VA Construction: Additional Actions Needed to Decrease Delays and Lower Costs of Major Medical-Facility Projects
Released: 2013-05-03T00:00:00

Letter

Background

VA operates one of the largest direct health-care delivery systems in the United States. As well, VA is one of the largest federal property-holding agencies, with 35,352 acres of land, 5,873 buildings, and over 149 million square feet of medical facilities and administrative space. VA provides health care to veterans in 152 medical centers, and nearly 1,400 community-based outpatient clinics, nursing homes known as community- living centers, veteran-counseling centers and live-in facilities.medical facilities offer services which range from primary care to complex specialty care, such as cardiac or spinal cord injury. VA has specialized services at some of its medical facilities for those veterans with post- traumatic stress disorder, whose condition cannot be managed in a primary care or general mental health setting.

According to VA, the average age of VA medical facilities is approaching 60 years. The department is updating its infrastructure to allow for cost- effective management of an aging inventory under increased workload demands, changing veteran patient demographics, advances in medical technology, complex treatment protocols, new advanced procedures, and evolving federal requirements. Additionally, VA’s facility program has struggled to keep pace with advancements in health care services that often dramatically change the physical infrastructure requirements of hospitals and clinics. Furthermore, changes in veteran demographics, ranging from the illnesses and care required for veterans of different generations and conflicts to the population shifts among different areas of the country, place a continued demand on the capital-asset portfolio.

To plan for future infrastructure needs, VA established its Strategic Capital Investment Planning process for the 2012 budget submission.As part of this planning effort, VA annually reviews its real property priorities and conducts a gap analysis to identify the needs of its medical facilities across the country. Local plans are centrally validated, evaluated, and consolidated into a prioritized national project list. VA also uses this planning process to develop a 10-year capital plan, which prioritizes a list of projects targeted to reduce the gaps. From the 10-year capital plan developed for the agency’s 2013 budget submission, VA estimated that it would cost approximately $21.7 billion to address all capital infrastructure costs for major medical-facility projects while also remediating all existing and projected gaps in medical facilities. However, this does not include life-cycle costs for infrastructure maintenance. According to VA, it is important to note that this estimate is a snap shot in time, based on current market conditions, baseline capital portfolio and demographic data, and projected needs.submission stated that the $21.7 billion in costs will likely change as projects move through the planning process and project requirements are more refined.

The agency’s 2013 budget The VA Office of Construction and Facilities Management (CFM) is responsible for administering major construction projects, including major No funds may be used for any major medical- medical-facility projects. facility construction project over $10 million, unless the funds have been specifically authorized by law, and VA is required to submit a prospectus to the House and Senate Committees on Veterans’ Affairs that contains information about each planned major medical-facility project. This information includes an initial estimate of the overall cost of the project and, in some cases, a completion date for the project. To begin a project, CFM hires an architectural and engineering firm to develop an architectural design for the project and a cost estimate for the project’s completion. The cost estimate provided by the architectural and engineering firm is generally more detailed and accurate than the initial cost estimate VA provides to Congress in a prospectus. After the project has been designed, VA requests construction funding. CFM then solicits bids for project construction and awards a construction contract.construction contractor is responsible for developing a detailed construction schedule that reflects the contract duration. CFM reviews the construction schedule and also assigns CFM engineers—known as resident engineers—to work on-site to monitor the construction process until the facility is ready to be turned over to local VA medical staff. Once construction begins, the construction firm is generally responsible for cost The increases and schedule overruns under the terms of the firm-fixed-price contract, unless VA and the contractor agree to a change to modify the scope, account for unforeseen conditions, or remedy a design error.

VA classifies the phases of construction projects in the following terms: planning; design (developing the design and construction documents); construction; and activation (staffing and activities that are needed to begin operations at a new medical facility). (See table 1 for more detail on these construction phases).

VA uses three project delivery methods for managing major medical- facility projects: “design-bid-build,” “design-build,” and “integrated design and construction” (IDC). Although VA has mainly used the traditional design-bid-build method, it has recently employed design-build and integrated design and construction. See table 2 for details on these project delivery methods. (App. II includes the project delivery methods used for each of VA’s 50 major medical-facility projects).

VA staff at various organizational levels participate in the construction management process for major medical-facility projects. For example, a contracting officer is ultimately responsible for managing the execution of the construction contract, while local site-level staff,—such as a project manager, senior resident engineers, and resident engineers—oversee the actual construction, with assistance provided by the contracting officer. In some instances, officials from CFM’s regional offices and VA’s central office, including the Office of General Counsel, provide assistance to the contracting officer. VA staff from CFM and VHA, such as medical center directors, also provide support during the construction of major medical- facility projects.

During the construction phase of any federal government project, changes need to be made to the construction contract. VA contracts contain specific language and requirements, in accordance with applicable Federal Acquisition Regulations, which give the government the right to make changes within the scope of the contract. Generally, government contracts contain a changes clause that permits the contracting officer to make unilateral changes, in designated areas, within the general scope of the contract. Contractors can also request changes to the contract. Changes can occur for a variety of reasons, such as design changes resulting from the addition of new medical equipment.

Cost Increases and Schedule Delays at the Four Largest Projects Occurred for a Variety of Reasons

Cost Increases and Schedule Delays

For VA’s four largest medical-facility construction projects, when comparing November 2012 construction project data with the cost and schedule estimates first submitted to Congress, cost increases ranged from 59 percent to 144 percent, representing a total cost increase of nearly $1.5 billion and an average increase of approximately $366 million per project. The schedule delays ranged from 14 to 74 months with an average delay of 35 months per project (see table 3).

In commenting on a draft of this report, VA stated that project designs, initial cost estimates, and completion dates are developed years prospectively, several years before Congress appropriates funds and the construction contract is awarded, which determines the cost to complete the project and the completion date. VA provided information indicating that after the Department received appropriations for these four projects, and the construction contract was awarded, the magnitude of cost increases and schedule delays was significantly less. For example, the costs for the four projects decreased or remained unchanged, and the number of months the completion dated extended ranged from 0 to 10 months.construction contract would be more accurate for measuring schedule delays; however, using this start date would not account for how VA VA officials said that using the initial completion date from the managed these projects prior to awarding the construction contract. By using the methodology VA suggests, the schedule delays and cost increases are significantly lower. We believe that the methodology in this report and in our past report on VA construction provides an accurate depiction of how cost and schedules for construction projects can change from the time they are first submitted to Congress.expectations are set among stakeholders, including the Veterans community, for when projects will be completed and at what cost. We recognize that many factors can affect cost and schedules over the life of a project and that some of these factors, including when appropriations are actually received, are beyond VA’s control. We also acknowledge that after Congress appropriates funds and contractors are selected for projects, VA and the contractors develop more accurate cost estimates and schedules and the likelihood increases that cost and schedule risks are mitigated or realized. Of the remaining 46 major medical-facility projects, 26 are under construction or were recently completed. As shown in figure 1, of these 26, half have experienced cost increases, but the other half experienced either no change in costs or a decrease in costs. (See app. II for detailed information on all 50 ongoing projects.)

VA Has Taken Steps to Improve Its Construction Management Practices and Has Opportunities for Further Improvement

Creation of a Construction Management Review Council

In April 2012, the Secretary of Veterans Affairs established the Construction Review Council to serve as the single point of oversight and performance accountability for the planning, budgeting, execution, and delivery of the VA real property capital-asset program. The council issued an internal report in November 2012 that contained findings and recommendations that resulted from meetings it held from April to July 2012. According to the council report, multiple internal and external VA reviews have found systemic deficiencies in a range of areas, including defining requirements, estimating costs, designing and scoping the project, managing the contract, overseeing the program, and activating completed projects. The analyses revealed that the challenges identified on a project-by-project basis were not isolated incidents but are indicative of systemic problems facing VA. The council report has several recommendations including that VA streamline processes and procedures for change orders and link the purchase of medical equipment with the coordination of the construction schedule. VA officials are reviewing specific options to address this issue and began receiving progress updates on these topics and others on a monthly basis in February 2013. However, VA has not yet developed specific guidance or instructions on how to implement these recommendations, which would provide specific steps on the new process to help ensure VA avoid problems involving the purchase of medical equipment on future construction projects. As discussed later in this report, VA is taking steps to address some of the council’s other recommendations.

Collaborating with Other Federal Agencies and the Construction Industry

We have emphasized in previous work the need for federal agencies to collaborate with other agencies to leverage each others’ resources, thus obtaining additional benefits that would not be available if they were working separately. VA’s Strategic Plan also recognizes the importance of such collaboration and of 1) addressing construction management issues by increasing communication and collaboration across organizations, such as federal agencies, to share best practices, and 2) identifying and addressing other opportunities to improve performance management.

VA has taken some action to tap the experience of other federal agencies involved in constructing medical facilities. VA stated that it has collaborated with Department of Defense agencies such as the Tricare Management Activity, U.S. Army Corps of Engineers, and Naval Facilities Engineering Command as well as other federal agencies such as the National Institute of Building Sciences and the Federal Preservation Institute to discuss general construction issues. Additionally, VA participates in the VA/Department of Defense Joint Executive Council and the Federal Facilities Council, as well as federal agency construction forums.

VA has also taken steps to reach out to the construction industry. In June 2011, VA convened a construction industry forum to facilitate communications with the construction industry about ways to improve medical facilities construction practices. VA hosted attendees from 75 contractor firms, who provided written feedback. According to a summary of the proceedings issued by VA, attendees said that VA needed to improve communication among project team members. VA construction officials noted that the participant suggestions have been valuable and have assisted them in their effort to improve medical-facilities construction practices. VA plans to host another industry forum in the future.

Evaluating Project Delivery Methods

To better manage the cost and schedules for major medical-facility projects, VA has taken steps to implement a new project delivery method, such as the Integrated Design and Construction (IDC). In response to the construction industry’s concerns that VA and other federal agencies did not involve the construction contractor early in the design process, VA and the Army Corps of Engineers began working to establish a project delivery model that would allow for earlier contractor involvement in a construction project, as is often done in the private sector. However, in Denver and New Orleans VA did not implement IDC early enough to garner the full benefits.

VA officials stated that Denver and New Orleans were initiated as design- bid-build projects and later switched to IDC after the projects had already begun. According to VA officials, the IDC method was very popular with industry, and VA wanted to see if this approach would be effective in delivering a timely medical facility project. Thus while the intent of the IDC method is to involve both the project contractor and architectural and engineering firm early in the process to ensure a well coordinated effort in designing and planning a project, VA did not hire the contractor for Denver until after the initial designs were completed. New Orleans officials said that they were delayed in bringing on the contractor because of a bid protest. The designer was allowed to continue with design development during the resolution of the protest, which did not allow the project to fully benefit from the IDC method. According to VA officials, had the award not been protested, sufficient interaction between the architectural and engineering and construction firm could have taken place during design development, which should have greatly limited or mitigated many of the design issues. According to VA, in both Denver and New Orleans, because the contractors were not involved in the design of the projects and formulated their bids based on a design which had not been finalized, these projects required changes that increased costs and led to schedule delays. VA staff responsible for managing both projects said it would have been better to maintain the design-bid-build model throughout the entire process rather than changing mid-project because VA did not receive the value of having contractor input at the design phase, as the IDC method is supposed to provide. For example, according to Denver VA officials, the architectural design called for curved walls rather than less expensive straight walls along the hospital’s main corridor. The officials said that had the contractor been involved in the design process, the contractor could have helped VA weigh the aesthetic advantages of curved walls against the lower cost of straight walls.

Using Medical Equipment Planners

VA officials have emphasized that they need the flexibility to change their heath care processes in response to the development of new technologies, equipment, and advances in medicine. Thus, for new heath care facilities, VA seeks to ensure that the most up-to-date equipment is installed, and that space and electrical installations support the equipment. However, this can be a challenge for projects that take a number of years to complete, as advances in technology can require design changes. Given the complexity and sometimes rapidly evolving nature of medical technology, many health care organizations employ medical equipment planners to help match the medical equipment needed in the facility to the construction of the facility. Naval Facilities Engineering Command officials told us that they use medical equipment planners on all medical facility projects, hired through the architectural and engineering contract. Army Corps of Engineers officials said they also use medical planners from the Department of Army’s Office of the Surgeon General on all of their medical facility projects. Officials from contracting firms currently working on VA projects told us that in their experience with other federal agencies, including the U.S. Army Corps of Engineers, medical equipment planners have helped avoid schedule delays. VA officials told us that they sometimes hire a medical equipment planner as part of the architectural and engineering firm’s services to address medical equipment planning. The planner can be brought on early in the design phase and remain through construction phases of the project. The planner should help coordinate with the architectural and engineering firm to ensure that the project’s design and construction will accommodate the necessary medical equipment. However, we found that for costly and complex facilities, VA does not have guidance for how to involve medical equipment planners during each construction stage of a major hospital.

VA has sometimes relied on VHA staff to make medical equipment planning decisions. For example, in Orlando, VA relied on local VHA staff with limited experience in procuring medical equipment for a new hospital. Orlando VA officials recommended hiring a consulting firm to assist them with various aspects of medical equipment planning, procurement, delivery, and installation in 2011. However, VA was unable to implement this recommendation until fiscal year 2012, at which point the design decisions had already been made. Because the medical equipment specifications changed several times, construction design documents for various parts of the medical facility had to be changed. Consequently, the facility also had to be altered, and some previously constructed areas required minor demolition to accommodate the medical equipment. These and other alterations led to cost increases of at least $14 million in addition to schedule delays. In other areas of the facility, medical equipment issues forced VA to suspend construction until the issues were resolved.

VA officials recognized in Orlando that the procurement of medical equipment was not successful because there was no guidance on determining the need for medical equipment procurement when building a major new facility. CFM headquarters and Orlando officials acknowledged that these problems might have been avoided if experienced medical equipment planners were used to coordinate the construction schedule and select medical equipment. They also agreed that a medical equipment planner is needed for future large scale projects. Procedures supporting the timely use of medical equipment planners—so that design decisions are coordinated with construction—would help ensure that medical equipment specifications such as space and electrical needs are included in planning and construction efforts and help to avoid added cost and construction delays later.

Sharing Information on the Roles and Responsibilities of VA’s Construction- Management Staff

Construction of large medical facilities involves numerous staff from multiple VA organizations. For example, VA staff involved in the projects we visited included local on-site officials and staff from VA’s regional and central office. In its 5-year Strategic Plan, VA identified the need for each organizational unit, including CFM, to review its spans of control and establish clear roles and responsibilities and make changes where necessary. Additionally, CFM stated that during the construction process, effective communication is essential and must be continuous and involve an open exchange of information among VA staff and other key stakeholders.and offices involved in the construction management process.

Conclusions

VA has made improvements in its management of major medical-facility construction projects, but many of these projects continue to experience cost increases and schedule delays similar to those we reported in 2009. Although we recognize that some cost increases and schedule delays result from factors beyond VA’s control, our review of VA’s four largest projects indicates that weaknesses in VA’s construction management processes also contributed to cost increases and schedule delays. The Construction Review Council has also identified a number of these same weaknesses, including in particular a review process that hinders the timely processing of change orders. VA is considering the council’s recommendations for addressing construction management weaknesses.

As part of its action involving the council’s recommendations, VA is confronted with addressing a lack of guidance and procedures for some important aspects of construction management, specifically, guidance and procedures for using medical equipment planners on projects, clearly communicating the roles and responsibilities of VA construction staff to stakeholders, and streamlining the change-order process. Such guidance would help institutionalize the types of changes that the Construction Review Council and others say are needed in VA’s construction management process. Without guidance on which projects require medical planners and at which the stage they should be used, VA could continue to experience delays and cost increases resulting from late- stage design changes to accommodate medical equipment. Furthermore, the lack of clear guidance delineating the roles and responsibilities of VA staff for managing each aspect of construction projects, can make it difficult for VA and contractors to communicate clearly, which also contributes to schedule delays and cost increases. Moreover, while the Construction Review Council has identified opportunities to streamline VA’s multi-layered change-order process, VA has yet to be develop guidance to ensure that change orders are approved in a prompt manner to avoid project delays. Given that VA is currently involved in 50 major medical-facility construction projects, including four large medical centers, such guidance could help to strengthen the management of these projects.

Recommendations for Executive Action

To improve the management of VA’s major construction projects, we recommend that the Secretary of Veterans Affairs should take the following three actions: develop and implement agency guidance for assignment of medical equipment planners to major medical construction projects; develop and disseminate procedures for communicating, to contractors, clearly defined roles and responsibilities of VA officials who manage major medical-facility projects, particularly the change- order process; and issue and take steps to implement guidance on streamlining the change-order process based on the findings and recommendations of the Construction Review Council.

Agency Comments and Our Evaluation

We provided a draft of this report to VA for review and comment. In its written comments, VA concurred with our recommendations, generally agreed with our conclusions and discussed actions underway or planned to implement the recommendations. However, VA stated that it had significant concerns with how we portrayed medical center cost and scheduling issues, particularly with respect to the table in the draft report showing cost increases and schedule delays for these projects. In our analysis of changes in cost and schedules for these projects, we considered the initial cost estimates and completion dates to be those that were first submitted to Congress. Cost estimates at this stage should be as accurate and credible as possible because Congress uses these initial estimates to consider authorizations and make appropriations decisions. We used a similar methodology to estimate changes to cost and schedule of construction projects in a previous report issued in 2009 on VA construction projects. VA has been working to improve its initial cost estimates, as noted in our 2009 report. In its comments, VA stated that designs, initial cost estimates, and initial completion dates are developed several years before Congress appropriates funds and the construction contract is awarded, actions that then determine the cost and completion date. According to VA, a more accurate depiction of the project’s cost would be to make a comparison between the total appropriations received and the current total estimated cost, and a more accurate depiction of the schedule would be to compare the initial completion date established at the award of the construction contract with the estimated or actual completion date. In its letter, VA provided information on the changes to cost and schedules for the four projects after the final congressional appropriation was received and the construction contract was awarded. By using the methodology VA suggests, the schedule delays and cost increases are significantly lower. VA asked that we include this new information to supplement the information on cost and schedule changes already included in the report.

We believe that the methodology we used in this and our prior report on VA construction provides an accurate depiction of how cost and schedules for construction projects can change from the time they are first submitted to Congress. It is at this time that expectations are set among stakeholders, including the veterans community, for when projects will be completed and at what cost. As noted earlier, we recognize that many factors can affect cost and schedules over the life of a project and that some of these factors, including when appropriations are actually received, are beyond VA’s control. We also recognize that VA and the contractors develop more accurate cost estimates and schedules after Congress appropriates funds and contracts are awarded, and the likelihood increases that cost and schedule risks are either mitigated or realized. We therefore incorporated information in the report indicating how cost increases and schedule delays for the four projects have decreased in the stages after VA received appropriations. In addition, VA suggested a number of technical corrections which we incorporated as appropriate. VA’s letter is reprinted in appendix IV.

As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies of this report to the appropriate congressional committees, the Secretary of Veterans Affairs, and other interested parties. In addition, the report will be available at no charge on GAO’s website at http://www.gao.gov.

If you or your staff have any questions regarding this report, please contact me at (202) 512-2834 or stjamesl@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 V.

Appendix I: Scope and Methodology

To determine changes to costs, schedule, and scope for selected Department of Veterans Affairs’ new major medical-facility projects, we obtained and analyzed data that VA provided on the status of VA’s 50 active major medical-facility projects as of November 2012, including the original cost estimates and completion dates and the project’s current status. The data included a short project description, project location, the original and current total estimated cost of the project, the original and current completion date, and the type of acquisition strategy selected for the project. We analyzed the current cost and completion dates to determine any increases in costs and the extent to which projects may have exceeded time allotted and summarized the results. We also collected VA information on reasons for cost increase and schedule changes to VA projects based on scope changes. We assessed the reliability of the data through interviews with knowledgeable VA officials and a review for completeness and any unexpected values. We determined that the data was sufficiently reliable for the purpose of this report. To identify the reasons for cost, schedule, and scope changes in VA’s construction projects, we interviewed VA’s headquarters officials regarding the status of all major medical-facility projects and examined project documents and interviewed on-site managers and engineers. We selected the four most expensive ongoing major medical-facility construction projects based on cost, current status of the project, and type of facility, located in Denver, Colorado; Orlando, Florida; New Orleans, Louisiana; and Las Vegas, Nevada. We obtained specific information from VA’s ongoing major medical-facility projects as of November 2012. We visited the construction sites in Denver, Orlando, and New Orleans to talk to officials on site to determine the reasons for changes in costs and schedules. We updated our prior work on the Las Vegas facility with information on the project completion costs and the change-order process.and cannot be generalized to sites agency-wide.

The information from our site visits is illustrative To identify which actions VA has taken to improve its construction management, and any opportunities that exist for VA to further improve its management, we reviewed VA’s management practices of construction projects at the three locations we visited and interviewed VA headquarters’ officials from the Veterans Health Administration, Office of Construction and Facilities Management, Office of General Counsel, as well as project managers and senior resident engineers at the construction sites we visited. We reviewed and analyzed construction documents, agency policy and guidance, previous VA reports, and interviewed officials from VA, veterans support organizations, architecture and engineering firms, general contractor construction firms, and construction management firms. We also reviewed the Federal Acquisition Regulations, VA’s Strategic Plan, and GAO past reports. In addition, we interviewed officials from the Naval Forces Engineering Command and the U.S. Army Corps of Engineers to discuss their current construction practices in major medical-facility projects.

We conducted this performance audit from April 2012 to April 2013 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.

Appendix II: Changes in Cost for Department of Veterans Affairs Major Medical-Facility Projects

In November 2012, VA provided GAO with data for its 50 ongoing major medical-facility projects. The term “major medical-facility project” is defined as “a project for the construction, alteration, or acquisition of a medical facility involving the total expenditure of more than $10 million.” We calculated the percentage change in cost by using the initial total estimated costs, which were first submitted to Congress and total estimated costs, as reported by VA. Included is a summary of cost data arranged in descending order by the percentage change for each of VA’s 50 major medical-facility projects.

Appendix III: Changes in Schedule for Department of Veterans Affairs Major Medical-Facility Projects

In November 2012, VA provided GAO with data for its 50 ongoing major medical-facility projects. The term “major medical-facility project” is defined as “a project for the construction, alteration, or acquisition of a medical-facility involving the total expenditure of more than $10 million.”

We calculated the “total months delayed” column by counting the months from the initial estimated completion date, which was first submitted to Congress, to the current estimated completion date, as reported by VA. According to VA, the dates in the initial estimated completion dates are from the initial budget prospectus, which assumed receipt of full construction funding within 1 to 2 years after the budget submission. In some cases, construction funding was phased over several years and the final funding was received several years later. Included is a summary of schedule data arranged in descending order by the number of months delayed for each of VA’s 50 major medical-facility projects.

Appendix IV: Comments of the Department of Veterans Affairs

VA sent our agency comments 3/29/13.

GAO Contact

Lorelei St. James, (202) 512-2834 or stjamesl@gao.gov.

Staff Acknowledgments

In addition to the contact named above, Ed Laughlin, Assistant Director; Nelsie Alcoser; George Depaoli; Raymond Griffith; Joshua Ormond; Amy Rosewarne; James Russell; Sandra Sokol; and Crystal Wesco made key contributions to this report.