Military Construction: Observations on Mismanagement of the	 
Kaiserslautern Military Community Center (28-JUN-07,		 
GAO-07-1039T).							 
                                                                 
According to the Air Force, the Kaiserslautern Military Community
Center (KMCC), an over 800,000 square-foot facility, is currently
the Department of Defense's largest single-facility project under
construction. It is intended to provide lodging, dining,	 
shopping, and entertainment for thousands of U.S. military and	 
civilian personnel and their families in the Kaiserslautern,	 
Germany, area. Initial costs for the KMCC were estimated at about
$150 million, with funding coming from a variety of appropriated 
and nonappropriated fund sources. The construction for the	 
project, which began in late 2003, was originally scheduled to be
completed in early 2006. This testimony discusses GAO findings to
date related to the KMCC. The testimony describes (1) current	 
problems facing the KMCC, (2) causes for identified problems, and
(3) the effect of problems identified and their implications for 
future projects in Germany. To address our objectives, we	 
interviewed officials from the U.S. Air Force, Army and Air Force
Exchange Service, U.S. Army Corps of Engineers, and German	 
government. We also conducted a site visit and reviewed relevant 
KMCC documents. We plan to continue our work and make		 
recommendations to the Air Force as appropriate.		 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-07-1039T					        
    ACCNO:   A71613						        
  TITLE:     Military Construction: Observations on Mismanagement of  
the Kaiserslautern Military Community Center			 
     DATE:   06/28/2007 
  SUBJECT:   Air Force facilities				 
	     Construction contracts				 
	     Contract administration				 
	     Contract performance				 
	     Contractor payments				 
	     Cost analysis					 
	     Cost overruns					 
	     Internal controls					 
	     International agreements				 
	     Military cost control				 
	     Military forces					 
	     Performance management				 
	     Program evaluation 				 
	     Risk management					 
	     Schedule slippages 				 

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GAO-07-1039T

   

     * [1]Summary
     * [2]KMCC Currently Experiencing Substantial Cost, Schedule, and
     * [3]KMCC Problems Caused by Overseas Construction Risks, LBB-Kai

          * [4]Overseas Construction Risks
          * [5]LBB-Kaiserslautern Did Not Effectively Perform Required Duti

               * [6]Flawed Project Design and Implementation
               * [7]Ineffective Project Management

          * [8]Air Force Did Not Appropriately Minimize Risks

               * [9]Air Force Lacked Necessary Staffing and Expertise for
                 Adequa
               * [10]Air Force Policies and Control Procedures were
                 Inadequate

     * [11]KMCC Problems May Adversely Affect Military Members and Futu
     * [12]Concluding Comments
     * [13]GAO Contacts
     * [14]Appendix I: Scope and Methodology

          * [15]Order by Mail or Phone

Testimony

Before the Committee on Oversight and Government Reform, House of
Representatives

United States Government Accountability Office
GAO

For Release on Delivery
Expected at 10:00 a.m. EDT
Thursday, June 28, 2007

MILITARY CONSTRUCTION

Observations on Mismanagement of the Kaiserslautern Military Community
Center

Statement of Gregory D. Kutz, Managing Director
Forensic Audits and Special Investigations

Bruce A. Causseaux, Senior Level Specialist
Forensic Audits and Special Investigations

Terrell G. Dorn, Director
Physical Infrastructure

GAO-07-1039T

Mr. Chairman and Members of the Committee:

Thank you for the opportunity to discuss our initial findings related to
our audit of the Kaiserslautern Military Community Center (KMCC). The KMCC
is one of many projects that were initiated at Ramstein Air Base to
upgrade the capabilities of the base as a result of the consolidation of
military bases in Europe. According to the Air Force, the KMCC, an
844,000-square-foot facility, is currently the Department of Defense's
largest single-facility project. Funding for the project was provided from
a variety of sources including nonappropriated funds from the Army and Air
Force Exchange Service (AAFES) and Air Force Services Agency,1 military
construction appropriations, and Rhein Main Transition Program funds.2 The
KMCC is intended to provide lodging, dining, shopping, and entertainment
for over 50,000 U.S. military and civilian personnel and their families in
the Kaiserslautern, Germany, area. The KMCC won the Air Force 2006 Design
Award for an outstanding design concept for its environmentally-friendly
"green" roof,3 glass domes, and facades allowing maximum light into the
facility, and its amenities to the Kaiserslautern military community.
Project highlights include a 350-room visiting quarters, sports bar, name
brand restaurant, food court, slot machines, and numerous retail
businesses. Construction on the KMCC began in November 2003 and the
building was planned to be completed in early 2006. This represented an
expedited schedule developed to accommodate the need for additional
visiting quarters resources resulting from the closure of Rhein Main Air
Base in 2005.

1AAFES is a joint military activity providing merchandise and services to
active duty, guard and reserve members, military retirees, and their
families. AAFES utilizes earnings to improve troops' quality of life and
to support morale, welfare, and recreation programs. Air Force Services
Agency provides combat support and community service programs that enhance
the quality of life for Air Force members and their families. Air Force
Service Agency programs include lodging, youth programs, and sports and
fitness programs

2The closure of the Rhein Main Air base is part of the Rhein Main
Transition Program where the United States and Germany agreed to return
the base to Germany. In return, Germany allowed the relocation of the
base's key airlift capability to Ramstein and Spangdahlem Air Bases. As
part of the agreement, the Federal Republic of Germany, federal states of
Rheinland-Palatinate and Hessen, city of Frankfurt, and Fraport AG
Frankfurt Airport Services Worldwide agreed to provide funds to upgrade
the facilities at Ramstein and Spangdahlem Air Bases, including about 14
million euros for KMCC.

3According to a USAFE official, for KMMC, green roof refers to an
environmentally engineered roof whereby soil and vegetation are placed on
the roof of a structure in order to provide a reduction in energy costs,
reduce water runoff, and offset the forest area cleared for a project.

The activities of U.S. forces personnel in Germany are to be carried out
in accordance with the provisions of the North Atlantic Treaty
Organization's (NATO) Status of Forces Agreement (SOFA), the German
Supplementary Agreement (SA) to the NATO SOFA, and the various
administrative agreements that implement these two agreements. The KMCC,
like other military projects constructed in Germany, is governed by one
such agreement, the Auftragsbaugrundsaetze 1975 (ABG-75) Administrative
Agreement. ABG-75 establishes specific procedures for construction of
military projects, including the KMCC, in Germany. AGB-75 provides that
U.S. forces are to coordinate construction planning with the German
government to ensure the optimum use of German design and construction
capacities. For the KMCC, the responsibility for construction resided with
the Landesbetrieb Liegenschafts- und Baubetreuung office in Kaiserslautern
(LBB-Kaiserslautern), a German government construction agency.

As requested, this testimony highlights the findings to date from our
audit of the KMCC. Specifically, the testimony will describe (1) the
current problems facing the KMCC, (2) the causes for identified problems,
and (3) the effect of problems identified and their implications for
future projects in Germany.

To address our objectives, we conducted interviews with officials from the
U.S. Air Force, including U.S. Air Forces in Europe (USAFE) personnel
responsible for the KMCC project and Air Force Services Agency. In
addition, we interviewed officials from LBB-Kaiserslautern, AAFES, and the
U.S. Army Corps of Engineers (USACE). We also obtained and reviewed
project plans, cost estimates, and other relevant documents related to the
design and construction of the KMCC. We physically inspected the KMCC and
viewed the current status of the project. Our audit work was performed
between May and June 2007 in accordance with generally accepted government
auditing standards.

Summary

The KMCC project has encountered cost, schedule, and performance problems.
Factors contributing to problems facing the KMCC include construction
flaws, vandalism of property, contractor work stoppages and slowdowns
resulting from delays in payments, and an ongoing fraud investigation.
Originally scheduled to be completed over a year ago, continuing KMCC
construction and financing problems are likely to delay its completion. In
fact, problems are so severe that neither officials from
LBB-Kaiserslautern nor the Air Force can now forecast the completion date
of the project. Original cost estimates for the project totaled
approximately $150 million. However current cost estimates total
approximately $200 million and will likely increase in the future. Cost
increases have been compounded because of the significant appreciation of
the euro versus the U.S. dollar since inception of the project. The KMCC
is also experiencing numerous performance problems resulting from design
flaws, ineffective construction management, and substandard workmanship.
For example, the KMCC's multimillion dollar roof is experiencing water
leaks, which according to Air Force officials will likely require its
replacement at a cost of millions of dollars. In addition, the Air Force
delayed payments to some contractors because contractor invoices were for
contracts which had already reached their contract cost ceiling. Because
of the delay in payments, contractors drastically decreased their
workforce from several hundred workers per day to about 50.

Finally, project management of both LBB-Kaiserslautern and the Air Force
have experienced significant changes including: (1) replacement of
LBB-Kaiserslautern project managers, (2) firing of LBB-Kaiserslautern's
construction management contractor, and (3) resignation of a senior Air
Force civilian working on the project. In addition, several Air Force and
LBB-Kaiserslautern personnel involved in the management of the KMCC are
currently under investigation by Air Force Office of Special
Investigations (AFOSI) and German police.

The causes for the current problems facing the KMCC stem from risks
associated with overseas construction, failures by LBB-Kaiserslautern to
effectively perform its construction management duties, and failures by
the Air Force to institute effective controls to mitigate project risks.
Overseas construction projects pose additional risk due to differences in
languages, laws, construction standards, and currency fluctuations when
costs are denominated in the host country's currency. Almost all U.S.
military construction in Germany must be done within the framework of
ABG-75. ABG-75 largely gives the German government contracting agency
control over projects and contractors while financial risks are borne by,
in this case, the Air Force and its funding partners. ABG-75 generally
gives the German government the authority to contract and manage
construction of most U.S. facilities in Germany through what is called
indirect contracting.4 In addition, ABG-75 requires the U.S. government to
pay the German government construction agency a percentage fee based on
the cost of the contract.5 As a result, German government construction
agencies do not have an incentive to control costs because each dollar
increase in the project costs results in increased fees for the German
government construction agents.6

4According to ABG-75, indirect contracting means the planning, execution,
and administration of construction works are performed by the German
government on behalf of the U.S. forces.

In addition, LBB-Kaiserslautern did not effectively manage the KMCC
project. The failures included LBB-Kaiserslautern's inability to maintain
and implement a valid, updated construction schedule and to effectively
coordinate work between multiple contractors. LBB-Kaiserslautern, and its
architect-engineer contractor JSK, also did not adequately design the
project prior to construction. Because of the poor design, Air Force
officials estimate that millions of dollars of changes and rework were
necessary as of June 2007. For example, the Air Force noted in the design
review phase that KMCC's kitchen exhaust ducts as designed did not meet
U.S. fire safety standards. However, because the Air Force design comment
was not incorporated by LBB-Kaiserslautern, hundreds of thousands of
dollars of rework on the KMCC's exhaust ducts will be necessary. In
addition, LBB-Kaiserslautern acknowledged that it was vastly understaffed
to effectively manage a project the size of the KMCC. This understaffing
resulted in LBB-Kaiserslautern being unable to process the large number of
change orders that arose from the project. According to Air Force
officials, this resulted in work related to more than 400 contract changes
being billed to the Air Force without supporting documentation.7

Despite the high risks surrounding the KMCC, Air Force officials failed to
institute effective management oversight and controls in order to mitigate
the high risk from the project. Had LBB-Kaiserslautern done an effective
job of managing the project, the lack of Air Force controls would have
been mitigated. Unfortunately, as stated above, LBB-Kaiserslautern did not
manage the project effectively and therefore increased the importance of
effective Air Force controls. Normally the Air Force hires USACE to
oversee projects in Germany to provide assurance that construction,
procurement, and financial controls are in place and U.S. interests are
protected. However, for the KMCC, the Air Force elected not to use USACE,8
and subsequently did not institute sufficient controls of their own to
mitigate the project risks. The Air Force did not have sufficient staffing
to oversee the project, given its complexity. According to Air Force
officials, they initially had about 8 personnel on the project but have
recently increased staff to 17 personnel. However, the Air Force still
does not have experts, such as contracting officers or certifying
officials, on-site to provide assurance that all requirements of the
contract are met. As a result, the Air Force did not properly review many
invoices prior to payment--tasks that a contracting officer or certifying
official would be expected to perform. In addition, because of internal
demands to complete the project on an expedited basis to accommodate needs
rising from the closure of Rhein Main Air Base, the Air Force instituted
processes that circumvent its main controls for monitoring costs
associated with the project. Although ABG-75 allows all U.S. forces the
right to reject invoices for which the contract or change order were not
previously approved, Air Force project management instructed its staff to
approve invoices that included items listed on certain change orders that
had not been submitted to or approved by the Air Force. In addition, the
Air Force instructed its staff to approve invoices where quantity
limitations specified in the contracts were exceeded as long as
LBB-Kaiserslautern provided a form letter stating the price was fair and
the work was necessary. Therefore, despite risks associated with the KMCC,
the Air Force elected to reduce controls instead of increasing their
oversight of the project.

5Thus, the total cost for the KMCC is the cost of the contracts that the
German government construction agent negotiated with contractors for
constructing the building plus the fee for the German government
construction agent.

6LBB-Kaiserslautern for the KMCC is reimbursed 5.6 percent of the total
cost of the project as its fee for managing the construction on behalf of
the U.S. forces.

7The 400 contract changes refer to changes in the project that were
approved by LBB-Kaiserslautern, but have not been submitted to the Air
Force. The extent of documentation provided to the Air Force justifying
the need for the changes has been limited to a one-line description.
Although requested, LBB-Kaiserslautern did not provide any additional
documentation to us to substantiate the existence or justification for
these changes.

Cost increases and schedule delays will most significantly affect AAFES
and the Air Force Services Agency, the primary funding sources for the
project. For example, according to an AAFES official, recent estimates by
AAFES, the largest contributor to the KMCC, forecast its portion of the
total KMCC cost will end up doubling its original cost estimate. As a
result, the reduction in AAFES return on investment from the KMCC caused
by escalating costs may reduce profits and thus may diminish future
funding of morale, welfare, and recreational activities for U.S. service
members. In addition, as a result of the higher KMCC costs, AAFES and the
Air Force Services Agency are also likely to have less funding for their
other planned capital projects, such as the construction or renovation of
their stores. Also, because of the delay in the completion of the visiting
quarters portion of the KMCC, which was needed to accommodate the
additional quarters requirements arising from the closure of Rhein Main
Air Base, service members in transit to and from other locations, such as
Iraq and Afghanistan, may also be forced to stay off-base, at additional
cost to the government. Finally, Air Force officials estimate there is at
least $400 million in additional operations and maintenance projects and
military construction projects planned in Germany over the next 5 fiscal
years. Absent better Air Force controls, these projects may experience the
same types of heightened risks associated with KMCC.

8Air Force officials stated that they did not use USACE because of the
limited amount of military construction funds associated with the KMCC
project and additional costs associated with using USACE.

KMCC Currently Experiencing Substantial Cost, Schedule, and Performance Problems

The KMCC currently faces significant cost, schedule, and performance
problems, and it is unclear as to when the project will be completed and
at what cost. Despite being originally scheduled to open in early 2006,
neither LBB-Kaiserslautern nor the Air Force can estimate a completion
date for the project because of the widespread construction management
problems. In addition, estimated costs associated with the KMCC have
already exceeded original estimates and will continue to grow.
LBB-Kaiserslautern mismanagement has caused numerous problems with the
KMCC. Examples include poor designs, substandard workmanship on key
building components, and a significant reduction in the number of workers
on-site. Furthermore, there may be fraud within the project, which is
supported by the fact that there are ongoing criminal and civil
investigations by AFOSI and German police.

The latest official design schedule completed by LBB-Kaiserslautern and
provided to the Air Force in September 2006 indicated that the KMCC would
be completed by April 2007. However, during our visit to the KMCC in May
2007, LBB-Kaiserslautern and Air Force officials stated that key milestone
dates from the most recent design schedule had obviously slipped. In fact,
neither LBB-Kaiserslautern nor Air Force officials could provide a new
estimated project completion date during our audit of the project. Also,
both LBB-Kaiserslautern and the Air Force provided us current cost
estimates of about $200 million, which have already exceeded the original
estimate of about $150 million. We found that these cost estimates did not
include substantial costs related to the expected roof repair and
replacement discussed later, as well as hindrance claims associated with
the project.9 Furthermore, the Air Force contract with LBB-Kaiserslautern
is denominated in euros and therefore the U.S. cost equivalent varies with
the exchange rate. For example, the original cost estimate of about $150
million was developed in 2003 when 1 dollar was able to purchase
significantly more in euros than 1 dollar can currently purchase. Figure 1
below shows the trend in the strengthening of the euro against the U.S.
dollar over the past several years.

Figure 1: Currency Exchange Rates for Euros since 2003

The schedule delays associated with the KMCC have compounded cost problems
because of the appreciation of the euro versus the U.S. dollar. Given the
substantial costs associated with repairs to the roof, schedule delays,
and potential hindrance claims by contractors, assuming currency rates
remain higher than they were for the original project budget, the
appreciation of euros versus the U.S. dollar compounds the effect of cost
overruns on this project.

9Hindrance claims refer to claims against the United States for additional
costs contractors incurred due to interruption of contractor work.

Since the start of construction in 2003, the KMCC has experienced numerous
problems including poor design, substandard workmanship, poor coordination
of the different contractors, and a reduction of workers on the site. Some
of the more notable problems associated with this project include the
following:

           o Roof: The roof is experiencing water leaks causing considerable
           damage to the walls and the floors of the complex. According to
           Air Force officials, since the contractor responsible for roof
           construction went bankrupt, KMCC funding sources from the United
           States (AAFES, Air Force Services Agency, and Military
           Construction funds) will likely be used to pay the estimated
           millions of dollars in costs required to repair or replace the
           entire roof along with any internal damage. Figure 2 shows some
           damage in the KMCC resulting from the leak in its roof.

           Figure 2: KMCC Damage from Leaks in Roof

           o Exhaust ducts: The kitchen exhaust ducts installed in the KMCC
           do not comply with fire code standards established by the National
           Fire Protection Association.10 According to Air Force officials,
           it will take several months to make the exhaust ducts compliant
           with the fire codes at a cost of hundreds of thousands of dollars.

           o Bathroom faucets: Design plans called for some of the bathroom
           faucets in the KMCC to be automatic where water would turn on when
           a motion sensor indicated the presence of a person. However
           faucets and walls were installed prior to the electrical
           contractor installing wires needed to power the automated faucets.

           o Vandalism: In April 2006, vandalism occurred in over 200 rooms
           inside the KMCC. The cost to repair damage caused by the vandalism
           is estimated to be over $1 million. To make matters worse, as
           shown in figure 3, due to poor project coordination, a German
           contractor installed light fixtures on top of the vandalized
           walls. These lights will need to be removed to enable wall repairs
           to be made and then reinstalled.
			  
10National Fire Protection Association 96: Standards for Ventilation
Control and Fire Protection of Commercial Cooking Operations.

           Figure 3: Light Fixture Installed on Top of Vandalized Wall

           o Reduction of construction workers: In the past several months,
           the KMCC has faced a drastic reduction of the number of workers
           on-site. LBB-Kaiserslautern officials attributed this decrease to
           slow payment for services and reduced payment amounts from the Air
           Force due to increased scrutiny of invoices by the Air Force. The
           Air Force has delayed the payments to certain contractors because
           the total amount of charges billed to the Air Force has already
           risen to the contract cost ceiling for the specific contractor.
           Therefore, the Air Force has been unable to pay those contractors
           for work performed without a contract change order to increase the
           contract ceiling. As a result, many of the contractors either
           reduced the number of workers or have quit working altogether on
           the project. Prior to September 2006, the number of workers on the
           site was normally several hundred. Currently, the number of
           workers on the site is routinely less than 50.

           In addition to the construction problems faced by the KMCC, there
           have been a number of personnel who have been removed or have
           resigned from the project. In the past year, project management
           officials from LBB-Kaiserslautern have been replaced. Also, JSK,
           the firm hired by LBB-Kaiserslautern to manage the KMCC, was
           fired. Finally, a senior Air Force civilian in charge of the
           project resigned from the position and left the Air Force in 2006.
           On top of those personnel changes, both the AFOSI and the German
           Police have ongoing investigations into the project. The
           investigations span a variety of issues, both criminal and civil,
           including the investigations of Air Force project management
           officials as well as German government officials. In the past
           year, both Air Force and LBB-Kaiserslautern offices have been
           searched and documentation seized by both AFOSI and German police
           in relation to these investigations.
			  
			  KMCC Problems Caused by Overseas Construction Risks,
			  LBB-Kaiserslautern Management Deficiencies, and Lack of Air Force
			  Controls

           Current problems facing the KMCC have been caused by the
           additional risks associated with overseas construction, project
           management deficiencies by LBB-Kaiserslautern, and the Air Force's
           lack of effective controls to mitigate project risks. Guidelines
           set forth in ABG-75 add risk to the contract management process
           for U.S. forces construction in Germany. In addition, during the
           design and construction of the KMCC, the German government
           construction agent, LBB-Kaiserslautern, did not effectively carry
           out its project design and construction management duties.
           Finally, the Air Force failed to recognize risks associated with
           the KMCC and develop control procedures to minimize project risks.
           Because the most significant control that the United States can
           exercise over construction projects in Germany is financial
           control, the Air Force should have increased the project oversight
           controls to identify any invalid, unsupported, or inaccurate costs
           before money was spent. Instead, the Air Force did not have basic
           oversight and in some cases has circumvented controls in order to
           expedite payments.
			  
			  Overseas Construction Risks

           The KMCC presented increased risk from the beginning because U.S.
           forces are not in direct control of construction projects in
           Germany. Under the terms of ABG-75, most U.S. military
           construction projects are required to be executed by German
           government construction agencies, in this case LBB-Kaiserslautern,
           in accordance with German laws. This includes all contractual
           authority for design, bid tender and award, project execution,
           construction supervision, and inspection for all military projects
           within Germany. As such, the German government construction agency
           contracts directly with the design and construction companies
           responsible for a given project. As a result, the United States is
           required to work through this indirect contracting method, and
           does not have any direct legal relationship with the contractors
           for construction projects that are to be built on their behalf.

           According to Air Force officials, because ABG-75 gives the German
           government such broad powers in the construction of military
           projects, the United States has limited influence on how
           construction projects are built. For example, Air Force officials
           stated that they were initially resistant to use a trade lots11
           acquisition strategy for the construction of the KMCC because of
           the complexity involved with coordinating and managing the
           contractors associated with this strategy. Air Force officials
           stated that they relented to German government demands for trade
           lots after it was pointed out that the method of contracting was
           clearly within the German government's prerogative under ABG-75.
           ABG-75 stipulates that the U.S. government pay German government
           construction agencies (e.g., LBB-Kaiserslautern) between 5 and 7
           percent of the project cost for administering the contract
           regardless of the total project costs with no incentives for early
           completion. As a result, no incentive exists to minimize costs or
           encourage early completion.

           Despite additional risks associated with ABG-75, U.S. forces do
           have some leverage in managing construction projects in Germany.
           Specifically, under ABG-75, the United States is granted the
           authority to approve designs and provide prior consent to any
           modifications to the construction contract (also known as "change
           orders") that affect the scope, quality, or cost of the project.
           Any excess costs must be approved in advance by U.S. forces, and
           the forces are not liable for costs proved to be the fault of
           German officials or contractors. Thus, U.S. forces do have the
           "power of the purse" which can be used to pay only for costs
           within the scope of the contract. According to Air Force
           officials, the Air Force has the ability to cut off funding for
           its projects. However, since the projects are needed for base
           operations, such a step would only be used as a last resort.

           Finally, general risks associated with overseas construction
           projects add to an already risky situation. Increased complexities
           of overseas projects include differences in languages, culture,
           construction laws, safety regulations, and exposure to changes in
           currency exchange rates. Changes in currency exchange rates can
           pose a significant risk when project costs must be paid in the
           host country's currency, especially when projects take
           substantially longer to complete than originally planned. Despite
           risks associated with overseas construction, the Air Force did not
           institute sufficient controls to manage the project.
			  
11The use of trade lot contracts refers to the practice of contracting
directly with individual companies for specific sections of work on a
larger project instead of contracting with one general contractor who then
subcontracts out the specific tasks.

           LBB-Kaiserslautern Did Not Effectively Perform Required Duties for
			  the KMCC

           During the design and construction of the KMCC, LBB-Kaiserslautern
           did not effectively carry out its project design and construction
           management duties. LBB-Kaiserslautern's deficiencies in these
           areas have contributed to additional costs, schedule delays, and
           increased financial risk to the U.S. government for the KMCC
           project.
			  
			    Flawed Project Design and Implementation

           The design of the KMCC was inadequate and resulted in numerous
           instances of rework costing millions of dollars to fix.
           LBB-Kaiserslautern hired an architect-engineer firm, JSK, to draft
           plans for the KMCC, and subsequently contracted with JSK to be the
           construction manager. According to Air Force and AAFES officials,
           numerous design flaws were identified by the Air Force in the
           initial design review of the KMCC and were communicated to both
           LBB-Kaiserslautern and JSK. However, according to these U.S.
           officials, neither LBB-Kaiserslautern nor JSK incorporated many of
           their comments into the final design, which later resulted in
           additional work and costs. Air Force officials stated that, as of
           June 2007, they have identified millions of dollars of additional
           work required because of identifiable design flaws, which the Air
           Force plans to pay for in order to keep construction work moving
           forward.

           The following are some examples of design and construction flaws
           for the KMCC project:

           o Exhaust ducts: During review of the initial KMCC design, Air
           Force identified and commented to LBB-Kaiserslautern and JSK that
           the exhaust ducts used in the restaurant kitchens did not meet
           U.S. fire safety standards. However, LBB-Kaiserslautern and JSK
           failed to ensure the change was addressed by contractors
           responsible for duct construction. As a result, the exhaust ducts
           installed at the KMCC were not compliant with U.S. fire safety
           standards. In addition, when we toured the KMCC, an Air Force
           official showed us the material used to seal the exhaust ducts.
           According to the official, this material was flammable and, as
           such, posed a safety risk when hot gasses are vented through the
           exhaust ducts. Because of the poor design of the exhaust ducts,
           the Air Force has recently approved a change order for hundreds of
           thousands of dollars to fix the problem. Figure 4 below is a
           picture of the flammable sealant used in the kitchen exhaust
           ducts.

           Figure 4: Flammable Sealant Inappropriately Used in Kitchen
           Exhaust Ducts

           o Retail space ceiling: The design of the ceiling in the AAFES
           retail area was not adequate to support light fixtures. The design
           detailed an open-grid suspended ceiling (not fitted with tiles)
           with light fixtures fitted into some of the openings. However,
           during installation, workers discovered that the ceiling grid was
           not strong enough to support the light fixtures. Ceiling tiles
           stabilize the grid to keep it from shifting, so omitting the tiles
           weakened the grid to the point where the light fixtures could not
           be supported. As a result of this design error, a contract change
           was necessary in order to provide additional steel supports for
           the ceiling grid.

           o Escalator/escalator pit: Poor design and construction
           coordination caused problems with installation of the building's
           escalator. The escalator pit was initially built as part of the
           contract to construct the building's concrete floor. A subsequent
           contract was issued for installation of the escalator itself.
           However, the contract specifications for the escalator
           installation did not sufficiently detail the size and location of
           the escalator pit, and the escalator provided by the contractor
           did not fit in the previously-built pit. As a result, rework was
           necessary to build a new pit in the proper location.
			  
			    Ineffective Project Management

           LBB-Kaiserslautern did not effectively manage the KMCC project.
           Instead of using a general contractor who would be contractually
           responsible to build the project, LBB-Kaiserslautern attempted to
           execute the project by managing more than 30 separate trade lot
           contracts by itself. Each trade lot contractor was only
           responsible for its section of work, and no one party, other than
           LBB-Kaiserslautern, was responsible for the overall completion of
           the project. In addition, the LBB-Kaiserslautern's decision to use
           trade lot contracts also meant that LBB-Kaiserslautern would be
           required to properly coordinate the effort of all the contractors,
           adequately staff the project, and appropriately monitor
           construction schedule and costs, so that work could progress. As
           described below, LBB-Kaiserslautern did not carry out its
           requirements in the following areas:

           o Poor project coordination: LBB-Kaiserslautern did not
           effectively coordinate the work of the more than 30 construction
           contractors on-site. This resulted in inefficiencies in
           construction as well as damage to finished work. For example, one
           contractor responsible for installing a tile floor was forced to
           delay work while the contractor responsible for installing the
           ceiling finished work over the area where the floor was to be
           installed. In another case, the contractor responsible for laying
           the paving stones outside the building was allowed to finish its
           work before major exterior construction was completed. This
           resulted in damage to the paving stones when heavy cranes were
           subsequently used on top of the stones to install exterior bracing
           to the building.

           o Inadequate staffing: In our interviews, LBB-Kaiserslautern
           officials told us that their office was understaffed.
           LBB-Kaiserslautern officials stated that this lack of staffing
           hindered LBB-Kaiserslautern's ability to provide assurance that
           the project design was adequate and improve contractor
           coordination discussed previously. In part, as a result of the
           above listed design and coordination problems, numerous contract
           change orders were necessary. Again, the lack of staffing hindered
           LBB-Kaiserslautern's ability to process necessary change orders as
           required by ABG-75.12 According to Air Force officials, there are
           hundreds of change orders that LBB-Kaiserslautern has approved,
           yet has not submitted documentation to the United States for
           approval. Many of these change orders also had corresponding
           invoices submitted and certified by LBB-Kaiserslautern that the
           Air Force subsequently paid. LBB-Kaiserslautern was only able to
           provide us a listing of the change orders involved. This was far
           less than the detailed specifications required for review by the
           Air Force prior to the approval of the change and payment.

           Air Force officials also stated that this failure to process
           change orders was a major problem because this processing serves
           as the basis for increasing the obligation authority for the
           contract. In addition, LBB-Kaiserslautern officials stated they
           had approved the work for most of these change orders and thus the
           contractors performed the work and were expecting payment.
           According to Air Force officials, in some cases when the Air Force
           refused to make payment on the unapproved changes, contractors
           halted work and sent notices to the LBB-Kaiserslautern that they
           would be liable for any costs associated with delays in payment.
           In many cases, the Air Force chose to reduce controls and make
           payments on these items despite not having appropriate change
           order documents in an attempt to keep the work on the project
           progressing.

           The lack of staff also hindered LBB-Kaiserslautern's ability to
           sufficiently monitor the quality of the contractors work. For
           example, as stated previously, the KMCC roof is leaking
           substantially because LBB-Kaiserslautern did not properly monitor
           the contractor's work. Because of this, the Air Force is facing
           potentially millions of dollars in additional costs to replace the
           poorly built roof.

           o Unreliable construction schedule and cost estimates:
           LBB-Kaiserslautern is responsible for providing the Air Force with
           up-to-date detailed construction schedules and cost estimates.
           According to Air Force officials, the latest official construction
           schedule provided by LBB-Kaiserslautern was in September 2006 and
           showed a completion date of March 2007 for the visiting quarters
           and April 2007 for the mall portion of the KMCC. During our visit
           in May 2007, LBB-Kaiserslautern officials stated that they do not
           have a current construction schedule or completion date
           established for the project. Despite the lack of an estimated
           completion date, LBB-Kaiserslautern officials had developed an
           estimate of the total KMCC cost at completion. This estimate
           currently projects that costs will be higher than original
           estimates of approximately $150 million. According to
           LBB-Kaiserslautern officials, this cost estimate does not include
           certain expected costs, which we consider significant. For
           example, as stated earlier, the roof on the facility is
           continually leaking and likely will need to be replaced. Air Force
           and AAFES officials estimate that the cost to replace the roof
           will be in the millions of dollars. In addition to roof estimates,
           there are additional costs associated with hindrance claims that
           were not included in the cost estimate. In fact, in May of 2007,
           LBB-Kaiserslautern officials stated they received a single claim
           for several million dollars, which has not been substantiated,
           from just one of the more than 30 contractors. Finally,
           LBB-Kaiserslautern cost estimates do not include adjustments for
           future cost increases on existing contracts. Although past
           experience on this project has shown that many of the contract
           amounts have increased due to change orders or quantity increases,
           LBB-Kaiserslautern did not include any estimates for these
           expected future increases.

12During normal construction work done under the ABG-75 agreement,
contractors perform work as specified in the original contract. When
changes to the original contract are necessary, U.S. forces are to be
given advance notice of any change and must give their approval before
work can begin. This notice and approval process would be accomplished by
LBB-Kaiserslautern through development of a contract change order document
which specifies the details of the change, cost, and other related
information. Once documents are approved by the U.S. forces, work can be
initiated.

           Air Force Did Not Appropriately Minimize Risks

           The Air Force did not incorporate sufficient controls to minimize
           the significant project risks involved with the KMCC. Control
           deficiencies included inadequate staffing, poor policies, and a
           lack of effective control processes in place. By not utilizing
           controls that were available to them through the ABG-75 agreement,
           the Air Force has given up any leverage it had on keeping project
           costs within budget. These control weaknesses contributed to
           schedule and performance problems without a sufficient reaction
           from the Air Force. In addition, after problems were identified,
           the Air Force did not take appropriate corrective actions.
			  
			    Air Force Lacked Necessary Staffing and Expertise for Adequate
				 Oversight

           Air Force officials did not have adequate staff with appropriate
           expertise needed to oversee the KMCC. In 2002, the Air Force
           elected not to use the USACE as the servicing agent for the KMCC
           project. According to the Air Force officials, they were not
           required to use the USACE on this project because only a small
           percentage of the KMCC funds were based on appropriated military
           construction funding. However, in foregoing USACE oversight, the
           Air Force did not establish adequate staffing or contracting and
           construction management expertise needed for a project as complex
           as the KMCC. According to Air Force officials, at the inception of
           the project, there were approximately eight full time personnel
           assigned to the KMCC from the Air Force. In addition, the limited
           number of Air Force staff did not have adequate expertise in the
           areas of contracting or construction management. As of May 2007,
           no contracting officers or certifying officials have been assigned
           to the KMCC. 13 These experts are trained and certified to
           obligate and spend funds on behalf of the U.S. government and
           would typically be found in any military construction-funded
           project.14

           As a result of the lack of staffing with adequate contracting and
           construction management expertise, many invoices came into the Air
           Force office, overwhelming the ability of the staff to adequately
           review invoices prior to payment. According to Air Force
           officials, no invoices were disputed prior to September 2006.
           However, after September 2006 when significant problems with the
           KMCC were recognized, some staffing improvements were made. For
           example, the Air Force increased the number of personnel to
           approximately 17 full time personnel currently on site, because it
           became apparent that they did not have sufficient personnel to
           conduct adequate reviews of invoices. Since the increase in staff,
           the Air Force has been able to review invoices more thoroughly,
           and according to Air Force officials, the percentage of recent
           invoices disputed increased to 75 percent.
			  
			    Air Force Policies and Control Procedures were Inadequate

           The Air Force did not have adequate policies and control
           procedures in place for the management of the KMCC. At the
           beginning of the project, project management officers lacked a
           standard operating procedure to follow. According to Air Force
           officials, the only written process in place was a simple one-page
           process flow chart to delineate how the entire process was
           supposed to work. Since the recognition of numerous problems
           associated with the KMCC, the Air Force has instituted additional
           control procedures, such as increased invoice reviews, but has not
           formalized those procedures into a written operating procedure.

           We were unable to determine if there were any specific procedures
           in place prior to September 2006. However, the project schedule
           slippage and lack of disputes of invoices by the Air Force
           indicates that the controls in place were not fully effective.
           When we asked the Air Force officials about control procedures in
           place prior to September 2006, several officials, who were working
           on the project during the time in question, stated they were
           unable to answer questions based on advice from their legal
           counsel. The same officials who declined to answer questions
           stated that the project was under investigation by AFOSI. In
           addition, a senior Air Force civilian on the project prior to
           September 2006 had resigned and was therefore unable to answer
           questions. Without written procedures or explanations from Air
           Force staff, we could not determine what controls, if any, existed
           prior to September 2006.

13For example, a German national employed by the Air Force has been
obligating and expensing millions of dollars spent on the KMCC. This
official is neither a contracting officer nor a certifying official but
rather what the Air Force calls their ABG-75 specialist.

14According to a USACE official, the USACE makes it a standard practice to
have a contracting officer involved in all of their projects.

           In September 2006, Air Force officials recognized that significant
           problems faced the project. One problem specifically recognized
           was that numerous payments were made on invoices for work that had
           been billed on the 400 contract changes, which lacked
           documentation and had not been previously approved by the Air
           Force. Upon this recognition, the Air Force attempted to institute
           controls going forward. For example, the Air Force instituted a
           closer review of invoices to identify items that were billed but
           were not approved by the United States through change orders.
           However, under pressure to keep the project moving forward to
           completion, the Air Force subsequently relinquished much of this
           control by expediting the payment of invoices upon receipt from
           LBB-Kaiserslautern including charges for unapproved work. Examples
           of the relaxing of these controls include:

           o paying invoices submitted after September 2006 on work billed to
           the Air Force related to the 400 contract changes which had not
           been submitted by LBB-Kaiserslautern, and

           o approving invoices even though the line item quantities greatly
           exceed contracted amounts.

           The Air Force stated the decision to relax the controls was made
           so that construction proceeded as expeditiously as possible on the
           KMCC.15 Despite the removal of these controls, the number of
           workers on-site has still decreased significantly. In addition,
           Air Force officials stated that they viewed these payments on
           unapproved work as "partial payments" of expenses, and that any
           disputes in payments could be recouped upon project completion.
           However, we have reported in the past that such "pay and chase"
           strategies are not effective and increase risks substantially to
           recover the unapproved amounts. The Air Force was unable to
           provide any examples were the United States had successfully
           recouped overpayments in German courts.
			  
15The Air Force continues to look for ways to relax controls to expedite
payment. For example, the Air Force is studying whether to approve change
orders based on contractor's initial offer instead of negotiated amount,
as is typically required.

           KMCC Problems May Adversely Affect Military Members and Future
			  Construction Projects

           The substantial schedule and cost overruns of the KMCC may affect
           military personnel and have major implications for future projects
           in Germany. The effects of these cost increases are likely to be
           shouldered by our men and women in the military. AAFES, the
           largest financial contributor to the KMCC, has stated that cost
           overruns have reduced the return of investment (e.g., the amount
           of profit they plan to receive from the project). As a result,
           AAFES and Air Force Services Agency funding of morale, welfare,
           and recreational activities for U.S. military members may be
           reduced. In addition, the escalation in costs may also affect the
           ability of AAFES and the Air Force Services Agency to finance
           future capital projects from its nonappropriated funds. Further,
           because of the delay in the completion of the visiting quarters
           portion of the KMCC, service members on travel to other locations,
           including Iraq and Afghanistan, may have to stay off-base. In
           addition to the inconvenience that this places on service members,
           the Department of Defense--and thus taxpayers--must fund the
           additional cost of any required temporary lodging off-base, which
           the Air Force estimates to be approximately $10,000 per day or
           $300,000 per month.

           In addition to the effect on military members and their families,
           the current Air Force project management weaknesses may have
           implications for future Air Force construction in Germany. The Air
           Force planned construction within the Federal Republic of Germany
           for the next 5 fiscal years totals more than $400 million. These
           construction projects include small operations and maintenance
           projects (such as school renovations and road repairs) and major
           military construction projects (such as a $50 million clinic and a
           $50 million base exchange and commissary). Absent better Air Force
           controls, these projects may experience the same types of
           heightened risks associated with KMCC.
			  
			  Concluding Comments

           Although one of the major problems with KMCC related to
           ineffective project management by LBB-Kaiserslautern, the Air
           Force did not effectively institute oversight to mitigate the
           high-risk nature of the entire project. By the time the Air Force
           started making an attempt at oversight, the project was already
           several months past the original construction deadline of early
           2006. With mounting problems including contractors walking off the
           job, the Air Force faces the dilemma of instituting controls far
           too late in the process and further extending the completion of
           the project versus paying whatever it costs to get the job done as
           quickly as possible. The likely substantial cost overruns and
           potential years of schedule slippage will negatively affect
           morale, welfare, and recreation programs for DOD service members,
           civilians, and their families for years. The Air Force needs to
           seriously consider substantial changes in oversight management
           capabilities for the hundreds of millions of dollars of planned
           construction projects planned in Germany over the next several
           years.

           Mr. Chairman and Members of the committee, this concludes our
           statement. We would be pleased to answer any questions that you or
           other members of the committee may have at this time.
			  
			  GAO Contacts

           For further information about this testimony, please contact
           Gregory Kutz at (202) 512-7455 or [email protected] or Terrell Dorn at
           (202) 512-6293 or [16][email protected] . Contacts points for our
           Offices of Congressional Relations and Public Affairs may be found
           on the last page of this testimony.
			  
			  Appendix I: Scope and Methodology

           To assess the current problems facing Kaiserslautern Military
           Community Center (KMCC), we interviewed agency officials from the
           Air Force at Ramstein Air Force Base in Germany. We physically
           inspected the KMCC facility with an Air Force project manager and
           documented construction problems. We also reviewed financial
           records and statements in the form of contracts, change orders,
           and invoices to the extent that they were available.

           To examine the effect the Auftragsbaugrundsaetze 1975 (ABG-75) had
           on the management of the KMCC project, we reviewed the ABG-75
           agreement, which outlines construction requirements for U.S.
           forces stationed in Germany. In addition, we conducted interviews
           with officials from the Air Force, Landesbetrieb Liegenschafts-
           und Baubetreuung (LBB) the German government construction agency,
           and the U.S. Army Corps of Engineers.

           In order to determine the management weaknesses of LBB and the Air
           Force, we interviewed officials from both organizations, conducted
           interviews with other organizations affected by the KMCC project
           including the Air Force Office of Special Investigations (AFOSI),
           Air Force Audit Agency, Air Force Services Agency, and the Army
           and Air Force Exchange Service. We also reviewed applicable
           Department of Defense Financial Management Regulations as well as
           the National Fire Protection Association standards.

           To assess the effect that control weaknesses found in the KMCC
           project could have on future the Air Force projects in Germany, we
           obtained information from the Air Force on future construction
           plans in Germany. We also interviewed Air Force officials to
           determine what changes in processes had been made that would
           affect future construction projects.

           We performed our audit work from May 2007 through June 2007. Audit
           work was conducted in accordance with generally accepted
           government auditing standards.
			  
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[23]www.gao.gov/cgi-bin/getrpt?GAO-07-1039T .

To view the full product, including the scope
and methodology, click on the link above.

For more information, contact Gregory Kutz at (202) 512-7455 or
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Highlights of [24]GAO-07-1039T , a testimony before the Committee on
Oversight and Government Reform, House of Representatives

June 28, 2007

MILITARY CONSTRUCTION

Observations on Mismanagement of the Kaiserslautern Military Community
Center

According to the Air Force, the Kaiserslautern Military Community Center
(KMCC), an over 800,000 square-foot facility, is currently the Department
of Defense's largest single-facility project under construction. It is
intended to provide lodging, dining, shopping, and entertainment for
thousands of U.S. military and civilian personnel and their families in
the Kaiserslautern, Germany, area. Initial costs for the KMCC were
estimated at about $150 million, with funding coming from a variety of
appropriated and nonappropriated fund sources. The construction for the
project, which began in late 2003, was originally scheduled to be
completed in early 2006.

This testimony discusses GAO findings to date related to the KMCC. The
testimony describes (1) current problems facing the KMCC, (2) causes for
identified problems, and (3) the effect of problems identified and their
implications for future projects in Germany.

To address our objectives, we interviewed officials from the U.S. Air
Force, Army and Air Force Exchange Service, U.S. Army Corps of Engineers,
and German government. We also conducted a site visit and reviewed
relevant KMCC documents. We plan to continue our work and make
recommendations to the Air Force as appropriate.

The KMCC project has encounteredcost, schedule, and performance problems.
Currently neither Landesbetrieb Liegenschafts- und baubetreuung's office
in Kaiserslautern (LBB-Kaiserslautern), the German government construction
agency in charge of the project, nor the Air Force have a reliable
estimated completion date or final cost for the project.

Problems facing KMCC include construction flaws, vandalism of property,
repeated work stoppages and slowdowns by contractors, and ongoing criminal
investigations. Because of financial problems facing the project, the
number of workers on-site has dwindled from several hundred to less than
50, which will likely further delay completion of the project. In
addition, the KMCC's multimillion dollar "green" roof is experiencing
water leaks, and will likely require the Air Force to spend millions of
dollars for its replacement. Below is a picture of damage caused to the
building interior from the roof leak.

The KMCC faced a high level of risk from its inception, which was not
effectively mitigated by the Air Force. Increased risks included an
overseas project controlled by LBB-Kaiserslautern with financial risks
borne by the Air Force and its funding partners. Unfortunately,
LBB-Kaiserslautern did not effectively manage the design and construction
of the project. Rather than increase controls to mitigate project risks,
the Air Force provided minimal oversight and in some cases circumvented
controls to expedite the invoice payment process in an attempt to complete
the project.

Because this project is funded primarily with nonappropriated funds, the
likely substantial cost increases in the project will be borne by military
servicemembers, civilians and their families. Further, absent better Air
Force controls, future projects may experience the same types of
heightened risks associated with KMCC.

References

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