General and flag officers' quarters are government-provided quarters for military officers with the rank of brigadier general or rear admiral (lower half) (O-7) and above. The services have a total of 685 general and flag officer quarters, of which 372, or about 54 percent, are considered historic as table 1 below shows. The general policy in the military services is that general and flag officer housing is to be maintained in an excellent state of repair, commensurate with the rank of the occupant and the age and historic significance of the building. Accordingly, general and flag officer housing is expensive to maintain; and the age, size, and historic significance of some of these quarters tend to escalate their operations and maintenance costs as the following examples show: Army: The Commandant's home at Carlisle Barracks was built in 1932. The house is a two-story stone structure with 8,156 square feet of living space and is currently undergoing a major renovation. The residence has an average annual maintenance and repair cost of about $14,000. Navy: Tingey House, the home of the Chief of Naval Operations, is located in the historic Navy Yard, Washington, D.C. Constructed in 1803, the quarters was one of the earliest buildings erected at the Washington Navy Yard. The home is a 2 1/2-story brick structure containing 12,304 square feet of space and has an average annual maintenance and repair cost of about $27,500. Marine Corps: The Home of the Commandants--located within the Marine Corps Barracks at Eighth and I Streets S.E., Washington, D.C. --has been the home of the Marine Corps Commandants since its completion in 1806. The Marine Corps considers the quarters as much a museum as a residence. The home is a three-story structure containing approximately 15,605 square feet of space and has an average annual maintenance and repair cost of about $41,811. Air Force: Carlton House is the home of the Superintendent of the U.S. Air Force Academy and was constructed in the 1930s. The home is a two-story structure with a total of 10,925 square feet of space and has an average annual maintenance and repair cost of about $21,000. All of these homes are used extensively for official entertainment purposes and all but the Commandant's home at Carlisle Barracks are listed on the National Register of Historic Places. However, the Commandant's quarters at Carlisle Barracks is considered historic and is eligible for listing on the National Register of Historic Places. The services are to follow DOD Financial Management Regulations and service-specific guidance to prepare budget estimates for major repair projects to general and flag officer quarters. For example, the Navy and Marine Corps justify projects on the basis of mission, life-cycle economics, health and safety, environmental compliance, or quality of life. The services generally hire architectural and engineering firms to inspect and assess the property for projects expected to cost more than $50,000 to determine needed repairs and establish a project cost estimate. Using information developed during the project justification and cost-estimating process, the services are to prepare budget estimates that are submitted to Congress for approval during the annual appropriations cycle. Congress has acted to control spending associated with maintaining these homes by establishing expense thresholds and reporting and notification requirements. For example, the services must include in their annual family housing budget submitted to Congress detailed budget justification material explaining the specific maintenance and repair requirements for those homes expected to exceed an annual $35,000 threshold for maintenance and repair expenses. Section 2601, of Title 10, United States Code authorizes the service Secretaries to accept, hold, administer, and spend any gift of real or personal property made on the condition that it is used for the benefit--or in connection with the establishment, operation, or maintenance--of an organization under the jurisdiction of their departments. Monetary gifts are accepted and deposited in the Treasury in service-designated accounts. In some instances, these funds have been used to supplement appropriations for renovations to general and flag officer quarters. The Military Construction Appropriation Act for fiscal year 2000 directed that funds, appropriated under the act, were to be the exclusive source of funds for repair and maintenance of all military family housing. This excluded the use of gift funds to repair or maintain general and flag officer quarters. A year later, however, Congress expressly authorized the use of gift funds pursuant to Section 2601, of Title 10, United States Code, to help fund the construction, improvement, repair and maintenance of the historic residences at the Marine Corps Barracks at Eighth & I Streets S.E., Washington, D.C. DOD guidance provides the services with a framework for property accountability policies, procedures, and practices. The 1996 Military Housing Privatization Initiative allows private sector financing, ownership, operation, and maintenance of military family housing including, in some cases, housing occupied by general and flag officers. The goal of the initiative is to help the services remove inadequate housing from their family housing inventories and improve service- member morale. Under the program, DOD utilizes various means to encourage private developers to renovate existing housing or construct new housing on or off military installations. Service members, in turn, may use their housing allowance to pay rent and utilities to live in the privatized housing. The privatization firms use the housing allowances to pay for the maintenance and repair of the quarters. As of March 2003, the military services had privatized about 28,000 family housing units, only a small number of which were general or flag officer quarters. The services plan to privatize about 183,000 units, or 72 percent of their total family housing inventory, by fiscal year 2007 and will increasingly include general or flag officer housing. With a few exceptions, the services' reported actual costs for renovation projects for general and flag officer quarters were generally consistent with or less than the budget estimates provided to Congress. For fiscal years 1999 to 2003, of the 197 projects estimated to cost more than $100,000, 184 (about 93 percent) were under or met their budget estimates; and 13 (about 7 percent) exceeded their budget. While we did not identify any Air Force renovation projects that exceeded their budgets, we did learn of other concerns about costs associated with Air Force plans to replace and repair general officer quarters. See appendix II for further information on this issue. Table 2 shows a comparison of actual costs to budget requests for the 197 renovation projects of more than $100,000 included in our review. Of the 13 over-budget projects, 5 of the 7 Marine Corps projects--4 located at the Marine Corps Barracks at Eighth and I streets, Washington, D.C., and the other located at Kaneohe, Hawaii--exceeded their budgets by more than 10 percent. The other 2 Marine Corps projects exceed their budgets by about 9 percent, and the 6 Navy projects exceed their budgets by less than 2 percent. As seen in table 2, the majority of renovation projects stayed within their budgets. However, some projects cost less than budgeted because the scope of planned work was revised or canceled for a project. For example, the Navy identified instances where the scope of work was reduced or cancelled because a change in occupancy did not occur as scheduled and planned repair work could not be accomplished. Army housing officials cited examples where the scope of renovation projects was reduced because the contractor's final bid for lead-based paint and asbestos removal exceeded the government's estimate. The projects' scope had to be reduced or the budgets would be exceeded. Customer requests for changes and unforeseen repairs were the primary reasons for cost increases to renovation projects. To help minimize costs, housing handbooks provided to general and flag officers occupying government quarters discourage customer-requested changes based on personal preferences and entrust final approval of such changes to the discretion of the installation housing officer or the commanding officer. Although these handbooks seek to limit customer-requested changes, we found numerous approvals for customer-requested changes granted for renovations at the Marine Corps' Home of the Commandants that contributed to project costs exceeding the budget estimate. Customer driven requests, such as upgraded kitchen and bathroom renovations, or work that was not included in the original scope of work were responsible for about 45 percent of the total cost increase for the 5 Marine Corps projects that exceeded their budgets by more than 10 percent. Table 3 shows the reasons for changes in scope for the projects as well as the amount of cost increase and the percent of the total increase associated with the changes. Six Navy projects exceeded their budgets by less than 2 percent. According to the Navy, the overruns were mostly due to planned work costing more than was originally budgeted--a fairly regular occurrence since budgets are submitted nearly 18 to 24 months before the work is accomplished. However, some of the increases occurred due to such customer requests as additional interior painting and such unforeseen repairs as the need to replace an old, broken boiler heating system with a new forced-air system. Customer-requested changes for the 5 projects that exceeded their budgets by more than 10 percent occurred because the customer, usually the quarters' occupants, wanted various changes and the housing manager, the commanding officer, and at times the service headquarters acquiesced and approved the changes. For example, at the Marine Corps Barracks Home of the Commandants, where one project exceeded its budget by about 52 percent, customer-requested changes resulted in identifiable cost increases totaling about $338,000. The single largest identifiable increase was due to a customer request for a major kitchen renovation not included in the original scope of work and costing more than $197,256. Major cost drivers for the kitchen renovation included cabinets, granite counter tops, butler pantry, and flooring that the occupant requested. Other customer- requested changes included the renovation of attached guest quarters that included the construction of public, handicap-accessible restrooms and replacement of a newly installed marble tile floor. Cost increases due to customer requests for Quarters 1, 2, and 4 included requests for upgraded kitchen cabinets and counter tops, upgraded bathroom fixtures, and wall- to-wall carpeting. To help minimize costs, the services' provide handbooks to general and flag officers occupying government quarters that address the propriety of and seek to discourage customer-requested changes based on personal preferences. The installation housing officer or the commanding officer has final approval for such changes. However, we found numerous approvals for customer-requested changes granted for renovations at the Marine Corps' Home of the Commandants and other quarters at the Marine Corps Barracks that contributed to project costs exceeding the budget estimates. Navy and Army housing officials told us that controlling costs due to customer requests is directly related to a housing officer's ability to say no to requests that could be perceived as excessive and draw undue public scrutiny upon the service. For the 5 projects that exceeded their budgets by more than 10 percent, cost increases due to such unforeseen repairs as for termite damage or such undetected structural deficiencies as sagging floor supports occurred because these deficiencies or requirements were not identified during initial inspections. For example, at the Home of the Commandants, identifiable changes due to unforeseen repairs resulted in cost increases totaling about $559,416. The single largest cost increase due to unforeseen repairs was for the roof. The initial budget estimate was around $192,189. However, the architectural and engineering firm that did the initial inspection upon which the budget estimate was based did not actually inspect the roof for damage and did not perform destructive testing to look for structural deficiencies. The current roof estimate is around $582,730, an increase of more than $390,541 with about 70 percent of the total increase due to unforeseen deficiencies at the Home of the Commandants. Another unforeseen repair involved replacing a portion of the wood flooring on the first floor because of severe termite damage that was not detected until the old flooring was removed. Again, the deficiency went undetected because destructive testing was not performed. According to service officials, destructive testing is often not accomplished because the quarters' occupants do not want either the testing to interfere with their entertainment responsibilities or the inconvenience of having their homes in disrepair. Additionally, for the Marine Corps project in Kaneohe, Hawaii, unforeseen historical restoration requirements caused actual renovation costs to exceed the budget estimate by about $47,600 or nearly 25 percent. Marine Corps officials stated that the state historical preservation office wanted the interior walls restored with the same materials used when the house was originally built in 1941. The Marine Corps budget estimate did not include this requirement. The Army, Navy and Marine Corps each received private donations of cash, property, or services to furnish and renovate general and flag officer quarters. While the Army and Navy accepted gift funds to furnish quarters, the Marine Corps accepted and used gift funds to both furnish and help renovate the Home of the Commandants. Although guidance exists to ensure such gifts are properly accepted, held, and used in accordance with the donor's wishes, neither the Navy nor the Marine Corps followed these procedures for all gifts associated with furnishing the quarters of the Superintendent of the Naval Academy and the renovation of the Home of the Commandants. Section 2601, of Title 10, United States Code, provides gift acceptance authority to each service Secretary to accept, hold, administer, and spend any gift of real or personal property made on the condition that it is used for the benefit--or in connection with the establishment, operation, or maintenance--of an organization under the jurisdiction of their departments. In addition to this legislative authority, the Secretary of the Navy has issued an instruction to help implement and centralize gift acceptance authority. The Marine Corps implements the Secretary's policy and re-delegates authority to subordinate commands under its jurisdiction. The following table summarizes Navy and Marine Corps procedures for accepting gifts. Although aware of these procedures, Navy and Marine Corps officials acknowledge that in two projects, they did not list nonmonetary gifts on the property accounts and cannot fully account for those gifts made to furnish and renovate two general and flag officer quarters. According to Marine Corps officials, they did not follow the prescribed procedures for accepting and accounting for the estimated $765,500 in nonmonetary gifts (materials such as kitchen cabinets, furniture, wall coverings, draperies, and furniture upholstery) from the Friends of the Home of the Commandants. We contacted the Friends of the Home of the Commandants, which provided us with a listing of donations and their value totaling $765,500 provided to the Marine Corps to help renovate the Home of the Commandants. After some delay, the Marine Corps provided us with a list of nonmonetary gifts totaling $492,413 from the Friends of the Home of the Commandants but had no documentation to support formal acceptance of the gifts and that the gifts were recorded in property records. According to Marine Corps officials, the Friends of the Home of the Commandants provided the remaining $273,087 in nonmonetary gifts directly to the project contractor. However, the Marine Corps also did not document that these gifts were formally accepted and accounted for in property records. Furthermore, Navy and Marine Corps financial records document receipt of about $88,300 donated to the Navy General Gift Fund from the Friends of the Home of the Commandants during fiscal years 1999 through 2003. The Marine Corps, after some delay, produced receipts to account for expenditures using these gift funds to help renovate and furnish the Home of the Commandants. However, the Marine Corps property records do not include the items purchased with the gift funds. These gifts were used to supplement $2,269,000 in appropriations for renovations to the Home of the Commandants. The Navy and Army also accepted nonmonetary or monetary gifts for furnishings for flag and general officer quarters. The gifts were not used for renovations to the quarters. The Navy acknowledges receiving about $59,780 in nonmonetary gifts provided by various donors as furnishings to help decorate the home of the Superintendent of the Naval Academy. However, similar to the Marine Corps, the Navy did not properly accept and account for about $3,970 of the gifts in the property records. The Army properly accepted $50,000 in furnishings from the Army War College Foundation for the home of the Commandant of the Army War College at Carlisle Barracks. DOD and the military services could lose visibility over spending to maintain and repair an increasing number of privatized general and flag officer housing units because there is no consistent DOD-wide policy requiring review of maintenance and repair projects over certain dollar thresholds. By the end of fiscal year 2003, the services had privatized 65 of their 784 general and flag officer quarters and planned to privatize 426, or 54 percent, by the end of fiscal year 2008. DOD has no policy requiring the services to review renovation costs on these homes, such as is done for maintenance and repair projects of more than $35,000 for government- owned quarters. However, the Air Force has developed draft guidance, expected to be issued in May 2004, which will provide more visibility and accountability over spending to operate and maintain privatized general and flag officer housing. The Navy and the Marine Corps have also developed draft guidance that requires headquarters approval for all renovation projects over a certain dollar threshold. No such policy is under development in the Army. Currently, all service headquarters are required to review any renovation project exceeding $35,000 for a government-owned general or flag officer quarters. However, there is no such requirement to review renovations projects involving privatized general and flag officer quarters. Recognizing the need for direction, the Navy, Marine Corps, and Air Force are developing draft guidance and procedures that will provide more visibility over the spending to operate and maintain privatized general and flag officer housing. For example, the Air Force draft guidance applies the same project approvals for renovations to privatized general officer homes as currently exist for government-owned homes, which is all renovation projects over $35,000. Likewise, the Navy and the Marine Corps have developed draft guidance for internally reviewing annual operating budgets for privatized housing that would require approval by Navy or Marine Corps headquarters officials for costs that exceed $50,000 in one year for any house. The Army has no plans to issue additional guidance regarding costs to maintain and repair privatized housing. According to Army officials, annual operating budgets for privatized housing are reviewed by headquarters officials, which they believe will provide adequate visibility over renovations to privatized housing. We agree that reviewing annual budgets provides visibility over renovation costs but question its ability to provide oversight where renovation costs for selected residences are higher than the norm. The services' procedures to develop cost estimates for renovation to general and flag officer quarters generally produce budget estimates that are consistent with the projects' actual costs. However, Marine Corps officials approved costly customer-requested changes based on personal preferences notwithstanding guidance in handbooks discouraging the approval of such requests. The Marine Corps failed to follow established guidance and procedures and properly accept and account for gifts, especially nonmonetary gifts, used to help renovate and furnish the Home of the Commandants. Thus, they have no assurance that the nonmonetary gifts remain in their possession. Finally, DOD and the military services could lose visibility over renovations to general and flag office quarters that are privatized. While some services are taking some steps to ensure that renovation projects over certain dollar thresholds are reviewed internally, there is no consistent DOD-wide guidance. We recommend that the Secretary of Defense take the following three actions: Direct the Secretary of the Navy to (1) reemphasize the importance of limiting customer-driven changes to renovation projects for general and flag officer housing and (2) properly account for all gifts accepted and used to help renovate the Home of Commandants of the Marine Corps. Furthermore, we are recommending the Secretary of Defense direct the Under Secretary for Acquisition, Technology, and Logistics to ensure the standardization and periodic review of the expenditure levels for individual privatized units on a programmatic basis, to include general and flag officer quarters, with periodic reports to the office of the Secretary of Defense. In commenting on a draft of this report, DOD concurred with our first and second recommendations and did not concur with the third. With regard to the first two recommendations, DOD indicated that the Navy has agreed to reemphasize the importance of limiting customer-driven changes to renovation projects for general and flag officer housing, properly accounting for all gifts accepted and used to help renovate the Home of Commandants of the Marine Corps, and incorporating accountability measures into revisions of Secretary of the Navy guidance governing the general and flag officer quarters program. However, DOD did not provide a time frame for accomplishing these actions. Our draft report also contained a third recommendation to the Secretary of Defense. He was asked to direct the Under Secretary for Acquisition, Technology, and Logistics to develop departmentwide guidance that provides similar project review and approval for renovation projects to privatized general and flag officer housing as required for government- owned quarters over certain dollar thresholds. However, DOD did not agree with that recommendation expressing the view that extending the same government oversight to privatized housing is contrary to the fundamental tenets of privatization. DOD added that currently projects are monitored to protect government interests, including expenditure levels on individual units, but that the monitoring is not linked to a specific type of housing such as general and flag officer quarters. DOD indicated that although it intends to continue to rely on private sector cost-control mechanisms, it would review standardization of individual unit expenditure levels on a programmatic basis. Such action, to the extent it incorporates general and flag officer housing, meets the intent of our recommendation. Accordingly, we refined our recommendation to better reflect this intent and stay within the parameters of the privatization program. Additionally, the Principal Assistant Deputy Under Secretary commented that our report did not capture the Air Force's response to issues the DOD Inspector General raised concerning the Air Force's plans to renovate or replace general officer housing. As we note in appendix II, the Air Force disagreed with the Inspector General's findings. This disagreement appears largely based on differences between the Air Force and the Inspector General concerning individual renovation projects versus the Air Force's broader strategic plans for addressing general officer quarters collectively and upgrading the housing to today's standards, rather than undertaking only immediate repair needs. Other technical comments are incorporated in the report where appropriate. The Principal Assistant Deputy Under Secretary's comments are included in appendix III of this report. We are sending copies of this report to interested congressional committees; the Secretaries of Defense, Army, Navy and Air Force; the Commandant of the Marine Corps; and the Director, Office of Management and Budget. We will also make copies available to others upon request. In addition, the report will be available at no charge on GAO's Web site at http://www.gao.gov. Please contact me on (202) 512-8412 or Michael Kennedy, Assistant Director, on (202) 512-8333 if you or your staff have any questions. Major contributors to this report were Claudia Dickey, Jane Hunt, Richard Meeks, and Michael Zola. We performed our work at the headquarters offices responsible for general and flag officer housing at the Army, the Navy, the Marine Corps, and the Air Force. At each location, we reviewed applicable policies, procedures, and related documents and interviewed responsible officials for the family-housing and general and flag officer quarters program. We also visited and met with officials from several military installations, including Fort McPherson, Georgia, and Fort McNair, the Washington Navy Yard, the Marine Corps' Barracks at Eighth and I, and Bolling Air Force Base, all of which are located in Washington, D.C. At each of these locations we toured general and flag officer quarters that were recently renovated, were undergoing renovation, or had not been renovated. We also discussed our review with officials of Housing and Competitive Sourcing, Office of the Secretary of Defense, and with DOD's Office of the Inspector General. To determine how the actual costs of renovation projects for general and flag officer quarters compared to the service budget estimates provided to Congress, we reviewed all renovation projects of more than $100,000 for fiscal years 1999 through 2003. We obtained the budget estimate for each of these projects from the service budget submissions provided to Congress for the fiscal year. We obtained the reported actual obligations related to the cost for each renovation project from the military services. We compared this information to determine which projects were completed for less than or more than budget. We did not validate service budget and reported obligation data, but we did discuss data reliability with responsible service officials and obtained information from them on steps they have taken to ensure the data's reliability. Based on this, we believe that the data we used were sufficiently reliable for the purposes of this report. To identify the primary reasons for any cost increases and the services' procedures to control cost increases, we held discussions with responsible service family-housing, engineering, comptroller, general counsel, and command officials about those renovation projects that exceeded their service budgets. We also reviewed and analyzed documentation that supported the reasons for cost increases. To determine the services' accountability over gifts provided to help renovate general and flag officer quarters, we reviewed applicable laws and interviewed cognizant officials to identify those general and flag officer quarters with major renovations of more than $100,000 during fiscal years 1999 through 2003 that received gifts used to help with renovations. We identified one Army, one Navy, and one Marine Corps quarters that received gifts either monetary or nonmonetary during the scope of our review. The Army ($50,000 nonmonetary items, such as furniture and drapery material) and Navy ($51,952 nonmonetary items, such as rugs, and $7,830 cash) gifts were for furnishings for the quarters. The Marine Corps used gifts--monetary and nonmonetary--to help with the renovation of a general officer quarters. To determine how the services accounted for monetary and nonmonetary gifts, we reviewed DOD and service gift fund and gift acceptance regulations and guidance; interviewed cognizant service officials; and reviewed administrative, contract, funding and accounting documents. Since only the Marine Corps accepted gifts intended to help with the renovation of a general officer quarters, we focused additional attention on determining how the Marine Corps accounted for monetary and nonmonetary gifts provided to help renovate the Home of the Commandants. We compared the Marine Corps listing of gifts received with a listing of gifts provided by the Friends of the Home of the Commandants--the primary contributor of gifts for the Home of the Commandants during fiscal years 1999 through 2003. We also asked to review property records that showed the Marine Corps' receipt of these gifts. The Marine Corps was unable to provide receipts or produce property records for the nonmonetary gifts. Further, we compared the Navy Comptroller's reported balance for the Navy General Gift Fund for the Marine Corps Barracks at Eighth and I, with the Marine Corps Barracks-reported expenditures and supporting documentation. The Marine Corps could not provide documentation to support all Navy General Gift fund expenditures as reported by the Navy Comptroller. As a result, we were unable to verify the total amount of gifts, monetary and nonmonetary, received by the Marine Corps to help renovate the Home of the Commandants. However, where we could, we reconstructed the flow of gifts to the Marine Corps and reconciled individual gifts that we could identify. To assess the extent to which DOD and the services have issued guidance to provide visibility and control over costs associated with renovation projects for privatized general and flag officer quarters, we interviewed Office of the Secretary of Defense and service officials responsible for family housing and privatization. Where available, we also obtained and reviewed service draft guidance regarding review of renovations to privatized housing. While we did not identify any Air Force renovation projects that exceeded their budgets, we did learn of other concerns about costs associated with Air Force plans to replace and repair general officer quarters. The DOD Inspector General recently identified issues concerning the Air Force's plans to renovate or replace general officer quarters. The Inspector General questioned $21.3 million of the $73.7 million in Air Force General Officer Quarters Master Plan requirements because its analysis showed the assessment methodology did not always reflect existing conditions. The Air Force issued a master plan in August 2002 to identify whole house investment requirements for their general officer quarters. Part of the GOQ master plan included a prioritized operations and maintenance plan for each GOQ to manage and minimize maintenance and repair expenditures that may become necessary prior to the execution of a whole-house improvement project. For all 267 general officer quarters, the Air Force developed an individual facility profile. The profile consists of a description of the home, a detailed analysis of existing conditions and functional deficiencies, recommendations for maintenance and repair, house plan suitability recommendations to correct functional deficiencies and bring the unit up to Air Force standards, and the estimated cost to perform a whole-house improvement project. Incorporated within the profile is a condition assessment score for each of the homes major systems and subsystems and house plan suitability scores to arrive at an overall composite score for each general officer quarters. The assessments indicated that 219 or 82 percent of their 267 homes required whole house improvement projects to resolve deficiencies. Based on this information, the Air Force developed a plan to renovate 203 homes at a cost of about $52.3 million and replace 64 others at a cost of about $21.4 million, an overall plan cost of about $73.7 million. In a January 23, 2004, letter to the Air Force Deputy Chief of Staff for Installations and Logistics, the DOD Inspector General reported that the Air Force's estimate for renovating and replacing general officer quarters may be overstated by $21.3 million because the profile recommendations were not consistent with Air Force assessments of existing conditions. According to the Inspector General, some of the homes' systems such as the roof, structural components, or the house plan met standards or needed only minor maintenance and repair, but the Air Force recommended them for replacement, relocation, or reconfiguration. For example, one house at Bolling Air Force Base, Washington, D.C. had a system with a condition rating of "good," "indicating a fully serviceable condition which met standards," but the Air Force master plan included a recommendation to reconfigure rooms and interior walls in the home at a cost of $190,000. The Inspector General concluded that the Air Force's condition assessment matrix tool design might have contributed to the inconsistencies between existing conditions and maintenance and repair recommendations. The Inspector General also reported that the inconsistency of Air Force recommendations with existing condition assessments demonstrated that the Air Force did not always consider where the home was in its life cycle. Additionally, DOD Inspector General officials told us separately of their concerns about Air Force plans to replace two homes at Bolling Air Force Base, which under original Air Force plans were to be renovated. The original fiscal year 2002 project recommended renovating the homes for an estimated $345,000 per home. However, because the Air Force designated these two homes as Special Command Position quarters, and these homes have additional space requirements for an enlisted aide and for added entertainment requirements, the Air Force now estimates the renovation will cost an estimated $555,000 per home--an increase of $210,000--that is more than 70 percent of the estimated cost to replace each house. As a result, the Air Force recommended that each house be replaced rather than renovated as originally planned. Air Force officials stated that the $210,000 increase in estimated renovation costs was due to escalation from the 2002 project to the present as well as about $110,000 for costs associated with structural work to modernize and expand the kitchen, provide an enlisted aide's office area, and correct functional deficiencies in the dining room to provide a more usable space; about $30,000 for a two car garage; and the remaining approximately $70,000 to address various unforeseen environmental remediation, force protection, and basement waterproofing requirements, as well as other electrical, plumbing, floor repair, cabinets, countertops and appliances not included in the original estimate. Since the homes are eligible for the National Historic Register, the Air Force must seek approval for their plans with the District of Columbia Historic Preservation Office. According to the Air Force, it initiated contact with the office in October 2002, and is currently proceeding with the regulatory process to obtain approval for their plans. The District of Columbia Historic Preservation Office has not yet approved the Air Force's plans. The Air Force disagreed with the Inspector General findings.

Summary:
Recent cost increases in renovation projects to general and flag officer quarters raised questions about the services' management of the programs. GAO was asked to determine (1) how actual costs of renovation projects for general and flag officer housing compare to service budget estimates provided to Congress and (2) the primary reasons for any increases and the services' procedures to control cost increases. Additionally, GAO is presenting observations about the services' accountability over gifts provided to help renovate some general and flag officer quarters and the extent to which Department of Defense (DOD) guidance provides visibility and control over costs associated with renovation projects for privatized general and flag officer quarters. With few exceptions, the services' reported costs for renovation projects for general and flag officer quarters were generally consistent with budget estimates provided to Congress. For fiscal years 1999 to 2003, GAO found that 184, or 93 percent, of the 197 renovation projects over $100,000 cost less than or the same as budget estimates. While the remaining 13 projects--6 Navy and 7 Marine Corps--exceeded cost estimates, 5 Marine Corps projects exceeded their budgets by more than 10 percent. Customer-requested changes and unforeseen repairs were the main reasons for cost increases to renovation projects. For 5 of the 7 projects that exceeded their budgets by over 10 percent, about 45 percent of the increased costs was for customer-driven changes, 53 percent for unforeseen repairs, and 2 percent could not be determined. Though the services have guidance to limit customer-requested changes, the Marine Corps approved many such changes that contributed to project costs exceeding budgets. Customer requests included upgraded kitchen and bathroom renovations or initially unplanned work. Unforeseen repairs, such as for termite damage or unexpected historic preservation requirements, occurred because problems were not identified in the inspections on which the estimates were based. Military services did not properly account for gifts used for general officer quarters in two instances, one involving renovation costs. In that instance, the Marine Corps did not comply with existing regulations to properly accept and account for all gifts used to renovate the Home of the Commandants. The Friends of the Home of the Commandants told GAO it provided about $765,500 in nonmonetary materials and services (e.g., furnishings and construction labor). However, the Marine Corps could list nonmonetary gifts totaling only $492,413 because it did not follow specified gift acceptance and accounting procedures. Navy General Gift Fund records show receipt of an additional $88,300 in monetary gifts from the Friends of the Home of the Commandants. The Marine Corps has receipts for monetary expenditures, but not property records for items purchased with the gift funds. The Navy and Army also accepted gifts to furnish general and flag officer homes. Of those, the Navy did not properly accept and account for about $3,970 in nonmonetary gifts. DOD and the military services could lose visibility over housing renovation costs for privatized general and flag officer homes. DOD does not require review of renovation costs for these quarters, such as costs over $35,000, as required for government-owned quarters. The Navy, Marine Corps, and Air Force are developing guidance to increase visibility and accountability over the spending for these quarters, but the draft guidance is not consistent. Although the services have privatized only 65 of their 784 general and flag officer quarters, they plan to privatize 426 or 54 percent by fiscal year 2008.