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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