A key reason for the difference between the 2003 total project cost estimate and the revised 2005 estimate to install in-line baggage screening systems at LAX and ONT was that the 2003 estimate was developed at an early stage in the design process and was therefore based on preliminary data and assumptions that were subject to change. Consequently, the estimate did not adequately foresee some of the costs of retrofitting new systems into existing buildings or allow for sufficient space for the EDS machines, baggage inspection rooms, and conveyor belts. LAWA officials stated that they were under a tight timeframe to apply for the LOI because TSA had told them that federal funding was limited and that 17 other airports were competing for the funding. The 2003 total project cost estimate used concepts and construction estimates developed in about 12 weeks by Boeing, TSA’s contractor. LAWA relied on designs and estimates developed by Boeing and its subcontractors to determine the total project cost estimate because the company had expertise in integrating EDS equipment into airports. According to TSA and LAWA officials, both TSA and Los Angeles signed the LOI/MOA knowing the preliminary nature of the cost estimate. According to construction industry guidance, an estimate’s accuracy depends on the quality of information known about the project at the time the estimate is prepared. The 2003 estimate was made at the “concept development” stage where the final project cost can be expected to range from 50 percent under to 100 percent over the estimated cost, according to this guidance. The 2005 revised estimate was made at the “design development” stage where the range of the final project cost estimate can be expected to be more accurate—from 20 percent under to 30 percent over the estimated cost. In December 2003, LAWA presented TSA with a summary of inadequacies it had found in the original Boeing concept and the associated potential cost and scheduling impacts. LAWA then began an engineering study to update the in-line system concepts at LAX and ONT, the results of which it presented to TSA in September 2004. TSA reviewed these updated concepts and determined that they would meet its performance requirements; however, TSA’s review did not address cost issues. LAWA used these updated concepts to develop its 2005 estimate, which was based on more definitive information about terminal design requirements than the 2003 estimate. According to LAWA, new construction and excavation included in the 2005 designs increased the estimated costs. Among the design changes, LAWA determined that the placement of EDS machines in the 2003 concepts was infeasible in five of nine of the LAX terminals and both ONT terminals. In addition, the 2005 estimate included 20 additional baggage inspection rooms, 9 rooms for on-screen resolution of EDS alarms, and 10 computer rooms at LAX and ONT terminals. The 2005 estimate also included over $11 million in computer networking costs and costs associated with on-screen resolution of EDS alarms, which the 2003 estimate did not foresee. TSA also highlighted two additional factors that caused differences between the two estimates—cost increases due to the delay in beginning construction of the project and the escalation of construction costs between 2003 and 2005. LAWA also determined that TSA’s contractor and subcontractor made a mathematical error in the 2003 concept development estimate: construction costs were only included for one of the two baggage screening facilities and neither of the connected tunnels at ONT. TSA officials told us in January 2007 they were not able to substantiate this error. Further, according to LAWA, system redesigns were required because TSA’s guidance on in-line baggage screening systems changed between the 2003 and 2005 estimates, leading to higher estimates. Because few in-line systems were in use at the time of the September 2003 LOI/MOA, only limited information on the capabilities of the in-line EDS machines, including actual bags screened per hour and false alarm rates, was available for modeling the systems. In June 2006, TSA produced the Recommended Security Guidelines for Airport Planning, Design and Construction to guide future construction of in-line checked baggage screening systems based on its past experiences. TSA also expects to release more detailed guidelines for in-line system planning and design in a few months. The LOI/MOA affords TSA flexibility to amend the agreement to account for changed circumstances. However, under the terms agreed to in the LOI/MOA, TSA has no obligation to amend the LOI/MOA or to reimburse the City of Los Angeles for any additional costs beyond those agreed to in the LOI/MOA, and TSA officials have stated that the agency does not have plans for such reimbursement. To review key factors that contributed to the differences between the 2003 and 2005 cost estimates, we reviewed TSA and LAWA documents used in developing the cost estimates, including design plans, reports, briefings, and emails. We interviewed officials from TSA and LAWA, as well as TSA contractors and other relevant officials who participated in the cost- estimation process to learn about the factors that contributed to the increased estimate of the cost of in-line checked baggage screening systems at LAX and ONT. We visited LAX and ONT to obtain a first-hand perspective of the modifications needed to install the in-line EDS systems at both airports. Additionally, we examined industry guidance on estimating costs for construction projects. We did not independently verify the 2003 or 2005 cost estimates. We conducted our work in accordance with generally accepted government auditing standards from October 2006 through March 2007. We provided a draft of this report to LAWA and the Department of Homeland Security (DHS) for review and comment. LAWA provided written comments which we have included in their entirety in appendix III. DHS provided no written comments. TSA provided e-mail comments. In addition, LAWA and TSA provided technical comments concerning facts in the report which we incorporated as appropriate. In its March 8, 2007, comments, LAWA wrote that it believes the draft did not paint an accurate or complete picture of the facts. In general, LAWA raised three points: (1) TSA has the authority to revise the LOI to reflect accurate cost figures and explicitly anticipated doing so during the LOI/MOA development process, (2) the report fails to assign specific responsibility for initial designs and any errors, as directed by the Report of the Senate Appropriations Committee, and (3) the report does not recognize that LAWA responded to TSA urgency in completing the agreements and, as a result, used preliminary design and cost estimates as the basis for entering into the LOI/MOA. We do not agree with LAWA’s comments. With respect to its first point, it is true that the LOI/MOA agreements afford TSA flexibility to amend the agreements to account for changed circumstances. As stated in our report, however, under the terms of the LOI/MOA and in accordance with the law, TSA is under no obligation to amend the LOI/MOA or to reimburse LAWA for any costs beyond those agreed upon in the LOI/MOA. To date, as noted in our report, TSA has not indicated any intent to amend the LOI/MOA agreements to provide LAWA with additional funding for this project. LAWA states that it did not believe it would be held financially responsible for increases in eligible and allowable costs due to reasons beyond its control. When subsequent estimates revealed that the project costs would exceed the LOI/MOA-estimated amount, LAWA requested an amendment to the LOI to receive a 75 percent federal reimbursement of the $485 million revised estimate. LAWA also commented that a senior TSA official provided written assurances that the agency “would have the opportunity to cover an increase in costs due to design changes” and referenced an April 2004 e-mail from a TSA official to LAWA in support of this assertion. LAWA noted that it relied on this and other assurances from TSA, “reinforced in various discussions,” at the time it concluded the LOI/MOA process. While the April 2004 e-mail cited above did note that LAWA would not “be held to estimates that do not prove to be right on the mark,” this particular statement was made at least seven months after TSA and LAWA had concluded the LOI/MOA process and entered into the agreements. Furthermore, the MOA clearly provides that the agreement signed by both parties constitutes the “complete integration of all understandings between the parties.” More generally, it provides that any prior, contemporaneous, or subsequent changes, whether written or oral, have no force or effect, and that any changes or modifications to the MOA must be in writing, signed by the TSA Contracting Officer, and duly executed by the City of Los Angeles to have such force or effect. Neither LAWA nor TSA presented any documentation suggesting that steps prescribed in the MOA had been (or were anticipated to be) taken to amend the LOI/MOA with respect to the reimbursable amount. LAWA also stated that the report does not reflect the extensive and protracted discussions LAWA had with TSA, leaving the impression that LAWA simply presented a new set of design concepts to TSA in September 2004. Our objective in this report, as agreed with congressional offices, was to identify the key factors that contributed to the differences between the 2003 and the 2005 cost estimates. As such, we reported that LAWA reported the findings of its engineering study in September 2004 and that TSA approved the concepts. We believe this statement sufficiently demonstrates the agreement between TSA and LAWA on the revised designs.