District of Columbia: Status of the New Convention Center Project
(18-JAN-02, GAO-02-335T).					 
								 
The Washington Convention Center Authority (WCCA) Act of 1994	 
authorizes WCCA to construct, maintain, and operate the new	 
convention center as well as maintain and operate the existing	 
convention center. Subsequent to GAO's November 2001, report,	 
WCCA and the construction manager (CM) have made significant	 
progress in their negotiations to reset the Guaranteed Maximum	 
Price (GMP). The two parties have achieved agreement on the two  
most critical components of the GMP proposal: price and time	 
frames for completing the new convention center. WCCA officials  
stated that a special meeting of its board of directors will be  
scheduled in early to mid-February to review and officially act  
on the proposed GMP agreement. The revised GMP amount of $590.7  
million represents a $71.3 million, or 13.7 percent, increase	 
over the estimated GMP amount of $519.4 million that GAO cited in
its November 2001, report. This testimony is summarized in the	 
November report, GAO-02-182R.					 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-02-335T					        
    ACCNO:   A02689						        
  TITLE:     District of Columbia: Status of the New Convention Center
Project 							 
     DATE:   01/18/2002 
  SUBJECT:   Convention facilities				 
	     Cost analysis					 
	     Facility construction				 
	     Future budget projections				 
	     Construction costs 				 

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GAO-02-335T
     
United States General Accounting Office

GAO Testimony

Before the Subcommittee on the District of Columbia, Committee on Government
Reform, House of Representatives

For Release on Delivery
Expected at
9 a.m.
Friday,
January 18, 2002

DISTRICT OF COLUMBIA

Status of the New Convention Center Project

Statement of Jeanette M. Franzel
Acting Director, Financial Management and Assurance

GAO-02-335T

Madam Chairwoman and Members of the Subcommittee:

Thank you for the opportunity to discuss our November 30, 2001, report1 on
the status of the new District of Columbia (D.C.) Convention Center. The
Washington Convention Center Authority (WCCA) Act of 19942 authorizes WCCA
to construct, maintain, and operate the new convention center as well as
maintain and operate the existing convention center. At the request of the
Subcommittee, we have provided periodic status reports on the convention
center regarding estimated cost projections, the progress of construction,
the sufficiency of the financing plan, and other issues affecting the
project.

Our most recent report, dated November 30, 2001, provided a status of the
convention center project as of July 2001 and additional information
regarding the resetting of the Guaranteed Maximum Price (GMP) agreement and
the negotiation of potential changes through November 2001. Today, I will
discuss the results presented in our November 30, 2001, report along with
updated information for the following three aspects of the project: (1) the
status of the GMP negotiations, (2) the estimated time frames for completion
of the convention center, and (3) estimated cost projections in relation to
planned project financing.

                              GMP Negotiations

WCCA and the construction manager (CM) signed the original GMP amendment in
the amount of $500.6 million in August 1998. Under the terms of the original
GMP, WCCA and the CM can adjust the GMP amount when actual quantities and
costs differ from the original baseline assumptions. Accordingly, WCCA and
the CM agreed that they would reset the GMP once purchasing activities were
90 percent complete. In our November 30, 2001, report, we noted that as of
November 13, 2001, the revised GMP had not yet been set, and WCCA and the CM
were continuing to negotiate. The delay in resetting the GMP had been mainly
due to a lack of agreement between WCCA and the CM on total estimated costs
and the project completion schedule. Specifically, as of July 2001, the CM
had approximately $135 million in submitted and unsubmitted change orders
for WCCA's consideration that had not been included in the estimated

1 District  of  Columbia:  Status  of  the  New Convention  Center  Project
(GAO-02-182R November 2001).

2DC Law 10-188, September 28, 1994 41 DCR 5333,6823, DC Official Code, secs.
10-1201.01 through 10-1203.07

costs of the project. We also reported that as of November 2001, WCCA's
managing director stated that the CM had agreed in principle to withdraw
$109 million of the pending changes during the GMP negotiations. The
managing director also stated that the remaining $26 million would be
resolved, and the final GMP would include funding reserves for any pending
amounts that were not released. At the time of our report, WCCA and the CM
were negotiating the pending changes.

Subsequent to our November 30, 2001, report, WCCA and the CM have made
significant progress in their negotiations to reset the GMP. The two parties
have achieved agreement on the two most critical components of the GMP
proposal: price and time frames for completing the new convention center.
The next step in the process is the review of the proposed GMP agreement by
WCCA's Board of Directors, followed by formal ratification of the agreement
by both WCCA and the CM. WCCA and the CM have reached agreement on a GMP
amount of $590.7 million, which includes resolution of the previously
pending change orders and dates of March 31, 2003, for substantial
completion of convention ready areas and October 31, 2003, for a final
completion date. According to WCCA officials, they recently received a
letter from the CM's chairman and chief executive officer formally stating
the CM's intention of accepting the terms of this most recent GMP proposal,
including the revised price and completion time frames. WCCA officials
stated that a special meeting of its board of directors will be scheduled in
early to mid-February to review and officially act on the proposed GMP
agreement.

The revised GMP amount of $590.7 million represents a $71.3 million, or 13.7
percent, increase over the estimated GMP amount of $519.43 million that we
cited in our November 30, 2001, report. WCCA attributes a portion of the
increase in the GMP amount to the inclusion of costs previously considered
as outside of the GMP agreement, such as work related to removal of
contaminated soil, the metro station, and costs associated with expanded
scope of work for certain aspects of the project. Also contributing to the
increased GMP is the inclusion of costs and reserves for work related to
change orders.

The revised GMP, once ratified, will provide a new contractual agreement
between WCCA and the CM for the construction costs of the project, along

3WCCA reported in its July 2001 monthly status report that the GMP estimate
had increased to $519.4 million.

Project Completion Dates

with an allocation of responsibility between WCCA and the CM for costs. The
intent of the revised GMP is to prevent future claims or disputes between
WCCA and the CM for changes that have occurred since the original contract.
The GMP represents the maximum price to be charged by the CM for its
allocated portion of construction costs. Any increases in the cost of items
assigned to the CM in the GMP agreement will be the responsibility of the
CM. Any increases in the costs of items assigned to WCCA in the GMP
agreement, along with any increases resulting from change orders issued by
WCCA, will be the responsibility of WCCA.

In our November 30, 2001, report, we reported that substantial differences
existed in the estimated completion dates of WCCA and the CM as of July
2001. WCCA's estimated substantial completion4 date was February 4, 2003,
while the CM had an estimated date of July 8, 2003, or a difference of 5
months. The CM further estimated that if design delays continued, the
substantial completion date could be as late as March 12, 2004, or a
difference of 13 months from WCCA's estimate. Similar differences existed
between WCCA's and the CM's estimated dates for final completion.5 WCCA's
estimated final completion date was May 7, 2003, while the CM had an
estimated date of November 6, 2003, or a difference of 6 months. The CM's
estimate under the assumption of continued design delays was as late as July
11, 2004, or a difference of 14 months from WCCA's estimate.

We also reported that the CM partially attributed the estimated project
delays to design changes, incomplete designs, and delays in shop drawings.
The CM reported that these issues could result in increased costs and time
delays. In addition, we reported that WCCA officials stated that they did
not agree with the CM's assessment of the design delays or its estimated
substantial and final completion dates.

As a part of the GMP negotiations, WCCA and the CM have reached agreement
regarding the dates for completion of the new convention center. The
proposed GMP agreement contains the following dates:

4Substantial completion is defined as obtaining occupancy permits for all
three buildings and having those buildings available for operations, except
for minor items identified by WCCA that have not yet been completed.

5Final completion is defined as the completion of all three buildings and
minor items identified by WCCA.

* March 31, 2003, for substantial completion of convention-ready areas. WCCA
has defined convention-ready areas by identifying specific areas within the
convention center facility that can be utilized for actual convention
activities. The substantially complete status includes having obtained
Certificates of Occupancy from the appropriate District entities for the
specifically defined convention-ready areas.

* October 31, 2003, for final completion of the convention center facility.
At

Estimated Cost and Financing

this date, all construction related activities should be completed.

In our November 30, 2001 report, we reported that the estimated total cost
of the new convention center was $778.2 million and the estimated financing
sources available for the project totaled $815.7 million, leaving an
estimated surplus of $37.5 million. We also reported that as of July 31,
2001, WCCA had already received $770.9 million, or 94.5 percent, of the
total estimated $815.7 million in available financing sources.

Since our November 30, 2001, report, the total estimated cost for the
convention center has increased from $778.2 million to $799.5 million. (See
appendix I.) This represents a $21.3 million, or 2.7 percent, increase over
the estimate included in our November report. While the total estimated cost
has increased, the estimated financing sources of $815.7 million have
remained the same. (See appendix II.) WCCA officials attribute the increase
in total project cost to increases in construction costs and other costs
associated with the middle building of the convention center facility. Based
on current cost estimates of $799.5 million and existing financing sources
of $815.7 million, an estimated $16.2 million surplus remains available to
the project. The surplus amount could be higher if WCCA achieves certain
cost savings goals. Cost savings goals are included in the proposed GMP
agreement, with financial incentives to the CM if both scheduling and
savings goals are met.

According to WCCA officials, the events of September 11, 2001, have had
little impact on the construction of the convention center. As of December
31, 2001, approximately 98 percent of the construction subcontracts had been
executed and all major construction trades had been purchased. Of the $815.7
million in funding available to the project, WCCA had received $789.5
million, or 97 percent, as of December 31, 2001, an increase of $18.6
million since July 31, 2001. Further, according to WCCA, none of the 197
currently booked events for the new Convention Center has been cancelled.

Dedicated Taxes

The WCCA issued revenue bonds backed by dedicated taxes to finance the
construction cost of the project. Dedicated taxes were also used for
construction and are pledged to cover the debt service for the bonds. These
taxes consist of 4.45 percentage points of the District's 14.5 percent hotel
sales tax and 1 percentage point of the District's 10 percent tax on
restaurant meals, alcoholic beverages served on premises, and rental
vehicles.6

Currently, all the dedicated taxes included in the financing schedule to
fund the actual construction of the new convention center have been received
by WCCA, including the $10 million reported as outstanding in our November
30, 2001, report. The $10 million was considered an equity contribution to
the project and represents the estimate of the amount of dedicated tax
revenues that will be collected in fiscal year 2002 above the amounts needed
for operations of the existing convention center and debt service on the
bonds of the new facility. As a result of collecting this equity
contribution, all of the dedicated tax revenues included in WCCA's
construction financing plan have been collected. Future dedicated taxes are
pledged as security for WCCA's debt service.

From 1999 through 2002, WCCA's debt service consists of interest payments
only. Beginning in October 2003, WCCA will also be required to make payments
of principal. With respect to the ability of WCCA to cover its obligations,
we note that the financing of the new convention center is based on the
conservative assumption of no growth in the dedicated tax revenues for the
next 30 years. However, based on WCCA's analysis, the dedicated tax revenues
have shown continued growth since the creation of the WCCA. Several other
steps have been taken to enhance WCCA's ability to meet its obligations. For
example, the Washington Convention Center Authority Act of 1994 permits the
Mayor to impose a surtax in the event that the dedicated taxes are not
sufficient to fund WCCA's debt service and reserve requirements. Also, WCCA
purchased a municipal bond insurance policy that would cover debt service
payments if WCCA were unable to make such payments.

An additional matter directly related to the dedicated taxes is the Office
of the District of Columbia Auditor's (DCA) certification of WCCA's revenues

6DC Official Code secs. 10-1202.01 (4), 47-2002.02 and 47-2202.

and reserve balances. In a July 24, 20017, report, the DCA certified that
WCCA's estimated total revenues (including dedicated taxes) and excess
reserves of $155.9 million would be sufficient to meet WCCA's projected
expenditures (including debt service) and reserve requirements of $81.9
million for fiscal year 2002. The DCA plans to recertify the fiscal year
2002 projections once the fiscal year dedicated tax estimates are revised
next month.

In recent discussions, WCCA officials indicated that they had performed a
sensitivity analysis that showed that WCCA could continue to meet its fiscal
year 2002 debt service payments even if dedicated taxes declined by as much
as 40 percent below the certified fiscal year 2002 estimate, while
maintaining a coverage ratio of at least 1.5 times the amount needed for
fiscal year 2002 debt service. In fiscal year 2003, when WCCA is scheduled
to start making principal payments, WCCA's analysis shows that dedicated
taxes could decrease by as much as 20 percent, while maintaining a debt
coverage of 1.5 times the amount of principal and interest due.

Scope and Methodology

In order to prepare this testimony and the report upon which it is based we

* held discussions  with and obtained information from WCCA officials on the
status of the projected and the ongoing GMP negotiations;

* reviewed WCCA  and CM progress reports, visited the construction site, and
compared  WCCA current  estimates  for the  project with  the original  cost
estimates of September 19988;

*   reviewed cost  reports  and schedules  and  held discussions  with WCCA
officials  to obtain  information  on the  current GMP  estimates and  total
project cost estimates; and

*  reviewed  the  most current  financing documents  and analyzed  financing
available in relation to total estimated projected costs.

We  conducted our  work  in accordance  with generally  accepted  government
auditing standards.

7Certification Review of the Sufficiency of the WCCA's Projected Revenues
and Excess Reserve to Meet Projected Operating and Debt Service Expenditures
and Reserve Requirements for Fiscal Year 2002 (July 24, 2001).

8WCCA considers the September 1998 estimate to be the original estimate.

Madam Chairwoman and members of the Subcommittee, this concludes my
statement. I will be happy to answer any questions that you or members of
the Subcommittee may have.

Contacts and For future information regarding this testimony, please call
Jeanette M. Franzel, Acting Director, at (202) 512-9471. Key contributors to
this Acknowledgments testimony included Keith A. Thompson, Terrell G. Dorn,
and Arkelga L. Braxton.

Appendix I: WCCA's Unaudited Estimated Costs for the New Convention Center

                           (Dollars in thousands)

Estimate as of 9/1998

Estimate as of 7/2001

Estimate as of 1/2002

                             Project component

a

            WCCA-estimated hard costs $505,600 $563,422 $590,677

b

             WCCA-estimated other costs 118,903 143,815 145,410

                      Contingency 30,497 14,634 11,088

Estimated future additions to project budgetc

$59,000 $56,338 $52,373 Total estimated construction costs $714,000 $778,209
                                  $799,548

aHard costs are  construction costs related to the physical structure of the
facility, such as masonry, concrete, and structural items.

bOther costs include  items such as design fees, legal costs, consulting and
inspections, and administrative items.

cEstimated additions include portions of the outsourced work such as work on
the metro station, utility relocation, central plan, telecommunications, and
food service costs.

Source: WCCA records.

Appendix II: Comparison of WCCA's Unaudited Financing Schedule for the New
Convention Center

                           (Dollars in millions)

                              Funding sources

                    Financing plan as of 9/1998 Financing plan as of 1/2002

Increase (decrease)

                      Bond proceeds $507.4 $507.4 $0.0

                     WCCA contribution 114.5 114.5 $0.0

                 Construction fund earnings 53.1 53.1 $0.0

Excess dedicated taxes (equity contributions) through 2002

   Source: WCCA
    records.
*** End of document. ***