oversight

General Services Administration: Factors Affecting the Construction and Operating Costs of Federal Buildings

Published by the Government Accountability Office on 2003-04-02.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                             United States General Accounting Office

GAO                          Testimony
                             Before the Subcommittee on
                             Transportation, Treasury, and Related
                             Agencies, Committee on Appropriations
                             House of Representatives
For Release on Delivery
Expected at 10:00 a.m. EST
Wednesday, April 2, 2003     GENERAL SERVICES
                             ADMINISTRATION
                             Factors Affecting the
                             Construction and Operating
                             Costs of Federal Buildings
                             Statement of Bernard L. Ungar, Director,
                             Physical Infrastructure Issues




GAO-03-609T
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                                                  April 2003


                                                  GENERAL SERVICES ADMINISTRATION

                                                  Factors Affecting the Construction and
Highlights of GAO-03-609T, a testimony
for the Subcommittee on Transportation,           Operating Costs of Federal Buildings
Treasury, and Related Agencies, House
Committee on Appropriations




The General Services                              Several factors have affected GSA’s construction, leasing, and operating
Administration (GSA) has                          costs for federal buildings. For example, new security requirements for
responsibility for more than 8,000                federal buildings developed after the 1995 bombing of a federal building in
owned and leased buildings                        Oklahoma City and the September 11, 2001, terrorist attacks have led to
nationwide, together encompassing                 increased costs for such measures as strengthening the ability of buildings to
about 338 million square feet of
space. Understanding construction
                                                  sustain a bomb blast and limiting building access. According to a GSA
and operating costs for these                     official, security costs for courthouses have increased from about $8 a
buildings is important, as the                    square foot to about $24 a square foot. Another factor affecting costs is
increased federal budget deficit has              budget scorekeeping requirements meant to ensure full recognition of the
led to intensified competition for                government’s financial commitments. The scorekeeping requirement that
federal resources and recent events               GSA must include in its budget the entire cost of constructing a building in
have highlighted security needs.                  the year the government commits the resources has led GSA to lease space
                                                  rather than construct it, even though leasing often results in a higher overall
GAO examined (1) factors that                     cost to the taxpayer. For example, a GSA present value cost analysis
have affected GSA’s construction,                 estimated that the recently leased U.S. Patent and Trademark Office
leasing, and operating costs and                  complex shown below, currently being constructed in Alexandria, Virginia,
(2) our designation of federal real
property as a high-risk area.
                                                  by a private company, cost taxpayers about $48 million more to lease over
                                                  the 20-year lease period than it would have cost to purchase it.

                                                  In January 2003, GAO designated federal real property as a high-risk area, in
                                                  part because of such cost factors and also because many property assets are
                                                  no longer effectively aligned with or responsive to agencies’ changing
                                                  missions and are no longer needed. Furthermore, many assets are in an
                                                  alarming state of deterioration that may cost tens of billions of dollars to
                                                  address. GAO believes there is a need for a comprehensive and integrated
                                                  transformation strategy for federal real property.

                                                  The U.S. Patent and Trademark Office Complex in Alexandria, Virginia, February 2003




Www.gao.gov/cgi-bin/getrpt?GAO-03-609T.

To view the full testimony, including the scope
and methodology, click on the link above.
For more information, contact Bernard L.
Ungar at (202) 512-2834 or ungarb@gao.gov.
Mr. Chairman and Members of the Subcommittee:

We welcome the opportunity today to discuss factors affecting the costs of
constructing, leasing, and operating General Services Administration
(GSA) owned and leased buildings. Reports of rising costs in these areas
are of particular concern in today’s environment, as the increased federal
budget deficit has led to intensified competition for federal resources. At
the same time, one of the main cost factors facing GSA is security.
Physical security for federal office buildings has been a governmentwide
concern since the 1995 bombing of the Alfred P. Murrah Federal Building
in Oklahoma City, Oklahoma. This concern has become more compelling
in the wake of the terrorist attacks of September 11, 2001, and the anthrax
incidents that closely followed it. To assist GSA in determining how to
best prioritize security enhancements while also addressing other federal
building needs, we believe it is helpful to consider factors affecting the
costs of meeting these needs.

GSA has responsibility for more than 8,000 owned and leased buildings
nationwide, together encompassing about 338 million square feet of space.
GSA’s owned and leased space, which includes office buildings,
courthouses, border stations, and other types of facilities, makes up about
6 percent of all federally owned space worldwide and 39 percent of all
federally leased space worldwide. Between fiscal year 1995 and fiscal year
2002, GSA’s average rental rate for leased space increased 4.1 percent in
constant dollars, to $20 per square foot, and GSA’s building operations
obligations increased by 31.3 percent in constant dollars, to about $1.9
billion. In fiscal year 2002, GSA had total estimated project costs of about
$2.6 billion for new construction, about $690 million for major
renovations, and more than $435 million for design of repair and
alterations. It has obligated about $3.1 billion for the rental of space, which
is a 24 percent increase in constant dollars since fiscal year 1995. Today, in
this context of rising costs and limited funds, we would like to discuss (1)
factors that have affected GSA’s construction, leasing, and operating costs
and (2) our designation of federal real property as a high-risk area.

My statement today is based largely on our past work on constructing,
operating, leasing, and securing federally owned or leased buildings. In
certain instances, we obtained updated information and opinions from




Page 1                                                            GAO-03-609T
    GSA officials. We also reviewed a GSA contractor’s March 2002 report on
    courthouse construction costs. 1

    Summary

•   Several factors have affected GSA’s construction, leasing, and operating
    costs for federal buildings. Two factors we recently reported on are
    increased security requirements and budget scorekeeping requirements
    meant to ensure full recognition in the budget of the government’s
    commitments.2 First, new security requirements for federal buildings
    developed in the wake of the 1995 bombing of the Alfred P. Murrah
    Federal Building in Oklahoma City and the September 11, 2001, terrorist
    attacks have resulted in increased building costs for such measures as
    strengthening the ability of buildings to sustain a bomb blast and limiting
    access to parking and building areas through such means as increasing the
    number of guards. For example, according to a GSA official, security costs
    for courthouses have increased from about $8 a square foot to about $24 a
    square foot. Second, to ensure budget recognition of the government’s
    commitments, budget scorekeeping requires that GSA include in the
    budget the entire cost of constructing a building in the year that the
    government commits the resources. This has led GSA to sometimes use
    leasing over construction, even though leasing often results in a higher
    overall cost to the taxpayer. For example, a GSA present value cost
    analysis estimated that the recently leased U.S. Patent and Trademark
    Office complex, now under construction in Alexandria, Virginia, cost
    taxpayers about $48 million more to lease than it would have cost to
    construct it. The choice of geographic location has also affected GSA’s
    building costs, as have federal mandates that require measures such as the
    payment of specific minimum wages on government construction projects
    and energy conservation. Still other factors that have affected federal
    building costs include GSA’s failure to adequately maintain buildings, the
    choice of building finishes, contract modifications, and inflation.

•   In January 2003, we added federal real property to our high-risk list. We
    did this, in part, due to the issues affecting the cost of federal buildings
    discussed in this testimony, such as the challenges the federal government


    1
     Kilpatrick Stockton, Studley, DPR, Gensler, US Courthouse Construction Cost
    Comparison Study (Mar. 12, 2002, revised).
    2
     U.S. General Accounting Office, Building Security: Security Responsibilities for
    Federally Owned and Leased Facilities, GAO-03-8 (Washington, D.C.: Oct. 31, 2002);
    Budget Scoring: Budget Scoring Affects Some Lease Terms, but Full Extent Is Uncertain,
    GAO-01-929 (Washington, D.C.: Aug. 31, 2001).



    Page 2                                                                   GAO-03-609T
                             faces in protecting its property, employees, and those who visit or use
                             federal facilities. In adding this issue to our high-risk list, we also
                             recognized that the federal government owns much vacant or
                             underutilized property that it must pay to maintain, operate, and/or secure.
                             To the extent that the federal government can rationalize its inventory of
                             real property and retain only what it needs, it can save money and focus its
                             efforts and limited resources on operating, maintaining, and securing only
                             those facilities that are truly needed by the government. Furthermore,
                             many assets are in an alarming state of deterioration; agencies have
                             estimated restoration and repair needs to be in the tens of billions of
                             dollars. In our high-risk report issued in January 2003,3 we stated that there
                             is a need for a comprehensive and integrated transformation strategy for
                             federal real property, and that an independent commission or
                             governmentwide task force may be needed to develop this strategy.
                             Realigning the government’s real property assets with agency missions and
                             taking into account the requirements of the future federal role and
                             workplace will be critical to improving the government’s performance and
                             ensuring accountability within expected resource limits.


                             In managing the costs of constructing, leasing, and operating federal
Security, Budget             buildings, GSA has faced pressures in a number of areas in recent years.
Scorekeeping                 Many factors driving costs, such as security requirements, have tended to
                             increase costs for construction, leasing, and operations. In addition,
Requirements, and            budget scorekeeping requirements have resulted in pressure to lease
Other Factors Have           rather than construct, when in many cases leasing is more expensive over
                             the long term. Another factor—implementing a federal mandate
Affected Federal             encouraging environmentally sound construction and renovation
Building Costs in            techniques—may result in higher initial construction costs but lead to
Recent Years                 lower operating costs.


Security Requirements        As a result of the Oklahoma City bombing in 1995, President Clinton
Have Raised Costs of         directed the Department of Justice to assess the vulnerability of federal
Constructing, Leasing, and   office buildings to attack, which resulted in a 1995 report entitled
                             Vulnerability Assessments of Federal Facilities. The study designated
Operating Federal            five levels of security needs into which federal office buildings could be
Buildings                    categorized, depending on the number of federal employees housed in the
                             facility and the responsibilities of the agency; identified minimum


                             3
                              U.S. General Accounting Office, High-Risk Series: Federal Real Property, GAO-03-122
                             (Washington, D.C.: January 2003).



                             Page 3                                                                    GAO-03-609T
standards for each of the five security levels; and recommended the
establishment of the Interagency Security Committee (ISC) to provide a
permanent body to address continuing governmentwide security concerns.

In May 2001, ISC issued security design criteria for new federal office
buildings and major modernization projects, and in 2002 issued draft
security standards for leased space. 4 Both of these take into consideration
the five levels of security needs, recognizing that some federal facilities
need more protection than others. Overall, ISC’s security design criteria
and leasing security standards are designed to strengthen the ability of
buildings to sustain a bomb blast or chemical attack as well as reduce the
likelihood of such attacks through measures to better control access to
parking and work areas. Construction measures in ISC’s design criteria
include items such as providing glazing protection for windows,
establishing distances that buildings should be set back from the street,
controlling vehicular access to the buildings, and locating air intakes. ISC’s
draft security standards for leased space require that GSA incorporate
security operating standards into all future leases and in existing locations
on a case-by case basis, and include similar measures as its construction
standards, where relevant, such as controlling vehicular access to the
building. We have not reviewed the implementation of the ISC security
design criteria.

Although we have not comprehensively evaluated how these changes in
security requirements have affected GSA’s costs, we have gathered some
examples of rising security costs in recent years. For example, according
to a GSA official, security costs for courthouses have risen from about $8 a
square foot to about $24 a square foot. Security requirements also have led
GSA to look for larger sites for courthouses. According to a GSA official,
in some cases, GSA is obtaining two separate but collocated urban sites on
which to construct a courthouse and may need to close a street between
the two sites to construct the building. In these circumstances, GSA may
need to pay to move utilities that are in the street between the two sites.
Both the increased size of the site and moving utilities located in the street
will add to construction costs. A GSA official also stated that the estimate
to renovate GSA’s headquarters has risen from about $80 million to $120


4
  Interagency Security Committee, ISC Security Design Criteria for New Federal Office
Buildings and Major Modernization Projects (May 28, 2001). These criteria apply to new
construction of general purpose office buildings and new or leased-construction of
courthouses occupied by federal employees in the United States and not under the
jurisdiction and/or control of the Department of Defense.



Page 4                                                                   GAO-03-609T
    million, mostly due to meeting security needs. Similarly, in August 2001,
    we reported that the additional cost of security features for the Security
    and Exchange Commission’s (SEC) new building currently under
    construction in Washington, D.C., is expected to be $19 million.5
    Enhancing blast protection for the Department of Transportation building
    in Washington, D.C., was estimated at about $8 million in 2001.

    Regarding the effects of ISC security leasing standards on costs, at one of
    four security roundtables that was held by an ISC team to discuss ISC’s
    proposed security leasing standards with the private sector, the potential
    cost of security improvements was estimated at $1.50 to $2.50 per square
    foot, excluding heating, ventilating, and air conditioning. In extreme cases
    in which there are an unusually high number of entrances to protect, it
    could be as high as $9 a square foot. Using the estimate of $1.50 per square
    foot and the estimated 155 million square feet of leased space GSA had as
    of fiscal year 2002, GSA leasing costs could increase by a minimum of $232
    million dollars a year because of security requirements, assuming none of
    the improvements have already been made.

    Building operations costs have also risen due to security requirements.
    GSA’s building operations obligations have increased by 31.3 percent in
    2002 constant dollars since fiscal year 1995. Forty-five percent of this
    increase is due to the increase in security obligations, which have risen by
    231 percent in 2002 constant dollars since fiscal year 1995 to about $397
    million in fiscal year 2002.

    One concern for which improving security is likely to affect construction,
    leasing, and operating costs is upgrading existing mailrooms in federal
    buildings. ISC guidelines addressing mailroom security were written prior
    to anthrax being sent through the mail to several federal buildings in the
    fall of 2001 and focused on securing mailrooms from bomb blasts rather
    than contamination. However, in the wake of the anthrax incidents, some
    agencies have begun screening and testing their incoming mail for
    hazardous material. Agencies have initiated a variety of efforts in this area,
    including, among other things,

•   retrofitting existing mailrooms with air handling and ventilation systems
    that are independent of the systems supporting the rest of the facility;
•   moving mailroom operations off-site;


    5
        GAO-03-8.



    Page 5                                                            GAO-03-609T
•   contracting with private companies to screen, test, and process incoming
    mail;
•   training mailroom employees on the proper procedures for handling
    potentially hazardous mail and providing these employees with protective
    clothing and gear;
•   purchasing equipment to screen and test mail for hazardous material; and
•   modifying existing security contracts to require that security personnel
    X-ray incoming mail.

    These and other measures to safeguard the mail are adding to the cost of
    security for federal agencies in the Washington, D.C., metropolitan area. In
    addition, GSA issued mail management guidelines in June 2002, which
    brought into question whether some of the actions taken by federal
    agencies to safeguard their mail were necessary, particularly in light of the
    U.S. Postal Service’s efforts in this regard, which include irradiating
    certain mail destined for federal agencies located in the Washington
    metropolitan area. Because of the cost associated with safeguarding the
    mail and the uncertainty over the need for some of these safeguards, at the
    request of the Senate Committee on Governmental Affairs, we have
    initiated a review of agencies’ mail security efforts and associated costs.

    In October 2002, we issued a report that identified security-related costs
    being incurred by various agencies.6 While this information gives a picture
    of the security costs, we did not determine what types of costs are
    included. Some examples of recent security costs that agencies reported
    to us include the following:

•   The Federal Protective Service (FPS) obligated approximately $1.3 billion
    for security for fiscal years 1996 through 2001. Its fiscal year 2002 budget
    was $362.1 million, of which about $207 million was for contract guard
    services. Additionally, in fiscal year 2002, GSA was slated to spend over
    $300 million more from its reimbursable program7 for contract guard
    services, according to a FPS official. This total of over $500 million for
    contract guard services was to fund approximately 7,300 contract guards.
•   In fiscal years 1999 through 2001, the Federal Judiciary paid $71.6 million
    for security through its rent payments to GSA. The Federal Judiciary and
    the U.S. Marshals Service (USMS) also obligated about $577.1 million from


    6
        GAO-03-8.
    7
     The reimbursable program provides security funding from the rents paid by agencies
    assigned space in GSA owned or leased buildings; the rent includes a building-specific
    charge for contract guards.



    Page 6                                                                       GAO-03-609T
                          the Court Security Appropriation. For fiscal year 2002, the Federal
                          Judiciary expected to pay $36.7 million for security through its rent
                          payments to GSA. Also, in fiscal year 2002, the Federal Judiciary received
                          an appropriation and emergency supplemental for court security officers,
                          court security inspectors, and security systems and equipment and
                          transferred $280.5 million to USMS to administer the Judicial Security
                          Facilities Program. Through its own appropriation, USMS also received
                          $24.1 million in funding for construction; security, including guard
                          contracts and security equipment; and furniture to handle serious security
                          deficiencies in federal courthouses related to prisoner handling and the
                          protection of judges, judicial employees, the public, and the Marshals.
                      •   For fiscal years 1996 through 2001, the Department of Education paid GSA
                          approximately $7.7 million in security-related expenses. In fiscal year 2002,
                          it expected to spend approximately $2.0 million in security-related
                          expenses, of which about $1.9 million was for guard costs.

                          The ISC security design criteria recommend that in order to control costs,
                          security budgets should be the result of a project-specific risk assessment
                          on which a budget can be based. ISC reasoned that if cost is not
                          considered early on, mitigation of one security risk might consume a
                          disproportionate amount of the budget while other security risks might
                          remain insufficiently or not addressed.

                          We also have supported the concept of risk assessment as a way to
                          determine how best to use limited funds in the context of enhancing
                          security. Specifically, we reported in a study focusing on homeland
                          security and information systems security that applying risk management
                          principles can provide a sound foundation for effective security whether
                          the assets are information, operations, people, or federal facilities. 8 We
                          identified the following five basic steps as being part of a risk management
                          process to determine security priorities and implement appropriate
                          solutions: (1) identify assets, (2) determine threats, (3) analyze
                          vulnerabilities, (4) assess risks, and (5) apply countermeasures. According
                          to GSA, the agency uses a risk management approach when considering
                          security needs for its owned and leased properties.

Budget Scorekeeping       Our work has shown that budget scorekeeping requirements affect the
                          government’s cost of acquiring space in two ways—by favoring operating
                          leases over construction and by encouraging agencies to lease space for


                          8
                           U.S. General Accounting Office, Homeland Security: A Risk Management Approach Can
                          Guide Preparedness Efforts, GAO-02-208T (Washington, D.C.: Oct. 31, 2001).



                          Page 7                                                               GAO-03-609T
shorter time periods.9 To ensure budget recognition of the government’s
commitments when they are made, budget scorekeeping requires GSA to
include the total cost of a building construction project in its budget in the
year that the government commits the resources. This requirement for full
up front funding promotes discipline by requiring that the full cost of
decisions be accounted for upfront when the irrevocable decision to
commit the resources is made. Requiring up front funding for all programs
(including health, education, and human capital as well as real property)
ensures that none of them are given a relative advantage, especially when
there is no clear evidence that a shift in relative priorities would be
appropriate. However, we have previously reported that scorekeeping
requirements favor operating leases, the cost of which can be accounted
for in the budget on a yearly basis, rather than accounting for the total cost
upfront. This has led GSA to lease rather than construct space for some
new acquisitions needs. This practice has resulted in increasing the cost of
space to the government and taxpayers because the cost of leasing space
for which the government has a long-term need is usually greater than the
cost of purchasing that space through construction.

In March 1999, we reported that our review of the economic analyses of 24
lease and construction acquisitions by GSA for approval in the budget
cycles for fiscal years 1994 through 1999 showed that, given certain
assumptions, construction was estimated as less costly than leasing in all
but one case.10 Analysis of 15 of these acquisitions showed that
construction had a cost advantage over leasing in present value terms
ranging from $2.9 million to $63 million. The present value analysis of the
construction of a hypothetical 100,000 square foot building in 11 locations
throughout the country showed that construction was consistently more
cost-effective than leasing, with the differences ranging from $0.3 million
to $14 million. The new Patent and Trademark Office complex currently
under construction in Alexandria, Virginia, is one example of an
acquisition that cost taxpayers more because GSA leased the property
rather than constructing it. A GSA present value cost analysis estimated



9
  Budget scorekeeping is the process of estimating the budgetary effects of pending and
enacted legislation and comparing them with limits set in the budget resolution or
legislation. Scorekeeping tracks data such as budget authority, receipts, outlays, the
surplus or deficit, and the public debt limit.
10
 U.S. General Accounting Office, General Services Administration: Comparison of Space
Acquisition Alternatives—Leasing to Lease Purchase and Leasing to Construction,
GAO/GGD-99-49R (Washington, D.C.: Mar. 12, 1999).



Page 8                                                                      GAO-03-609T
that the recently leased U.S. Patent and Trademark Office complex cost
taxpayers about $48 million more to lease than construct.

The budget scorekeeping requirements for leases can also affect the cost
of leasing federal properties by encouraging GSA or other agencies to
lease space for shorter time periods. Budget scorekeeping requirements
treat different types of leases differently. The Office of Management and
Budget has established six criteria for defining an operating lease.11 A
capital lease is any lease other than a lease-purchase that does not meet
the criteria of an operating lease. Budget scorekeeping requires that for a
capital lease, the net present value of the entire cost of the lease be
included in the budget for the year the lease is approved, while for an
operating lease, only each year’s cost must be included in that year’s
budget. We reported on this issue in August 2001.12 We found that at least
13 leases or lease project13 terms—the length of the lease—were affected
by budget scoring, and that others may have been similarly affected. For
example, the term of the lease for the SEC building was reduced from 20
years to 14 years, and the lease for the new Department of Transportation
headquarters building was reduced from 20 years to 15 years; the changes
in terms changed the leases from capital leases to operating leases.
Although we could not determine the overall monetary impact of the
budget scoring requirements for leases on lease terms, GSA officials
agreed that a 20-year lease usually has a lower annual cost than a 10- or 15-
year lease. Furthermore, in the report, we cited a private-industry official
who had testified before Congress that a 20-year lease term could have
annual rates as much as 33 percent less expensive than a 10-year lease and
13 percent less expensive than a 15-year lease. We found that the lease




11
  The Office of Management and Budget defines capital and operating leases in Circular-
No. A-11, appendix B. A capital lease means any lease other than a lease-purchase that does
not meet the criteria of an operating lease. An operating lease must meet six criteria: 1)
ownership of the asset remains with the lessor during the term of the lease and is not
transferred to the government at or shortly after the end of the lease term; 2) the lease does
not contain a bargain-price purchase option; 3) the term does not exceed 75 percent of the
estimated economic life of the asset; 4) the present value of the minimum lease payments
over the life of the lease does not exceed 90 percent of the fair market value of the asset at
the beginning of the lease term; 5) the asset is a general purpose asset rather than being for
a special purpose of the Government and is not built to the unique specification of the
Government as lessee; and 6) there is a private sector market for the asset.
12
     GAO-01-929.
13
     A lease project is a project on which GSA is trying to obtain a lease.



Page 9                                                                         GAO-03-609T
                         terms on these 13 cases were shortened because of the budget
                         scorekeeping requirements for leases.

                         Decision-makers have struggled with this matter since the scoring
                         requirements were established and the tendency for agencies to choose
                         operating leases instead of ownership became apparent. We have
                         suggested the alternative of scoring all operating leases up front on the
                         basis of the underlying time requirement for the space so that all options
                         are treated equally.14 Although this could be viable, there would be
                         implementation challenges if this were pursued, including the need to
                         evaluate the validity of agencies’ stated space requirements. Another
                         option, which was recommended by the President’s Commission to Study
                         Capital Budgeting in 1999 and discussed by us,15 would be to allow
                         agencies to establish capital acquisition funds to pursue ownership where
                         it is advantageous from an economic perspective. Budget scorekeeping
                         and its effects on the acquisition of space is a complex issue that will not
                         be easy to effectively resolve. Nonetheless, as we reported in January
                         2003, it has a significant unintended effect on costs and needs to be
                         addressed.16


Geographic Location of   Three aspects of where a building is located can affect its costs. The first
Buildings                aspect is the part of the United States in which the building is located. For
                         example, in a 1999 report, we reported that, at that time, to build a
                         hypothetical 100,000 square foot building would cost a high of $63.2
                         million in New York City, New York; $37.9 million in Boston,
                         Massachusetts; and a low of $32.7 million in Denver, Colorado. 17 The
                         second aspect of location that can affect building costs is whether the
                         building site is in a central business area or a rural or noncentral business
                         area. Currently, the Rural Development Act directs federal agencies to give
                         first priority to the location of new offices and other facilities in rural
                         areas, and Executive Order 12072 specifies that when the agency mission



                         14
                           U.S. General Accounting Office, Supporting Congressional Oversight: Budgetary
                         Implications of Selected GAO Work for Fiscal Year 2003, GAO-02-576 (Washington, D.C.:
                         Apr. 26, 2002).
                         15
                           U.S. General Accounting Office, Accrual Budgeting: Experiences of Other Nations and
                         Implications for the United States, GAO/AIMD-00-57 (Washington, D.C.: Feb 18, 2000).
                         16
                              GAO-03-122.
                         17
                              GAO/GGD-99-49R.



                         Page 10                                                                  GAO-03-609T
and program requirements call for facilities to be located in urban areas,
agencies must give first consideration to locating in central business areas.

In a July 2001 report, we noted that federal agencies subject to the Rural
Development Act continue to locate for the most part in higher cost urban
areas. 18 Most of the agencies included in our review said that they located
their facilities on the basis of mission needs, although agencies did have
flexibility in some cases. We reported that 8 of the 13 cabinet agencies we
surveyed had no formal Rural Development Act siting policy, and there
was little evidence that agencies considered the act’s requirement when
siting new federal facilities. In contrast, we reported that private-sector
companies chose rural areas to take advantage of such factors as lower
real estate and labor costs. We did find that rural locations can result in
higher costs in some cases even though the cost of the land itself can be
cheaper. For example, according to a GSA official, rural sites for border
stations can result in increased construction costs because GSA may have
to bring in construction workers from long distances and pay them for
travel or pay for or provide local housing for the workers.

We also found that locating a building in a central business area can result
in higher lease costs than siting it in a noncentral business area;
specifically, the average cost of leasing for 11 cities was $4.03 more
expensive per square foot in the central business area than in noncentral
business areas. For example, locating in the central business area of San
Francisco can be $11.40 a square foot more expensive than locating in the
noncentral business area of that same city. However, out of the 11 cities
we reviewed, 3 had higher lease rates in their noncentral business areas.

The third aspect of location that can have a substantial effect on
construction costs is the specific site selected. In November 1995, we
testified that certain features of sites that had been selected for the
construction of federal courthouses had resulted in additional
construction-related costs that would not necessarily have been incurred
had another site been selected.19 For example:




18
  U.S. General Accounting Office, Facility Location: Agencies Should Pay More Attention
to Costs and Rural Development Act, GAO-01-805 (Washington, D.C.: July 31, 2001).
19
  U.S. General Accounting Office, Federal Courthouse Construction: More Disciplined
Approach Would Reduce Costs and Provide for Better Decisionmaking, GAO/T-GGD-96-19
(Washington, D.C.: Nov. 8, 1995).



Page 11                                                                   GAO-03-609T
                   •   a waterfront site required that the building include extensive
                       waterproofing and wind bracing and a $1.6 million pier and floating dock
                       to accommodate the Costal Zone Management Act;
                   •   an urban site, which was a small and oddly shaped parcel of land, did not
                       allow for an efficient design configuration and had contaminated soil that
                       cost $3.2 million to remove; and
                   •   another urban site, which sloped, allowed only a high-rise building, which
                       is more costly to build, and required a more costly “split-level” lobby.


Federal Mandates       Federal mandates, such as laws and executive orders, have affected the
                       construction, leasing, and operating costs of federal buildings. GSA’s
                       General Reference Guide for Real Property Policy lists the laws and
                       executive orders that impact GSA’s roles, including many that affect
                       design, construction, and leasing. In October 1999, we issued a report that
                       listed 29 federal statutes and 7 executive orders applicable to leasing.20
                       Examples of laws that affect construction and/or leasing and operations
                       include the following:

                   •   The Architectural Barriers Act of 1968 (42 U.S.C. §4151-4156) establishes
                       standards for the accessibility of federal buildings to physically disabled
                       persons.
                   •   The Davis-Bacon Act (40 U.S.C. §3142) requires the payment of minimum
                       wages for laborers and mechanics employed on government construction
                       projects. The wages are established by the Department of Labor and are
                       based on prevailing wage rates in a locality.
                   •   The Small Business Act (15 U.S.C. §631 et seq.) requires federal agencies
                       to utilize small and small disadvantaged businesses and to ensure that
                       such businesses have the maximum practical opportunity to participate as
                       subcontractors in the performance of federal contracts.
                   •   The Energy Policy and Conservation Act (42 U.S.C. §6201 et seq.) requires
                       federal agencies to implement programs that reduce energy consumption
                       in federal facilities. This includes federal leased space.

                       Examples of executive orders that may affect federal building costs
                       include the following:




                       20
                         U.S. General Accounting Office, Federal Statutes and Executive Orders Applicable to the
                       Public Buildings Service’s Leasing Program, GAO/GGD-00-27R (Washington, D.C.: Oct.
                       18, 1999)



                       Page 12                                                                    GAO-03-609T
•   Executive Order 11990—Protection of Wetlands—requires federal
    agencies to avoid causing wetlands to be filled unless there is no practical
    alternative to doing so.
•   Executive Order 12072—Federal Space Management—requires federal
    agencies to give first consideration to a centralized community business
    area when locating federal facilities.
•   Executive Order 12770—Metric Usage in Federal Programs—requires,
    with certain exceptions, that the metric system of measurement be
    implemented in all new federal design and construction projects.
•   Executive Order 12902—Energy Efficiency and Water Conservation at
    Federal Facilities—requires that appropriate consideration be given to
    building efficiencies in the design and construction process.

    In a March 2002 study prepared for GSA by a contractor concerning
    courthouse construction costs, 28 federal mandates were identified that
    had to be considered on every federal courthouse construction project.21 In
    comparing state and federal courthouse construction costs, the study
    estimated that these mandates added an average $4.04 per square foot to
    the cost of a federal courthouse. A specific example of the impact of a
    mandate is the executive order on metric use. The study showed that using
    the metric system added an estimated $0.57 per square foot to federal
    government construction costs for the projects covered in the study. The
    study points out that pipe suppliers stock standard U.S. Customary System
    sizes of pipe and have to special order corresponding metric pipe sizes,
    which usually represents an increased cost to the supplier that is passed
    on to the federal government.

    In a March 2003 testimony we discussed federal mandates relative to
    building construction that address conservation and environmental
    protection, steps GSA and other federal organizations have taken to
    implement these mandates, and obstacles agencies have faced in
    attempting to implement them.22 We said that GSA encourages agencies to
    use sustainable design approaches in federal construction and renovation
    projects. Sustainable designs are intended to result in energy efficiency
    and minimal impact on the environment. The objectives of this type of
    design are to




    21
         US Courthouse Construction Cost Comparison Study (Mar. 12, 2002, revised).
    22
     U.S. General Accounting Office, Federal Energy Management: Facility and Vehicle
    Energy Efficiency Issues, GAO-03-545T (Washington, D.C.: Mar. 12, 2003).



    Page 13                                                                    GAO-03-609T
                          •   reduce consumption of nonrenewable resources,
                          •   minimize waste and impact on the environment,
                          •   optimize site potential,
                          •   minimize nonrenewable energy consumption,
                          •   use environmentally preferable products,
                          •   protect and conserve water,
                          •   enhance indoor environmental quality, and
                          •   optimize operation and maintenance practices.

                              By improving energy efficiency, federal agencies may also reduce
                              operating costs. Federal organizations have made progress in
                              implementing these efforts. GSA and other agencies have begun using the
                              Leadership in Energy and Environmental Design Rating (LEED) system.
                              By using LEED, agencies can gauge the impact of design decisions on
                              energy efficiency and other sustainable factors. In a similar vein, the White
                              House reduced its operating costs by about $300,000 annually using
                              sustainable design. As part of the Pentagon renovation, sustainable design
                              principles are being implemented with the hope of reducing operating
                              costs by $4 million to $5 million each year.

                              Although up-front investments in sustainable design features can save
                              building operating costs and help protect the environment, agencies have
                              faced obstacles in implementing this concept. For example, initial costs of
                              sustainable design features can be more costly than other approaches.
                              GSA estimated that obtaining the second from the highest LEED rating for
                              the construction of the Department of Transportation headquarters
                              building would cost about $10 a gross square foot. Agencies have faced
                              difficulty in securing the funding needed for this approach.


Inadequate Maintenance,       Failure to adequately maintain buildings may also affect operating costs.
Construction Finishes,        In 2001, we reported that 44 buildings in GSA’s inventory each had $20
Contract Modifications,       million or more in repair and alteration backlogs.23 Many of the repair and
                              alteration needs in these buildings had a direct impact on the energy
and Inflation                 efficiency of the buildings, including aging and inefficient plumbing,
                              heating ventilation, and air conditioning systems. For example, the Dwight
                              D. Eisenhower building in Washington, D.C., had a repair and alteration
                              backlog of $216 million, which included the need to address the building’s


                              23
                                U.S. General Accounting Office, Federal Buildings: Funding Repairs and Alterations
                              Has Been a Challenge—Expanded Financing Tools Needed, GAO-01-452 (Washington,
                              D.C.: Apr. 12, 2001).



                              Page 14                                                                  GAO-03-609T
antiquated air conditioning system. GSA officials said that this system,
which uses about 250 individual window units, is outdated and not
efficient in cooling the building or conserving energy. In July 2000, we
reported estimates that the Government Printing Office could save over
$400,000 a year in energy and maintenance costs by replacing its aged air
conditioning chillers with new, more energy efficient ones and could save
$800,000 annually by upgrading its energy inefficient lighting at an
estimated cost of $1.6 million.24 The Government Printing Office expects to
have its air conditioning chillers and its lighting projects completed in
April and May 2003, respectively. Greening the Building and the Bottom
Line, a report from the Rocky Mountain Institute in cooperation with the
Department of Energy (DOE), documents the case of a lighting retrofit
that resulted in a 540 percent return on investment.

In 1995, we testified that interior construction costs, which include
interior finishes, ranged from $19 to $68 a square foot for eight courthouse
construction projects we studied.25 For example, we noted that for one
courthouse, using wood veneer paneling from floor-to-ceiling increased
costs by $5 million versus using wood wainscot paneling. Also, the choice
of exterior finish can increase cost. For example, using granite versus
precast concrete or brick will increase the construction costs. GSA and
the Administrative Office of the United States Courts established the
Independent Courts Building Program Panel to evaluate the program.

Contract modifications after the initial contract is issued also can affect
costs. In June 1994, we reported that, for GSA’s 100 new construction
contracts and 337 repair and alteration contracts that were substantially
completed between fiscal year 1988 and the first half of fiscal year 1993,
over 50 percent had cost growth that exceeded the 5 percent and 7
percent, respectively, that GSA provided as contingencies for contract
modifications.26 Our detailed case studies of 12 construction contracts for
7 major projects showed that contract changes to overcome design and
planning problems were a major contributor to contract cost growth. As



24
  U.S. General Accounting Office, Government Printing Office: Space Utilization and
Potential Opportunities for Saving on Facilities, unnumbered correspondence
(Washington, D.C.: July 24, 2000).
25
     GAO/T-GGD-96-19.
26
  U.S. General Accounting Office, General Services Administration: Better Data and
Oversight Needed to Improve Construction Management, GAO/GGD-94-145 (Washington,
D.C.: June. 27, 1994).



Page 15                                                                  GAO-03-609T
                        part of GSA’s current strategic goals, a long-range performance goal has
                        been established to reduce the cost escalation rate for new construction
                        projects to 1 percent. GSA reported that cost escalation on construction
                        projects was 2.3 percent in fiscal year 2002. Finally, inflation is a factor in
                        construction cost growth. A GSA contractor asked to report on inflation
                        rates indicated that from 1999 to 2000 the construction inflation rate in the
                        Washington, D.C., area was 7 percent due to significant labor shortages in
                        concrete, masonry, and especially drywall.


                        In January 2003, we designated federal real property as a high-risk area.27
We Have Designated      As you know, our high-risk update is provided at the start of each new
Federal Real Property   Congress in conjunction with a special series we have issued biennially
                        since January 1999, entitled the Performance and Accountability Series:
as High-Risk            Major Management Challenges and Program Risks. This effort is
                        intended to help the new Congress focus its attention on the most
                        important issues and challenges facing the federal government. In
                        designating this area high-risk, we reported that the federal real property
                        portfolio reflects an infrastructure that is based on the business model and
                        technological environment of the 1950s. Many assets are no longer
                        effectively aligned with or responsive to agencies’ changing missions and
                        are therefore no longer needed. Furthermore, many assets are in an
                        alarming state of deterioration; agencies have estimated restoration and
                        repair needs to be in the tens of billions of dollars. Compounding these
                        problems are the lack of reliable governmentwide data for strategic asset
                        management, a heavy reliance on costly leasing instead of ownership to
                        meet new space needs, and the cost and challenge of protecting these
                        assets against potential terrorism. The persistence of these problems—
                        many of which have been discussed earlier in this testimony—and various
                        obstacles that have impeded progress in resolving them led to the high-risk
                        designation.

                        The problems the government faces in this area have multibillion-dollar
                        cost implications. The cost implications are particularly evident regarding
                        excess and underutilized property and the need for the government to
                        realign these assets. For example, underutilized or excess property is
                        costly to maintain. The Department of Defense estimates that it is
                        spending $3 billion to $4 billion each year maintaining facilities that are
                        not needed. In July 1999, we reported that vacant Department of Veteran


                        27
                             GAO-03-122.



                        Page 16                                                            GAO-03-609T
Affairs (VA) space was costing as much as $35 million to maintain each
year.28 Costs associated with excess DOE facilities, primarily for security
and maintenance, exceed $70 million annually.29 It is likely that other
agencies that continue to hold excess or underutilized property are also
incurring significant costs for staff time spent managing the properties and
for maintenance, utilities, security, and other building needs. Furthermore,
in addition to day-to-day operational costs, the government is needlessly
incurring unknown opportunity costs, because these buildings and land
could be put to more cost-beneficial uses, exchanged for other needed
property, or sold to generate revenue for the government. For example, in
1998, we reported that VA could reduce expenditures by an estimated $200
million over the next 10 years by consolidating hospital services into three
locations in Chicago, Illinois, rather than continuing to operate four
underutilized locations.30

GSA also has vacant and underutilized property. In August 2002, we
reported on a recent GSA initiative to deal with its under performing
properties.31 GSA had identified over 500 of its owned properties that were
not generating sufficient income to cover their expenses and meet other
financial performance criteria. GSA was developing and beginning to
implement strategies for disposing of these properties, renting space to
nonfederal tenants, or taking other actions to address the problem.

The problem of repair backlogs in federal facilities also has major cost
implications. In addition to the multibillion-dollar backlog in needed work
that is currently identified, we have reported that the ultimate cost of
completing delayed repairs and alterations may escalate because of
inflation and increases in the severity of the problems caused by the
delays. The overall cost of needed repairs could also be affected by
government realignment. That is, to the extent that unneeded property is



28
  U.S. General Accounting Office, VA Health Care: Challenges Facing VA in Developing
an Asset Realignment Process, GAO/T-HEHS-99-173 (Washington, D.C.: July 22, 1999).
29
 DOE Office of the Inspector General, Disposition of the Department’s Excess Facilities,
DOE/IG-0550 (Washington, D.C.: Apr. 3, 2002)
30
  U.S. General Accounting Office, VA Health Care: Closing A Chicago Hospital Would
Save Millions and Enhance Access to Services, GAO/HEHS-98-64 (Washington, D.C.: Apr.
16, 1998).
31
  U.S. General Accounting Office, Financial Condition of Federal Buildings Owned by
the General Services Administration, unnumbered correspondence (Washington, D.C.:
Aug. 8, 2002).



Page 17                                                                   GAO-03-609T
also in need of repair, disposing of such unneeded property could reduce
the repair backlog. And finally, the cost of securing unneeded assets
against the threat of terrorism, in addition to being significant, will use
funds that likely could have been directed to realignment and repair
efforts for properties that the government determines it should retain.

As discussed in our high-risk report, resolving these long-standing
problems will require high-level attention and effective leadership by
Congress and the administration. Also, because of the breadth and
complexity of the issues involved, the long-standing nature of the
problems, and the intense debate that will likely ensue regarding potential
solutions, current structures and processes may not be adequate to
address these problems. Given this situation, we concluded in our high-
risk report that there is a need for a comprehensive and integrated
transformation strategy for federal real property, and an independent
commission or governmentwide task force may be needed to develop this
strategy. Such a strategy could be based on input from agencies, the
private sector, and other interested groups. The strategy also should
reflect the lessons learned and leading practices of public and private
organizations that have attempted to reform their real property practices.
These organizations have recognized that real property, like capital,
people, technology, and information, is a valuable resource that, if
managed well, can support the accomplishment of their missions and the
achievement of their business objectives. In addition, as these
organizations are recognizing, the workplace of the future will differ from
today’s work environment.

For the federal government, technological advancements, electronic
government, flexible workplace arrangements, changing public needs,
opportunities for resource sharing, and security concerns will call for a
new way of thinking about the federal workplace and the government’s
real property needs. Realigning the government’s real property assets with
agency missions and taking into account the requirements of the future
federal role and workplace will be critical to improving the government’s
performance and ensuring accountability within expected resource limits.
If actions resulting from the transformation strategy comprehensively
address the problems and are effectively implemented, agencies will be
better positioned to recover asset values, reduce operating and space
acquisition costs, improve facility conditions, enhance safety and security,
and achieve mission effectiveness.




Page 18                                                         GAO-03-609T
           For questions regarding this testimony, please contact Bernard L. Ungar at
Contact    (202) 512-2834 or at ungarb@gao.gov.




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