U.S. Securities and Exchange Commission: Building Project	 
Management and Related Budget Planning (20-OCT-05, GAO-06-61R).  
                                                                 
Congress asked us to provide a briefing on the facilities	 
management and budgeting issues of the U.S. Securities and	 
Exchange Commission (SEC) that SEC disclosed to Congress in May  
2005, which resulted in SEC's requesting a reprogramming of	 
approximately $48 million of 2005 and 2006 funds. The		 
reprogramming was requested to cover unbudgeted costs related to 
the construction of new facilities in Washington, D.C., and the  
improvement of new leased facilities in New York City and Boston.
Specifically, our objectives were to provide information on (1)  
the amount of funding for these projects that was not planned;	 
(2) the reasons for the change in budgeted amounts; (3) the	 
related actions taken by SEC since this budgeting issue was	 
uncovered; and (4) any corrective actions to prevent this issue  
from recurring. 						 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-06-61R 					        
    ACCNO:   A39918						        
  TITLE:     U.S. Securities and Exchange Commission: Building Project
Management and Related Budget Planning				 
     DATE:   10/20/2005 
  SUBJECT:   Accountability					 
	     Budget activities					 
	     Budget administration				 
	     Budget controllability				 
	     Budget obligations 				 
	     Budget updates					 
	     Construction costs 				 
	     Facility construction				 
	     Future budget projections				 
	     Internal controls					 
	     Reporting requirements				 
	     Reprogramming of appropriated funds		 
	     Cost estimates					 

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GAO-06-61R

United States Government Accountability Office Washington, DC 20548

October 20, 2005

The Honorable Frank R. Wolf Chairman Subcommittee on Science, the
Departments of State,

Justice, and Commerce, and Related Agencies Committee on Appropriations
House of Representatives

Subject: U.S. Securities and Exchange Commission: Building Project
Management and Related Budget Planning

Dear Mr. Wolf:

You asked us to provide a briefing on the facilities management and
budgeting issues of the U.S. Securities and Exchange Commission (SEC) that
SEC disclosed to your subcommittee in May 2005, which resulted in SEC's
requesting a reprogramming of approximately $48 million of 2005 and 2006
funds. The reprogramming was requested to cover unbudgeted costs related
to the construction of new facilities in Washington, D.C., and the
improvement of new leased facilities in New York City and Boston.
Specifically, our objectives were to provide information on (1) the amount
of funding for these projects that was not planned; (2) the reasons for
the change in budgeted amounts; (3) the related actions taken by SEC since
this budgeting issue was uncovered; and (4) any corrective actions to
prevent this issue from recurring.

In order to meet these objectives, we interviewed SEC personnel and
reviewed supporting documents. We conducted our work from July through
August 2005 in accordance with U.S. generally accepted government auditing
standards. We requested comments from the SEC Chairman or his designee. On
August 30, 2005, we briefed the staff of your subcommittee on the
preliminary results of our review. The briefing slides discussed at that
meeting are included as enclosure I and written comments from SEC's
Chairman have been reprinted as enclosure II.

                                Results in Brief

In May 2005, the SEC disclosed to your subcommittee that it had identified
unbudgeted costs of approximately $48 million attributable to misestimates
and omissions of budget costs associated with the construction of its new
facilities in Washington, D.C. and improvements in its new leased
facilities New York City and Boston. SEC estimates that the impact on its
2005 and 2006 budgets for construction costs is $20.2 million and $28.5
million, respectively, for a total of $48.7 million. On

                       GAO-06-61R SEC Project Management

June 7, 2005, SEC requested a reprogramming of 2005 funds among object
classes to address construction-related needs associated with these
offices.

Our work identified the following as the primary causes of the
misestimates and omissions of amounts in SEC's budget submission: (1)
ineffective management controls over budget formulation and review for
these projects; (2) an inadequate administrative infrastructure; and (3)
the nature of these facilities projects.

SEC has taken several actions, as detailed in the enclosed briefing
slides, to address its facilities project management and budget problems.
In addition, we are recommending that the Chairman of the SEC direct the
Executive Director to take the following additional actions:

establish accountability at both the staff and management levels for the
reasonableness of budget estimates submitted during the budget formulation
process;

establish regular reporting and review procedures related to the three
construction projects, and any future projects, to ensure that management
is promptly informed when changes or problems occur with estimates;

improve communication and consultation with operating units and staff
regarding space and property needs; evaluate options for budget and
facilities management activities in terms of number of staff and expertise
needed; and complete hiring for new positions in the Office of
Administrative Services and Office of Financial Management.

In commenting on a draft of this report, the SEC Chairman agreed with the
conclusions and recommendations in the draft report and included
information on actions taken and planned in this area. The complete text
of SEC's response is included in enclosure II.

We are sending copies of this report to the Ranking Minority Member of
your subcommittee. We are also sending copies to the Senate Committee on
Appropriations, Subcommittee on Commerce, Justice, and Science, and other
interested congressional committees.

This letter will also be available on GAO's home page at
http://www.gao.gov. If you have any questions, please contact me at (202)
512-9471 or by e-mail at [email protected]. Key contributors to this letter
were Cheryl Clark, Kimberley McGatlin, and Maxine Hattery.

Sincerely yours,

Director Financial Management and Assurance

Enclosures

                    Page 2 GAO-06-61R SEC Project Management

         SEC Facilities Project Management and Related Budget Planning

Briefing for the staff of the Subcommittee on Science, the Departments of
State, Justice, and Commerce, and Related Agencies, House Committee on
Appropriations

August 30, 2005

                                   Background

In May 2005, the Securities and Exchange Commission (SEC) informed
Congress that it had identified unbudgeted costs of approximately $48
million related to construction of its two new building facilities in
Washington, D.C. (Station Place One and Station Place Two), and
improvements in its new leased offices in New York City and Boston.

On June 7, 2005, SEC requested a reprogramming of funds among object
classes to address construction-related needs

associated with Station Place One and Two and certain costs associated
with improvements in the new leased offices in Boston and New York City.

                       Objective, Scope, and Methodology

        * Our objectives were to determine
                  space in New York City for budget years 2005 and 2006; and
                  * included unrealistically low costs for improvements in
                    the new Boston office and construction costs for Station
                    Place Two.
                       o Estimates for Boston were based on a rule-of-thumb
                         amount that had not been updated annually and was
                         not adjusted for current labor and materials costs.
                       o Estimates for Station Place Two had not been updated
                         in 18 months and therefore did not reflect increased
                         costs for construction materials, security, and
                         technology.
     o SEC estimates that the impact on the 2005 and 2006 budgets for
       construction and lease improvement costs is $20.2 million and $28.5
       million, respectively, for a total of $48.7 million.

                Budget: Construction and Lease Improvement Costs

(Dollars     FY 2005    Updated       2005 President's  Updated       2006 
in                                                              
millions)                                                       
              operating 2005       difference     Proposed    2006 difference 
                        budget                                     
                 budget      (June                 FY 2006  budget 
                             2005)                                 
                ( as of                          operating (June   
               December                         budget (as 2005)   
                  2004)                                 of         
                                                  February         
                                                     2005)         
Station Place     $6.00    $6.80   ($0.80)           $1      $1         $0 
One                                                             
Station Place      8.60    14.60    (6.00)            3   15.50    (12.50) 
Two                                                             
Total Station     $14.60   $21.40  ($6.80)           $4  $16.50   ($12.50) 
Place                                                           
One and Two                                                     
New York City        5.00   17.00  (12.00)            0   16.00    (16.00) 
Boston               2.60    4.00   (1.40)            0       0       0.00 
Total           $22.20    $42.40  ($20.20)           $4  $32.50   ($28.50) 
Note: $5 million in New York City original                      
2005 operating budget is for                                    
the buyout of the previous New York lease.                               6 

                    Causes of Facilities and Budget Problems

     o Ineffective management controls
     o Inadequate administrative infrastructure
     o Nature of the facilities projects

                        Ineffective Management Controls

     o Lack of oversight and quality assurance over project management and
       budget planning for these projects
          * Lack of internal controls, including reporting and accountability
            mechanisms, over budget estimates
               o Reliance on amounts in budget requests without proper review
                 and analysis
               o Project managers not held accountable for providing accurate
                 and complete estimates
     o Personnel problems and staff vacancies were not addressed timely.
     o Inadequate consultation with key divisions and commissioners regarding
       space needs and accommodations resulted in change orders and
       additional costs.

                    Inadequate Administrative Infrastructure

        * Insufficient institutional expertise and resources in facilities
          project management
        * o  Construction of building is not a typical SEC operating
          activity.
             o Leases and improved lease-held space were more typical for
               SEC.
             o Concurrent lease expirations overtaxed facilities management
               staff.
        * Key management positions over the construction projects and related
          budget process were restructured and positions left vacant.
             o Human Resources (HR) and Office of Administrative Services
               (OAS) had been one combined office but was split into two
               separate offices.
             o The executive heading the combined office was reassigned to
               another position.
        * o  As a result, there was a five month vacancy of an executive
          position in OAS during the budget formulation process.
        * OFM did not have sufficient staff to perform budget analysis,
             o placed too much reliance on OAS for budget estimates, and
             o focused heavily on financial statement audit.
        * Construction project managers were overwhelmed by
        * o  heavy workload and insufficient SEC infrastructure for handling
          construction projects of this size.
        * Growth in financial, budget, and administrative demands of SEC
          overall was not met with commensurate changes in the administrative
          infrastructure.
             o SEC grew from 2,936 staff in 2001 to 3,871 staff in 2005.
             o SEC's appropriations went from $413 million in 2001 to $888
               million in 2005.

o  During the period of rapid SEC growth, OAS and OHR staff decreased from
146 staff in 2001 to 143 staff in 2005.

                         Nature of Facilities Projects

o  For construction and lease improvements in general, building and lease
improvement costs are estimates until construction and improvements are
complete.

o  In our experience of reviewing construction projects, we have found
that original estimates are necessarily based on incomplete information
and need to be continually updated.

o  SEC's 2005 and 2006 original budget figures did not include -changes in
building codes (Station Place One); -environmental factors (New York);
-increase in construction and improvement materials (Boston

and Station Place Two); -additional security needs after 9/11/2001(Station
Place One and Two); -"lessons learned" from building Station Place One
(Station Place Two); and -aesthetics similar to Station Place One (Station
Place Two).

o  A high level of experience and expertise is needed to handle the
complexity and unpredictability of construction and to produce reliable
estimates based on the best information available at the time of the
estimate

Actions Taken by SEC to Address Facilities Management and Budget Problems

     o New head of OAS has budgeting and construction experience
     o Improved communication between OFM and OAS regarding budget
       formulation
     o Increased staffing of day-to-day management of construction projects
     o Created several new budgeting and project oversight positions in OAS
     o Instituted a budget analysis branch
          * New automated budget system was approved and is in planning: SEC
            expects the new system to
               o free-up staff for analysis and
               o detect abnormalities.
     o Program areas have been asked to provide more support for their budget
       estimates and their estimates are to receive closer scrutiny by OFM.
     o Three staff members previously involved in managing and overseeing the
       construction and lease improvement projects have been replaced.
          * Commitment from Chairman
          * o  August 10, 2005, message to all SEC staff cited the budget
            issue as one of SEC's top priorities.
     o Cost estimates for all three projects have been updated based on
       recent information and included in SEC's budget.
     o Project management for the three projects has been restructured and is
       receiving increased SEC management oversight.

                           Additional Actions Needed

We recommend that the Chairman of SEC direct the Executive Director to:

     o Establish accountability at both the staff and management levels for
       the reasonableness of budget estimates submitted during the budget
       formulation process.
     o Establish regular reporting and review procedures related to the three
       construction and lease improvement projects, and any future projects,
       to ensure that management is promptly informed when changes or
       problems occur with estimates.
     o Improve communication and consultation with operating units and staff
       regarding space and property needs.
     o Evaluate options for budget and facilities management activities in
       terms of numbers of staff and expertise needed.
     o Complete hiring of new positions in OAS and OFM.

Enclosure I

2004 - Calendar Year
March           Boston: new lease signed                                   
Summer/Fall     New York: decision to leave Woolworth                      
                   Building/negotiations begin on 3 World Financial Center    
Midyear         Budget: regular financial review                           
August          Head of Office of Administrative and Personnel Management  
                   (OAPM) removed from position                               
November        Budget: memo from SEC Executive Director begins 2005       
                   operating budget cycle                                     
December        Budget: FY 2005 requests due back to Office of Financial   
                   Management (OFM)                                           
                   SEC FY 2005 appropriations enacted                         
                   Budget staff analyze Office of Administrative Services     
                   (OAS) 2005 rent numbers                                    
2005 - Calendar 
Year            
January         Heads of OAS and Office of Human Resources hired to fill   
                   vacancy created by removal of OAPM head in August 2004     
                   Facilities budget problems surface in preparation for      
February-March  mid-year comparison of actual to budget costs, magnitude   
                   unknown                                                    
                   Several meetings of directors and staff held to study the  
                   facilities budget problems                                 
March           New York: lease signed for 3 World Financial Center        
May             "How did this happen" meeting of Managing Executive        
                   Officer (MEO), Executive Director (ED), and staff from OAS 
                   and OFM                                                    
                   2005 & 2006 Budget Impact meeting: MEO, ED, and staff from 
                   OFM discuss the overall picture and proposals for          
                   addressing                                                 
                   the shortfalls                                             
                   Conference call by MEO and ED with appropriations          
                   subcommittee staff                                         
                   Reprogramming: draft of request sent to appropriations     
                   subcommittee                                               
                   The SEC budget issue was reported in press                 
June            Reprogramming: Final request letter sent to appropriations 
                   subcommittee                                               

                                  (194559) 21

               Page 23 GAO-06-61R SEC Project Management (194559)

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