[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]




 
WASTE, FRAUD, AND ABUSE AT K-TOWN: HOW MISMANAGEMENT HAS DERAILED DOD'S 
              LARGEST SINGLE FACILITY CONSTRUCTION PROJECT

=======================================================================

                                HEARINGS

                               before the

                         COMMITTEE ON OVERSIGHT
                         AND GOVERNMENT REFORM

                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                       FIRST AND SECOND SESSIONS

                               __________

                    JUNE 28, 2007 AND JUNE 25, 2008

                               __________

                           Serial No. 110-77

                               __________

Printed for the use of the Committee on Oversight and Government Reform


  Available via the World Wide Web: http://www.gpoaccess.gov/congress/
                               index.html
                      http://www.house.gov/reform


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              COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM

                 HENRY A. WAXMAN, California, Chairman
TOM LANTOS, California               TOM DAVIS, Virginia
EDOLPHUS TOWNS, New York             DAN BURTON, Indiana
PAUL E. KANJORSKI, Pennsylvania      CHRISTOPHER SHAYS, Connecticut
CAROLYN B. MALONEY, New York         JOHN M. McHUGH, New York
ELIJAH E. CUMMINGS, Maryland         JOHN L. MICA, Florida
DENNIS J. KUCINICH, Ohio             MARK E. SOUDER, Indiana
DANNY K. DAVIS, Illinois             TODD RUSSELL PLATTS, Pennsylvania
JOHN F. TIERNEY, Massachusetts       CHRIS CANNON, Utah
WM. LACY CLAY, Missouri              JOHN J. DUNCAN, Jr., Tennessee
DIANE E. WATSON, California          MICHAEL R. TURNER, Ohio
STEPHEN F. LYNCH, Massachusetts      DARRELL E. ISSA, California
BRIAN HIGGINS, New York              KENNY MARCHANT, Texas
JOHN A. YARMUTH, Kentucky            LYNN A. WESTMORELAND, Georgia
BRUCE L. BRALEY, Iowa                PATRICK T. McHENRY, North Carolina
ELEANOR HOLMES NORTON, District of   VIRGINIA FOXX, North Carolina
    Columbia                         BRIAN P. BILBRAY, California
BETTY McCOLLUM, Minnesota            BILL SALI, Idaho
JIM COOPER, Tennessee                JIM JORDAN, Ohio
CHRIS VAN HOLLEN, Maryland
PAUL W. HODES, New Hampshire
CHRISTOPHER S. MURPHY, Connecticut
JOHN P. SARBANES, Maryland
PETER WELCH, Vermont

                     Phil Schiliro, Chief of Staff
                      Phil Barnett, Staff Director
                       Earley Green, Chief Clerk
                  David Marin, Minority Staff Director


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    June 28, 2007................................................     1
    June 25, 2008................................................   199
Statement of:
    Dorn, Terrell G., Director, Physical Infrastructure, 
      Government Accountability Office; Gregory D. Kutz, Managing 
      Director, Forensic Audits and Special Investigations, 
      Government Accountability Office; and Bruce A. Causseaux, 
      Senior Level Contract and Procurement Fraud Specialist, 
      Forensic, Government Accountability Office.................   224
        Dorn, Terrell G..........................................   224
        Kutz, Gregory D..........................................   225
    Garber, Judith, Deputy Assistant Secretary of State, Bureau 
      of European and Eurasian Affairs, U.S. Department of State.   214
    Kutz, Gregory D., Managing Director, Forensic Audits and 
      Special Investigations, Government Accountability Office 
      and Terrell G. Dorn, Director, Physical Infrastructure, 
      Government Accountability Office; Bruce A. Causseaux, 
      Senior Level Contract and Procurement Fraud Specialist, 
      Forensic Audits and Special Investigations, Government 
      Accountability Office; and Brigadier General Danny K. 
      Gardner, Director of Installations and Mission Support, 
      U.S. Air Forces in Europe..................................   140
        Dorn, Terrell G..........................................   141
        Gardner, Brigadier General Danny K.......................   168
        Kutz, Gregory D..........................................   140
    Rogers, Major General Marc E., USAF, Vice Commander, U.S. Air 
      Forces in Europe...........................................   214
Letters, statements, etc., submitted for the record by:
    Davis, Hon. Tom, a Representative in Congress from the State 
      of Virginia, prepared statements of..................... 138, 210
    Dorn, Terrell G., Director, Physical Infrastructure, 
      Government Accountability Office; Gregory D. Kutz, Managing 
      Director, Forensic Audits and Special Investigations, 
      Government Accountability Office; and Bruce A. Causseaux, 
      Senior Level Contract and Procurement Fraud Specialist, 
      Forensic, Government Accountability Office, prepared 
      statement of...............................................   143
    Gardner, Brigadier General Danny K., Director of 
      Installations and Mission Support, U.S. Air Forces in 
      Europe, prepared statement of..............................   171
    Kutz, Gregory D., Managing Director, Forensic Audits and 
      Special Investigations, Government Accountability Office 
      and Terrell G. Dorn, Director, Physical Infrastructure, 
      Government Accountability Office, prepared statement of....   228
    Rogers, Major General Marc E., USAF, Vice Commander, U.S. Air 
      Forces in Europe, prepared statement of....................   217
    Watson, Hon. Diane E., a Representative in Congress from the 
      State of California, prepared statement of.................   277
    Waxman, Chairman Henry A., a Representative in Congress from 
      the State of California:
        Fact sheet and audit report..............................     4
        Letter from Hubert Heimann...............................   213
        Prepared statements of................................ 127, 202


WASTE, FRAUD, AND ABUSE AT K-TOWN: HOW MISMANAGEMENT HAS DERAILED DOD'S 
              LARGEST SINGLE FACILITY CONSTRUCTION PROJECT

                              ----------                              


                        THURSDAY, JUNE 28, 2007

                          House of Representatives,
              Committee on Oversight and Government Reform,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 10 a.m. in room 
2154, Rayburn House Office Building, Hon. Henry A. Waxman 
(chairman of the committee) presiding.
    Present: Representatives Waxman, Cummings, Davis of 
Illinois, Tierney, Watson, Higgins, Davis of Virginia, Shays, 
Platts, Duncan, Issa, and Sali.
    Staff present: Phil Schiliro, chief of staff; Phil Barnett, 
staff director and chief counsel; Karen Lightfoot, 
communications director and senior policy advisor; David 
Rapallo, chief investigative counsel; John Williams, deputy 
chief investigative counsel; Margaret Daum and Suzanne Renaud, 
counsels; Molly Gulland, assistant communications director; 
Earley Green, chief clerk; Teresa Coufal, deputy clerk; Caren 
Auchman, press assistant; Zhongrui ``JR'' Deng, chief 
information officer; Leneal Scott, information systems manager; 
Sam Buffone, staff assistant; David Marin, minority staff 
director; Larry Halloran, minority deputy staff director; 
Jennifer Safavian, minority chief counsel for oversight and 
investigations; John Brosnan, minority senior procurement 
counsel; Emile Monette, minority counsel; Patrick Lyden, 
minority parliamentarian and member services coordinator; Brian 
McNicoll, minority communications director; and Benjamin 
Chance, minority clerk.
    Chairman Waxman. The meeting of the committee will please 
come to order.
    I would like to ask unanimous consent that the chairman and 
the ranking member or his designee each have 10 minutes of time 
for questioning when we begin this morning.
    Today's hearing will be the seventh hearing the Oversight 
Committee has held this year on waste, fraud, and abuse in the 
Federal Government. We are holding this hearing to examine what 
has gone wrong at the K-Town Mall, a $200 million Defense 
Department construction project.
    On September 28, 2006, this committee held a hearing on the 
Baghdad Police College. This was a U.S. project to build new 
barracks and classrooms to educate and train Iraqi police 
forces. As we learned at that hearing, the project was in 
shambles. I have some pictures of that project which I would 
like to show.
    At the hearing we heard testimony from the Special 
Inspector General for Iraq Reconstruction that construction was 
so deficient that toilets were draining through the reinforced 
concrete floors and literally raining on the cadets. Auditors 
told us about light fixtures so full of urine and feces that 
they would not operate.
    The excuse from the Defense Department was that this was a 
war zone.
    Today we consider a different construction project. This 
project is not in a war zone. It is not in Iraq or Afghanistan. 
This project is being built on a U.S. military base in Germany. 
U.S. project officials live and work every day next to the 
facility. It is called the Kaiserslautern Military Community 
Center, also referred to as the K-Town Mall. Yet, it is also 
over budget, behind schedule, and falling apart.
    The K-Town Mall is the Pentagon's largest single facility 
construction project in the world. It will have a hotel, sports 
bar, slot machines, and over 800,000 square feet of retail 
space. But, just like the Baghdad Police College, the 
construction has been deficient, and U.S. oversight has been 
wholly inadequate.
    I have some pictures of this project, and the similarities 
are striking. Here is one showing how the roof is leaking 
continually and is causing damage to the finished construction 
underneath. This will cost millions of dollars to replace. Here 
are some additional pictures of the faulty construction, and 
here is another picture showing how flammable sealant was used 
in kitchen exhaust ducts.
    How could this have happened? How could construction of a 
modern-day facility in a western country on a U.S. military 
base resemble the shoddy and makeshift practices of a war zone? 
That is what we are here to find out.
    Certainly there are problems with the contractor on this 
project, which is a German government-controlled entity called 
LBB, and we will hear about some of these deficiencies today. 
But the bottom line is that this is a U.S. Government project. 
We are spending over $200 million in U.S. funds to build the K-
Town Mall, yet the Air Force has failed in its responsibilities 
to conduct proper planning and oversight. The project is 
millions of dollars over budget, has no validated cost 
estimate. The project was supposed to be done last year, but 
now there is no working completion date in sight.
    I want to introduce for the record an audit issued by the 
Air Force Audit Agency just last week on June 22nd. This audit 
report is the European Area Audit Office, June 22, 2007. This 
report details literally dozens of oversight defects by the 
U.S. Government in the K-Town Mall project. Let me just read a 
few from it.
    ``The Air Force did not provide adequate oversight of the 
planning procedures. The Air Force did not establish a process 
for the contractors to provide contractor qualification for 
U.S. review. The Air Force did not establish procedures 
directing project managers to review and validate cost 
estimates and did not properly monitor and approve contractor 
payments. The U.S. Air Force paid for materials in excess of 
approved contract quantities and did not properly appoint 
certifying and accountable officials.''
    This is a long report, over 100 pages, so I asked my staff 
to prepare a short fact sheet with the key auditor findings, 
and that fact sheet is available to Members, and I ask 
unanimous consent it be included in the record. Without 
objection.
    [The information referred to follows:]

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    Chairman Waxman. GAO investigators also visited the K-Town 
Mall. We are fortunate that they can be here today to tell us 
what they learned. As we will hear, they saw irresponsible 
management, shoddy work, and millions of dollars in waste.
    The Federal Government spent a record amount, over $400 
billion, on Federal contracts last year. Over 40 cents of every 
discretionary Federal dollar now goes to a private company, but 
far too much of this spending is being squandered.
    The report I released yesterday identified 187 contracts 
worth over $1 trillion that had been plagued by waste, fraud, 
abuse, or mismanagement since 2000. The same pattern happens 
over and over again. The contractors get rich, the work doesn't 
get done, and the taxpayers get soaked.
    As the main oversight committee in the House we have an 
essential job to do. We need to examine what went wrong so we 
can hold officials accountable and enact reforms, and that is 
what I hope we can begin to do today by holding this important 
hearing.
    [The prepared statement of Chairman Henry A. Waxman 
follows:]

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    Chairman Waxman. I want to recognize Representative Shays, 
who will deliver the opening statement on behalf of Congressman 
Tom Davis, the ranking member.
    Mr. Shays. Thank you, Mr. Waxman. This is, in fact, 
Representative Tom Davis' statement.
    Good morning. Let me first commend Chairman Waxman for 
holding a hearing on acquisition issues that does not involve 
Halliburton. We hope today's broader perspective marks the 
beginning of a trend.
    As the chairman said, we need today to discuss the 
challenges facing the Department of Defense's largest ongoing 
facilities construction project, the Kaiserslautern Military 
Community Center at Ramstein Air Base in Germany. The facility 
was designed as a massive, multi-use complex featuring retail, 
hotel, and entertainment space to service American personnel 
stated in Germany and for others passing through Ramstein, but 
today the project stands unfinished after chronic delays, lax 
management and oversight, huge cost overruns, dangerous design 
flaws, vandalism, and allegations of corruption.
    According to the Government Accountability Office, which 
brought this matter to the committee's attention, these 
problems go well beyond the risks inherent in foreign 
construction projects. This acquisition effort seems to have 
collapsed under the combined weight of several daunting but not 
altogether unique complications.
    First, the project is supported by four different funding 
sources, each with different spending rules, currently valued 
at over $170 million. The acquisition requires coordination of 
expenditures from Air Force working capital funds, other non-
appropriated accounts, and $21 million in appropriated military 
construction funding.
    Second, the facility is being built under a riskier fast 
track design/build process.
    Third, the project must be constructed in accordance with a 
NATO status of force agreement which requires the German 
government to manage construction using German contractors to 
perform the work.
    Fourth, the Air Force decided not to use the U.S. Army 
Corps of Engineers, the Defense Department's resident 
construction management experts, to oversee the project.
    And, finally, to top it all off, the Air Force Project 
Management Office was under-staffed. The result was a high-
risk, high-visibility project managed by too few people.
    Any one of these factors presents significant management 
challenges. Together, they spell disaster in the form of 
inadequate and unfocused high-level leadership, poor planning, 
poor design requirements, and an inadequate number of trained 
personnel overseeing the project.
    The Air Force recognizes the project has serious problems 
in management and oversight, and it is in the process of taking 
steps to get control of the situation. Some of the identified 
challenges have been mitigated; others remain works in 
progress.
    There is still a great deal of money committed to the 
project and substantial funding remains in the pipelines in 
Germany for other construction endeavors. We need to be sure 
this project is completed properly and that the future projects 
do not fall prey to the same oversight mistakes that steered 
this project into a cost and scheduling ditch.
    I hope this hearing will focus on what needs to be done to 
get this project back on track and what should be done to 
protect the integrity of future projects built under the 
existing status of force agreement in Germany. We need to know 
what has gotten better, what is still being fixed, and what is 
still broken, and we need to refine our understanding of the 
difference between interim findings that may make this complex 
process look bad now, and the real problems that will actually 
affect the cost to taxpayers in the end.
    I do need to sound a note of caution, however. The GAO 
audit findings being presented today are only preliminary. 
Criminal and administrative investigations of the project are 
still underway. Without the final results of those efforts, we 
are not in a position to get the full story in this hearing. It 
might have been wiser to wait, but as we proceed today we 
should take care not to jeopardize the hard work of the 
Department of Justice and the Air Force in pursuing serious 
allegations of civil and criminal violations in connection with 
this project.
    Investigators from the GAO are here today to provide their 
initial views on these issues, and we commend them for their 
hard work. We also value the experience and the perspectives 
our Air Force witnesses bring to this discussion of the 
critical challenges faced by this construction project.
    Much is at stake in terms of U.S. tax dollars and in terms 
of ensuring our troops get the best possible services and 
accommodations while deployed overseas.
    We look forward to the testimony of all the witnesses and 
to a frank, constructive discussion.
    That is the end of his statement.
    [The prepared statement of Hon. Tom Davis follows:]

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    Chairman Waxman. Thank you very much.
    I want to welcome now our witnesses for this hearing, Greg 
Kutz, who is joined by Bruce Causseaux and Terrell Dorn from 
the Government Accountability Office, who will present the 
interim results of their investigation into deficiencies at the 
K-Town Mall.
    We also want to welcome Brigadier General Danny Gardner, 
who is the Director of Installations and Mission Support for 
the U.S. Air Forces in Europe.
    Hopefully we will get an explanation of what has been 
happening at the K-Town Mall.
    I thank you all very much for being here. It is the 
practice of this committee to ask all witnesses to take an oath 
before they testify.
    [Witnesses sworn.]
    Chairman Waxman. The record will indicate that each of the 
witnesses answered in the affirmative.
    Your prepared statements are going to be in the record in 
their entirety. We would like to ask you to proceed in any way 
you wish in your oral presentation to us.
    Mr. Kutz.

  STATEMENTS OF GREGORY D. KUTZ, MANAGING DIRECTOR, FORENSIC 
 AUDITS AND SPECIAL INVESTIGATIONS, GOVERNMENT ACCOUNTABILITY 
  OFFICE; TERRELL G. DORN, DIRECTOR, PHYSICAL INFRASTRUCTURE, 
 GOVERNMENT ACCOUNTABILITY OFFICE; BRUCE A. CAUSSEAUX, SENIOR 
   LEVEL CONTRACT AND PROCUREMENT FRAUD SPECIALIST, FORENSIC 
 AUDITS AND SPECIAL INVESTIGATIONS, GOVERNMENT ACCOUNTABILITY 
  OFFICE; AND BRIGADIER GENERAL DANNY K. GARDNER, DIRECTOR OF 
  INSTALLATIONS AND MISSION SUPPORT, U.S. AIR FORCES IN EUROPE

                  STATEMENT OF GREGORY D. KUTZ

    Mr. Kutz. Mr. Chairman and members of the committee, thank 
you for the opportunity to discuss our initial findings 
relating to the KMCC project. The bottom line of our testimony 
today is that the KMCC project is in serious trouble. 
Ineffective management and oversight have resulted in a 
situation with no good solutions.
    Our testimony has three parts: first, the current problems; 
second, the causes of these problems; and, third, the effects 
of the problems and implications for future projects in 
Germany.
    First, it was initially estimated that the KMCC would cost 
about $150 million and be completed in early 2006. Today 
neither the Air Force nor the German construction agency, LBB, 
have a reliable cost estimate or completion date.
    KMCC currently faces a multitude of problems that threaten 
the completion of this important project. For example, German 
contractors are leaving the constructionsite in part because 
they aren't getting paid. The number of workers has dwindled 
from hundreds to what we understand to be about 50 today. 
Construction flaws include significant water leaks, as you 
mentioned, related to the roof, which will require millions of 
dollars to fix.
    Examples of other problems include vandalism in over 200 of 
the hotel rooms, turnover in key LBB personnel, and the firing 
of a company that LBB hired to manage the project, and ongoing 
fraud investigations.
    Under the causes of the problems, from the beginning KMCC 
was a high-risk overseas project. Key risk factors, which are 
also shown on the monitor, include an accelerated schedule due 
to the need for the 350 hotel rooms; LBB having control over 
contracting and management; in effect, a cost-plus percentage 
of cost agreement; scheduling and coordination of over 30 
German trade contractors; currency exposure due to a Euro-
denominated contract; and financial risks borne by the Air 
Force and its funding partners.
    However, rather than beef up financial contract and 
construction oversight, the Air Force provided minimal 
oversight. For example, it appears that millions of dollars of 
invoices and alleged change orders were paid for by the Air 
Force with little or no supporting documentation. We refer to 
this as a pay-and-chase process, which is highly vulnerable to 
fraud, waste, and abuse.
    Unfortunately, LBB failed to effectively design the project 
and oversee the work of the trade contractors. Ironically, LBB 
will receive a 5.6 percent fee on top of every dollar of 
construction cost overruns for this project.
    Let me now turn to Terry Dorn, who will discuss the effects 
of the problems and implications for future projects in 
Germany.

                  STATEMENT OF TERRELL G. DORN

    Mr. Dorn. Mr. Chairman, failure of the Air Force and LBB to 
meet the project's construction schedule affects all of the 
funding partners. For example, Air Force estimates it is losing 
$10,000 per day because the hotel rooms being built by this 
project are not available, requiring many transiting service 
members from places such as Iraq and Afghanistan to stay off 
base in higher-cost German hotels.
    AAFES, which uses non-appropriated funds, bears the 
heaviest burden. Not only is their proportional share of both 
current and future construction and possible delay costs the 
largest, but because they are a retail operation they also 
suffer from lost profits and lost opportunities. Their ability 
to plan future operations also suffers without a firm opening 
date, because they don't know when to stock the shelves and 
they don't know when to hire new employees.
    Additionally, AAFES is returned a portion of those profits 
as dividends, which are used to support morale and welfare 
activities for our service members and their families. Because 
of the double hit of increased construction cost from this 
project and lost sales, AAFES will not be able to return as 
much money to morale and welfare activities as they had 
planned. They may also have to delay construction of two 
shopping centers on other military bases and delay renovation 
of other facilities.
    Air Force officials estimate that there is at least $400 
million in additional military construction and operations and 
maintenance projects slated for Germany over the next 5 years. 
Absent better controls, these projects face the same type of 
heightened risks associated with the Kaiserslautern 
construction project.
    In summary, the Kaiserslautern Military Community Center 
project is in serious trouble and needs serious attention by 
Air Force and LBB to mitigate the risks. While both recognize 
some of the issues and are taking some steps to address them, 
due to inadequate internal controls and mounds of unprocessed 
change requests, there is an increased risk of fraud and waste.
    Due to reported design issues, the lack of a construction 
schedule, shoddy construction work requiring rework, work 
stoppages, and the large backlog of unprocessed change 
requests, the project's schedule and consequently its budget 
are at risk of large increases.
    The largest share of those budget increases will be passed 
along by Air Force to AAFES, affecting their available capital 
for new projects and reducing the amount of dividends they can 
provide for the morale and welfare funds for our service 
members and their families serving overseas.
    Mr. Chairman. that concludes our opening statement this 
morning. We are prepared to answer any questions for the 
committee.
    [The prepared statement of the Government Accountability 
Office follows:]

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    Chairman Waxman. Mr. Causseaux, you are here to answer 
questions?
    Mr. Causseaux. Yes, sir.
    Chairman Waxman. OK. Thank you.
    General Gardner.

        STATEMENT OF BRIGADIER GENERAL DANNY K. GARDNER

    General Gardner. Good morning, Chairman Waxman and 
distinguished members of the committee. It is an honor for me 
to be here today.
    Mr. Chairman, I have a brief opening statement, but my 
written statement presents the facts of this situation to the 
best of my knowledge.
    In opening, I would like to state that the Kaiserslautern 
Military Community Center project [KMCC], remains a cornerstone 
requirement for U.S. Enduring Presence in the European Theater. 
It will help provide quality of life transit capability to 
America's finest going to, coming from, or supporting any EUCOM 
or CENTCOM area of responsibility.
    This project is governed by the ABG-75 administrative 
agreement, a bilateral agreement between the United States and 
the Federal Republic of Germany. This agreement details the 
roles, responsibilities, and procedures of all parties in the 
acquisition of U.S. facilities projects in Germany.
    As you are all aware, this project is experiencing 
management, technical, and fiscal issues which are 
significantly delaying its completion.
    Mr. Chairman, if you will indulge me for a moment, I would 
like to explain the contractual relationships of the parties 
involved in construction in the Federal Republic of Germany in 
terms of a football team, something we can all relate to. This 
is not to suggest, Mr. Chairman, that this is a game, but the 
analogy will serve to better illustrate the roles and 
responsibilities of the various parties.
    In my analogy, the players are the contractors. The 
quarterback is the construction manager, JSK. The coach is our 
German construction agent, LBB Kaiserslautern. The owners and 
investors are the German and U.S. Government, respectively. Our 
quarterback, or our construction manager, is our key player. 
JSK is responsible for orchestrating the plays while working 
the field.
    Our coach, LBB Kaiserslautern, developed a strategy to be 
successful on the field and responsible for evaluating and 
adjusting performance of the quarterback and players. The 
owners and investors provide resources for the coach to hire 
players, develop strategy, and succeed in the field. The owners 
and investors can be somewhat involved in the pre-game 
strategy, but in Germany once the game begins or contracts are 
awarded the success of the team lies with the coach, the 
quarterback, and the players.
    In the case of KMCC, we have experienced several 
weaknesses, and in some cases complete failure in our 
quarterback, JSK, and our coach, LBB Kaiserslautern. These 
weaknesses and failures have brought us to where we are today. 
The owners and U.S. officials are working hand-in-hand to 
determine solutions to the challenges our team is facing.
    It is my belief that the challenges surrounding the KMCC 
project are deeply rooted in an irreversible decision by our 
German construction agent to use an acquisition methodology 
known as trade lots. Although the decision was well intended, 
it was ill fated. Simply defined, trade lots dispense with the 
use of single general contractor normally fiscally responsible 
for all aspects of single contract. Instead, trade lots award 
numerous contracts to individual trades, such as electrical, 
mechanical, and architectural, to finish this.
    This method was touted as offering two strategic 
advantages. First, it would better serve the local economy 
surrounding Ramstein Air Base by allowing smaller, local firms 
to bid and perform on numerous smaller contracts. Second, this 
method of contracting would afford the opportunity to fast 
track construction.
    Early trades such as site work, foundation, structural work 
could therefore be designed and constructed while subsequent 
trades continued with design efforts. Barring a very costly 
full termination and re-solicitation, this decision cannot be 
undone.
    With few exceptions, most of the project challenges can be 
linked to the weaknesses of our construction agent to properly 
develop and manage the execution of this project. One 
manifestation was an exceptional number of construction change 
orders due to design errors and omissions. This led to the 
agent's inability to orchestrate the schedule and maintain 
quality control on more than 35 different contracts across 
seven projects and four funding sources. Further, they were not 
structured or resourced to process this large number of change 
orders in a manner that would keep construction on time and 
within budget.
    The resulting haste in change order processing then led to 
accountability issues. In December 2005 I began to see 
indications that the project was not going as smoothly as we 
had hoped, specifically in regards to scheduling work. We began 
engaging with our agent to find ways to influence changes on 
the constructionsite.
    In September 2006 LBB replaced JSK and assumed the role of 
a general contractor. Simultaneously, we ramped up our 
oversight to a level not required by our ABG-75. Though some 
effective corrections have been made, there are still many 
challenges ahead.
    We have learned many lessons from this project that we have 
applied to other projects across USAFE.
    Returning to my football analogy, great effort has been 
exerted by USAFE and our German partners to turn this team 
around. Our commander and vice commander, as well as our 
embassy staff, have personally engaged with senior German 
officials to find solutions in order to complete this project 
as quickly as possible and within United States and German laws 
governing construction.
    These efforts have led to additional changes within the 
leadership of the project and promise to bring fresh game plan 
to the players on the field.
    It is my belief that our current strategy represents the 
most attractive course of action. We must continue construction 
to avoid extensive delay costs and to bring the facilities to a 
point where they can generate income and provide vital mission 
support.
    Mr. Chairman, we appreciate your genuine concern in this 
effort and I respectfully request the committee's support as we 
work through the remaining challenges to complete this project 
as quickly as possible and bring this badly needed mission 
support facility online.
    Thank you. I look forward to your questions.
    [The prepared statement of General Gardner follows:]

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    Chairman Waxman. Thank you very much for your testimony.
    We are going to proceed now, without objection, with 
questions in the regular order, 5 minutes each Member. I am 
going to start.
    General Gardner, on page 3 of your written statement you 
say that the K-Town Mall project was put on a fast track. I 
would like to ask you about this.
    According to your testimony, the Air Force had a major 
interest in completing the project by 2005. Why was this 
project so important?
    General Gardner. Sir, we have a Rhein Main transition 
program where we were closing our base in Frankfort, Rhein Main 
Air Base, and the objective was to close that base, transfer 
the missions from Rhein Main and duplicate those missions to 
the extent that we could at Ramstein and at Spangdahlem. The 
closure of that base was to happen in December 2005. It did 
happen in December 2005. And the opening of the facilities, the 
VQ area, the visiting quarters area of that facility was to 
open simultaneously with that.
    But I also point out to you, Mr. Chairman, that the 
December 2005 date was a desired date by USAFE for the 
facilities. It was never a contractual date that was set up by 
our contracting agent.
    Chairman Waxman. The Air Force audit also referred to this 
pressure. On page 3 the audit states, ``The senior management 
emphasis was on expediting design and schedule, rather than 
ensuring personnel conducted appropriate design reviews.'' What 
I don't understand is how a project that was so important could 
go so off course.
    Mr. Kutz, how would you answer this question? How did we 
end up with a $200 million white elephant when we were supposed 
to have an urgently needed facility for our troops?
    Mr. Kutz. Well, our testimony talks about three parts to 
that. There are inherent risks involved with overseas 
contracting. There is the limitations based upon the agreement 
with the German government. You have currency risks. Then, with 
respect to the actual German agency, LBB, they failed to 
provide effective oversight and management of the design and 
implementation. The third part of this is Air Force not having 
effective and proactive controls in place and oversight to 
identify and deal with the problems earlier, and we see it as 
all three being a combination of the perfect storm, if you 
will, creating this situation.
    Chairman Waxman. Was one of the factors the pressure to cut 
corners in order to get the job done quickly? If this were the 
case, this approach certainly produced the exact opposite 
result. What do you think about that?
    Mr. Kutz. I do believe that a lot of the oversight was 
relaxed, in part because they wanted to get it done, and so 
there was a tendency to want to pay the bill, and, as we 
mentioned in our statement, even if there was no support for 
the invoices or change orders. That was because of the 
schedule-driven project.
    Chairman Waxman. General Gardner, did any official involved 
in this project ever object to the proceeding on this risky 
fast track approach?
    General Gardner. There were some communications between the 
partners on the fast track approach, but in the end, in order 
to get the facility open in December 2005, all parties agreed 
that the fast track was an acceptable manner, with some 
stipulations that were identified in the long run.
    Chairman Waxman. We have a memo. We will make it available 
to you. This was sent in September 2004 to the civil engineer 
and the Director of Services for the U.S. Air Forces in Europe. 
This memo was sent by the two other key stakeholders in this 
project, the Army and Air Force Exchange Services and the Air 
Force Services Agency. In this memo they warn that the fast 
track process was eliminating ``the time needed to adequately 
review and resolve critical design issues.''
    Have you ever seen this memo before?
    General Gardner. Yes, sir, I have seen it.
    Chairman Waxman. Let me read the next sentence. ``This 
accelerated process has contributed to critical design process 
omissions, design coordination problems, and schedule 
complications that may cause cost increases and project 
delays.''
    General, this memo was written in 2004, well before the 
majority of the construction had taken place. Can you tell us 
why the Air Force disregarded the objections of these key 
officials and proceeded with this approach, despite these 
warnings?
    General Gardner. Yes, sir. This was before my time, but let 
me try to give you what I think happened based upon what I have 
been able to research.
    The individuals involved in this, we did actually go 
through a process of looking at it, analyzing it, and 
determined that the risk was--we knew that there was a risk 
involved. We would not have the idea it would be as risky as it 
has turned out, but we did know there would be a risk, and that 
all parties, again, involved agreed that the fast track method 
was an appropriate method to start this particular project.
    Chairman Waxman. Mr. Kutz, what is your view of the memo 
and the way it proceeded?
    Mr. Kutz. My staff had seen this memo before, and, again, I 
think it just showed that, I guess, the incentive was to get it 
done quickly rather than to get it done with the all controls 
and additional caution. You know that high-pressure schedules 
are oftentimes a problem that causes failure in a project.
    Chairman Waxman. Thank you.
    Mr. Davis.
    Mr. Davis of Virginia. Thank you, Mr. Waxman, for holding 
this hearing. This is a kind of microcosm of what goes wrong in 
contracting.
    Mr. Kutz, your statement here weaves a pretty woeful tale. 
You say the German government entity charged with managing the 
project performed poorly, as did many of the German 
contractors. You don't spare the Department of Defense, either, 
stated that the Air Force oversight was grossly inadequate for 
such a large, high-risk program. Did anyone or any entity 
perform well here?
    Mr. Kutz. I suppose some of trade contractors did because, 
again, I understand German trade contractors do good work 
generally and there is more of a history with German 
construction that I am not as well aware of, but certainly I am 
sure some of them did good work. I think it was more the 
oversight, the fast track, the design had flaws, and, of 
course, Air Force did not provide any oversight.
    Mr. Davis of Virginia. Is this a problem throughout the Air 
Force in the way they oversee these, or is this just one 
isolated case where the contracting officer, or whoever was 
responsible, just fell asleep?
    Mr. Kutz. I can't speak beyond this.
    Mr. Causseaux. No. We have no indication that this is 
indicative of systemic problems, but, again, we only looked at 
this project so we can only speak for this particular one at 
this time.
    Mr. Davis of Virginia. How much do you think American 
taxpayers are out on this? How much did we lose?
    Mr. Kutz. Only a fraction of this is coming from the MILCON 
appropriations. Most of this is not appropriated money.
    Mr. Davis of Virginia. Coming from where?
    Mr. Kutz. Soldier morale programs at the end of the day.
    Mr. Davis of Virginia. So how much was lost when you put 
all that through?
    Mr. Kutz. At the end of the day I don't think anybody 
knows. I mean, there is no estimate of the cost of the project 
right now, and the original estimate, Mr. Davis, was $150 
million. There is no estimate today.
    Mr. Davis of Virginia. Let me ask you this: did anybody get 
fired over this?
    Mr. Kutz. I would defer to Air Force on that.
    Mr. Davis of Virginia. Anybody fired?
    General Gardner. No, sir. Not to my knowledge anyone has 
been fired. But I would like to say, if I could----
    Mr. Davis of Virginia. Anybody promoted?
    General Gardner. Sir, could I set the record straight on 
the money?
    Mr. Davis of Virginia. Sure.
    General Gardner. We are within our budget authority on this 
project. We still have $55 million that we haven't spent on 
this project. The prognosis, even with the repairs of the roof, 
which is substantial, even with the prognosis we will be under 
our project program amount.
    Mr. Davis of Virginia. But you admit this wasn't very well 
handled, don't you? Or are you going to defend it?
    General Gardner. I am not defending our contracting agent. 
No, sir, I am not.
    The other thing, though, I will tell you----
    Mr. Davis of Virginia. Did the contracting agent do their 
job in this case or did they fall down?
    General Gardner. The contracting agency obviously fell in 
this case.
    Mr. Davis of Virginia. Was anybody reprimanded for this?
    General Gardner. Sir, they have been----
    Mr. Davis of Virginia. Was anybody demoted or fired?
    General Gardner. Sir, there have been people. I am sorry. I 
thought you were talking about the U.S. side being fired. No 
one on the U.S. side has been fired that I am aware of. On the 
contracting agent's side, yes, sir. JSK, which was a 
contracting agent for the LBB, was totally removed from the 
project. Four individuals have also been fired. Senior 
management onsite have been removed from the site, as well, per 
my assistants.
    Mr. Davis of Virginia. But from the government side, the 
people overseeing it, no heads rolled? Nothing?
    General Gardner. The individual, the contracting agent is a 
German organization, so yes, government organizations have----
    Mr. Davis of Virginia. On the German side.
    General Gardner. Yes.
    Mr. Davis of Virginia. But I am saying----
    General Gardner. Not on the U.S. side.
    Mr. Davis of Virginia. Right.
    Mr. Kutz, you point out that the Air Force provided minimal 
oversight, and in some cases actually circumvented payment 
processes. A major reason behind this seems to have been a Air 
Force's desire to complete the project on schedule; is that 
correct?
    Mr. Kutz. Yes.
    Mr. Davis of Virginia. Was the key element behind this mess 
an unreasonably ambitious schedule for project completion?
    Mr. Kutz. That was certainly one of the key elements. 
Again, I think there were a multitude of factors that 
contributed to this, including some that aren't under the 
control, like the currency exchange. The Euro dollar has gone 
up by 30 percent since the beginning of the project, so that is 
outside of anyone's control.
    Mr. Davis of Virginia. Right, and probably you could argue 
that wasn't even foreseeable.
    To your knowledge, nobody on the American side of this 
thing, though, was reprimanded, demoted?
    Mr. Kutz. No, none that we were aware of. I think the Air 
Force would know better, but we are not aware of any.
    Mr. Davis of Virginia. Do you think the problems were 
caused by the complexity of the various funding streams, which 
included both, as we noted, appropriated and non-appropriated 
funds, as well as some money from the German government?
    Mr. Kutz. Yes, that contributed.
    Mr. Davis of Virginia. Do you think the fact that a 
majority of the funds here were not DOD appropriated funds was 
a cause of some of the lax oversight?
    Mr. Kutz. That was one of the reasons they didn't engage 
the Corps of Engineers. Apparently, in most projects like this 
the Corps of Engineers would be engaged to provide oversight, 
at least certain elements of financial and construction 
oversight. Because it was not appropriated, in part, that was 
not done in this case.
    Mr. Davis of Virginia. My time is up. Thanks.
    Chairman Waxman. Thank you, Mr. Davis.
    Mr. Cummings.
    Mr. Cummings. I am confused. Mr. Kutz, you said from the 
very beginning there was no good solutions to this problem. 
General Gardner tells us that apparently he has a plan that 
this thing is going to come in under budget. I mean, do you 
agree with that?
    Mr. Kutz. No. Not at all.
    Mr. Cummings. Why not?
    Mr. Kutz. The project is already 18 months behind schedule 
and there is no estimate for cost and schedule. I am not sure 
how you can say you are going to be under budget. There is 
going to be significant litigation, claims responding. There is 
re-work, and there are replacement of the roof, not just to fix 
the leaks. They are going to have to tear out the roof, put a 
new roof in. I think it is very ambitious to say this is going 
to be within any budget at this point.
    Mr. Cummings. General, I am under the impression from your 
testimony that you believe the German agency and the German 
contractors are to blame for the problems with the project. I 
don't see one sentence in this testimony that acknowledges any 
fault on the part of the Air Force. Is that correct? You don't 
believe the Air Force did anything wrong here? I understand 
nobody has been demoted or dismissed.
    General Gardner. Sir, with the advantage of 20/20 
hindsight, there are things that we could have done better or 
would do differently, and those things are what we call lessons 
learned that we have already instituted across USAFE in project 
management.
    But overall, again, we have trust in our contracting agent, 
which is LBB in this case, in accordance with international 
agreements, and in accordance with international agreements 
they are authorized or expected to build these facilities with 
their own right and under their own responsibilities, so we 
follow. We sit on the sideline once the game gets started, as I 
was pointing to earlier.
    Mr. Cummings. But--there is a big but here--we hold the 
money; is that right?
    General Gardner. That is correct.
    Mr. Cummings. We hold the money.
    General Gardner. That is correct, sir.
    Mr. Cummings. And so, because we hold the money, I assume 
there are certain controls that we should have; is that 
correct?
    General Gardner. We have that, sir. The oversight that was 
alluded to earlier, we have a program management office onsite. 
The program management office is the ones that identified the 
leak problems, for example, on the roof, and they are the ones 
that have identified the kitchen duct problem.
    Mr. Cummings. Are you telling this committee this morning 
that it is adequate, this oversight is adequate or has been 
adequate?
    General Gardner. The oversight, again in hindsight, we 
could have maybe have increased the number of people in the 
program office, but----
    Mr. Cummings. Let's talk about it. You don't seem to want 
to admit that there are some major problems here with the Air 
Force, but I would like to ask about when the Air Force first 
became aware of the problems with construction and finances and 
the scheduling. On page 3 of your written testimony you state 
that the project indicators, both financial and schedule, began 
slipping in September 2006; is that correct?
    General Gardner. No. The schedule had already started 
skipping [sic] before September 2006.
    Mr. Cummings. I am sorry. And is----
    General Gardner. But that is when we began to realize that 
there were more issues than just schedule slippage, because 
that is when we realized that we had a--well, actually it was 
before that when we had a number of change orders that our 
contracting agent had approved.
    Mr. Cummings. I would hope so, Brigadier General, because 
the hotel was supposed to be done by December 2005; is that 
correct?
    General Gardner. That is right. Yes, sir.
    Mr. Cummings. Yet you seem to be asserting that the Air 
Force had no idea there was anything wrong until after the date 
this project was supposed to be 100 percent complete. Can you 
explain that statement?
    General Gardner. The project was scheduled to be completed, 
the hotel was completed contractually April 2006. I began to 
realize that we were having some major issues with schedules 
in----
    Mr. Cummings. You just got slipped a note. I want to make 
sure we are accurate here. Why don't you read your note.
    General Gardner. VQ was scheduled to open in April 2006.
    Mr. Cummings. OK. Let me ask you this, then, General. There 
was a press story running in Bloomberg News yesterday in which 
you were quoted. In it you made this statement, ``There had 
been an environment of trust between the U.S. forces and LBB 
until about 18 months ago, when significant coordination and 
scheduling problems on LBB's part became apparent.'' Eighteen 
months ago was December 2005, so according to your statement in 
Bloomberg yesterday, the Air Force became aware of the 
significant coordinating and scheduling problems in 2005, a 
year before the date you assert in your testimony today. Which 
statement is accurate? Did the Air Force become aware of these 
problems in September 2006 or were there indicators in 2005?
    General Gardner. As I stated in my verbal testimony, I 
became aware of significant problems with scheduling in 
December 2005. In the beginning of January 2006 is when I began 
to have a series of meetings with our contracting agent in 
order to determine what is the magnitude of these problems.
    Mr. Cummings. And so why do you take action then?
    General Gardner. We did take action.
    Mr. Cummings. What did you do?
    General Gardner. We worked with our contracting agent to 
determine why are we behind schedule and began to take action 
as to how we were going to get back on schedule.
    Chairman Waxman. The gentleman's time has expired.
    Mr. Shays.
    Mr. Shays. Thank you.
    General Gardner, I want to be fair to you, and I know this 
committee does, as well. Sometimes when people testify they 
don't do as well as they should, but this is almost bizarre to 
me, and so I want you to stop and maybe explain to us. Maybe we 
are thinking of something different than you are thinking.
    When was this facility supposed to be complete?
    General Gardner. The VQ was scheduled to be completed in 
April 2004. That is when we were to get BOD.
    Mr. Shays. April of----
    General Gardner. I am sorry, April 2006.
    Mr. Shays. Let me say something to you. You do not need to 
speak quickly.
    General Gardner. April 2006.
    Mr. Shays. April 2006. And what you are saying to us is in 
December 2005 you began to be aware that there were some 
challenges in completing the project. It seems to me if it is 
supposed to be done just 5 months later, for you to be aware of 
it so late is stunning. Explain to me why you would be aware so 
late that there were delays.
    General Gardner. Because we were being told by our 
contracting agent that everything was on schedule.
    Mr. Shays. Well, being told by your contractor and having 
people there seeing that the contractor must be smoking 
something--in other words, did you not have anyone who was 
following this project and watching it and checking out to make 
sure that at least the contractor was saying things correctly?
    General Gardner. Sir, that is exactly what we were doing. 
That is, again, the reason we had a series of meetings with 
them.
    Mr. Shays. No, you weren't doing it, because you should 
have known before December 2005. Clearly you should have known.
    The other thing that just leaves me uncomfortable, and it 
is an impression that you wanted to leave with us but it 
doesn't make sense to me. I mean, when we read the document 
from GAO, this looks like a disaster of a project that is going 
to have significant cost overruns, and you are trying to give 
us the impression that you are under-budgeted. The way I think 
you are doing it is by not adding in the cost that will be 
needed just to get us up to a certain state of correction 
before you complete the project.
    For instance, the claims, what are the kinds of claims 
against this building right now? In other words, if you don't 
pay a contractor, you have money in the bank, but that is money 
that is allocated somewhere. I mean, are you trying to give us 
the impression that you have unallocated dollars that will make 
you feel comfortable and Air Force comfortable that you are 
going to be under budget?
    General Gardner. Sir, our prognosis, based upon our 
contracting agent, as well as the other government officials 
that looked at this, we agree that at this particular point in 
time we are under the budget. That is to include the repairs 
that have been identified in this committee this far. It does 
not include, however, the unknowns. We don't know what claims 
are out there yet as far as what the Germans would refer to as 
hindrance. We don't know what those may be and how that will 
account in here. But many of those claims costs, we are working 
with our German counterparts in order to recover some of those 
claims.
    Mr. Shays. Well, I became the general contractor of my 
house when my contractor left me a few years ago, and I would 
never feel comfortable saying that we are going to be under 
cost, because the fact is you have problems with your 
contractor because you are over cost. Rarely do you have 
problems with a contractor when you are under cost.
    Mr. Kutz, walk me through. And I want you to be candid on 
how you are reacting to General Gardner's response to us.
    Mr. Kutz. It is just optimistic. I mean, I just don't see 
facts behind it from what we can see.
    Let me give you an example. There are tens of millions of 
dollars of change orders in the pipeline that have not been 
reviewed. There is no support for most of those, or many of 
those. Some of them have been paid for, some of them haven't, 
and that is based on our own----
    Mr. Shays. You have one change order, you have added cost 
and the change order they can charge you top dollar because it 
is a change order. How many change orders are there?
    Mr. Kutz. I don't know today, but as of February there were 
500 or 600 that were in the pipeline, according to their 
consultant.
    Mr. Shays. 500 or 600 change orders?
    Mr. Kutz. That is what we understand, yes.
    Mr. Shays. Yes. OK. Mr. Dorn.
    Mr. Dorn. I would like to comment first to add to what Greg 
said. If you don't know the cost of the change orders and the 
cost of the claims that still haven't come in yet, there is no 
way you can know that you are going to be under budget under 
your programmed amount. Being under the programmed amount 
doesn't mean that there hasn't been any waste; it just means 
that your programmed amount was a lot higher than your initial 
contract.
    Mr. Shays. Well, my time has run out, but basically two 
issues right now. You are going to have claims and you are 
going to have change orders and, third, you are going to have 
repairs. Those three things are going to increase your cost, so 
you are going to have to find where did you save money in your 
project.
    At any rate, thank you, Mr. Chairman.
    Chairman Waxman. Thank you very much.
    Mr. Davis.
    Mr. Davis of Illinois. Thank you very much, Mr. Chairman. I 
want to thank you for calling this hearing.
    Following up pretty much the same line of questioning, Mr. 
Kutz, I want to try and understand exactly how much this 
project is going to ultimately cost. I am looking at the Air 
Force audit report, and it says that in 2003 the K-Town Mall 
project would cost $132 million. Is that correct?
    Mr. Kutz. That could be one of the early numbers. There are 
a number of numbers of what it was going to originally cost. 
Our best guess was 150, from what we could tell.
    Mr. Davis of Illinois. Then by January 2006 the audit says 
that the cost of the project had risen to about $180 million, 
and by September 2006 the estimate was $201.6 million. Now, I 
understand that some of that increase was because of the change 
in the value of the Euro, but a lot of that increase was for 
increased contractor cost; is that not correct?
    Mr. Kutz. That could be rework and other types of things, 
or just changes in quantity and other types of prices of 
materials.
    Mr. Davis of Illinois. General Gardner, do you agree with 
the Air Force auditors that the latest estimate for the cost of 
this project is approximately $200 million?
    General Gardner. I am glad you asked me that question, Mr. 
Congressman. If I could clear the record, the current amount is 
the PA amount. The program amounts for this project is 
$181,997. The cost prognosis, including all the repairs, all of 
the change orders, the 776 change orders, including all those, 
we are looking at roughly $174 million.
    I will tell you, however, that does not include the claims 
that we were referring to here. We have not gotten around to 
the claims.
    There is Article 18 of the ABG-75 says that the U.S. Air 
Force or U.S. Government will not be held, cannot be held 
responsible for faults caused by the German government or their 
representatives that they hire. Article 40 of ABG-75 says those 
discrepancies and disputes will be handled at the ministerial 
level. That is what we are in the process of doing. We are 
trying to work those disputes that were referred to, the claims 
that we are talking about, at the ministerial level. We have no 
idea what those numbers are going to be just yet.
    But I just wanted to make sure that the record is straight. 
These are prognoses from everybody who has looked at this other 
than our GAO and audit agency, is $174 million is where we are 
at the present time based on our best prognosis.
    Mr. Davis of Illinois. Now, are you getting any money for 
the project from the German government?
    General Gardner. There is a small amount. For the claims, 
no, but there is a small portion of this, about $11 million, 
that we get through a Rhein Main transition program which is 
paid for by the partners. This money is used to pay for 200 of 
the rooms in the VQ area, at least portions of the VQ area.
    Mr. Davis of Illinois. Mr. Kutz, in your testimony you say 
that even $200 million is an estimate that is too low. Do you 
still----
    Mr. Kutz. We don't really have an estimate, but it is hard 
to believe there could be a valid estimate when there is no 
schedule completion date. I mean, no one has. Maybe the General 
has a new schedule completion date that he would like to go on 
record with, because I just don't know how you can make an 
estimate of cost when you don't know when it will be done.
    Mr. Davis of Illinois. General, let me ask you, is there a 
time for reassessing the ultimate cost of the project where you 
can come in with an amount that probably would get agreed to by 
the GAO or auditors who would look at it?
    General Gardner. We are constantly looking at funding 
because, contrary to what some might believe, we are good 
stewards of American dollars. We are constantly looking at our 
expenses, where do we need to make adjustments, and so forth.
    As we speak today, I can't predict what is going to happen 
into the future, but as we sit today the prognosis is just as I 
have just read it to you. That is where we are. And the $200 
million that you have seen floating around is a figure that we 
use when we take people around visiting, this is a $200 million 
project. It is not a $200 million project. It is really about a 
$181 million project, but we have used the $200 million as a 
kind of a round figure for our tourists.
    Mr. Davis of Illinois. Could it be that you really don't 
know what the cost of the project is going to be?
    General Gardner. Ultimately, including the claims and the 
unknowns, no, we do not know.
    Mr. Davis of Illinois. Thank you, Mr. Chairman.
    Chairman Waxman. Thank you, Mr. Davis.
    Mr. Issa.
    Mr. Issa. Thank you, Mr. Chairman. I want to thank you for 
holding this hearing. It is always refreshing when we can have 
a totally bipartisan hearing, one in which we are looking at 
the kind of mistakes that are endemic in our large bureaucracy.
    I don't claim to be an expert on contracting. The biggest 
building I ever built was 200,000 square feet. But it will tell 
you that, given a budget of $200 a square foot, given the 
ability--General Gardner, let's start it off. Were you there at 
the start of the project?
    General Gardner. No, sir, I was not.
    Mr. Issa. OK. Where were you at the start of the project?
    General Gardner. I was on another assignment in Brussels.
    Mr. Issa. What were you doing?
    General Gardner. I was the Deputy U.S. military 
representative to NATO.
    Mr. Issa. OK. So you weren't in contracting? It wasn't a 
skill set you brought here today except what you have learned 
on the job?
    General Gardner. That is correct, sir.
    Mr. Issa. Isn't that one of the problems of the U.S. 
military is, with the exception of the Corps of Engineers, for 
the most part putting on that uniform doesn't give you the 
qualifications, graduating from the Air Force Academy with an 
engineering degree in aeronautical engineering doesn't make you 
a general contractor? Isn't that generally one of the problems 
of men and women in uniform?
    General Gardner. Sir, I can't comment to that.
    Mr. Issa. OK. We will take that as a yes.
    Did anyone ever consider doing a PPV type project, in fact, 
having a partnership? You know, Paris Hilton is in the news, 
but Baron Hilton built a lot of hotels with 350 rooms and he 
came in on time and under budget. Was this ever considered in 
the contracting?
    Mr. Kutz, did you see anything in the record that said that 
at the time the Germans and the Americans were figuring it out 
they considered the idea that they would go to somebody skilled 
in producing hotels? Mr. Dorn. Anybody? Because I will tell you 
I don't believe for a minute that you are going to do better 
the next time unless you start off with a different attitude on 
how we approach the project to begin with.
    Go ahead, sir.
    Mr. Causseaux. The U.S. Forces are obliged, under the ABG-
75 agreement, to contract through using essentially an indirect 
process where a German agent--in this case LBB--represents the 
American interest. That does not mitigate the U.S. obligation 
to provide general oversight of that venture.
    Mr. Issa. So you get to be in the airplane, but you don't 
get to touch the controls, but you get to complain about the 
altitude and direction?
    Mr. Causseaux. The German government----
    Mr. Issa. I am not a football guy. I am going to have to do 
this in Air Force terms.
    Mr. Causseaux. Well, in all deference to the General, 
while----
    Mr. Issa. This is a fly by wire with no connections. 
[Laughter.]
    Mr. Causseaux. With all respect to the General, I agree 
with his analogy that this is not a game; what I don't agree 
necessarily, however, is that the German government was an 
owner. I believe the United States is the owner. It is our 
money. We have a vested interest.
    The fact that this was a fast track process, there was a 
decision made not to engage a general contractor, driven, I 
believe, primarily by the fact that it was a fast track. The 
Air Force opted not to have the Corps of Engineers engaged. 
There were designers. The design was incomplete. And there were 
multiple funding sources collectively and, given the size and 
order of magnitude of the project, made this a high-risk 
project.
    The Air Force needed to have adequate oversight and they 
did not.
    Mr. Issa. OK. You know, did any of you see anywhere in the 
contract history somebody looking at what it would cost to buy 
Euros at the front end of the project, since this was clearly 
known as a Euro-denominated project? Does anybody think for a 
minute that they simply write checks for fuel around the world 
and they don't hedge it in any way, shape, or form?
    Mr. Kutz. I don't believe the Federal Government hedges, 
but any business would have hedged this kind of a project. 
There is no question about that.
    Mr. Issa. You mean the Federal Government just calls up 
every day and says what it is going to cost us for fuel?
    Mr. Kutz. I believe that is correct.
    Mr. Issa. There is no contracting ahead, no forcing the 
vendor to hedge?
    Mr. Kutz. I am pretty sure that is the case.
    Mr. Issa. OK. So for this committee, we should understand 
that all that talk about world class private sector type 
thinking is just bull; that, in fact, that is not going on; 
that what would normally go on--Southwest Airlines doesn't have 
a problem when they are dealing in buying fuel. They are going 
to have to buy at variable prices. They hedge it. They set a 
contract.
    You didn't do that. You didn't fix the contract cost or 
exposure, you didn't deal with the German government and say, 
Because we don't control this we are going to put a cap on 
meeting the performance. We will pay for change orders but we 
are not going to pay for the basic question of whether you 
build this right. Is that true that the basic contract the day 
it was signed was flawed and that the Air Force doesn't know 
how to write a contract that protects the interest of the 
American people? Is that true?
    Mr. Causseaux. Again, this was not a contract----
    Mr. Issa. Yes or no. I don't have much time. Please.
    Mr. Causseaux. No.
    Mr. Issa. OK. Let's go through a couple more.
    I heard you say that you need more people, General Gardner. 
How much do those people cost and how are they scored? You need 
more people to do oversight, but I understand from the 
testimony that you don't really have control, so you can look 
at it and you can complain, but you can't get there. And don't 
answer that because I think it answers itself.
    I am looking at pictures from just a couple of weeks ago. 
Now, again, I haven't done a project of this size, but this is 
not within 3 months of completion today, even if it wasn't 
damaged. So I ask you, General Gardner, tell me why 3 months 
before the project was to be done was the first time you knew 
it wasn't 3 months of completion, because this is a recent 
picture. This means that today it is not within 3 months. Could 
you answer that for us, please, if the chairman will allow?
    General Gardner. Yes. The picture you are looking at is the 
mall portion of the complex. The VQ, itself, is in January of--
--
    Mr. Issa. Wait a second. Just correct, if I can, this 
section here, this is the hotel. This high-rise section is not 
a mall.
    Chairman Waxman. Your time has expired----
    Mr. Issa. Would the ranking member give me some of his 
time?
    Chairman Waxman [continuing]. But I want to give him the 
opportunity to answer the question.
    General Gardner. In December 2005 the hotel was still on 
schedule for BOD at the end of April. The hotel is different 
from the mall complex there. The mall complex we knew would be 
about 4 to 6 months later.
    Chairman Waxman. Thank you very much, Mr. Issa.
    Mr. Tierney.
    Mr. Tierney. Thank you, Mr. Chairman.
    I am curious when the General indicates that nobody on the 
Air Force side has been held accountable and no one has been 
disciplined or fired on that. We talked about the extraordinary 
number of change orders, many of which the Air Force didn't 
even know about.
    Mr. Kutz, in your report you mentioned that there were only 
eight offices in the U.S. project management office, none of 
whom, I understand, were warranted contract officers; is that 
right?
    Mr. Kutz. That is correct.
    Mr. Tierney. You then mentioned that the director of the 
office may have been responsible for some of the decisions that 
led to the situation today, correct?
    Mr. Kutz. Correct.
    Mr. Tierney. And in retrospect, when they were offered the 
help of the Army Corps of Engineers, the people who have 
expertise on that, that was rejected?
    Mr. Kutz. That was rejected. Yes.
    Mr. Tierney. Do you know if the director of the program 
management office played any role in recommending against 
seeking the additional contracting resources from the Army 
Corps of Engineers?
    Mr. Kutz. I don't know.
    Mr. Causseaux. My understanding was that the Air Force 
requested or decided not to engage the Army Corps of Engineers 
from a cost factor and because there had been indications that 
they had some difficulties dealing with the Corps of Engineers, 
and because this project is largely funded by non-appropriated 
funds versus MILCON or appropriated funds, it was not required 
that the Corps of Engineers be engaged. But they did have that 
option.
    Mr. Tierney. OK. And do we know what role the director of 
the program management office played in all those decisions?
    Mr. Causseaux. I do not.
    Mr. Tierney. I just want to explore the idea of this 
official that I would think that in that position that he had 
he had some responsibility in those decisions. When I look at 
page 11, Mr. Kutz, of your testimony, you say he left his 
position and left the Air Force in 2006; is that right?
    Mr. Kutz. That is correct.
    Mr. Tierney. Do you know why he left and what the 
circumstances were around his departure?
    Mr. Kutz. For another job with the contractor in Dubai, I 
believe.
    Mr. Tierney. I understand the Air Force is involved in a 
criminal investigation in this matter?
    Mr. Kutz. Of this individual, yes.
    Mr. Tierney. So I think we have to be a little delicate how 
we discuss it, but your testimony says that the Air Force 
officers have been searched and documents have now been seized; 
is that correct?
    Mr. Kutz. Correct.
    Mr. Tierney. General Gardner, do you know where this 
official is today?
    General Gardner. I believe he is somewhere in the Middle 
East, sir.
    Mr. Tierney. Do you know where he is specifically in the 
Middle East?
    General Gardner. I believe he is in Dubai, but I am not 
sure.
    Mr. Tierney. He is in Dubai? And I guess committee staff 
had the opportunity to track him down. They were interested in 
having him here today to testify. Do you happen to know what 
company he is working for in Dubai, General?
    General Gardner. I believe he is working with Jacobs.
    Mr. Tierney. And, in fact, isn't that the same company that 
the Air Force hired to help oversee this project?
    General Gardner. We do have two employees from Jacobs that 
work with our quality control assurance guys.
    Mr. Tierney. Well, this is serious stuff and I think we 
ought to let the Air Force and the investigators carry on their 
own investigation on that, but we push fast track schedule, we 
hire minimal oversight staff, reject the help of experienced 
agencies. It just seems to me like a recipe for disaster on 
that, and I would expect that somebody is going to take 
responsibility. I don't see a lot of responsibility 
acknowledged in your testimony, General.
    But just on the point of missing change orders, the 427 
change orders I think is something of a stunning number for a 
project on this.
    Mr. Kutz, just so we understand that process, the 
Government has approved the overall scope of the work on the 
project, and if the contractor thinks a change is needed it 
submits a change order, then the U.S. Government has to approve 
that change order before the work can be done, and certainly 
before any bills are paid; is that right?
    Mr. Kutz. Actually, LBB would submit the change order. They 
would work on those with the contractors that they had 
effectively subcontracted with.
    Mr. Tierney. OK.
    Mr. Kutz. And then they would submit that to the Air Force.
    Mr. Tierney. And then the Air Force decides whether or not 
to approve it and to pay it?
    Mr. Kutz. Correct, although in many cases they paid before 
they got the change order.
    Mr. Tierney. Well, if they did that, that is not normal 
course of business, right?
    Mr. Kutz. No, not at all.
    Mr. Tierney. All right. I was going to say you caught me up 
there for a second. Because in general you submit it, it gets 
approved, only if it is approved it gets paid.
    Mr. Kutz. Well, keep in mind some of the change orders 
really aren't change orders. They are like one line that says 
something was done. They are still waiting for hundreds of 
supporting change orders for work that was supposed to have 
been done.
    Mr. Tierney. So the documentation was supposed to accompany 
it; it never did show up or hasn't shown up to this date on it?
    Mr. Kutz. Correct.
    Mr. Tierney. OK. I am looking through your report here. You 
found in a lot of cases the Air Force didn't even know about 
some of these change orders before they were paid.
    Mr. Kutz. That is correct.
    Mr. Tierney. At all.
    Mr. Kutz. Yes, because a large number of them came in, we 
understand, in the summer of 2006. Some of those dated back 
into 2005.
    Mr. Tierney. OK. Tell us a little bit about what kind of 
documentation would really usually accompany a change order 
request.
    General Gardner. The change orders, they can vary in size, 
but they are normally about this size.
    Mr. Tierney. It is hard to believe that somebody would miss 
that or not realize that it hadn't shown up at some point.
    Chairman Waxman. The gentleman's time is up, but you may 
answer that question.
    Mr. Tierney. It really wasn't a question. Thank you, Mr. 
Chairman. I guess I am just so stunned that over 400 of these 
fairly significant items here were just missed somewhere along 
the line.
    I yield back. Thank you.
    Chairman Waxman. Mr. Duncan.
    Mr. Duncan. Thank you, Mr. Chairman.
    I just want to see if I can come a little closer to an 
understanding about the cost of all this, because I think Mr. 
Kutz said he couldn't give an estimate of what the cost would 
end up being.
    We have a fact sheet given to us by the committee that 
says, as a result of these deficiencies, that auditors 
estimated that costs for the K-Town Mall have increased from 
$131.3 million to at least $201.6 million. Although the project 
was originally scheduled to be operational by the end of 2005, 
the auditors reported it is only 65 percent finished and has no 
determined completion date.
    Is that all correct and accurate?
    Mr. Kutz. That is the Air Force Audit Agency's report, I 
believe. We have not done sufficient work to have our own 
estimate.
    Mr. Duncan. And you said that only a small fraction, you 
said, of the money was coming from the MILCON program?
    Mr. Kutz. That is correct.
    Mr. Duncan. And I think I read someplace else where $21 
million had come from that program?
    Mr. Kutz. Something along those lines, yes. U.S. dollars.
    Mr. Duncan. But then you said some of the rest of it or all 
of the rest of it or something was from soldier morale 
programs? What was the term you used?
    Mr. Kutz. Army/Air Force Exchange was the largest funding 
partner, and then Air Force Services is the second largest. 
Between the two of them, it is 75 or 80 percent. To the extent 
that there are issues with this program, it will impact soldier 
morale programs.
    Mr. Duncan. So the largest funds were coming from the Army 
and Air Force Exchange Program, which is subsidized by the 
taxpayers?
    Mr. Kutz. Most of that comes from profits from----
    Mr. Causseaux. Revenue generated from the exchanges.
    Mr. Kutz [continuing]. Operating exchange programs.
    Mr. Duncan. Well, you know, I think what disturbs so many 
people is that when we hear about these cost overruns in almost 
every department of the Federal Government, but particularly in 
the Defense Department, nobody really seems to care because it 
is not coming out of their own pockets. I mean, you care when 
you are sitting here in front of the congressional committees 
and testifying because you don't like being here, but really, 
as several Members have pointed out, nothing seems to ever 
happen to anybody. As the term is, nobody seems to ever be held 
accountable and nobody seems embarrassed, nobody ever seems 
ashamed, nobody ever seems to--you know, we hold these 
hearings, but then we just have these things happen over and 
over and over again.
    And then what we hear, whenever we find a program in the 
Federal Government that is messed up, they always say one of 
two things or both. They always say they were under-funded, 
they need more people, or they need more money--you know, they 
need more money so they can lose even more--or their technology 
was out of date, their computers were out of date. You hear 
that over and over again. Yet, the technology owned by the 
Federal departments and agencies is far better and far more 
expensive and far advanced over what the private sector has. 
But when things like this happen in the private sector, things 
happen.
    Anyway, thank you. Thank you, Mr. Chairman.
    Chairman Waxman. Thank you, Mr. Duncan.
    Ms. Watson.
    Ms. Watson. I want to thank all of you gentlemen and the 
chairman for being here, but I think we are gagging at a gnat 
and swallowing an elephant. I have sat in this committee and I 
have heard and spoken of $9 billion missing in Iraq and moneys 
that were to be used for contracts and to be handed out to the 
workers and so on, and no one can explain. We even had the 
Ambassador who was there during that time said it was only 
Iraqi money.
    I am very, very familiar with this area of Germany. In 
fact, I worked for the Air Force and I was in France and spent 
my weekends over in Germany, so I am familiar with this area 
and I think it is commendable that we are building this mall. 
However, I am very, very upset about taxpayers' money 
disappearing. This is not even a war zone, not even a war zone, 
but I am talking about in theater, and taxpayers' money 
disappearing without the oversight, without the management, and 
so on.
    So, Mr. Kutz, I thank you for the work you do, but this is 
exemplary of a bigger, bigger problem that we are using this 
money without the proper management, oversight, and without 
people who have the expertise in place.
    You know, I don't have really any problem with this 
because, you know, we are trying to service the civilians and 
the military in a foreign country, and I am all for that, but 
what I have the problem with is the mismanagement of our moneys 
and the fact that currently tax cuts, where are we going to get 
the pool of money to really provide the construction and the 
needs and whatever domestically and in theater and in other 
places?
    So none of you have to respond, but I am frustrated, 
because when we talk about real dollars on projects that really 
would be meaningful in terms of outcomes, we don't get the 
answers.
    I want you to continue to give your reports. I want you to 
give us strong recommendations as to how we can look at the 
overall system of management accountability.
    We are the committee that looks at fraud, waste, and abuse, 
but we need to have some over-arching principles, and we need 
to have answers why they are not being followed.
    Thank you so very much. I give back my time, Mr. Chairman.
    Chairman Waxman. Thank you very much, Ms. Watson.
    Mr. Platts.
    Mr. Platts. Thank you, Mr. Chairman. I appreciate your 
holding this hearing. I appreciate our witnesses being here 
today. I apologize for coming in late from another commitment 
as this issue was addressed.
    When I look at the problems that are clearly identified 
with this project, it is kind of two-fold. One is the waste of 
those tax dollars and other dollars related to the operation of 
our facilities that support our men and women in uniform and 
their families, the exchanges and the projects that can be 
built, or in this case maybe not done because of the loss of 
money on this project.
    I see a double hit, that loss of money and the fact that 
the quality of life for our men and women who are courageously 
serving us along with their families and those who either pass 
through Germany or are there has not yet been improved because 
this project is far from completion.
    In my numerous visits overseas I have come through Ramstein 
a number of times and have seen this project underway, and the 
fact that we are now a year past when it was supposed to have 
been done, that is a year of lost quality of life improvements 
for our men and women in uniform and their families, and no 
date certain yet of when it will be done, so it is both a 
dollar issue and a quality of life.
    What I wanted to focus on specifically is my understanding 
from the audit that was done that there are recommendations, 
and specifically that--and, General, if you could address 
this--that there were recommendations from the auditors that 
would address internal controls relating to some of the change 
orders, as well as to the process for reviewing the invoices 
submitted and when the work was done, that recommendations were 
made, but those in charge of the project refused to accept 
those recommendations and act on them and said, No, we think we 
are doing what we need to do, even though the evidence tells us 
otherwise.
    I guess it is two-fold. One is, to the best of your 
knowledge, who made those decisions not to accept the 
recommendations of the auditors? And any basis for why they did 
not accept that, given the information we know today of the 
wrongs that were being committed?
    General Gardner. We are in the process of trying to figure 
out how do we get this project completed. We have contractors 
that have walked off the site because we haven't paid them. Our 
guys have refused to pay them because change orders have not 
been completed. We know now that these change orders that we 
are talking about, the work was done, the work was needed, and 
we will eventually pay for those change orders. We know that.
    What we did was set up a process to try to get money to the 
contractors to get them back to work so that we could finish up 
the project. For every day that these contractors are off the 
site they are actually charging us money, so we are incurring 
hindrance costs, delays, and all types of other types of costs 
as a result of contractors not being at work.
    So what we have done is tried to find ways within the law. 
This has all been coordinated with our legal staff, coordinated 
with our FM staff, and that was the process that we have used. 
So I feel comfortable with what we have done with that.
    Mr. Platts. You are addressing where change orders were 
reviewed and were accurately fulfilled and payment, but my 
understanding is there is significant evidence of improper 
oversight, of perhaps--I think one number is $13 million that 
could not be accounted for, expenditures, and at least $13.7 
million in construction change orders that the auditors 
reported that the Air Force was not able to validate. Is that 
an inaccurate statement?
    General Gardner. I don't know the exact part that you are 
reading from, but it is true that in the summer timeframe of 
last year we received a register of modifications--the number 
was 549--of change orders that our agent had approved or 
someone had approved that we were not aware of. There were 549 
of them.
    We have since gone back out on the site and worked with our 
organization or the German contracting agent to verify that the 
work had been done on these.
    The process to do a change order, according to the ABG-75, 
should take 30 days. Some cases, because the way you go through 
the process of the change order, verifying, negotiating the 
prices, checking the prices and so forth, especially when you 
have a change order this size--17,000 line items in this 
document here--it takes a while. That is what has happened, is 
that we have been trying to figure out a way. We know the work 
has been done. We can verify that. But we do not have a means 
to pay the contractor, get them onsite, so they are walking 
off. So we are in this catch-22.
    Mr. Platts. Mr. Chairman, could I do a followup here, if I 
may?
    Chairman Waxman. Yes.
    Mr. Platts. Thank you. I want to followup quickly with our 
GAO officials.
    General, one, I appreciate your efforts and your staff in 
trying to get this project back and for your and your fellow 
men and women in uniform's service. We want you to be 
successful getting this project back and success for the 
benefit of the taxpayers and for the families and our men and 
women in uniform.
    General Gardner. Thank you.
    Mr. Platts. I do want to followup on that issue of the 
auditors' recommendation. In your review, are there still 
significant recommendations of the auditors to prevent further 
problems that are not yet being implemented and accepted and 
pursued by those overseeing the project?
    Mr. Kutz. We don't know that. Our work is still ongoing.
    I would say this: this is the situation. There is no real 
good solution necessarily. Just as important as this project is 
really the hundreds of millions of additional projects that are 
going to be happening, and at the front end--now you are not 
the front end any more. You are now at the back end of this, 
trying to deal with a real kind of a mess. For the projects 
going forward, it would be more important to deal with the 
front end so we don't have these kinds of discussions.
    Granted, you could still have problems, but you have a 
better chance of preventing at the front end. Now you are 
really in a situation of having, in many cases, to pay, 
regardless of whether you are going to get the money back, for 
rework or other types of problems here.
    So the only thing I would just comment on is the General 
said that the work has been done, and I expect hopefully most 
of it has, but I am not sure how he can conclusively state that 
where there are change orders with--supposed change orders. I 
said alleged in my opening statement--with no support. Again, I 
trust that most of it has been done, but also some of the 
people that are involved in this process are under 
investigation for fraud. So to the extent of saying that the 
work has been done, you don't know for sure.
    General Gardner. I beg to differ with you, but we do know.
    Mr. Platts. I think your point that the work not being done 
up front. And, General, I understand that was prior to your 
time----
    General Gardner. Right.
    Mr. Platts [continuing]. In your position, this change 
order with thousands of line items. If there had been a more 
thorough vetting and oversight up front we probably wouldn't 
have that type document. You are always going to have change 
orders, but probably not to this degree maybe if it was better 
laid out and overseen from the beginning. I think that is part 
of your point.
    Thank you, Mr. Chairman, for the time.
    Chairman Waxman. Thank you, Mr. Platts.
    As we conclude this hearing, General, I want to make it 
very crystal clear why this committee is so concerned with the 
failure of the Air Force. It doesn't matter who the contractor 
is, whether it is an Iraqi contractor or German contractor or 
an American contractor. As I understand, there are special 
rules for international agreements, but you are the U.S. 
Government. You hold the money, and with it you hold the 
responsibility to ensure that it is not wasted.
    Your written testimony says you are the third line of 
defense in protecting U.S. interests and resources. I disagree. 
You write the checks. You are the first line of defense for the 
American taxpayers. When you compare your testimony here today 
with this 112-page audit, you get a completely different 
picture. This Air Force audit report details at least 30 
critical failures, not by contractors but by Air Force 
officials who were supposed to oversee this project, and these 
are fundamental, core responsibilities that have been 
disregarded.
    I don't have any further questions for you, but I just want 
you to take that back and understand that is why Congress is 
concerned. It is not just for you to point fingers; it is to 
make sure these kinds of things never happen again.
    Thank you very much. That concludes our hearing today. We 
stand adjourned.
    [Whereupon, at 11:30 a.m., the committee was adjourned.]

 
            WASTE, FRAUD AND ABUSE AT K-TOWN: ONE YEAR LATER

                              ----------                              


                        WEDNESDAY, JUNE 25, 2008

                          House of Representatives,
              Committee on Oversight and Government Reform,
                                                    Washington, DC.
    The committee met, pursuant to notice, at 10:05 a.m., in 
room 2154, Rayburn House Office Building, Hon. Henry A. Waxman 
(chairman of the committee) presiding.
    Present: Representatives Waxman, Cummings, Kucinich, 
Tierney, Watson, Sarbanes, Davis of Virginia, Shays, Platts, 
Duncan, and Sali.
    Staff present: Phil Barnett, staff director and chief 
counsel; Kristin Amerling, general counsel; Karen Lightfoot, 
communications director and senior policy advisor; David 
Rapallo, chief investigative counsel; John Williams, deputy 
chief investigative counsel; Margaret Daum, counsel; Earley 
Green, chief clerk; Jen Berenholz, deputy clerk; Caren Auchman 
and Ella Hoffman, press assistants; Lawrence Halloran, minority 
staff director; Steve Castor, minority counsel; Ali Ahmad, 
minority deputy press secretary; Patrick Lyden, minority 
parliamentarian and member services coordinator; Emile Monette, 
minority professional staff director; and John Ohly, minority 
professional staff member.
    Chairman Waxman. The committee will please come to order.
    On June 28, 2007, almost exactly a year ago today, this 
committee held an oversight hearing on the Defense Department's 
single largest construction project in the world, a massive 
840,000 square foot mall being built in Germany called the 
Kaiserslautern Military Community Center, also referred to as 
the K-Town Mall. This facility will have an 8-story, 350-room 
hotel. It will have a movie theater with stadium seating and 
large retail areas. A military spokeswoman called the K-Town 
Mall a smaller version of the Mall of America in Minnesota.
    Last year, GAO testified that this project was in ``serious 
trouble.'' They told us it was millions of dollars over budget, 
had no validated cost estimate, and had no working completion 
date. GAO told us about the mall's defective and continuously 
leaking roof, which was going to cost millions of dollars to 
repair, and GAO told us about serious construction mistakes, 
like kitchen exhaust ducts sealed with flammable insulation.
    We also obtained a report from the Air Force Audit Agency 
detailing 35 different deficiencies in the Air Force's 
management of this project, and we were informed of several 
ongoing criminal investigations of U.S. officials involved in 
this project, including one official who fled to Dubai instead 
of agreeing to testify before this committee.
    During last year's hearing, officials from the Air Force 
essentially told us not to worry. They said that despite 
problems identified by GAO and the auditors, the project was 
under control. They promised that even if the project came in 
late, it would still be under budget.
    Part of good congressional oversight is sustained 
congressional oversight. So today we are having our second 
hearing on the K-Town Mall. Today we will hear from the GAO 
team that has been tracking this project closely. 
Unfortunately, their testimony will sound like the movie 
Groundhog Day. The project has gone further over budget and has 
been further delayed. Here is what today's GAO report says: 
``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.''
    What is most troubling about this year's report is that new 
problems are compounding the old ones. In addition to the 
faulty roof and the dangerous kitchen exhaust ducts, GAO has 
now identified long cracks in the concrete foundation of the 
building. Nobody yet knows the full extent of this damage, how 
long it will take to repair, or how much these repairs will 
cost.
    Another new concern that GAO raises is that the Air Force 
is not counting millions of dollars of costs in its budget 
estimates. These include costs to design portions of the mall, 
cost to rework deficiencies like the roof and the foundation, 
and costs to assign additional Air Force personnel to this 
project.
    GAO has also raised serious questions about $38 million in 
German funds that have been provided for the project. Although 
the Air Force believes this is a grant from the German 
Government, the Germans believe apparently that it is only a 
loan and they expect to be repaid.
    Finally, GAO reports that the criminal investigations of 
U.S. officials involved with this project ``have matured 
significantly'' since our last hearing and that several 
officials are being investigated for dereliction of duty and 
bribery.
    Here is the bottom line. This facility was supposed to cost 
$120 million and be open by 2006. But today, GAO projects that 
the project will cost well over $200 million and may not be 
open for business until sometime in 2009. Even at that point, 
GAO predicts, ``it will likely take years before all issues 
related to this project, including litigation and potential 
construction quality problems, are resolved.''
    As a result, 50,000 servicemen and women who live and work 
on or near Ramstein Air Base lack modern facilities. Soldiers 
traveling to and from Iraq and Afghanistan are deprived of 
promised amenities. And service members around the world have 
reduced funding for morale, welfare and recreation.
    At yesterday's hearing on Afghan ammunition contracts, I 
said that over the last 8 years there has been a complete 
breakdown in the procurement process. Today's hearing is more 
evidence of a pervasive dysfunction in Federal contracting. And 
this hearing is particularly frustrating because the glaring 
problems that we identified a year ago have not been fixed. We 
need accountability for problems like the ones that we have 
found at the K-Town Mall, and those responsible ought to face 
appropriate consequences.
    We urgently need a new approach that welcomes oversight and 
demonstrates a commitment to fixing problems and protecting 
taxpayers from waste, fraud and abuse.
    I look forward to working with all of my colleagues to make 
this goal a reality, and I want to recognize Mr. Davis.
    [The prepared statement of Chairman Henry A. Waxman 
follows:]

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[GRAPHIC] [TIFF OMITTED] T4635.173

[GRAPHIC] [TIFF OMITTED] T4635.174

    Mr. Davis of Virginia. Thank you, Mr. Chairman. Good 
morning and thank you for returning to the subject of the Air 
Force's major construction project in Germany dubbed the K-Town 
Mall where I had the opportunity to visit a few months ago. 
This building has become such a lingering and costly mess, I 
think perhaps we should start calling it the Capitol Visitor 
Center NATO annex.
    A year ago we heard testimony on significant problems 
plaguing the massive, multi-purpose complex designed to feature 
retail, hotel and entertainment space for use by American 
personnel stationed in Germany and for others passing through 
Ramstein en route to and from other parts of the world. At that 
hearing, the GAO witnesses said mismanagement and lack of 
oversight had resulted in significant cost overruns, schedule 
delays and construction deficiencies. While any foreign 
construction effort is bound to involve unusual complexities 
and risks, those in charge of this development seem to have 
fallen into all of those inherent traps, and then they kept 
digging. Predictable difficulties were compounded by inadequate 
and unfocused high-level leadership early on, poor planning, 
badly designed requirements and an inadequate number of trained 
personnel overseeing the project.
    Now, that was last year. GAO went back to K-Town earlier 
this year and the new observations they bring us today don't 
describe a clear path out of this expensive international 
morass. Steps by the Air Force to augment oversight staff and 
strengthen internal controls have helped to gain some measure 
of control over the project, but those measures aren't enough 
to untangle the knot formed by--and we need to understand 
this--multiple funding sources, vaguely worded international 
agreements, and the need to navigate diplomatic process to 
resolve complex disputes involving German contractors and U.S. 
dollars.
    To break the logjam that stalled the project for so long, 
the German Government provided 25 million euro, or almost $39 
million, to get construction workers back on the job. While all 
parties recognize the influx of money was necessary to get the 
project going and the status of that funding is not altogether 
clear, GAO has characterized it as a loan. The Air Force claims 
money--the United States won't have to pay back the money. The 
bilateral agreement between the United States and the German 
Governments calls the money prefinancing. No one is quite sure 
what it means. I hope this hearing will shed some additional 
light on that. But this lingering confusion about key issues 
doesn't bode well for completing construction by the end of 
this year, a forecast both the Air Force and the GAO already 
consider highly unlikely.
    In any case, we have a great deal of money invested in the 
project and substantial funds remain at risk. We need to be 
sure this project is completed properly and that future 
projects don't fall prey to the same oversight lapses and 
mistakes that steered this project into the ditch and kept it 
there.
    I hope this hearing will focus on what needs to be done to 
get this project back on track and the hard lessons that the 
Air Force and others need to learn to ensure the integrity of 
any future agreements governed by the terms of the current 
status of force agreement in Germany. And I think that is what 
is critical, is that you have international agreements here 
that have made this far more complex than ordinary--being just 
a government contracts problem.
    Investigators from the GAO are here today to provide their 
views on this issue. We commend them for their hard work. We 
also value the experience and the perspectives that the Air 
Force witnesses bring to this discussion. Much is at stake in 
terms of the U.S. tax dollars and in terms of providing our 
troops with the best possible overseas accommodations while 
deployed overseas. We look forward to today's testimony and to 
a frank and constructive discussion.
    Thank you, Mr. Chairman.
    [The prepared statement of Hon. Tom Davis follows:]

    [GRAPHIC] [TIFF OMITTED] T4635.175
    
    [GRAPHIC] [TIFF OMITTED] T4635.176
    
    Chairman Waxman. Thank you, Mr. Davis. We are pleased to 
welcome the following witnesses to our hearing today. Judith 
Garber is Deputy Assistant Secretary of the European and 
Eurasian Affairs Bureau at the Department of State. Major 
General Mark E. Rogers is the Vice Commander of the U.S. Air 
Forces in Europe. Greg Kutz is the Managing Director of the 
Office of Forensic Audits and Special Investigations at the 
Government Accountability Office. Bruce A. Causseaux is a 
Senior Level Contract and Procurement Fraud Specialist in the 
Office of Forensic Audits and the Special Investigations at 
GAO. And Terrell G. Dorn is the Director of Physical 
Infrastructure at GAO.
    The committee also requested testimony from Hubert Heimann, 
the managing director of LBB, the German Government office that 
supervises the KMCC construction project. Mr. Heimann wrote the 
committee a letter stating that he would not be able to 
participate in today's hearing. I ask unanimous consent that 
Mr. Heimann's letter be placed in the hearing record. And 
without objection, that will be the order.
    [The information referred to follows:]

    [GRAPHIC] [TIFF OMITTED] T4635.177
    
    Chairman Waxman. We welcome all of our panelists, witnesses 
today. We welcome all of you today to testify. It is the policy 
of this committee that all witnesses testify under oath. I'd 
like to ask you if you would, please, rise and raise your right 
hands.
    [Witnesses sworn.]
    Chairman Waxman. The record will indicate that each of the 
witnesses answered in the affirmative. Your prepared statements 
will be made part of the record in full. We would like to ask 
you, if you would, to limit your oral presentation to 5 
minutes. And we will have a clock. It will be green. At the 
last minute it will turn yellow. And then after the 5 minutes 
is up, it will turn red. And when you see the red light, we 
would like to ask you to conclude.
    Ms. Garber, why don't we start with you? There is a button 
on the base of the mic. Be sure to press it and pull the mic 
close enough to you.

   STATEMENT OF JUDITH GARBER, DEPUTY ASSISTANT SECRETARY OF 
STATE, BUREAU OF EUROPEAN AND EURASIAN AFFAIRS, U.S. DEPARTMENT 
                            OF STATE

    Ms. Garber. I'm pleased to be here today and I'll be ready 
to answer any questions. I do not have an oral statement.
    Chairman Waxman. You don't have a statement?
    Ms. Garber. No.
    Chairman Waxman. OK. General Rogers.

     STATEMENT OF MAJOR GENERAL MARC E. ROGERS, USAF, VICE 
              COMMANDER, U.S. AIR FORCES IN EUROPE

    General Rogers. Thank you, Mr. Chairman. Members of the 
committee, the U.S. Air Forces in Europe appreciates the 
opportunity to appear today and update you on the KMCC. This 
facility is important to ensure that future retail goods, 
services, morale and recreation activities and mission-related 
lodging facilities are available to our military members and 
their families who live in the Kaiserslautern military 
community. These services are all currently available to our 
forces, but the quality of service is hampered by early cold 
war era facilities. They are old, dispersed, have high 
maintenance costs, frustrating parking deficiencies and space 
limitations.
    I first became engaged on the KMCC in December 2006 when I 
chaired the KMCC Oversight Council for the first time as the 
new Vice Commander of the USAFE. By that time, the project was 
months late, quality defects had been identified and arguments 
were ongoing between the USAFE Project Office and LBB, the 
construction agent, because USAFE was not paying invoices and 
contractors were continuing to walk off the site due to 
nonpayment.
    Additionally, I was briefed on a draft audit by the Air 
Force Audit Agency that USAFE personnel had improperly paid 
invoices and that the Air Force Office of Special 
Investigations was investigating two personnel for possible 
wrongdoing. The Commander of USAFE at that time directed me to 
take charge of an effort to do three things: Investigate the 
reason for the delays and failures in KMCC; find out who is 
accountable for any failures, mismanagement or wrongdoing and; 
three, lead an effort with our German partners to find a 
strategic solution to completing the KMCC.
    I found that USAFE personnel had indeed improperly paid 
invoices. According to the GAO, those funds have been 
recovered. Investigations continue; and once complete, 
responsible individuals will be held accountable.
    I also found that Air Force internal controls found the 
initial wrongdoing, properly identified quality defects, and 
preserved our taxpayer money. And I found many previous 
decisions by USAFE leaders were fortuitous and positioned us to 
keep costs under control and enforce quality performance.
    We stood up a task force and have been conducting root 
cause analysis on about 35 different potential causes for 
delays and failures. This analysis is complex and continues; 
however, many conclusions have already proven useful in working 
with our German partners for solutions.
    Some work has continued over the past years--past year, and 
I brought a few photos to show there are bright spots in the 
progress. So if you'll put up the first photo.
    Just so we all know, Mr. Chairman, what we're talking 
about, is there is an image of the KMCC. The tall portion, of 
course, is the hotel portion and all of the green area you see 
is the green roof over the mall portion. It is a very complex 
and, as you said, huge facility, reputed to be DOD's largest 
single facility project in the world.
    Next slide, please. There is an image of the front entry to 
the mall.
    Next. That is an image of the hotel portion as it stands 
today.
    Next, please. That is an image inside the hotel lobby.
    Next. That is one of the rooms in the hotel that has been 
outfitted with furniture. All of the rooms are essentially 
complete. There are 27 rooms that have finishes to be done and 
we've outfitted one with furniture for visitors who want to see 
what this is going to look like.
    Next. That is the Ramstein tickets and tours office, one of 
the morale welfare and recreation offices in the building.
    Next. This is the mall concourse showing the entryways to 
some of the vendor shops.
    Next. And that photo is 90 degrees out, but it is office 
space in the building.
    Next. I think that is the last slide. So there has been 
some progress over the past year, although minimal because 
contractors were essentially trying to not be in default of a 
contract. German leadership has worked hard to pick up the 
management and administrative train wreck of the KMCC and get 
construction on track and, due to their personal leadership, 
both Federal and state level, is now picking up more steam with 
more workers onsite and contractors have signed up to a new 
schedule.
    We want to thank our German counterparts for demonstrating 
commitment to our great partnership by standing up to 
responsibilities under the international agreement, stepping 
out with strong leadership, and I'm convinced the German 
Government wants to get this facility finished as much as we 
do.
    There has been numerous rumors surrounding the cost and 
quality, extended delays on this project in the past year. And 
since the committee's hearing, we have strengthened the 
management, corrected all the discrepancies and the GAO has not 
found any new ones. We are frustrated and disappointed, but 
we're doing everything we can, sir, to get this done.
    That concludes my opening statement. And as you mentioned, 
I have a written statement for the record. We appreciate your 
interest, sir. Thank you.
    [The prepared statement of General Rogers follows:]

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    Chairman Waxman. Thank you very much, General Rogers. Mr. 
Kutz, why don't we hear from you next and your colleagues? Just 
a minute.
    Mr. Kutz. Mr. Dorn can start and I'll finish.

       STATEMENTS OF TERRELL G. DORN, DIRECTOR, PHYSICAL 
 INFRASTRUCTURE, GOVERNMENT ACCOUNTABILITY OFFICE; GREGORY D. 
      KUTZ MANAGING DIRECTOR, FORENSIC AUDITS AND SPECIAL 
INVESTIGATIONS, GOVERNMENT ACCOUNTABILITY OFFICE; AND BRUCE A. 
    CAUSSEAUX, SENIOR LEVEL CONTRACT AND PROCUREMENT FRAUD 
     SPECIALIST, FORENSIC, GOVERNMENT ACCOUNTABILITY OFFICE

                  STATEMENT OF TERRELL G. DORN

    Mr. Dorn. Thank you, Mr. Chairman, Mr. Davis, members of 
the committee.
    Construction projects can be broken down into three 
fundamental areas: Cost, schedule and quality. Optimization of 
those three areas is the goal of good project management. But 
in the case of KMCC, none of the three went Air Force's way. 
There have been serious quality issues, escalating and still 
uncertain project costs, and a schedule that is likely to 
deliver the project at least 3 years late. This morning I will 
cover the construction quality and schedule issues, and then 
Mr. Kutz will discuss the cost issues.
    A year ago, the serious KMCC quality issues we discussed 
included a defective roof and kitchen exhaust duct work that 
did not comply with U.S. Fire Code standards. Both needed to be 
ripped out and replaced. Schedule-wise, no one knew when the 
project would be finished, and in fact the contractors had all 
but abandoned the site. Project management and internal 
controls were inadequate and there were allegations of fraud. 
Since then, there has been a lot of progress in some areas and 
almost none in others.
    First the good news. Since the committee's last oversight 
hearing, the Air Force has made great progress in addressing 
internal controls and has quadrupled the size of its KMCC 
Project Management Office with particular focus on staff 
training and acquisition management, construction management 
and financial management. In addition, General Rogers, assisted 
by State Department, met with high-level German officials to 
cooperatively work out the details necessary to improve 
oversight of the project by LBB, who is the German Government's 
construction agent in Rheinland-Pfalz. They also laid the 
groundwork for the German Government to pay its contractors and 
to get them back to work.
    Now the not-so-good news. The new internal controls and the 
new processes and the new Project Management Office have hardly 
been tested because insignificant progress has been made in 
construction over the last 12 months. Our review of the latest 
construction schedule furnished to Air Force by LBB was not 
encouraging. The schedules for the mall portion and the hotel 
portion of the project were not integrated to show how they 
might affect each other. It was also not clear from the 
schedule what contractor resources, such as crew sizes, were 
necessary to keep the project on time.
    The project's critical path, which is supposed to show what 
tasks need to be completed by certain dates to keep the project 
on schedule, was not clear. However, it was clear from the 
schedule that some tasks were already late. Given those issues, 
finishing all construction and fire alarm testing in the mall 
and hotel by the end of the January 2009 is very unlikely. And 
given that AAFES may need as many as 4 months to take the 
building from the Air Force's definition of complete to the day 
the first customer buys a pair of shoes, it is foreseeable that 
we may be waiting at least 1 year from today before the 
buildings are fully occupied.
    Here are a few slides to better illustrate the lack of 
construction progress over the last year. This first slide is a 
side-by-side comparison of the food court area just inside the 
mall's entrance. On the left 2007 and on the right 2008.
    This next slide shows a similar lack of progress in the 
mall's name-brand restaurant. If progress can be defined as 
ripping out defective work, then some progress has been made on 
the kitchen exhaust duct work and the roof. Demolishing and 
replacing the KMCC's roof began this spring, but the work is 
extensive, must be done in sections, and will not be completed 
for some time.
    In addition, we have identified that the KMCC project was 
not an isolated failure. Several other projects constructed 
more or less concurrently for the Air Force by LBB 
Kaiserslautern also experienced significant cost, schedule and 
quality issues.
    On this slide, you will see a logistics distribution 
facility designed to be an open bay and to not have interior 
columns. It now has 43 temporary columns running down the 
center of the building to keep the roof from collapsing. A 
forklift operator running into one of those columns and 
collapsing a portion of the roof was the nightmare scenario of 
one official we interviewed.
    This last photo is from our return visit to Ramstein in 
March of this year. It shows large pond that formed next to a 
runway extension that was built by LBB as part of the Rheinland 
transition program. The pond not only attracted waterfowl, 
which is something you don't want around an airfield, but also 
repeatedly shorted out the runway lights, causing the possible 
diversion of aircraft to other bases.
    Clearly LBB's recent track record of construction for the 
Air Force indicates that increased oversight to protect U.S. 
tax dollars is required now and in the foreseeable future.
    And now Mr. Kutz will highlight the KMCC's cost issues.

                  STATEMENT OF GREGORY D. KUTZ

    Mr. Kutz. Given the problems Mr. Dorn just described, you 
might be wondering what the total cost of this project will be. 
Unfortunately, because certain costs have not been tracked by 
the Air Force, nobody will ever fully know. If you could put 
the pie chart up for us.
    This pie chart on the monitor shows the elements of total 
cost, including that red slice that is referred to as unknown 
costs. The amounts shown are estimates by the Air Force and the 
German construction agency of the total U.S. dollar cost at 
completion. The biggest piece of the pie or the black piece 
there is construction costs. This $163 million represents 
primarily charges for trade contractor work. Other costs shown 
relate to foreign currency, rework design and other contracted 
services and furniture and equipment. When added up, the total 
estimate for this amount or these amounts here is $214 million. 
The unknown or the red piece there represents millions of 
dollars of contingencies and other costs that are not tracked 
as part of the KMCC.
    For example, the cost of Air Force staff overseeing the 
project are not captured. Other unknown include hindrance 
claims and estimates of cost to repair the new cracks in the 
floor. In addition to the $214 million estimate and the 
unknowns there are other real costs resulting from the problems 
and delays. For example, for every month of delay, it is 
estimated that $500,000 of profits are lost from operation of 
the shopping mall and the restaurants. In total, if the project 
opens 3 years late, which is the best case scenario, these lost 
profits and additional costs will approach $20 million.
    As the chairman mentioned, last year the Air Force 
testified that KMCC was under budget. Many of the members of 
the committee expressed concern and wondered how that could 
possibly be true. Last week, Air Force officials briefed your 
staffs and told you the same thing. Let me clarify some of the 
facts related to this representation.
    For this project, what you have is a 35 percent increase in 
the euro-dollar exchange rate, at least 3 years of delay, over 
$10 million of rework and millions of dollars of improper 
payments. Further, funding partner records reveals substantial 
cost overruns. For example, the largest funding source for KMCC 
is the Army and Air Force Exchange Service. According to their 
records, their piece of the construction pie you see alone is 
$24 million, or 45 percent over budget. Their worst case 
estimate is a $59 million, or 110 percent cost overrun.
    Clearly, KMCC will cost substantially more than the Air 
Force and its funding partners envisioned at the beginning of 
this project. Their budget number they are speaking about, it 
represents the congressionally authorized spending limits for 
the construction piece of the pie.
    Last year I testified that KMCC was from the beginning a 
high risk overseas project with minimal Air Force oversight. As 
Mr. Dorn mentioned, Air Force has since your hearing last year 
substantially increased its oversight. Improvements include 
more and better trained staff, standardized procedures and 
enhanced disbursement controls. We believe these improved 
controls reduce the risk of fraudulent and improper payments.
    In conclusion, the people most impacted by the problems at 
KMCC are military members and their families. The tens of 
millions of dollars of cost overruns and lost profits have 
reduced the money that is available for morale, welfare and 
recreation programs worldwide. We are encouraged that the Air 
Force has beefed up its oversight of this project. Given the 
problems with other large projects at Ramstein, we believe they 
should provide this enhanced oversight for all future projects.
    Mr. Chairman, this ends our statement. We look forward to 
your questions.
    Chairman Waxman. Thank you very much. Mr. Causseaux you are 
here to answer questions?
    Mr. Causseaux. They took care of it.
    [The prepared statement of Messrs. Kutz, Dorn, and 
Causseaux follows:]

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    Chairman Waxman. Without objection, we'll proceed for 10 
minutes on each side, 10 minutes controlled by the majority and 
then 10 minutes controlled by the minority, and I will start 
off the questions.
    Mr. Kutz, when you testified before us last year, you 
identified several severe construction deficiencies at this K-
Town Mall. One of these was the roof. And as you said last 
year, this roof had major defects and leaked continually. As a 
result, the water was damaging other aspects of the 
construction; is that right?
    Mr. Kutz. Correct.
    Chairman Waxman. Now, last year you couldn't tell us how 
much it was going to cost to fix this roof, but in your report 
today you have a number. You say it is going to cost $10.8 
million; is that right?
    Mr. Kutz. That is an Air Force estimate, yes.
    Chairman Waxman. That is a major setback. The original cost 
estimate for the whole project was $131 million and now it is 
going to cost more than 8 percent of that just to repair the 
roof. Is it possible that this number could go up?
    Mr. Kutz. Yes, it is. Because as I mentioned, the exchange 
rate we are talking with for the euro--you know they're being 
built in euros. Since your hearing last year, it has gone up 16 
percent and certainly materials have gone up and other costs 
have gone up. So it is possible that it will come in higher. 
That is yet to be determined. They are in the first and second 
phases of a multi-phase roof replacement.
    Chairman Waxman. Last year, you gave us your testimony and 
this year you found even more problems. Your report describes 
major cracks in the concrete. And I think we have a picture of 
an example of that. Can you tell us more about these cracks? 
Where else did you find them?
    Mr. Dorn. These cracks were in the floor. And what you are 
looking at is probably defective concrete. The Germans working 
with the Air Force have a consultant, who--a proof engineer 
they call them in Germany who is investigating to see why that 
concrete is that way. It was probably a bad mix or too much 
water or not enough water. At this point, I would say it is not 
structural because it is on the floor. It is like a topping 
slab over the existing slab. But it could affect whatever floor 
finishes go in over top of that.
    Chairman Waxman. Does this raise new concerns about 
construction quality?
    Mr. Dorn. Absolutely, Mr. Chairman. I would recommend that 
the--in this relative lull in construction, that the Air Force 
and their consultants go over that facility with a fine toothed 
comb looking for other quality control issues.
    Chairman Waxman. Some of these defects we heard about last 
year, some of these are new. Are you worried that there might 
be other defects that aren't readily visible? In other words, 
defects that you wouldn't see just by walking around?
    Mr. Dorn. That's correct. I do expect that they will find 
latent defects.
    Chairman Waxman. General, how much is it going to cost to 
repair the concrete?
    General Rogers. Sir, I don't know. That is in the German 
courts and Germany is fixing the cracks.
    Chairman Waxman. I understand that contractors make 
mistakes, but these are serious flaws. The Air Force should 
have people inspecting the architectural plans before the 
designs are approved and they should have people overseeing 
construction, before things are installed incorrectly, but that 
didn't happen here.
    I would like to ask a few questions about when the K-Town 
mall project will be completed. General, as I understand it, 
the Air Force broke ground on this project in the summer of 
2004. At that time, the plan was for the hotel to open in 
December 2005 and the mall to open July 2006; isn't that right?
    General Rogers. That sounds right, sir.
    Chairman Waxman. But this deadline was missed, so the next 
deadline the Air Force set was April 2007; isn't that right?
    General Rogers. Sir, the Air Force did not set those 
deadlines. 2005 in December was the mission due date. But when 
the German construction agent told us that couldn't be met, 
they established April. We accepted that because we don't 
control their schedule really. Later slippages were the same 
way. They basically do this work since we have no contracts 
with the construction workers company. So every time they give 
us a slippage, it is a slippage. We can complain, but it is up 
to them to respond and fix schedules.
    Chairman Waxman. Mr. Kutz, according to your report, the 
current plan is for the project to be turned over in January 
2009. Is that your estimate?
    Mr. Kutz. No. We really don't have an estimate. We haven't 
seen a legitimate estimate. As Mr. Dorn mentioned in his 
opening statement, middle to late 2009 is probably the best 
case scenario where you'll actually see people shopping and 
staying at the hotel. But there is no estimate right now that 
we're comfortable has legitimate support behind it.
    Chairman Waxman. Is that an estimate of the completion of 
the project?
    Mr. Kutz. The General is going to have to answer that. We 
don't really know if there is a legitimate estimate. I don't 
think there is a legitimate--that may be the last date that 
they've thrown out there, is January 2009. But that isn't even 
really when they are going to have people in. That was when the 
keys kind of get turned over. You would have to add several 
months to that to do the final finishing and to get the 
restaurants ready and the hotels ready. So that would be plus 3 
or 4 months and that would be certainly the best case scenario.
    Chairman Waxman. Well, General, let me understand this. The 
project was supposed to take 2 years, 2004 to 2006. Now the 
best case scenario is that it will take at least 5 years, 2004 
to 2009. Is that the situation, best case?
    General Rogers. That's about right, sir.
    Chairman Waxman. Mr. Kutz, in your written testimony you 
raise concerns that the project may not be finished even by 
this newest projected completion date. And you just indicated 
some of these a minute ago. We just don't know for sure then 
when this project is going to be completed.
    Mr. Kutz. That's correct, Mr. Chairman.
    Chairman Waxman. Is that correct, General?
    General Rogers. Yes, sir. I would say that the January 2009 
completion date given to us by the construction agent probably 
has more fidelity than any we have seen in over 2 years. But 
whether or not the construction agent is able to actually pull 
that off, I don't know. I do have more faith in it than in the 
past, but probably wouldn't bet on it being complete by then. 
Maybe in a few months delay.
    Chairman Waxman. We also want to explore the total cost of 
this project. We seem to have a disagreement among the 
panelists about how much the K-Town Mall will actually cost. 
General Rogers, you state in your testimony that your budget 
estimate is $162.9 million, which is below the amount 
authorized by Congress. But, Mr. Kutz, in your report you 
conclude that tens of millions of dollars of other project 
costs are not included in the Air Force cost estimates. So let 
us just walk through these.
    General, construction costs paid out so far are $121.7 
million and you estimated it will take about $41.2 million more 
to complete construction. That is how you got to your number of 
$162.9; isn't that right?
    General Rogers. Yes, sir.
    Chairman Waxman. Mr. Kutz, you say this excludes other 
costs. For example, it doesn't count $16.3 million for 
furniture and equipment; is that right?
    Mr. Kutz. That's correct.
    Chairman Waxman. And, General, why don't you count the cost 
of the furniture? Are you going to get that furniture for free?
    General Rogers. Oh, no, sir. That was planned all along, 
but it was never reported in the same channels. And questions 
in the past have not been about such things as furniture. They 
have been about construction. But the Air Force has tracked 
these costs all along for secondary services, furniture and 
equipment, any other kinds of costs that are normal in standing 
up a facility. And we don't report those numbers routinely in 
any construction project, although we have them budgeted and we 
know what they'll cost. In September 2005, we submitted a new 
1391, which is the form that comes over to Congress to get 
approval for a total cost of a facility. That was approved by 
Congress in January 2006. And we said at that time that total 
costs for construction and furniture equipment, secondary 
services, design, the entire bit would be a $210 million 
ceiling.
    Chairman Waxman. Mr. Kutz, does that explain what appears 
to be the discrepancies in your testimony?
    Mr. Kutz. Yeah. I think last year it was confusing, too, 
because the Air Force representative simply focused on a 
construction piece. But that is not the project. The project 
does include, as you mentioned, furniture and equipment. There 
are additional foreign currency translation charges that have 
gone against certain other appropriations and there is other 
things like rework, design--those are really costs of the 
project. So you have to look at this in a more holistic 
approach. And when you look at the whole thing, you're talking 
about over $200 million.
    Chairman Waxman. And when you look at the whole thing, that 
includes fixing the kitchen ducts for $1.2 million at the cost 
of currency fluctuation because of these delays for another 
$8.6 million. And when you add all these up, you get an 
estimate of $213.9 million. That is 63 percent more than the 
original cost estimate of $131.1 million; isn't that right?
    Mr. Kutz. About, yes, that's about correct.
    Chairman Waxman. You've also estimated how much the Air 
Force pays to house officials in other hotels while this 
facility is still being built. On page 16 of your testimony you 
say this amount will be $2.9 million by January 2009, the best 
case estimate for completion date. You also estimate the amount 
of revenue lost from retail sales to be another $14 million. So 
if you include these amounts, by my calculations, you're up to 
more than $230. And that doesn't even include other costs like 
all of the additional Air Force staff assigned to this contract 
or the cost to fix the cracks in the concrete foundation; is 
that correct?
    Mr. Kutz. Yeah, those are related costs. Certainly they are 
a little bit different in their nature. But, yes, they are 
resulting from the problems and delays we are talking about. 
And they do--much of that impacts soldier morale, welfare, 
recreation programs, as we both mentioned in the opening there.
    Chairman Waxman. General Rogers, I don't understand how you 
can continue to tell this committee that the project is under 
budget. It seems that you're deliberately excluding millions of 
dollars worth of costs just so that we get this somewhat 
misleading statement. And I think the taxpayers deserve more of 
a clear explanation if--could you respond to that?
    General Rogers. Yes, sir. There is no deliberate shading 
here, sir. Those kind of costs to send these people off base, 
for example, exist today. They existed in the past. What is 
lost here is an opportunity cost to save that money because it 
is not open. The cost today to send people off base is not 
nearly what it was, say, a couple of years ago. For the first 4 
months of this year, for example, the cost to send people off 
base to lodging was about $1,200 a month. It surged in May 
and--yeah, April/May because of an exercise we had, but it is 
back to normal now.
    Chairman Waxman. Well, when you take all of those costs 
into consideration--you said we would incur them anyway--do you 
agree with the estimate of all of them combined, $230 million?
    General Rogers. Yes, sir. But it is not the same as--it is 
not the issue we're talking about here. We're talking about the 
controllable parts of construction and other management 
controls we can have. A lot of these costs are things that you 
would include in the cost of doing business of opening any 
facility. We don't include the cost of the roof rework, the 
hindrance claims, concrete repair, etc., because we are under 
no liability to pay those.
    Currency fluctuation is a major portion of this problem. 
Since this project began, we've experienced a total of $47 
million of expenses due to currency fluctuation alone. And as 
you know, we can't control that. If the project was delivered 
on time top quality in 2006, we would have paid out $32 million 
in foreign currency fluctuation. The delays so far have been 
worth $15 million of additional foreign currency fluctuation 
costs. Those parts--this is the equivalent of buy low, sell 
high. We set these contracts when the dollar was at its 
strongest in Europe and at the same time construction contracts 
could be had for a minimum. Today in Germany, there is what I 
would call a Katrina effect. Contracts are very high, materials 
are up and it is difficult to bring anything in very cheaply 
today. It is one reason the construction manager has had such a 
difficulty in getting contractors back to work because there 
are much more lucrative contracts out there to be had and they 
are tied to this one settled back in 2004.
    Chairman Waxman. Thank you very much. We're going to have 
other questions. I'm sure other Members will ask questions.
    Mr. Davis.
    Mr. Davis of Virginia. General Rogers, let me just 
understand. Basically the fact that the euro has risen so much 
against the dollar accounts for an important part of the cost 
rise?
    General Rogers. Very important part, sir.
    Mr. Davis of Virginia. You have no control over that. Now, 
how about in hiring the construction contractors? That wasn't 
the Air Force, was it?
    General Rogers. No, sir. We do business with the German 
Government under the international agreement known as ABG-75.
    Mr. Davis of Virginia. Let me ask Ms. Garber. It looks like 
a huge part of this problem was that the construction--the 
contractors in this case were German contractors hired by the 
German Government and our only job was to approve the work and 
pay. Is that a fair understanding or am I missing something?
    Ms. Garber. ABG-75 provides a framework for these military 
construction activities to take place.
    Mr. Davis of Virginia. Can you speak into the microphone?
    Ms. Garber. ABG-75 provides a framework for these military 
construction contracts to take place.
    Mr. Davis of Virginia. I understand that. And it is my 
understanding that framework, correct, that basically the 
hiring of the contractors, the German Government does that, we 
basically approve the work and pay the government, who then 
pays the contractors. Isn't that the way it works?
    Ms. Garber. Article 49 of the U.S.----
    Mr. Davis of Virginia. Just yes or no. I don't need to get 
into all of the article. Is that a correct understanding?
    Ms. Garber. The supplemental provides that the military 
construction for the benefit of foreign forces stationed in 
Germany should be carried out by German authorities. That is 
correct.
    Mr. Davis of Virginia. So a lot of this problem just goes 
back to the German Government, who they hired and--is that fair 
to say? Let me ask GAO.
    Mr. Causseaux. That's----
    Mr. Davis of Virginia. I understand that there was some 
work at one point--this is before General Rogers got into it. 
There was some work that was approved and accepted that 
probably shouldn't have been accepted.
    Mr. Causseaux. That's true, sir. As far as the U.S. 
influence or control over the process, the United States can 
request a contracting approach. In this case, the United States 
did not opt for or did not go for a general contractor 
approach. So the Germans went with what they call trade lots. 
It is essentially 40 small business or trade-lot contractors, 
individuals and then they attempted the--LBB attempted to 
manage that. That was a significant problem for them. They were 
effectively overwhelmed.
    Mr. Davis of Virginia. And some of these contractors walked 
off the job, didn't they?
    Mr. Causseaux. They walked off the job because they weren't 
getting paid.
    Mr. Davis of Virginia. They weren't getting paid because 
they weren't doing good work.
    Mr. Causseaux. It wasn't--I don't believe that was 
necessarily the case. It was that the invoices that they were--
ultimately when they were providing their invoices and they 
were coming through--because the change orders had not been 
approved--this is when the Air Force stepped in and said we're 
not going to pay any invoices for unapproved change orders. 
When that occurred, the funding stopped, the contractors walked 
off the job. That is certainly a control that the United States 
had. The question----
    Mr. Davis of Virginia. And if they had paid these 
contractors and with unapproved change orders, they would 
probably be up before this committee trying to answer why you 
paid unapproved change orders.
    Mr. Causseaux. Absolutely. And there were improper payments 
that had been made at a--up until a certain point and then it 
was finally discovered. But the question is whether or not the 
United States had the ability or the authority to inject 
greater oversight and control in the process from the 
beginning. And the answer to that under the ABG-75 is clearly 
yes.
    Mr. Davis of Virginia. But that horse is long since out of 
the barn. I mean, that's--we are where we are today.
    Mr. Causseaux. That's correct.
    Mr. Davis of Virginia. So, you know, we are where we are. I 
don't know--I mean, it should be a lesson learned for the Air 
Force and State and everybody else in terms of future projects, 
in terms of what can go wrong. I guess the question is today, 
as we look at this today, and we see where we are in trying to 
get this completed as rapidly as possible, given all of the 
other factors, the fact that construction costs are high, that 
you still have a rising euro against the dollar, that we don't 
have direct control under the contractual arrangement that we 
have, what is the fastest way to get this thing wrapped up as 
quickly as we can at the best costs? And is the Air Force doing 
a satisfactory job on that? That is the question.
    Mr. Causseaux. I think certainly the Air Force has 
instituted effective controls at this point. As Mr. Dorn 
indicated----
    Mr. Davis of Virginia. So they are doing a satisfactory job 
at this point?
    Mr. Causseaux. That's correct. But the question is those 
controls have not really been tested yet because there hasn't 
been sufficient progress. But have they--do they have adequate 
infrastructure and oversight in place----
    Mr. Davis of Virginia. From your perspective of looking 
forward, are they doing everything they can do?
    Mr. Causseaux. It appears so, yes. And I think the Air 
Force in terms of--is to be commended for the actions in terms 
of engaging the German Government and getting them to put forth 
funds to stem the process and get it going.
    Mr. Davis of Virginia. Yeah. I mean, the German Government 
can't feel too good about this project. I'm not going to ask 
you to comment in terms of what they feel. But just looking at 
this, I'm sure it is a source of embarrassment to them, which 
is probably why they kicked in some money at this point to get 
it going.
    What is the status of those dollars that the German 
Government put in? Do they expect to get that back at this 
point? Do they just kind of add it to the cost? Can anybody on 
the record--Ms. Garber, I'll start with you as far as the State 
Department. Any idea what this--the money they kicked in, what 
is the status of that? What do we expect to get back? Would 
that be an added reimbursement for us? If it is an added 
reimbursement, do we have to do it under the euro as it rises? 
Can you give me a feel for that?
    Ms. Garber. The State Department was not involved in that 
particular piece. I think the Air Force is the best place to 
answer that question.
    Mr. Davis of Virginia. So you don't have the answer to 
that, OK. General Rogers.
    General Rogers. Sir, when we went to the Germans and laid 
out failures of their agents, we asked them for solutions to 
this problem. They agreed with us that the real problem is lack 
of flow of money. If you don't keep the money flowing, 
construction doesn't proceed.
    Mr. Davis of Virginia. Contractors don't work for free, in 
other words?
    General Rogers. Yes, sir.
    Mr. Davis of Virginia. They aren't liquid enough to carry 
any costs and----
    General Rogers. Yes, sir. This money that has been injected 
by the Germans is prefinancing, was their solution to that 
problem to sustain liquidity in the project.
    Mr. Davis of Virginia. Now, did we sign a note for that, 
that they advance this and we sign a note and we pay them 
later?
    General Rogers. No, sir. We never signed any paperwork. We 
didn't get any of the money. We have no control over the money.
    Mr. Davis of Virginia. So they went ahead and paid their 
own contractors ahead of time with no understanding from us 
that we'd reimburse them as far as you know?
    General Rogers. Yes, sir. And they--you know, we really 
don't know exactly what they're doing with the money. There are 
contractors involved. There are previous costs involved. And we 
are staying out of it because under advisement by our legal 
staff, if we stick our finger in it, we could create liability. 
So we've stayed out of that completely.
    Mr. Davis of Virginia. What do you see the--how do you see 
this moving forward at this point? There are still--as we saw 
from the pictures that were put up there, there has been no 
progress in some areas over the last year.
    General Rogers. True.
    Mr. Davis of Virginia. We have a plan now that--GAO has 
testified that you have controls in place that they are 
satisfied with at least to date. They haven't been tested and 
we all understand that, but at least you have them in place. 
They've given you good marks for moving ahead. How do you see 
this progressing on a timeline or getting contractors back in 
there working? Can you walk us through what we can expect 
from----
    General Rogers. Yes, sir. The real test on whether we are 
making good progress is to have the worker count adequate to 
meet the construction schedule they have created.
    Mr. Davis of Virginia. Have enough workers to get the job 
done?
    General Rogers. Yes, sir. We have not seen that yet. The 
German authority----
    Mr. Davis of Virginia. You don't control that either, do 
you?
    General Rogers. No, sir. The German authorities are doing 
what they can with the contractors. But as I mentioned about 
the constructing environment in Germany, they have some 
challenges in dealing with these contractors. To put it 
bluntly, they are holding the cards with the government. The 
measures the government is taking are to be commended, but not 
all the problems are solved yet. We have seen work progress on 
the roof. We have seen kitchen ducting removed. But we 
understand there are additional details they are having 
difficulty working out with the contractors.
    Mr. Davis of Virginia. So the big variable, the big delta 
here in terms of being able to get this thing done on time and 
cutting our losses is getting the workers there to perform to 
standards in a timely manner?
    General Rogers. And yes, sir.
    Mr. Davis of Virginia. And that is something we don't 
control. Does everybody agree with that?
    Mr. Dorn. I would agree with that.
    Mr. Davis of Virginia. And is there anything else we can do 
to make this happen? Obviously don't go this route in the 
future when you're constructing this type of building because 
this is one case of, you know, if it can go wrong, it will go 
wrong. But is there anything else we could be doing at this 
point, except for maybe a phone call from the President to Ms. 
Merkel or something like that? I mean, what else can you do at 
this point to get the contractors?
    Mr. Causseaux. Short of writing a blank check to bring more 
workers in and pay them more than they are contracted to do, 
no, I don't think so.
    Mr. Davis of Virginia. OK. So we still have the unresolved 
issue of trying to get the contractors in in a timely manner to 
get this thing done, and that is the variable that nobody 
controls here. You think we are doing everything we can. It 
goes back, then, to the initial agreement that is before 
anybody was here on this panel, was here in terms of the 
contractual vehicle that would handle this where we allowed the 
German Government to basically hire the contractors to make 
this go and things started going bad from there. We made a 
mistake along the way at one point evidently in accepting some 
work that wasn't acceptable, but that is not the major part of 
the problem. Is that fair to say?
    Mr. Causseaux. I think that is fair to say, but I think the 
agreement itself also has provisions that the United States did 
not take full advantage of in terms of its risk mitigation. 
There are opportunities that the United States has to inject 
itself into the process for oversight control, checking and 
checks and balances and that type of thing.
    Mr. Davis of Virginia. But we're doing that now?
    Mr. Causseaux. Yes, sir.
    Mr. Davis of Virginia. OK. Thank you very much.
    Chairman Waxman. Thank you, Mr. Davis.
    Mr. Sarbanes.
    Mr. Sarbanes. Thank you, Mr. Chairman. Can I pick up right 
where you just left off? What--because that is the--the 
suggestion is that we are now at a place where we are sort of 
being held hostage by these German contractors and so forth. 
But like you said, it didn't have to come to that. And I'm 
curious as to--well, first of all, how typical or atypical is 
it for this kind of situation to arise where work stops and 
then a third party enters the scene apparently without 
objection and starts funding the project that we are supposed 
to have control or oversight on and then creating expectations 
of some kind of disposition of that outlay of funds down the 
line, which apparently is not totally resolved yet. This 
strikes me as out of the ordinary. Am I correct in that?
    Mr. Causseaux. That is our understanding, yes. It is I 
believe the first time the Germans have engaged in this type of 
a prefinancing loan, however you want to--whatever semantic 
term you want to----
    Mr. Sarbanes. Well, even just going beyond the Germans, on 
a project of this kind you wouldn't expect to see that kind of 
situation arise, right?
    Mr. Causseaux. No, I don't believe so.
    Mr. Sarbanes. OK. And you suggested that it is because we 
didn't take advantage of earlier warning signs, things we could 
have done presumably before it got to a stage where the 
contractors felt they had to walk off--well, before it got to a 
stage where we had to do a stop work----
    Mr. Causseaux. Correct.
    Mr. Sarbanes [continuing]. Order and then force these 
contractors in effect to walk off the job because they weren't 
getting paid and then invite the third party, German 
Government, to come into the situation. What are some of the 
things--what are some of the earlier stages that we could have 
taken advantage of to avoid that?
    Mr. Causseaux. Well, at the very outset of the arrangement 
or the agreement, the United States has the ability to inject 
itself in terms of reviewing the construction, onsite quality 
control, oversight of the process, the invoices, all the change 
orders. The fact that there were such a huge backlog of change 
orders and that the invoices were being paid associated with 
those before the change orders had been approved suggests that, 
you know, the government--the United States was not, you know, 
adequately monitoring the process at that time. That all caught 
up when the surge of change orders hit and it was finally 
realized, you know, holy cow, we're paying for stuff that we 
haven't approved of yet. So then it was we are not going to 
process any further payments. That obviously created the 
dilemma. So injecting the adequate amount of oversight 
resources up front would have mitigated that risk.
    Mr. Sarbanes. How fast based on your--when you do reviews 
of these kinds of projects and other instances as well and have 
a general sense of how a contract proceeds over time and when--
where the trigger mechanisms are. So--I mean, how fast if you 
have an efficient oversight and monitoring role in place, how 
fast should you be able to detect things that you need to weigh 
in on? I mean, this project started when--what was the start 
time when this project----
    General Rogers. Fall of 2004.
    Mr. Sarbanes. So on a project of this size and complexity, 
you know, granted--if you have a good oversight function in 
place, how quickly could you expect to know? I mean, 2 months 
out, 3 months out, 6 months out? I mean, here we are 4 years 
out. We looked at this last year. So say 3 years out. But, I 
mean, a good oversight operation should be able to judge 
whether things are going in the right direction or not how 
quickly?
    Mr. Dorn. A couple of months, Mr. Sarbanes.
    Mr. Sarbanes. A couple of months. A couple of months you're 
going to know if you've got----
    Mr. Dorn. That's correct. Construction is normally 30 days 
in arrears. So--but if you're out there every day, you're going 
to see what is going on. One of the things that they didn't do 
early, and I'll be brief, is they didn't have a schedule that 
they could trust. The Germans are giving them Excel 
spreadsheets instead of network schedule that showed what 
resources were needed. So they didn't have the tools necessary 
to even know how many people were going to be on the site. And 
they don't have that tool today. They still couldn't tell you 
how many people need to be on the site today to make sure 
you're on schedule.
    Mr. Sarbanes. So tracing back to--I mean, if I were 
interested in knowing exactly how the oversight role broke 
down, where does that path lead? Was it that there should have 
been 10 people overseeing this and there was only one, that 
there should have been somebody with more experience and 
background doing this sort of thing, and there wasn't anyone? 
What was the breakdown in terms of the failure to do the early 
oversight? Specific.
    Mr. Dorn. It's--again, it gets to back to what Mr. 
Causseaux said. In the beginning we had the option to insist on 
one general contractor, for example, and instead we had over 20 
general contractors effectively; and trying to manage that many 
contractors is----
    Mr. Sarbanes. I'm out of time, but it sounds like, right 
out of the gate, the structure of this was such that it was 
going to lead to confusion, missed oversight, and all the rest 
of it; and here we are.
    Mr. Dorn. Made it a high-risk job, as Mr. Causseaux said.
    Chairman Waxman. Thank you, Mr. Sarbanes.
    Mr. Tierney.
    Mr. Tierney. Thank you, Mr. Chairman.
    Thank you, folks, for coming in to testify.
    Mr. Kutz, particularly, I want to thank GAO for helping us 
understand what went wrong with this particular project. But in 
your report you also warned that there may be some construction 
problems that were also discovered in other places when you 
were looking at the installation in Germany.
    First, you showed us a picture of a runway at Ramstein Air 
Base. I think there's a photo on the screen there. Your report 
says this runway was built to help support an increase in U.S. 
mission to Iraq and Afghanistan. You said that the runway's 
lights don't work when it gets wet. And you said a construction 
defect allows groundwater to damage lights and cause power 
outages. As a result, the base actually has to divert aircraft 
to other bases in Europe.
    Am I understanding that correctly?
    Mr Kutz. Yes, that is correct.
    Mr. Tierney. And now they're forced to use portable lights, 
and they have to pump water from the manholes on an ongoing 
basis?
    Mr. Kutz. Yes.
    Mr. Tierney. I don't understand how this could have 
happened. Should there not have been some oversight that 
identified the contractor who installed these lights and some 
required repairs by them?
    Mr. Kutz. Yes. It was the same LBB agency, I believe, that 
is overseeing the KMCC, which is why we looked at them. We 
looked to see if there were other similar types of issues in 
that immediate area that LBB Kaiserslautern was involved with.
    And so we see the same kinds of things we saw with KMCC on 
a little bit smaller projects, but still important projects.
    Mr. Tierney. So no one inspected the work before it was 
accepted by the U.S. Government?
    Mr. Kutz. We don't know that.
    Mr. Tierney. Does anybody on the panel know that?
    General Rogers. Say again the question, sir.
    Mr. Tierney. Did not somebody inspect the work before it 
was accepted by the government?
    General Rogers. Yes, sir. Some of these projects were 
managed by another government agency. LBB as the German 
construction agent, a German government organization, accepts 
from contractors on behalf of the forces. So when LBB accepted 
it, there was the first breakdown.
    Mr. Tierney. Back to Mr. Kutz's report, it says, When it 
rains, ponds that are as big as acres across develop between 
the runways because of poor drainage. So I think you're saying 
that again we accepted that particular situation of the 
construction without its ever being properly graded.
    Mr. Kutz. Yes. And that is the picture you see. That was in 
March of this year.
    Mr. Tierney. What's going on with the runway now?
    Mr. Kutz. These guys were there last month, Mr. Dorn and 
Bruce.
    Mr. Tierney. Mr. Dorn, what's happening now?
    Mr. Dorn. As of last month, they've started grading 
operations to fill in those low spots, but they're still having 
trouble; and we watched them pump water out of the manholes.
    Mr. Tierney. So was that same company that was responsible 
brought back to do the repairs, or is some additional or new 
company in there doing the work?
    Mr. Dorn. I'm not aware of that. The Air Force probably is.
    General Rogers. Those are items that we identified to the 
Germans as unacceptable. The construction agent and the German 
Government is working with the contractors to repair these 
deficiencies.
    In the meantime, it's true that they impact certain 
capabilities out there. We've got measures in place to ensure 
safety and mission are not impacted more than necessary, but 
we're holding their feet to fire to make sure we get good 
results on this one.
    Mr. Tierney. So we're not paying additional to have that 
done; they're coming back under the original contract and 
completing that. Is there any penalty involved?
    General Rogers. So far, we haven't paid anything. They 
haven't told us we're going to pay anything. Because we have 
identified most--in fact, all of the known ones that were shown 
here we identified prior to when it was accepted. Because you 
can accept the runway for usage while other pieces can be 
repaired later, a punch list.
    Mr. Tierney. So it was accepted for use, but not accepted 
in terms of all responsibility; and they own the problem of 
fixing it and the cost of doing that?
    General Rogers. Yes, sir.
    Mr. Tierney. Ms. Garber, is that generally the recourse 
that the U.S. Government has from the German Government or the 
German contractors when a situation like this arises?
    Ms. Garber. I think the Air Force is the best place to 
answer that question. The State Department generally does not 
get involved in the technical construction issues and 
questions.
    Mr. Tierney. And it never gets to a diplomatic level of 
concern?
    Ms. Garber. In this particular case, because there were 
problems with the LBB agent, the embassy did play a 
facilitative role in trying to arrange meetings to facilitate 
and support, to help bring the parties to agreement at the 
Federal level. So in that sense, yes, but generally it was 
handled by the Air Force directly.
    Mr. Tierney. Mr. Kutz, could you tell us what you found 
when you went to the warehouse in terms of the structure there 
and deficiencies in the steel frame?
    Mr. Kutz. Well, there were the beams that were inserted. I 
guess that is the picture there. And there was originally 
issues where this had to be evacuated because there was concern 
that the roof would cave in. So, again, Mr. Dorn and Mr. 
Causseaux saw that last month; and I believe that is a recent 
picture.
    Mr. Tierney. So the building can't be used to capacity. In 
some areas, I think you said, a forklift couldn't get into it 
anymore, correct?
    Mr. Causseaux. That's correct.
    Mr. Tierney. So what's happening with that?
    Mr. Causseaux. They have work-arounds.
    Mr. Tierney. And now we are just going to have a building 
that is not up to the capacity originally designed?
    Mr. Causseaux. It's essentially a huge basketball court 
with pillars in it, and it's a little difficult to play 
basketball in that scenario. But they have forklifts moving 
equipment and other things around, and in some cases they can't 
get to certain locations easily so they have to use either hand 
facilities or work-arounds. But as Mr. Dorn alluded, one of the 
officers that we spoke with there said one of the things that 
he worries about significantly is a forklift backing into one 
of those pillars and the pillar falling or affecting the 
structure of the roof.
    Mr. Dorn. They are using that facility. There are 
operations, but they are degraded by the interior columns.
    Mr. Tierney. So have we accepted that? Are we paying for 
it? Are we going to pay in full? Is somebody going to assist on 
that? What's going on?
    General Rogers. That facility was accepted about 3 years 
ago by another government agency, and the Germans notified us 
of the defects in the building because they weren't visible to 
us. It has to do with the defective metal that was used in 
multiple government facilities throughout Germany, some German 
Government projects, some U.S. Army projects; and in 
conjunction with that, they found some defective welds in this 
one.
    It is now in the hands of German courts, and we're standing 
by for the German officials to tell us what their solution is.
    Mr. Tierney. They'll tell us what our recourse is?
    General Rogers. Yes, sir.
    And this is, of course, dragged out with the court process 
over there.
    Mr. Tierney. I see my time is up, Mr. Chairman. Thank you.
    Ms. Watson. I just want to followup the questioning of my 
colleague, Mr. Tierney.
    The committee staff received a briefing on June 30th from 
the Air Force Office of Special Investigations. And at this 
briefing, Air Force investigators gave us some additional 
information, and they said we could share it with certain 
limitations.
    They told us that they believed that two Air Force officers 
and two Air Force civilians and a fifth individual, who was a 
contract employee, falsely certified almost $8 million in 
payments to German contractors. So this is a question for 
General Rogers.
    Are you familiar with this investigation and these 
allegations?
    General Rogers. Yes, ma'am, I am.
    Ms. Watson. And let me ask you this. Have you reprimanded 
or removed any of the Air Force personnel that were involved in 
the payments?
    General Rogers. I would put it this way, ma'am. One of them 
self-removed. The others, the investigations are not complete 
yet, but when they are complete and if it's warranted, we will 
take appropriate action and hold them accountable.
    To date, it appears that it's more process foul and lack of 
training versus intentional----
    Ms. Watson. Criminal activity?
    General Rogers. Yes, ma'am.
    Not absolving them of responsibility to know, but the 
individual who self-eliminated also happened to run that 
office, who had an interest in them not necessarily knowing 
exactly how to do this job.
    Ms. Watson. Because the case is being investigated now. I 
think they're in court.
    If there are criminal activities, it will be adjudicated 
there? Is that what you're saying?
    General Rogers. Yes, ma'am.
    A civilian employee, it would go through the civilian 
process, the Department of Justice. Military ones do the 
Universal Code of Military Justice.
    Ms. Watson. It seems like there has been very poor conduct 
by U.S. officials, so this question is to Mr. Kutz.
    Program managers have an obligation to protect the 
taxpayers' funds, don't they?
    Mr. Kutz. That's correct, yes.
    Ms. Watson. And do you think a government supervisor needs 
to prove beyond a reasonable doubt that someone engaged in 
criminal activity before taking any administrative action?
    Mr. Kutz. We don't believe that because we come across it. 
We refer hundreds of thousands of cases to agencies for 
criminal investigation and administrative action because, as 
you're probably well aware, criminal virtually never happens, 
but administrative should happen when someone does things.
    So that's our view. And if it's proven, if someone is still 
being investigated, then that is one thing. But if you know 
that they did a poor job in their work, they should be 
reprimanded. Their ratings should reflect that, their 
performance ratings and things like that.
    And you're talking here about individuals who were rubber-
stamping, if you will, the bills that came in versus other 
individuals who are under investigation for fraud. There are 
other cases of fraud.
    Ms. Watson. Well, when we see the pictures that were up on 
the screen and the shoddy kind of construction, and we look 
away or we wait for somebody to maybe give us a clue that 
things are not right, it just is very troubling.
    We're the oversight committee, and we're here to protect 
the general public, the taxpayers' dollars, protect Americans; 
and when we have these kinds of projects that seem to be not 
worthy of who we are, it's very troubling.
    And we have all of you out there, and I appreciate your 
coming here today and being willing to testify. We need to get 
to the truth, and we need to remove those people who are 
demonstrating very poor judgment and poor, shall I say, 
conduct--maybe because they expect a fiduciary reward in the 
end. That is always our concern.
    So I yield back my time, Mr. Chairman, and thank you very 
much, witnesses.
    Thank you, Mr. Chairman.
    Chairman Waxman. Thank you, Ms. Watson.
    I want to ask a few questions.
    Mr. Kutz, last year, you testified before us on this 
project and you told us that the Air Force's program office had 
lost control of project finances and was paying invoices for 
work they weren't sure was done.
    At last year's hearing, the witness for the Air Force was 
Brigadier General Danny Gardner, who was in charge of the 
project at that time. He acknowledged some problems with the 
project, but he basically said the Air Force had addressed 
these problems.
    Mr. Kutz, if I recall correctly, you didn't agree with 
those assertions; is that correct?
    Mr. Kutz. That's correct.
    Chairman Waxman. It doesn't seem the Air Force believed 
them either, because after our hearing the Commander of Air 
Forces in Europe, General Hobbins, formed a high-level task 
force to troubleshoot the project; and by the following month, 
July 2007, it presented its findings to top Air Force officials 
supporting GAO's findings. Here is what the Air Force's own 
internal review stated, ``Air Force did not properly monitor or 
approve contractor payments. Air Force did not have adequate 
policies and controls in place. And Air Force did not have 
sufficient staffing to oversee complex project.''
    General Rogers, you're here in the Air Force seat today. Do 
you agree that the Air Force did not adequately oversee this 
project, and do you agree with GAO's findings in that regard?
    General Rogers. Sir, as I mentioned earlier, I have been 
investigating this thing for 18 months, and I probably know 
more about it than anybody.
    What I found is--of course, I participated in this piece of 
it. The task force was directed by General Hobbins even prior 
to the hearing. We just had logistic difficulties getting stood 
up quick enough.
    The internal findings that you speak of by the Air Force, 
the source for that was members from here in the Air Staff in 
the Pentagon. Those members were there for 2 weeks and had a 
short look. Their opinion, I do not agree with. Initially I 
did, but now I know better.
    As it turns out, the main crux of the problem was 
transparency from our construction agent. As an example, to 
know about change orders, the construction agent has to tell 
you they're there, because we're not in their offices. In terms 
of controls, we have to know something is not quite right to 
ramp it up.
    Initially, the Air Force knew that this project was going 
to be more complex. And because we had tried to get a general 
contractor--actually written an official letter to the Germans 
and couldn't get it supported by the Minister of Defense of 
Germany, who also wrote letters saying, you have to put a 
general contractor on this--we lost that fight, and LBB did not 
put a general contractor on it.
    So based on that, the Air Force doubled its normal 
oversight team size to eight in the beginning.
    Chairman Waxman. But you disagree with the Air Force's own 
findings?
    General Rogers. Sir, those--you can't classify those as the 
Air Force's own findings. Those were members of the team who 
generated their briefing when they came back here, and they had 
far less information.
    So I don't. There are pieces of it that have some 
credibility, but you can't count those as the findings.
    Chairman Waxman. This was at the request of General 
Hobbins, they put together this inquiry?
    General Rogers. He directed me to lead it, sir.
    Chairman Waxman. On the chart, the type of findings, it 
says, these are the findings pursuant to an internal Air Force 
review.
    General Rogers. Yes, sir.
    We're talking two different things here. This is not the 
task force; this is the Air Force Audit Agency findings.
    Chairman Waxman. I see. And there are findings and you 
agree with those findings?
    General Rogers. We agreed with those when the audit agency 
came up with them. What I now know is that when an audit agency 
looks at a project in Europe, they can only look at the U.S. 
side. That is like looking at the tip of an iceberg and judging 
the whole iceberg.
    Chairman Waxman. GAO created some findings as well. Do you 
disagree with their findings?
    General Rogers. Depends which ones you're talking about 
sir.
    Chairman Waxman. With regard to the work of the Air Force 
and their having sufficient staffing to oversee the complex, to 
properly monitor and approve the contractor payments, and 
adequate policies and controls in place, address those as well.
    General Rogers. Here is what happened. If the question on 
any given day through the process of building this facility, 
what do you know at the time?
    In this project LBB hired another firm to act as a 
surrogate general contractor because they were directed not to 
have a general contractor. That general contractor served and 
failed miserably and did not inform LBB of all the situation on 
the site. The LBB subsequently did not inform the Air Force. So 
the story----
    Chairman Waxman. Does the Air Force have any responsibility 
or is it all the contractor's fault?
    General Rogers. Sir, I will tell you that the Air Force has 
responsibility. We execute the responsibility based on what we 
know at the time.
    As I look back at those times, the question becomes, what 
was reasonable at the time based on what you knew. I have reams 
of facts that show that the efforts made by Air Force people at 
the time seemed reasonable. Now that I have more information 
from the surrogate GC, the general contractor, and from LBB, 
what their internal memo said at the time, I realize the 
situation the Air Force people were trying to manage was 
completely different from reality.
    Chairman Waxman. Let me ask Mr. Kutz. It seems to me that 
we don't have an acknowledgement from General Rogers to what 
the findings were from the internal audit of the Air Force, 
that there were some mistakes by the Air Force.
    Do you agree that those findings were incorrect and General 
Rogers is correct?
    Mr. Kutz. We would agree with the Air Force Audit Agency's 
findings. And last year you asked, I think, General Gardner, 
when they first became aware that there were real problems. He 
told you December 2005, a couple of months before the project 
was supposed to be done.
    How could you say you didn't have Air Force oversight 
problems when you became aware of the problems a couple of 
months before the ribbon-cutting ceremony? It doesn't make any 
sense, Mr. Chairman.
    Chairman Waxman. Well, General Rogers, what has passed is 
past. But it seems to me it's important to have some 
acknowledgement of the problems that existed and how they came 
to be the responsibility of the Air Force.
    It sounds like the Air Force is in denial mode, and that is 
not very comforting. If you deny what happened in the past, I 
fear you might be likely--not you yourself, but the Air Force--
might be likely to make some of the mistakes again.
    General Rogers. Sir, I'm not in a denial mode. I 
acknowledge what happened in the past. My job is to figure out 
why it happened.
    I do now understand why the Air Force Audit Agency and GAO 
could come up with these findings, that we also would agree 
with--there were inadequate controls, etc. The issue is, why 
did it happen.
    For example, Mr. Kutz says, why did we learn in December 
2005 that this facility is going to be late when it's only a 
couple of months from delivery. The delivery date being 
promised in December 2005 by the construction agent and showed 
to the KMCC council with all of the stakeholders, German 
Government officials, AFE services, everybody at the table, was 
April or May 2006.
    At that time, there was 16 weeks of construction work 
remaining, and if you look at the clock, you would say, Well, 
there is the building, it is standing, looks right, 16 weeks 
from now--they're telling us 16 weeks, it's going to open in 16 
weeks. You don't have a reason to question that, and when you 
go out and look at the site, you can correspond work to 
invoices you are getting.
    So as you can see, the issue here was one of transparency.
    My finding is that once this construction project broke 
ground, there was a difference in the rate of information that 
flowed from the surrogate general contractor to LBB, and from 
LBB to the Air Force. And as you went through time, that lag in 
situation awareness continually grew to the point that even in 
November or December 2005, I now have internal memos from LBB 
showing that project was not going to be delivered until--the 
hotel portion until July or August. Yet the entire council, 
which is where they're reporting out the status to the 
oversight, to all the stakeholders, that council was briefed, 
this will be here in May.
    Chairman Waxman. Let me ask Mr. Kutz the last question I 
have.
    If we hold a hearing next year at this time, are we going 
to find that we've learned some lessons and they're going to 
correct the situation, or do you think that there is a denial 
going on, and it's as troubling to you as it appears to be to 
me.
    Mr. Kutz. It's too late for KMCC. It is what it is at this 
point. It's a mess. There is a lot of issues and a lot out of 
our control at this point.
    The real question is for new projects going forward, at the 
very beginning, before we start spending the money, will we 
have the people in place, will we make sure that a general 
contractor whatever makes sense here, we'll make sure we're not 
schedule driven, driven based upon milestones, etc. That is the 
real test here.
    I think KMCC, it's really too late.
    Hopefully, there are lessons learned going forward, and at 
the very beginning of the project they will learn from what has 
happened here and, hopefully, not repeat the same situation.
    Mr. Davis of Virginia. Do you want to ask any questions Mr. 
Duncan?
    Mr. Duncan. Well, very briefly. Thank you, Mr. Chairman.
    I was sitting here reading this memo that the staff 
provided us, and it says, ``Unfortunately, this recent report 
from GAO is not good. Little work has been completed in the 
year that has passed since the first hearing, and while the 
U.S. Air Force and the German Government have recently reached 
an agreement on a plan to complete the project by January 2009, 
neither the Air Force nor GAO has confidence that completion 
date will be met. The project is now more than 2 years overdue 
and the building will suffer from significant structural 
problems, including a defective roof that is in the process of 
being replaced.''
    If neither the Air Force nor the GAO has confidence that 
the completion date of January 2009 will be met, General 
Rogers, when is the completion date? When is this going to be 
completed?
    General Rogers. Sir, we count on our German construction 
agent to give us the schedule, in terms of--you know, they 
figure out how long it's going to take and level of effort. And 
they have offered January--not offered; they have told us that 
January 2009 is when they expect to turn it over.
    We see indications that do not--while they're performing 
better than in the past, it's not like we should count on 
January 2009. But as I mentioned earlier, I at least have a 
little more confidence in this schedule in only slipping a few 
months versus years because contractors have at least signed up 
to this schedule. And it's the first hard schedule, after years 
of begging, that LBB has given us since November 2004.
    Mr. Duncan. And in this memo also says that ``Total cost to 
complete the project is unclear. The Air Force contends it will 
spend $162 million, but the GAO estimates the cost to complete 
the project will be over $200 million.''
    What do you say about that? Where is the disagreement 
between the Air Force and the GAO?
    General Rogers. The Air Force and the GAO are really saying 
the same thing here, sir. The $163 alludes to pure construction 
costs. That one should be about $7 to $7.5 million, under the 
agency approved amount for construction. The other costs that 
take over $200 million include furniture and equipment, 
secondary services, design fees that are not included in 
construction that are normal in any construction project; and 
just about all of those would have been spent even if we 
completed it on time.
    Last year, the discussion seemed to be all about the 
construction costs being out of control, so those other costs 
weren't really brought up. The Air Force tracks them carefully, 
which is why we're able to provide them to the GAO when they 
ask. But we're basically saying the same thing.
    Mr. Duncan. But do you have somebody now who is in charge 
of this, who has major construction experience?
    General Rogers. Yes, sir. We had to delay a little bit last 
year to stand up and consolidate the management office, because 
our colonel was deployed to Iraq. We got him back, and as soon 
as he came back, he plowed into this and he is doing a great 
job.
    Mr. Duncan. Thank you very much. I yield back.
    Mr. Shays. I'm not going to take the full 5 minutes because 
I wasn't here. But could we have it clarified for the record 
why there was no general contractor, a U.S. general contractor, 
overseeing this?
    General Rogers. Yes, sir, I can.
    During investigation of this project, I found letters from 
previous vice commanders of USAFE, and meeting minutes, where 
USAFE officially and repeatedly asked for a general contractor.
    Additionally, the Minister of Defense in Germany wrote 
letters to German Government agencies saying, you're going to 
need a general contractor or this thing is going to go afoul. 
However, there were other German bureaus and political 
interests who insisted on trade lot contracts because they, 
like us, have rules and laws that ensure that small business 
has opportunities, etc.
    And in those initial days, when told we wouldn't get a 
general contractor, the people overseeing the project accepted 
it in the sense that there were only about four trade lots 
envisioned at the time. But nobody had a clue that it was going 
to grow to over 42.
    Mr. Shays. Just a question: We had a project manager on 
this project? Someone?
    General Rogers. Yes, sir.
    Mr. Shays. Thank you, Mr. Chairman.
    Mr. Davis of Virginia. Let me sum up.
    We just don't want to be here next year going through the 
same thing. And I guess the real variable here is Germans and 
the contractors and how they act. And we have the controls in 
at the Air Force, I understand. So the real question is, are 
the German contractors going to show up? Are they going to be 
able to do the job? Are they going to show in the numbers that 
we need to get this thing done?
    Am I missing some something, or is that the essence of 
where we are right now?
    Mr. Kutz. Yes. And I think the other thing that has been 
discussed here, too, is whether that German amount is a loan or 
a grant or whatever the case may be, because that will have to 
be sorted out later as to who will pay for what.
    But with respect to physical progress, getting it done, we 
agree with that.
    Mr. Davis of Virginia. Just tell me, we're not going to use 
this procedure again. General?
    General Rogers. Sir, under ABG 75, we're obligated to use a 
German construction agent which in that region is LBB. What we 
intend to do is----
    Mr. Davis of Virginia. Is this is State Department 
agreement or a military agreement?
    I'll ask Ms. Garber.
    Ms. Garber. It's an agreement between the forces and the 
Germans.
    Mr. Davis of Virginia. Does that agreement have a 10-year 
timeframe? Is that just part of the agreement for our bases 
being there?
    General Rogers. Yes, sir. The Germans conclude agreements 
like this with all forces, all nations. It will be changed if 
the forces at some point decide to renegotiate.
    Mr. Davis of Virginia. But we did note we did have other 
options with this?
    Mr. Causseaux. There are clearly provisions in the ABG 75 
for the United States to--in some cases to demand, insist and 
request; and the option for using a general contractor, I think 
the United States could have insisted on the use of a general 
contractor.
    Mr. Davis of Virginia. My question is, we have learned from 
this so that next time we will handle it differently, within 
the confines of that agreement.
    General Rogers. Yes, sir. As a matter of fact, the Germans 
agree because this didn't work for them either, and it's now 
costing. Believe me, the impact on them is more than us.
    Mr. Davis of Virginia. Good. Thank you very much.
    Chairman Waxman. Well, I thank you all for advising us 
where we stand with this project, and I appreciate your being 
here today.
    That concludes our business, and the committee stands 
adjourned.
    [Whereupon, at 11:34 a.m., the committee was adjourned.]
    [The prepared statement of Hon. Diane E. Watson follows:]

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