 years.

1990: General Design Memorandum Supplement The Louisville District issued a modified project design plan resulting from comments on the General Design Memorandum and from changes in the dam configuration and project scope as presented in the General Design Memorandum.

1990: First appropriation for construction The Corps received its first appropriation for construction of the Olmsted project.

1993: Award of lock cofferdam construction contract The first major contract was awarded for the construction of the lock cofferdam.

1997: Method of Construction Study A consultant study compared the in-the-wet and in-the-dry construction methods and found that the in-the-wet method would cost less, provide the greatest schedule flexibility, and be just as reliable as in-the-dry construction. For these reasons, the study recommended that the Corps select the in-the-wet method to construct the dam.

1997: Decision to construct the dam using the in-the-wet method The Louisville District decided to construct the dam using the in-the- wet method because of lower cost, shorter construction schedule, reduced impact on navigation during construction, and potential for fewer negative environmental impacts. It was estimated that it would take 6 years to construct the dam.

1999: Design Memorandum No. 8, Dam The Louisville District issued its proposed design for the Olmsted dam, which incorporates changes made after the completion of the General Design Memorandum and Supplement.

2002: Request for proposals for the dam construction as a firm The Corps requested proposals for the dam construction contract as a firm fixed-price contract, but received no offers.

2003: Request for proposals for the dam construction as a cost- The Corps requested proposals for the dam construction as a cost- reimbursement contract and received two offers.

2004: Award of dam contract The Corps awarded the dam construction contract to a joint venture contractor. The winning proposal was $564 million. The dam was estimated to be completed in 8 years.

2006: Dam rebaseline estimate A rebaseline estimate increased the total estimated cost of the dam construction contract by approximately $81.6 million.

2011: Dam rebaseline estimate A rebaseline estimate extended the schedule by 4 to 5 years and increased the cost of the dam construction contract by approximately $551.1 million.

2012: In-the-Dry Study The Corps conducted a study to determine whether to complete the dam using the in-the-wet construction method or the in-the-dry method. The study estimated that continuing to use in-the-wet construction would cost more, but would allow the project to be completed sooner. For this reason, the Corps decided to complete the dam using the in-the-wet method.

2012: Post-authorization change report Because the project would exceed its maximum authorized cost, the Corps submitted a post-authorization change report to Congress in 2012, seeking an increase in the Olmsted project’s authorized cost to $2.918 billion, with an estimated completion date of 2024.

2013: Continuing Appropriations Act, 2014 The Continuing Appropriations Act, 2014, increased the Olmsted project’s authorized cost to $2.918 billion.

2014: Consolidated Appropriations Act, 2014 The Consolidated Appropriations Act, 2014, provided that for fiscal year 2014, 25 percent of the funding proposed for the Olmsted project would be derived from the Inland Waterways Trust Fund.

2014: Water Resources Reform and Development Act of 2014 The Water Resources Reform and Development Act of 2014 specified that beginning with fiscal year 2015, only 15 percent of the Olmsted project’s construction costs are to be paid from the Inland Waterways Trust Fund.

Appendix II: Comments from the Department of Defense

Appendix III: GAO Contact and Staff Acknowledgments

GAO Contact

Anne-Marie Fennell, (202) 512-3841 or fennella@gao.gov.

Staff Acknowledgments

In addition to the contact named above, Vondalee R. Hunt (Assistant Director), Marie Bancroft, Timothy Guinane, and Susan Malone made key contributions to this report. Important contributions were also made by Michael Armes, Martin (Greg) Campbell, Patricia Farrell Donahue, Jason Lee, Oliver Richard, Dan Royer, Jeanette Soares, Kiki Theodoropoulos, and William T. Woods.