Military Construction: Kaiserslautern Military Community Center Project Continues to Experience Problems
Released: 2008-06-25T00:00:00

Letter

Progress on the KMCC Has Been Slow, Quality Problems Persist, and Project Costs Are Unknown

Approximately 1 year after our initial testimony and over 2 years after the KMCC’s originally scheduled construction completion date, the project continues to experience significant cost and schedule uncertainty along with construction quality problems and ongoing criminal investigations. Since our testimony in June of 2007, limited progress has been made on KMCC construction, and estimates of how much the total project will cost or when it will be completed are uncertain. Total project costs are uncertain because the Air Force does not track all costs associated with the project. Specifically, tens of millions of dollars related to design, foreign currency fluctuation, rework, personnel, and furniture and equipment costs are not included in the Air Force’s cost to date or estimate for construction completion of the project. Contingencies to fund items such as potential hindrance claims are also not included in the estimated costs for construction completion. When including all estimated costs, the total cost of the project will likely exceed $200 million.

Limited Progress Has Been Made

Over the past year, limited progress has been made on constructing the KMCC, and the project’s construction completion date is uncertain. Figures 1 and 2 show comparisons of the project when we visited in 2007 and during our last visit in May 2008. The comparison of the KMCC food court area shows that other than some wall finishes and floor tiles being installed, the area remains essentially the same and still requires finishing work and the installation of the food court restaurants. Overall, relatively few contractor employees were on-site from the time of our initial site visit in May 2007 through early 2008, as LBB-Kaiserslautern experienced repeated delays in reaching agreements with major contractors to return to work. While LBB-Kaiserslautern reached completion agreements with its major contractors in March 2008, and the number of workers on-site has increased since that time, it is not clear if the number and type of workers are sufficient to sustain production and meet LBB- Kaiserslautern’s new estimated construction completion date of January 2009. This projected date represents construction completion; however, the facility will not be open to the public for about 4 months following construction completion. Moreover, because LBB-Kaiserslautern has not met earlier construction schedules and the estimated construction completion date has continued to slip, we are concerned about LBB- Kaiserslautern’s ability to manage actions needed to achieve the January 2009 estimated construction completion date.

The comparison of the KMCC name-brand restaurant shows that the restaurant still requires painting, wiring, and other finishing work similar to that needed in 2007.

In addition, major construction deficiency problems, such as the leaking roof and improperly installed kitchen exhaust ducts, which we discussed in our 2007 testimony, are just now being repaired. For example, contracts were recently awarded for the first two of four phases of repair work on the leaking roof, and most of the deficient ductwork has been removed. However, additional problems, such as several long cracks in the concrete floor of the AAFES store, have been identified by the Air Force since our last testimony. LBB-Kaiserslautern has retained an expert consultant to investigate the floor cracks, and the consultant’s report recommends that joints be cut into the floor to control further cracking. The actual scope of the floor repair work and associated cost and schedule impacts are not known at this time. Figure 3 shows an example of these cracks. The pen in the photograph is provided for scale.

Final Costs of the KMCC Project Are Still Unknown

Because the Air Force does not track the total cost of the KMCC project, there are no accurate estimates of how much the total KMCC project will cost. Cost estimates provided by the Air Force primarily include core construction-related costs and do not account for millions of dollars in other costs related to the KMCC project. When all project-related costs are taken into account, the total cost for the project will likely exceed $200 million. This figure was derived by consolidating numerous Air Force cost estimates captured in different accounts, such as military construction funds (MILCON), non-appropriated funds, and operations and maintenance funds. According to Air Force officials, approximately $121 million has been spent on core construction-related costs for the KMCC as of March 31, 2008. In addition, Air Force officials estimate that an additional $41 million in construction-related costs are required to complete the project. However, this estimate only relates to those costs that the Air Force tracks for reporting purposes. Not included in the Air Force’s estimate are design costs, costs of rework to repair known construction deficiencies, foreign currency fluctuation costs, costs for furniture and equipment, some costs for secondary services, and costs for the numerous Air Force personnel reassigned from other projects in order to help manage the KMCC construction project. For example, the Air Force cost estimate does not fully reflect the effect of the weakening dollar compared to the euro because payments from MILCON funded project components to cover losses due to foreign currency fluctuation are drawn from a separate account that the Air Force does not track as part of this project. Table 1 shows the Air Force cost estimate for core construction-related expenses along with additional costs associated with the project. As the table shows, an accurate estimate on the total cost of the project is not possible because of a number of unknown expenses, such as the Air Force’s liability for contractor hindrance claims.

Additional clarification on selected project costs not included in the Air Force’s construction cost estimate is provided below.

Construction deficiency repairs. Deficient construction has been identified on major building components, including the roof and kitchen exhaust ducts. LBB-Kaiserslautern is taking steps to contract for repairs to correct these deficiencies.

Roof damage. Significant sections of the roof require repair or replacement. The current plan is to complete repairs to the roof in four phases. The first phase of repairs is expected to cost $2.7 million and is included in the Air Force’s construction cost estimate, which according to the Air Force is being paid for primarily with funds withheld from the original roof contractor. Costs for repair phases two through four are estimated by the Air Force to cost about $10.8 million and are not included in its construction cost estimate. U.S. government funds remaining from the original roof contract are being used to fund the majority of phase one repairs; therefore, the phase one repair cost is reflected in the Air Force’s construction cost estimate. Funds for repair phases two through four are initially being funded by the German government, and the Air Force excludes these costs in its construction costs to complete the project.

Kitchen exhaust ducts. The kitchen exhaust ducts installed in the KMCC do not comply with U.S. National Fire Protection Association standards specified by the Air Force. LBB-Kaiserslautern has completed the design for repairs to the exhaust ducts and is negotiating with its contractor a final price for their installation. The estimated installation cost is approximately $1.8 million. In early 2007, the Air Force agreed to pay for $600,000 of the rework and has included that amount in its construction cost estimate, but has not included the rest of the repair cost as part its construction cost estimate.

Secondary services. As the project has progressed, the Air Force has retained several contractor personnel to provide construction inspection, engineering, consulting, and other secondary services. For example, since January 2005 the Air Force has contracted for construction inspectors who are responsible for, among other things, ensuring that installed work meets the terms of the contract and checking that invoices correctly reflect the work performed. The cost for most of these secondary services is not included in the Air Force’s construction cost estimate. Air Force officials indicated that some of the Air Force’s technical consultants were also supporting other projects, but that the majority of their work involved support on the KMCC. Since the majority of work performed under these secondary services contracts relates to the KMCC project, we have included the cost of these contracts in the Air Force’s estimate.

Foreign currency fluctuation. Since the start of the project in 2003, the euro has appreciated 35 percent relative to the U.S. dollar. Because KMCC contractors are paid in euros but KMCC project funds are budgeted in dollars, the Air Force is susceptible to paying more when the dollar loses value. In addition, this risk has been magnified by the 2-year delay in completion of the project. Since the June 2007 testimony alone, the euro has appreciated by 15 percent, from $1.35 to $1.55. As a result of the devaluation of the dollar, nonappropriated fund payers (AAFES and AFSVA) have paid about $31.9 million in foreign currency fluctuation expenses, and appropriated MILCON funds have paid $8.6 million since the project’s inception. The Air Force includes nonappropriated fund foreign currency fluctuation costs in its construction cost estimates. However, because MILCON foreign currency fluctuation costs are paid from a separate account, the effect of foreign currency fluctuation is not reflected in the Air Force’s construction cost estimate. Therefore we have included in the estimate based on the Air Force’s reported numbers the actual foreign currency fluctuation costs paid to date associated with MILCON funds. In addition, the Air Force also did not include an allowance for future foreign currency fluctuation costs associated with MILCON funding. Based on the trend of the strengthening euro, these foreign currency fluctuation costs will only increase as MILCON expenses increase. Figure 4 shows the trend in the strengthening of the euro against the U.S. dollar over the past several years.

In addition to the estimated expenses listed above, there are still a number of significant costs associated with project completion that have not been estimated. These items include potential hindrance claims, repair of cracking concrete, and Air Force personnel costs for staff needed to manage the KMCC’s construction. Depending on the resolution of these unknown costs, the total cost of the KMCC project could increase substantially before completion.

Hindrance claims. As a result of delays to the project, the Air Force expects that contractors will submit claims for additional costs incurred from being hindered in their performance. As of June 1, 2008, LBB-Kaiserslautern had forwarded change order requests for contractor hindrances totaling $8.2 million (5.4 million euros) to the Air Force. However, the Air Force has denied the requests because it contends that they are not substantiated. In anticipation of contractors making formal hindrance claims—that must meet a prescribed legal standard and would be adjudicated through the German courts—the Air Force has retained a consultant to evaluate the history of the project and prepare the Air Force’s claims defense strategy. At this time, the Air Force’s potential exposure to claims is unknown.

Concrete cracking. Long cracks have been identified by the Air Force at various locations on concrete floors of the KMCC subsequent to our 2007 site visit. A German court appointed an expert consultant to determine the severity of the cracks and identify their causes. The consultant’s report, issued in March 2008, indicates that joints will need to be cut into the floor to keep additional cracks from occurring. LBB- Kaiserslautern subsequently initiated design work to detail the scope of the repairs. The Air Force expects that LBB-Kaiserslautern will award a contract for the repairs in July 2008. At this time, the cost of repairs is unknown. (See fig. 3 for an example of these cracks).

Air Force personnel costs for staff managing the KMCC.

According to the Air Force, a team of 29 military, civilian, and contractor personnel manage the KMCC construction project. They are responsible for financial management, claims management, design and construction management, and stakeholder operations. This team comprises 6 military officers and enlisted personnel, 10 civil service employees, and 13 contracted employees. The cost of the salaies and benefits for military and civil service employees who have been reassigned from other projects to assist in managing the KMCC project since its inception in 2003 is a real cost of the project but is not included in the Air Force’s overall cost estimate. This cost is difficult to quantify because the military and civilian personnel occasionally work on other projects, and it is not clear how their time is apportioned among projects.

Federal Republic of Germany funds. The extent to which project cost increases will be borne by the Air Force and its funding partners is unknown because of uncertainties regarding the $37.9 million (25 million euros) committed by the German government for the project. The German government allocated $15.2 million (10 million euros) to pay contractors’ invoices against change orders that had not yet been approved by the Air Force. According to the Air Force, only $8.6 million (5.7 million euros) were actually expended by LBB-Kaiserslautern prior to the funds expiring at the end of calendar year 2007. According to the German officials, this initial $8.6 million amounts to a loan, and the Air Force stated that it will reimburse this amount when it approves the change orders and makes payment against the associated invoices. The additional $22.7 million (15 million euros) are planned to be used by LBB-Kaiserslautern to fund contracts for rework items, such as roof repairs and kitchen exhaust duct replacement, and may also be used to settle contractor hindrance claims. In discussions with us, German officials characterized the $22.7 million (15 million euros) as a loan as well and said that they expected full repayment of funds. However, Air Force officials contended that they will only pay for valid work under the original KMCC contract and will not pay for rework. In light of these opposing views, for transparency purposes, all expenses paid from the German funds are incorporated into the total project cost regardless of which party is ultimately responsible for financing them.

Delayed Completion Has Caused Opportunity Costs to Grow

As a result of the delayed KMCC project completion, AFSVA and AAFES, two major funding sources for the project, have experienced negative financial effects. Both AFSVA and AAFES invested in the project with the expectation of returns being generated in early 2006, the project’s original construction completion date. However, the delayed completion has resulted in lost profits and in turn reduced the amount of funds AAFES and AFSVA can provide to military communities for morale, welfare, and recreation. For example, AAFES estimates that every month the KMCC’s opening is delayed, AAFES loses approximately $500,000 in net profits from stores such as the base exchange and food court restaurants. In total, AAFES estimates it will have lost more than $14 million in net profits by the time construction is estimated to be completed in January 2009. Also, the unavailability of the 350 hotel rooms to be completed in the KMCC Visitors Quarters results in the U.S. government paying more for lodging on the local economy. According to an Air Force estimate, on average each month that the opening of the hotel is delayed results in the U.S. government paying an additional $90,000 for off-base lodging of displaced personnel traveling at the government’s expense. Estimated increases in off-base housing costs will total $2.9 million dollars if construction is completed in January 2009.

Criminal and Civil Investigations Continue to Surround the KMCC and Other Projects

In our June 2007 testimony, we reported that several Air Force and LBB- Kaiserslautern personnel involved in management of the KMCC and other RMTP projects were under investigation by AFOSI and German police for a variety of issues, both criminal and civil. AFOSI officials stated that the cases have matured significantly since that time; however, formal indictments have not yet been made. Because the investigations are still active, AFOSI is limited as to the information it can disclose. However officials did state that investigations involve U.S. military and civilian employees, employees of LBB-Kaiserslautern, and KMCC trade contractors. These individuals are being investigated for offenses such as dereliction of duty and bribery.

The Air Force Has Improved Controls over the KMCC Project

The Air Force has made significant improvements in its oversight and internal controls over the KMCC project. As stated in the June 2007 testimony, the Air Force had failed to institute effective management oversight and internal controls in order to mitigate the high risk of the project. Specifically, the Air Force lacked standardized policies, did not have sufficient staffing to oversee the project, was not thoroughly reviewing invoices, and was approving change orders and payments on the project without proper documentation. In the last year, the Air Force created the RDO, which centralized management oversight of the KMCC project and brought together appropriate personnel specializing in financial management, claims management, design and construction management, and stakeholder operations. The Air Force has also standardized its invoice and change order review processes to minimize future risks of paying for unapproved work. The Air Force trained and appointed certifying officers and accountable officials for the KMCC project to ensure that personnel authorizing payments are aware of their fiduciary responsibilities. Finally, during 2007, senior officials within the Air Force engaged officials from the Department of State and the Federal Republic of Germany in an effort to encourage progress on the project.

Establishment of the RDO and Improvements in Invoice and Change Order Reviews

In August 2007, the Air Force established the RDO to centralize control over all aspects of the KMCC project. According to the Air Force, the RDO has 29 personnel, which is a significant increase from the 8 oversight personnel initially assigned to the KMCC project. These 29 personnel are 6 military officers and enlisted personnel, 10 civil service employees, and 13 contracted employees. The RDO is divided into four branches: financial controls, ABG-75 administration, engineering, and operations/quality assurance. The Air Force also standardized policies and procedures for the four RDO branches, which are documented in an official operating instruction manual for the KMCC project. The documented policies were a measurable improvement from the one-page flowchart used during our last visit in 2007. As part of the establishment of the RDO, the Air Force also appointed and trained 9 certifying officers and accountable officials. Certifying officers are responsible for certifying vouchers for payment. Accountable officials provide source information to a certifying officer to support a decision to certify a voucher for payment or to disburse funds. Appointment and training of these types of officials are key to ensuring that appropriate controls are in place over payments made by the Air Force. The RDO also includes 6 quality assurance engineers and technicians responsible for performing technical reviews of designs and conducting daily surveillance of the work site.

Since creating the RDO, the Air Force has also improved its review process for invoices. During our initial visit last year, we reported how Air Force management instructed its staff to certify for payment invoices with items included in unapproved change orders and items that exceeded quantity limitations specified in contracts. The Air Force has since revised its policy and now rejects invoices for quantities in excess of contracted amounts and also rejects invoices with items included in unapproved change orders. For example, if the Air Force receives an invoice that contains charges for items contained in unapproved project change orders, the Air Force will reject the invoice and refuse payment until LBB- Kaiserslautern submits an invoice that only lists items that have been approved by the Air Force. In addition, the Air Force has gone back on prior invoices and recouped amounts previously paid in excess of contracted quantities.

Involvement of Senior Air Force Officials

Beyond improvements over internal controls and the establishment of the RDO, senior Air Force, Department of State, and German government officials have also increased oversight of the project. Beginning in August 2007, the U.S. Air Forces in Europe Vice Commander, the U.S. Ambassador to Germany, and the heads of the German Ministry of Construction and the German Ministry of Finance started meeting regularly to discuss problems facing the KMCC. These repeated meetings between U.S. and German officials prompted the German government to provide $37.9 million (25 million euros) to the project for backlogged change orders and repair work. According to the Air Force, German support is essential for a successful completion of the KMCC project. The Air Force’s expectation is that by maintaining strong relationships among senior officials, it will ensure that those running the KMCC project are able to better organize, prioritize, and execute the project. Unfortunately, this joint effort has not yet expedited KMCC construction to an acceptable pace according to Air Force officials.

Other Recent U.S. Projects on Ramstein Air Base Have Experienced Similar Problems

Other projects recently completed in the KMCC area managed by LBB- Kaiserslautern have experienced problems similar to those affecting the KMCC. Air Force officials report that several recent projects on Ramstein Air Base experienced cost and schedule growth, including projects that were delivered by LBB-Kaiserslautern months after the planned delivery dates. In addition, several projects were delivered with construction flaws that have caused flights to be diverted and have affected the processing of freight shipments. According to the Air Force, it has experienced fewer problems with less sophisticated projects, such as the construction of more than 1,000 new military family housing units in the KMCC area and the construction of an indoor pool on Ramstein Air Base, that were managed by LBB-Kaiserslautern. However, construction of these projects is not comparable to the scope and complexity of constructing the KMCC building, runways, and other operational facilities.

Cost and Schedule Growth of Other Projects

Numerous recent projects associated with the RMTP built on Ramstein Air Base by LBB-Kaiserslautern have experienced significant cost growth, according to the Air Force. Several of these projects have also not received final bills from LBB-Kaiserslautern despite being turned over to the United States more than a year ago. Therefore, the final costs of the projects are still unknown. In addition, many of the same group of projects managed by LBB-Kaiserslautern also experienced significant schedule growth according to the Air Force, including projects that were delivered months after their scheduled completion dates.

Construction Deficiencies of Other Recently Completed Projects

Construction deficiencies experienced on several of the RMTP projects built by LBB-Kaiserslautern add to the concerns associated with cost and schedule growth. Specifically, there have been several projects where faulty construction has resulted in safety concerns, building evacuations, and potentially reduced useful lives of facilities. Below are examples of such problems.

South runway. This runway was recently built on Ramstein Air Base in order to upgrade the base’s capabilities in support of overseas missions, including those in Iraq and Afghanistan. However, the runway lights are adversely affected by a construction defect that allows groundwater to collect in the underground ducts and manholes that contain electrical components used to control the lights. The intrusion of water has damaged electrical components resulting in power outages to the lights. These lights are crucial for operations because they allow aircraft to land during times of extremely limited visibility. According to the Air Force, because of the lighting failures, aircraft could not land during periods of limited visibility from November through December 2007 and flights were diverted to other bases in Europe. Portable lights have been used to temporarily resolve the problem. Additionally, water is pumped from the manholes as an ongoing maintenance activity that according to Air Force officials, has cost about $65,000 to date. Finally, during rainy periods, several large ponds developed between the south runway and adjacent runways and taxiways because of poor water drainage. These ponds, which were several acres in total area during our visit in March 2008, have attracted large waterfowl, which pose a safety hazard to aircraft using the runway. Figure 5 shows one of these large ponds. Studies and court actions are currently under way to resolve these issues.

Freight terminal. This large 100,000 square foot material handling facility was constructed to assist in processing freight shipments to and from overseas locations. However, deficiencies with the structural steel that frames the freight terminal required evacuation of the building until additional support columns could be installed. According to the Air Force, because of material fabrication issues, insufficient welds, and undersized connections, the steel structure that supports the freight terminal building was determined to be at risk of collapsing. As an interim safety measure, 41 additional support columns were installed to bolster the structural integrity of the facility. According to the Air Force, these additional supports effectively reduce the open area in the center of the facility and affect freight processing operations. For example, forklifts are restricted in maneuvering and cannot access certain areas. Figure 6 shows an example of the additional support columns installed within the freight terminal building. A permanent resolution will be determined by legal proceedings that are currently ongoing in the German courts. In addition, officials were concerned that a building attached to the freight terminal was also structurally deficient as a result of potentially insufficient welds on the structural steel. Because of these concerns, the building was evacuated from July through September 2007 while additional support columns were installed. An inspection completed in March 2008 confirmed that the structural steel was, in fact, installed correctly and that the building is not at risk of collapsing. The attached building is currently being used as intended.

Hot cargo pad. A large concrete area intended to be used for loading live munitions onto aircraft destined for overseas locations such as Iraq and Afghanistan was recently built near the Ramstein Air Base runway. However, when building the concrete pad, contractors did not install dowels between adjacent concrete slabs as is typically done in this type of construction. Because the dowels were not installed, Air Force officials stated that differential settling of the concrete slabs could result in damage to the cargo pad and reduce its useful life. The Air Force is currently negotiating with LBB-Kaiserslautern to determine what, if any, actions will be taken to address this issue. While this does not represent a safety risk, the reduced life span of the cargo pad could result in the Air Force spending money for repair or replacement earlier than would normally be expected.

Concluding Comments

Although the Air Force has made measurable improvements in its oversight and control of the KMCC since our last testimony, the project remains at risk because of schedule and cost uncertainties. With few visible changes, no reliable construction completion date, rising repair costs, and continuing construction quality problems, the KMCC will continue to be a high-risk project. Even after the KMCC is completed and open, it will likely take years before all issues related to this project, including litigation and potential construction quality problems, are resolved.

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

GAO Contacts

For further information about this testimony, please contact Gregory Kutz at (202) 512-6722 or kutzg@gao.gov or Terrell Dorn at (202) 512-6293 or dornt@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this testimony.

Appendix I: Scope and Methodology

To determine the current status of the Kaiserslautern Military Community Center (KMCC) construction project, including projected costs, cost completion analyses, projected construction completion dates, and status of ongoing investigations, we interviewed officials from the Air Force at Ramstein Air Base in Germany, the Army and Air Force Exchange Service (AAFES), the Air Force Services Agency (AFSVA), the U.S. Army Corps of Engineers (USACE), the Air Force Audit Agency, the Air Force Office of Special Investigations (AFOSI), and the Department of State. In addition, we interviewed officials from Landesbetrieb Liegenschafts-und Baubetreuung office in Kaiserslautern (LBB-Kaiserslautern), the German government construction agency; the Federal Republic of Germany’s construction division; and the German police. We physically inspected the KMCC facility with an Air Force project manager and observed construction deficiencies. We also reviewed financial records and statements in the form of contracts, change orders, and invoices to the extent that they were available. We also compiled Air Force and LBB- Kaiserslautern cost estimates for the various cost elements associated with the KMCC project.

To determine whether oversight and internal control improvements have been made by the Air Force since our last testimony, we interviewed Air Force officials from the KMCC Resident Director’s Office. We also interviewed officials from LBB-Kaiserslautern, AAFES, AFSVA, AFOSI and the Air Force Audit Agency. We obtained and reviewed project management plans, standardized policies and procedures, cost estimates, training materials for certifying officers and accountable officials, and other relevant documents related to project management.

To determine if other projects recently completed in the KMCC area have experienced problems similar to those affecting the KMCC, we interviewed Air Force officials regarding their construction projects in Germany. We also conducted interviews with other organizations, including USACE, AFOSI, LBB-Kaiserslautern, and the Air Force Center for Engineering and the Environment to understand the cost, schedule, and construction flaws experienced by other military construction projects in the KMCC area and how they may affect the viability of future construction projects. We also reviewed available technical expert reports documenting construction deficiencies associated with these projects.

Because of ongoing investigations, we were not able to fully explore and discuss the details of fraud investigations with AFOSI and the German police, which limited the scope of our audit.

We conducted this performance audit from November 2007 through June 2008 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives.

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